970514.docx

Q.Please state your name and business address for the record.
A.My name is Donald M. Oliason.  My business address is 472 West Washington Street in Boise, Idaho.
Q.By whom are you employed and in what capacity?
A.I have been employed by the Idaho Public Utilities Commission as an electrical engineer since January 1990.
Q.Please describe your educational background and engineering experience.
A.I received Bachelor of Science degrees in Civil and Electrical Engineering from the University of Idaho and I am a registered Electrical Engineer in the states of Washington and Idaho.  In addition to my work with the Idaho Public Utilities Commission, I have had 24 years of experience in various engineering and operating positions with an electric, water and natural gas utility.
Q.What is the purpose of your testimony in this proceeding?
A.The purpose of my testimony is to identify the extent of Capitol Water Corporation’s (Capitol) water quality problem and the alternatives for correcting the problem (see Exhibit No. 105).  I also comment on each of the improvements Capitol proposes to make to its water system and I propose a rate design to finance these improvements.
Q.Please summarize the nature of Capitol’s water quality problem.
A.When a water supply contains an iron concentration of 0.30 parts per million (ppm), some of the metal atoms are likely to oxidize (rust) and cause some discoloration.  As the concentration increases above 0.30 ppm, more rust forms to the point that the water appearance is a rusty brown color causing stains on appliances and laundry.  A similar problem occurs with manganese when its concentration is above 0.15 ppm.
Well No. 6, Capitol’s newest well, is used only during the irrigation season.  The concentration of iron in this well is about 1.3 ppm and the manganese is about 0.3 ppm.  At these levels, one can expect rust problems.
Q.Do iron and manganese represent a health hazard?
A.The U.S. Environmental Protection Agency (EPA) reports that it knows of no adverse health effects from iron and manganese in the trace amounts generally found in drinking water.  (See Exhibit No. 104)  Certain small concentrations are said to be important to human health.  However, the EPA lists iron and manganese as “secondary contaminants” because of undesirable qualities such as taste, smell and appearance (rusty water).  EPA lists secondary maximum contaminant levels for iron at 0.3 ppm and for manganese at 0.05 ppm.  Above these concentrations rust begins to appear and begins to stain plumbing and laundry.  As concentrations increase, smell and taste begin to be offensive.  The EPA “listing” is only a guide and is not mandatory.  States are permitted to set mandatory limits for iron and manganese but few have done so.
Q.The Commission opened Case No. CAP-W-96-1 for an investigation of Capitol’s water quality problem which surfaced with a customer petition.  What is the result of that investigation?
A.Exhibit No. 105 is the Staff investigation report and it identifies the high concentration of iron in the water of Well No. 6 as the primary problem causing rusty water.  This exhibit also includes an important resource document which is a report by Scanlan Engineering Company on methods to alleviate the problem.
Q.Did Capitol have a rust problem prior to Well No. 6 coming into production?
A.Yes, but it is my understanding that the prior problem was more modest.  Capitol gave free cleaning solvent (and still does) on request to customers which removed rust stains from dishwashers and clothes washers.  Several of the older wells have iron concentrations of about 0.40 ppm, much lower than Well No. 6 at 1.3 ppm, but still high enough to produce rust.
Q.The Scanlan Engineering report recommends drilling a new well as the best alternative to solving the rust problem.  Do you agree with the Scanlan report?
A.Yes, I do.  To secure a source of good water, drilling a new well is the only dependable alternative.  However, it should be mentioned that a test well must be drilled first and each aquifer sampled and tested for iron and manganese to ensure that the production well will be in an aquifer which has good water.
Q.Does Capitol plan to use the test well method?
A.Yes, that is my understanding.
Q.Is there absolute assurance that a test well will discover good water?
A.No.  If a test well does not discover an adequate aquifer, then another test well will have to be drilled in another location.  However, the Scanlan Engineering report identifies several wells that have good water in the vicinity of the Capitol water system and Capitol itself has several very good wells.
Q.What are your comments on the improvements Capitol proposes to make to its water system?
A.I will comment on each item and identify which ones will contribute to improving water quality.
CAPITAL INVESTMENTS FOR WATER QUALITY IMPROVEMENTS
1.  Drill a new well (Well No. 7): $272,300.
This is the only dependable alternative for providing good water.  If the iron problem is to be solved, Staff recommends a new well.
2.  Rebuild Well No. 2:  $60,000.
Well No. 2 has gradually lost capacity from 450 gpm to 250 gpm.
New Well No. 7 cannot be completed in time for the 1997 irrigation season, which means that Well
No. 6 will be called upon to operate.  Whatever capacity can be called upon to displace some of the production of Well No. 6 will help alleviate the rust problem in 1997.  Since, increased output will contribute to water quality, rebuild at this time makes sense.
3.  Repair Well No. 3:  $11,500.
The water column collapsed making this well inoperable.  This well has the lowest iron and manganese concentration of all six wells and at 1,500 gpm capacity, it’s repair is very important to water quality and for meeting the 1997 irrigation season demand.
4.  Scanlan Engineering Company report:  $2,800.
Staff encouraged Capital to hire a consulting engineering firm to examine the alternatives for resolving the iron problem and to make recommendations for necessary improvements.  Staff believes this report was a good investment.
5.  1996 Sequestering expense:  $11,500.
Capitol tried injecting polyphosphates (sequestering) on advice of a consultant during 1996.  The result was that the concentration of iron and manganese in Well No. 6 was too high for sequestering to work.  Staff concludes that, with the number of complaints Capitol was receiving, it was prudent to try sequestering with the hope that it might eliminate or at least reduce the rust problem.
6.  Sequester Well Nos. 1 and 4:  $16,500.
Capitol proposes to purchase equipment necessary to sequester the output of these two wells based on the Scanlan report recommendation.  Staff agrees that this should be done.  These wells have concentrations of iron and manganese suitable for the sequestering process.
7.  Lower water mains, at Cole and Ustick:  $15,000.
This is the only item of capital work that does not relate to water quality.  Ada County is reconstructing the intersection at Cole and Ustick Roads and it requires Capitol to lower its water mains.  The Company was provided with notice of this required lowering of mains in June 1995.  Capitol is required to do so according to its franchise with Ada County.  All utilities have this kind of requirement in their franchises.
8.  Legal and accounting expenses for rate case:  $9,000.
This is a one time cost that is unavoidable in this rate case.
9.  Loan fees and expenses:  $4,000.
This is the cost of obtaining a $402,600 bank loan to finance the above improvements.
ANNUAL OPERATING AND MAINTENANCE EXPENSE FOR QUALITY IMPROVEMENTS
1.  Sequester Well Nos. 1 and 4:  $13,600.
This annual expense is for maintenance of the chemical storage area, cost of polyphosphates and additional water chemistry tests to monitor the sequestering program.  Replacement of Well No. 6 will not completely eliminate all of the rust problem.  Staff concludes that treatment of these two wells should be done.
Q.The capital investment required to alleviate the rust problem is roughly $400,000.  If the rust problem is to be solved, how should this investment be recovered?
A.The Company proposes and Staff agrees that the investment should be recovered by a surcharge.  Capitol proposes to obtain a 7-year bank loan and to implement a surcharge to pay off the loan in 7 years.
Q.Will Capitol profit from the proposed surcharge and from making the water quality investments?
A.No.  The surcharge is designed only to recover the payments on the bank loan, the income tax resulting from the surcharge and the incremental operating expenses.
Q.How should the surcharge be designed?
A.Please refer to Exhibit No. 101, Column (F) in the testimony of Staff witness Robert Smith.  Note that the “Cash Required” for income tax, for repaying the bank loan and recovering incremental expenses is nearly constant during the seven-year loan period.  Therefore the surcharge revenue should be constant to the extent possible.  This suggests that the surcharge for the 2,303 residential customers should be a flat monthly amount.
The commercial customers don’t fit so neatly into the guidelines.  They are metered and it seems appropriate that their surcharge should be based on consumption.  The commercial customers number only 147 and applying a percentage to their bills will introduce some seasonality, but its effect will be small.
Q.Does Staff agree with the surcharge proposed by the Company?
A.No, not entirely.  Staff agrees with the 25% surcharge proposed by Capitol for commercial customers but not the $4.03 flat rate surcharge proposed for residential customers.
Q.How did you calculate the surcharge and what are your recommendations?
A.The basic calculations were done by Staff witness Robert Smith.  Please refer to his Exhibit
No. 101, Column (F), “Cash Required” shows the amount of annual surcharge revenue required to make loan payments, pay income tax associated with the surcharge and recover the incremental expenses.  The average of the amounts for the first seven years in Column (F) is $104,862.51 which amount is the average annual surcharge revenue required.  This amount is apportioned to the residential and commercial classes in proportion to their contribution to 1996 annual revenue.  The residential class provided 86.10% of 1996 revenue and the commercial class provided  13.90% of 1996 revenue.  Therefore, the residential share of the required annual surcharge revenue is 86.1% of $104,862.51 or $90,286.62.  This amount divided by 12 months in a year and divided by 2303 customers gives a monthly surcharge of $3.27 per customer.  The commercial share of the required annual surcharge revenue is 13.90% of $104,862.51 or $14,575.89.  Since the commercial surcharge is to be a percentage of its 1996 revenue which was $57,744, then the surcharge is 14,575.89 divided by 57,744 or 25.24%.
Q.What percentage change will the Staff recommended surcharge make in customers’ bills?
A.For a residential customer, the current winter rate including franchise tax and DEQ fee is $9.25 per month.  In the summer this rate increases to $20.65. The proposed $3.27 monthly surcharge represents a 35.4% increase in the winter and a 15.8% increase in the summer.
For a commercial customer, each step of the commodity rate will increase 25.2% and the monthly minimums will increase by the same percentage, therefore each commercial bill will be 25.2% higher.
Q.Do you agree with the way the Company’s new tariff sheets are submitted?
A.No, I don’t.  As filed, a customer will not be able to identify the amount of the surcharge because it is not identified separately.  I recommend the Company resubmit tariff sheets for Schedule Nos. 1 and 2 listing the surcharge separately similar to the way the Franchise Tax is shown.
Also, the surcharge should be separately identified on the customer bill, and accounted for as discussed by Staff witness Smith.
Q.If the Commission declined to approve the investment in drilling new Well No. 7, what work would still need to be done?
A.The rebuild of Well No. 2 could probably be postponed since the Company has been able to supply peak summer demand with Well No. 2 at its presently reduced capacity.  The other items would remain to be completed.  They are:
a.  Repair Well No. 3:  $11,500.
The 1,500 gpm capacity of this well is needed for the 1997 summer peak demand.
b.  Scanlan Engineering report:  $2,800.
This money has been spent.
c.  1996 Sequestering expense:  $11,500.
This money has been spent.
d.  Sequestering equipment, Well Nos. 1 & 4:  $16,500.
This will reduce rust for some customers.
e.  Lower water mains at Cole and Ustick:  $15,000.
Work is mandated by Ada County.
f.  Legal and accounting expenses for this rate    case:  $9,000.
g.  Loan fees and expenses:  $4,000.
If the rebuild of Well No. 2 and drilling a new well are not approved, then the remaining project work totals $70,300 plus an annual maintenance expense for sequestering two wells of $13,600 per year.
Q.Does that conclude your direct testimony in this proceeding?
A.Yes, it does.