pennsylvania-american water company 2017 …- 2 - 1 commission, the new mexico public regulation...

VOLUME 14

PENNSYLVANIA-AMERICAN WATER COMPANY

2017 GENERAL BASE RATE CASE

R-2017-2595853

STATEMENT NO. 12

DIRECT TESTIMONY OF PAUL R. HERBERT

EXHIBITS NO. 12-A, 12-B

WATER OPERATIONS COST OF SERVICE

AS OF DECEMBER 31, 2018,

CUSTOMER CLASS DEMAND STUDY

PAWC STATEMENT NO. 12 DOCKET NO. R-2017-2595853

BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION


ON BEHALF OF PENNSYLVANIA-AMERICAN WATER COMPANY

CONCERNING

COST OF SERVICE ALLOCATION

AND

CUSTOMER RATE DESIGN

DOCKET NO. R-2017-2595853

APRIL 28, 2017

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BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION

RE: PENNSYLVANIA-AMERICAN WATER COMPANY DOCKET NO. R-2017-2595853


Line

No.

Q. Please state your name and address. 1

A. My name is Paul R. Herbert. My business address is 207 Senate Avenue, 2

Camp Hill, Pennsylvania. 3

Q. By whom are you employed? 4

A. I am employed by Gannett Fleming Valuation and Rate Consultants, LLC. 5

Q. Please describe your position with Gannett Fleming Valuation and Rate 6

Consultants, LLC, and briefly state your general duties and 7

responsibilities. 8

A. I am President. My duties and responsibilities include the preparation of 9

accounting and financial data for revenue requirement and cash working 10

capital claims, the allocation of cost of service to customer classifications, 11

and the design of customer rates in support of public utility rate filings. 12

Q. Have you presented testimony in rate proceedings before a regulatory 13

agency?14

A. Yes. I have testified before the Pennsylvania Public Utility Commission 15

(“Commission”), the New Jersey Board of Public Utilities, the Public Utilities 16

Commission of Ohio, the Public Service Commission of West Virginia, the 17

Kentucky Public Service Commission, the Iowa State Utilities Board, the 18

Virginia State Corporation Commission, the Missouri Public Service 19

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Commission, the New Mexico Public Regulation Commission, the Public 1

Utilities Commission of the State of California, the Illinois Commerce 2

Commission, the Delaware Public Service Commission, the Arizona 3

Corporation Commission, the Connecticut Department of Public Utility 4

Control, the Idaho Public Utilities Commission, the Hawaii Public Utilities 5

Commission, the New York State Public Service Commission, and the 6

Tennessee Regulatory Authority, concerning revenue requirements, cost of 7

service allocation, rate design and cash working capital claims. A list of 8

cases in which I have testified is attached to my testimony. 9

Q. What is your educational background? 10

A. I have a Bachelor of Science Degree in Finance from the Pennsylvania State 11

University, University Park, Pennsylvania. 12

Q. Would you please describe your professional affiliations? 13

A. I am a member of the American Water Works Association (“AWWA”) and 14

served as a member of the Management Committee for the Pennsylvania 15

Section. I am also a member of the Pennsylvania Municipal Authorities 16

Association. In 1998, I became a member of the National Association of 17

Water Companies as well as a member of its Rates and Revenue 18

Committee. 19

Q. Briefly describe your work experience. 20

A. I joined the Valuation Division of Gannett Fleming Corddry and Carpenter, 21

Inc., predecessor to Gannett Fleming, Inc., in September 1977, as a Junior 22

Rate Analyst. Since then, I advanced through several positions and was 23

assigned the position of Manager of Rate Studies on July 1, 1990. On June 24

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1, 1994, I was promoted to Vice President and Senior Vice President in 1

November 2003. On July 1, 2007, I was promoted to my current position as 2

President. 3

While attending Penn State, I was employed during the summers of 4

1972, 1973 and 1974 by the United Telephone System - Eastern Group in its 5

accounting department. Upon graduation from college in 1975, I was 6

employed by Herbert Associates, Inc., Consulting Engineers (now Herbert 7

Rowland and Grubic, Inc.), as a field office manager until September 1977. 8

Q. What is the purpose of your testimony in this proceeding? 9

A. My testimony is in support of the cost of service allocation and rate design 10

studies conducted under my direction and supervision for the Pennsylvania-11

American Water Company’s (“PAWC” or the “Company") Water Operations, 12

Wastewater Operations Excluding Scranton and the Scranton Wastewater 13

Operations. 14

Q. Have you prepared exhibits presenting the results of your study? 15

A. Yes. Exhibit No. 12-A presents the results of the allocation of pro forma cost 16

of service for Water Operations as of December 31, 2018. Exhibit No. 12-B 17

presents the results of the Customer Class Demand Study in support of the 18

demand factors used in the cost of service allocation study for Water 19

Operations. Also, the Appendix to Exhibit No. 12-A contains the response to 20

Rate Structure and Cost of Service Filing Requirement No. RS1. . 21

Exhibit Nos. 12-C, 12-D and 12-E set forth the proposed rate design 22

and the proof of revenues under present and proposed rates for Water 23

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Operations, Wastewater Operations Excluding Scranton and Scranton 1

Wastewater Operations, respectively. 2

Exhibit Nos. 12-F and 12-G, present the results of the cost of service 3

allocation studies for Wastewater Operations Excluding Scranton and 4

Scranton Wastewater Operations, respectively. 5

Q. Please describe the revenue requirements included in the cost of 6

service study for water operations being presented in this case. 7

A. The cost of service study for Water Operations I prepared for this case is 8

based upon the Company’s revenue requirement for water operations 9

including a portion of the revenue requirement of its wastewater operations, 10

as authorized by Section 1311(c) of the Public Utility Code. . The 11

development of the revenue requirement for Water Operations, including the 12

revenue requirement allocated to Water Operations from the Company’s 13

Wastewater Operations, is explained by Mr. Nevirauskas in PAWC 14

Statement No. 1. Using the total revenue requirement for Water Operations 15

developed by the Company in the manner described by Mr. Nevirauskas, I 16

prepared the cost of service study for the Company’s Water Operations set 17

forth in Exhibit No. 12-A. The cost of service study allocates among 18

customer classes: (1) the entire revenue requirement of the Company’s 19

Water Operations; and (2) the portion of the revenue requirement of the 20

Company’s Wastewater Operations (including Scranton) that will not be 21

recovered from wastewater customers under the Company’s proposed 22

wastewater rates, which I will refer to, collectively, as the cost of service or 23

total revenue requirement. 24

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1

COST OF SERVICE ALLOCATION – WATER OPERATIONS 2

Q. Briefly describe the purpose of your cost of water service allocation 3

study. 4

A. The study applies generally accepted cost of service principles and 5

procedures to allocate the total revenue requirement to the residential, 6

commercial, industrial, public, other water utilities, private fire protection and 7

public fire protection classifications. The results of the cost of service study 8

indicate the relative cost responsibilities of each class of customers. The 9

allocated cost of service is one of several criteria that are appropriately 10

considered in designing customer rates to produce the required revenues. 11

Q. Have you prepared an exhibit that sets forth the results of your 12

studies? 13

A. Yes. As I previously noted, Exhibit No. 12-A sets forth the results of my 14

allocation of the pro forma cost of service as of December 31, 2018, and the 15

customer rates the Company is proposing in order to produce pro forma 16

revenues equal to its revenue requirement. 17

Q. Please describe the method of cost allocation that was used in your 18

study. 19

A. The base-extra capacity method, as described in the 2017 (seventh edition) 20

and prior editions of the Water Rates Manual published by AWWA, was 21

used to allocate the pro forma costs that comprise the total revenue 22

requirement. It is a recognized method for allocating the cost of providing 23

water service to customer classifications in proportion to each classification's 24

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use of the commodity, facilities, and services of a water utility and has been 1

accepted by this Commission for that purpose. Indeed, it is the method that 2

was used in the Company's prior rate cases, including its last water base 3

rate case at Docket No. R-2013-2355276, and has been accepted by the 4

Commission for use by the Company and other water utilities in the 5

Commonwealth. 6

Q. Is the base-extra capacity method described in Exhibit No. 12-A? 7

A. Yes. It is described on pages 3 and 4 of the exhibit. 8

Q. Please describe the procedure followed in the cost allocation study. 9

A. Each identified category of cost in the pro forma cost of service was 10

allocated to the customer classifications through the use of appropriate 11

allocation factors. This allocation is presented in Schedule D on pages 11 12

through 16 of Exhibit No. 12-A. The categories of cost, which consist of 13

operation and maintenance expenses, depreciation expense, taxes and 14

income available for return, are identified in column 1 of Schedule D. The 15

costs in each category, shown in column 3, are allocated to the several 16

customer classifications based on allocation factors referenced in column 2. 17

The development of the allocation factors is presented in Schedule E of the 18

exhibit. 19

I will use some of the larger cost items to illustrate the principles and 20

considerations used in the cost allocation methodology. Purchased water, 21

purchased electric power and treatment chemicals are examples of costs 22

that tend to vary with the amount of water consumed and are, therefore, 23

considered base costs. These costs are allocated to the several customer 24

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classifications in direct proportion to the average daily consumption of those 1

classifications through the use of Factor 1. The development of Factor 1 is 2

shown in Schedule E on page 17 of Exhibit No. 12-A. 3

Other source-of-supply, water treatment and transmission costs are 4

associated with meeting usage requirements in excess of the average. This 5

means that these costs are incurred generally to meet maximum day 6

requirements. Costs of this nature were allocated to customer classifications 7

partially as base costs (i.e., in proportion to average daily consumption, 8

pursuant to Factor 1), partially as maximum day extra capacity costs (i.e., in 9

proportion to maximum day extra capacity, pursuant to Factor 2) and, for 10

certain pumping stations and transmission mains, partially as fire protection 11

costs (i.e., pursuant to Factor 3). Factors 2 and 3 are developed in 12

Schedule E, on pages 17 through 20, of Exhibit No. 12-A. 13

Costs associated with storage facilities and the capital costs of 14

distribution mains were allocated partly on the basis of average consumption 15

and partly on the basis of maximum hour extra demand, including the 16

demand for fire protection service, because these facilities are designed to 17

meet maximum hour and fire demand requirements. The development of 18

Factor 4, which is used for these allocations, is shown in Schedule E, on 19

pages 21 through 22 of Exhibit No. 12-A. Fire demand costs were allocated 20

to public and private fire protection service and to general service in 21

proportion to the relative potential demands on the system from hydrants 22

and fire services and from commercial service lines sized to provide both fire 23

protection and general service. 24

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Costs associated with pumping facilities and the operation and 1

maintenance of mains were allocated on the combined bases of maximum 2

day and maximum hour extra capacity because these facilities serve both 3

functions. The relative weightings of Factor 3 (maximum day) and Factor 4 4

(maximum hour) for pumping facilities and the operation and maintenance of 5

mains were based on the functional use of pumps and footage of mains, 6

respectively, serving maximum day and maximum hour functions. The 7

weighted factors, identified as Factor 5, Factor 5A and Factor 8, are 8

developed on pages 23, 24, and 26 of Exhibit No. 12-A. 9

Costs associated with meters and services were allocated to 10

customer classifications in proportion to the capital costs of the sizes and 11

quantities of meters and services serving each classification. The factors for 12

allocating the cost of meters and services, identified as Factor 10 and Factor 13

11, are developed on pages 27 through 29 of Exhibit No. 12-A. 14

The costs of customer accounting, billing and collecting were allo-15

cated on the basis of the number of customers for each customer 16

classification. The costs of meter reading were allocated on the basis of the 17

pro forma number of meters by classification. These factors, identified as 18

Factor 14 and Factor 15, are developed on page 31 of Exhibit No. 12-A. 19

Bad Debt expense was allocated based on the average net write-offs for 20

2016 (Factor 22), as shown on page 37. 21

Administrative and general costs were allocated on the basis of 22

allocated direct costs excluding those costs that require little administrative 23

and general expense, such as purchased water, power, chemicals, and 24

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waste disposal. The factor for this allocation, identified as Factor 16, is 1

developed on page 32 of Exhibit No. 12-A. 2

Annual depreciation accruals were allocated on the basis of the 3

function of the facilities in each plant account to which depreciation expense 4

is recorded. The original cost less accrued depreciation of utility plant in 5

service was also allocated based on the function of the plant recorded in 6

each account for the purpose of developing Factor 19, which is used to 7

allocate items such as return and income taxes. Factor 19 is developed on 8

pages 34 through 36 of Exhibit No. 12-A. 9

Q. What was the source of the total cost of service data set forth in 10

column 3 of Schedule D of Exhibit No. 12-A? 11

A. The pro forma costs of service were furnished by the Company and are the 12

same as those set forth in PAWC Exhibit No. 3-A. 13

Q. Refer to Schedule E, pages 18 through 22, of Exhibit No. 12-A, and 14

explain the source of the system maximum day and maximum hour 15

ratios used in the development of Factors 2, 3 and 4. 16

A. The ratios were based on a review of experienced Company data. The 17

maximum day ratio of 1.4 times the average day approximates the ratio of 18

maximum daily send-out experienced by the Company in 1988, 1995, 1996, 19

1999 and 2003. The maximum hour ratio of 2.1 times the average hour 20

approximates the results of an analysis that was performed to determine the 21

peak hour consumption experienced by the Company's three largest 22

operating districts. 23

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Q. Are the system maximum day and maximum hour ratios the same as 1

those used in studies presented on behalf of the Company in prior 2

proceedings before this Commission? 3

A. Yes, they are. 4

Q. Are the customer class extra capacity factors the same as those used 5

in the most recent prior study for the Company? 6

A. No. In the settlement in the Company’s 2011 base rate case at Docket No. 7

R-2011-2232243, the parties agreed that the Company would prepare a new 8

customer class demand study and submit the results 30 days before its next 9

water base rate filing following the completion of the study. The demand 10

study was not completed prior to the Company filing its 2013 base rate case. 11

Consequently, this is the first base rate case following the completion of the 12

demand study. Accordingly, the Company complied with the terms of the 13

settlement of its 2011 case and submitted and served upon the parties the 14

customer class demand study at the end of March 2017. The demand study 15

is also provided as Exhibit No. 12-B. The extra capacity factors used in the 16

cost of service allocation study (Exhibit No. 12-A) reflect the results of the 17

customer class demand study. 18

Q. How was the customer class demand study conducted? 19

A. A detailed explanation of the methods and procedures used, the sampling 20

techniques, the areas and customers monitored, the results of the 21

monitoring during the 2013-2015 period, and the conclusions from the study 22

results are described in the text of the study provided in Exhibit No. 12-B. 23

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Q. Returning to Exhibit No. 12-A, did you make any adjustments to the 1

cost allocation study? 2

A. Yes, four adjustments were made to the study. I will describe each 3

adjustment and explain why it was made. 4

Q. Please explain the first adjustment. 5

A. The first adjustment was made to exclude the volume of contract sales 6

under Riders DIS (Demand Industrial Sales) and DRS (Demand Resale 7

Sales) in developing the allocation factors for the industrial classification and 8

the sales for resale – Group A classification. As a result, costs are allocated 9

only to the non-Rider DIS and non-Rider DRS customers. Correspondingly, 10

the revenues received from those contract sales of $4,520,865 were 11

deducted from the total cost of service and from each of the classes of 12

service, as shown on page 6 of 6 of Schedule D of Exhibit No. 12-A. 13

Q. Why did you make this adjustment? 14

A. This adjustment was made in order to provide a more meaningful 15

comparison of allocated costs and revenues. Including contract sales would 16

inappropriately reduce the relative rate of return for the applicable class 17

because revenues from the contract sales reflect contract rates that, to 18

address competitive situations and avoid loss of load (or gain incremental 19

load), are lower than the non-Rider DIS and non-Rider DRS rates. By 20

excluding contract sales, as I have done, the resulting cost of service and 21

revenues properly reflect the costs and the rates for non-contract customers. 22

The Commission, in approving Riders DIS and DRS, found that those riders 23

create benefits for all of the Company’s customers by preserving or 24

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attracting incremental sales that, because of competitive forces, could not 1

otherwise be made. Accordingly, the revenues derived from Rider DIS and 2

Rider DRS customers are reflected as deductions from all classes’ cost of 3

service. 4

Q. Please describe the second adjustment. 5

A. The second adjustment excludes from the extra capacity portion of Factors 6

2, 3 and 4 the curtailment volumes associated with service provided under 7

the Company’s industrial curtailment rate schedule. This adjustment 8

properly accounts for the fact that curtailment volumes are interruptible and 9

that a customer, to be eligible for this service, is required to meet certain 10

minimum load factor requirements and have sufficient on-site storage 11

capacity to meet its demands during periods of curtailment or interruption. 12

This adjustment reflects the fact that a customer on this rate does not 13

impose extra-capacity demand costs. 14

Q. Are the volumes associated with curtailment service included in the 15

base portion of Factors 2, 3 and 4? 16

A. Yes, they are. 17

Q. Please describe the third adjustment. 18

A. The third adjustment reallocates the unrecovered portion of public fire 19

protection costs to the residential, commercial, industrial and public 20

classifications. This was done to comply with Section 1328 of the Public 21

Utility Code, which provides that public fire hydrant rates may only recover 22

25% of the cost of public fire protection service and that the unrecovered 23

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portion should be recovered in the fixed charges of other customer 1

classifications. 2

Q. How did you allocate the unrecovered portion of public fire service 3

costs? 4

A. Consistent with the statutory requirement that these costs are to be 5

recovered in fixed charges, I allocated the unrecovered public fire costs 6

using Factor 21, which is based on the meter equivalents of the residential, 7

commercial, industrial and public classifications. 8

Q. Please describe the fourth adjustment. 9

A. As discussed earlier, the Company is adding a portion of the revenue 10

requirement of its wastewater operations to the revenue requirement of its 11

water operations.. Accordingly, the fourth adjustment to the water cost of 12

service study allocates a portion of the Company’s total wastewater cost of 13

service to the cost of service of the Company’s water operations. The 14

wastewater cost of service allocated to water operations is the cost of 15

wastewater service less the revenues the Company’s proposed wastewater 16

rates are expected to produce. 17

Q. What is the total amount of wastewater revenue requirement allocated 18

to the Company’s water operations? 19

A. As shown in column 3 of Schedule A-1 of Exhibit No. 12-A, the wastewater 20

revenue requirement allocated to the cost of water service is $13,685,763. 21

In addition, anticipated higher penalty revenue as a result of recovering the 22

wastewater cost of service will add $119,424 to the total cost recovery or 23

$13,805,187. 24

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Q. Have you summarized the results of your cost allocation study? 1

A. Yes. The results for the combined water and wastewater operations are 2

summarized in columns 2, 3 and 4 of Schedule A on page 6 of Exhibit No. 3

12-A. Columns 2 (water), 3 (wastewater) and 4 (total water and wastewater) 4

set forth the total allocated pro forma cost of service as of December 31, 5

2018 for each customer classification identified in column 1. Column 5 6

presents each customer classification's cost responsibility as a percent of 7

the total cost. 8

Q. Have you compared these cost responsibilities with the proportionate 9

revenue under existing rates for each customer classification? 10

A. Yes. Allocated cost responsibilities (column 5) can be compared to the 11

percentage revenue under present rates (column 9), as shown on Schedule 12

A of Exhibit 12-A. Column 8 of Schedule A is the summation of present rate 13

revenues for water (column 6) and wastewater (column 7) operations. The 14

percentage cost responsibilities (relative cost of service) (column 5) can be 15

compared to the percentage of pro forma revenues (relative revenues) under 16

proposed rates (column 13), as shown on Schedule A of Exhibit No. 12-A. 17

Q. Have you prepared a similar comparison for water operations only? 18

A. Yes, I have. Schedule A-1, on page 8 of Exhibit No. 12-A, shows, in column 19

2, the results of the allocation of the water cost of service to the various 20

customer classifications. Column 3 shows the portion of wastewater service 21

revenue requirement allocated to customer classifications, and column 4 is 22

the summation of columns 2 and 3. Column 4 shows the total cost of 23

service to be recovered from water customers. The allocated cost 24

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responsibilities (column 5) can be compared to the percentage revenue 1

under existing rates (column 7), as shown on Schedule A-1 of Exhibit No. 2

12-A. A similar comparison of the percentage cost responsibilities (relative 3

cost of service) and the percentage of pro forma revenues (relative 4

revenues) under proposed rates can be made from columns 5 and 9 of 5

Schedule A-1 of Exhibit No. 12-A. 6

7

COST OF SERVICE ALLOCATION – WASTEWATER OPERATIONS 8

EXCLUDING SCRANTON 9

Q. Please describe the overall cost of service allocation for the 10

Company’s Wastewater Operations, excluding Scranton. 11

A. The cost of service allocation study for the Company’s Wastewater 12

Operations, excluding Scranton, includes the combined wastewater revenue 13

requirements for the Company’s Wastewater Rate Zones 1 through 11. 14

The purpose of the study was to allocate the total cost of service, 15

which is the total revenue requirement, to the several customer 16

classifications. In the study, the total costs were allocated to the residential, 17

non-residential, large industrial, and bulk use customer classifications in 18

accordance with generally accepted cost of service principles and 19

procedures. For the purposes of cost allocation, small industrial customers 20

are included in the non-residential class, which also includes commercial 21

and public customers. Two large industrial customers are included in the 22

large industrial class. The bulk use class, which also includes the Veterans 23

Administration Hospital, is served from the Coatesville system. 24

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Q. Have you prepared an exhibit presenting the results of your study? 1

A. Yes. The results of my allocation of the pro forma cost of service as of 2

December 31, 2018, and proposed customer rates to produce the pro forma 3

revenue requirement as of that date are presented in Exhibit No. 12-F. 4


study. 6

A. I used the functional cost allocation methodology described in “Financing 7

and Charges for Wastewater Systems”, Manual of Practice No. 27, 8

published by the Water Environment Federation (“Manual of Practice No. 9

27”). This method allocates the cost of providing wastewater service to 10

customer classifications in proportion to each classification’s use of the 11

service provider’s facilities and services. Costs are assigned to cost 12

components using predominant operational purposes as cost-causative 13

factors. The functional cost method is generally accepted as a sound 14

method for allocating the cost of wastewater service. 15

Q. What procedures did you use to apply the cost allocation methodology 16

for wastewater operations? 17

A. Each element of the cost of service is allocated to customer classifications 18

according to the functional categories of flow, infiltration and inflow (“I&I”), 19

customer facilities and customer accounting. With the exception of certain 20

depreciation and rate base items that are directly assigned to the bulk use 21

class, the functional costs are allocated to customer classifications based on 22

the amount of flow contributed to the system, the amount of I&I allocated to 23

each class, and the number and relative size of customers. 24

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Q. What costs have you directly assigned to the bulk use class? 1

A. I have directly assigned certain components of rate base and annual 2

depreciation expense related to wastewater treatment, gravity mains, and 3

manholes based on the result of the allocation in the 2010 Coatesville cost 4

of service study in Docket R-2010-216612 (“Prior Cost of Service Study”). 5

This study allocated Coatesville Wastewater System capital costs to the bulk 6

users in accordance with the design-basis methodology described in Manual 7

of Practice No. 27. and the I&I study submitted in compliance with the terms 8

of the settlement at Docket No. R-2008-2032689. Pursuant to the terms of 9

that settlement, the Company conducted a comprehensive study to 10

determine the current and future flow volumes for each classification and the 11

volume of I&I in the system as it relates to direct and bulk customers. The 12

study was submitted with the Company’s wastewater base rate filing at 13

Docket No. 2010-2166212 and was used in determining the cost of service 14

for the bulk user class in that case. In this case, because there are bulk 15

users only in the Coatesville service area, it is appropriate to continue to 16

allocate certain capital costs related to treatment and mains to the bulk user 17

class based on the Prior Cost of Service Study and I&I study. 18

Q. What is the basis for the volumes used to allocate costs to customer 19

classifications in Factor 1? 20

A. Factor 1 is used to allocate costs related to wastewater treatment. In Factor 21

1, for the residential and non-residential classes, the flows were based on 22

pro forma water usage billing determinants multiplied by a factor of 88%, 23

consistent with the Coatesville I&I study, which determined that 88% of water 24

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use is returned to the sewer system. I then added average daily I&I in 1

column 3. Using the Company’s flow records for Wastewater Rate Zones 1, 2

2 and 3 (which represent 80% of the Company’s wastewater flow excluding 3

Scranton), it was determined that 37.5% of the average daily flow was from 4

I&I. Except for the bulk use class, 1/3 of I&I was allocated to the customer 5

classes based on average daily flow and 2/3 was allocated based on service 6

equivalents. The I&I allocated to the bulk use class was based on the 7

amount allocated in Factor 1 in the Prior Cost of Service Study. 8

Q. Please give a similar description of Factor 2. 9

A. Factor 2 is used to allocate costs related to collection. This factor was 10

calculated in a similar manner as Factor 1 except that, based on Company 11

records, maximum day volumes were found to be 3 times total average flow. 12

Except for the bulk use class, 1/3 of I&I was allocated to the customer 13

classes based on average daily flow and 2/3 was allocated based on service 14

equivalents. The I&I allocated to the bulk use class was based on the 15

amount allocated in Factor 2 in the Prior Cost of Service Study. 16

Q. Please explain the factors used to allocate capital costs. 17

A. Factors 3 and 3A are similar to Factors 1 and 2 except that Factors 3 and 3A 18

exclude the bulk use class because assets for these customers have been 19

directly assigned. 20

Q. Please explain the remaining cost allocation factors. 21

A. Factors 4 and 5 were used to allocate customer facilities and customer 22

accounting costs. These factors were based on the number and relative size 23

of the customers. 24

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Factor 6 is a composite factor used to allocate employee pension and 1

benefit expenses and payroll taxes. Factor 6 is based on the allocation of 2

direct labor expense. 3

Factors 7 and 8 are based on the allocation of plant in service and 4

rate base, respectively. Factor 7 allocates other rate base elements and 5

Factor 8 is used to allocate return and taxes. 6

Factor 9 is based on the total cost of service and is used to allocate 7

regulatory commission expense and other revenues. 8

Factor 10 is used to allocate administrative and general expenses and 9

is based on the allocation of all other operating expenses exclusive of 10

power, chemicals and waste disposal. Factor 11 allocates cash working 11

capital and is based on the allocation of all operating expenses. 12

Q. Please explain the procedure for allocating costs to the several 13

customer classifications. 14

A. The items of cost, which include operation and maintenance expenses, 15

depreciation expense, taxes and income available for return, are identified in 16

column 1 of Schedule D. The cost of each item, shown in column 3, is 17

allocated to the several customer classifications based on allocation factors 18

referenced in column 2. The development of the allocation factors is 19

presented in Schedule E of the exhibit. 20


column 3 of Schedule D of Exhibit No. 12-F? 22

A. The pro forma costs of service were furnished by the Company and are the 23

same as those set forth in Exhibit No. 3-A. This pro forma cost of service 24

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was reduced by $3,429,475 ($3,400,000 in revenue requirement and an 1

additional $29,475 in penalty revenue) that is proposed to be recovered in 2

water rates. The resulting increase in revenue requirement to be recovered 3

from wastewater rates is $4,093,984 or approximately 17% over present 4

rates. This increase is similar to the increase proposed in water revenues. 5


A. Yes. The results are summarized in columns 1, 2 and 3 of Schedule A of 7

Exhibit No. 12-F. Column 2 sets forth the total allocated pro forma cost of 8

service as of December 31, 2018 for each customer classification identified 9

in column 1. Column 3 presents each customer classification's cost respon-10

sibility as a percent of the total cost. 11



A. Yes. A comparison of the allocated cost responsibilities and the percentage 14

revenue under existing rates can be made by comparing columns 3 and 5 of 15

Schedule A of Exhibit 12-F. A similar comparison of the percentage cost 16

responsibilities (relative cost of service) and the percentage of pro forma 17

revenues (relative revenues) under proposed rates can be made by 18

comparing columns 3 and 7 of Schedule A of Exhibit No. 12-F. The rate of 19

return by customer classification under present and proposed rates is set 20

forth on Schedules B and C, respectively. 21

22

23

24

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COST OF SERVICE ALLOCATION – SCRANTON WASTEWATER OPERATIONS 1

Q. Why did you prepare a separate cost of service study for Scranton 2

Wastewater Operations? 3

A. The separate cost of service study for the Scranton Wastewater Operations 4

was prepared to comply with the Commission’s Order at Docket No. A-2016-5

2537209, which granted the Joint Application of PAWC and the Sewer 6

Authority of the City of Scranton (“Scranton Sewer Authority” or “SSA”) for 7

approval of PAWC’s acquisition of substantially all of SSA’s wastewater 8

assets. The Commission’s Order states as follows: 9

First, we shall direct PAWC include a cost of service study 10 that fully separate the costs of providing stormwater services 11 in the SSA service area. Moreover, PAWC shall address the 12 pros and cons of designing stormwater rates on this separate 13 basis. 14

Second, PAWC shall file a cost of service study that 15 removes all costs and revenue associated with the SSA 16 operations (both wastewater and stormwater) and, using the 17 same rate design methodology it proposes be adopted in the 18 case, develop rates that exclude the impact of the SSA 19 acquisition included in the case rate filing. These studies will 20 enable the parties in the next base rate case and this 21 Commission to better evaluate the rate impacts of this 22 transaction of PAWC’s existing customers. Both studies shall 23 be submitted at the time of filing the next base rate case. The 24 requirements of filing these two items is not intended to limit or 25 affect what PAWC may propose as rates or the positions that 26 it or any party, including the Commission, may take. 27

28

Q. Please describe the cost of service allocation for the Company’s 29

Scranton Wastewater Operations. 30

A. The cost of service allocation study is based on the revenue requirement 31

developed by the Company in Exhibit 3-A for the Scranton Wastewater 32

- 22 -

Operations. The study allocated the cost of service to residential, non-1

residential, large industrial, and stormwater classifications. 2

Q. Have you prepared an exhibit presenting the results of your study? 3

A. Yes. The results of my allocation of the pro forma cost of service as of 4

December 31, 2018, and proposed customer rates as of that date are 5

presented in Exhibit No. 12-G. 6


study. 8

A. For this study I also used the functional cost allocation methodology 9

described in Manual of Practice No. 27. I modified the allocation method in 10

order to determine the incremental cost related to handling stormwater for a 11

combined sewer system (“CSS”) and combined sewer overflows (“CSO”). 12

Q. What procedures did you use to apply the cost allocation methodology 13

for Scranton Wastewater Operations? 14

A. Each element of the cost of service is allocated to customer classifications 15

according to the functional categories of sanitary flow (including normal I&I), 16

stormwater introduced from surface sources, customer facilities and 17

customer accounting. With the exception of certain operating costs, 18

depreciation, and rate base items that are directly assigned to either the 19

sanitary system or to the stormwater function, the functional costs are 20

allocated to customer classifications based on the amount of flow 21

contributed to the system, the amount of I&I allocated to each class, the 22

volume of stormwater, and the number and relative size of customers. 23

- 23 -

Q. What costs have you directly assigned to the sanitary sewer 1

classifications? 2

A. I directly assigned rate base items and annual depreciation expense 3

associated with pumping stations, wastewater treatment structures and 4

equipment, gravity mains, and manholes to the sanitary sewer classes 5

(residential, non-residential and large industrial). The Scranton wastewater 6

collection system is not entirely a CSS. Approximately 63% of the collection 7

system is combined sewers and the remaining 37% comprises sanitary 8

sewers only. Therefore, for gravity mains, after assigning specific 9

stormwater assets to the stormwater class described below, I allocated 37% 10

of the remaining costs of gravity mains to the sanitary classes, and I 11

allocated 63% on a combined system basis. The cost of manholes in 12

Account 361.2 were allocated in the same manner. 13

The Froude Ave. pumping station serves only sanitary sewers and, 14

therefore, its cost was assigned solely to the sanitary classifications. The 15

remaining pumping stations were allocated on a combined system basis. 16

For the wastewater treatment plant, a detailed analysis of the 17

structures account and the equipment account was performed in order to 18

identify the portions of the plant specifically related to secondary sanitary 19

treatment. The portions of the plant thus identified were allocated to the 20

sanitary classifications. The remaining portions of the wastewater treatment 21

structures and equipment accounts, sized to handle 60 mgd of flow, was 22

assigned 41.67% (25 mgd) to the sanitary classes and 58.33% (35 mgd) to 23

stormwater. 24

- 24 -

Q. What costs have you directly assigned to the stormwater 1

classification? 2

A. I directly assigned operating labor for five collection system employees who 3

are specifically tasked with operating and maintaining the CSO assets within 4

the collection system. In addition to the pumping stations and portions of the 5

treatment plant related to stormwater that I previously discussed, I also 6

identified rate base items and associated annual depreciation expense for 7

specific CSO assets within Account 361.10, Gravity Mains. These assets 8

include catch basins, CSO outfalls, regulator chambers, diversion manholes, 9

culverts, a detention basin, and biofiltration catch basin systems. The costs 10

of these assets were directly assigned to the stormwater classification. 11

Q. What other costs were directly assigned to the stormwater function? 12

A. For Account 391, Transportation Equipment, the cost of one vactor truck and 13

the cost of a street sweeper were allocated directly to stormwater. 14

Q. What is the basis for the volumes used to allocate costs to customer 15

classifications for operating and maintenance expenses? 16

A. Factors 1 and 2 are used to allocate operation and maintenance costs 17

related to wastewater collection and treatment. For Factor 1, for the 18

residential, non-residential, and large industrial classes, the flows were 19

based on pro forma water usage billing determinants multiplied by a factor of 20

88%, consistent with the Coatesville I&I study. I then added average daily I&I 21

in column 3. Using Company flow records for Wastewater Rate Zones 1, 2 22

and 3 (which represent 80% of the Company’s wastewater flow excluding 23

Scranton), it was determined that 37.5% of the average daily flow was from 24

- 25 -

I&I. One-third of the I&I was allocated to the customer classes based on 1

average daily flow and 2/3 was allocated based on service equivalents using 2

Factor 1A. 3

Factor 2 is based on average daily sanitary flows from Factor 1 plus 4

average daily stormwater flow. The total wastewater flow (sanitary and 5

stormwater) is based on the experienced average daily total flow of 10.535 6

mgd. 7

Q. Please explain the factors used to allocate the capital costs. 8

A. Factors 3 and 4 are similar to Factors 1 and 2 except that Factors 3 and 4 9

include peak flows. For Factor 3, the total peak sanitary flow is based on 25 10

mgd, which reflects additional I&I under peak conditions. For Factor 4, the 11

total peak wastewater flow is based on 60 mgd, with the addition of 35 mgd 12

of peak stormwater flow. 13

Q. Please explain the remaining cost allocation factors. 14

A. Factors 5 and 6 were used to allocate customer facilities and customer 15

accounting costs. These factors were based on the number and relative size 16

of the customers. 17

Factor 7 is a composite factor used to allocate employee pension and 18

benefit expenses and payroll taxes. Factor 7 is based on the allocation of 19

direct labor expense. 20

Factors 8 and 9 are based on the allocation of plant in service and 21

rate base, respectively. Factor 8 allocates other rate base elements, and 22

Factor 9 is used to allocate return and taxes. 23

- 26 -

Factor 10 is based on the total cost of service and is used to allocate 1

regulatory commission expense and other revenues. Factor 10A is based 2

on the total cost of service with stormwater costs reallocated to the sanitary 3

classes and is used to allocate the portion of the cost of service for Scranton 4

wastewater operations to be recovered from water rates. 5

Factor 11 is used to allocate administrative and general expenses and 6

is based on the allocation of all other operating expenses exclusive of 7

power, chemicals and waste disposal. Factor 12 allocates cash working 8

capital and is based on the allocation of all operating expenses. 9

Q. Please explain the procedure for allocating costs to the several 10

customer classifications. 11

A. The items of cost, which include operation and maintenance expenses, 12

depreciation expense, taxes and income available for return, are identified in 13

column 1 of Schedule C. The cost of each item, shown in column 3, is 14

allocated to the several customer classifications based on allocation factors 15

referenced in column 2. The development of the allocation factors is 16

presented in Schedule D of the exhibit. 17


column 3 of Schedule C of Exhibit No. 12-G? 19

A. The pro forma cost of service were furnished by the Company and are the 20

same as those set forth in Exhibit No. 3-A. This pro forma cost of service 21

was reduced by $10,375,712, which is the amount the Company proposes to 22

recover in water rates. The revenues under the present Scranton 23

Wastewater Operation’s rates are sufficient to recover the remaining 24

- 27 -

revenue requirement of $21,963,725. No increase to the Scranton 1

wastewater rates is proposed at this time. 2


A. Yes. The results are summarized in columns 1, 2 and 3 of Schedule A of 4

Exhibit No. 12-G. Column 2 sets forth the total allocated pro forma cost of 5

service as of December 31, 2018 for each customer classification identified 6

in column 1. Column 3 presents each customer classification's cost respon-7

sibility as a percent of the total cost. The total cost of service associated 8

with stormwater for the combined system is $7,899,218, as shown on 9

Schedule C, page 4 of 4, column 7. This cost was reallocated to the sanitary 10

classes based on Factor 1A. 11



A. Yes. A comparison of the allocated cost responsibilities and the percentage 14

revenue under existing rates can be made by comparing columns 3 and 5 of 15

Schedule A of Exhibit 12-G. A similar comparison of the percentage cost 16

responsibilities (relative cost of service) and the percentage of pro forma 17

revenues (relative revenues) under proposed rates can be made by 18

comparing columns 3 and 7 of Schedule A of Exhibit No. 12-G. The rate of 19

return by customer classification under present and proposed rates is set 20

forth on Schedules B. 21

22

23

24

- 28 -

CUSTOMER RATE DESIGN 1

Q. What are the appropriate factors to be considered in designing a rate 2

structure? 3

A. In preparing a proposed rate structure, one should consider the allocated 4

costs of service, the impact of radical changes from the present rate 5

structure, the understandability and ease of application of the rate structure, 6

community and social influences, and the value of service. General 7

guidelines should be developed with management to determine the extent to 8

which each of these criteria is to be incorporated in the rate structure to be 9

designed, inasmuch as the pricing of a commodity or service is a function of 10

management. 11

Q. Did the Company’s management provide rate design guidelines to you 12

for water rates? 13

A. Yes, it did. As described in Ms. Lontz’s testimony, the Company furnished 14

the following guidelines: (1) consolidate all rate zones with Rate Zone 1 15

pursuant to the Single Tariff Pricing policy adopted by the Company and 16

approved by the Commission, with a proposed two-year phase-in for the 17

Nittany and McEwensville Rate Zones; (2) increase customer charges to 18

recover the direct customer costs; (3) increase private fire protection charges 19

to recover the cost of service; (4) increase the public fire hydrant charges in 20

all zones that are below 25% of the public fire protection cost of service to a 21

rate that is 25% of that cost of service; and (5) increase rates by customer 22

classification in a manner that moves the revenues recovered from each 23

- 29 -

classification toward the indicated cost of service, including the wastewater 1

revenue requirement of $13,805,187 allocated to water operations. 2

Q. How much of the $13,805,187 of wastewater revenue requirement 3

allocated to Water Operations is attributable to the Scranton 4

Wastewater Operations? 5

A. The portion of the total of $13,805,187 attributable to the Scranton 6

Wastewater Operations is $10,375,712. 7

8

Q. What would be the effect on water rates if the $10,375,712 attributable 9

to the Scranton Wastewater Operations were not recovered in the 10

proposed water rates? 11

A. If the $10,375,712 of Scranton wastewater costs were not included in the 12

proposed water rates, the proposed first block rate of $1.2844 per hundred 13

gallons would decrease to $1.24898 per hundred gallons. All other rates 14

would remain the same. 15

Q. One of the directives in the Commission’s Order was for the Company 16

to provide a cost of service study that separates the costs of 17

stormwater in the Scranton wastewater system and to discuss the pros 18

and cons of developing separate stormwater rates for the Scranton 19

wastewater operations. Please comment. 20

A. As discussed earlier in my testimony, Exhibit No. 12-G shows that the costs 21

associated with stormwater for the Scranton combined sewer system are 22

$7,899,218 annually at the Company’s proposed level of revenue 23

- 30 -

requirements, including its proposed overall rate or return for wastewater 1

operations. 2

I do not believe it would be appropriate to establish separate 3

stormwater rates in Scranton. When stormwater is combined with sanitary 4

sewage flow, the combined flow is wastewater, just as in other non-5

combined wastewater systems that have significant infiltration. The 6

customers of Scranton have been paying for their wastewater service 7

through sewer rates since the system was first established. Nothing has 8

changed other than ownership. Mr. Nevirauskas discusses recent legislation 9

that conclusively establishes that the flow of a CSS that combines sanitary 10

sewer flows and stormwater is entirely “wastewater.” Furthermore, if rates 11

for the Scranton Wastewater Operations (i.e., the costs of the sanitary sewer 12

and CSS portions of the system) were designed to recover the full cost of 13

service (i.e., including costs attributed to the stormwater function) 14

established in this case, the Scranton Wastewater Operations’ rates would 15

still be less than the rates currently proposed for Wastewater Zone 1. 16

Consequently, if all of the Scranton Wastewater Operations’ costs were 17

combined with Wastewater Zone 1 and rates were designed to recover that 18

composite cost of service, the rates for Wastewater Zone 1, determined on 19

that composite basis, would also be lower than the rates currently proposed 20

for Wastewater Zone 1. These indications of relative costs of service both 21

with and without the separation of stormwater, in addition to the legislative 22

change discussed earlier, establish that there is no basis to treat stormwater 23

as a separate form of service for cost of service or rate purposes. 24

- 31 -

Q. Please describe the guidelines provided to you for designing the 1

Company’s proposed wastewater rates. 2

A. The guidelines were as follows: (1) consolidate wastewater Rate Zones 1 3

through 10 into Rate Zone 1; (2) propose a separate rate for Rate Zone 11, 4

New Cumberland, with a 2.5% across-the-board increase; (3) propose that 5

the wastewater rates for Scranton will remain unchanged; and (4) propose 6

increases to customer charges and consumption charges for Rate Zone 1 to 7

better align revenues with the allocated cost of service. 8

Q. Do the proposed rates comply with these guidelines? 9

A. Yes, they do. 10

Q. Please describe the proposed wastewater rates. 11

A. The proposed Zone 1 wastewater rates provide for a customer charge for 12

residential customers of $10.00 per month, customer charges for non-13

residential service of $25.00 per month and customer charges for large 14

industrial service and bulk users of $250.00 per month, and also provide for 15

separate volumetric charges for each classification of service. Zone 11, New 16

Cumberland, maintains its existing rate structure with a 2.5% across-the-17

board increase. As indicated earlier in my testimony, the Company is not 18

proposing to change the existing wastewater rates for the Scranton 19

Wastewater Operations. 20

Q. Please describe the consolidation of water rates proposed in this 21

proceeding. 22

A. As shown in Schedule H of Exhibit No. 12-A, the metered rates for all 23

classes of customers in each of the Company’s service territories are the 24

- 32 -

same under proposed rates, thereby consolidating all rate zones into Rate 1

Zone 1, except for the specific contractual rates for public fire protection in 2

certain municipalities. Also, Rate Zone 40 (Nittany) and Rate Zone 52 3

(McEwensville) will be consolidated into Rate Zone 1 over a two-year period 4

by implementing a Phase-in Rider for each of these rate zones as described 5

in the direct testimony of Ms. Lontz. 6

Q. Please explain the increases in customer charges for water service. 7

A. The customer charges for residential, commercial and municipal classes for 8

all meter sizes in the present Rate Zone 1, including the effect of a roll-in of 9

a 7.5% Distribution System Improvement Charge (“DSIC”), were increased 10

by 14.9%. This compares to the overall revenue increase for water sales of 11

about 17% over present rates, including the 7.5% DSIC. Customer charges 12

in all other rate zones are being increased to the same rate as the Rate 13

Zone 1 customer charges. 14

The 5/8-inch customer charge is being increased from $16.10 ($15.00 15

plus a 7.5% DSIC and a 0.13% State Tax Adjustment Surcharge credit) to 16

$18.50 per month. This increase continues the movement toward the direct 17

customer costs of $18.63 per month, including the unrecovered cost of 18

public fire service. The direct customer costs for a customer with a 5/8-inch 19

meter for each classification are set forth on page A-22 of the Appendix to 20

Exhibit No. 12-A. The fully allocated customer costs for a 5/8-inch metered 21

customer for each classification are set forth on page A-21 of the Appendix 22

to Exhibit No. 12-A. The fully allocated customer costs are $23.63 per 23

month for a 5/8-inch metered customer. 24

- 33 -

Q. Why did you perform two calculations customer costs based on (1) all 1

costs allocated to the customer function; and (2) only so-called “direct” 2

customer costs? 3

A. I believe that customer costs should be determined based on all of the costs 4

properly allocated to the customer function, and that such costs are the 5

appropriate basis for determining customer charges. The use of such fully 6

allocated customer costs is recommended by the AWWA’s Water Rates 7

Manual as the appropriate way to capture all customer-related costs in the 8

customer charge. In addition to properly recognizing all customer costs, the 9

use of fully allocated customer costs to establish the customer charge 10

provides greater revenue stability by recovering a slightly larger percentage 11

of the Company’s total revenue requirement through a fixed charge. This 12

effect is important given that the Company continues to experience declining 13

per-customer sales and associated declines in revenue per-customer. 14

I prepared and provided the “direct” cost allocation because the 15

Commission in the past has relied on such “direct” cost allocations to 16

determine customer charges. 17

Q. What are the proposed customer charges for the Industrial and Other 18

Water Utilities classes? 19

A. Customer charges for the Industrial class were increased approximately 40% 20

in order to move such charges toward the fully allocated customer costs for 21

industrial customers. Customer charges for other water utilities were 22

increased 25% in order to move such charges toward the fully allocated 23

customer costs for other water utilities customers. 24

- 34 -

Q. What changes are you proposing to private fire protection rates? 1

A. Because the revenues under present rates are below the indicated cost of 2

private fire protection service, the Rate Zone 1 base rates for private fire 3

protection were increased by approximately 28.1%. 4

Q. Please explain the proposed Public Fire Protection hydrant rates. 5

A. The current cost of providing public fire protection service is $68.44 per 6

month. Section 1328 of the Public Utility Code prohibits increasing public 7

fire protection rates if the revenues under existing rates recover more than 8

25 percent of the cost of public fire protection service. The present monthly 9

rate per hydrant in Rate Zone 1 is $20.00, or approximately 29.2% of the 10

cost of service. Therefore, the Company does not propose to increase that 11

rate. 12

The public fire hydrant rate calculated at 25% of the cost of service is 13

approximately $17.11 per month, or $205.32 annually. All public hydrant 14

rates below this level will increase to $17.11 per month except for hydrants 15

in Bradford Township, which will remain unchanged in accordance with a 16

Commission-approved agreement between Bradford Township and the 17

Company. 18

Additionally, pursuant to the terms of the Commission-approved 19

settlement of the Company’s water rate case at Docket No. R-994638, the 20

applicable rate for public fire hydrants placed in service after January 1, 21

2000, will be 25% of the cost of service, or $17.11 per month under 22

proposed rates. 23

- 35 -

Q. Do the proposed rates result in movement toward the cost of service 1

for each classification? 2

A. Yes, as shown by the data in Schedules A and A-1, at pages 6 and 8 of 3

Exhibit No. 12-A, the revenues under proposed rates are more closely 4

aligned with the cost of service by classification than the revenues under 5

present rates. 6

Q. Have you prepared comparisons of present and proposed rates for 7

each classification and each rate zone? 8

A. Yes. Schedule H of Exhibit No. 12-A presents comparisons of the present 9

and proposed water rates. Schedule F in Exhibit No. 12-F presents 10

comparisons of the present and proposed wastewater rates. 11

Q. Have you prepared proof of revenue schedules under present and 12

proposed rates? 13

A. Yes. Exhibit No. 12-C, Schedules 1 through 9, sets forth the proof of 14

revenues from the application of present and proposed water rates to the 15

customer consumption analysis. Exhibit No. 12-D, Schedules 1 through 7, 16

provides the proof of revenues from the application of present and proposed 17

wastewater rates (excluding Scranton) to the customer consumption 18

analysis. Exhibit No. 12-E, Schedules 1 through 4, presents the proof of 19

revenues from the application of present Scranton wastewater rates to the 20

customer consumption analysis. 21

Q. Does this complete your testimony at this time? 22

A. Yes, it does. 23

PAUL R. HERBERT – LIST OF CASES TESTIFIED

Year Jurisdiction Docket No. Client/Utility Subject

1. 1983 Pa. PUC R-832399 T. W. Phillips Gas and Oil Co. Pro Forma Revenues 2. 1989 Pa. PUC R-891208 Pennsylvania-American Water Company Bill Analysis and Rate Application 3. 1991 WV PSC 91-106-W-MA Clarksburg Water Board Revenue Requirements (Rule 42) 4. 1992 Pa. PUC R-922276 North Penn Gas Company Cash Working Capital 5. 1992 NJ BPU WR92050532J The Atlantic City Sewerage Company Cost Allocation and Rate Design 6. 1994 Pa. PUC R-943053 The York Water Company Cost Allocation and Rate Design 7. 1994 Pa. PUC R-943124 City of Bethlehem Revenue Requirements, Cost

Allocation, Rate Design and Cash Working Capital

8. 1994 Pa. PUC R-943177 Roaring Creek Water Company Cash Working Capital 9. 1994 Pa. PUC R-943245 North Penn Gas Company Cash Working Capital 10. 1994 NJ BPU WR94070325 The Atlantic City Sewerage Company Cost Allocation and Rate Design 11. 1995 Pa. PUC R-953300 Citizens Utilities Water Company of

Pennsylvania Cost Allocation and Rate Design

12. 1995 Pa. PUC R-953378 Apollo Gas Company Rev. Requirements and Rate Design 13. 1995 Pa. PUC R-953379 Carnegie Natural Gas Company Rev. Requirements and Rate Design 14. 1996 Pa. PUC R-963619 The York Water Company Cost Allocation and Rate Design 15.

1997

Pa. PUC

R-973972

Consumers Pennsylvania Water Company Shenango Valley Division

Cash Working Capital

16.

1998

Ohio PUC

98-178-WS-AIR

Citizens Utilities Company of Ohio

Water and Wastewater Cost Allocation and Rate Design

17. 1998

Pa. PUC

R-984375

City of Bethlehem - Bureau of Water Revenue Requirement, Cost

Allocation and Rate Design 18.

1999

Pa. PUC

R-994605

The York Water Company

Cost Allocation and Rate Design

19. 1999

Pa. PUC

R-994868

Philadelphia Suburban Water Company


20. 1999

WV PSC

99-1570-W-MA

Clarksburg Water Board

Revenue Requirements (Rule 42), Cost Allocation and Rate Design

21. 2000

Ky. PSC

2000-120

Kentucky-American Water Company


22. 2000

Pa. PUC

R-00005277

PPL Gas Utilities

Cash Working Capital

23. 2000

NJ BPU

WR00080575

Atlantic City Sewerage Company


24. 2001

Ia. St Util Bd

RPU-01-4

Iowa-American Water Company


25. 2001

Va. St. CC

PUE010312

Virginia-American Water Company


26. 2001

WV PSC

01-0326-W-42T

West-Virginia American Water Company

Cost Allocation And Rate Design

27.

2001

Pa. PUC

R-016114

City of Lancaster

Tapping Fee Study

28. 2001

Pa. PUC

R-016236



29. 2001

Pa. PUC

R-016339

Pennsylvania-American Water Company


30. 2001 Pa. PUC R-016750 Philadelphia Suburban Water Company Cost Allocation and Rate Design 31. 2002 Va.St.CC PUE-2002-0375 Virginia-American Water Company Cost Allocation and Rate Design

32. 2003 Pa. PUC R-027975 The York Water Company Cost Allocation and Rate Design 33.

2003

Tn Reg Auth

03-

Tennessee-American Water Company


34. 2003

Pa. PUC

R-038304

Pennsylvania-American Water Company


35. 2003

NJ BPU

WR03070511

New Jersey-American Water Company


36. 2003

Mo. PSC

WR-2003-0500

Missouri-American Water Company


37. 2004

Va.St.CC

PUE-200 -

Virginia-American Water Company


38. 2004

Pa. PUC

R-038805

Pennsylvania Suburban Water Company


39. 2004

Pa. PUC

R-049165



40. 2004

NJ BPU

WRO4091064

The Atlantic City Sewerage Company


41. 2005 WV PSC 04-1024-S-MA Morgantown Utility Board Cost Allocation and Rate Design

42. 2005 WV PSC 04-1025-W-MA Morgantown Utility Board Cost Allocation and Rate Design

43. 2005 Pa. PUC R-051030 Aqua Pennsylvania, Inc. Cost Allocation and Rate Design

44. 2006 Pa. PUC R-051178 T. W. Phillips Gas and Oil Co. Cost Allocation and Rate Design

45. 2006 Pa. PUC R-061322 The York Water Company Cost Allocation and Rate Design

46. 2006 NJ BPU WR-06030257 New Jersey American Water Company Cost Allocation and Rate Design

47. 2006 Pa. PUC R-061398 PPL Gas Utilities, Inc. Cost Allocation and Rate Design

48. 2006 NM PRC 06-00208-UT New Mexico American Water Company Cost Allocation and Rate Design

49. 2006 Tn Reg Auth 06-00290 Tennessee American Water Company Cost Allocation and Rate Design

50. 2007 Ca. PUC U-339-W Suburban Water Systems Water Conservation Rate Design

51. 2007 Ca. PUC U-168-W San Jose Water Company Water Conservation Rate Design

52. 2007 Pa. PUC R-00072229 Pennsylvania American Water Company Cost Allocation and Rate Design

53. 2007 Ky. PSC 2007-00143 Kentucky American Water Company Cost Allocation and Rate Design

54. 2007 Mo. PSC WR-2007-0216 Missouri American Water Company Cost Allocation and Rate Design

55. 2007 Oh. PUC 07-1112-WS-IR Ohio American Water Company Cost Allocation and Rate Design



56. 2007 Il. CC 07-0507 Illinois American Water Company Customer Class Demand Study

57. 2007 Pa. PUC R-00072711 Aqua Pennsylvania, Inc. Cost Allocation and Rate Design

58. 2007 NJ BPU WR07110866 The Atlantic City Sewerage Company Cost Allocation and Rate Design

59. 2007 Pa. PUC R-00072492 City of Bethlehem – Bureau of Water Revenue Reqmts, Cost Alloc.

60. 2007 WV PSC 07-0541-W-MA Clarksburg Water Board Cost Allocation and Rate Design

61. 2007 WV PSC 07-0998-W-42T West Virginia American Water Company Cost Allocation and Rate Design

62. 2008 NJ BPU WR08010020 New Jersey American Water Company Cost Allocation and Rate Design

63. 2008 Va St CC PUE-2008-0009 Virginia American Water Company Cost Allocation and Rate Design

64. 2008 Tn.Reg.Auth. 08-00039 Tennessee American Water Company Cost Allocation and Rate Design

65. 2008 Mo PSC WR-2008-0311 Missouri American Water Company Cost Allocation and Rate Design

66. 2008 De PSC 08-96 Artesian Water Company, Inc. Cost Allocation and Rate Design

67. 2008 Pa PUC R-2008-2032689 Penna. American Water Co. – Coatesville Wastewater


68. 2008 AZ CC. W-01303A-08-0227 Arizona American Water Co. - Water

SW-01303A-08-0227 - Wastewater Cost Allocation and Rate Design

69. 2008 Pa PUC R-2008-2023067 The York Water Company Cost Allocation and Rate Design


71. 2008 Ky PSC 2008-00250 Frankfort Electric and Water Plant Board Cost Allocation and Rate Design

72. 2008 Ky PSC 2008-00427 Kentucky American Water Company Cost Allocation and Rate Design

73. 2009 Pa PUC 2008-2079660 UGI – Penn Natural Gas Cost of Service Allocation

74. 2009 Pa PUC 2008-2079675 UGI – Central Penn Gas Cost of Service Allocation

75. 2009 Pa PUC 2009-2097323 Pennsylvania American Water Co. Cost Allocation and Rate Design

76. 2009 Ia St Util Bd RPU-09- Iowa-American Water Company Cost Allocation and Rate Design

77. 2009 Il CC 09-0319 Illinois-American Water Company Cost Allocation and Rate Design

78. 2009 Oh PUC 09-391-WS-AIR Ohio-American Water Company Cost Allocation and Rate Design

79. 2009 Pa PUC R-2009-2132019 Aqua Pennsylvania, Inc. Cost Allocation and Rate Design

80. 2009 Va St CC PUE-2009-0059 Aqua Virginia, Inc. Cost Allocation (only)


82. 2010 VaSt CorpCom PUE-2010-00001 Virginia American Water Company Cost Allocation and Rate Design



85. 2010 Pa PUC 2010-2167797 T.W. Phillips Gas and Oil Co. Cost Allocation and Rate Design

86. 2010 Pa PUC 2010-2166212 Pennsylvania American Water Co.

- Wastewater



88. 2010 Ky PSC 2010-00094 Northern Kentucky Water District Cost Allocation and Rate Design

89. 2010 WV PSC 10-0920-W-42T West Virginia American Water Co. Cost Allocation and Rate Design

90. 2010 Tn Reg Auth 10-00189 Tennessee American Water Company Cost Allocation and Rate Design

91. 2010 Ct PU RgAth 10-09-08 United Water Connecticut Cost Allocation and Rate Design

92. 2010 Pa PUC R-2010-2179103 City of Lancaster-Bureau of Water Rev Rqmts, Cst Alloc/Rate Design

93. 2011 Pa PUC R-2010-2214415 UGI Central Penn Gas, Inc. Cost Allocation

94. 2011 Pa PUC R-2011-2232359 The Newtown Artesian Water Co. Revenue Requirement

95. 2011 Pa PUC R-2011-2232243 Pennsylvania-American Water Co. Cost Allocation and Rate Design

96. 2011 Pa PUC R-2011-2232985 United Water Pennsylvania Inc. Demand Study, COS/Rate Design

97. 2011 Pa PUC R-2011-2244756 City of Bethlehem-Bureau of Water Rev. Rqmts/COS/Rate Design

98. 2011 Mo PSC WR-2011-0337-338 Missouri American Water Company Cost Allocation and Rate Design

99. 2011 Oh PUC 11-4161-WS-AIR Ohio American Water Company Cost Allocation and Rate Design


101. 2011 Id PUC UWI-W-11-02 United Water Idaho Inc. Cost Allocation and Rate Design

102 2011 Il CC 11-0767 Illinois-American Water Company Cost Allocation and Rate Design

103. 22011 Pa PUC R-2011-2267958 Aqua Pennsylvania, Inc. Cost Allocation and Rate Design

104. 22011 VaStCom 2011-00099 Aqua Virginia, Inc. Cost Allocation

105. 22011 VaStCom 2011-00127 Virginia American Water Company Cost Allocation and Rate Design

106. 22012 TnRegAuth 12-00049 Tennessee American Water Company Cost Allocation and Rate Design

107. 22012 Ky PSC 2012-00072 Northern Kentucky Water District Cost Allocation and Rate Design

108. 22012 Pa PUC R-2012-2310366 Lancaster, City of – Sewer Fund Cost Allocation and Rate Design

109. 22012 Ky PSC 2012-00520 Kentucky American Water Co. Cost Allocation and Rate Design

110. 22013 WV PSC 12-1649-W-42T West Virginia American Water Co. Cost Allocation and Rate Design

111. 22013 Ia St Util Bd RPU-2013-000_ Iowa American Water Company Cost Allocation and Rate Design

112. 22013 Pa PUC R-2013-2355276 Pennsylvania American Water Co. Cost Allocation and Rate Design


114. 22013 Pa PUC R-2013-2350509 City of DuBois – Bureau of Water Cost Allocation and Rate Design



115. 22013 Pa PUC R-2013-2390244 City of Bethlehem – Bureau of Water Cost Allocation and Rate Design

116. 22014 Pa PUC R-2014-2418872 City of Lancaster – Bureau of Water Cost Allocation and Rate Design

117. 22014 Pa PUC R-2014-2428304 Borough of Hanover Cost Allocation and Rate Design

118. 22014 VAStCom 2014-00045 Aqua Virginia, Inc. Cost Allocation


120. 22015 Pa PUC R-2015-2462723 United Water PA Cost Allocation and Rate Design


122. 2015 Id PUC UWI-W-15-01 United Water Idaho Inc. Pro Forma Revenues


124. 2015 Va St Com PUE-2015-00097 Virginia American Water Company Cost Allocation and Rate Design

125. 2015 Hi PSC 2015-0350 HOH Utilities, Inc. Cost Allocation and Rate Design


127. 2016 Pa PUC R-2015-2518438 UGI Utilities, Inc. - Gas Division Cost Allocation

128. 2016 Il CC 16-0093 Illinois American Water Company Cost Alloc/Rate Dsgn/Demand Sty

129. 2016 NY PSC 16-W-0130 SUEZ Water New York Inc. Cost Allocation and Rate Design

130. 2016 Oh PUC 16-0907-WW-AIR Aqua Ohio, Inc. Cost Allocation and Rate Design

131. 2016 Ia St Util Bd RPU-2016-0002 Iowa American Water Company Cost Allocation and Rate Design

Exhibit No. 12-A Witness: P. R. Herbert


Hershey, Pennsylvania

WATER COST OF SERVICE

ALLOCATION STUDY

AS OF DECEMBER 31, 2018

AND

PROPOSED CUSTOMER RATES

GANNETT FLEMING VALUATION AND RATE CONSULTANTS, LLC

Harrisburg, Pennsylvania

Gannett Fleming Valuation and Rate Consultants, LLC

P.O. Box 67100 • Harrisburg, PA 17106-7100 | 207 Senate Avenue • Camp Hill, PA 17011-2316 t: 717.763.7211 • f: 717.763.4590

www.gfvrc.com

April 25, 2017 Pennsylvania-American Water Company 800 West Hersheypark Drive Hershey, PA 17033

Attention Ladies and Gentlemen:

Pursuant to your request, we have conducted a cost of service allocation study based on pro forma revenue requirements estimated for the test year ended December 31, 2018 and have prepared proposed water rate schedules designed to produce pro forma revenues more commensurate with the allocated costs.

The attached report presents the results of the allocation study, as well as

supporting schedules which set forth the detailed cost allocation calculations and the proposed schedule of rates. Schedules A and A-1, on pages 6 and 7, present a comparison of the cost of service by customer classification with the pro forma revenues produced by each classification under present and proposed rates. The proof of revenue calculations are set forth in Exhibit No. 12-D.

Respectfully submitted,

GANNETT FLEMING VALUATION AND RATE CONSULTANTS, LLC

PAUL R. HERBERT President

CONSTANCE E. HEPPENSTALL Project Manager, Rate Studies

PRH:mlw 062027.200

CONTENTS Page

PART I. INTRODUCTION Plan of Report ..................................................................................................... 2

Basis of Study .................................................................................................... 2

Allocation Procedures ......................................................................................... 3

Base Costs ............................................................................................ 3

Extra Capacity Costs ............................................................................. 3

Customer Costs ..................................................................................... 3

Fire Protection Costs ............................................................................. 4

Results of Study .................................................................................................. 4

Schedule A. Comparison of Pro Forma Cost of Service with Revenues

Under Present and Proposed Rates for the Twelve Months Ended

December 31, 2018 ................................................................................ 6

PART II. COST OF SERVICE BY CUSTOMER CLASSIFICATION

- WATER OPERATIONS

Schedule A-1. Comparison of Pro Forma Cost of Service with

Revenues Under Present and Proposed Rates for the Twelve

Months Ended December 31, 2018 ............................................................... 8

Schedule B. Development of Rate of Return by Customer

Classification Under Present Rates ............................................................... 9

Schedule C. Development of Rate of Return by Customer

Classification Under Proposed Rates ............................................................ 10

Schedule D. Allocation of Cost of Service to Customer

Classifications for the Twelve Months ended December 31, 2018 ................ 11

Schedule E. Factors for Allocating Cost of Service to Customer

Classifications ................................................................................................. 17

Schedule F. Calculation of Commodity/Demand Rates for

Standby Service Under Proposed Level of Revenue ...................................... 38

Schedule G. Summary of Average and Maximum Day System

Sendout and Maximum Day Ratios ............................................................... 39

CONTENTS, cont.

PART III. COMPARISONS OF PRESENT AND


Schedule H. Comparative Schedule of Present and Proposed Rates - Water Operations

Residential, Commercial and Municipal ................................................... 41

Industrial................................................................................................... 42

Zone 1 - Other Water Utilities ................................................................... 43

Private Fire Protection ............................................................................... 44

Public Fire Protection ................................................................................ 45

APPENDIX

Responses to Rate Structure and Cost of Service Filing Requirements ................ A-1

PART I. INTRODUCTION

- 1 -


WATER COST OF SERVICE ALLOCATION STUDY

AS OF DECEMBER 31, 2018

AND


PART I. INTRODUCTION

PLAN OF REPORT

The report sets forth the results of the cost of service allocation study for the water

operations based on pro forma costs as of December 31, 2018, for Pennsylvania-

American Water Company. Part I, Introduction, contains statements with respect to the

basis of the study, the procedures employed, and a summary of the results of the study.

Schedule A, on page 6, summarizes the cost allocation for the water and wastewater

operations and total revenues under present and proposed rates. Part II, Cost of Service

by Customer Classification - Water Operations, presents detailed schedules of the

allocation of costs to customer classifications, as well as the basis for the allocations.

Schedule A-1 in Part II summarizes the water cost allocation and the revenues produced

under present and proposed rates. Part III, Comparisons of Present and Proposed

Customer Rates, sets forth the proposed rate schedules for water and wastewater service.

BASIS OF STUDY

The purpose of the cost allocation study was to determine the relative cost of

service responsibilities of the several customer classifications based on considerations of

quantity of water consumed, variability of rate of consumption, and costs associated with

customer metering, billing and accounting. The allocation study incorporated generally-

accepted principles and procedures for allocating the several categories of cost to

- 2 -

customer classifications in proportion to each classification's use of facilities, commodities

and services required in providing water service.

ALLOCATION PROCEDURES

The allocation study was based on the Base-Extra Capacity Method for allocating

costs to customer classifications. The method is described in the 2017 and prior editions

of the Water Rates Manual published by the American Water Works Association. The

four basic categories of cost responsibility are base, extra capacity, customer, and fire

protection costs. The following discussion presents a brief description of these costs and

the manner in which they were allocated.

Base Costs are costs that tend to vary with the quantity of water used, plus costs

associated with supplying, treating, pumping, and distributing water to customers under

average load conditions, without the elements necessary to meet peak demands. Base

costs were allocated to customer classifications on the basis of average daily usage.

Extra Capacity Costs are costs associated with meeting usage requirements in

excess of the average. They include operating and capital costs for additional plant and

system capacity beyond that required for average use. The extra capacity costs in this

study are subdivided into costs necessary to meet maximum day extra demand and costs

to meet maximum hour extra demand. The extra capacity costs were allocated to

customer classifications on the bases of each classification's maximum day and hour

usage in excess of average usage.

Customer Costs are costs associated with serving customers regardless of their

usage or demand characteristics. Customer costs include the operating and capital costs

related to meters and services, meter reading costs, and billing and collecting costs. The

- 3 -

customer costs were allocated on the bases of the capital cost of meters and services, the

man-hours required to read meters and the number of customers.

Fire Protection Costs are costs associated with providing the facilities to meet the

potential peak demand of fire protection service. Fire Protection costs are subdivided into

costs to meet Public Fire Protection and Private Fire Protection demands. The extra

capacity costs assigned to fire protection service were allocated to Public and Private Fire

Protection and Commercial General Service on the basis of the total relative demands of

the hydrants, fire service lines, and commercial service lines sized to provide fire

protection, as well as general service.

RESULTS OF STUDY

The results of the cost of service allocation studies are set forth on the following

page. The data summarized in Schedule A, Comparison of Pro Forma Cost of Service

with Revenues Under Present and Proposed Rates for the Twelve Months Ended

December 31, 2018, constitute the principal results of the cost allocation studies and

subsequent rate design.

The water operations cost of service by customer classification shown in column

2 of Schedule A is developed in Schedule D, Allocation of Cost of Service to Customer

Classifications for the Twelve Months ended December 31, 2018 water operations. The

allocation of the total cost of service to the several customer classifications was performed

by applying the allocation factors referenced in column 2 of Schedule D to the cost of

service set forth in column 3. The bases for the allocation factors are presented in

Schedule E. The cost of service for the wastewater operations, including Scranton

- 4 -

Wastewater, is shown in column 3. This allocation is developed in Exhibits 11-E and 11-

F, and includes the costs associated with providing wastewater service.

Schedule G presents the calculation of the firm standby service and interruptible

standby service commodity-demand rates based on the unit costs of service by function

for the water operation.

Schedule H sets forth the average day, maximum day system sendout, and

maximum day ratios.

Comparisons of present and proposed rates for each of the customer

classifications are set forth in Part III. Schedule I (Water Ope

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