102595v2.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 Dealer and Motor Fuel Distributor Tax returns, International Fuels Agreement 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.Yes.  I previously testified in Capitol Water’s interim rate request (Case No. CAP-W-95-1).
Q.What is the purpose of your testimony in this case?
A.I will present the Commission Staff's (Staff) audit results for the 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.
Q.Are you sponsoring any exhibits in this case?
A.Yes.  I am sponsoring Exhibit No. 109, Rate Base Calculation and Revenue Requirement, and Exhibit  No. 110, Effective Tax and Net-to-Gross Multiplier Calculations.
Q.Have you performed an independent review and analysis of the water system operation of Capitol Water in preparation for your testimony today?
A.Yes, I examined the books and records of Capitol Water Corporation and reviewed the information provided in response to the Staff's production requests.  My review of the books and records of Capitol Water Corporation included but was not limited to, the journal vouchers, invoices, cancelled checks, bank statements, year-end adjusting entries, year-end trial balance, general ledgers for 1993 and 1994, and contract account information.  I performed a detailed examination of 1994 Operating Expenses, 1994 Plant-in-service Adjustments, 1993 Plant-in-service Adjustments, payroll records, customer billings, and the depreciation schedules for 1994 from Presnell Gage, Capitol Water Corporation’s accountants.
Q.Please explain the purpose of Exhibit     No. 109, "Rate Base Calculation and Revenue Requirement."
A.Exhibit No. 109 is a two page, side by side comparison between the Company Rate Base and Revenue Requirement, and the Staff Rate Base and Revenue Requirement.
Q.Please review the plant-in-service amounts of Staff Rate Base as shown on the right side of Exhibit No. 109, page 1.
A.The $1,811,843 on line 1, Total Plant in Service, was taken from the 1994 Annual Report submitted to the Idaho Public Utilities Commission.  This reflects the dollar amount shown 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 exhibits submitted to the IPUC on July 11, 1995.  Line 8, adjusts Plant in Service for the Staff Rate Base by $192,680 to reflect the most recent level of system upgrades and repairs.  The adjustment consists of:
Well No. 3 Actual $49,183
Well No. 6 Actual  $9,820
Well No. 2 Estimate  $9,200
1994 Contract Accounts$130,864
Water Main Lowering $11,384
Saddle Replacements     $6,208
Personal Use of Vehicles($23,979)
Additions to Well Nos. 3 and 6 are supported by actual invoices/receipts submitted by Capitol Water in response to Staff's First Production Request and the Supplemental Direct Testimony of Bob Price dated August 18, 1995.  The in-service date for the repair work completed on Well  No. 3 was July 28, 1995.  The in-service date for the repair work completed on Well No. 6 was July 10, 1995.  The response to Request No. 3 from Staff's First Production Request details the total current cost of the work performed to date on Well No. 3, which totals $47,078.  In addition to the work done directly to Well No. 3, additional repair work was performed on the building housing Well No. 3.  The building wall was reconstructed ($1,060) and the inside of the pump house was painted ($358) following the completion of well repairs.  The adjacent property owner allowed Capitol Water access to Well No. 3 via their private property.  A concrete slab ($687) was put in place at the adjacent property as part of the necessary repairs to the adjacent property.  Actual receipts were used for verification of the dollar amounts.  The total cost for Well No. 3 amounts to $49,183.  The invoice included as part of the Supplemental Direct Testimony of Bob 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.  The estimated costs for repairs to refurbish Well No. 2 and repair the pump and motor are from the Riverside, Inc. bid dated 6/27/95.  These costs are included as work has begun on Well No. 2.
Q.Please explain in more detail why you have included these investments in Plant in Service in Rate Base when they were completed outside the test year.
A.These 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 work also represents plant in service that is not revenue producing, therefore it is appropriate to include these out-of-period adjustments to Plant in Service.  
Q.Please continue by explaining the adjustments for the 1994 Contract Accounts, the water main lowering and the saddle removals.  
A.The 1994 Contract Accounts represent distribution mains and services that are in-service and meet the “used and useful” criteria.  These were previously not included as increases to Plant in Service for 1994.  
The water main lowering amount represents the materials needed to lower the water mains for the Cory Lane storm drain maintenance project and the Ustick storm drain project at Maple Grove, Project 44102, as required by the Ada County Highway District to facilitate their roadway improvement projects.  The amount for the saddle removals is primarily for the work done to the distribution lines on Iron Court and Long Drive.  The saddles were removed because there was an iron build-up inside the pipe in the area encompassed by the saddles, causing water pressure problems.  I have included this amount in Plant in Service because the work is necessary to maintain adequate service and will be capitalized.  Since it is a non-revenue producing asset it should be included as a pro-forma adjustment to rate base.  
Q.Please continue by explaining the Staff Rate Base adjustments to Transportation Costs.
A.The $23,979 adjustment for the personal vehicle is a deduction representing the personal use of the Ford Ranger and the Chevrolet Suburban included in Plant in Service.  It was determined in prior cases that until vehicle logs are kept, the Ford Ranger will be allocated 25% for business usage, and the Chevrolet Suburban will be allocated 50% for business usage.    Line 9 shows $2,004,523 as the subtotal of 1994 Plant in Service plus the adjustment to Plant in Service.  
Q.Please describe the Staff Rate Base adjustments to Accumulated Depreciation.
A.Line 10, the accumulated depreciation of $912,506, reflects the amount recorded on the Company's depreciation and property records schedule and is the same number as in the 1994 Annual Report.  It is also the same dollar amount used by Capitol Water in their current rate increase application.  The total adjustment to accumulated depreciation is $66,533 as shown on line 14 of Exhibit No. 109, page 1.  This adjustment removes the depreciation taken on the Contributions in Aid of Construction ($49,357) 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.  The accumulated depreciation on the personal portion of the autos ($21,449) is also removed.  The accumulated depreciation for the 1994 Contract Accounts ($2,617) using a 25-year life, and a half-year convention is added.  The accumulated depreciation for the 1995 well additions ($1,363) using a 25-year life, half-year convention is also added.  Line 14 adjustments to accumulated depreciation is subtracted from line 10 to arrive at line 15, the subtotal of Accumulated Depreciation.  Line 16, Net Plant in Service of $1,158,550 reflects line 9, Subtotal Plant in Service, less line 14, Subtotal Accumulated Depreciation.
Q.Please describe the deductions taken from Net Plant in Service, line 16, to arrive at Adjusted Plant in Service, line 19 and the Allowance for Working Capital to arrive at Total Rate Base on the Staff Rate Base side.  
A.From Net Plant in Service, deductions are taken totalling $452,594 for the Contract Accounts and $139,193 for Contributions in Aid of Construction, lines 17 and 18 respectively.  Line 17 includes the 1994 Contract Accounts not previously included in the developer advances figure.  This gives an adjusted Plant in Service of $566,763, line 19.  The Working Capitol Allowance, shown on line 22 is calculated using the one-eighth of annual O&M (Operating and Maintenance) expenses method.  This method has been utilized for other small water company cases and is the same as the Company proposed.  The Working Capitol Allowance was calculated using the adjusted operating expenses of $244,105 from line 40.  The total Rate Base of $597,276 of Exhibit No. 109, line 23, is the result of adding the Allowance for Working Capitol to the Adjusted Plant in Service.
Q.How did you calculate the required earnings?
A.The required earnings are calculated using the overall rate of return of 10.78% that Staff witness Carlock recommends in Exhibit No. 108.  The overall return consists of 4.99% debt return and 5.79% equity return.  The return components are applied to the total rate base of $597,276 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 shown on Exhibit No. 110 titled “Effective Tax and Net-to-Gross Multiplier Calculations.”  The multiplier is based on an Idaho State tax rate of 8% and an effective federal tax of 15%.  This produces a net-to-gross multiplier of 127.88%.
Q.How is the Total Return Requirement Including Taxes, on the Staff Revenue Requirement side, line 30 of Exhibit No. 109, page 2 calculated?
A.The Equity Earnings Required (line 25) are calculated by multiplying Rate of Return - Equity (line 24) with Total Rate Base (line 23).  This amount is grossed-up by multiplying the Equity Earnings Required (line 25) with the Net-to-Gross Multiplier (line 26) to arrive at Return Requirement on Equity Including Taxes (line 27).  Debt Earnings Required (line 29) are calculated by multiplying Rate of Return - Debt (line 28) with Total Rate Base (line 23).  The Total Return Requirement Including Taxes (line 30) of $74,028 is calculated by adding Debt Earnings Required (line 29) to the Return Requirement on Equity Including Taxes     (line 27).
Q.How are the "Pro-Forma Operating Expenses" on line 40 of the Staff Revenue Requirement side calculated?
A.The operating expenses reflect the reported expenses from the 1994 Annual Report as included in the Company's application and adjusted for various additions and deduction.  Salaries are increased to the current 1995 level ($4,904).  An additional salary amount of $10,000 is included to move the salary level of the maintenance and service employee toward current market levels.  The Division of Environmental Quality requires certain water tests every three years.  The cost of $5,973 is amortized over a three-year period.  An additional amount of $1,991 is included for this amortization.  A deduction for non-itemized disallowed expenses in the amount of $16,126 has been removed from the reported expenses.  This figure represents various personal expenses, as well as business expenses not included for ratemaking purposes.  Other itemized deductions from 1994 Operating Expenses include an additional $5,792 for the personal usage portion of the transportation expenses, $576 for the personal usage portion of the vehicle insurance, $123 for the late power charges, and $258 for personal telephone charges.  These additions and deductions to 1994 Operating Expenses result in Pro-Forma operating expenses of $244,105.  
Q.How is the "Total Depreciation and Amortization" figure on the Staff Revenue Requirement side, line 46 of Exhibit No. 109 determined?
A.This is the current year's depreciation ($49,078) plus the depreciation for the well additions ($1,364).  Additional depreciation expense for the 1994 Contract Accounts is added ($2,617) as is additional depreciation expense for the saddle removals and main lowering on Cory lane and Ustick Road ($352).  The personal portion of the auto depreciation expense ($1,709) is deducted from the current year’s depreciation.  Rate case costs of $15,000 have been amortized over three years with the amortization of $5,000 included on line 46.  These additions and deductions to 1994 Total Depreciation and Amortization result in allowable depreciation and amortization expense of $56,702.
Q.Please explain the Staff Adjustment to the  “Taxes other than Income Tax” figure on line 47?
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 lines 49, 50 and 51 of the Staff Revenue Requirement side of Exhibit No. 109, page 2.  
A.Line 49, the "Revenue Requirement" of $407,247 is Total Return Requirement including Taxes of $74,028 from line 30 plus Total Expenses of $333,219 from line 48.  Line 50, Operating Revenues of $380,714, reflects the revenues shown on Company Exhibit No. 3, page 2.  Line 51, Revenue Deficiency of $26,533 is the additional Revenue Requirement (line 49) above the adjusted Operating Revenues (line 50).
Q.Does this complete your testimony?
A.Yes, it does.