960105RL.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?
A.The purpose of my testimony is to describe the details of the proposed service area exchange between United Water Idaho (UWI) and Garden City and explain its effect on both the customers involved in the exchange and existing UWI customers.
Q.Please summarize your testimony.
A.The proposed exchange between UWI and Garden City boils down to a swap of supply and distribution facilities used to serve 382 UWI customers for distribution facilities used to serve 912 Garden City customers at an up front capital cost to UWI of approximately $700,000.  As a result of the exchange, the new UWI customers will see rate increases ranging from 22% to 50% while the new Garden City customers will see rate decreases ranging from 35% to 68%.  The primary purpose for the exchange is to realign water service boundaries so they more closely follow the incorporated boundaries of Boise and Garden City.  Although the benefits to customers in the North State Area are difficult to quantify, Staff supports the Company's proposal to charge these customers the same rates charged all other similar UWI customers should the exchange be approved.  Different rates for similar service within a customer class should be considered discriminatory or preferential and should not be allowed.  This is particularly true in conjunction with rates based on average system cost.
While Staff is not opposed to the exchange of service territories, we believe that the Company has not justified recovery of the purchase price through rates.  Allowing UWI to recover this price in rates would represent a double recovery of the water system costs.
Q.Please describe United Water's proposal.
A.UWI proposes to amend and revise its Certificate of Convenience and Necessity by relinquishing a portion of its existing service area known as the Millstream Subdivision.  The Millstream Subdivision, located within the city limits and impact area of Garden City consists of a single water supply well and distribution facilities that serve 382 customers.  These facilities and the customers served would be exchanged for Garden City distribution facilities and customers currently served in an area referred to in this case as the North State Area.  The North State Area, as represented, has 912 customers and is located outside the Garden City limits and within the certificated area of United Water.  Under the exchange agreement, United Water would convey to the City $593,250, the Millstream facilities with a Net Book Value (NBV) of $104,000 and all customers served by those facilities.  In return, the City would convey to United Water the North State Area facilities with a depreciated installation cost of $1,088,000 and all customers served by those facilities.  United Water also agrees to continue serving the North State Area with water purchased from Garden City for a period of at least two years and up to ten years.
Q.What effect will the service area exchange have on the customer rates in the Millstream subdivision and the North State Area?
A.The Millstream customers will become customers of Garden City and I assume will be charged the same rates as other Garden City customers within the city limits.  The monthly residential customer charge will decrease from $6.00 to $1.95 and the commodity rate will decrease from $0.809 to $0.524 per 100 cubic feet (CCF) in the winter and from $1.011 to $0.524 per CCF in the summer.  This change represents potential monthly decreases ranging from approximately 35% to 67.5%.
In the North State Area, the Company proposes that the new customers be charged existing UWI tariffed rates.  For residential customers this results in a monthly customer charge increase of $1.09 from $4.91 to $6 and a commodity increase of $0.136 per CCF in the winter and $0.338 per CCF in the summer.  These rate changes result in increases ranging from approximately 22% to 50%.  Staff Exhibit No. 105 shows a rate change comparison for both customer groups at various levels of consumption.
Q.If the exchange is approved, does Staff support the proposed rates?
A.Yes.  Staff supports the uniform application of currently tariffed UWI rates to all similar Company customers.  To do otherwise could be considered discriminatory because it would unfairly single out one customer group within a customer class for special rate treatment.  Rather than establishing multiple rates within the residential customer class based on numerous site specific cost differences, United Water rates are based on average system costs to set uniform rates for all customers within the same class.  The primary reason for system averaging and uniform rates is to assure that no single small group of customers is required to pay extremely high site specific costs.  While one customer group may pay more than their actual cost of service at a given point in time, that same group of customers may pay less than their actual cost of service at another point in time if the Company incurs unusually high costs to serve them.  The result of this pricing methodology is the same rate for every residential customer regardless of their particular cost or quality of service.
In addition, it should be noted that a significant portion of the rate increase that will be experienced by the North State Area customers occurs because of the summer/winter commodity rate differential. The seasonal differential of 25% is experienced by all UWI customers every May when the summer rate begins.  If the rate change is evaluated in this fashion, the increase experienced by customers will be limited to 20%  for winter commodity and $1.09/mo increase in the customer charge.
Q.The Company has proposed to serve the North State Area with the same water supply and the same distribution facilities that Garden City uses to serve the area.  Why should these customers pay more for the same water supply and distribution facilities?
A.In addition to the need for uniform application of rates as described above, these customers will hopefully see some qualitative improvement in service through increased pressure, improved fire flows and better representation through the Company and Idaho Public Utilities Commission than they had through Garden City.  The North State Area customers may also be able to take advantage of a greater array of UWI resources in the areas of engineering expertise, water conservation and system maintenance.  UWI has automated system monitoring equipment, storage reservoirs and the ability to provide supply from other areas.  All of these capabilities should put UWI in a better position than Garden City to address any problems that currently exist or might occur in the future.
Obviously, service quality is a matter of perception and higher rates do not necessarily mean better service quality.  Once the North State Area residents become customers of UWI, they are required to follow the rules and regulations of UWI and pay the tariffed charges.  While some improvement in service quality may occur, the bottom line is that this exchange was not proposed because of poor service quality in the North State Area.  It was initiated by the cities in order to settle a boundary dispute.  The rates of UWI recover additional costs such as taxes, profit and some additional system resources.  Additional system resources may result in improved service.
Q.What effect will the exchange have on customers in the Millstream area?
A.Aside from the previously described rate reductions, changes in service quality in the Millstream area are difficult to predict.  Just as service quality does not necessarily improve with a rate increase, it does not necessarily decline with a rate decrease.  These customers will also continue to be served by the same facilities that have provided service in the past.  To the extent customers are currently satisfied with the system pressure and water quality, I would expect satisfied customers after the exchange particularly in conjunction with the rate decrease.  To the extent UWI capabilities exceed those of Garden City then some decline in service quality might be expected in the Millstream area just as some improvement might be expected in the North State Area.
Q.What impact will the Company's exchange proposal have on the existing customers of United Water?
A.Prior to a rate case, the effect of the exchange on existing UWI customers will be minimal.  Even after a rate case, the effect on existing customers will depend on whether or not the net revenue generated after the exchange is sufficient to cover the revenue requirement associated with exchange related costs.  Staff Exhibit No. 106, page 1 of 2, provides an analysis showing the estimated return on Company investment assuming that all of the proposed investment is allowed in rate base, 530 new customers generate an average of $300 per year and area water supply is purchased from Garden City.  The last line of the table (line 13) shows that under these assumptions, the Company will come very close to earning its authorized return on this investment from these customers.  Therefore, based on the residential escrow analysis, existing customers would not be expected to provide a significant subsidy in order to recover exchange related costs.  If the Company serves only 388 new customers as indicated in response to Staff Production Request No. 6, UWI's return on investment will be considerably less than authorized.  Staff Exhibit No. 106, page 2 of 2, shows the estimated return on investment using the same assumptions used on the first page of the exhibit except number of new customers.  These analyses do not assume any additional interconnection costs, new well construction or any contribution to existing Company costs.
Q.Does Staff oppose the exchange as proposed by UWI?
A.Yes.  Staff is opposed to UWI's proposal to allow the purchase price to be included in rate base and recovered through rates.  Staff's position is that all of the North State Area facilities were contributed to Garden City by developers and therefore, the facilities have no net book value.  In other words, the cost of water facilities as contributed to the city by developers was a cost associated with developing the residential property and was recovered by the developer through the sale of lots.  Recovery of the payment through UWI rates would constitute double recovery of those costs.  The testimony of Staff witness Madonna Faunce provides a detailed analysis of Staff's proposed treatment of exchange related costs.
Q.Aside from the recovery of purchase costs, does Staff oppose the proposed exchange?
A.No.  While Staff does not believe there is a single compelling reason for the exchange and it is difficult to balance the interests of all impacted customer groups, Staff believes that the proposed exchange (absent purchase price recovery) could have some benefit.  Although customer rates will increase, Staff believes that service quality in the North State Area could improve and customers may see some benefit from greater UWI resources.  Moreover, the North State Area is already certificated to United Water and the Company has an obligation to serve.  While service quality could decline in the Millstream area without the resources of UWI, there is no evidence that pressure or water quality problems currently exist or that Garden City will provide less than adequate service.  Moreover, the Millstream customers will be charged a significantly lower rate.  Finally, absent recovery of purchase price as proposed by the Company, existing UWI customers should be no worse off than they would be without the exchange.
From a technical perspective the exchange will eliminate the competition for customers between UWI and Garden City in the North State Area allowing more efficient use of distribution facilities.  The Company has also indicated that fire flows in the area will be improved.  Staff is somewhat concerned with the Company's proposal to purchase water from Garden City over a two to ten year period given the high iron content of the water as indicated by the Company’s response to Staff Production Request No. 18.  However, a new Company well will increase the cost to serve the area and there is no guarantee that a new well will result in lower iron content.
Q.What would be the effect on customers if the exchange does not take place?
A.Without the exchange, service would continue in much the same way it has in the past.  Millstream customer would continue to be served by UWI with oversight by the Commission.  Service quality changes in the North State Area would depend upon Garden City. Company witness Brown states that Garden City has plans to improve system pressure in the North State Area in 1996.  I assume that the City would follow through with those plans.  Fire flow improvement may or may not occur with service from Garden City.  Competition between Garden City and UWI in the North State Area would probably continue but at a reduced pace because of reduced growth in the area and the desire of both Boise and Garden City to establish uniform city boundaries.
Q.Does that conclude your testimony in this proceeding?
A.Yes, it does.