20040819Doe Direct.pdf

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Idaho Public Utilities Commission
Office of the SecretaryRECEIVED
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Boise, Idaho
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. J!J:~.f~
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DIRECT TESTIMONY OF JANE DOE
FOR RESORT WATER COMPANY
Q. Please state your name.
A. My name is Jane Doe
Q. By whom are you employed and in what capacity.
A. I am employed by Harbor Mountain LLC in the capacity of Financial Analyst.
Q. Please describe your professional training and employment history.
A. I have worked for Harbor Mountain for 1 Y2 years as a financial analyst, and have
provided financial analysis for the utility company and real estate division. I have a
Masters in Business Administration from the University of Washington concentrating in
Finance & Operations.
Q. In preparation for this rate case filing did you examine the financial books and records of
Resort Water?
A. Yes I did. I examined the 3 previous years general ledgers.
Q. Please describe the condition of Resort Water s books as you found them and what you
did to obtain an accurate picture of Resort Water s financial circumstances.
A. I chose a "test year" to explore thoroughly, and develop a representative financial
operating scenario for the purposes of the IPUC test year presentation. The test year
chosen was FY2003 (ending August 31 st 2003). In my review of the company records, I
found accolmting errors, charges that would not occur under normal operating conditions
the absence of some normal operating charges that were not on the books, and incorrect
allocations of general & administrative expenses. It was also apparent that hookup fees or
1 "Jane Doe" is a pseudonym. The true identity of the witness and the reasons for protection of her true identity will
be explained confidentially to the Commission and Staff.
Doe, Di
Resort Water
Page 1
impact fees collected from new customers were used to pay normal operating expenses of
the company.
I made numerous adjustments to correct these errors. My adjustments are fully
explained in my work papers that are being filed with this Application and they are
available for review and audit by the staff.
Q. As a result of your examination of the company s financial records have you prepared
exhibits that accompany your testimony?
A. Yes, I have prepared three exhibits. Exhibit No.1 is entitled Statement of Operating
Income; Exhibit No.2 is entitled Rate Base Summary and Exhibit No.3 is entitled
Calculation of Revenue Requirement.
Q. Turning your attention to Exhibit No., please explain the adjustment entitled
Accounting Errors
A. As noted above, I found numerous accounting errors, most of which were Resort Water
invoices that had been coded to the Cable TV division, and Cable TV invoices had been
coded incorrectly to Resort Water. I reversed these errors for the purposes of this
Application. The adjustment of $35 906 is the sum of all adjustments, the details of
which are disclosed by my work papers.
Q. Please describe each of the adjustments shown in column C , Known and Measurable
changes.
A. These changes were a combination of the following: Resort Water had a general and
administrative division that captured costs associated with the Mountain Utility Company
as a whole. For the purposes of this Application I allocated these across all divisions
Doe, Di
Resort Water
Page 2
benefiting from its use: R WC, the sewer and cable TV divisions. The G & A general
account was also allocated and dismantled during the FY2004 year.
In addition, there were costs of operation that were captured and paid at the
Harbor Molmtain Company level that had not before been charged to Resort Water, for
example; insurance costs, accounting software license charges and management fees.
Q. Based on your analysis is Resort Water currently operating at a profit?
A. No. As shown on Exhibit 1 , Resort Water lost more than $6 000 in the test year.
Q. Please describe Exhibit 2.
A. Exhibit 2, consisting of two pages, sets our rate base calculations. Currently, the
company s books record depreciation based on expected tax lives. Exhibit 2 page 1
adjusts these accounts to use the depreciation lives for utility accounting purposes.
Q. Please describe the major items of investment the Company is proposing for inclusion in
rate base as shown on Exhibit 2 page
Item 001 , Acquisition Price Allocated, represents the purchase price of the system
when it was purchased from the United States Bankruptcy. The Company hired an
appraiser who used the income capitalization approach to determine the value of the
Utility Company. The Value of the Water Company was then extrapolated using an
allocation based on a net operating revenue approach.
Item 002/012, Water System Reservoir, represents the construction of a 65 000
gallon reservoir. When Resort Water bought the system, there was only with a 40 000
gallon reservoir. That reservoir was insufficient to provide for the existing customers.
The new reservoir was necessary to provide additional capacity.
Doe, Di
Resort Water
Page 3
Item 002/007, Water System Improvement & Design, represents capitalized
engineering and planning costs necessary for the study and design of necessary system
improvements including the Water Reservoir, Source Development, Distribution System
Upgrades, and Back-up Power system design.
Item 003/011 , Water Source Development represents the cost of drilling two
wells to provide an adequate water source for Resort Water customers. One well is in
service now, and the other will go in service with the new reservoir. The Idaho
Department of Environmental Quality, required that the Company abandon a well due to
surface water influences Before drilling the wells Resort Water had problems with
serving Resort Water customers during peak demand.
Q. Please describe items in the company s asset accounts you are proposing to remove from
rate base.
A. Exhibit 2 page 1 lists several items which are carried on the company s books but which
are not currently used and useful in providing water service to our customers. These
items have been removed from the rate base calculation.
Q. Please describe Exhibit 2 page two.
A. This summary page collects the adjustments from Exhibit 2 and contains additional
adjustments.
Q. Please describe the additional adjustments shown on Exhibit 2 page 2.
A. Line 1 Utility Plant in Service:There are several assets listed on R WC books that are not
relevant for IPUC purposes. The total purchase price of these assets equals $133 554.
and they have been removed from rate base. Line 2 Accumulated Depreciation: The
amount of$90 509.00 is the difference of accumulated depreciated under our company
Doe, Di
Resort Water
Page 4
book depreciation methods and the IPU C recommended book depreciation method. The
company depreciates water company assets on 25 year straight-line ODS method in
accordance with Publication 946 Cat. No. 13081F page 106 (Department of Treasury,
Internal Revenue Service). It is my understanding that the IPUC uses the class life for
water utilities, which is 50 years. Line 5 Contributions in Aid of Construction: The
amount of $66 757.00 represents all impact fees collected by Resort Water from 1999 to
2004 excluding impact fees collected in FY03 which is shown in column A, an amount of
$61 851.00. I have assumed that these amounts should be subtracted from the utility plant
in service, signifying a contribution to capital, rather than a normal revenue stream of the
Resort Water used to cover operating expenses.
Q. Turning your attention to Exhibit No., why are you proposing a return on equity of
11%?
A. It is my understanding that for water companies that meet the Commission s definition of
small water company" the Commission generally allows a return on equity of 120/0 in
recognition of the risks inherent with a small customer base. See for example In the
Matter of the Application of Falls Water Company, Case No. FLS-03-, Order No.
29307 (2003). Because Resort Water has revenues in excess of $50 000 and serves more
than 300 customers it is not a "small water company" as defined by Commission rules.
See IDAPA 31.36.01.101. Resort Water may not face the same level of risk as does a
company like Falls Water, for example.
Nonetheless, for the reasons stated in Mr. Elsea s testimony the company faces
numerous operational risks. Resort Water is certainly more risky that a large water
utility, such as United Water, which currently has an authorized return on equity of
Doe, Di
Resort Water
Page 5
10.6%. See Order No. 28505. I believe an 11 % return fairly reflects the relative risk
faced by Resort Water, when compared to the returns allowed other utilities.
The owners of Harbor Mountain Company require that all its lines of business
produce a return of 14%. Because a utility company may face less risk than the other
existing lines of business the investors are willing to reduce the return expectation to
11 %. It should be emphasized, however, that the investors to date have received no
return whatsoever from the utility company and have invested since purchase an
additional $500 000.00.
Q. Why are you proposing a capital structure consisting of 100% equity and no debt?
Because that is Resort Water s actual capital structure. Resort Water has not issued any
debt; all of its capital is supplied by equity investment from its related companies.
Q. Please explain how you derived the net to gross multiplier.
A. The net to gross multiplier takes the effect of taxes into account. I used a 6.30/0 State Tax
rate and a 32.795% Federal Tax rate.
Q. Based on your analysis how much additional annual revenue is required to meet Resort
Water s annual operating expense and produce a reasonable return on investment.
A. $131 291.00.
Q. Have you calculated the monthly rate for water service necessary to produce the required
revenue and what is that rate?
A. Yes. The additional required revenue per user per month would be $28.96. Added to the
current monthly rate, the new monthly rate would be $61.96 per equivalent residential
unit.
Doe, Di
Resort Water
Page 6
Q. The new rate is more than double the current rate. Why do you believe such a significant
increase in rates is justified?
A. The Resort Water Company has not been operating profitably since it was acquired in
1999. It has used hookup/impact fees to supplement operating income required to run the
business. The investors have spent $500 000.00 on improvements and maintenance of the
system in the last few years, in addition to buying the water system for $355 000., and
they have had no return on their investment.
Q. Does that conclude your testimony?
A. Yes it does.
Doe, Di
Resort Water
Page 7
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Rate Base 671,953
Required Rate of Return 11%
Required Net Operating Income 915
Adjusted Net Operating Income Realized (6,048)
Net Operating Income Deficiency 79,963
Net to Gross Multiplier 642
Gross Revenue Increase 131,291
Doe, Di
Exhibit 3
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