951201v1.docx

Q.Please state your name and business address for the record.
A.My name is Madonna Faunce.  My business address is 472 West Washington Street, 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 auditor since 1989.  I am licensed as a Certified Public Accountant in the State of Idaho.
Q.Please give us a brief description of your educational and professional background.
A.I received a B.A. degree in Accounting from Boise State University in 1975 and an M.B.A. from Boise State University in 1977.  I have attended several seminars since graduation in accounting, tax, law, personnel, management and negotiation.  I have also attended a Training for Utility Management Analysts seminar sponsored by NARUC in September of 1989.
Prior to working for the Idaho Public Utilities Commission, I was employed by Grays Harbor College as Assistant Dean for Administration.  I was in charge of all accounting, payroll, capital projects, contracts, personnel and affirmative action.  While at the College, I also taught accounting and management.  Before working for the College, I was Chief Operational Officer, Treasurer and Controller in private industry.
Q.What is the purpose of your testimony in this proceeding?
A.To provide testimony with respect to United Water Idaho, Inc.’s (United Water) and Eagle Water Company, Inc's (Eagle Water) financial conditions, which will affect the ability to finance growth and continue service in the Eagle area.
Q.What is United Water's financial position?
A.United Water is the successor in interest to Boise Water Corporation.  In Boise Water's last general rate case BOI-W-93-3, Order No. 25640, dated July 14, 1994, the Commission found that Boise Water had a rate base of $67,218,005 (Exhibit No. 111).  The Commission approved a capital structure for Boise Water that was 52% debt, 8% minority interest and 40% common equity in BOI-W-93-3.
United Water is entirely owned by General Water Works Corporation which is wholly owned by United Water Resources.  United Water receives 100% of its financing from its parent Corporation.  There is no indication that United Water or it's parent has any debt problems.
Based on prior audits, Staff believes United Water's record keeping is up-to-date with affiliated companies and transactions accounted for properly.  United Water uses budgets to account for needed capital, planned maintenance and system improvements.  United Water has demonstrated it is capable of keeping records asked for by this Commission and following Commission Orders.
Q.If United Water is granted a certificate of Public convenience and necessity to operate as a water utility in the Eagle area, are there any recommendations Staff would make for accounting treatment.
A.Yes.  In Katherine Shiflet's supplemental direct testimony for United Water, page 3, line 10, the Company states that existing customers of United Water will not be asked to subsidize the new customers.  Commission policy appears to support the concept that existing customers should not subsidize new customers.  This is demonstrated by requiring hook-up fees, developer advances and/or contributions.  In this case, United Water has not demonstrated the benefits to existing customers so maintaining separate records will be required.  Another reason is that this venture is speculative in nature as noted by Staff witness Lobb in his testimony (page 3).  Staff therefore recommends that United Water be required to account for the Eagle system in a manner that allows the Eagle system assets, liabilities, revenues and expenses (including allocated common costs) to be separated and looked at on a stand-alone basis for rate proceedings.  Staff recommends that the accounting remain separate until the system has generated enough history for Staff to analyze the results and until that history demonstrates that existing ratepayers will not be asked to support or subsidize the Eagle system.
Q.What is Eagle Water's financial position?
A.In Staff's limited audit of the 1994 financial data for Eagle Water, Staff found Eagle Water had a negative rate base of $65,499 (Exhibit No. 112).  Staff also found Eagle Water's capital structure to consist of unsecured long-term debt, notes payable and long-term debt secured by a surcharge hook-up fee in the total amount of $146,818.  Eagle Water's common equity, like it's rate base, is in a negative position of approximately $47,400 (Exhibit No. 112).  With a negative rate base and negative shareholder position, Eagle Water is not in a secure financial position.
Q.What impact has this had on Eagle Water?
A.Because there is no rate base or equity and because of Eagle Water's credit history, Eagle Water is unable to obtain conventional financing for capital improvements, replacement or extraordinary maintenance.
Q.Can you explain how Eagle Water has financed some of its capital assets?
A.Yes.  When Eagle Water, Max A. Boesiger, Inc. (Boesiger) and Eagle Pointe Homeowners Association, Inc. applied to the Commission for approval of an agreement for Eagle Water to deliver wholesale water to the Eagle Pointe Homeowners, Staff asked for an engineering study to determine if Eagle Water could serve the additional customers without harm to existing customers.  Eagle Water was unable to finance the study.  Boesiger offered to loan the money to Eagle Water and the loan was to be repaid by a $100 hook-up surcharge.  In Case EAG-W-91-1, Order 23808, dated August 6, 1991 the Commission stated:
The Applicant’s proposal for a hook-up
fee surcharge, appears for the interim,
to be a reasonable solution to dealing
with a financially problematic utility.
The Company certainly does not have the
financial wherewithal to advance the funds
necessary to pay for the engineering study.
Boesiger is willing to incur the risk that
the study will show that Eagle Water's
system does not have sufficient capacity to
service the Eagle Pointe subdivision.  The
study will put to rest long-standing
concerns, including complaints filed by
Eagle Water's ratepayers with the
Commission, concerning the system's capacity
not only to handle additional growth but
current ratepayers as well.  We hereby grant
interim approval of the surcharge.
The engineering study revealed the need for an additional well on Eagle Water's system to accommodate future growth.  On April 2, 1992, Eagle Water and Boesiger filed a Joint Application in Case No. EAG-W-92-1.  The Application asked for approval of the construction of a new well.  The Application also sought approval of a loan from Boesiger to Eagle Water up to a maximum amount of $80,000 to finance the new well.  The loan was to bear interest at 8% per annum.  To provide funds for the loan payments, the parties to the Application proposed a $500 hook-up fee surcharge.  The surcharge was to be collected from each new hookup in Eagle Water's certificated area which would be applied to the minimum annual loan payments.  The hook-up fee surcharge was to terminate when Boesiger was repaid the loan amount in full, with interest.  The loan agreement granted Boesiger a security interest in the well construction surcharge proceeds.  In Case EAG-W-92-1, Order 24474, dated September 2, 1992, the Commission stated:
We hereby grant final approval to the Wholesale Water Agreement and the $100
engineering study surcharge provided that the
surcharge cease when the loan is paid
in full.  Eagle Water's acquisition of
significant additional capacity without cost
to existing ratepayers is an added benefit.
Were it not for Boesiger's willingness to
provide the necessary financing to Eagle
Water, the Company certainly would not be able
to acquire the funds to construct the well.
The $500 hook-up fee surcharge is a reasonable
means of repaying Boesiger for its loan.
In Case No. EAG-W-93-1 the Application asked to install a 2500 gallon per minute (gpm) pump in the new well instead of the 600 gpm originally proposed.  The larger pump was to add an additional $60,000 to the cost of the well which was to be obtained by a loan from developer Trevor Roberts, at 8% per annum.  This new loan again was to be repaid by the $500 hook-up fee surcharge.  When EAG-W-93-1 was filed, Eagle Water had collected approximately $35,000 in hook-up fee surcharges which they used on the new well and had borrowed $45,000 from Boesiger to pay for the new well.  In Case
No. EAG-W-93-1, Order 24890, dated May 12, 1993 the Commission stated:
We hereby approve Eagle Water's Application.
We note that the Company's Application in this case is similar to its Application in Case Nos. EAG-W-91-1 and 92-1 in which Eagle Water obtained Commission approval to impose a surcharge for the construction of a new well financed with a loan from developer Boesiger.
The same rationale that guided our decision in
those two cases is equally applicable here.
In order for Eagle Water to adequately serve
existing customers, to serve new growth within
its certificated area, and to expand its
certificated area to serve new customers, it
must provide adequate additional water supply.
In order to provide adequate supply, the
Company must obtain financing from developers
requesting service.
Q.Does this type of financing impact Eagle Water’s rate base?
A.Yes.  Because loans are being obtained and secured with future hook-up fee surcharges, Eagle Water’s negative rate base may not change.  This would mean that Eagle Water would continue financing capital improvements, replacement and extraordinary maintenance with future growth.  When growth is minimized or ceases (i.e., when the certificated area can not be expanded or an economic down turn) Eagle Water will no longer be able to repay existing debt or make needed system improvements unless the ratepayers pay higher rates.
Q.How does the financial condition of Eagle Water affect future expansion?
A.Eagle Water has no internal way of raising the needed funds to continue expansion.  Therefore, Eagle Water cannot finance future expansion without continued creative financing and/or without developers contributing plant.  This type of financing will not improve Eagle Water's rate base or shareholder's position, but it will keep Eagle Water going until growth stops.  When growth stops and the existing plant needs repaired or replaced creative sources of financing and repayment will be required.
Q.Does this conclude your testimony in this proceeding?
A.Yes, it does.