UWIW963v1.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?
A.I will present the IPUC Staff (Staff) position in this case regarding revenue requirement and rate design.
Q.Are you presenting any testimony regarding changes to the Company’s Customer Contribution Rules?
A.No.  Staff has joined in the motion of the parties to bifurcate that issue from the question of the Company’s need for a rate increase.  Staff will address customer contributions at a later time.
Q.Are you sponsoring any exhibits?
A.Yes.  I am sponsoring Staff Exhibit Nos. 101 through 110.
Q.In summary, what is the result of the Staff’s recommendations in this case regarding revenue requirement?
A.Staff has adjusted the Company’s proposed rate base downward by $199,870, reduced the Company’s proposed Operating Expenses by $218,490 and corrected the calculation of normalized revenue to recognize an additional $25,318 in gross revenues.
Staff’s analysis produces a gross revenue deficiency for the Company of $823,114.  This is a 26.27% reduction of $293,238 from the $1,116,352 the Company requested.  Staff’s recommendation would result in a gross revenue increase of 3.904% as compared to the 5.3% requested.
Q.Does the Staff propose any significant changes to the Company’s rate design?
A.No.  Staff believes a simple across the board increase to all rate schedules is appropriate in this case.
 Q.Please enumerate the adjustments you have made.
A.Exhibit No. 101 develops a downward correction of $1,131 to the Company’s calculation of Chemical Expenses.  Exhibit No. 102 develops an upward adjustment of $3,125 to the Company’s calculation of Payroll Expenses.  Exhibit No. 103 develops a downward adjustment of $1,637 to the Company’s Payroll Tax Expense.  Exhibit No. 104 develops a downward adjustment of $1,323 to the Company’s O&M Expenses for payroll costs capitalized to construction.  Exhibit No. 105 eliminates from Operating Expenses $20,816 for bonuses paid to executive officers of the Company.  Exhibit No. 106 develops a $23,825 downward adjustment to the Company’s proposed operating ratio adjustment.  Exhibit No. 107 increases the Company’s operating revenue growth adjustment by $25,318.
The last two Staff adjustments can be seen on Exhibit No. 108.  In Column “G” Staff has eliminated from rate base $261,370 for the Company’s investment in the Pierce Park Lane main line extension.  Depreciation Expense related to this line has been reduced by $5,621.  Finally, in Column “H”, Staff has eliminated the Company’s proposed adjustments to replace Company-owned fleet vehicles with leased vehicles.  This last adjustment increases rate base by $61,500 and reduces Operating Expenses by $167,641.
Q.Why has the Staff eliminated the rate base and depreciation expense related to the Pierce Park Main Line as shown on Exhibit No. 108, Column “G”?
A.This adjustment was made to be consistent with the Commission's orders in the Company’s last two rate cases.  The Commission’s findings in those cases excluded this line.  The Company, through an oversight, neglected to make this adjustment to their case at the time the application was filed in this case.
QWhy has the Staff reduced the Company’s Chemical Expenses as shown on Exhibit No. 101?
A.During the course of our audit of the Company’s case, we discovered an error in the calculation the Company made to its Chemical prices.  The Company used a price of $360/ton for the dry product in its calculation for ferric chloride used at the Marden treatment plant.  The correct price based upon the most recent purchase should have been $322.55 per ton.  The calculation on Exhibit No. 101 reprices the cost of ferric chloride solution (40%) used at the plant with the corrected dry tonnage price.  This calculation produces the downward adjustment shown on line 18 of $1,131.
Q.Exhibit No. 102 develops an upward adjustment to Payroll Expenses of $3,125.  What caused these expenses to be higher than those proposed in the Company case?
A.Two factors caused this adjustment to be necessary.  First, the Company’s case was based upon its best guess regarding a new contract for its collective bargaining union employees.  The contract was subsequently signed at terms somewhat different than anticipated by the Company.  The adjustments shown in Column “C”, lines 1-5 show that indeed the final contract produced wages somewhat less than anticipated.  The Company, when it made its calculations, inadvertently overlooked the Plant standby pay for the Marden treatment plant employees.  Line 6, Column “C” includes recognition of this standby pay.  Column “B” of this exhibit is based upon the final negotiated contract including the standby pay for the Marden treatment plant.
Q.Is the adjustment shown on Exhibit No. 103 simply a carry forward for the effect of the prior payroll adjustment on payroll taxes?
A.Yes.
Q.Why doesn’t the payroll amount shown on
line 3, Columns “B” and “D” match the payroll amount shown on Exhibit No. 102, line 8, Column “B”?
A.The Company has several contract employees for whom it pays no payroll taxes.  The salaries of these employees ($47,908) have therefore been eliminated from this calculation.
Q.Is that the same reason why the amount on line 3, Columns “A” and “C” don’t match the Company’s number shown on your Exhibit No. 102, line 8, Column “A”?
A.Partly.  The differences between these numbers also includes a calculation error.
Q.Does that error affect the Staff’s calculations?
A.No.  The Staff’s calculations are independent of the numbers represented in the Company’s original application.  The Company numbers shown on Staff’s exhibits are simply presented to provide a comparison of the Staff’s recommendations with the Company’s application.
Q.Why is it necessary to make the calculation shown on Exhibit No. 104?
A.The Company routinely capitalizes some of its labor costs to its construction projects.  The calculation shown on this exhibit is necessary to be consistent with the payroll adjustment made on Exhibit No. 102 to recognize the new labor contract and recognize standby pay.  Not all of the Company’s payroll costs are passed on directly through rates.  Those payroll costs associated with construction rightfully should be capitalized, added to rate base and depreciated over the life of the capital project.  Failure to recognize this procedure when making proforma wage adjustments would result in double recovery of the wage-related costs, once through recognition in a proforma O & M Expense item, and again when the actual wages are capitalized and placed in rate base.
Q.You have eliminated bonuses of $22,422 on Exhibit No. 105 producing a net O&M Expense adjustment of $20,835.  Why do you believe this is an appropriate adjustment?
A.The Company’s application in this case is characterized as a “Make Whole” application.  Normally a “Make Whole” application is intended to recognize pressures on the Company’s earnings that are entirely outside the control of management.  Management incentive bonuses do not fit this definition.  It is totally inappropriate to recognize management discretionary expenditures in this environment.
Q.On Exhibit No. 106 you have made some modifications to the Company’s proposed Operating Ratio Adjustment.  Why are these modifications necessary?
A.The Company’s application included separate adjustments for Purchased Power, Chemicals and Transportation costs.  These same costs were used by the Company in the last General Rate Case to develop a ratio of variable costs to revenue.  The calculation from the last case is shown in Column “A”, lines 1 through 9.  On Exhibit No. 106, lines 1, 2 and 3, I have eliminated these separate adjustments from the calculation of this ratio.  This modification is necessary to avoid compounding or restoring other adjustments to the Company’s proposed adjustments in this case.
For example, using the Company’s calculation, if the Chemical Expense adjustment of $1,131 were flowed through this calculation as proposed by the Company, line 13 of this Exhibit would be reduced and the $1,131 adjustment would be restored when line 13 is subtracted from line 12.  It is also worthy to note that the Company did not include its adjustment of $197,170 for leased vehicles (transportation costs) in its Exhibit on line 15.  Had the Company included this amount, the Company-proposed adjustment shown on line 14, Column “A” would be a reduction of $109,353 rather than an increase of $87,817.  The Staff adjustment also includes on
line 10, recognition of the Staff’s correction to normalized revenues of $25,318.  These combined changes produce a reduction to O&M Expense of $23,426.
Q.Has the Staff reviewed Mr. Healy’s revenue adjustment for new customers?
A.Yes.
Q.Do you have any changes to recommend?
A.Yes.  Mr. Healy’s new customer revenue adjustment incorporates the weather normalization methodology approved by the Commission in Order
No. 25640.  However, Mr. Healy uses an erroneous weather adjustment for residential and commercial consumption of 1,024,000 ccf per year rather than the 1,323,000 ccf annual consumption adjustment specified by the Commission order.  Exhibit No. 107 is Staff’s calculation using the correct consumption.  This correction increases annual growth revenue by $25,318 from the $1,173,000 shown on Mr. Healy’s Exhibit No. 3, Schedule 1 to the $1,198,318 shown on line 11 of Staff Exhibit No. 107.
Q.Does Exhibit No. 108 present a summation of the Staff’s adjustments to the Company’s Case?
A.Yes.  Column “B” of this exhibit is a summary of the Company’s case.  Columns “C” through “J” present each of the adjustments I have discussed.  
Column “K” of this exhibit represents the Staff proposed operating results and rate base for determining revenue requirement in this case.
Q.Column “D” of this exhibit is titled “Correct Payroll and Payroll Tax.”  Does this column combine the adjustments shown on Exhibit Nos. 102 and 103?
A.Yes.
Q.Referring to Column “H” of Exhibit No. 108, why has the Staff eliminated the Company’s proposed adjustment to recognize vehicle leases?
A.Several years ago the Company’s parent corporation at the time (General Waterworks) made a decision to substitute leased vehicles for Company-owned vehicles.  In this case, that decision produced an adjustment to the Company’s case to increase Operating Expenses by $197,170.  Staff requested a copy of any cost/benefit analysis performed by the Company that led to the decision to begin leasing vehicles.  The information Staff received was inadequate to support the Company’s decision in Idaho.  The analysis included revenue taxes related to the State of New York and did not include realistic residual values or lives for Company-owned vehicles at retirement.  Staff spent several days talking with corporate employees of United Water in New Jersey attempting to modify the data supplied to overcome these shortcomings.  Our efforts were futile given the limited time remaining to complete our analysis and prepare exhibits and testimony on time.
Staff believes it is the Company’s responsibility to present proof that its decision was prudent and in the best interest of its customers.  This case has been characterized as a “Make Whole” application and as such should not include recognition of changes in the operation of the Company that are entirely within the control of management.  Therefore, absent a reasonable analysis by the Company, Staff has reversed the Company’s proposed adjustment.
Q.What is the final result of the Staff analysis in this case regarding revenue requirement?
A.Exhibit No. 109 presents Staff’s recommended revenue increase of $823,114 as shown on line 7.  This revenue increase was developed using the Staff-adjusted rate base of $74,392,096 that is shown on line 1, the overall allowed rate of return from the last general rate case of 9.51% shown on line 2 and the Staff-adjusted net operating income of $6,577,611 shown on line 4.
Q.Are there any other issues Staff believes should be brought to the attention of the Commission at this time?
A.Just one.  During our investigation we discovered that the Company has not yet retired its Gowen and Oregon Trail wells as proposed in Case
No. BOI-W-95-1.  That case concerned the Company’s expansion of its service territory, the construction of new wells and the construction of a new transmission line to connect the new wells to the Micron and Oregon Trail service areas.  Micron Technology was to finance most of the cost of these projects and in return, United (Boise Water) was to turn over its interest in the Gowen and Oregon Trail wells to Micron.  Due to the groundwater moratorium in effect at the time the Company received its water rights for the new wells, the Company is unable to provide service to Micron from the new wells.  Therefore, United has not yet retired its old wells which are providing service to Micron.
The Commission approved the application in Case No. BOI-W-95-1 under the assumption that these two wells would be retired from service and consumers would no longer bear any costs associated with ownership or operation of the wells by the Company.  Since the proposed retirements have not yet taken place, Staff is concerned that customers of United may indeed be affected by these projects.  Staff has been unable to fully analyze the potential impact due to time constraints.
We are confident that customers are not adversely affected by the failure to retire the Oregon Trail well other than the potential for a small amount of O & M expense that may be associated with that well.  The Company collected adequate contributions for construction of this well to offset the construction cost.  These contributions have been verified.  Therefore, we don’t believe the failure to retire this well is of significant consequence in this case.  We are not so confident regarding the Gowen well.  The Company’s original work order for this well (BI-79-079B) indicates that the Company intended to collect contributions from both industrial and residential developments to compensate the Company for its costs.  However, the Company’s construction accounting system has not captured contributions received related to this project.
The Company has been asked to provide proof that contributions adequate to offset it’s costs have indeed been collected.  The Company was unable to provide this information in time for Staff review prior to filing this testimony.  Staff expects the Company, in its rebuttal testimony, to address this question and provide either proof of the contributions and the rate base offset or an analysis of the revenue effect on customers resulting from its failure to retire this well.
Q.Does Exhibit No. 110 represent the affect on rates due to the Company’s failure to retire the Gowen well?
A.Yes.  This exhibit presents the adjustment Staff would have made in this case had we been confident that there were no compensating contributions collected and booked as a rate base offset by the Company. If the necessary documentation on the contributions has not been received and verified by the time of the hearing, Staff recommends that the adjustment on Exhibit No. 110 be made.  As shown on line 12 of this exhibit, this adjustment lowers the Company’s revenue requirement by $20,879.
Q.Does that conclude your testimony?
AYes.