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MIDDLESEX WATER COMPANY - PURCHASED WATER ADJUSTMENT CLAUSE

Middlesex Water ComDanv, which serves customers in Middlesex and Union Counties, requested a rate increase for purchased water which the Company acquires from outside sources to meet its customer's demands. The Ratepayer Advocate, Staff of the Board of Public Utilities and Middlesex Water reached a partial Stipulation which pertained to the Company's Purchased Water Rate for the period from July 1, 1996 through June 30, 1997. The parties could not agree on the accounting methodology to be employed by the Company to calculate the over/under recovery for the period July 1,1996 through June 30, 1997. That remaining unresolved issue was litigated at the Office of Administrative Law.

The Judge found that the appropriate accounting methodology to be employed for reconciliation or "true-up" purposes was the one recommended by the Ratepayer Advocate. On January 22, 1997, the Board of Public Utilities, after review of the Initial Decision, agreed with the methodology adopted by the Judge. Since the Board of Public Utilities adopted the Ratepayer Advocate's accounting methodology, New Jersey ratepayers will be billed a more accurate amount for purchased water costs of the utility.

BEFORE THE BOARD OF PUBLIC UTILITIES

STATE OF NEW JERSEY

BPU DOCKET NO. WR96040307

 

IN THE MATTER OF MIDDLESEX WATER COMPANY

APPLICATION FOR APPROVAL OF A CHANGE IN RATES

PURSUANT TO A PURCHASED WATER ADJUSTMENT CLAUSE

 

TESTIMONY OF ROBERT J. HENKES

ON BEHALF OF

THE NEW JERSEY DIVISION

OF THE RATEPAYER ADVOCATE

AUGUST 9, 1996

 

Middlesex Water Company

BPU Docket No. WR96040307

Testimony of Robert J. Henkes

TABLE OF CONTENTS

I. Statement of Qualifications

II. Scope and Purpose of Testimony

III. Introduction

IV. Discussion of Issues

Exhibits

Appendix I: Prior Regulatory Experience of Robert J. Henkes

 

I. STATEMENT OF QUALIFICATIONS

Q. WOULD YOU STATE YOUR NAME AND ADDRESS?

A. My name is Robert J. Henkes and my business address is 456 Main Street, Ridgefield, Connecticut.

 

Q. WHAT IS YOUR PRESENT OCCUPATION?

A. I am a principal in the firm of Georgetown Consulting Group, Inc., which is a financial management consulting firm specializing in utility regulation.

 

Q. WHAT IS YOUR REGULATORY EXPERIENCE?

A. I have prepared and/or presented numerous testimonies in rate proceedings involving electric, gas, telephone and water companies in a number of jurisdictions including Arkansas, Delaware, District of Columbia, Georgia, Kentucky, Maryland, New Jersey, New Mexico, Ohio, Pennsylvania, Vermont, the U.S. Virgin Islands and before the Federal Energy Regulatory Commission (FERC). A complete listing of jurisdictions and rate proceedings in which I have been involved is provided in Appendix I attached to this testimony. All of my regulatory work has been on behalf of the ratepayers.

 

Q. WHAT OTHER PROFESSIONAL EXPERIENCE HAVE YOU HAD?

A. Prior to joining Georgetown Consulting Group, Inc., I was employed by the American Can Company as Manager of Financial Controls. Before joining the American Can Company, I was employed by the Management Consulting Division of Touche Ross & Co. for six years. At Touche Ross, my experience, in addition to regulatory work, included numerous projects in a wide variety of financial areas including cash flow projections, bonding feasibility, capital and profit forecasting, and the design and implementation of accounting and budgetary reporting and control systems.

 

Q. WHAT IS YOUR EDUCATIONAL BACKGROUND?

A. I hold a Bachelor degree in Management Science, received form the University of Utrecht, The Netherlands in 1966; a Bachelor degree in Marketing, received from the University of Puget Sound in 1971; and an MBA degree in Finance, received from Michigan State University in 1973. I have also completed the CPA program of the New York University Graduate School of Business.

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II. SCOPE AND PURPOSE OF TESTIMONY

Q. MR. HENKES, WHAT IS THE SCOPE AND PURPOSE OF THIS TESTIMONY?

A. I was engaged by the New Jersey Division of the Ratepayer Advocate to conduct a review and analysis and present testimony in the matter of Middlesex Water Company's ("MWC" or "Company") application for approval of a change in rates pursuant to a Purchased Water Adjustment Clause ("PWAC"), BPU Docket No. 96040307.

The purpose of this testimony is to present to the New Jersey Board of Public Utilities ("NJBPU" or "Board") the appropriate methodology that should be used by the Company to calculate purchased water cost over/underrecovery deferrals as part of its PWAC mechanism starting on July 1, 1996.

In developing this testimony, I have reviewed the Company's original and updated/revised PWAC filing data; Company responses to interrogatories; two letters and attachments sent by Mr. Dennis G. Sullivan of Middlesex to Ms. Ami Morita of the Ratepayer Advocate dated July 18, 1996 and July 26, 1996, respectively, and the Board-approved Stipulation of the Company's prior PWAC proceeding, BPU Docket No. WR95020067. In addition, I attended a settlement conference on July 11, 1996 at the BPU Staff office.

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III. INTRODUCTION

Q. MR. HENKES, DO YOU HAVE AN INTRODUCTORY STATEMENT?

A. Yes. The Company's original PWAC filing in this case, dated April 16, 1996, requested a PWAC revenue requirement increase of $334,400 to become effective on or about September 1, 1996, the anticipated rate effective date of Elizabethtown Water Company's pending base rate proceeding. This original PWAC filing contained certain assumptions which were incorrect and included a claimed PWAC period purchased water underrecovery amount based on actual data for the 8-month period July 1, 1995 - February 29, 1996 and projected data for the 4-month period March 1, 1996 through June 30, 1996.

After correcting for the incorrect assumptions included in the Company's original PWAC filing and updating the Company-calculated purchased water underrecovery amount as of June 30, 1996 for 12 months of actual results, the Company, Board Staff and Ratepayer Advocate reached an agreement that the PWAC revenue requirement increase in this case should be $235,981. Exhibit A of this testimony contains the Company's revised Exhibits G, H and I showing a more detailed presentation of the stipulated PWAC rate increase of $235,981. In summary, the Stipulation provides for the following PWAC rate increase elements:

1. A total PWAC rate increase of $235,981, including the impact of associated Gross Receipts and Franchise Taxes ('GRAFT") at a rate of 15.5313%.

2. The assumption that Elizabethtown Water Company's base rates from its pending base rate proceeding will become effective on August 15, 1996.

3. The assumption that MWC's PWAC rate increase of $235,981 will become effective on September 25, 1996.

4. The inclusion in the stipulated rate increase of a purchased water underrecovery amount of $2,709 (without GRAFT considerations). As shown in the Company's revised Exhibit H under Exhibit A of this testimony, this purchased water underrecovery amount of $2,709 represents the underrecovery as of June 30, 1996, based on 12 months of actual results and as calculated based on the Company's proposed over/underrecovery reconciliation method. The parties agreed to the use of this Company-proposed reconciliation method in this proceeding because this was expressly stipulated in MWC's prior PWAC proceeding, BPU Docket No. WR95020067.

5. As shown in the Company's revised Exhibit I under Exhibit A of this testimony, the stipulated rate increase of $235,981 will result in a PWAC rate per MG of $20.60 effective September 25, 1996.

The Stipulation in this case also provides that the currently stipulated rate increase of $235,981 will be adjusted to the extent that the Elizabethtown Water Company base rate increase or the MWC PWAC rate increase will have rate effective dates different than the currently assumed respective dates of August 15 and September 25, 1996.

Q. IS THERE A REMAINING ISSUE IN THIS CASE?

A. Yes. This remaining issue concerns the appropriate methodology to be used by the Company to determine the purchased water over/underrecovery amount for the period July 1, 1996 through June 30, 1997.

 

Q. PLEASE ELABORATE ON THIS.

A. In the Company's prior PWAC proceeding, involving the PWAC period ended June 30, 1995, the Ratepayer Advocate and the Company presented two different methodologies to determine the purchased water over/underrecovery amount as of June 30, 1995. The Ratepayer Advocate, under its recommended reconciliation mechanism, had determined a substantial purchased water overrecovery amount, whereas the Company, under its proposed reconciliation mechanism, had calculated an underrecovery amount of approximately $6,000. By stipulation, the parties came to the following resolution as stated in paragraph 4 on page 2 of the Order Adopting Initial Decision Settlement, BPU Docket No. WR95020067:

4. The parties agree that for the period from July 1, 1994 through June 30, 1995, and for the period from July 1, 1995 through June 30, 1996, the Over/Under Recovery Account will be calculated in accordance with the agreed upon methodology by comparing the actual additional or reduced costs incurred each month with the actual revenues each month from the PWAC in effect.¹ The continuation of this methodology for the periods after June 30, 1996 shall be reviewed in the Company's next PWAC or base rate proceeding, whichever is applicable.

 

Q. WHY DID THE RATEPAYER ADVOCATE, IN THE PRIOR PWAC STIPULATION, AGREE TO REFLECT THE PURCHASED WATER COST OVER/UNDER RECOVERY ACCORDING TO THE COMPANY'S PROPOSED METHOD NOT ONLY FOR THE ANNUAL PWAC PERIOD ENDED JUNE 30, 1995 BUT ALSO FOR THE THEN PROSPECTIVE ANNUAL PWAC PERIOD ENDED JUNE 30, 1996?

A. In the prior PWAC proceeding, the Company made it known that it had made agreements with Elizabethtown Water Company and the Borough of Highland Park whereby, starting at some time in 1995, it would increase its purchases of treated water from Elizabethtown Water Company from 2.5 MGD to a minimum of 3.0 MGD and, in turn, sell these increased water purchases from Elizabethtown Water to the Borough of Highland Park. At that time, the Company made representations that, because of this new and unique purchase and sales arrangement, it would incur fairly significant purchased water underrecoveries if the reconciliation method recommended by the Ratepayer Advocate were to be used. For this reason, the Ratepayer Advocate decided to agree to use the Company's proposed methodology for one more year (i.e. the PWAC period ended June 30, 1996 since that period would incorporate the impact of this new purchase and sales arrangement) in order to verify the accuracy of the Company's claim. As will be discussed in more detail in a subsequent section of this testimony, the Company's claim that because of this unique purchase and sales arrangement it would experience a substantial underrecovery as of June 30, 1996 based on the Ratepayer Advocate reconciliation method has not come true. In fact, the Ratepayer Advocate's recommended reconciliation method indicates a purchased water overrecovery position as of June 30, 1996 that is even larger than the purchased water overrecovery amount that was calculated for June 30, 1995 under the Ratepayer Advocate's recommended reconciliation method.

 

Q. BASED ON THE AFOREMENTIONED, COULD YOU SUMMARIZE THE REMAINING ISSUE IN THIS CASE?

A. Yes. The use of a particular purchased water over/under recovery method for the period July 1, 1996 through June 30, 1997 is no longer dictated by a previous Stipulation. The Company is arguing for the continuation of its proposed reconciliation mechanism, while the Ratepayer Advocate believes that its recommended reconciliation methodology is the only appropriate method to use. The various reasons for the Ratepayer Advocate's opinion on this matter will be discussed in detail in a subsequent section of this testimony.

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IV. DISCUSSION OF ISSUES

Q. WHAT IS THE METHODOLOGY AND FORMULA RECOMMENDED BY THE RATEPAYER ADVOCATE TO DETERMINE THE APPROPRIATE PURCHASED WATER OVER/UNDERRECOVERY DURING A PARTICULAR PWAC PERIOD?

A. The Ratepayer Advocate believes that the only appropriate and accurate method to determine a water company's PWAC period purchased water over/underrecovery balance is to compare the actual purchased water costs incurred during the PWAC period to the actual purchased water costs actually recovered in both the base rates and the PWAC rate during the PWAC period.

In order to accomplish this recommended reconciliation procedure, the following calculations would need to be made:

(1) The actual purchased water cost incurred is simply the actual purchased water cost booked by the utility during the PWAC period.

(2) The actual purchased water costs recovered in base rates during a PWAC period are to be calculated by multiplying the actual volume of water sold (consumption) during the PWAC period times the purchased water cost per unit of sales (consumption) allowed in the most recent base rate case.

(3) The actual purchased water costs recovered in PWAC rates are to be calculated by multiplying the actual volume of water sold (consumption) during the PWAC period times the PWAC rate per unit of sales (consumption) allowed in the most recent PWAC proceeding.

(4) The sum of the rate recovery amounts calculated in (2) and (3) should then be compared to the actual costs in (1) and the resulting difference represents the appropriate and true purchased water cost over/underrecovery during the PWAC period.

Q. IS THIS RECOMMENDED RECONCILIATION METHOD CONSISTENT WITH THE RECONCILIATION METHOD USED IN LEACS AND LGACS BY THE NEW JERSEY ELECTRIC AND GAS UTILITIES?

A. Yes. The recommended reconciliation methodology is conceptually exactly the same as the reconciliation methodology applied by New Jersey's electric and gas utilities in their LEACs and LGACs, which methodology has consistently been approved by the Board.²

The New Jersey electric and gas utilities determine fuel over/underrecovery balances in their fuel adjustment clauses by comparing:

1. the actual total fuel costs incurred during a particular historic fuel adjustment clause period

to

2. the actual total fuel cost recovery in this same period, through both base rates and fuel adjustment rates, determined by multiplying actual sales ³ times the sum of the base fuel recovery rate⁴ and the fuel adjustment clause recovery rate.²

In fact, the Ratepayer Advocate recommended reconciliation method is not only the accepted standard procedure used in the LEACs and LGACs of New Jersey's electric and gas utilities, but also in LEACs and LGACs of utilities in neighboring states such as Delaware and Pennsylvania.

Q. HAVE YOU INCLUDED SAMPLE COPIES OF FILING DOCUMENTS IN ELECTRIC AND GAS LEAC AND LGAC PROCEEDINGS SHOWING THAT LEAC AND LGAC PERIOD OVER/UNDERRECOVERIES ARE DETERMINED THROUGH THE SAME RECONCILIATION METHOD AS THE RATEPAYER ADVOCATE IS RECOMMENDING FOR THE MIDDLESEX PWAC PERIOD PURCHASED WATER RECONCILIATION?

A. Yes. These documents are included under Exhibit B of this testimony.

Page 1 of Exhibit B shows "Exhibit D, page 2 of 3" of Rockland Electric Company's ("RECO") most recent LEAC filing which became effective in January 1996. This page shows RECO's calculated fuel (over)/underrecovery for its LEAC period ended December 1995. Column (1) shows RECO's 1995 billed sales in kwhs. Column (2) represents the fuel cost per kwh recovered in base rates. Column (3) represents the fuel cost per kwh recovered in LEAC rates. Columns (4), (5) and (6) show the total fuel dollars recovered in base and LEAC rates, calculated by multiplying the kwh billed sales times the per kwh base rate recovery and the per kwh LEAC recovery. Column (7) represents the actual total fuel costs incurred during 1995. Column (8) represents the resulting monthly fuel (over)/underrecovery, calculated by comparing the actually incurred fuel costs to the fuel costs recovered in base rates and LEAC rates. Column (8) represents the cumulative monthly (over)/underrecovery balances.

Based on my experience in LEAC and LGAC proceedings involving other New Jersey electric and gas utilities, I can represent that the fuel (over)/underrecovery reconciliation mechanisms utilized by these utilities and approved by the Board are conceptually exactly the same as the RECO sample shown on page 1 under Exhibit B of this testimony.

Page 2 of Exhibit B shows "Schedule E, page 1 of 2" of Delmarva Power and Light Company's (Delaware) most recent LGAC filing. This document shows Delmarva's calculated gas cost (over)/underrecovery balance as of October 1996 based on partially actual and partially projected data. Column (3) shows the sales numbers in MCF for the 12-month period. Column (4) represents the gas cost dollars recovered through Delmarva's GCR (equivalent to LGAC) rates. Column (5) represents the gas cost dollars recovered through Delmarva's base rates. Column (6) represents the total gas cost recovery through base and GCR rates. Column (7) represents the actual gas costs incurred. Column (8) represents the monthly gas cost (over)/underrecoveries, calculated by comparing the actual gas costs incurred to the actual gas costs recovered in base rates and GCR rates. Column (9) shows the cumulative monthly (over)/underrecovery balances.

Page 3 of Exhibit B shows schedule "GCR 11" of the most recent fuel adjustment clause filing of Philadelphia Gas Work ("PGW"). This document shows PGW's calculated fuel over/(underrecovery) balances from September 1995 through August 1996 on a partially actual and partially projected basis. Column (1) shows the total cost of fuel incurred. Column (4) represents the fuel costs recovered in base rates, calculated by multiplying the period's sales in column (2) times the per unit base fuel factor in column (3). Column (7) represents the fuel costs recovered in GCR (equivalent to LGAC) rates, calculated by multiplying the period's sales in column (2) times the per unit GCR factor in column (6). Column (8) represents the monthly fuel over/(underrecovery) balances, calculated by subtracting the sum of the base fuel cost and GCR fuel cost recoveries in columns (4) and (7) from the total fuel costs incurred in column (1).

In summary, the documents contained under Exhibit B of this testimony support the fact that the PWAC purchased water over/underrecovery reconciliation mechanism recommended by the Ratepayer Advocate in this case is wholly consistent with the Board-approved over/underrecovery reconciliation methods used by the New Jersey electric and gas utilities in their LEAC and LGAC proceedings and is also being used as an accepted standard method in fuel clause proceedings involving utilities in other states.

 

Q. ARE THERE OTHER NEW JERSEY WATER AND/OR SEWER UTILITIES WHICH ARE CURRENTLY DETERMINING THEIR PWAC/PSTAC PERIOD OVER/UNDERRECOVERIES BASED ON THE RECONCILIATION METHOD RECOMMENDED BY THE RATEPAYER ADVOCATE IN THIS CASE?

A. Yes. Starting July 1, 1995, Elizabethtown Water Company is determining its PWAC period purchased water over/underrecovery balance based on the reconciliation method recommended by the Ratepayer Advocate in this case. In other words, Elizabethtown Water is now calculating its purchased water over/underrecovery balance by comparing its actual purchased water costs for the PWAC period to the sum of the purchased water costs recovered in base rates and the purchased water costs recovered in its PWAC rate. Prior to July 1, 1995, Elizabethtown had been using a purchased water cost reconciliation method different from the method recommended by the Ratepayer Advocate in this case.⁵ However, during Elizabethtown's PWAC proceeding for its July 1, 1995 - June 30, 1996 PWAC period, Elizabethtown agreed that it would be more appropriate to use the purchased water reconciliation method advocated by the Ratepayer Advocate in that case (which reconciliation method was exactly the same as the method recommended by the Advocate in the Middlesex case at hand). Elizabethtown is still using this Ratepayer Advocate recommended reconciliation method in its current PWAC period July 1, 1996 through June 30, 1997. Other large New Jersey water utilities such as New Jersey American Water Company and United Water of New Jersey currently have no PWACs in place.

I also understand that Adelphia Sewer Company is currently using an over/underrecovery reconciliation method that is conceptually exactly the same as the reconciliation method recommended by the Ratepayer Advocate for Middlesex in this case.

 

Q. IS IT YOUR OPINION THAT WHEN THE NJBPU ADOPTED THE NEW RULES FOR PURCHASED WATER ADJUSTMENT CLAUSES IN BPU DOCKET NO. WX87060524, THE INTENT OF THE NJBPU WAS TO MAKE THE IMPLEMENTATION OF THE PWAC MECHANISM AS CONSISTENT AS POSSIBLE WITH PREVIOUSLY ESTABLISHED BOARD POLICY REGARDING ELECTRIC AND GAS FUEL ADJUSTMENT CLAUSES?

A. Yes, it is. My opinion is based on my review of the Board's responses to comments regarding the originally adopted rules for PWACs as published in the New Jersey Register, Monday, October 21, 1991 (23 N.J.R. 3171-3175). In two of its responses listed on 23 N.J.R. 3172, the BPU made reference to making the procedures and mechanisms related to PWACs consistent with current Board policy regarding the treatment of electric and gas fuel adjustment clauses.

 

Q. DO YOU BELIEVE THAT WHEN THE NJBPU ADOPTED THE NEW RULES FOR PWACs, THE INTENT OF THE NJBPU WAS TO ALLOW PWAC RECOGNITION FOR INCREMENTAL PURCHASED WATER COST CHANGES DUE TO VOLUME AND PRICE DEVIATIONS WITHOUT TAKING INTO ACCOUNT INCREMENTAL BASE RATE AND/OR PWAC RATE COST RECOVERY CHANGES DUE TO DEVIATIONS IN CONSUMPTION?

A. I do not believe so. The previously referenced New Jersey Register publication regarding the adoption of new rules for PWACs contains at least two statements by the NJBPU which clearly indicate that any incremental purchased water cost recovery changes as a result of incremental consumption deviations must be taken into account in determining purchased water cost over/underrecoveries in PWAC proceedings. For example, 23 N.J.R. 3173 contains the following Board statement:

RESPONSE: The Board would note that the definition of "base consumption" contained in N.J.A.C. 14:10-8.2 and the formula for determination of base cost set out in N.J.A.C. 14:10-8.5 indicate that changes in levels of consumption can be taken into consideration within a PWAC proceeding. (emphasis supplied)

More importantly, in 23 N.J.R. 3173 the Board made the following response to a comment made by Rate Counsel:

RESPONSE: The Board does not agree with Rate Counsel that any inconsistency exists between the stated purpose of the proposed rule set out in the summary and the body of the proposed rule itself. It is the Board's opinion that any rate adjustment review must include consideration of not only any incremental cost deviations but also any consumption deviations and the underlying factors thereof. To do otherwise would result in possible inequities in any allowed adjustment. (emphasis supplied)

The underscored portion of the above Board response would indicate that, in the Board's opinion, any base rate and/or PWAC rate cost recovery changes due to changes in consumption (sales) must be considered in determining a water utility's purchased water cost over/underrecovery balance during a PWAC proceeding. My recommended method to calculate purchased water cost over/underrecoveries does exactly this.

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Q. ARE THE PWAC RULES ORIGINALLY ADOPTED BY THE BOARD IN DOCKET NO. WX8706524 ABSOLUTELY CLEAR WITH REGARD TO THE PURCHASED WATER OVER/UNDERRECOVERY RECONCILIATION METHOD TO BE USED IN PWAC PROCEEDINGS.

A. No, they are not. In fact the rules with regard to this particular issue are quite ambiguous and confusing.

 

Q. DID THE BOARD RECENTLY READOPT, WITH AMENDMENTS, THE ORIGINAL PWAC RULES AS A RESULT OF ITS PROPOSED RULEMAKING RE: N.J.A.C. 14:9 - PROPOSED READOPTION WITH AMENDMENT, BPU DOCKET NO. WX95070305?

A. Yes. In this proposed rulemaking, the Ratepayer Advocate submitted comments which, among other things, advocated that the Board clarify the method and formula to be used for determining PWAC over/underrecoveries. Specifically, the Ratepayer Advocate commented that

..."the most appropriate and accurate methodology to determine a water utility's PWAC over/underrecovery balances is to compare the actual purchased water costs incurred during the PWAC period to the purchased water costs actually recovered in the base rates and PWAC rates during the PWAC period."

The Board's response to this particular Ratepayer Advocate comment was as follows:

After reviewing the Advocate's comments on this issue, the Board is of the opinion that said comments, in whole or in part, may be appropriate. In order to come to a final determination, a review will have to be conducted to allow the Board to acquire all necessary information. Since the Board is of the opinion that N.J.A.C. 14:9 should not be allowed to expire, the Board will readopt the chapter as proposed concerning this issue. The Board, however, will immediately begin a review of the Advocate's comments, and, subsequently, initiate an appropriate rulemaking proceeding. (emphasis supplied)

[Source: 28 N.J.R. 2406, May 6, 1996]

In this Middlesex PWAC proceeding, which precedes the above-referenced planned rulemaking proceeding on the appropriate reconciliation method, the Board will have to make a determination regarding this very reconciliation method issue. I respectfully submit to the Board that the information contained in this testimony will "allow the Board to acquire all necessary information" in order to make a definitive ruling on this issue and recommend that the Board adopt the Ratepayer Advocate's recommended purchase water cost over/underrecovery reconciliation method. This recommended reconciliation method is straightforward and simple to calculate and administer; is consistent with the fuel reconciliation methodology used by the New Jersey electric and gas utilities and adopted by the Board in LEAC and LGAC proceedings; represents a standard procedure applied not only in New Jersey fuel adjustment clauses but also in fuel adjustment clauses in other states; and has been adopted by other New Jersey water and sewer utilities.

Q. COULD YOU NOW DISCUSS WHAT THE COMPANY'S INDICATED PURCHASED WATER OVER/UNDERRECOVERY BALANCE IS AS OF JUNE 30, 1996 AS CALCULATED UNDER THE RATEPAYER ADVOCATE RECOMMENDED RECONCILIATION METHOD AND CONTRAST THE RESULTING OVER/UNDERRECOVERY AMOUNT WITH THE OVER/UNDERRECOVERY AMOUNT CALCULATED BY THE COMPANY UNDER ITS PROPOSED METHODOLOGY?

A. Yes. In various responses to interrogatories and informal discovery, the Company has confirmed the following facts:

- the actual cost of purchased water booked by MWC during the PWAC period ended 6/30/96 is:

NJWSA6:	7,669.433 MG x $220.78 per MG	= $ 1,693,257
EWC:	1,007.092 MG x $1,094.27 per MG	= 1,102,028
Total		$ 2,795,2867

- the actual sales (consumption) booked by MWC
during the PWAC period ended 6/30/96 is:	12,430,000 MG 8

- the per MG purchased water cost currently
recovered in base rates (w/o GRAFT):	$241.58 per MG9

- the per MG purchased water costs currently
recovered in PWAC rates (w/o GRAFT):	$ 4.05 per MG6

Based on these undisputed facts, the Company's over/underrecovery balance as of June 30, 1996, as calculated under the Ratepayer Advocate recommended reconciliation method is as follows:

By contrast, the Company's claimed over/underrecovery amount at June 30, 1996, based on its proposed reconciliation method, is an underrecovery amount of $2,709 (w/o GRAFT). The Company's proposed method is termed by MWC as an "incremental" method which is based on the following facts (see MWC's Revised Exhibit H under Exhibit A of this testimony):

- actual purchased water volume booked by MWC during the PWAC period ended 6/30/96:

NJWSA:		7,669.433 MG
EWC:		1,007.092 MG

- difference between current cost of purchased water per MG and cost of purchased water per MG included in Company's most recent base rate case:

NJWSA:	current: base case: difference:	$ 220.78 per MG 221.80 per MG $ (1.02) per MG
EWC:	current: base case: difference:	$1,094.27 per MG (weighted) 1,039.72 per MG $ 54.55 per MG

- actual sales (consumption) booked by MWC during the PWAC period ended 6/30/96:

12,430,00 MG

- per MG purchased water costs currently recovered in PWAC rates (w/o GRAFT):

$ 4.05 per MG

Based on the above facts, MWC claims an underrecovery balance of $2,709 as calculated under its proposed "incremental" reconciliation method:

1. Actual incremental purchased water costs:

2. Actual purchased water costs recovered in PWAC rates:

3. PWAC period purchased water cost underrecovery (w/o GRAFT)

4. Starting underrecovery balance of 7/1/95

5. Net cumulative underrecovery (w/o GRAFT) at 6/30/96

Thus, there is a substantial difference between the 6/30/96 purchased water over/underrecovery balances as calculated under the Ratepayer Advocate recommended reconciliation method as compared to MWC's proposed reconciliation method. The Ratepayer Advocate's recommended method indicates a net overrecovery balance as of 6/30/96 of $251,956, while MWC's proposed method indicates a net underrecovery balance as of 6/30/96 of $2,709.

Both methods consider the PWAC period PWAC rate recovery for purchased water (amounting to $50,342 under both the Ratepayer Advocate recommended and MWC's proposed reconciliation methods), calculated by multiplying the PWAC period's MWH sales times the effective PWAC rate per MG of sales. However, the Ratepayer Advocate's reconciliation method also considers the purchased water base rate recovery (calculated by multiplying the PWAC period's MWH sales times the effective purchased water base rate recovery per MG of sales) and then compares the total PWAC and base rate recoveries with the total purchased water costs incurred during the PWAC period. By contrast, the Company's reconciliation method does not consider the purchased water base rate recovery and only compares the PWAC rate recovery with the difference between the current purchased water costs and the purchased water costs included in the most recent base rate proceeding. The Ratepayer Advocate recommended reconciliation method is superior in that it is "all inclusive"; it considers the increased base rate recovery for purchased water as a result of increases in sales (consumption) from the last base rate case to the current PWAC period. The Company's proposed method ignores this factor.

Q. WHAT WERE THE INDICATED PURCHASED WATER OVER/UNDERRECOVERY BALANCES AS OF JUNE 30, 1995 IN THE PRIOR PWAC PROCEEDING AS CALCULATED BOTH UNDER THE RATEPAYER ADVOCATE RECOMMENDED AND THE COMPANY'S PROPOSED RECONCILIATION METHOD?

A. Based on 10 months actual and 2 months projected data, the Company's purchased water over/underrecovery balance as of June 30, 1995 as calculated under the Ratepayer Advocate's recommended reconciliation method was an overrecovery amount of $146,855 (w/o GRAFT). The Company's proposed reconciliation method determined an underrecovery amount of $5,088 (w/o GRAFT). As discussed earlier in this testimony, the Company at that time argued that the unique EWC/Highland Park purchase and sales arrangement, which would become effective at some time in 1995, would result in a substantial underrecovery balance as of June 30, 1996 based on the Ratepayer Advocate's recommended reconciliation method.

However, the opposite turned out to be true as evidenced by the fact that the Company's indicated purchased water over/undercollection balance as of June 30, 1996 amounts to a net overrecovery amount of $251,956 (w/o GRAFT) based on the Ratepayer Advocate's recommended reconciliation method.

As previously discussed, because of the Stipulation in the prior PWAC proceeding, neither the overrecovery amount of $146,855 (w/o GRAFT) as of June 30, 1995 nor the overrecovery amount of $251,956 (w/o GRAFT) as of June 30, 1996, both calculated under the Ratepayer Advocate recommended reconciliation method, were recognized for ratemaking purposes. Instead, the Stipulation provided that for those two annual periods the underrecovery amount of $5,088 (w/o GRAFT) as of June 30, 1995 and the underrecovery amount of $2,709 (w/o GRAFT) as of June 30, 1996, both calculated under the Company's proposed reconciliation method, be recognized for ratemaking purposes.

However, this Stipulation provision expired as of June 30, 1996 and the Ratepayer Advocate now recommends that for the period July 1, 1996 - June 30, 1997 the Company's purchased water over/underrecovery balances be determined based on the previously discussed Ratepayer Advocate recommended reconciliation method.

 

Q. DO YOU HAVE ANY ADDITIONAL COMMENTS REGARDING THIS ISSUE?

A. Yes. On July 17, 1996, Mr. Sullivan from Middlesex sent to the Ratepayer Advocate a letter, including two pages of handwritten calculations, showing the Company's estimate of what the over/underrecovery balance would be on a going-forward basis based on using the Ratepayer Advocate's recommended reconciliation method. The Company's two pages of handwritten calculations and the Ratepayer Advocate's one-page response are included under Exhibit C of this testimony.

In its analysis, the Company has assumed an annualized level of forward-looking consumption, including the full annual impact of its sales to the Borough of Highland Park ("Highland Park") at 1MGD. The Company also assumed the full annual impact of purchased water from Elizabethtown Water Company ("EWC") at 3.0 MGD (as opposed to 2.5 MGD) to reflect the increased purchased water from EWC to satisfy the increased sales to Highland Park; and the full annual impact of the increased cost per MG from EWC of $1,342.30.

Based on these assumptions, the Company has calculated that its annualized consumption would be 12,581 MG and that its annualized cost of purchased water will be $3,165,433. The Company then calculated that under these assumptions it would have an underrecovery of $123,168 (w/o GRAFT) using the Ratepayer Advocate's recommended reconciliation method. However, the Company made a mistake in its calculations in that it only considered the base rate recovery of purchased water. It completely disregarded the PWAC rate recovery for its purchased water during this going-forward period. As shown in "Revised Exhibit I of the petition dated 7/12/96" (included in the July 16, 1996 letter from MWC to the service list), the PWAC recovery rate per MG based on the total revenue requirement of $235,981 in this case is $20.60 per MG. As shown on the first page of Exhibit C of this testimony, taking the PWAC rate recovery into account (which was ignored by the Company), the Company's hypothetical analysis would result in a purchased water overrecovery position of $98,204 without GRAFT considerations and $113,456 with GRAFT considerations under the Ratepayer Advocate recommended reconciliation method.

 

Q. MR. HENKES, DOES THIS CONCLUDE YOUR TESTIMONY?

A. Yes, it does.

 

Footnotes

1 The PWAC in effect is MWC's proposed methodology. Back

2 See, In the Matter of the Petition of Atlantic City Electric Company for a Final Increase in Its Energy Adjustment Charge BPU Dkt. No. ER95040166; In the Matter of Petition of Jersey Central Power & Light Company for Increases in Its Levelized Energy Adjustment Charge (LEAC) and Demand Side Factor(DSF), BPU Dkt. No. ER94120577; and In the Matter of the Motion of Public Service Electric and Gas Company for Approval to Increase its Levelized Energy Adjustment Clause (LEAC), BPU Dkt. No. ER94070293. Back

3 Generally expressed in terms of kwhs for electric and Mcfs or Dths for gas utilities. Back

4 Generally expressed in terms of cents per kwh for electric and cents per Mcf or Dth for gas utilities. Back

5 Although Elizabethtown's "old" reconciliation method was not exactly the same as the method proposed by Middlesex in this case, there were several similarities to Middlesex's proposed method. Back

6 New Jersey Water Supply Authority. Back

7 Per MWC's Revised Exhibit H, 7/12/96 and Ms. Reynold's July 18, 1996 letter and attachment to the service list. Back

8 Derived from MWC's Revised Exhibit H, 7/12/96 and confirmed by Mr. O'Connor. Back

9 Response to RAR-11. Back

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