960621v1.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 (IPUC) 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?
A.I have conducted an audit of the asset accounts of Warm Springs Mesa and will present the Staff recommended amounts to be booked for net plant in service, Well No. 3, land, and the acquisition adjustment involved in the sale.  I will also address the United Water Idaho Inc. (United Water) revenue requirement needed to cover the proposed rate base.  I will recommend that the sale be approved.  I will support Well No. 3 and the acquisition adjustment being allowed in the rate base of United Water once United Water has proven that:
1.Well No. 3 is used and useful;
2.customers have received benefits for the premium paid, and
3.existing United Water customers are not subsidizing the Warm Spring Mesa system.
Q.Why is there a problem in the Net Plant in Service amount?
A.In establishing the purchase price, Warm Springs Mesa, Inc. (Warm Springs, Mesa) used and United Water accepted a net plant in service amount of $340,037.  The $340,037 net plant in service is made up of the average rate base of $116,010 (including working capital of $9,088) used in IPUC Order No. 25445, Case No.
WSM-W-93-2, adjusted for the lower Mesa refit of $179,377 in Order No. 26081, Case No. WSM-W-95-2, plus $44,650 of items that had been disallowed in the refit Case No.
WSM-W-95-2.  Case No. WSM-W-93-2 was based on a 1992 test year and used a 13-month average rate base.  The actual 1992 year-end amount for net plant in service (not including working capital which is not a plant in service item) was $102,595.71.  No proforma adjustments were made to bring the net plant in service forward from year-end 1992 in either Order No. 25445 or Order No. 26081.  The lower Mesa refit of $179,377 was added to the existing 1992 average rate base in Order No. 26081.
Staff believes that the proper starting point is the 1992 year-end net plant in service of $102,595.71 brought forward to December 31, 1995 plus the approved lower Mesa refit less office equipment not included in the sale.
Q.What is required to update the year-end 1992 plant in service amount to year-end 1995?
A.The additions to plant of $3,458.78 in 1993, $549.73 in 1994, $28,803.45 in 1995 and the lower Mesa refit of $179,377 in 1995 must be added.  The depreciation of $10,826.10 in 1993, $10,906.27 in 1994 and $15,080.88 in 1995 must be deducted.  This would bring plant in service at December 31, 1995 to $277,971.42.  This amount must then be reduced by the $723.85 net amount in office furniture because the office furniture is not being purchased.  The total book value of plant in service being purchased is $277,247.57.
Q.In 1995, plant in service increased by $28,803.45.  Please explain why.
A.The main reason for the increase was the rebuild of Well No. 2 in the amount of $23,011.84.  This rebuild of the well will extend the life of the well and is proper to include in rate base.  Staff also found a few invoices with canceled checks in the amount of $5,473.16 for the lower Mesa refit that Staff believes are proper to place in the rate base.
Q.You stated that United Water and Warm Springs Mesa included $44,650 in plant in service that had been excluded in Order No. 26081.  Please explain what these costs represent and why they were excluded from plant in service in Order No. 26081.
A.The additional items included interest on pipe $2,911, interest on loan $6,566, appraisal for loan $4,450, title fees for loan $1,321, loan fees $18,500, St. Clair cost not allowed $4,152 and Paul Wise professional services $6,750.  The first five items relate to debt which Staff addressed on page 3 of Staff Comments in Case No. WSM-W-95-2 stating “Staff does not believe the first three items are properly included in rate base, which are expenses related to debt issuance and thus are properly recovered over the life of the loan through a higher interest cost in the capital structure.  ... Staff recommends including AFUDC of $13,904, which will cover the interest expense.”  The Commission accepted the AFUDC in rate base.  When Paul Wise claimed the $4,450 of St. Clair cost, Staff was unable to determine that this was actually owed St. Clair because this amount had not been paid.  Staff relied on the actual canceled checks to determine the amount that had been paid to St. Clair.  In Order No. 26081 the Commission stated “Absent a more formal proceeding in which additional expenses can be examined, we agree that the actual payments issued by Warm Springs are the best way to determine in this case the rebuild costs incurred by the Company.”  While Warm Springs Mesa Water Co. did issue Check No. 1641 to St. Clair Contractors Inc. in the amount of $4,151.88 dated June 26, 1995 the check had not been mailed or canceled as of May 14, 1996 when Staff audited the plant accounts.  Therefore, Staff believes this amount is not owed and that it should not be included in rate base.  Staff rejected Mr. Wise’s claim for professional service in Case No. WSM-W-95-2.  Staff rejected this claim for several reasons, 1) it had been rejected by the City of Boise; 2) it was redundant in that $9,000 had been paid to the City of Boise for the same service; 3) Mr. Wise could not substantiate his time spent on the system; and 4) the fee was determined as a percentage of the estimated cost of $150,000 without showing value.  Staff still believes the fee for Mr. Wise’s professional services in the lower Warm Springs Mesa refit is without merit.
Q.Does Staff still believe all of these items should be excluded from plant in service?
A.Yes.  Staff’s audit revealed that there were no changes in the circumstances that originally caused Staff to question the appropriateness of adding these costs to rate base in Case No. WSM-W-95-2.
Q.Please explain the difference between the Company’s purchase price for Well No. 3 and the Staff verified cost for Well No. 3.
A.There are two basic differences.  The first is that Staff could only verify $114,794.82 in cost for the well compared to the Company’s claimed cost of $117,003, for a difference of $2,208.  Second, Staff has added an allowance for funds used during construction (AFUDC).  Staff believes that it is proper to include AFUDC in accordance with Idaho Code 61-502A (Commission must include AFUDC when construction work in progress is excluded from rate base).  In Case No. WSM-W-93-2, Order No. 25445, dated March 25, 1994, the Commission found “Warm Springs has admitted that Well No. 3 is not yet completed and has not received final approval from DEQ...  Once the well is used and useful, the Company may make a subsequent filing requesting that its investment, or some portion of it, in Well No. 3 be included in rate base.”  Because Well No. 3 was not completed and was not allowed in rate base in Case No. WSM-W-93-2, Staff believes it is proper to add $32,505.43 in AFUDC for Well No. 3 which represents the time the well was under construction up to the time it was ready for service.
Q.Is there a problem with the value of the land?
A.No.  The purchase value of the land is $63,000 but Staff also found an invoice for $150 for the land appraisal.  Staff believes it is proper to add the appraisal cost to the value of the land.
Q.United Water and Warm Springs have claimed intangibles of $29,960.  Do you agree?
A.No.  United Water defines intangible property as “...customer lists and records, customer deposits, well logs, maintenance records, tariffs and rules and regulations governing the rendering of service and extension of service to future development, franchises, permits, certificates (....).”  Staff maintains that the above items are either public information, items that will not be used or useful because United Water tariffs and rules and regulations etc will be used or that customer deposits, franchises, permits, certificates are non-existent or will have to be applied for by United Water.  Therefore, Staff concludes that the above mentioned items are not worth the value United Water and Warm Springs have attributed to them.  What we do have however, is an acquisition adjustment.  The acquisition adjustment is the difference between Warm Spring Mesa’s original cost of the assets less depreciation and United Water’s purchase price of the assets.  This is consistent with the Uniform System of Accounts for Class A Water Utilities (USOA) as adopted by this Commission and is consistent with Staff’s position on acquisition adjustments in Case No. UWI-W-95-2 (see Faunce, M. testimony, page 2-10).  By using original costs for plant in service, Well No. 3, and the land and subtracting this amount from the purchase price of $550,000, Staff finds the acquisition adjustment should be $62,302.18.
Q.Can you show a comparison of the Companies’ position and Staff’s position?
A.Yes.
INVESTMENTCOMPANIESSTAFF
Plant-in-Service, net$340,037$277,247.57
Well No. 3 117,003 147,300.25
Land  63,000  63,150.00
Intangibles  29,960              0.00
Acquisition Adjustment      0  62,302.18
PURCHASE PRICE$550,000$550,000.00
Q.What is United Water’s revenue requirement with Well No. 3 and the acquisition adjustment included in rate base?
A.Staff Exhibit No. 101, Column A, shows that with the Well No. 3 and the acquisition adjustment included in rate base United Water would have a revenue requirement of $114,852.53.  Column A also shows that with 325 customers United Water would have a revenue deficiency of $17,353.  This would mean that existing United Water customers would be subsidizing the Warm Springs customers if Well No. 3 and the acquisition adjustment were included in rate base in a rate case before enough new customers were added and/or the rate base was sufficiently depreciated.  Collecting or imputing hook-up fees will also reduce the revenue deficiency.
Q.Are you recommending that Well No. 3 and the acquisition adjustment not be allowed in rate base?
A.No.  While Well No. 3 was not found to be used or useful in Case No. WSM-W-93-2, Staff believes that once Well No. 3 is connected to the United Water system, United Water should have no trouble proving that this well is used and useful and is serving a system larger than the Mesa.  Once the well is connected to the system the cost of the well should be spread over the whole system.  Therefore, Staff believes United Water should be allowed to book the well to plant in service with the understanding that United Water will have to prove that the well is used and useful in a rate case.  If the well is not connected to the United Water system, United Water would have to show that enough customers have been added either in the Mesa system or other new developments in the area to prove the well is used and useful in a rate case.
Staff also believes that United Water should be allowed to book the acquisition adjustment above the line and begin amortization with the understanding that in a rate case United Water will have to show that the Mesa customers are covering the revenue requirement with the acquisition adjustment included in rate base.  United Water should also show that the Mesa customers have received a quantifiable benefit from the acquisition by United Water that warrants recovery of the acquisition adjustment from Mesa customers.
Staff recommends that the Warm Springs Mesa system be accounted for in a manner that would allow all rate base, revenues and expenses, including allocated expenses to be analyzed in rate cases.  This could be accomplished by using separate subaccounts.  When United Water has demonstrated that sufficient revenue is collected to earn its revenue requirement, the subaccounts could be collapsed and rolled in with the total system.  Until that time, existing United Water customers should be held harmless in future rate cases with the shareholders bearing the risk for any Warm Springs Mesa area revenue deficiencies.
Q.Have you made an estimate as to when the revenue generated by the Mesa customers might cover United Water’s revenue requirement on the Mesa system?
A.Yes, Exhibit No. 101, Column B, shows that if United Water does not need to make any improvements to the Mesa system, 36 new customers are added to the Mesa system and the assets are depreciated for another three years before United Water includes the Mesa assets in a rate case, the revenue requirement should be covered.
Q.Is adding 36 new customers and depreciating the assets for an additional three years, the only way that United Water could earn their rate of return on the Mesa assets?
A.No, there are several ways.  The collection of hook-up fees will reduce the asset base and the resulting revenue requirement.  I have not included this impact on Exhibit No. 101.  Assuming that each customer generates $300 per year and that the incremental cost to serve each customer is $43 it would take approximately 67 new customers on the Mesa to recover United Water’s full rate of return.  Mr. Hepler states in his direct testimony that there are 65 lots currently under construction on the Mesa.  If all 65 lots were completed in 1996 this would generate approximately $16,705 towards the $17,353 revenue deficiency and with the depreciation for 1996 United Water would be very close to full recovery of its revenue requirement.
Q.What is your position on the issue of hook-up fees?
A.Staff believes that if United Water does not collect a hook-up fee on the Mesa system, hook-up fees should be imputed in a rate case.  This would insure that all United Water customers are not subsidizing the Mesa.  Although, there are many areas in United Water’s system that at present do not need a new water source, new connections pay hook-up fees since a new source may be needed in the future.  All United Water tariffs and regulations should apply to Warm Springs Mesa customers.  Staff believes it is important to maintain the consistency of the system and not discriminate on the use of tariffs by not applying all tariffs equally.  Staff witness Oliason discusses this issue further.  If United Water does not collect a hook-up fee or chooses not to implement any other tariff, those fees should be imputed in a rate case to eliminate any disadvantages to existing customers.
Q.Can you please summarize your recommendations?
A.Staff recommends the sale be approved.  United Water should be allowed to book costs as recommended by the Staff with the understanding that before United Water can include these costs in rates it demonstrate the following:
1)Well No. 3 is used and useful.
2)A quantifiable benefit has been received by the Mesa customers prior to including the acquisition adjustment in rates.
3)Existing United Water customers are not subsidizing the Mesa system prior to collapsing the subaccounts.
Staff also recommends that revenue for any hook-up fees not collected on the Mesa system be imputed as if received and booked to CIAC in future rate proceedings.
Q.Does this conclude your direct testimony in this proceeding?
A.Yes, it does.