082895v2.docx

Q.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 for over 3 years.  Under this subcommittee, I also chaired 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, a Standard & Poor's Corporation Telecommunications Ratings Seminar and other non-utility specific finance seminars.  Since joining the Commission Staff in May 1980, I have participated in several audits, performed financial analysis on various companies and have presented testimony before this Commission on numerous occasions.
Q.What is the purpose of your testimony in this proceeding?
A.The purpose of my testimony is to evaluate the interim Application of Capitol Water Corporation (Capitol Water or Company) in this proceeding.  I will explain the standards I have used to evaluate the interim, analyze the current cash flow for Capitol Water, discuss the impact postponement of the interim to the general case would likely have on Capitol Water, present the capital structure and costs to evaluate the interim revenue requirement calculation if an interim is to be allowed.
Q.Have you prepared an exhibit to accompany
your testimony?
A.Yes, I have prepared Exhibit No. 105.
Q.What standards have been set by the Idaho Public Utilities Commission (IPUC) for interim increases?
A.The IPUC stated in Order No. 21209 dated April 29, 1987, Case No. U-1002-67 for General Telephone Company of the Northwest, Inc. that ”The granting of interim rate relief is a discretionary matter for the Commission's consideration.  Traditionally, interim relief is an extraordinary remedy to be granted only in an emergency or where there is danger that the utility will not be able to render adequate service if relief is withheld.  Past decisions of the Commission have allowed interim relief if (1) requested revenues match increased costs; (2) such increased costs are known and measurable; and (3) the utility's earnings are considerably below a reasonable rate of return.”  
Q. Please summarize the Staff position on the interim.
A.Capitol Water has failed to provide Staff with sufficient documentation to demonstrate that an interim increase is necessary.  Staff recommends no interim be granted.  The proposed hearing schedule in this case will allow the revenue requirement to be determined in November.
Q.Is Capitol Water Corporation experiencing a financial emergency that would impair providing adequate service?
A.Not at this time.  The financial results of Capitol Water are below the allowed or requested return on equity but the Company is not experiencing a financial emergency that would impair the provision of adequate service.  They have experienced numerous occurrences that are unusual in that they happened in a short period of time.  None of these occurrences are unusual for a water company but the fact that they all happened during approximately a one-year time period is unusual.  Mr. & Mrs. Price personally guaranty the loans and have personally borrowed money to support the water system.  
Q.Is it unusual for a small water company to have the owners personally guaranty loans for the water system?
A.No it is not unusual for owners of smaller systems to personally guaranty loans for the water system.  However, it is unusual for owners to borrow money in the fashion utilized by Mr. Price.  He has mortgaged his house for an additional $44,750 and borrowed $20,000 against his VA life insurance policy to obtain additional funds to use for capital improvements and repairs on the water system.
Q.Doesn't the fact that Mr. & Mrs. Price have borrowed money on his life insurance and increased the mortgage on their house to use on the water system prove there is a financial emergency for Capitol Water?
A.No.  Mr. & Mrs. Price would be required to personally guaranty any loan with a local bank.  I have seen no evidence to show that banks would not loan additional funds to the water system with Mr. & Mrs. Price's guaranty.  If First Interstate is at its bank limit, additional banks should be consulted.  Capitol Water may be able to qualify for a CoBank loan where up to 80% of net book value could be borrowed using the water system as collateral.  Any limit on borrowing Capitol Water is experiencing probably could be traced to the Bayhill Subdivision investment.  A loan agreement was negotiated between Capitol Water and the contractor rather than setting up a contract account.  Any financing difficulties caused by this arrangement should not be paid by the general ratepayers.  
The mortgage loan is at 8.75% and the VA loan is at 5%.  I will be evaluating the terms of these loans further prior to the general rate case.  These loans may be more appropriately classified as additional paid-in capital from Mr. & Mrs. Price.  It appears that leveraging of this paid-in capital is the most economic source of funds available for Mr. & Mrs. Price.  Capitol Water has a $15,000 note outstanding that is due September 20, 1995.  Even if Capitol Water were granted the increase it requested, the loan could not be repaid on September 20, 1995 from the rate relief requested.  This note will have to be converted to a term loan whether an interim is granted or denied.  The Company should be able to negotiate the conversion of this note.
Q.Is Capitol Water experiencing financial difficulties?  Please explain.
A.Capitol Water is experiencing financial difficulties in 1995 on a cash flow basis due to the capital requirements necessary to repair the wells as explained by Mr. Price in his testimony.  Staff Exhibit No. 104 shows a cash flow analysis for January through July 1995.  The amounts payable at the end of July 1995 total $26,042 and the ending cash balance was $7,240 leaving an additional cash requirement of $18,802.  On the surface this may look like an emergency situation.  However, if the type of expenses in 1995 are similar to 1994, many of the expenses may not be allowable for ratemaking purposes.  Until a more comprehensive audit can be completed, expenses amounting to $23,633 in 1994 are questioned for ratemaking purposes.  This level alone makes up the cash requirements needed to pay the bills not paid at the end of July 1995.  Some of the expenses paid in 1995 may also be for items questioned as being appropriate for ratemaking.  This would further reduce the cash flow required from ratepayers and reduce the amounts owed for ratemaking purposes.
The net income of $21,722 in 1994 as shown on Company Exhibit No. 3, page 2 produces a return on equity in 1994 of 9.06%.  Using the assumptions for the interim in Staff Exhibit No. 102 results in an earned return on equity for ratemaking purposes of 11.48%.   This is not as high as Capitol Water's allowed return on equity of 11.75%, nor as high as the 14% return requested by Capitol Water in this case.  These results do not show dire financial conditions that would jeopardize adequate service and this return is not considerably below a reasonable rate of return.
Q.Please summarize why you do not believe an interim should be granted to Capitol Water Corporation.
A.An interim should not be granted to Capitol Water because the Company has not met the requirements to justify an interim as stated on page 2, line 25 through page 3, line 10.  The utility earnings are not considerably below a reasonable rate of return to create an emergency or a danger that adequate service will not be rendered.
Q.If the Commission were to grant Capitol Water Corporation an interim increase, what level of additional revenues can be justified at this time?
A.Exhibit No. 102 shows a revenue deficiency of $5,889.  This revenue deficiency reflects the level of additional revenues that can be justified at this time.  A more comprehensive audit will be completed for the general rate case but until then the $5,889 reflects the additional revenue requirement that is verifiable and would not currently be at issue.
Q.Please explain the purpose of Exhibit
No. 105.
A. Exhibit No. 105 reflects the capital structure and weighted costs of funds used in Staff Exhibit No. 102 for Capitol Water Corporation.  It reflects Company financings as indicated by the records and Company representatives.  A return on equity of 12% is used for the interim as being the most representative return on equity to utilize in the interim.  It is the same return most recently authorized a smaller water company by this Commission.  A 12% return on equity was authorized in Order No. 25445 for Warm Springs Mesa.  The issue of the capital structure and the return on equity will be more fully examined in the general case.
Q.Does this complete your direct prefiled testimony for the interim?
A.Yes, it does.