Order 15664 - Pawt. Water Supply Board: General Rate Case

In summation, Mr. Edge projected rate year revenue, at current rates, to be $8,066,644 (Id.). Mr. Edge's Schedule RY-2 provides pro forma revenue details. This schedule has been attached to this Report and Order as "Appendix 2", and is incorporated by reference.

Mr. Edge next turned to a discussion on how he calculated the Board's expense balances for the rate year. He related that expense accounts were reviewed individually, or in related groups as deemed appropriate. He also explained that he divided expense sub accounts into the following three classifications:

(1) accounts which fluctuate from year to year without any definitive trend, these accounts were projected for the rate year using a four year average; 2) payroll, and payroll related accounts which were adjusted to reflect the terms contained in PWSB's union contracts, and 3) accounts that have to be analyzed in detail such as chemicals, property taxes, etc. (Id., p. 29).

Mr. Edge enumerated 30 accounts which were projected using a four-year average (Id., p. 29, and Sch. RY-4). He testified that the total adjustment for these 30 accounts reflects an increase over the test year level of expenditure in the amount of $37,622 (Id.). Mr. Edge related that since the annual balances for these accounts fluctuate each year, he opined that neither inflation nor the test year values seemed as appropriate as using a four-year average (Id.).

Mr. Edge next testified that he projected the cost of payroll, payroll taxes, and fringe benefit accounts for the rate year by preparing a payroll reconciliation schedule, which reconciled the test year payroll to the test year budgeted payroll. He related that he then used the budget document to project payroll expense for the rate year (Id., p. 30).

Mr. Edge testified that two labor contracts are currently in effect for both management and non-management Board employees. He utilized these contracts to project rate year payroll (Id.). The record reflects that non-management union employees will receive 3.0% increases in 1998. The management union contract provides for a 1.0% increase in 1998 (Id., pp. 30-31). Mr. Edge also related that his projection includes step and longevity increases where appropriate (Id., p. 31). Mr. Edge also related that two of the Board's employees are not in either union. He testified that both of these employees have employment contracts, which are currently being renegotiated. He planned to have final salary information for the rebuttal phase of this proceeding (Id.).

Mr. Edge testified that the Board's "employee pension and benefits" expense account only involves health insurance costs (Id.). He related that to project this expense for the rate year he calculated the actual interim year (1998) health insurance cost using the actual rates and the actual number of employees receiving coverage. He noted that this calculation reflects a small decrease compared to the Board's test year expense. Mr. Edge decided to use the interim level of expenditure, $303,333, for the rate year (Id., p. 32).

Mr. Edge next testified that the cost of the Board's pension plan has declined in each of the last three years; 1.38% in 1996, 1.30% in 1997, and 1.18% in 1998. He related that he believes the trend will continue and used 1.10% for the rate year pension contribution rate. He also related that the Board's share of the FICA tax is not expected to change through the rate year. For these two expenses, Mr. Edge projected a rate year combined cost of $189,734 (Id., p. 32-33; and Sch. RY-5C).

Mr. Edge stated that the Board self insures for unemployment costs. He related that in the test year, $25,467 was charged to this benefit account which is included in the "injuries and damages" account (Id., p. 33). Mr. Edge opined that the Board's unemployment expense is low because it has very little turnover in staff. Consequently, Mr. Edge used $25,467 for his rate year forecast (Id.).

Mr. Edge next discussed the Board's six overtime expense accounts. He related that three of the overtime accounts are minor, and as a result he decided that test year levels could be used for the rate year (Id., p. 34 and Sch. RY-5C). For "treatment overtime", Mr. Edge used a four-year average. He related that a four-year average was more appropriate for this expense because the test year expense was greater than the prior three years, and because the Board plans to fill the causative vacant positions (Id., p. 34).

For "T & D overtime", Mr. Edge related that the unpredictable nature of this expense (a function of winter weather and main breaks) justifies the use of a four-year average too.

Mr. Edge testified that "meter overtime" was significant in 1994, 1995 and 1996, but dropped off in 1997. He explained that this change resulted from the Board's decision to stop using its own staff in its meter replacement program (Id., p. 35). Mr. Edge chose the test year level for the rate year for this account (Id.).

Mr. Edge next addressed the Board's increased principal and interest expense. He testified that the increases are primarily due to "the 1998 bond financing which was approved by the voters of Pawtucket in the November 4, 1997 election" Id.). He related that the proceeds from the bonds will be used to modernize the Board's treatment facility (Id.). Mr. Edge testified that he estimated the associated interest expense to be 8 percent for purposes of the Board's direct case. He indicated that he would revisit this estimated interest rate in his rebuttal testimony (Id., p. 36).

Mr. Edge testified that he estimated the principal payment on the new debt in the rate year to be $270,000. He explained that this estimate was based on prior bond issues (Id., p. 36).

Mr. Edge next testified that he used the rate year level of payments to forecast the Board's capital lease expense in the rate year (Id., p. 37). These leases all relate to vehicles being used by the Board. A detailed schedule was provided (Id., Sch. RY-11).

Mr. Edge next discussed how he calculated the Board's rate year property insurance expense. He explained that this account showed no trend and there is no known and measurable adjustment which can be made. He therefore decided to use a four-year average, which he noted turned out to be less than the test year cost. He proposed a rate year level of $56,182 (Id., p. 37).

Mr. Edge next looked at the Board's "insurance and damages" account. He related that the majority of this account represents workman's compensation claims, which he opined is best projected using a four-year average. Mr. Edge called the other three components to this account (unemployment payments, workmen's compensation reserve, and customer and employee claims) "immaterial or constant". Using a four-year average, Mr. Edge proposed a rate year amount of $191,778 (Id., pp. 38-39).

Mr. Edge testified that the "franchise fees account" represents a 25% commission paid to Central Falls for water sold to customers living in Central Falls. He related that since the Board is not projecting any growth in metered sales in the rate year, he has proposed using the test year level of $141,270 for franchise fees (Id., p. 39).

Mr. Edge proposed a rate year level of $60,000 to cover the Board's "regulatory commission" expense. He based this amount on a $10,000 "PUC assessment" [pursuant to Section 39-1-23], and on the anticipated rate case expense associated with this docket. He offered the following calculation to support his rate case projection:

(Id., p. 39).

Mr. Edge next discussed the Board's "interdepartmental charges" or "city charges". He related that this account represents expenses incurred by the City on behalf of the Board. He testified that this expense has remained relatively constant at about $100,000 per year (Id., p. 40). However, because the Board plans to do its own billings in the rate year he proposes a decrease of $14,495, for a rate year total of $95,559 (Id.).

Mr. Edge calculated the Board's property tax expense to be $570,603 in the rate year. He related that he obtained as many of the tax bills for 1998 as possible and estimated the rest. He then increased that amount by 5.5% to reflect the rate year (Id., p. 41).

Mr. Edge testified that the Board does not expect to use more chemicals in the rate year. However, Mr. Edge determined that there have been price increases from the chemical vendors. He proposed a rate year amount of $433,751 or $3,245 more than the test year amount (Id., p. 41; and Sch. RY-14).

Mr. Edge next testified that the Board's "road surface restoration" expense increased significantly in the test year due to an accounting change (Id., p. 41). According to the witness, the accounting change involved a decision to no longer capitalize these expenses. Mr. Edge opined that the rate year level of expenditure for road repair should be the same as the test year, $63,229 (Id., p. 42).

Mr. Edge did identify $255,598 of capitalized road repairs and inventory. He related that the inventory expenditure level has decreased from the last docket because over the last three years the Board has completed a major meter replacement program and replaced most of its hydrants (Id., p. 42; and Sch. RY-3). He adopted the test year level of expenditure of $160,020 for capitalized inventory (Id.). Mr. Edge also used the test year level of $95,578 for capitalized road repair (Id. p. 43).

Mr. Edge also noted that he did not include any bad debt expense for the rate year. He reasoned that the Board "will continue to reduce its accounts receivable in the future and the collection of old accounts can be used to off-set any lost revenue from future bad debts" (Id.).

Mr. Edge next discussed the Board's municipal leasing expense. He related that the Board currently charges only the lease of its "beepers" to this account. He opined that the test year balance of $1,415 is adequate for the rate year (Id., p. 44).

Mr. Edge projected no "other interest" expense for the rate year. He explained that this interest expense is normally paid to the City because of negative cash balances. Mr. Edge related that the Board "hopes that its cash flow problems are over" and consequently projects no interest expense (Id.).

Mr. Edge testified that the Board's "operations labor and expense" account represents charges for Burns International Security to provide the security for the Board's property (Id., p. 44). Despite the addition of $3,000,000 of additional land to the Board's water system, Mr. Edge related that the test year expense of $37,368 will be used for the rate year (Id. and Sch. RY-3).

Mr. Edge related that the "treatment operation labor and expense" account includes annual charges for uniforms, boots, and general treatment supplies and expense. Mr. Edge testified that he used the test year amount of $59,380 for the rate year (Id., p. 45).

Mr. Edge also reiterated the Board's request for $2,000,000 for infrastructure replacement in the rate year, and $3,000,000 per year for each year following the rate year (Id.). This expense was added as a new expense category in the Board's cost of service (Id., Sch. RY-1).

Mr. Edge also requested that a 1.5 percent net operating income allowance be added to the Board's revenue requirement. Mr. Edge testified that in the last rate case the Commission reduced this allowance from the customary 1.5 percent to 1.0 percent based on a finding that the Board had been operating inefficiently and had made managerial errors (Id., p. 46). Mr. Edge asserted that the prior inefficiencies and errors have been corrected and the Board now seeks the full 1.5 percent net operating income allowance to provide for unforeseen expenditures (Id., pp. 46-48).

Mr. Edge's Schedule RY-1 provides the basis for the Board's revenue requirement. This schedule has been attached to this Report and Order as "Appendix 3", and is incorporated by reference.

The remainder of Mr. Edge's testimony focused on rate design. He related that the Board's current rate design utilizes declining block rates (Id., p. 49). He explained that the differential between the two blocks was reduced in the Board's last rate case. He now believes the differential should be completely eliminated. Mr. Edge maintained that current Rhode Island law supports this proposal (Id.). (See R.I.G.L. Section 46-15.4-6 (8)(b)).

Mr. Edge testified that by eliminating the second block the Board "would generate $260,447 of additional revenue" (Id.). He related that this additional revenue can be used to offset the $3,634,020 increase being sought through this filing. If this additional revenue is applied across-the-board, Mr. Edge testified that the rate increase impact of the instant filing will be reduced from 45.05% to 42.31% (Id., p. 50; and Sch. RY-16).

B. The Division's Direct Case

The Division proffered the prefiled direct testimony of three individuals in its direct case. These witnesses were identified as Ms. Andrea C. Crane, a consultant with the Columbia Group, Inc., 38C Grove Street, Ridgefield, Connecticut; Mr. Jerome D. Mierzwa, a consultant with Exeter Associates, Inc., 12510 Prosperity Drive, Suite 350, Silver Spring, Maryland; and Mr. Raymond Church, a water engineering specialist with the Division.

Ms. Andrea Crane stated that her firm was engaged by the Division to review Pawtucket's rate filing, and to provide revenue requirement recommendations. Based on her evaluation of the filing, and after the discovery process, Ms. Crane summarized her conclusions and recommendations as follows:

1. Based on the test year ending June 30, 1997 as adjusted, the Board has pro forma revenue at present rates of $8,208,595 (see Schedule 1).

2. The Board has pro forma costs, including pro forma debt service costs, of $8,585,374 and an operating reserve allowance requirement of $128,781, for a total revenue requirement of $8,714,155.

3. Based on these determinations, a rate increase of $505,559 is appropriate. This represents an increase of 6.16% on total pro forma revenue at present rates. My recommendation is considerably less than the rate increase of $3,634,020 or 45.05% of total revenue being requested by the Board (Division Exh. 1, p. 6).

Ms. Crane began her testimony with comments about Pawtucket's pro forma revenue. She disagreed with Pawtucket's use of the actual test year level of metered sales to develop its rate year revenues. She explained that because metered consumption fluctuates, it is common to use an average consumption over a period of time to determine a "normalized" level of consumption for ratemaking purposes (Id., p. 7). She related that in order to mitigate the impact of weather variations from year to year, she recommends that an average consumption over a period of five to ten years be used to determine pro forma consumption for ratemaking purposes (Id., p. 8). Ms. Crane opined that this pro forma consumption would then be applied to Pawtucket's "average rate year customers" (Id.). However, according to Ms. Crane, Pawtucket's reporting system is so antiquated that she could not obtain either actual sales data or customer counts (Id.). She also related that Pawtucket is "also unable to determine its total volume of water sold, nor does it have confidence in the reported pumpage totals" (Id.).

Ms. Crane testified that Pawtucket's methodology to develop pro forma operating revenue is unreasonable. She explained that the Board's methodology:

...inappropriately matches test year usage with number of rate year customers that includes two years of annual growth (Id., p. 10).

She opined that the net result of the Board's methodology is that its rate year revenue claim includes consumption that is lower than the actual consumption experienced in the test year. She further criticized this methodology because the Board has not demonstrated that the test year consumption level was higher than normal (Id., p. 10).

Accordingly, Ms. Crane recommended that Pawtucket's test year metered sales revenue be increased by 1% annually between the test year and the rate year to reflect incremental sales associated with customer growth. The resulting adjustment is $116,055 (Id., Sch. 2).

Ms. Crane also recommended a corresponding adjustment to increase that portion of the surcharge collected by the Board pursuant to State law (R.I.G.L. Chapter 46-15.3). The resulting adjustment is $2,550 (Id., Sch. 3).

Ms. Crane also recommended an adjustment relating to the Board's sales for resale revenue. Ms. Crane proffered the following table to show the Board's variations in sales for resale over the past four years:

FY 1997    662,830 HCF

FY 1996    968,046 HCF

FY 1995    877,588 HCF

FY 1994    754,394 HCF (Id., p. 12).

Ms. Crane related that it was proper for Pawtucket to exclude fiscal years 1995 and 1996 due to their "abnormally high" sales. However, she contended that the Board's methodology, which uses averaged sales for resale revenue in fiscal years 1994 and 1997, "ignores the rate increase that occurred in September, 1994" (Id., p. 12). Instead, she recommended that the average reported sales for resale in fiscal years 1994 and 1997 be priced at the current tariff rate in order to develop the rate year sales for resale pro forma revenue (Id., p. 13). The resulting adjustment is $23,347 (Id., Sch. 4).

All told, Ms. Crane recommended a total pro forma revenue adjustment of $141,951 (Id., Sch. 1).

Ms. Crane began her discussion regarding Pawtucket's pro forma expenses with a recommended adjustment for "salaries and wages" expense. She noted that the Board projected payroll expense for the rate year based on the projected increases to be granted under the two union agreements applicable to Pawtucket's employees. Ms. Crane related that the Board's proposed increase represents a 13.2 percent increase over the actual test year cost ($2,168,393 v. $1,915,102).

Ms. Crane testified that in order to provide the necessary link between the test year actual expense and the rate year, she utilized the test year expense, adjusted to reflect a 4% increase in fiscal year 1998, and a further adjustment of 2% for the rate year (Id., pp. 14-15). She noted that since the test year actuals already include the step and longevity payments made in the test year, she recommends no additional adjustments over and above these across-the-board increases (Id., p. 15). Ms. Crane calculated a new salary and wage expense of $2,031,540. Accordingly, she recommended a $136,853 negative adjustment (Id., Sch. 5). Ms. Crane also noted that her recommendation reflects total increases "that exceed those specified in the current [union] contracts" (Id., pp. 15-16).

Ms. Crane next addressed the Board's "payroll taxes and pension" expenses. She related that to be consistent with her salary and wage expense recommendation, she recommends a corresponding adjustment to reduce the Board's payroll tax and pension expenses. She calculated a negative adjustment of $11,975 (Id., Sch. 6).

Ms. Crane did not recommend any adjustment to Pawtucket's claim for its annual regulatory Commission assessment or for its total rate case costs. However, she did recommend that the rate case costs (estimated at $100,000) be amortized over three years instead of two. She based this recommendation on a review of the frequency with which Pawtucket has filed rate cases in the past (Id., pp. 17-18). The resulting negative adjustment is $16,667 (Id., Sch. 7).

Ms. Crane next discussed the Board's "injuries and damages" expense. She noted that this account includes the following four costs: unemployment costs, workmen's compensation reserve funding, Workmen's Compensation annual claims, and customer and employee injuries and damages claims.

Ms. Crane recommended the elimination of the Board's funding to the workmen's compensation reserve. She instead proposed that the Board book all claims directly as an expense for the utility (Id., p. 19). The resulting negative adjustment is $50,000 (Id., Sch. 8).

Ms. Crane also recommended that the Commission eliminate the $141,270 franchise fee expense included in Pawtucket's revenue requirement relating to Central Falls. Ms. Crane cited two reasons for her recommendation. First she contended that there:

...is no justification for requiring this payment to be funded by ratepayers, as this franchise fee is not necessary for the provision of safe and adequate utility service (Id., p. 22).

As her second factor, Ms. Crane stated that the contract between Central Falls and Pawtucket requires Central Falls to pay for its meters. She related that Central Falls has not reimbursed Pawtucket for the meter costs it has incurred in Central Falls (Id.). Ms. Crane recommended that the Commission encourage Pawtucket to either pursue the purchase of the Central Falls distribution system, or to exercise its right to terminate the contract (Id).

Mr. Crane next addressed the Board's "property tax" expense. She noted that Pawtucket's proposed rate year property tax expense of $570,603 represents an increase of almost 30% over its test year expense of $439,876.

Ms. Crane testified that the property tax increase included in Pawtucket's revenue requirement is significantly more than the increases that have been experienced by Pawtucket over the past five years. Ms. Crane recommended that the actual fiscal year 1996 property tax expense be used as a proxy for the Board's rate year property tax expense. She testified that this represents an annual increase over the actual test year cost of approximately 5.8%. The resulting negative adjustment is $76,609 (Id., Sch. 10).

Ms. Crane next recommended that the fiscal year 1995 cost be eliminated from Pawtucket's pro forma "maintenance of treatment equipment" expense calculation. She reasoned that the Board's calculation, which uses a four-year average, should not include the 1995 cost as this fiscal year amount "is almost ten times higher than the test year amount and it is almost three times higher than the next highest annual cost" (Id., p. 25). She proffered the table below to show the history of these costs over the past four years:

FY 1994    $28,392

FY 1995    80,573

FY 1996    10,850

FY 1997    8,250 (Id.).

She concluded that this data suggests that the use of a simple four-year average may not be appropriate for this expense. The resulting negative adjustment is $16,185 (Id., Sch. 11).

Ms. Crane objected to the Board's use of different methodologies for calculating its "capitalized road repair" and "resurfacing" expenses for the rate year. She noted that the Board used a four-year average of costs incurred from fiscal year 1994 through fiscal year 1997 with regard to capitalized road repair. For road surfacing expense, she noted that the Board used the actual test year amount, which she observed was considerably higher than the expenses incurred in the previous three years (Id., p. 26).

Ms. Crane related that the Board's decision to use the actual test year amount for road resurfacing, based on an accounting change which took place in the test year, is inappropriate. Instead, she opined that since the accounting change impacted the level of costs in each of these two accounts relative to prior years, "it is appropriate to examine the two accounts together and use the same methodology for both accounts..." (Id., p. 27). She recommended a negative adjustment of $31,881 (Id., Sch. 12).

Ms. Crane recommended two adjustments to Pawtucket's debt service claim. First, she recommended that the debt service associated with the new debt issuance be excluded from the Board's revenue requirement. She cited the following reasons:

First, the Board's filing did not provide sufficient support for the projects on which this $10 million is to be spent. While Mr. Doucette provides some general discussion in his testimony regarding the types of projects that might be undertaken, the Board has not provided a comprehensive rehabilitation plan for its water treatment facility. Furthermore, I understand that the PWSB has a substantial number of new members. It is likely that this new Board will be involved in further review of any plans for water treatment plant rehabilitation I believe that it would be premature at this time to approve debt service on the additional $10 million when the new Board has not had the opportunity to develop a comprehensive plan for the facility. Moreover, there is some question as to whether the Board will incur any debt service on this new debt in the rate year. According to Mr. Doucette, the Board still has $3.4 million of unexpected proceeds relating to the earlier debt issuance. For all these reasons, the issuance of the new debt does not appear to be as imminent as suggested by the PWSB's testimony (Id., pp. 28-29).

Ms. Crane also expressed her continued concern about the relationship between the Board and the Pawtucket Building Authority ("PBA"), and the lack of responsiveness to past Commission directives with regard to debt financing. She related that in its last rate case, the Board was directed:

...to report quarterly on the interest income generated through Board funds held by the PBA. The report should detail the interest income earned and how these funds are being spent.

Ms. Crane testified that no such reports have been filed by the Board (Id., p. 29). She also noted that it appears that the Board is having difficulty reconciling its reported cash balances with the PBA records (Id.).

Ms. Crane also commented on the PBA's recent refinancing of its 1991 $10 million bond issuance. She explained that at the time of the refinancing the principal balance of the 1991 issuance had been reduced from $10 million to $8.5 million. Nevertheless, Ms. Crane related, in undertaking this refinancing the PBA replaced the $8.5 million in outstanding debt with $10 million in new debt. According to Ms. Crane, this additional $1.50 million is not mentioned in the Board's rate filing (Id., pp. 29-30).

For the reasons cited above, Mr. Crane recommended that the debt service costs associated with the projected $10 million bond issuance be eliminated from the Board's claim. The resulting negative adjustment is $800,000 (Id., Sch. 13).

Ms. Crane testified further that, if the Commission decides to allow the Board to collect these prospective debt service costs from ratepayers, an interest rate of 5.2% should be adopted. She reported this rate to be the average municipal bond rate as reflected in the New York Times as of April 5, 1998 (Id., p. 31).

Ms. Crane also recommended a debt service adjustment relative to the interest earned on funds being held by the PBA. She related that this interest income, once used for capital projects, is now used to directly reduce debt service costs. However, she stated that the instant filing does not reflect any corresponding reductions (Id.).

In order to calculate a corresponding adjustment, Ms. Crane considered the unexpended bond proceeds as estimated by Mr. Doucette, and the Board's estimate of current debt service reserves. She explained that she then used one-half of this total balance as a proxy for the average balance during the rate year. The resulting negative adjustment is $134,341 (Id., Sch. 14).

Ms. Crane next discussed the Board's Infrastructure Replacement ("IFR") Plan. She contended that the Board's IFR Plan, as submitted, does not demonstrate a need for the funding level being requested. She emphasized that the Plan includes no infrastructure funding requirement in the rate year, fiscal year 1999 (Id., p. 33).

Ms. Crane also opined that capital costs should not be funded from current rate revenues. She related that requiring current ratepayers to fund these costs from current rate revenue will result in:

Today's ratepayers providing all of the funding for certain assets that will continue to serve ratepayers for many years, and in some cases for generations, into the future (Id., p. 34).

In spite of her belief, Ms. Crane stated that she recognizes that the Commission has approved the funding of IFR plans for other utilities from current rate revenues. Accordingly, she reflected current funding in her revenue requirement recommendation (Id.).

In her closing IFR comments, Ms. Crane stated that she has included an annual IFR funding level of $845,000 in her revenue requirement recommendation. She related that this amount represents the average of the first three years of funding requirements as specified in the Board's Plan which was submitted to the Rhode Island Department of Health ("DOH") (Id., Sch. 15). Ms. Crane also recommended that the Commission direct Pawtucket to provide quarterly reports to the Commission detailing the IFR revenues received each quarter, the total IFR revenues collected to date, and the actual IFR expenditures made (Id., p. 35).

Ms. Crane also recommended adjustments to the Board's $198,000 claim for motor vehicle replacement costs. She testified that the Board's program should be extended from five years to ten years. She reasoned that over the past three fiscal years the Board's transportation plant in service balance has increased on average by $30,000 annually. She testified that if her recommendation is accepted, the Board will be able to expend three times this amount each year (Id., pp. 35-36). The resulting negative adjustment is $99,000 (Id., Sch. 16).

Finally, in order to be consistent with her recommended aggregate adjustments, Ms. Crane proposed an adjustment to the Board's "operating reserve allowance" claim. The resulting negative adjustment is $46,729 (Id., pp. 36-37; and Sch. 17).

Ms. Crane provided the Commission with a revenue requirement summary. This summary is attached to this report and order as "Appendix 4", and is incorporated by reference (Id., Sch. 1).

Mr. Jerome Mierzwa testified that his firm was retained by the Division to perform a cost of service study for the Board, and to assist in evaluating the rate design aspects of the Board's rate filing.

Mr. Mierzwa summarized his findings and recommendations as follows:

- The PWSB should refine the cost of service study prepared by the Division in this proceeding and present it in its next rate proceeding. Potential refinements could include separately identifying the costs associated with serving PWSB's various retail customer classes;

- Current rates for public fire protection service recover significantly less than the indicated cost of service. If the PWSB is granted in excess of 50 percent of its requested increase in this proceeding, the rates for public fire protection service should be increased by the system average increase authorized by the Commission. If the PWSB is granted 50 percent or less of its requested increase, the rates for public fire should be increased by one and one-half times the system average increase;

- PWSB's current rates for private fire protection service should be retained;

- Rates for Retail, Central Falls and Wholesale customers should be increased by an equal percentage basis to produce the revenue target approved by the Commission after accounting for the additional public fire protection service revenues; and

- One-half of the existing differential between PWSB's existing 1st and 2nd block consumption rates should be retained (Division Exh. 2, p. 3).

In order to compare the results of the Division's cost of service study with Pawtucket's current and proposed rates, Mr. Mierzwa proffered the following table:

Table 1

PAWTUCKET WATER SUPPLY BOARD

Comparison of Allocated Costs and Present and Proposed Rates

 [(a) Reflects consumption revenues plus 11.44 percent of customer charge revenues. Customer charge revenue allocation is based on the respective number of Retail and Central Falls customers (Id., p. 10).]

Mr. Mierzwa testified that overall the proposed rates for retail and wholesale customers closely reflect the indicated cost of service and, therefore, appear reasonable (Id., p. 10).

Mr. Mierzwa also related that IFR-related costs have been allocated entirely to the "General Water Service" category, and subsequently allocated to the Retail, Central Falls and Wholesale customer classes based on net plant investment. Mr. Mierzwa related that based on prior Commission decisions, no IFR costs have been allocated to fire protection service in the Division's study (Id., p. 9).

Mr. Mierzwa opined that one-half of the existing differential between the Board's 1st and 2nd block rates be retained in order to mitigate the impact of rate shock. Mr. Mierzwa related that a total elimination of the 2nd block rate now will cause certain customers to realize rate increases in excess of 65 percent (Id., p. 11). He recommended that one-half of the differential be retained until "more complete cost of service data is presented" by the Board in its next rate case (Id.).

In his final comments, Mr. Mierzwa testified that because the rates for public fire protection service recover significantly less than the indicated cost of service, he recommends that if the Board:

...is granted less than 50 percent or less of its requested increase, the rates for public fire be increased by one and one-half times the authorized percentage increase (Id., p. 11).

Subsequently, on April 17, 1998, Mr. Mierzwa filed supplemental prefiled direct testimony for the primary purpose of presenting the Division's cost of service study at the Division's recommended revenue requirement. Mr. Mierzwa also clarified the Division's recommendation concerning the rates for service to Central Falls (Division Exh. 4).

Mr. Mierzwa testified that his original cost of service study was based on Pawtucket's filed revenue requirement. The amended study now reflects the use of the Division's recommended revenue requirement (Id., p. 2). To clarify the Division's recommendation regarding rates to Central Falls, Mr. Mierzwa explained as follows:

...if Central Falls continues to upgrade and maintain its distribution system, and if the Commission deems it appropriate to eliminate the Central Falls franchise fee from the PWSB's revenue requirement as recommended by Division witness Ms. Andrea Crane, then Central Falls should pay PWSB's wholesale usage rate. Because the PWSB performs the metering and billing function for Central Falls, Central Falls' customers should pay the same customer charges as the PWSB's other retail customers. If the PWSB continues to be required to pay the franchise fee to Central Falls or if the PWSB assumes responsibility for renewing, replacing and maintaining the distribution system in Central Falls, then the rates to Central Falls' customers should be at least equal to the rates charged to the PWSB's other retail customers (Id.).

Mr. Raymond Church presented the Division's position relative to Pawtucket's IFR program (Division Exh. 3).

At the outset of his testimony, Mr. Church explained that the Board's IFR program is a requirement of Rhode Island's Comprehensive Clean Water Infrastructure Act of 1993 ("Act") (R.I.G.L. Chapter 46-15.6). Mr. Church proffered a general description of the Act's parameters and requirements.

Mr. Church related that Pawtucket's IFR plan was submitted to the DOH in February, of 1996. According to Mr. Church, the DOH approved Pawtucket's plan on May 27, 1997 (Id., p. 3).

Mr. Church testified that while he believes the projects outlined in the Board's IFR plan comport with the requirements of the Act, he expressed concerns with regard "to the amount of work and revenue being requested" (Id., p. 4). Mr. Church explained that the IFR plan submitted to the DOH "outlined a three-year average of $845,000 per year for the first three years" (Id., pp. 4-5). In contrast, Mr. Church noted that Mr. Doucette's testimony now reflects a request for $2,000,000 with an automatic increase of $1,000,000 (Id., p. 5). Mr. Church recommended that the Board be limited to $845,000 per year (Id., p. 8). Mr. Church also rejected any automatic ramp-up increase in IFR funding (Id.).

Mr. Church also questioned the Board's plans for the $3.4 million in bond proceeds remaining from Pawtucket's second $10 million bond issue (Id., p. 5). Mr. Church further questioned the Board's plans regarding the design of certain water treatment projects. He relates that these plans have yet to be finalized (Id.).

Mr. Church also recommended that an evaluation take place to compare the feasibility of constructing a new treatment facility with the cost of rehabilitating the existing facility (Id., p. 6). Mr. Church additionally recommended that Pawtucket investigate obtaining "Drinking Water State Revolving Fund" [sic] funds from the DOH. He opined that this funding source can be used in lieu of bonds or as a supplement thereto (Id.).

In his final comments, Mr. Church criticized the Board's current billing format. He expressed concern that the general public cannot easily calculate their bill with the information provided (Id., p. 9).

C. Central Falls' Direct Case

The city of Central Falls proffered the prefiled direct testimony of two individuals in its direct case. These witnesses were identified as Mr. Thomas B. Nicholson, P.E., Managing Engineer, Pare Engineering Corporation, 8 Blackstone Valley Place, Lincoln, Rhode Island; and Mr. Leo H. Fox, CPA, 660 Roosevelt Avenue, Pawtucket.

Mr. Thomas Nicholson testified that Pare Engineering Corporation ("Pare") has become familiar with Pawtucket's water system through a number of engagements dating back to 1987 (Central Falls Exh. 1, p. 2). Mr. Nicholson opined that Central Falls' cost obligations under the instant rate filing "is not justifiable" (Id., p. 3).

Mr. Nicholson described his concerns as follows:

First, the proposed expenditures for water system improvements, in many respects will be carried out in a manner which will provide no direct benefits to the City of Central Falls service customers. Specifically, the PWSB is proposing the rehabilitiation of several miles of transmission and distribution mains throughout the system in 1998 at a cost of $3,400,000. These are described in the supporting documents of the Rate Filing as PBA Contract 3B and 3C. The majority of these pipelines are outside of the Central Falls service area and will provide no benefit to the City's service customers. Major portions of this work include the cleaning and lining of water mains on Newport Avenue, Cottage Street, Mineral Spring Avenue and Armistice Boulevard, all intended to improve transmission and distribution service to the outer reaches of the PWSB system. The Central Falls service area receives almost all of its supply directly from the main pumping station on Branch Street. There is no pipeline rehabilitation for the pipes leading to the Central Falls service area so the residents will not receive any benefits from this work. In fact it is the PWSB's position that, due to the fact that the City owns its own distribution piping, the rehabilitation of these pipelines is the responsibility of the City. Therefore, in addition to assisting in the payment of the rehabilitation of the PWSB system, it is the position of the PWSB that the City must fund its own pipeline rehabilitation program. This inequity is also reiterated in past bonding to fund system-wide improvements in which the costs for the replacement to hydrants and customer service lines within the PWSB system was included in the overall rate structure when the City of Central Falls must pay for the replacement of similar items within the City's service area directly to the PWSB with City funds (Id., p. 3).

Mr. Nicholson also criticized the Board for its failure to properly treat its water. Mr. Nicholson contended that the severe tuberculation problem manifest in Pawtucket's pipes results from a lack of "a proper treatment scheme" necessary to "render the water less aggressive" (Id., p. 4). Mr. Nicholson testified that because of past treatment deficiencies the Board now proposes to spend $40 million over the next ten years to rehabilitate and replace its pipeline. He asserted that Central Falls receives no benefit from this pipeline work and should not share in these costs.

Mr. Nicholson related that it is unfair for Pawtucket to ask Central Falls to help pay for its pipeline work, while at the same time insisting that Central Falls maintain its own pipeline system (Id., p. 5). Mr. Nicholson also called it unfair, because Central Falls' pipes must also be rehabilitated due to Pawtucket's failure to properly treat its water (Id.).

Finally, Mr. Nicholson opined that the Board's proposed ten-year plan of treatment system and transmission and distribution system improvements will not:

...have a significant effect in terms of improving overall residential water quality, unless all the distribution system pipelines are included in the rehabilitation program (Id., p. 5).

Mr. Nicholson related that the proposed IFR plan involves only "a small fraction of the more than 21 miles of distribution pipelines" within the Pawtucket water system (Id.). He testified that a majority of the Board's ratepayers will see no water quality improvements from these proposed improvements (Id.).

Mr. Leo Fox testified that he was engaged by Central Falls to assist the City in demonstrating the adverse economic impacts that the proposed Pawtucket rate increase will have upon Central Falls' ratepayers. Mr. Fox also expressed Central Falls' concern with "pay-as-you-go" financing, and offered clarifications relative to the purposes for the franchise fee payments Central Falls receives from Pawtucket (Central Falls Exh. 2, p. 2).

Mr. Fox contended that unless Pawtucket is required to complete a relining and replacement program in Central Falls, Central Falls should not be subsidizing the improvements proposed for Pawtucket's distribution system. He related that Central Falls alone must pay for its distribution system improvements, and so should Pawtucket (Id.). Mr. Fox calculated the Central Falls contribution to the Pawtucket distribution system to be $439,725, under the proposed rate increase (Id.).

Mr. Fox emphasized that Central Falls only objects to the costs it must incur relative to Pawtucket's distribution system. He related that the City does not object to costs associated with maintenance of the source of supply, treatment, transmission, water analysis, billing, collection and administration systems (Id., p. 3).

Mr. Fox asserted that the contract which exists between Central Falls and Pawtucket does not require Central Falls to assist in maintaining Pawtucket's distribution system. Moreover, Mr. Fox related, the contract arguably does not even require Central Falls to maintain the distribution system located in Central Falls (Id., p. 5). Mr. Fox requested that the Commission interpret the contract for the purpose of answering the following question:

What would motivate the parties to the agreement to insert such strong language about one party constructing their system while NOT STIPULATING the same provisions to the second party, the city of Pawtucket (Id., p. 6).

Mr. Fox related that it is inconceivable that the original parties to the contract would expect Central Falls to subsidize improvements to both cities' distribution systems. Rather, he opined, it is more probable that they expected that both parties would provide adequate on-going maintenance and repair to their own distribution systems which would provide parity (Id.).

Mr. Fox testified that Central Falls must also object to Pawtucket's "pay-as-you-go" financing alternative. He related that the concept of "pay-as-you-go" was intended for providing a fixed level of funding for on-going repairs and maintenance of infrastructure, assuming that the system was properly maintained (Id., p. 8). He maintained that "it was not intended for extraordinary repairs and replacement" (Id.). Mr. Fox opined that bond financing is a more appropriate method for funding such capital costs (Id., p. 9).

Relative to the purpose of the franchise fees, Mr. Fox testified that:

There should be no association between the fees paid to Central Falls and their rights and obligations to construct and/or maintain the Central Falls water system. The payments are fees for the right to sell water to the residents and businesses within the city of Central Falls. They are Franchise Fees (Id.).

D. OSRAM's Direct Case

OSRAM proffered the prefiled direct testimony of one individual in its direct case. The witness was identified as Mr. Gary D. Shambaugh, Executive Vice President of AUS Consultants, 1000 North Front Street, Wormleyburg, Pennsylvania.

Mr. Shambaugh testified that OSRAM has retained his firm to review Pawtucket's rate filing in order to determine if the proposed customer rates are justified (OSRAM Exh. 1, p. 3). Mr. Shambaugh related that based on his review, he believes Pawtucket's proposed customer rates are "excessive and discriminatory" (Id.). Mr. Shambaugh also related that he has performed a functional cost allocation study which supports the continuation of Pawtucket's current 2nd block rates, and which suggests other modifications to Pawtucket's proposed rates (Id., exhibit A).

Mr. Shambaugh addressed the following nine issues in his prefiled testimony:

1. PWSB annual operating revenues,

2. PWSB annual operating expenses,

3. Proposed infrastructure rehabilitation program,

4. Proposed 3rd $10,000,000 bond issue,

5. Current debt service,

6. Vehicle replacement,

7. Net income,

8. Cost of service, and

9. Customer tariff rate design.

He also noted that because Pawtucket did not supply a customer bill frequency analysis, an accurate customer tariff rate design at proposed rates cannot be established (Id., p. 4).

Addressing operating revenues first, Mr. Shambaugh related that he does not agree that there was little or no operating revenue growth in fiscal years 1996 and 1997. He noted that the annual reports filed by Pawtucket with the Commission in fiscal years 1996 and 1997, reflect respective increases of $467,465 and $399,102 (Id., p. 5). Mr. Shambaugh calls Pawtucket's direct testimony on this subject "useless" (Id.). He testified that no adjustments should be made to the Board's operating revenue. He also recommended a complete audit of all customer accounts; and that the Commission direct the Board to retain all future customer usage data by meter size and class (Id.).

Mr. Shambaugh stated that a review of the overall operating expenses in the test year indicates that they are in the range of reasonableness, with one exception. He opined that the Board's lack of explanation regarding five vacant positions constitutes grounds for a related negative adjustment totaling $173,309 (Id., p. 6).

Mr. Shambaugh provided $800,000 to the Board in his recommendation regarding infrastructure rehabilitation costs. He concluded that the current management of the Board has failed to demonstrate its ability to spend more "wisely and economically" (Id., p. 7). He also related that "pay-as-you-go" funding only penalizes current customers for past management neglect (Id.). He recommended bonding instead (Id.).

Mr. Shambaugh also recommended the elimination of the entire claim for a third $10 million bond issue. He opined that Pawtucket must first develop a comprehensive business plan for the entire system rehabilitation, present detailed engineering studies to support the proposed expenditures, and set forth a detailed plan of long-term financing (Id., p. 8).

Mr. Shambaugh also opined that interest earned by Pawtucket through funds retained by the PBA should be used to offset current debt cost (Id.). He recommended no adjustments.

Mr. Shambaugh testified that he sees nothing wrong with a "systematic replacement" of the Board's vehicles. However, he related that in the instant filing the Board appears again to be penalizing current customers for prior management errors (Id., p. 9). He recommended $50,000 of annual capital lease costs as a "reasonable and realistic" vehicle replacement program (Id.).

Mr. Shambaugh also recommended limiting the Board's net operating reserve allowance to 1.25 percent. He reasoned that the instant filing still reflects a number of management inefficiencies. He cited the following examples:

- No customer bill frequency analysis was prepared for the test year period.

- The number of customers by meter size and class of customer could not be provided.

- An audit of the customer base was not performed.

- Proofs of revenue at present and proposed rates and customer impact schedules were not prepared by customer class and meter size, and

- Support was lacking for the proposed $10,000,000 bond issue and the infrastructure rehabilitation program (Id., p. 10).

Mr. Shambaugh recommended an annual operating revenue requirement of $8,476,926 for Pawtucket, or an increase of $410,284. He proffered the following supporting table:

(Id., p. 10).

Mr. Shambaugh also testified that because the Board did not provide a cost of service study, customer bill frequency analysis, or customer impact schedules by meter size and class of customers, it is not able to determine if its current customer tariff rate structure "is fair, just, and equitable" (Id., p. 11). Mr. Shambaugh related that unlike the Board, he utilized a cost of service study based on principles adopted by the American Water Works Association of Water Supply Practices (Id., p. 12).

Mr. Shambaugh related that where Pawtucket "assumes that a declining block rate is bad for water conservation", his analysis shows that if the declining block rates are set properly, a declining block rate will have little or no effect on water conservation (Id., pp. 12-13). Mr. Shambaugh explained that the functional cost allocations used in his cost of service study show that:

...the lowest price for which water is sold should be $0.7521 per hundred cubic feet (hcf) (Id., p. 15).

He concluded therefrom that the second volumetric block rate should be in the range of $0.7521 per hcf (Id., p. 15).

Mr. Shambaugh also explained that his analysis proves that residential class water customers require more cost to serve than a larger user. He related that residential customers are responsible for a larger potion of the peak load which requires more capacity-related facilities and cost to serve. He contended that from a fixed-cost and variable-cost basis, it is cheaper to serve a large-volume user than serve residential class customers (Id.). He stated that for this reason "it makes no sense to eliminate the last volume block in the...[Board's] current rate structure" (Id., p. 16).

In conclusion, Mr. Shambaugh recommended that customer tariff rates be based upon an annual revenue requirement of $8,476,928. He also recommended maintaining the 2nd block of Pawtucket's current volumetric rate at $0.8345 hcf. Alternatively, Mr. Shambaugh related that if a declining block rate structure continues to be undesirable, the 2nd block rate can be adopted as a separate rate for large commercial and industrial customers. He opined that all other proposed rates should be scaled back based upon the final revenue requirement approved by the Commission (Id., p. 16).

E. Pawtucket's Rebuttal Case

Mr. Thomas Doucette prefiled rebuttal testimony in response to the direct cases of the other parties. In response to Mr. Nicholson's testimony, Mr. Doucette related that the 1997 Pare report, referred to by Mr. Nicholson, constitutes five large volumes of data with a nine-page Capital Improvement Program for a 25-year planning horizon. He stated that the report provides no specific recommendations (Pawtucket Exh. 9, p. 1). He further related that the 1993 Pare report was solely for "Stump Hill Storage". He also criticized Mr. Nicholson for not recognizing that the contract between Central Falls and Pawtucket makes Central Falls responsible for their own distribution system (Id.).

Mr. Doucette also took exception to Mr. Fox's testimony. Mr. Doucette related that Mr. Fox has failed to recognize the fact that the franchise fee is to be used to maintain the Central Falls distribution system. He added that the franchise fee amount that Pawtucket pays Central Falls "should be an offset to the subsidization he calculated in his testimony" (Id., p. 2).

Mr. Doucette also addressed Mr. Shambaugh's testimony. Mr. Doucette asserted that Mr. Shambaugh merely created a generic situation which does not truly reflect the Pawtucket scenario (Id.).

Mr. Doucette agreed with Mr. Mierzwa's recommendation that Pawtucket maintain a two-block rate structure, and that wholesale, retail and Cumberland customers be increased by the same percentage (Id., p. 3). He did not however, agree with Mr. Mierzwa's recommendation that Central Falls' customers pay less for water (Id.).

Mr. Doucette agreed with Mr. Church's contention that the Board is responsible for updating its IFR plan. He also noted that Pawtucket is looking into the availability of "Safe Drinking Water Act Revolving Loan Funds" [sic] (Id.).

In his final comments, Mr. Doucette related that while he believes that the 42 percent increase originally requested is still appropriate in view of the improvements which are necessary for his water system, he has agreed to reduce the rate request down to 13 percent. He explained that because Pawtucket has recently experienced a change in the majority of its board members, in fairness to them, he opines that they:

...need to have time to understand the operation of the Pawtucket Water Supply Board and the needed Infrastructure improvements (Id., p. 4).

Mr. Walter Edge also prefiled rebuttal testimony. At the outset he observed that the Division's largest three recommended adjustments related to Pawtucket's request for pay-as-you-go funding, interest on the third $10 million bond, and principal on the third $10 million bond (Pawtucket Exh. 10, p. 2). He related that the Division's position appears to suggest that these reductions would only apply for this docket, rather than to say that the proposed projects will never be needed (Id.).

Mr. Edge explained that the current turnover at the Board (4 of the 5 members) has resulted in a need for the new board members to consider "these very important issues" (Id., p. 4). Consequently, he related that he "would agree that the Division's postponement of these three issues is appropriate" (Id.). Based on this conclusion, Mr. Edge stated that Pawtucket will agree with the Division's proposed aggregated adjustment of $2,225,000 for these three expense items (Id.).

Mr. Edge next identified eight other Division adjustments agreeable to Pawtucket. He enumerated and discussed them as follows:

1. The Division has recommended a reduction of $136,853 to salaries and wages and $11,975 for the related payroll taxes and pension which was proposed by the PWSB. The PWSB has a few vacancies that the new Board should review to determine if the positions will be filed. I believe that the Division has provided the PWSB with adequate moneys to pay the current staff for the rate year and any additional moneys needed after the new Board reviews the positions can be requested in the next rate case.

2. The Division has recommended that rate case expense be allowed as requested, but that a three year amortization (a $16,667 issue in the rate year) be used instead of two years as proposed by the PWSB. This is acceptable to PWSB.

3. The Division has reduced the maintenance of equipment allowance by $16,185 because they have calculated their historic average excluding one significant historic year. This issue is minor and PWSB believes that it can survive without the $16,185, but cutting maintenance costs is often a mistake in the long run.

4. The Division proposed an adjustment to capitalized road repair of $31,881. Their calculation appears reasonable and PWSB concurs.

5. The Division also proposed an adjustment for PBA interest revenues ($134,341) as an off-set to PBA interest expense. The need for this adjustment was actually identified by PWSB in responding to a Division data request. The amount of the adjustment appears a bit high but it is acceptable to the PWSB.

6. The motor vehicle replacement plan should be reviewed by the new board, and therefore, the Division's adjustment ($99,000) to slow down the program is acceptable to the PWSB at this time.

7. The Division has made an adjustment of $46,729 to the net operating reserve allowance to reflect the reduction needed as a result of all the above listed proposed adjustments. Since PWSB has agreed to a significant portion of these adjustments, it is appropriate that PWSB agrees to the correct calculations of the net operating reserve.

8. Lastly, the Division has made an adjustment for the revenue account "sales for resale" of $23,347 which I have reviewed and found to be more correct than my initial calculation. PWSB accepts this adjustment (Id., pp. 4-6).

Mr. Edge testified that there are still five Division adjustments which are opposed by Pawtucket. He identified the remaining issues as revenue growth, surcharge revenue, workmen's compensation reserve, property tax, and franchise fee.

Mr. Edge testified that the Division has no basis for its revenue growth adjustment of $116,055. He related that it was improper for the Division to project consumption revenue growth from the Board's 1 percent increase in customer charge revenue (Id., p. 6). He opined that "consumption is only impacted a minor amount by a few new residential customers" (Id., p. 7). He also reiterated that Pawtucket does not expect any increase of consumption sales in the rate year (Id.).

Mr. Edge objected to the Division's $2,550 surcharge growth adjustment for the same reason. He related that since the revenue growth adjustment is inappropriate, then the surcharge revenue adjustment is likewise inappropriate (Id.).

Mr. Edge disagreed with the Division's $50,000 workmen's compensation allowance adjustment because by using the Division's argument "you could never change from 'pay as you go' approach to the 'establishment of a reserve' approach (Id., p. 8).

Mr. Edge disagreed with the Division's $76,609 property tax adjustment because newly-received actual tax bills invalidate the Division's projections. He related that Pawtucket would agree to a $25,000 reduction (Id., p. 8).

Mr. Edge stated that while the Division's recommendation for Pawtucket to cease paying franchise fees to Central Falls is reasonable, he believes that it would be illegal (Id., p. 9). He noted that the contract has a two-year provision for termination.

Predicated on the aforementioned adjustments, Mr. Edge calculated the Board's amended revenue requirement as follows:

(Id., p. 10)

Mr. Edge related that $1,070,513 represents a rate increase of about 13 percent (Id.).

Mr. Edge next testified that he could agree with Mr. Mierzwa's recommendation to continue with the second block at a lesser differential, but he found Mr. Mierzwa's recommendations inconsistent with his [Mierzwa's] own calculations (Id., p. 13). Mr. Edge related that Mr. Mierzwa's cost of service study fixed rates far exceed the current customer charge rates, and the first block consumption rates are lower than the current rates for the first block. Mr. Edge also noted Mr. Mierzwa's use of "ratemaker license" for proposing rates that partly reflect his cost allocation study and partly reflect the current rate design (Id.). Despite these shortcomings, Mr. Edge opined that with the exception of the Central Falls recommendation, the Commission should adopt Mr. Mierzwa's cost allocation study (Id.).

Mr. Edge next testified that Mr. Shambaugh's base/extra capacity cost allocation study is "text book correct, but has little to do with [Pawtucket's] actual...cost allocations" (Id., p. 14). Mr. Edge also questioned the validity of Mr. Shambaugh's study in view of the large number of assumptions used (Id.). Mr. Edge reiterated that Pawtucket's lack of rate design-related data makes the task of designing rates that much more difficult (Id., p. 14).

Mr. Edge also disagreed with Mr. Shambaugh's extra capacity costs. He offered opposing views on the effect salaries and wages, property taxes, and pumping and chemicals have on peak demand costs (Id., pp. 14-15).

Mr. Edge also criticized Mr. Shambaugh's revenue requirement conclusions. He called his analysis "very simplistic" and "nothing more than his opinions" (Id., p. 15). He testified that Mr. Shambaugh's adjustment on long-term interest included a $352,393 mistake (Id.). He also contended that Mr. Shambaugh's recommendations to eliminate vacancies, reduce "pay-as-you-go" to $800,000, and allow $50,000 for annual capital leases "are totally without basis or support" (Id.).

Mr. Edge called Mr. Fox's testimony "old news" (Id., p.16). He related that these are the same arguments that were proffered by Central Falls in the Board's last rate case.

Mr. Edge also characterized Mr. Fox's testimony as "nearly moot" (Id.). He cited the Board's rebuttal position on the "pay-as-you-go" amount issue as an example (Id.).

Mr. Edge related that Mr. Fox's positions on the Central Falls franchise fee and its distribution system "conveniently follows the Central Falls party line" (Id.). He criticized Mr. Fox for wanting to maintain the franchise fee while having Pawtucket maintain Central Falls' distribution system (Id., pp. 16-17).

F. The Division's Surrebuttal Case

Ms. Andrea Crane proffered prefiled surrebuttal testimony relative to the disputed issues remaining between the Division and Pawtucket.

Ms. Crane took exception to Mr. Edge's contention that the Division failed to prove its point regarding metered sales revenue growth. She related that in her direct testimony she accepted Mr. Edge's 1% anticipated customer growth rate. She stated that her recommended metered sales revenue adjustment simply recognizes the fact that additional customers will result in additional consumption. She maintained that it is Pawtucket that has failed to demonstrate that "new customers will result in no incremental consumption" (Division Exh. 5, p. 3).

Ms. Crane did, however, amend her recommended adjustment based on her acceptance of Pawtucket's contention that it was improper to assume that all new customers have "average" consumption (Id., p. 3). She agreed that new customers would likely be residential customers, which class accounts for 74% of total consumption. Accordingly, she now recommends that the 1% annual growth rate be applied only to 74% of the total consumption, which results in an effective annual growth rate of .74% (Id., p. 4). She related that this modification will reduce her initial sales revenue adjustment by about 26%, to $85,770 (Id., p. 4; and Sch. 2).

Based on the above modification, Ms. Crane also made a corresponding adjustment to Pawtucket's State surcharge revenue. Her amended recommended adjustment for State surcharge revenue is $1,884 (Id., p. 4; and Sch. 3).

Ms. Crane continued to reject Pawtucket's claims for workmen's compensation costs. She offered the following supporting rationale:

Mr. Edge claims that it may be appropriate to fund both a reserve and the current level of actual claims for some period of time as a conversion is made from the pay-as-you-go method to the reserve method. However, the reserve has already been funded in the amount of $159,204, which is greater than the actual test year pay-as-you-go expense. Therefore, even if the PWSB was converting to the reserve method, it appears that the reserve already contains a sufficient accrual and therefore continued accruals of $50,000 per year are no longer required. Should the PWSB adopt the reserve method, the pay-as-you-go funding that I have included in my revenue requirement calculation should be sufficient to replenish the reserve as needed (Id., pp. 4-5).

Ms. Crane next testified that she did not ignore the Board's recent purchase of $3,000,000 of property when she calculated her recommended property tax adjustment. However, she did observe that the actual test year expense may not have been the $439,876 included in Pawtucket's test year claim, but rather $466,840 as shown in Mr. Edge's rate year calculation. Based on this observation, Ms. Crane reduced her original adjustment to reflect the impact of increased taxes associated with the new property. Her amended recommended adjustment is $46,609 (Id., pp. 5-6; and Sch. 10).

Ms. Crane also observed that Mr. Edge did not dispute the basis for her recommendation regarding the elimination of the franchise fee to Central Falls. She related that Mr. Edge simply believes that her recommendation is "illegal" (Id., p. 6). Ms. Crane stood by her ratemaking perspective and deferred to the attorneys on the legality question (Id.).

At the conclusion of her testimony, Ms. Crane related that the aggregate effect of her amended adjustments results in a new Division recommendation for Pawtucket's revenue requirement. She related that she is now recommending a rate increase of $566,950 for Pawtucket, which represents an increase of 6.93 percent over current revenues (Id., p. 7; and Sch. 1).

Ms. Crane's revised Schedule 1 provides the basis for the Division's revenue requirement recommendation. This schedule has been attached to this report and order as "Appendix 5", and is incorporated by reference.

Mr. Jerome Mierzwa proffered surrebuttal testimony to respond to the cost allocation and rate design positions of Pawtucket and OSRAM (Division Exh. 6).

Mr. Mierzwa disagreed with Mr. Edge's claim that Pawtucket's ratepayers are subsidizing the city of Central Falls. He offered the following explanation:

The cost of service study presented on behalf of the Division in this proceeding shows that rates to the City of Central Falls should be approximately 25 percent less than the rates applicable to the PWSB's other retail customers if the City of Central Falls continued to upgrade and maintain its distribution system and the PWSB is not required to pay a 25 percent franchise fee. If the PWSB continues to pay the franchise fee, and this Commission approves inclusion of the franchise fee as part of the PWSB's revenue requirement, then rates to the City of Central Falls should be increased by 25 percent from those shown in the Division's cost of service study. An increase of 25 percent in the cost of service study rates for the City of Central Falls would result in approximately the same rates for the City of Central Falls and the PWSB's other ratepayers. Under its current arrangements with the PWSB, the City of Central Falls pays the same rates as the PWSB's other ratepayers. Therefore, the PWSB's other ratepayers are not currently subsidizing the City of Central Falls. Conversely, because the City of Central Falls is paying on net, rates approximately equal to the cost of service, the City of Central Falls is not currently subsidizing the PWSB's other ratepayers (Id., p. 2).

Mr. Mierzwa also disagreed with OSRAM's witness, Mr. Shambaugh, regarding his claim that OSRAM's load factor is flat. Mr. Mierzwa related that a review of OSRAM's usage statistics clearly shows that OSRAM does not use water at a uniform or flat rate (Id.).

G. Central Falls' Surrebuttal Case

Mr. Thomas Nicholson proffered surrebuttal testimony to comment on Pawtucket's revised rate increase proposal (Central Falls Exh. 4).

Mr. Nicholson related that Pawtucket's revised request will provide $1 million per year for system improvements. He asserted that this level of spending will provide even less overall water quality improvement for the Board's customers than the Board's original rate increase proposal (Id., p. 1). Mr. Nicholson reiterated that a proper program for improving water quality must include a comprehensive program for addressing all water pipes in the system which can contribute to water quality concerns (Id.).

Mr. Nicholson also opined that because the Pawtucket and Central Falls systems are hydraulically connected, it makes no technical sense to rehabilitate one system and not the other (Id., p. 2). He emphasized that only a comprehensive program of corrosion control coupled with pipeline rehabilitation for the entire system will be successful in addressing the water quality problems which affect the service customers of Pawtucket, Central Falls, and southern Cumberland (Id.).

Mr. Leo Fox also proffered surrebuttal testimony. At the outset, Mr. Fox revised his estimate of the subsidy he previously opined that the citizens of Central Falls will contribute to help pay for the Pawtucket distribution system improvements. He related that the revision is necessary in view of the Board's revised revenue requirement proposal (Central Falls Exh. 5, p. 2).

In order to calculate the revision, Mr. Fox explained that he used the Division's recommended revenue requirement to start. He related that he then added back in the Central Falls franchise fee, which the Division had excised from its calculation. He stated that the end result was a revenue requirement of $8,901,063 (Id.). Based on this amount, and assuming the Commission approves the debt service cost requested by Pawtucket, and the $845,000 pay-as-you-go allowance to fund the improvements planned for the Board's distribution system, Mr. Fox estimated the amended Central Falls subsidy to be approximately $257,682 per year (Id., p. 3).

Mr. Fox also reiterated his earlier contention that the Commission should order Pawtucket to improve its entire water system, including the pipes in Central Falls (Id., p. 6). He also maintained that Pawtucket must have a long-range financing plan that makes economic sense. Mr. Fox opined that Pawtucket needs "to get their act together before they are allowed to spend any more money..." (Id.).

Mr. Fox also questioned the accounting behind the PBA's decision to refinance $8.5 of the 1991 bonded debt issue with $10 million of additional debt (Id., p. 6-7). He related that it now appears that Pawtucket's ratepayers are now responsible to pay $10,610,000 for refinancing debt of $8,680,000. He further related that it also appears that ratepayers are required to pay $1,248,904 "for the privilege of recalling the original bonds early" (Id., p. 8). Mr. Fox recommended that the Division investigate this refinancing matter (Id., p. 8-9). Mr. Fox also recommended that the PBA's cumulative retained earnings of $1,675,732, as of June 30, 1997, be used to pay debt service costs (Id., p. 10).

H. OSRAM Surrebuttal Case

Mr. Gary Shambaugh proffered surrebuttal testimony to address several outstanding issues. He began by stating that Mr. Doucette "is misinformed" with respect to data in OSRAM's possession (OSRAM Exh. 2, p. 2). He related that OSRAM has all of the data responses which have been circulated between the parties. He added that the data which is not available to OSRAM, is data that is not available at all (Id., pp. 2-3).

Mr. Shambaugh defended his use of "industry accepted practices" in the preparation of his cost of service, where better data was not available (Id., p. 3). He also found it interesting that Pawtucket has requested the elimination of the 2nd block volumetric rate without providing any information as to the cost of producing water. He additionally reiterated that a long-term financing of the Board's infrastructure improvements "has a better effect on the ratepayers' pocketbook than a pay-as-you-go method" (Id., p. 6).

In response to Mr. Edge's criticism of his direct testimony, Mr. Shambaugh related that it is not OSRAM's intent to micro-manage this utility. However, he testified that many of Pawtucket's claims were "unjustified, unsupported, and outrageous" and had to be addressed (Id., p. 6). Thereupon, Mr. Shambaugh reiterated his reasons for recommending adjustments to eliminate vacant employee positions, to reduce pay-as-you-go infrastructure improvements costs, and to reduce vehicle replacement costs (Id., pp. 6-8).

Mr. Shambaugh next criticized Mr. Edge's statement that OSRAM's cost allocation study has little to do with Pawtucket's actual cost allocations. He noted that Mr. Edge proposed the elimination of the 2nd block volumetric rate without basis or support. He also contended that neither Mr. Edge nor Mr. Mierzwa presented any support or calculations for the proposed rate design (Id., p. 9). Mr. Shambaugh further asserted that Mr. Edge "has demonstrated the lack of basic knowledge and understanding required to prepare a cost of service study" (Id.). He supported this contention as follows:

Mr. Edge would like everyone to agree that no effort is required to produce extra capacity or peak demand. Thus, no salary and wage costs are incurred to meet peak demand. That position is simply ridiculous. Facilities are in place to produce extra capacity or peak demand and should be allocated as such. Mr. Edge has further utilized an example of property taxes on an impounding reservoir as an example of 100% base costs. However, the reservoir provides all capacity, base and extra, including all water delivery at peak periods. Mr. Edge opines is that "This cost (property taxes) should be 100% base cost because it is not impacted by peak water usage. This statement is simply not true.

A fully allocated cost of service study assigns operating revenue requirements based upon the cost to serve a specific class or group of customers. Mr. Edge's theory of base cost assignment of property taxes is nothing more than an attempt to support his own baseless allocations to arrive at a uniform rate for all customers (Id., p. 10).

Mr. Shambaugh emphasized that it is possible to complete a cost of service study with insufficient data. He explained that when data is unavailable or inconsistent with reasonable expectations, it is necessary and acceptable to rely upon the limited knowledge of the system, industry published standards and guidelines in developing total system delivery, maximum day, average day, and maximum hour system deliveries. Mr. Shambaugh noted that the study he prepared was on a functional basis only. He stated that customer data was not required to complete the calculation of the base cost of water (Id., p. 11).

Mr. Shambaugh further testified that larger water users, which support base costs and overheads, will be severely impacted by dramatic increases in the cost of water service. He noted that Pawtucket is embarking on a major capital improvement program. He contended that if Pawtucket's rate design proposals are accepted, the larger water users in the system will be paying an unfair portion of these costs. Mr. Shambaugh related that competition may require adjustments in OSRAM's production or future business plans (Id., p. 13).

In closing, Mr. Shambaugh testified that the results of his cost of service study provide the basis for maintaining Pawtucket's current 2nd block volumetric rate at $0.8345 per hcf. He also asserted that his functional cost of service study "meets the test" of Rhode Island law.

Predicated on the totality of our findings we authorize the Pawtucket Water Supply Board to recover additional annual revenues of $614,430 for a total cost of service amount of $8,792,075. This represents an approximate increase of 7.5% over current revenues. Our cost of service calculation is attached to this Report and Order as "Appendix 1". This Appendix is incorporated by reference.

The revenue increase approved herein shall be apportioned on an across-the-board basis, with the exception of fire service rates as described herein. The existing two-block rate structure will be maintained until such time as the Commission can review the fully allocated cost of service study which the Pawtucket Water Supply Board has herein been directed to file.

Accordingly, it is

(15664) ORDERED:

1. That the tariff filing made by the Pawtucket Water Supply Board on January 9, 1998, is hereby denied and dismissed.

2. That the Pawtucket Water Supply Board is hereby directed to file with the Commission within thirty (30) days from the issue date of this Report and Order, new compliance tariffs designed to recover additional annual revenues of $614,430 for a total cost of service amount of $8,792,075. An approved cost of service schedule for the Pawtucket Water Supply Board is attached to this Report and Order as "Appendix 1", and is incorporated by reference.

3. That funding provided by this Report and Order for debt service and infrastructure replacement requirements shall be kept in restricted accounts. Funds not expended from these restricted accounts shall continue to be reserved and carried over to subsequent years for their designated purposes.

4. That the Pawtucket Water Supply Board shall act in accordance with all findings and instructions contained in this Report and Order.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND ON JULY 17, 1998, PURSUANT TO AN OPEN MEETING DECISION. WRITTEN ORDER ISSUED ON AUGUST 3, 1998.

PUBLIC UTILITIES COMMISSION

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