950823v2.docx

Q.Please state your name and business address?
A.My name is Robert E. Smith.  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 Senior Auditor.
Q.Please describe your educational background and professional experience.
A.I received my BBA degree majoring in Accounting from Boise State University in 1972.  Following graduation I was employed in the construction industry as Accountant/Office Manager until April 1975 when I accepted employment at the Idaho Public Utilities Commission.  During the course of my employment at the Public Utilities Commission, I have attended numerous training schools, programs and seminars in the field of regulation.
Q.Have you previously appeared as a witness in regulatory proceedings?
A.Yes, many times.
Q.What subjects have you addressed in those previous appearances?
A.I have presented testimony and sponsored exhibits dealing with rate base, operating results, cost of capital, revenue requirement, rate design, corporate cost allocations, corporate affiliated transactions, jurisdictional cost allocations and class cost-of-service allocations.  These appearances have included cases dealing with electric, gas, water, and telephone companies.
Q.What is the purpose of your testimony in this case?
A.I will present the Commission Staff's (Staff) recommendations regarding rate base, operating expenses and revenue requirement for the water system.
Q.Are you sponsoring any exhibits in this case?
A. Yes.  I am sponsoring Staff Exhibit No. 101 entitled "Rate Base and Revenue Requirement Calculations" and Exhibit No. 102 entitled "Effect on Revenue Requirement of Installing Customer Meters."
Q.Have you performed an independent review and analysis of the water system operation in preparation for your testimony today?
A.Yes, I reviewed the information provided in response to the Staff’s production request dated
February 23, 1995.  I visited the Teton Valley on May 2 through May 4 gathering information from both the Company and several water customers.  While in the area I also pressure tested the water system at various locations within the Packsaddle Creek Estates subdivision, inspected the well house and reservoirs, and toured the subdivision.  On July 7, Ms. Rose Schulte, of the Staff, and I conducted a public meeting in Driggs where we explained the regulatory process to both the Company and it's customers and gathered additional information.
Q.Did you audit the books and records of the Company?
A.The Company does not maintain an adequate set of double entry financial records.  I have reviewed check registers, receipts and tax returns for several years, however.
Q.The Commission by its Order No. 26077 declared the water system to be a public utility as defined in the Idaho Code, and, therefore, subject to its jurisdiction.  Are the records maintained adequate for a public utility under the jurisdiction of the Commission?
A.No.  The Commission requires that financial records conform to the uniform system of accounts prescribed by the Commission for water utilities.  I have provided information to the Company which will enable them to establish an adequate system and begin maintaining appropriate records.
Q.Did you earlier prepare a report outlining the results of your investigation of the water system?
A.Yes.  I prepared a report that was filed with the Commission on May 30, 1995.  Copies of the report were also provided to the Company and all of the current customers.
Q.Does your testimony in this case deviate from the findings and recommendations you made in that report?
A.Only in regard to the number of customers being served, the number of potential customers and the effect those changes have on the calculations made in that report.
Q.What is the magnitude of these changes on your recommendations?
A.The initial report was based upon service to 24 customers and the potential to ultimately serve 89 customers.  Since my initial visit, two more homes have begun construction and another customer of the water system has been identified that is outside the platted subdivision.  I have also learned that one of the lots in the subdivision has been split which is not shown on the plat map provided to the Staff.  Modifying the initial report to recognize 27 customers rather than 24 decreases the recommended average revenue requirement from $43.25 per customer per month to $39.39.
Q.How many lots have been sold by Packsaddle Development Corporation?
A.The Company has sold all but seven of the 89 developable lots.
Q.Turning now to your Exhibit No. 101, would you please describe the construction of this exhibit?
A.I have constructed this exhibit to reflect four alternative approaches to determine a revenue requirement for this water system.  The alternatives are reflected by the four column headings labeled as "ALT #1" through "ALT #4."  The first three alternatives represent three scenarios for determining a revenue requirement under the Commission's regulatory jurisdiction.  The fourth alternative is presented here to show that if the customers were to take over the system and operate it as a cooperative non-profit system, the required revenue would be much less.
Lines 1 through 6 of the exhibit present the calculation of rate base.  Lines 7 through 10 calculate the gross operating income required assuming a 12% return on the rate base shown on line 6.  Lines 11 through 21 present operating expenses that are recoverable through water rates.  Line 22 is the total revenue requirement which is composed of the gross operating income (line 10) plus the operating expenses shown on lines 11 through 21.  Lines 23 and 24 are simply the annual and monthly revenues per customer required to produce the total revenue requirement.
Q.How did you arrive at the 12% return on rate base as a reasonable return?
A.The Corporation has no debt.  Any debt associated with the water system is personal debt of the stockholders.  Therefore for ratemaking purposes one must assume that the entire capital structure of the Company is composed of stockholder equity.  This is not unusual for a company of this size.  The return on equity allowed by this Commission has to recognize the return on the investment that could be earned from other alternative investments and then add or subtract from that return percentage points to recognize the relative risk of the utility system in comparison to the risk of the alternative investments.  This Commission, after extensive analysis and pages of testimony on this issue, recently granted Idaho Power Company a return on equity of 11.25%.  Packsaddle Development Corporation's water operation is certainly riskier than the operation of such a large corporation with its large diversified customer base.  Warm Springs Mesa, a water company serving in Boise, was authorized a 12% return in Order No. 25445 dated March 25, 1994.  I selected the 12% return requirement based upon my perception of the relative risk of this system in comparison to the risk assumed by stockholders of Idaho Power Company and Warm Springs Mesa.
Q.What are the differences in the alternative rate base calculations shown on lines 1 through 6?
A.Alternative No. 4 (the homeowner operated non-profit alternative) assumes no rate base since no return or profit is required.  In each of the other three scenarios I have assumed that the investment in the initial system composed of wells, reservoirs and mains to deliver water throughout the subdivision has been recovered through the sale of lots.  This assumption is based upon a long standing policy of the Commission.  The Commission policy regarding developer installed systems presumes that either the water system was required by local officials before the subdivision was allowed, which means the lots were unsalable absent the water system or, the fact the system was in place increased the value of the lots.
In 1994, a second well, with a capacity of 70 gallons per minute, was developed at a cost of $21,341.43.  This well was developed due to problems encountered with the operation of the original well.  The original well which had a capacity of 35 gallons per minute was adequate to serve the number of customers connected to the system at the time.  The second well would have had to be developed eventually in order to provide adequate service to the subdivision when fully developed.  I have treated the investment in the new well differently in each of the first three alternatives.  The treatment of this well accounts for the entire difference between the three alternatives.
Q.What  are the differences in the treatment of this investment?
A.In Alternative No. 1, I have treated this investment as a required cost to complete the system and assumed full recovery of this cost through the sale of the lots along with all the other base system costs.  In Alternative No. 2, I have included the second well as a system improvement included in rate base.  In Alternative No. 3, I have included a prorata share of the cost of the new well in rate base.  The $5,820.39 represents the prorata portion of the investment used to serve 27 current customers assuming a total potential of 90 customers in the subdivision.
Q.Which of these alternatives do you recommend?
A.I recommend Alternative No. 1 which assumes all of this investment has already been recovered through the prior sale of the lots.  This investment was required to complete the system for the subdivision.  The two wells together, in the short term, provide system reliability in the event problems occur with one or the other of the two wells.
Q.What are the other rate base items you include on lines 3, 4 and 5?
A.The new pump in Well No. 1, shown on line 3, is the cost of a replacement pump placed in this well in December of 1992.  This pump is a replacement for original equipment that wore out and had to be replaced.  As replacement investment, as opposed to original, it is appropriate to capitalize this cost and recognize it in the rate base.  This investment was not recaptured through the sale of lots.
Lines 4 and 5 also show replacement investment for a pressure tank and pump.  These investments also represent replacement of old worn out equipment and should be treated the same as the pump in Well No. 1.
Q.What is the calculation shown on lines 7 through 10?
A.Line 7 shows the part of the calculation in  the revenue requirement necessary to provide a 12% return on the rate base discussed earlier.  The income taxes associated with the allowed return are shown on lines 8 and 9.  I have used the minimum corporate tax rates for both State and Federal taxes.  The required return together with the tax implications contribute a total of $503.65 to the total annual revenue requirement I propose under Alternative No. 1.
Q.On lines 11 through 21 you show operating expenses which you have added to the revenue requirement.  Why haven't you recognized income taxes associated with these items?
A.Operating expenses are recoverable through water rates on a dollar for dollar basis.  No recognition of income tax consequence is necessary since the expenses are deducted from gross revenue before taxes are calculated.
Q.How were each of these expenses developed?
A.I developed the estimate of the electricity cost for pumping based upon the actual cost incurred during the period August 1994 through February of 1995 which is the only period data was available with both wells operational.  1,500 kWh per month appears to be the average electric use during this period.  I applied this average use to the Utah Power billing rate shown on the bills to get the monthly and annual cost of electricity for pumping.
The depreciation expense shown on line 12 is simply the rate base (line 6) divided by a 20-year composite life estimate provided to me by Staff engineering witness Oliason.
The materials and supplies expense estimate is based upon actual expenses of the Company for the two most recent fiscal years.  I have excluded from these expenses the costs associated with new customer connections.  Normally a water utility charges new customers a connection fee to cover these costs so that other existing customers do not subsidize the cost of the connection through water rates.
The water testing expense (line 14) and Division of Environmental Quality (DEQ) fees (line 15) are based upon estimates of minimum costs provided to me by the DEQ for a "Transient" system.  DEQ defines a transient system as a system of less than 25 full time residents where consumers are seasonal or occasional users.  At this time, many of the current customers are part-time or seasonal customers.  When the system surpasses 25 full time residents, both the DEQ fees and the cost of water testing will increase significantly.  In some years the water testing fees could exceed $1,000.  DEQ fees will become $5 per customer.
The $50 PUC fee shown on line 16 is simply the minimum fee assessed by this Commission which is established by Idaho Code.
The property tax estimate shown on line 17 is calculated at 1.25% of rate base.  The 1.25% tax rate was provided to me by the Idaho State Tax Commission.  The Tax Commission, though not directly involved in actually assessing property taxes, appraises all utility property in the state.  The Tax Commission’s appraisal is used by taxing districts throughout the state for assessment purposes.
The two labor items shown on lines 18 and 19 for maintenance and administrative costs, respectively, are my own estimate of the time to perform these duties on a system of this size.  I developed these estimates after touring the subdivision and interviewing the individuals involved in these activities.  I believe the estimates are representative of the future costs that can be anticipated.  It was necessary to estimate these costs since no logs, time cards or payroll information has been maintained in the past.
The administrative materials and supplies expense shown on line 20 is simply a budget estimate of $.50 per customer per month for postage and office supplies.  This estimate does not assume monthly billing.  Again, it was necessary to factor in a realistic estimate since no record of such costs has been maintained in the past.
The vehicle allowance shown on line 21 also had to be developed using estimated data.  The Company owns no vehicles and given the size of the system cannot economically justify any.  Personal vehicles of the owners are used to perform water system activities.  The owners should not be expected to absorb the wear and tear, maintenance and fuel cost incurred on behalf of the water system.  I developed this allowance assuming a cost of $.26 per mile, three 20 mile round trips between Tetonia and the service area per week and six 80 mile round trips between Tetonia and Rexburg per year to deliver water samples and/or get supplies that are not available in the Teton Valley.  From this estimate I deducted 1/2 of the cost of the trips to Rexburg assuming the individuals derived some personal benefit from these trips.
Q.You have made reference several times to estimates.  Was there insufficient data available to be specific regarding historical costs?
A.That is correct.  The Company does not maintain a separate set of "books".  Costs and receipts are commingled with the personal records of the owners.  The only detail available for the Company is its Corporate tax return which includes costs associated with the water system.  I am not confident that even the tax return captures all of the costs associated with Corporate operations.  Therefore where actual data was available I used it as the basis for my proposal.  Where actual detail was not available I relied on my own judgement supplemented with as much additional information as I could gather.
Q.What is your proposed revenue requirement in this case?
A.I propose a total annual revenue requirement of $12,761.78 as shown under Alternative No. 1, line 22.  This translates to an average annual revenue requirement per customer of $472.66 as shown on line 23 or $39.39 per month as shown on line 24.
Q.Are you proposing a flat rate of $39.39 as the appropriate customer charge in this case?
A.No!  This is simply the average revenue requirement per customer that results from my recommendations on total revenue requirements.  Staff engineering witness Oliason discusses rate design in his testimony.
Q.Please explain Exhibit No. 102?
A.Staff witness Oliason, Staff engineer, asked me to prepare this schedule to show the effect on revenue requirement if the Company were to install customer meters.  I used Staff witness Oliason's estimated installation cost per meter of $300 to which I applied the Staff recommended rate of return of 12%, the tax effect on this return and then recognized the annual depreciation expense assuming a life of 20 years.  My calculation shows that the addition of meters at this time would increase the monthly revenue requirement per customer by $5.09.
Q.Would there be any efficiencies experienced that could reduce expenses if meters were installed?
A.There would undoubtedly be some reduction in the cost of electricity for pumping power.  It has been our experience in the past that unmetered systems typically waste a lot of water.  When unmetered flat rate water systems convert to a metered system, customers begin to watch consumption levels more closely and significant reductions in water use are experienced on the system.  It is impossible to quantify exactly how much savings would be experienced in the future.  The pumping power cost is the only incremental cost tied to consumption and only represents 12% of the total revenue requirement.
Q.Are you recommending the installation of customer meters on the system?
A.I am not making any recommendation in this regard.  I prepared this exhibit at Staff witness Oliason's request.  He discusses this issue in his testimony.
QDoes this conclude your direct testimony in this proceeding?
A.Yes, it does.