HomeMy WebLinkAbout19970912Carlock Direct Testimony.docQ. Please state your name and address for the record.
A. My name is Terri Carlock. My business address is 472 West Washington Street, Boise, Idaho.
Q. By whom are you employed and in what capacity?
A. I am employed by the Idaho Public Utilities Commission as the Accounting Section Supervisor.
Q. Please outline your educational background and experience.
A. I graduated from Boise State University in May 1980, with a B.B.A. Degree in Accounting and in Finance. I have attended the annual regulatory studies program sponsored by the National Association of Regulatory Utilities Commissioners (NARUC) at Michigan State University. I chaired the NARUC Staff Subcommittee on Economics and Finance and the Ad Hoc Committee on Diversification. I have also attended various finance conferences, including the Public Utilities Finance/Advance Regulation Course at the University of Texas at Dallas, the National Society of Rate of Return Analysts' Financial Forums, the Regulatory Economics and Cost of Capital Conference in Utah, and a Standard & Poor's Corporation Telecommunications Ratings Seminar. Since joining the Commission Staff in May 1980, I have participated in several audits, performed financial analysis on various companies and have previously presented testimony before this Commission.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony is to address the return issues, the criteria that must be met to receive and to continue receiving universal service funds (USF) and the filing requirements for Filer Mutual Telephone Company (Filer).
Q. Should the revenue requirement for Filer include a return on equity?
A. No. Filer should not earn a return on investment because they are required to return profits to the membership. If Filer is allowed to earn a return on investment while receiving USF funds, profits will ultimately be returned to the membership effectively reducing the rate Filer customers will pay below 125% of statewide average.
Q. What is Filers USF eligibility at this time if no return on investment is allowed?
A. Filer would not currently be eligible to receive USF funds if no return on investment is allowed in the calculation. Staff witness Faunces Exhibit No. 106, line 26 reflects a net income for Filer of $156,036. If a return is not allowed in the USF eligibility calculation, Filer would not be eligible to receive USF funds when it has a positive net income.
Q. If Filer is allowed a return in the USF calculation, how should the capital structure and the return be determined?
A. The actual capital structure for Filer consists of 100% equity. This equity is members equity from membership paid (at $1.00 per member since 3/1/84) or profits retained for future projects rather than paid out in patronage dividends. The members equity is recorded in Account Nos. 455010 - 455090.
Company witness Hendershot accurately suggests that the return must be adjusted when the capital structure consists of 100% equity or that a hypothetical capital structure should be utilized. He recommends an overall return of 10% using either method.
If a return is authorized in the USF eligibility calculation, an overall return of 10% is at the upper end of the reasonable range considering Filer is financed with 100% member equity. Member financing results in less business risk for Filer than is present for other small telephone companies. Management and the Board of Directors decisions appear to have resulted in a well run operation thus maintaining the lower risk levels.
Q. You state that the 10% overall return is at the upper end of the reasonable range. What do you recommend as the reasonable range?
A. I recommend an overall reasonable return range of 9.5% - 10.00%. This is a fair and reasonable range when the return is adjusted for the 100% members equity and the lower risk. If a hypothetical capital structure is utilized with 50% equity and 50% debt, a reasonable equity return range of 11% - 12% and a debt return of 8%, the overall return would be 9.5% - 10%.
Q. If a return is authorized for the USF eligibility calculation, what overall return has been used in Staffs analysis?
A. Staff witness Faunce utilized a 10% overall return to calculate the USF eligibility. Although any point in the 9.5% - 10% range is fair and reasonable, the 10% overall return is used since it is the upper end of my recommended range and the return recommended by Company witness Hendershot. This calculation is shown on Exhibit No. 105, line 18.
Q. Previously you stated that members equity includes profits retained for future projects rather than paid out in patronage dividends. What is the amount of the Companys retained funds held for future projects?
A. As of December 31, 1996 Filer had retained funds of $1,710,461 in a revolving funds account used for capital improvements.
Q. What is Filers main source for the revolving funds used for capital improvements?
A. In reading the Board of Directors minutes and in questioning the manager, John Gunn, and consultant, Ray Hendershot, Staff witness Faunce found that Filer is obligated to pay 100% of net income to the patronage (co-op members or customers). The Board of Directors vote each year on how much of the net income is to be returned to customers and how much to hold for future projects. The amount not paid to customers is considered an interest free loan and, therefore, is still owed to the patronage and is generally paid as the assets are depreciated. Future projects may benefit any part of Filers operation including regulated/non-regulated, Idaho/Nevada and/or intrastate/interstate operations.
In 1994, the Board voted to return 100% of the 1993 net income to customers. In 1995, the Board voted to return 40% of the 1994 net income to customers and retained 60% for the fiber optic project. In 1996, the Board voted to return 40% of the 1995 net income to customers and retained 60% of the net income to fund the EAS investment and a new building. The new building is not anticipated in the near future.
Q. How much is budgeted for capital improvements and how long would the revolving fund last when funding the capital budget?
A. The capital budget for 1997 is $303,242. This budget includes EAS capital improvements of $8,119 for 9 DCM cards and $3,000 - $4,000 for EAS trunking and translation costs. The remainder of the budget is for a new building that will not be built in the near future.
A five year capital budget was not available. Using the 1997 budget amount, the current revolving fund will fund capital improvements for more than five years.
Q. If a return is allowed in the USF calculation, is it reasonable to allow the full amount of the return calculated on Exhibit No. 105, line 18?
A. Although I believe it is not appropriate to allow any return for Filer in the USF calculation, if a return is allowed it is appropriate to include only 60% of the total return calculation. The 60% reflects the level of profit retention during the last two years. Considering the balance in the revolving fund account, it may be reasonable to conclude that even the 60% retention rate probably will not be maintained.
Q. If 60% of the return is allowed, what is Filers eligibility at this time?
A. The return allowance would be $125,614 ($209,356 * 60%). Compared to the current net income level of $156,036, Filer would not be eligible for USF funds at this time.
Q. If USF funds are received by Filer, how should any patronage dividends in excess of the percentage assumed to be paid to the membership be treated?
A. Any profits, patronage dividends, returned to the Filer membership in excess of that contemplated in the USF eligibility calculation should be a reduction to the amount received from USF. Since the Filer membership is the same as its customers, any patronage dividends paid will reduce the rate paid by customers below 125% of statewide average. To prevent unfair treatment between USF recipient customers, USF funds received by Filer must be reduced by patronage dividends.
Q. Does Filer receive National Exchange Carrier Association (NECA) funds?
A. Filer received NECA funds of $55,461 in 1995. In 1996, no NECA funds were received.
Q. How should any NECA funds received be treated?
A. Absent a rate case, any NECA funds received in 1997 or in the future by Filer should be used to reduce the draw from the Idaho USF by the amount received from NECA.
Q. What reporting requirements should be required of Filer?
A. Filer should be required to file the same annual report with the Idaho Public Utilities Commission as required by other small telephone companies. Filer would also be required to file the necessary reports with the USF Administrator. As part of these filings Filer should be required to report the amount of funds received from NECA and any patronage dividends paid to members.
Q. Should Filer fall under the same audit requirements as regulated utilities?
A. Yes. As long as Filer is receiving USF funds, it should be audited to verify reasonableness of expenditures and accuracy of the annual reports similar to regulated utilities.
Q. Does this conclude your direct testimony in this proceeding?
A. Yes, it does.
FIL-T-97-1 CARLOCK (Di) 1
9/12/97 Staff
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