20050406Stockton direct.pdf

BEFORE THE ILED L~,
r"- ft'~t.t ~tiVL'
f". ,y~" ",r'jt"\ At1 L. t:.
'--;~~
Y"'! n 'tot. It.J
( '
,".\,1 ""
" ~,, , ', j ,,
IDAHO PUBLIC UTiliTIES COMMISSION
:;"
UTHJ I itJ L.LJnr'l ~~ . n
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN THE STATE OF IDAHO
CASE NO. UWI-04-
DIRECT TESTIMONY OF KATHY STOCKTON
IDAHO PUBLIC UTiliTIES COMMISSION
APRil 6, 2005
Please state your name and business address?
My name is Kathy Stockton.My business address
is 472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed as a Senior Audi tor by the Idaho
Public Utilities Commission.
Please describe your educational background and
professional experience.
I received my B.A. degree in Accounting from
Boise State University in December 1992.Following
graduation I was employed by the Idaho State Tax
Commission as a Tax Enforcement Technician.In that
capacity I performed desk audits on individual state
income tax returns.I was promoted to Tax Audi tor and
later to Senior Tax Audi tor.In my capacity as an
auditor , I performed audits on Special Fuel and Motor Fuel
Tax returns, International Fuels Tax Agreement Returns and
Special Fuel User tax returns.I accepted employment wi
the Idaho Public Utilities Commission Staff in July of
1995.I attended the National Association of Regulatory
Utility Commissioners Annual Regulatory Studies program
Michigan State Uni versi ty.I have conducted numerous
audits and cases for electric, gas, and water utilities.
I have previously presented testimony before this
Commission.
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
What is the purpose of your testimony?
The purpose of my testimony is to explain
Staff's adjustments for United Water Idaho (UWI) to Plant
in Service regarding Allowance for Funds Used During
Construction (AFUDC); to explain Staff's adj ustment to
federal income taxes to include the production credit;
Staff's adjustment of Management and Service (M&S) fees;
Staff's adjustment to revenues to recognize the "risk
premium" from the sale of the Carriage Hill water system;
to explain Staff's adjustment to the Accumulated Deferred
Federal Income Taxes and to the Investment Tax Credi t, and
Staff's Income Tax and Debt Interest Synchronizations
calculation.
Are you sponsorlng any exhibits?
Yes, I am sponsoring 7 exhibits, Exhibit No. 101
through Exhibi t No.1 0 7 .
AFUDC Section
Do you have any adjustments to United Water
Rate Base?
Yes , I have adj ustments to Rate Base,
specifically Plant in Service, relating to the Allowance
for Funds Used During Construction (AFUDC), as well as the
associated adjustments to Accumulated Depreciation.
What types of adjustments to Plant in Service
related to AFUDC do you have?
CASE NO. UWI -W- 04-
04/06/05
STOCKTON , K.
STAFF
(Di)
I have an adj ustment to AFUDC to remove the
equity gross-up portion of the AFUDC rate the Company has
included in the AFUDC calculation for Plant in Service and
Construction Work in Progress (CWIP)I al so have an
adjustment to AFUDC related to water rights, as identified
in Staff witness Sterling s testimony.
What is Allowance for Funds Used During
Construction?
Allowance for Funds Used During Construction or
AFUDC is an accounting mechanism , which recognizes capital
costs associated with financing construction.Generally,
the capital costs recognized by AFUDC include interest
charges on borrowed funds and the cost of equity funds
used by a utility for purposes of construction.The main
purposes of AFUDC are to capi tal i ze wi th each proj ect the
costs of financing that construction; separate the effects
of the construction program from current operations; and
to allocate current capi tal costs to future periods when
these capital facilities are in service, useful and
producing revenue.AFUDC represents the cost of funds
used during the construction period before plant goes into
serVlce.When it is placed in serVlce, the entire cost of
the plant, including AFUDC, is added to rate base, where
it earns a rate of return and is depreciated over the life
of the plant.
CASE NO. UWI -W- 04-
04/06/05
STOCKTON , K
STAFF
(Di)
Has the Company properly accounted for this
carrYlng charge on the construction work in progress
account s?
AFUDC has been improperly charged on water
rights , which clearly are not construction work
progress.Plant items that are not construction proj ects
do not accrue AFUDC.Staff's Adj ustment to AFUDC, as
shown on Staff Exhibit No. 101, removes AFUDC that was
accrued on water rights.
Why is it inappropriate to accrue AFUDC on water
rights?
Water rights are not Construction Work in
Progress.No physical construction is actually taking
place.While the water rights are being pursued, the
amounts expended can be booked to Preliminary Survey and
Investigation Charges, Account 183.Once the water rights
have been secured, they are either used and useful, and
should be booked to the sub-account Land and Land Rights
in the Plant in Service records; or , if they are not used
and useful , but anticipated for future use, then the water
rights should be booked to Land and Land Rights, Plant
Held for Future Use.It may benefit the shareholders of
the Company to make the investment in water rights for the
future, but it does not benefit the customers until they
are actually using the water rights.
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K
STAFF
(Di)
What is the amount of your adj ustment to remove
the AFUDC that was accrued by the Company on water rights?
My adj ustment to remove the AFUDC accrued on
water rights is $94 918, and is incorporated in Staff
Exhibit No. 101.
Do you have other concerns regarding the way the
Company computes AFUDC?
Yes, I do.Beginning in 1995 the Company
grossed-up, for income tax purposes, the equity portion of
the AFUDC rate, and added this additional AFUDC component
to the overall rate of return the Company was using to
calculate AFUDC.
Why did the Company change the way it was
calculating AFUDC?
The Company changed the way it calculated AFUDC
as a result of the Financial Accounting Standards Board'
promulgation of Statement of Financial Accounting
Standards No. 109 (SFAS 109)Accounting for Income-Taxes,
which was introduced in February of 1992.Under SFAS 109,
a current or deferred tax liability or asset is recognized
for the current or deferred tax consequences of all events
that have been recognized in the financial statements or
tax returns measured on the basis of enacted law.This
was a change from Accounting Principles Board Opinion No.
11, Accounting for Income taxes (APB 11) .Under APB 11
CASE NO. UWI -W- 04-04/06/05
STOCKTON, K.
STAFF
(Di)
deferred tax consequences were recognized based on the
differences between the periods in which transactions
affect taxable income and the periods in which they enter
into the determination of pretax accounting lncome.This
change from APB 11 to SFAS 109 affected the measurement
and recognition of current and deferred income taxes
reported in financial statements.
One of the changes that resul ted from the
promulgation of SFAS 109 is the way in which AFUDC
accounted for.SFAS 109 considers the equity component of
AFUDC as a temporary difference for which deferred income
taxes must be provided.Therefore, an enti ty should
record the deferred tax liability for the equity component
of AFUDC in a sub-account of Accumulated Deferred Income
Taxes - Other, Account 283 (Uniform System of Accounts for
Class A and B Water Utili ties, National Association of
Regulatory Utility Commissioners; which the Company
currently following) and the corresponding regulatory
asset in sub account of Miscellaneous Deferred Debits,
Account 186.
Currently the Company is including an income tax
gross-up on the equity component of AFUDC as part of the
AFUDC amount.Staff asserts that this is an incorrect
application of SFAS 109.In discussions with Company
witness Healy, Staff understood the Company s position to
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
be that there were no adverse effects on the customer as a
resul t of the Company including the equi ty income tax
gross -up component of AFUDC as part of the total AFUDC
amount.According to the Company, there is no effect on
the customer because the amount of AFUDC attributable to
the income tax equity gross-up included in rate base
should be equal to the amount of the deferred tax
liability associated with the AFUDC equity income tax
gross-up component that is deducted from rate base,
resul ting in no net rate base change as a resul t of the
way the Company calculates AFUDC.
lssue.
Staff does not agree with the Company on this
Because the \equi ty income tax gross -up component
of AFUDC is included in the calculation of AFUDC, then the
AFUDC is overstated.When a construction proj ect
placed in service, the amount in the Construction Work in
Progress account for that proj ect, plus the associated
AFUDC for that proj ect, is transferred to Plant in
Service.At this point Plant in Service will be
ov~rstated by the amount of the equity income tax gross-
component of AFUDC.Al though this rate base amount, in
theory, should net out to zero when the deferred income
tax associated with the AFUDC is removed from rate base,
the problem of the overstated depreciation expense still
remalns It is this higher depreciation expense that
CASE NO. UWI-04-
04/06/05
STOCKTON, K.
STAFF
(Di)
adversely affects customers.
Please describe the adj ustments to correct this
problem.
Staff adj ustments (a) remove the equi ty income
tax gross -up component of AFUDC from Plant in Service;(b)
reclassify the Plant in Service amount associated with the
equity gross-up of AFUDC as Miscellaneous Deferred Debits,
Account 186;(c) reduce Accumulated Depreciation, and (d)
reduce Depreciation Expense.The balance sheet
adjustments '' and 'b' correct the equity income tax
gross-up component of AFUDC from 2001 through the adjusted
test year.
How did you calculate the balance sheet
adjustments?
Staff Exhibit No. 101 shows these adjustments.
Staff received from the Company, a spreadsheet wi th the
amount of AFUDC, by proj ect, by year.I backed out the
amount of AFUDC that is attributable to the income tax
gross-up on equity.
United Water Idaho used an AFUDC rate of 8.84%,
the overall rate of return granted the Company in their
last rate case, Case No. UWI-OO-, Order No. 28505.The
Company calculated the equity gross-up factor to be 2.78%.
This calculation and factor were verified from a
spreadsheet requested by Staff and provided by the Company
CASE NO. UWI-04-04/06/05 STOCKTON , K
STAFF
(Di)
during this rate case.
Please explain how the Accumulated Depreciation
Adj ustment and the corresponding Depreciation Expense were
calculated.
These two adj ustments were calculated using the
Company s overall depreciation rate.Staff did not have
sufficient information at the detailed plant level to
adequately make the adjustments by plant account.The
Accumulated Depreciation Adjustment is $13,482 and the
Depreciation Expense adjustment is $7 067 as shown on
Staff Exhibit \ No. 101.
Do you have an adjustment to Deferred Debits as
a resul t of moving the equi ty gross -up component of AFUDC
out of Plant in Service and into a Miscellaneous Deferred
Debits account?
Yes, Staff Exhibit No. 101 shows the inclusion
in deferred debits of the equity gross-up component of
AFUDC reclassified as a miscellaneous deferred debit to
Account 186XXX.
Do you have a recommendation regarding the AFUDC
equi ty gross -up component included in the various Plant in
Service accounts?
I recommend that the Commission order theYes.
Company to correct its Plant in Service records to remove
the equity gross-up component of AFUDC improperly included
CASE NO. UWI -W- 04-04/06/05
(Di)STOCKTON, K.
STAFF
in Plant in Service.The Company should recalculate its
Plant in Service from the time it implemented the SFAS 109
equi ty gross -up AFUDC component.The Company should be
required to correct the AFUDC components of Plant in
Service as well as accumulated depreciation and
depreciation expense; and provide Staff an opportunity to
review the corrected Plant in Service accounts.At that
point it may be necessary to update the rate base and
operating income included in the final order for this case
and to update the rates that are set in the final order in
this case as a result of a Commission ordered change in
account ing method.
Are there other issues associated wi th AFUDC
that the Commission should address?
For all Construction Work in ProgressYes.
proj ects that are included in rate base but are not yet
placed in service at the time rates become effective,
special treatment must be implemented by the Company.
proj ect work orders for plant included in rate base must
stop accruing AFUDC when rates from this case are
implemented. If AFUDC is not stopped, the Company will be
earning a return on the plant in rates and still accrulng
an AFUDC return for future recovery.This would allow
over-recovery and is inappropriate.
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
American Jobs Creation Act of 2004 Section
Do you have an adjustment associated with the
American Jobs Creation Act of 2004?
I have an adj ustment that reduces federalYes.
income taxes as a resul t of the production credi t from the
American Jobs Creation Act of 2004.
How did the American Jobs Creation Act of 2004
affect public utilities?
On October 22 , 2004 , President Bush signed into
law the American Jobs Creation Act of 2004.This act
includes tax relief for domestic manufacturers by
providing a tax deduction up to 9 percent (when fully
phased in) of the lesser of (1)qualified production
activities income " as defined in the act or (2) taxable
income (after the deduction for the utilization of any net
operating loss carryforwards) This tax reduction applies
to specific public utility operations.
Qualified domestic production gross receipts
(QDPGR) include gross receipts from the production in the
United States of electricity, gas and potable water, but
exclude gross receipts from the transmission of these
items.Activities included in the production of potable
water include the acquisition , collection and storage of
raw (untreated) water, as well as the transportation of
raw water to, and the treatment of raw water at, a
CASE NO. UWI-04-
04/06/05
STOCKTON, K.
STAFF
(Di)
treatment facility.However, gross receipts attributable
to the storage of potable water or the delivery of potable
water to customers do not give rise to QDPGR.A taxpayer
that both produces and distributes potable water must
properly allocate gross receipts between qualifying and
non-qualifying domestic production gross receipts (H. R.
Conf. Rep. No.1 0 8 - 755) .(Tax Legislation 2004; American
Jobs Creation Act of 2004; Law , Explanation and Analysis;
CCH Editorial Staff Publication; pages 88-89)
The Commission Staff , in Productipn Request Nos.
146 and 147 , asked the following questions:Has Uni ted
Water Idaho or its parent corporation (s) done any
investigation or research to ascertain how this act
applies to the Company or its parent corporation?Please
provide a schedule and a description of how this Act
applies to the Company, and/or its parent; and a schedule
showing the financial impact and how it was calculated.
How did the Company respond?
The Company responded wi th the following answer
to Production Request 146:This provision will apply to
Uni ted Water Idaho.However, at this time United Water
Idaho is still in the process of determining how it will
separate gross receipts from production vs. gross receipts
from distribution and storage.Guidance wi 11 be provided
through U. S. Treasury Regulations that have yet to be
CASE NO. UWI-04-
04/06/05
STOCKTON , K.
STAFF
(Di)
released. "
The Company further responded to production
Request 147 with the following answer:It is premature
to determine how the domestic production deduction will
impact Uni ted Water Idaho because the U. S. Treasury has
yet to promulgate regulations that will give guidance on
how to allocate between gross receipts from production and
gross receipts from distributions.
Should the impact of the production credi t be
considered in this proceeding?
Yes.Staff notes that the Company has stated
that this provision will apply to United Water Idaho, but
did not attempt to determine an amount to include in this
filing.Staff recognized the fact that there will be a
reduction to the Company s income taxes beginning with the
2004 income tax filing and the impact will increase going
forward.Staff finds it reasonable to include an amount
that recognizes a benefit to customers in this case Slnce
the production credit will benefit the Company.
Has the Staff calculated such an amount?
Yes, Staff has calculated an amount as a proxy
for the production credit that the Company will be
recel vlng.It is reasonable to include a proxy amount for
the production credi t since the Staff is recommending that
the Columbia Water Treatment Plant be included in rates as
CASE NO. UWI -W- 04-
04/06/05
STOCKTON , K.
STAFF
(Di)
if it were in service for a full year.The CWTP is a
large portion of plant in service that will be eligible
for this credi Including a proxy for the production
credit better reflects the cost of the plant and will
allow this advantage of the new water treatment plant to
flow to customers since increased expenses that are not
fully known are being charged to customers.
It is also reasonable to include a proxy for the
production credit because it is known that the credit will
be available to the Company.The exact amount is not
fully measurable at this point but the 3% production
credit in the 2004 tax year and increasing to 9% for
United Water Idaho is known.
It is also reasonable to include a proxy for the
production credi t because it is measurable.Staff has
proposed a conservative way to measure the credi The
proxy amount is conservative , since only the production
and water treatment plant in service is being used to
calculate the proxy production credi t amount and only the
3% credit is being used.Al though the exact method to be
accepted by Treasury is unknown , Staff's conservative
proxy allows this Commission to recognize that in the 2004
tax year there will be an amount of the production credi t
that United Water Idaho will be able to take advantage of.
Including at least this conservative amount in recognition
CASE NO. UWI-04-
04/06/05
STOCKTON, K.
STAFF
(Di)
of the existence of this lncome tax credit will help
lnsure customers are not overcharged.
What is the adjustment Staff proposes to
recogni ze the impact of the product ion credi t and how did
you calculate it?
Staff proposes to reduce federal lncome taxes by
a proxy amount for the production credit.I ha
calculated this adjustment by reducing federal income
taxes by the production credi t percentage for the first
year (3% in 2004, increasing to 9% by 2010) multiplied by
the amount of production and water treatment Plant in
Service, as supported by Staff wi tness Harms.The
calculation is shown in Staff Exhibit No. 102.I used the
production and water treatment accounts when calculating
this adjustment, as shown on Staff Exhibit No. 102 , Column
(5) .
What is the amount of the proxy production
credit used to reduce federal income taxes?
The proxy production credit is $87,501 as shown
on Staff Exhibit No. 102.
Management and Service Fees Section
During your on-site audit , did you review the
allocation method that the affiliate company, Management
and Service Corporation uses to allocate costs to the
various subsidiaries of United Water Works?
CASE NO. UWI-04-04/06/05
STOCKTON , K.
STAFF
(Di)
Yes. I reviewed the allocation methodology that
the Management and Service corporation uses to allocate
costs to the subsidiaries that they serve.Staff is
satisfied that the allocation method in the agreement that
United Water Idaho has with the Management and Service
Company is being applied properly.
What is the relationship between Uni ted Water
Idaho and United Water Management & Service Company?
United Water Management & Service Company (M&S)
provides services to Uni ted Water Idaho for accounting,
engineering, information technology, treasury, regulatory,
central purchasing, management, human resources and other
functions based upon the agreement that United Water Idaho
has wi th the M&S Company.The relationship established
with the M&S Company is designed to take advantage of
economies of scale in the provision of the common
servlces.The desired resul t is that the relationship
avoids inefficiencies and duplication of costs that could
occur if each operating group that contracts with the M&S
Company were to perform these functions separately.
other words, the M&S Company can save the overall parent
corporation money by handling all these functions
centrally for the various operating units of United Water
Resources.The M&S Company is operated as a cost center,
billing all costs out to the various operating groups
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
which they serve.The personnel code their time to the
opera t ing uni t s that they serve in proport ion to the
amount of time spent working on behalf of each operating
group.
Do you have an adjustment to the M&S fees?
My adjustment is based on using the M&SYes.
fees for the calendar year ended December 31 , 2004.
stated in the testimony of Company witness Healy in the
last rate case, Case No. UWI-00-1, "The calendar year
provides a more reliable indication of the true level of
M&S expense since these expenses are planned , accounted
for and adjusted, if needed, on a calendar basis.(Healy,
, pgs 11 & 12) .In the last rate case, the Commission
accepted the Company s adjustment that was based on the
calendar year basis rationale.Staff proposes to use the
same rationale in this case.Staff notes that the new
computer software from PeopleSoft now allocates the M&S
fees between corporate , regulated, and non-regulated
acti vi ties.Staff has removed the non-regulated M&S fees
as part of this adj ustment
What is the amount of Staff's adj ustment?
Staff's adjustment to M&S fees, as shown on
Staff Exhibi t No. 103, reduces operating expenses by
$20,678, increases state income taxes by $1,654, increases
federal income taxes by $6,658, and increases net income
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
by $ 12 , 3 6 6 .
Carriage Hill Revenue Section
Please explain the Carriage Hill issue.
United Water requested authority, in Case No.
UWI-04-3, to remove the Carriage Hill Subdivision from
the Company s certificated serVlce area and for an
accounting order regarding distribution of proceeds from
the sale of the Carriage Hill domestic water system by
Uni ted Water to the Ci ty of Nampa.The Commission in
Order No. 29625 addressed the sale and ordered revenue as
a result of the sale to be included in this rate case.
What has the Company proposed to do in this case
regarding the proceeds from the sale of the Carriage Hill
water system?
Company witness Wyatt states that "The Company
has no obj ection to booking whatever remains of the risk
premium ' as regulated revenue on its books, however the
actual amount of that revenue will not be fully known
until the transaction in that proceeding closes sometime
in December.All transaction costs must be netted against
the amount before a final accounting of the remainder can
be recorded as regulated revenue.(Case No. UWI-04-
Wya t t, D i
, pg
18) .
Did the Commission , in Order No. 29625, direct
the Company to book the remainder of the "risk premium
CASE NO. UWI -W- 04-
04/06/05
STOCKTON , K
STAFF
(Di)
after final closing as regulated revenue?
No, the Commission , in Order No. 29625 made the
following statement about the allocation of the sale
proceeds, "We further find it reasonable and direct Uni ted
Water to book the $28 138 amount originally proposed as a
risk premium distribution to United Waterworks as
regulated revenue to be passed through to customers in the
Company s upcoming general rate case.(emphasis added)
Did the Commission in Order No. 29625 requlre
the Company to submit the actual revenue amount when
was known so that the Commission Staff could include that
amount in this rate case, as proposed by Company wi tness
Wyatt?
No, the Commission specified the ,exact amount.
The Commission in Order No.2 9625 did not direct the
Company to provide numbers for the Commission Staff to
include as the actual revenue, nor did the Commission
direct the Company to submit a final accounting of the
sale proceeds.The directive was provided in the above
quote.
Did the Commission propose that the revenue for
ratemaking purposes be amortized over a three-year period
as proposed by the Company?
No, the Commission did not specify ratemaking
treatment other than including $28,138 in revenues in the
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K.
STAFF
(Di)
next general rate case.Staff believes, due to the
affiliate transaction and generous treatment to accomplish
the sale, the fixed amount was the amount intended to be
included in regulated revenues by the Commission.
Staff proposes that the full revenue amount be
amortized over a five-year period for ratemaking purposes.
A five-year amortization period is consistent with other
amortization periods recommended by Staff in this case.
What is your adj ustment to revenues as a resul t
of Commission Order 29625?
My adjustment, as shown on Staff Exhibit No.
104 , increases revenues by $5,628; increases state lncome
taxes by $450; lncreases federal income taxes by $1,812;
and increases net income by $3,365.
Accumulated Deferred Federal Income Taxes Section
Do you have an adj ustment to Accumulated
Deferred Federal Income Taxes?
Yes.Since depreciation expense was adjusted by
Staff witness Harms, Accumulated Deferred Federal Income
Taxes (ADFIT) has a corresponding adjustment.Staff'
Total Accumulated Deferred Federal Income Tax balance of
$14,521, 668 is shown on line 13 of Staff Exhibi t No. 105.
Staff's adj ustment is the difference between the Staff'
calculated Total Deferred FIT and the Company s Total
Deferred FIT July 31, 2004 Balance of $11,144,389.
CASE NO. UWI -W- 04-
04/06/05
STOCKTON, K
STAFF
(Di)
Staff's adj ustment increases Accumulated Deferred Federal
Income Tax by $3,377,279.
ITC Amortization Section
Do you have an adj ustment to the Income Tax
Credit Amortization?
Yes, I do.The Company s Exhibi t No., page
of 9 represents the pro forma calculation of pre-1971
investment tax credits that are deducted from rate base
and amortized at a rate of $750 annually.The balance at
July 31 , 2004 was adjusted by the Company to reflect the
balance at May 31 , 2005.Because Staff used an average of
monthly averages rate base, Staff reversed the Company
adjustment to investment tax credits, as the booked amount
would already reflect an average amount using the Average
of monthly averages rate base methodology.As a resul t
the average rate base methodology, Staff witness Harms
Exhibi t No. 111 , Column (C), 1 ine 8 shows the Company
investment tax credit balance as of July 31 , 2004.Staff
Exhibit No. 106 summarizes Staff's adjustment.
Income Taxes & Debt Interest Synchronization Section
Please explain Staff Exhibit No. 107, which
shows the lncome tax calculations and the debt interest
synchronization.
The purpose of Staff Exhibit No. 107 is to
determine both the state of Idaho and federal income tax
CASE NO. UWI -W- 04-04/06/05 STOCKTON, K.
STAFF
(Di)
expense and the debt interest synchronization.
Lines 13 through 18 of Staff Exhibi t No. 107
calculate the tax deductible interest expense.The resul t
of this calculation is carried to line 3 to calculate the
tax expenses.The calculation, using the debt ratio of
53.41% and debt cost rate of 4.65% from Staff witness
Hall's Exhibit No. 117 , together with the rate base Staff
witness Harms developed on Staff Exhibit No. 111, is
commonly referred to as interest synchronization.The
purpose is to match the tax deductible interest expense
with the case filings and ultimately the Commission
findings for the other three items.Any time one of these
factors is changed, this calculation must be made to
maintain the synchronization of the expense wi th the tax
effect.
Lines 19 through 22 on Staff Exhibit No. 107
calculate the difference between the Company s proforma
tax depreciation and the adj usted book depreciation.The
excess of tax depreciation over book depreciation shown on
ine 22 is carried to ine 4 of the exhibi t to cal cula te
the tax expenses.This calculation only affects the
calculation of state income taxes for which the benefits
of accelerated depreciation are flowed through to the
Company s customers.Accelerated depreciation benefits
are required to be normalized for the federal tax
CASE NO. UWI -W- 04-04/06/05
(Di)STOCKTON, K
STAFF
calculation.
The resul t ing income tax expenses shown on ine
7 for Idaho state income taxes and on line 11 for federal
lncome taxes, are also shown on lines 23 and 24 , Column
(P) on page 2 of Staff witness Harms ' Exhibit No. 111.
The calculations shown on Staff Exhibit No. 107
incorporate all of the financial data shown in Columns (A)
through (N) of Staff wi tness Harms Exhibi t No. 111 for the
computation of the income taxes.The calculated taxes are
shown in the end result in Column (P) of Staff Exhibit No.
111.The difference between the amount on Column (P) and
the amounts shown on Staff Exhibit No. 107 are due to the
interest synchronization effect and the book vs. tax
depreciation effect in the other columns , and are shown in
column (0)The debt interest synchronization calculation
results in a decrease of state income tax of $96,102 and
an increase of federal income tax of $444,429.These
amounts are shown on lines 23 and 24, Column (0) of Staff
wi tness Harms Exhibi t No. 111.Col umns (D) through (N)
were calculated at the statutory tax rates to approximate
the tax effect of the individual adj ustments.Staff
Exhibit No. 107 and Column (0) of Staff Exhibit No. 111
incorporate the debt interest synchronization for all of
Staff's adj ustments.
Does this conclude your direct testimony in
CASE NO. UWI-04-04/06/05
(Di)STOCKTON , K
STAFF
this proceeding?
Yes, it does.
CASE NO. UWI -W- 04-04/06/05 STOCKTON, K. (Di)
STAFF