960328.docx

Q.Please state your name, occupation and business address for the record?
A.My name is Robert E. Smith.  I am employed as an auditor by the Idaho Public Utilities Commission at 472 West Washington Street, Boise, Idaho.
Q.Are you the same Robert E. Smith that previously presented testimony in this case?
A.Yes.
Q.What is the purpose of your testimony in this rehearing of Commission Order No. 26296?
A.The Commission in its Order No. 26339 dated February 23, 1996, granted rehearing on the following issues: 1. rehabilitation of Well No. 1 in rate base;    2. operating expenses; 3. rate design; and 4. estimated expenses vs. actual expenses.  My testimony addresses issues 1, 2 and 4.  I also present an alternative calculation of the monthly revenue requirement per customer.
Q.Are you sponsoring any exhibits at this time?
A.Yes I am sponsoring Staff Exhibit No. 110, a one page exhibit entitled “Packsaddle Estates Water Company, Case No. GNR-W-95-1, Rate Base and Revenue Requirement Calculation.”
Q.Has the Staff changed its position regarding the inclusion of the rehabilitation of Well No. 1 in the Company's rate base?
A.No.  This well and the associated equipment was over twenty years old at the time of the rehabilitation.  We have seen no evidence that indicates the rehabilitation was a direct result of mismanagement.
Q.Has the Staff changed its position regarding the estimated levels of operating expenses necessary to maintain and manage the water system?
A.No.  We believe those estimates are realistic given the size of the system and the topography of the subdivision.
Q.If the Staff has not changed its position regarding these two issues, why do you feel it is necessary to address them?
A.Though the Staff believes these items were properly valued by Commission Order No. 26296, the intervenors' questions of that order have caused us to reconsider our position regarding responsibility for support of the resulting revenue requirement.  Should the Commission affirm its earlier decision of $43 per month, I fear some of the existing customers may, as some have indicated, drill their own wells and leave the system.  This action will simply cause additional upward pressure on rates for those customers who remain.  Staff Exhibit No. 110 presents a fifth alternative (see original testimony for the first four) for the Commission's consideration.  This alternative allocates responsibility for supporting the total revenue requirement between the current customers and the subdivision developer.
Q.How did you calculate the monthly revenue requirement per customer shown on line 24, Column (C) of Exhibit No. 110?
A.Column (A) of the exhibit is a reproduction of a calculation I made on Staff Exhibit No. 102 that was presented at the original hearing in this case on September 6, 1995.  That calculation was identified on Staff Exhibit No. 102 as “ALT #1" which is the alternative adopted by the Commission in its Order     No. 26296.  Line 24, Column (A) shows the $39.39 monthly revenue per customer used in establishing rates in Order No. 26296.  This $39.39 is simply the total revenue requirement shown on line 22, Column (A) divided by the number of current customers (27) to produce the annual revenue requirement per customer shown on line 23,  Column (A).  This annual revenue requirement is then divided by 12 to produce the monthly revenue requirement of $39.39.
Column (B) of this exhibit shows the number of customers over which it may be appropriate to spread each of the revenue requirement increments.  I have spread some of those increments over the number of current customers (27) and others over the total potential customers (89) within the subdivision.    Column (C) shows the annual revenue requirement per customer for each revenue requirement increment and the resultant total monthly revenue requirement per customer of $22.82 shown on line 24.
Q.Why may it be appropriate to spread some of the revenue requirement increments over all potential customers?
A.Current customers are being asked to support a system designed to serve a much larger customer base than currently served.  A number of the revenue requirement increments are not sensitive to the number of customers being served.  For instance, the gross operating income requirement shown on line 10 is a function of the rate base shown on line 6.  The infrastructure of the water system is in place and new customer connections will not cause these numbers to increase.  The infrastructure is in place to serve all potential customers.  The depreciation expense shown on line 12 is also a function of the rate base and the same logic applies.  Maintenance labor (line 18) and the vehicle allowance (line 21) would not increase significantly with the addition of new customers.  These costs are incurred for maintenance of the entire system.  On the other hand, the remaining revenue requirement increments are sensitive to the number of customers being served.
I have spread the relatively fixed revenue requirement increments to the total potential customer base.  These fixed increments are shown on lines 10, 12, 18 and 21 of this exhibit.  I have spread the remaining customer sensitive increments using the existing number of customers.  This approach recognizes the risk of underdevelopment any developer assumes when a subdivision is created.  In the simplest terms, the subdivision developer should bear the risk of any costs associated with slow development of the subdivision.  Rates established using this approach guarantees that the operator of the water system (the developer) will bear the risk of slow development until such time as the subdivision is fully developed.
Q.Is the water system and the Packsaddle Estates Subdivision typical of small single subdivision water systems regulated by the Idaho Public Utilities Commission?
A.No.  This subdivision and the water system are over 20 years old, 90% of the lots have been sold, yet only about 30% have been developed.  This situation is not typical.  Other small water systems the Commission deals with are fully developed, or nearly so, within a few years.
Should the Commission adopt the lower revenue requirement which translates to a monthly revenue requirement per customer in the neighborhood of $23, the owners may not have the incentive to maintain the system as it should.  Line 26, Column (C) shows the value of the labor ($5,369.45) for which the Company would not be compensated under this scenario.
Q.Earlier you spoke of the risks a developer must assume when a new subdivision and small water system is created.  How long should a developer be required to bear these risks when it is the individual property owners who have elected not to improve their lots?
A.Quite frankly, I don’t know.  This is a question I don’t believe the Commission has ever addressed.  As I stated earlier, this subdivision and the water system are not typical given the very slow lot improvement rate experience.  Arguments can be made that the developer should only have to subsidize the operation of a new system for some reasonable time period particularly when, as in this case, it is the property owners themselves who have elected not to improve the lots after purchase.  On the other hand, even stronger arguments can be made that water system customers who have improved their building lots cannot be made to shoulder full responsibility for costs associated with maintaining a system for the future benefit of vacant lot owners.
The Staff of the Commission strongly supports and recommends to developers of new subdivisions that they make provision in the subdivision covenants for the transfer of the water system to the property owners at some point in the future.  Such a covenant can be based upon a certain future date, a ratio of improved lots to total lots or a combination of the two.  This transfer of a small system to the property owners relieves the developer of responsibility for the system in perpetuity and gives the property owners direct control of the system.  These small systems usually can be operated much more economically through a homeowners association or water district than as a privately owned and operated public utility company.
Unfortunately, the Packsaddle Development Corporation did not make any such provision at the time this subdivision was created.  The Staff, the Commission and, I believe, the other parties to this case assumed that the stipulated agreement discussed at the prior hearing would achieve this same result.  Unfortunately, that agreement never came to fruition.
Q.Is it your recommendation that the Commission now base its rate design on the total annual revenue of $7,392.33 shown on Exhibit No. 110, line 25, Column (C)?
A.Yes.  I believe a rate designed to produce revenues anywhere between the two revenue numbers shown on Exhibit No. 110 ($7,392.33 and $12,761.78) can be justified.  Policy questions are before the Commission in this case to determine how long a developer is responsible for supporting a water system that is not fully developed and what is the value of the management risk associated with operating the system.
I strongly urge the Company and its customers to reopen negotiations regarding a transfer of the water system to the customers.  This solution, in my opinion, is the best option for all parties concerned.  Monthly water rates for the customers would be minimized, vacant lot owners could be assessed to help pay the cost of operating the system and the current owners of the Company would be relieved of their management and operating responsibilities.
Q.Does that conclude your testimony?
A.Yes.