R2004-154 09-13-04 RESOLUTION NO. R2004-154
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PEARLAND,
TEXAS, SCHEDULING A PUBLIC HEARING ON THE PROPOSED WATER
UTILITY RATE INCREASED BY WALKER WATER WORKS, INC. (WATER
CCN NO. 11862).
WHEREAS, Walker Water Works, Inc. ("Walker") is a water utility that serves
1,122 residential customers (approximately 60 customers in the City's incorporated
limits),
WHEREAS, Walker has filed a Water Utility Rate Change Application with the
City and the Texas Commission on Environmental Quality ("TCEQ"),
WHEREAS, pursuant to Chapter 13 of the Texas Water Code, the TCEQ has
exclusive original jurisdiction over retail water and sewer rates all of Walker's
customers residing outside the City limits while the City has exclusive original
jurisdiction over the rates of the customers residing in the City,
WHEREAS, pursuant to Section 13.187 (e) of the Water Code, the City must
conduct a hearing on the proposed rate change if at least ten percent (10%) of the
customers located in the City formally complain regarding the proposed rate increase,
WHEREAS, the City has received complaints from more than half of the
approximate (~0 customers located in the City, thus requiring a public hearing to be
scheduled within 120 days after the effective date of the proposed rate change,
WHEREAS, the Council now desires to schedule a public hearing on the proposed
water utility rate increase by Walker Water Works Inc.; now, therefore,
BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS:
RESOLUTION NO. R2004-154
Section 1. That the City Council hereby schedules a public hearing on proposed
water utility rate increase by Walker Water Works Inc., for 6:30 p.m., October 4, 2004,
Council Chambers, Pearland City Hall, 3519 Liberty Drive, Pearland Texas.
PASSED, ADOPTED this the 13th day of
September
APPROVED and
,A.D.,2004.
TOM REID
MAYOR
ATTEST:
UY SEOi;~TARY
APPROVED AS TO FORM:
DARRIN M. COKER
CITY ATTORNEY
To:
Mr. Bill Eisen
City Manager
City of Pearland City Hall
From: Jack E. Stowe, Jr.
Director
R.W. Beck, Inc.
Date: August 26, 2004
Re: 2004 Water Utility Rate Change Application of Walker Water Works, Inc
In August 2004, the City of Pearland retained the services of R.W. Beck, Inc., to review Walker
Water Works, Inc.'s ("Walker") application for water rate/tariff change. Walker currently
provides retail water service to two small subdivisions located within the city limits of the City of
Pearland for a total of approximately 60 customers. Walker's requested rate change can be
summarized as follows:
Current Requested % Increase
Rate of return on capital 12%
Return on capital $118,739
Income tax $41,559
Other taxes $20,363
Depreciation $47,746
Other revenue ($22,329)
O&M expense $535,295
Revenue requirement $449,108 $741,373 65%
Base rate $22.49 $22.48 0%
Gallonage charge $1.53 $3.56 133%
Findings & Recommendations
After reviewing Walker's above-mentioned application, we estimate the revenue requirement
should be 18% less and the gallonage charge 16% less than Walker's requests. Our findings and
recommendations are summarized in the table below:
Consultant
Requested Recommended
Rate of return on capital 12% 6.9%
Return on capital $118,739 $68,233
Income tax $41,559 $14,377
Test year adjustments $71,004 $14,431
Revenue requirement $741,363 $607,346
Base rate $22.48 $22.48
Gallona~e char[e $3.56 $2.99
% Difference
-18% 0%
-16%
Rate of Return on Capital
Walker has applied for a rate of return of 12% (or $118,739) on its invested capital of $989,492.
However, our analysis suggests Walker's appropriate rate of return should be 6.9% while its
invested capital should be $988,885, equating to a required return on capital of $68,233. The
following supports our analysis:
Walker Water Works, Inc was part of Enron North America until 2002 when American Water
bought Walker. American Water serves approximately 20 million customers in 27 US states, 4
Canadian provinces, Puerto Rico, and several countries in South America. In January 2003,
American Water was acquired by RWE Thames Water, the third largest water and wastewater
services company in the world and a division of RWE. A Germany utility conglomerate, RWE
through its subsidiaries, provides electricity, gas, water and environmental services to more than
120 million residential and business customers, primarily in Europe and North America. Thus,
Walker is an indirect subsidiary of RWE via ownership by American Water, which in turn is a
wholly owned subsidiary of RWE Thames Water.
Since RWE generally provides financing for its subsidiaries' capital requirements, Walker's rate
of return should mirror RWE's weighted average cost of capital (WACC). Per Attachment 1,
RWE's WACC is 6.9%. Applying this rate to the invested capital of $988,885, the return on
capital is $68,233. Assuming a tax rate of 35%, the income tax is $14,377, as shown in the table
below:
Invested Capital and Return on Capital
Net book value
Working cash allowance
Less: Deferred taxes
Less: Customer deposits
Total invested capital
Weighted cost of debt (before tax)
Weighted cost of equity (after tax)
Required rate of return
Return on debt (4.2% * $988,885)
Return on equity (2.7% * $988,855)
Return on capital
Income Tax ([$26,700/(1-.35)] *.35)
$1,006,164
$59,989
$(38,511)
$ (38,757)
4.2%
2.7%
$41,533
$26,7OO
$988,885
6.9%
$68,233
$14,377
Test Year Adiustments
Walker has 7 categories of adjustments totaling $71,004, but according to our estimates, only
$14,431 are reasonable and necessary.
Texas Commission on Environmental Quality ("TCEQ") and Texas Water Codes have legislative
and regulatory provisions that allow a utility company like Walker to recover its test year O&M
Expenses as adjusted for "known and measurable" changes if these expenses are "reasonable and
necessary". However, based on the application document, we believe that Walker failed to
provide substantiated data that would support the following adjustments requested:
Firstly, AD J-1 of $10,788 has been erroneously added to the calculation. Instead of an addition,
AD J-1 should be subtracted from the calculation. As stated in the application document, this
adjustment was to shift costs to Southwest (another subsidiary of American Water) had been
erroneously allocated to Walker.
Secondly, we recommend excluding AD J-2 (salaries & wages) of $24,077 for overtime and AD J-
3 (Miscellaneous) of $16,192 for corporate fees. We believe that Walker failed to provide
substantiated data that would support its requests for an overtime factor of 17.31% ($24,077) and
a corporate fees cost per customers of $15 (for a total of $16,192 at 1,100 water customers),
respectively. Based upon the data provided, we cannot affirm that the test year 17.31% overtime
level is normal, justified and/or necessary. Neither can we affirm that the alleged $15.00 per
customer Corporate Fee is justified, reasonable and/or necessary in as much as Walker has failed
to provide even a description of the purpose of this fee and how it was established.
In addition, we have added R.W. Beck's fees of $7,500 amortized over 3 years ($2,500 per year)
into AD J-7 for rate case expense.
In summary accounting for the above modifications, we recommend test year adjustments of
$14,431, as detailed in Attachment 2.
Revenue Requirement
Walker has projected a revenue requirement for next year of $741,373 as shown in Attachment 3.
However, applying Walker's appropriate rate of return of 6.9% and test year adjustments of
$14,431, the revenue requirement should be $607,346 (see Attachment 3), which is $134,027 or
18% less than what Walker has determined.
Walker asserted that while the cost of service is $741,373, it has only requested $664,855 to be
recovered through rates, resulting in a shortfall of $76,518. However, as indicated by the table
below, if we apply the appropriate rate of return of 6.9% (while making no changes to the test
year adjustments), the required return on capital is $68,233 and income tax is $14,377, for a total
of $82,610. Under the requested revenue requirement of Walker, return on capital is $118,739
and income tax is $41,599, for a total of $160,298. Thus, there is a $77,688 variance, as shown in
the table below. When we deduct this variance from $741,373, the modified revenue requirement
is $663,685, which is almost identical to $664,855, the amount that Walker has requested to
recover through its rates. From this evaluation, we can conclude that Walker is not requesting to
charge below its cost of service, but rather, is simply charging at its real cost of capital of 6.9%.
Consultant
Requested Recommended Variance
Return on capital $118,739 $68,233 $50,506
Income tax $41,559 $14,377 $27,182
Total $160,298 $82,610 $77,688
Base Rate and Gallona~e Charpe
Cost per 1,000 gal
Total # of 1,000 gal billed
Total cost to be recovered through gallonage charge
Total revenue requirement
Total to be recovered through base rate
Total # of meter equiv
Base Rate per meter equiv
Requested or consultant recommended base rate
Consultant
Requested Recommended
$3.56 $2.99
101,131 101,131
$360,027 $302,517
$741,373 $607,346
$381,346 $304,829
1,130 1,130
$28.12 $22.48
$22.48 $22.48
Based on its projected revenue requirement of $741,373, Walker requested raising the gallonage
charge by 133% from $1.53 to $3.56, while holding the base rate at $22.48. Furthermore, the
company asserted that the requested rates do not cover the full costs of service of $741,373 (as
shown in the table above, Walker should have applied for a base rate of $28.12 instead of $22.48
in order to recover the total revenue requirement of $741,373).
However, based on our recommended revenue requirement of $607,346, Walker would charge a
gallonage rate of only $2.99, a 16% decrease from $3.56.
Impact on Citv of Pearland
R.W. Beck's findings and recommendations are based solely upon Walker's application for tariff
change.
Assuming an average City of Pearland customer served by Walker uses 10,000 gallons of water
each month, the current monthly water cost is $37.79. Based on Walker's requested rates, the
total monthly water cost would increase 54% from $37.79 to $58.08. More importantly, based on
our recommended rates, the total monthly water cost would increase 39% to $5:g.39, which is
10% less than Walker's requested rates.
Base rate
Gallonage charge
Total monthly water cost
% increase from current
% decrease from requested
Consultant
Current Requested Recommended
$22.49 $22.48 $22.48
$15.30 $35.60 $29.91
$37.79 $58.08 $52.39
54% 39%
10%