951201v2.docx

Q.Please state your name and business address for the record.
A.My name is Randy Lobb and my business address is 472 West Washington Street, Boise, Idaho.
Q.By whom are you employed?
A.I am employed by the Idaho Public Utilities Commission as Engineering Supervisor.
Q.What is your educational and professional background?
A.I received a Bachelor of Science Degree in Agricultural Engineering from the University of Idaho in 1980 and worked for the Idaho Department of Water Resources from June of 1980 to November of 1987.  I received my Idaho license as a registered professional Civil Engineer in 1985 and began work at the Idaho Public Utilities Commission in December of 1987.  My duties at the Commission include analysis of utility rate applications, rate design, tariff analysis and customer petitions.
Q.What is the purpose of your testimony in this proceeding?
A.The purpose of my testimony is to discuss the competing certificate applications of United Water Idaho (UWI) and Eagle Water Company (EWC) and recommend a resolution to the conflicting requests.  I will also describe the potential effects of granting the service requests on existing customers in the project area, future customers in the project area and existing customers of both companies.
Q.Please summarize your testimony.
A.UWI is the more financially and technically capable of the two companies and should be granted a service certificate for this area.  Although EWC has overcome many of the financial and technical problems that have occurred in the past, EWC has not demonstrated and I do not believe it has the financial resources necessary to serve the entire area it has requested.  However, because EWC's customers have benefited from growth in the past, the company should be allowed some ability to expand in the future.  It is therefore, my recommendation that the majority of the contested area be certificated to UWI, and EWC be allowed to expand its existing certificate to areas adjacent to and directly east of its existing service territory.  In conjunction with EWC expansion, I recommend that the company develop a financial plan to replace existing facilities in the future.
With my recommendation to approve the vast majority of United Water's request, I must also point out the speculative nature of the company's investment in this area.  The ability of the company to earn its authorized return is dependent upon the number of subdivisions developed within its newly certificated area, the housing density of those subdivisions and the rates charged developers and new customers for service.  An analysis of the project economics shows that at anticipated growth levels and existing tariffs, existing customers of UWI could be expected to provide significant subsidies in order for the company to earn its authorized return on investment.  Finally, I do not believe the phased-in rates requested should be allowed in this case.  The company has failed to demonstrate that lower rates for water service in the Eagle area are justified or reasonable.  Charging different rates to customers within the same class without justification is preferential and discriminatory.  Based on Staff’s analysis lower rates in this case are not economically justified and could further diminish the company’s ability to earn its authorized return.
REQUESTED AREAS
Q.What areas have UWI and EWC requested?
A.The area requested by UWI is shown on Staff Exhibit No. 101, the area requested by EWC is shown on Staff Exhibit No. 102 as is the existing certificated area of EWC.  The overlapping areas are shown on Staff Exhibit No. 103.
Q.Has either company received any requests for service?
A.Yes, both companies have had several requests from area developers interested in obtaining water service for future residential projects.
Q.Where are these potential projects located?
A.The UWI requests have come primarily from areas north of Floating Feather Road, west of Eagle Road and south of the Boise River.  Included in the requested projects are the new Eagle Junior and Senior High schools currently being served by United Water.  The other approximately five requests for service are for residential subdivisions still in the planning stage.  EWC has also received several requests from potential customers that plan to develop residential subdivisions at some point in the future.  Most of these requests are located east of Eagle Road and south of Floating Feather Road.  In most cases, the potential customers have requested service from the utility with the closest facilities.  Staff Exhibit No. 104 shows the general location of customers requesting service from both companies.
Q.Where are the existing facilities of the two companies located?
A.EWC's facilities are obviously located within its certificated area with additional mainline running east to Highway 55 along Floating Feather Road.  Another mainline runs north of Floating Feather Road along Eagle Road to serve a church and small subdivision.  UWI facilities are located in two general areas.  The first set of facilities are located south of the Boise River and east of Eagle Road serving an area known as the Island Woods subdivision.  These facilities consist of two wells and distribution mains.  The second set of facilities are located north of State Highway 44 and west of Eagle Road serving the Redwood Creek subdivision, the new Eagle High School and the new Eagle Middle School.  Facilities consist of two wells, on-site distribution mains and a transmission main connecting the two wells.  The Island Woods and Redwood Creek facilities are not interconnected.
Q.Is there any redundancy with respect to overlapping facilities?
A.No, not at this time.  The existing facilities of the two companies are currently separated by approximately one-half mile on Floating Feather Road and about the same distance south of State Highway 44.  Facilities could certainly overlap in the future if both companies serve in this area.
Q.Are there any other regulated water companies providing service in the Eagle area?
A.No.  All other area water service is provided by individual wells, homeowners associations or municipalities.
EAGLE WATER COMPANY
Q.Please describe EWC's current service territory.
A.EWC currently serves about 1200 customers located generally in an area of about three square miles.  The system consists of four wells with a combined capacity of about 3900 gpm.  The system has 90,000 gallons of storage and utilizes a variable speed pump on one of the wells to follow system demand.  Based on a hydraulic analysis conducted in 1993, it appears the system is capable of adequately serving about 2500 customers without additional water supply.
Q.What are the financial and technical capabilities of EWC?
A.Like most small water companies, EWC is under capitalized and in the past has had difficulty obtaining financing to add new facilities and replace or repair existing facilities.  The company has had to rely extensively on developer contributions and loans for not only subdivision-specific line extensions but for new water supply, enhancement of existing mainlines and hydraulic studies to determine system deficiencies.
System growth and a willingness on the part of developers to provide financing appears to have alleviated chronic system pressure problems and provided adequate capacity for additional growth and fire protection.  A continuation of the methods used to resolve these problems could allow the company to expand further.  However, serious problems associated with plant replacement could arise if growth slows or stops and the company has not prepared financially.  This potential problem will increase with an expansion of facilities.  The testimony of Staff witness Madonna Faunce provides more detailed information regarding the financial condition of EWC.
With respect to technical expertise, the company appears to have the capability through experience to specify and install facilities necessary to provide adequate service.  The company is limited in its ability to monitor the system on a real-time basis or determine, in house, the adequacy of the system as new customers are added.  In addition, the company does not appear to have any specific planning process for system expansion.  Although problematic, this is not unusual for water companies of this size.
UNITED WATER IDAHO
Q.How does EWC's ability to serve the area requested compare to that of UWI?
A.From a financial standpoint there is no comparison.  UWI and its parent company have far greater financial resources than EWC and would have no problem financing facility improvement/expansion with or without developer participation.  EWC on the other hand would need to rely extensively if not entirely on developer participation.  For new development, developer participation requirements of the two companies are not that different in that both require developer contributions in some form and customer hookup fees.  For replacement or improvement of existing facilities, developer participation is not required by UWI but could be imperative for EWC.
A comparison of each company's technical capability results in the same lopsided advantage for UWI because technical resources are closely tied to financial resources.  In addition, EWC is simply not large enough to justify maintaining in-house expertise in engineering and planning.  If EWC had the financial ability, it could hire the expertise when necessary but could not match UWI's ability to monitor the physical status of the system on a real-time basis or to quickly adapt to changing conditions.
Q.What benefits would UWI bring to the area that could not be provided by EWC?
A.As previously mentioned, UWI is in a much better financial position than EWC and greater financial resources should certainly mean better facilities and improved service.  Also in conjunction with its better financial standing, is UWI's ability to respond more quickly to service requests in a consistent manner and consolidate what could be many marginally viable systems into a single economically and technically viable system.  UWI has a strong record of quality service in its existing service area and I would expect that to continue in the Eagle area if a certificate is granted.  I believe UWI could provide more consistent service quality over time given EWC’s financial uncertainty even though EWC's current service appears to be good.
Q.What disadvantages would UWI bring to the area if a certificate is granted?
A.The main disadvantage is higher rates.  A comparison of existing UWI rates to EWC rates show that a residential UWI customer with a 3/4-inch meter would pay $20.09 bi-monthly for 1000 cft in the winter and $113.10 bi-monthly for 100,000 cft in the summer while EWC customers would pay $15.68 and $54.65, respectively.  This equates to a rate differential of over 100% in the summer.  Other subjective disadvantages could be a lack of presence in the area in comparison to EWC and a perception by customers that UWI is not as much a part of the community.
UWI PROPOSED RATES
Q.Does UWI plan to charge Eagle area customers existing company rates?
A.No.  Company witness Shiflet states in supplemental testimony that rates will be established at a level similar to those of EWC and increased to current United Water rates over a three-year period.  Although the proposed rates are not presented in UWI testimony, they are partially provided in UWI's amended certificate application dated February 21, 1995.  Staff Exhibit No. 105, pages 1 and 2 show the two tariff sheets provided by UWI with effective dates of September 22, 1994 and January 1, 1997, respectively.  The initial Eagle area customer charge would be identical to the existing UWI charge but the commodity rate would be at a year-round price of $0.451 per 100 cubic feet (cft).  On January 1, 1997, the commodity rate would increase to 80% of the existing UWI winter and summer commodity rate.
UWI has not provided in its application or in testimony tariff sheets showing when additional increases would occur.  However, in response to Staff Production Request No. 6, the company provided the two sheets described above and two additional sheets with an increase to 90% of UWI rates in 1998 and 100% of UWI rates in 1999.  The two additional tariff sheets are shown in Staff Exhibit No. 105 pages 3 and 4.  I assume that these are the phased rates referred to in Shiflet's testimony.
Q.UWI states that concern over rate shock is the reason it has proposed phased-in rates for Eagle area customers.  Is rate shock a valid reason for charging these customers a lower rate than other company customers?
A.No, I believe that a rate differential for the same customer class within the same company is not justified in this case and could be considered discriminatory.  Certainly rate shock can occur any time a customer paying a low rate is forced to pay a higher rate.  The level of shock is primarily subjective and depends upon the rate differentials and the economic status of the customer.  Although the company has not indicated in testimony what rate is currently being charged existing Eagle area customers, the Staff has learned that the rates are identical to those of South County Water Company (SCW).
Residential SCW rates for a customer with a 3/4-inch meter are $6.83 per month and $0.44 per 100 cft in summer and $0.40 per 100 cft in winter for all monthly consumption above 600 cft.  A comparison of SCW rates with initial rates proposed by the company shows that monthly water costs would increase by 27.5 % ($1.87) for 600 cft in winter and 9% ($2.36) for 5000 cft in summer.
A comparison of SCW rates to existing UWI rates shows a monthly difference of 59% ($4.02) for 600 cft in winter and of 116% ($30.36) for 5000 cft in the summer.  This level of rate increase could cause a reaction that could be characterized as rate shock.  On the other hand only about 74 residential customers are currently being served in the area requested by UWI and 65 are in the Island Woods subdivision.  Island Woods could be characterized as an upscale subdivision with residential customers more economically capable of absorbing a larger water rate increase.  Moreover, the company estimates that as many as 250 additional customers will connect to the Eagle area system each year.  If rates are phased in, these new customers could experience rate shock that otherwise would not have occurred had existing UWI rates been charged at the onset.
Finally, the cost to serve the requested Eagle area is higher than that of the company’s existing service area, making cost recovery difficult at current UWI rates.  Any rate increase phase-in will make cost recovery even more difficult.
PROJECT ECONOMICS
Q.Is UWI's ability to earn its authorized return on investment at some point in the future relevant in considering the company's application for a certificate?
A.Given the speculative nature of the investment required to serve this area, I believe that it is appropriate to consider the potential effect on existing customers.  By speculative, I mean that in order for the company to expand into the Eagle area, it has been necessary to invest a significant amount of money with no guarantee that sufficient development will occur to recover costs.  In fact, Ada County Planning and Zoning projects about 250 new homes per year in the entire Eagle Planning area compared to the 600 new hookups per year estimated by the company.  The 600 hookup estimate was provided in response to Staff Production Request No. 3 and again in response to Request No. 21 showing the company's return on investment.  While company witness Brown reduces that number to 250 per year in testimony, it is still in excess of what the company could expect in its requested certificated area and insufficient for the company to realize the authorized rate of return from this area.
Q.Have you prepared an analysis to show what the revenue deficiency might be?
A.Yes.  Staff Exhibit No. 106 shows a revenue requirement escrow analysis of the Eagle project using the escrow methodology currently required by UWI for residential subdivisions.  Line 13 shows what the return on investment would be if 250 customers connect per year and each generate $200 per year in revenue.  This analysis assumes no revenue is generated through individual developer escrows.  Staff Exhibit No. 107 shows what the five-year revenue deficiency would be and what the return on investment would be after five years.  This analysis assumes 250 connections per year, $200 in revenue per customer per year with additional revenue provided by individual residential developers through both annual revenue escrows and up front contributions.
This analysis was repeated assuming that each customer generates the current UWI annual residential revenue per customer of $300.  Staff Exhibit Nos. 108 and 109 show the company return on investment and the five-year revenue deficiency, respectively.  The analysis does not include any future investment by the company for storage, wells or other non-contributed transmission mains.
Q.Should UWI's request for a certificate be denied because its investment is speculative and it may not earn its authorized return on investment without a rate increase?
A.No.  The prudency of the investment is more properly addressed in a rate case.  However, I believe the company and the Commission should be aware of the risk associated with serving this area.  Staff's position will be to oppose recovery of revenue deficiencies associated with this expansion from existing ratepayers.  Staff also believes that the Commission should be cognizant of the risk associated with under recovery of costs from project customers and the likelihood that the company will request recovery from the general body of ratepayers.
RECOMMENDATION
Q.What is your recommendation with respect to EWC's request to expand its certificated area?
A.I recommend that EWC be allowed to expand within an area generally bounded by State Highway 55, the Boise River, Floating Feather Road and its existing certificate border on the west (Ballantyne).  The proposed expanded area is shown on Staff Exhibit No. 109.  While I believe that the company should be allowed some room for expansion and that customers have the opportunity to benefit from customer growth, I also believe that the financial difficulties of the company in the past may reoccur in the future.  Therefore, as a condition of expansion, I recommend that EWC provide a specific plan for consistently financing facilities necessary to meet system growth and a plan to replace worn out existing facilities when growth does not occur.  Absent some method of financing replacement facilities in the future, I do not believe EWC should be allowed to expand.  In the event that EWC is unable to develop an acceptable financing plan, the expanded certificate would be forfeited and opened for service by another party.
Q.What should be done with the facilities of EWC that are located in the certificated area of UWI?
A.I recommend that EWC facilities in certificated UWI areas be retained by EWC until such time as adjacent areas are developed.  Once the development process begins, the existing EWC facilities can be transferred to UWI.
Q.What is your recommendation with respect to UWI's request for a certificate in this area?
A.I recommend that United Water's entire certificate request be granted with the exception of those areas specifically granted to EWC.  UWI has both the financial and technical ability to serve this area and will provide a more unified high quality water system.  Along with my recommendation to allow expansion, I also point out that this is not a common extension of existing company facilities to serve customers under existing tariffs.  This area constitutes a separate system with stand alone facilities.  To recover the system cost, the company will have to serve more customers than are projected to hook up and will need to charge more per customer.  Otherwise, the company will suffer the loss or will need to recover excess cost from the general body of ratepayers.
I also believe that rate differentials within the same customer class of the same company could be considered discriminatory without specific cost justification and should not be allowed.  From the standpoint of economic impact, I believe the limited number of existing customers could be considered economically upscale and capable of adjusting to this increase.  In addition, new customers would not suffer rate shock if existing UWI rates are in place prior to service, but could suffer rate shock due to scheduled rate increases.  Finally, the per-customer cost of this project requires that the company collect as much revenue as possible through rates to earn its authorized return.  Any reduction in rates increases the risk that other UWI customers will be called upon to make up the difference.
Q.Does that conclude your testimony in this proceeding?
A.Yes, it does.