082895v1.docx

Q.Please state your name and address for the record.
A.My name is Kathy L. Stockton.  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.  My title is Auditor.
Q.Please outline your educational background and professional experience.
A.I received my BBA degree majoring in Accounting from Boise State University in December 1992.  Following graduation I was employed by the Idaho State Tax Commission.  When first employed by the Tax Commission, my title was Tax Enforcement Technician.  In my capacity as a Tax Enforcement Technician, I performed desk audits on individual state income tax returns.  I was promoted to Tax Auditor, and after meeting the underfill requirements, was promoted to Senior Tax Auditor.  In my capacity as an auditor, I performed audits on Special Fuel and Motor Tax returns, International Fuels Tax returns and Special Fuel User Tax returns.  I was employed by the State Tax Commission for a total of 22 months, sixteen as an auditor and six as a technician.  I was employed by the Idaho State Tax Commission until April of 1995.  I accepted employment with the Idaho Public Utilities Commission in July of 1995.
Q.Have you previously appeared as a witness in regulatory proceedings?  
A.No.  This will be my first time.
Q.What is the purpose of your testimony in this proceeding?
A.I will present the Commission Staff's (Staff) audit results for the interim rate request of Capitol Water Corporation (Capitol Water or Company).  These results reflect the operating expenses, rate base, revenue requirement, effective tax rate and net to gross multiplier calculations, and cash flow analysis for Capitol Water.
Q.Are you sponsoring any exhibits in this case?
A.Yes.  I am sponsoring four exhibits consisting of five pages.  My exhibits consist of Staff Exhibit No. 101 titled ”Potential Expense Adjustments”,  Staff Exhibit No. 102 titled ”Rate Base Calculation and Revenue Requirement”,  Staff Exhibit No. 103 titled ”Effective Tax and Net to Gross Multiplier Calculations,” and Staff Exhibit No. 104 titled ”Cash Flow Analysis.”  
Exhibit No. 101 details the reported operating expenses and the adjusted operating expenses for 1994.  The adjusted operating expenses for 1994 utilized for the interim total $226,452.  Exhibit No. 102 shows a gross revenue requirement of $386,603 for the Company based on a 1994 test year restated with known and measurable changes.  This exhibit also shows a revenue deficiency of $5,889.  Exhibit No. 103 shows the calculations necessary to derive the net to gross tax multiplier.  Exhibit No. 104 details the cash flows for the Company for the first seven months of 1995, and the amounts that were due but not paid as of July 31, 1995.
Q.Have you performed an independent review and analysis of the water system operation in preparation for your testimony today?
A.Yes, I reviewed the information provided in response to the Staff's production request dated
July 27, 1995.  I visited Capitol Water Corporation beginning August 2, 1995.  While there I reviewed the books and records of Capitol Water Corporation.
Q.How did you arrive at the adjusted operating expenses shown on your Exhibit No. 101?
A.While at Capitol Water, I examined the books and records in order to verify the dollar amounts given in support of the interim rate proposal.  Specifically, I examined the journal vouchers and Cash Receipts Journal cover sheet for each month during the year of 1994.  I identified expense amounts that would be questionable for regulatory purposes.  The questionable expenses are detailed on Exhibit No. 101, page 2.  I also deducted the amount of salary for H. Robert Price that was over and above the amount specified as being reasonable during the last rate case, Case No. CAP-W-92-2.  These expenses will be analyzed further for the general rate case but have been removed for the interim until the full analysis can be completed.  
Transportation expenses were also reduced.  Fifty percent of all transportation expenses were deducted for the interim rate case because detailed records of transportation charges are not being kept and because of time constraints in preparation for the interim rate case.  One Chevron gasoline charge card is used by H. Robert Price and Bonnie Price, and employee Robert Vandekop, for fuel purchases.  Repairs to the vehicles and other miscellaneous charges such as oil changes and other purchases are charged to the Key Bank Visa or paid personally by either H. Robert or Bonnie Price and reimbursed by the Company.  Because of the lack of detail, the 50% amount was used as a surrogate amount for business use for the interim, per Terri Carlock, Audit Section Supervisor, based on Case No. CAP-W-92-2.  Previously, in Case No. CAP-W-92-2, it was decided that all expenses pertaining to the vehicle that employee Bob Vandekop drives are business related, while the Suburban that H. Robert Price drives is 50% business and 50% personal, and the Ranger that Bonnie Price drives is 25% business and 75% personal.
Q.Please explain the questionable expenses detailed in Exhibit No. 101, page 2.
A.Column one details the Idaho Power late charges.  These late charges were deducted from the reported expenses in the amount of $123.  Column Two details the Sterling Nursery billing statements.  Inspection of the billing statements from Sterling Nursery showed purchases that are questionable for regulatory purposes.  Further examination of these and all Sterling Nursery bills will be necessary to determine if the purchases are to be included for regulatory purposes.
Column three details the largest dollar amount subtracted from the reported expenses.  This is the miscellaneous expense category.  Included in the questionable expenses are American Express bills, one Bon Marche bill, FCNB (Spiegel Catalog sales), and the Key Bank Visa bills.  These are questionable expenses because there is not enough detail to determine if the expenses are acceptable for regulatory purposes.  Also included are donations to various causes.  Upon first inspection, these donations are not allowable for regulatory purposes, nor are the dues to the Hillcrest Country Club.  The payments made to Jack's Flowers have also been included in the questionable expenses.  Reimbursements to both H. Robert Price and Bonnie Price will need further inspection.  Not enough detail, nor any receipts were attached to the Journal vouchers in support of these miscellaneous amounts.  The penalties for filing withholding tax returns late are also included in the questionable expenses.  Upon further inspection, these questionable expenses may turn out to be acceptable for ratemaking purposes however, for the interim rate case time did not warrant a full inspection of these expenses.
Q.Please explain the amounts from Exhibit
No. 102, ”Rate Base Calculation and Revenue Requirement.”
A.The amount on line 1, Total Plant in Service was taken from the 1994 Annual Report submitted to the Idaho Public Utilities Commission.  It is also the same dollar amount reflected on the Company's depreciation and property records schedule and the same 1994 Total Plant in Service used by Capitol Water in their Application for Authority to Increase its Rates and Alternative Application for Interim Rates, submitted to the IPUC on July 11, 1995.  
Line 2, the additions to Well Nos. 3 and 6 are from the actual receipts submitted by Capitol Water in the response to the First Production Request and the Supplemental Direct Testimony of H. Robert Price dated
August 18, 1995.  The in-service date for the repair work done to Well No. 3 is July 28, 1995.  The in-service date for the repair work done to Well No. 6 is July 10, 1995.  The repair costs are included in the rate base calculation because the work has been done and the wells are back in service, i.e. ”used and useful.”  The response to Request No. 3 details the total current cost of the work performed to date on Well No. 3, which totals $47,078.  The invoice included as part of the supplemental direct testimony of H. Robert Price details the cost of the repair work to Well No. 6 for the variable frequency drive which failed.  This invoice, including sales tax, totals $9,820.  
Line 4, the accumulated depreciation, is from the Company's depreciation and property records schedule and is the same number as in the 1994 annual report, and is also the same dollar amount used by Capitol Water in their current rate increase Application.  Line 5 removes the depreciation taken on the Contributions in Aid of Construction included in the accumulated depreciation figure.  Contributions in Aid of Construction are not included in Plant in Service, nor are they depreciated, for ratemaking purposes, therefore, the depreciation amount taken must be backed out of the accumulated depreciation to arrive at the net plant in service, line 7.  
From Net Plant in Service, deductions are taken totalling $321,730 for the Contract Accounts and $139,193 for Contributions in Aid of Construction, lines 9 and 10 respectively.  This gives an adjusted Plant in Service of $544,669, line 11.  The Working Capitol Allowance, shown on line 13 is calculated using the one-eighth of annual O&M (Operating and Maintenance) expenses method.  This method has been utilized for other water company cases and is the same as the Company proposed.  The Working Capital Allowance was calculated using the adjusted operating expenses of $226,452 from line 20.  The total Rate Base, line 14 is the result of adding the Allowance for Working Capitol to the Adjusted Plant in Service.
Q.How did you calculate the total earnings required?
A.The earnings required are calculated using the overall rate of return Staff witness Carlock recommends of 10.78% in Exhibit No. 105.  The overall return consists of 4.95% debt return and 5.83% equity return.  The return components are applied to the total rate base of $572,976 to calculate the earnings required.  The equity return is grossed-up for income taxes.
Q.You show a net to gross multiplier of 127.88%.  How did you calculate this figure?
A.The calculation is from Exhibit No. 103 titled ”Effective Tax and Net to Gross Multiplier Calculations.”  The multiplier is based on a state tax of 8%, and an effective federal tax of 15%.  This produces a net to gross multiplier of 127.88%.
Q.How is Total Return Requirement Including Taxes, line 21 of Exhibit No. 102, calculated?
A.Equity Earnings Required are calculated by multiplying Rate of Return - Equity with Total Rate Base.  This amount is grossed-up by multiplying Equity Earnings Required with Net to Gross Multiplier to arrive at Return Requirement on Equity Including Taxes.  Debt Earnings Required are calculated by multiplying Rate of Return - Debt with Total Rate Base.  Total Return Requirement Including Taxes is calculated by adding Debt Earnings Required to Return Requirement on Equity Including Taxes.
Q.How are ”Operating Expenses” on line 23 calculated?
A.The operating expenses are the reported expenses from the 1994 Annual Report as included in the Company's Application less the questionable expenses detailed in Exhibit No. 101.
Q.How is the ”Total Depreciation and Amortization” figure on line 24 determined?
A.This is the current year's depreciation plus the depreciation for the well additions and the amortization of the rate case costs as detailed in Company Exhibit No. 3, page 1 of 2.
Q.What is the ”Taxes other than Income Tax” figure on line 25?
A.This is the current year's taxes plus additional property taxes relating to the increase in Plant in Service from the work done on the Well No. 6 and Well No. 3, minus $25 for Centennial special plate fees included in vehicle registrations.
Q.Please explain the amounts on line 27, 28 and 29.  
A.Line 27, the ”Revenue Requirement” is Total Return Requirement Including Taxes from line 21 plus Total Expenses from line 26.  Line 28, Operating Revenues, reflects the revenues shown on Company Exhibit No. 3, page 2.  Line 29, Revenue Deficiency is Revenue Requirement from line 27 minus Operating Revenues from line 28.
Q.Please explain Exhibit No. 104 titled ”Cash Flow Analysis.”
A.The Cash Flow Analysis shows the cash position from January 1, 1995 through July 31, 1995.  The first column shows the months included in the cash flow analysis.  The second column records the cash on hand at the beginning of the year.  The third column has the monthly deposits to the checking account.  These deposits are primarily revenue from the monthly water billings, including the flat rate, metered customers and the fire hydrants.  Revenues from contractors during this time are also included.  The fourth column is the decreases to cash.  These amounts are made up of checks written on the account to cover expenses, returned customer checks, the monthly bank service charge and other miscellaneous bank charges.  The fifth column is the ending cash balance in the checking account.  The sixth column shows the total amounts still owed but not paid by the end of the month.
A breakdown of the bills due but not paid as of July 31, 1995 is included below the cash flow analysis.  Detail of the balance due on the Contract Accounts Payable at the end of each month in the cash flow analysis is also shown at the bottom of this exhibit.
Q.  Does this conclude your testimony?
A.  Yes, it does.