20041129Trent Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
APPLICATION OF EAGLE WATER FORA RATE INCREASE
CASE NO. EAG-O4-
Testimony of
GENEVA TRENT, CPA
on behalf of
Eagle Water Company, Inc.
November 23, 2004
Please state your name and address for the record.
I am Geneva Trent, CPA. My office address is 942 Preakness Drive, Eagle, Idaho.
What is the purpose of your testimony in this case?
I am presenting the increased revenue requirement of $143 902 for Eagle Water
Company, as shown in the attached exhibit marked "Exhibit 1", together with all of the
supporting schedules and explanations for each component of it. I will also present the
proposed rates and tariffs based on this revenue requirement.
What is the percentage rate increase based on this revenue requirement?
Eagle Water s revenue for 2003 was $600 902, as shown on Exhibit 4, attached to
this testimony. When the increased revenue requirement of $143 902 is divided by
$600 902 , the yield is a 24% increase.
What is the first issue that needs to be considered in this case?
The first issue that must be addressed is the fact that Eagle Water Company has a
negative rate base.
It is my understanding that the staff of the Public Utilities Commission has
audited the books and records of Eagle Water Company in the past and encountered this
anomaly, but could not resolve it. I have reviewed Eagle Water Company s accounting
records for 2003, and they show that the company still has a negative rate base, which
I've detailed on the attached exhibit marked as "Exhibit 2"
Do you know what has caused this anomaly?
My review of those accounting records, coupled with my conversations with
Eagle Water Company president Robert DeShazo, bookkeeper Betty Holt, and the former
accountant C. Dean Graham, CPA, leads me to believe that most, if not all, of the
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problem has been the failure to capitalize much of the cost of plant put into service.
Instead it has been expensed.
Do you know why the plant in service was expensed?
My conclusion is that the former accountant did not understand utility accounting,
did not adequately listen to Eagle Water Company personnel about capitalizing all of the
plant in service, and independently sought to minimize income taxes by expensing those
costs.
Do you have a proposal for resolving this issue?
For this rate case, I propose that we acknowledge that there is plant in service at
least equal to the Contributions In Aid of Construction (CIAC). Then I propose that for
now we do not try to determine a rate base and apply a rate of return to it as is normally
done, but instead calculate the revenue requirement based on the booked operating
expenses of the year 2003 plus the interest expense incurred in 2003, and the pro forma
adjustments as shown on Exhibit
Why do you believe this is an appropriate solution?
Without extensive review of the prior years' accounting records of Eagle Water
Company, I can not estimate the amount of plant that needs to be capitalized, or the
associated income taxes that would be due. Therefore, I suggest that we not include any
income tax expense associated with the capitalized plant in the current revenue
requirement. Instead, I propose that the company be allowed to amortize the
Contributions In Aid of Construction (CIAC) over the next 20 years. As shown in Exhibit
, the accumulated CIAC is $2 420 103 as of December 31 , 2003. If amortized over the
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Page 2
next twenty years, the annual expense is $121 005. This would help to solve the problem
of the negative rate base.
Is an extensive review of the prior years' accounting records still warranted?
Yes. That is why the additional revenue requirement shown on Exhibit 1 includes
a budget for a full-time accountant.
Would you please explain the reasons for adding a full-time accountant to the
staff of Eagle Water Company?
Eagle Water Company needs an accountant to review the previous years
accounting records to determine when and how much of the plant in service has
erroneously been expensed instead of capitalized, and to make the necessary corrections.
This accountant could also be responsible for filing the tax returns. I believe it would be
more cost efficient to hire a staff accountant to perform these duties htan to hire outside
consultants.
Are there any additional reasons for adding a full-time staff accountant?
Yes. I believe there should be an accountant reviewing all accounting transactions
regularly to make sure they are properly accounted for. It is impractical to expect any
accountant to know the details behind all the transactions and to make sure they are
booked correctly if that accountant is only reviewing the accounting records at the end of
the year. Additionally, having a staff accountant would ensure that financial reports and
tax returns are prepared and filed timely, and at considerably less cost than hiring an
outside accountant to do it.
What is the expected cost for such a position?
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Page 3
My second pro forma adjustment (detailed on page 2 of Exhibit 3) addresses the
increased cost of hiring a full-time accountant. This calculation assumes that an
accountant is hire for $20 per hour. It also assumes that Eagle Water Company would no
longer need to hire an outside accountant, so the 2003 expenses for professional
accounting services have been subtracted from the total cost of hiring a staff accountant
to get the net increased cost to the company.
Do you have anything else you would like to tell the Commission regarding your
recommendation that Eagle Water Company hire a full-time accountant?
Just that I believe that the addition of a staff accountant would ultimately result in
other cost savings and in better operations in the office that can not be valued in dollars
but are never-the-Iess valuable.
Do you have any other recommendations regarding Eagle Water s application for
a rate increase?
Yes. In addition to hiring a full-time accountant, I am recommending that Eagle
Water separate the water company business from other business ventures, and that it be
allowed to recover its increased power costs.
Why do you believe separation of the three business ventures is necessary?
It is my understanding that, when auditing Eagle Water Company, the Public
Utilities Commission staff has had difficulty trying to sort out the accounting for the
construction activity from that of the water company, because there has not been clear
identification of which expenses are actually water company expenses and which ones
are non-utility expenses. Consequently, I believe that the water utility operations need to
be accounted for totally separately from any other business transactions.
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Page 4
In addition to providing water service to its customers, is Eagle Water Company
involved in any other business ventures?
Yes. It has a construction division called Eagle Water Construction, and it also
owns a commercial real estate property in Eagle, Idaho, called Jackson Square.
What is Jackson Square?
Jackson Square is a multi-tenant office and retail complex. Eagle Water Company
developed Jackson Square to house its business office, and it rents additional space out to
a variety of local businesses.
Have you prepared a pro forma adjustment regarding the separation of the water
company from the other business interests?
Yes. The pro forma adjustment for separating the construction company and the
property development activities from the water company operations is calculated on page
3 of Exhibit 3. This adjustment used the estimated cost of$3 000 for legal fees for get
Mr. DeShazo s operations divided into three separate legal entities; this estimate was
provided to me by Eagle Water Company s legal counsel Molly O'Leary. I have also
included cost of $3 000 for accounting software and services to set up separate
accounting systems for each of the operating entities, and moving the appropriate assets
liabilities, and income and expenses from the water company books to the other entities
accounting records.
Can you please explain your pro forma calculation?
I have taken the combined cost of $6 000 and allocated it between the water
company and the other operations based on the allocation factor used for the Annual PUC
Report, which would assign $3 413 of the cost to the Water Company. I also allocated the
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total cost based on the net fixed assets as of December 31 , 2003. This results in a cost of
500 for the water company. I have then used the average of those two amounts
457, in the revenue requirement detailed on Exhibit
Why aren t you recommending that these costs be amortized?
Although these costs would normally be considered a type of start-up costs that
would be amortized over a period of years, because this is a relatively small amount we
request that the Commission allow the total to be included in the current revenue
requirement.
Was there a business reason for not formally separating these other business
ventures in the past?
Yes. The operations were all managed within one entity in an attempt to
minimize the operating costs of the water company. A comparison of Eagle Water
Company s rates with those of the City of Eagle s water rates or United Water Idaho
rates for its Eagle customers - all of which are based on operating expenses - verifies that
Eagle Water Company had kept its operating costs low. (See Exhibit 5)
I notice that on page 4 of Exhibit 3 you have provided a pro forma adjustment for
increased power costs. Please explain how you calculated this annual increase of $2 703?
First I prepared a spreadsheet which recorded Eagle Water Company s actual
power usage and costs for the period of June 2003 through May 2004. This resulted in an
annual cost of $86 046.96. I then used the same usage amounts but changed the rates to
reflect the rates that Idaho Power Company charged beginning June 1 , 2004. The total
calculated annual cost using the new rates was $88 749.96. This is an annual increase of
703 as shown on page 4 of Exhibit 3.
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What are the Other Increased Costs totaling $65 265 as shown on Exhibit I?
The itemization of these other costs is shown on page 50f Exhibit 3.
The first item is additional salary for the owner of the water company. The
amount of $50 000 was chosen based on the review of other water company annual
reports. This amount is then reduced by the amount of Robert DeShazo s salary that was
allocated to account 603, Payroll- Officers/Directors/Shareholders, in the 2003 Annual
Report filed with the Commission. The additional salary is then increased by the payroll
taxes that would be incurred due to that additional salary to arrive at the total of $42 437.
The expense for rent of the office space for Eagle Water Company from the
separate real estate operations is calculated based on the same method as used for
determining the rent in the other units of Jackson Square - square footage. The fair
market rent on that space is $1 694 per month, or a total of $20 328.
The final expense included here is an amortization of the expenses for this rate
case, estimated to be $7 500 and amortized over 3 years for an additional expense of
500.
How have you determined that the proposed tariff rates will result in the total
revenue requirement?
I have simply increased each item on Eagle Water Company s Rate Schedules
No.1 through No.4 by 24%. This is shown as Exhibit 6.
Is there any thing else that you would like to bring to the attention of the
Commission?
I have prepared this revenue requirement and rate increase based on the principles
that I previously learned as an auditor for the Public Utilities Commission. I have been
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conservative in my cost estimates. Therefore I believe that Eagle Water Company
request is reasonable and supported by the evidence.
Does that conclude your direct testimony before the Commission on this matter?
Yes, it does.
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Eagle Water Company, Inc.
Revenue Requirement
at 1 0/30/04
2003 Operating Expenses 504 708 (Exhibit 3 page 1)
Pro Forma Adjustments:
Amortization of CIAC 121 005 (Exhibit 2)
Addition of Staff Accountant 666 (Exhibit 3 page 2)
Separate Water Company from Other Operations 3,457 (Exhibit 3 page 3)
ncreased Power Costs 703 (Exhibit 3 page 4)
Other increased costs 265 (Exhibit 3 page 5)
Total Operating Expenses 744 804
Less: 2003 Operating Revenues 600,902
143,902
(Exhibit 4)
Additional Revenue Required
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Exhibit 1
ACCT #
101
Eagle Water Company, Inc.
Rate Base Information
For the Three Years Ended December 31,
DESCRIPTION 2001 2003
Utility Plant in Service 880 275
108.1 Accumulated Depreciation
Net Utility Plant
271
335
544 850
Contributions in Aid of Construction
Rate Base
180,267
635
2002
1 ,900 1 09
379 395
520,714
311 629
790 915
924 628
423,743
500 885
103
919 218
Proposed Adjustment to Revenue Requirement:
Contributions in Aid of Construction
Amortized over Twenty (20) Years
Annual amount of Amortization of CIAC
2,420 103
divided by 20
121 005.
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Exhibit 2
Eagle Water Company, Inc.
Schedule of Operating Expenses
For the Three Years Ended December 31,
ACCT #DESCRIPTION 2001 2002 2003
OPERATING EXPENSES
601.Labor - Operation & Maintenance 147 018 621
601.Labor - Customer Accounts 811 651 893
601.Labor - Administrative & General 531 20,432 575
603 Salaries, Officers & Directors 889 071 11 ,393
604 Employee Pensions & Benefits 334 743 103
610 Purchased Water
615-Purchased Power & Fuel for Power 817 116 971 91 ,565
618 Chemicals
620.Materials & Supplies - Operation & Maint.18,483 343 866
620.Materials & Supplies - Administrative & General 624 715 607
631-Contract Services - Professional 542 763 266
635 Contract Services - Water Testing
636 Contract Services - Other
641-Rentals - Property & Equipment
650 Transportation Expense 841 525 058
656-Insurance 114 067 659
660 Advertising
666 Rate Case Expense (Amortization)
667 Regulatory Comm. Exp. (Other except taxes)1,418
670 Bad Debt Expense
675 Miscellaneous 885 437
Total Operating Expenses 358 018 406 154 382 631
403 Depreciation Expense 730 970 348
406 Amortization, Utility Plant Aquisition Adj.
407 Amortization Exp. - Other
408 Other Taxes 057 042 558
409 Income Taxes 11 657
Total Expenses from operations before interest 447 805 481 509 492 557
427.Interest Exp. on Long-Term Debt 120 320 924
427.Other Interest Charges 744 227
TOTAL EXPENSES 461 669 511 829 504 708
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Exhibit 3 page 1
Eagle Water Company, Inc.
Cost of Staff Accountant
Salary 2080 hours x $20/hr.41 ,600
Payroll taxes:
FICA taxes at 6.2 %579
Medicare Taxes at 1.45 %603
Unemployment Insurance at 1.4 %582
Workmans' Compo Insurance at 0.87 %362
Health Insurance Premiums 560
Annual cost of Staff Accountant 287
Less: 2003 cost for Professional Accounting Services 621
Net Additional Cost of Staff Accountant 666
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Exhibit 3 page 2
Eagle Water Company, Inc.
Cost to Separate Water Company from Other Operations
Legal Fees 000 per entity 000
Accounting Software & Services (estimate)
Total expected cost of separating companies
000
000
If allocated based on wages & income for PUC Report
Allocation to Water Company
56.89%
3,413
If allocated based on Net Assets:
Water Company (net utility plant)
Construction & Property
Total
$ 1 500 885
$ 1,071,405
$ 2 572 290
500.
2,499.
000
Allocation based on wages & income
Allocation based on net asets
Total
Average (total divided by 2)
3,413.40
500.
914.
3,457
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Exhibit 3 page 3
EAGLE WATER COMPANY
Comparison of Actual to Pro Forma Power Costs
9/30/04
TOTAL PRO-FORMA ANNUAL COST
Cost
Customer Charge
Energy charge
Energy charge
Energy charge
BLC Charge
Demand Charge
PCA Charges
Franchise Fee
Conservation Chg.
Fed. Columbia Rvr BPA
1 OOW Sodium Vapor
640.
225.
900.
783.
398.
326.
392.
727.
352.
(66.64 )
67.
101
107
109S
Total Annual Power Cost $ 88 749.
TOTAL ACTUAL ANNUAL COST
Cost
Customer Charge
Energy charge
Energy charge
Energy charge
BLC Charge
Demand Charge
Franchise Fee
Conservation Chg.
Fed. Columbia Rvr BPA
100W Sodium Vapor
101
107
109S
581.43
328.
106.
776.
334.
797.
$ 708.
$ 374.
$ (65.81)
$ 103.
Total Annual Power Cost $ 86 046.
Increased Annual Power Costs $ 2 703.
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Exhibit 3 page 4
Eagle Water Company, Inc.
Other Expenses
Owner Salary - New $ 50 000 less old
Payroll taxes:
FICA taxes at 6.2 %
Medicare Taxes at 1.45 %
Unemployment Insurance at 1.4 %
Workmans' Compo Insurance at 0.87 %
393
Office Rent $ 1 694/m' X 12 mo.
Rate Case Exp. Amortization 500 13 yrs.
Total Additional Other Expenses
607
394
560
540
336
42,437
328
500
65,265
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Exhibit 3 page 5
Eagle Water Company, Inc.
Schedule of Operating Revenues
For the Three Years Ended December 31,
ACCT #DESCRIPTION 2001 2002 2003
OPERATING REVENUES
460 Flat Rate 1 Unmetered Sales
461.Metered Sales - Residential 443 579 513,320 485,495
461.Metered Sales - Commercial 316 101 942 114 907
462 Fire Protection Revenue
464 Other Water Sales 500
465 Sales to Irrigation Customers
TOTAL OPERATING REVENUES 534 895 615 262 600 902
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Exhibit 4
Eagle Water Company, Inc.
Rates Compared to Other Water Companies
RESIDENTIAL METERED SERVICE -- 3/4 inch meter -- Monthly Charge
Eagle Water Company
Eagle City Municipal Water System
United Water Idaho Inc.
WATER USAGE CHARGE (in addition to monthly charge)
Eagle Water Company .451 per 100 cu.ft. in excess of 600 cu.ft.
Eagle City Municipal Water System $ 1.10 per 1 00 cu. ft.
United Water Idaho Inc.
$ .
9825 per 100 cu. ft. winter rate
$ 1.2281 per 100 cu. ft. summer rate
EXAMPLE: A family using 3,000 gallons of water per month through a 3/4" meter would pay
$18.66 if on Eagle Water Company system
$41.50 if on Eagle City Municipal Water system
$36.77 if on United Water Idaho system
$23.14 if on Eagle Water Company system after a 24% rate increase
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Exhibit 5
Tariff No.Page Sheet 29
4th RevisedI . P . U . C. No.
Cancel ing Sheet 29, 3rd Revised
Name of Utility
EAGLE WATER COMPANY, INC.(Approval Stamp)
RATE SCHEDULE No.
Small Volume Unmetered Service
A V AILIBILlTY:
Service under this Rate Schedule is available for each service connection of 1 - 114 inch
or smaller which is not metered.
RATES:
(a) For the months of November through April, inclusive, a flat rate of $14.57 per month.
(b) For the months of May through October, inclusive, a flat rate of $24.49 per month.
SERVICE CONDITIONS:
(a) All water service under this Rate Schedule is subject to the General Service Provisions
of the Company s tariff, of which this Rate Schedule is a part.
(b) The Company, at its option, may meter service otherwise qualifying under this rate
schedule, in which case such service shall be governed by Rate Schedule No.
Issued 2004 Effective 2004
Issued by EAGLE WATER COMPANY, INC.
Title
EAG-04-
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Exhibit 6 page
Tariff No.Page Sheet 30
3rd Revised
I . P . U . C. No.
Canceling Sheet 30 , 2nd Revised
Name of Utility
EAGLE WATER COMPANY, INC.
RATE SCHEDULE No.
Residential Metered Service
A V AILIBILlTY:
To all metered customers.
RATES:
First 600 cu. ft. or less
All over 600 cu. ft. per 100 cu. ft.
MINIMUM CHARGES:
3/4" and smaller
1 "
1 1/4" and 1 1/2"
3" or multilpe meters of equivalent capacity
4" or multiple meters of equivalent capacity
6" or multiple meters of equivalent capacity
8" or multiple meters of equivalent capacity
10" or multiple meters of equivalent capacity
CONDITIONS OF CONTRACT:
(Approval Stamp)
Cubic Ft.
Allowed
600
000
000
200
6,400
600
21 ,000
000
45,000
Monthly
Per Meter
$9.
56375
Monthly
Per Meter
The customer shall pay the minimum charge only when the amount resulting from
applying the rates to the quantity of water used is less than the minimum charge.
A minimum bill will be prorated whenever the customer had not been a customer
for the entire billing period and if the same customer has used less than the minimum
allowance.
Issued Effective2004
Issued by EAGLE WATER COMPANY, INC.
Title
Char
11.
17.
24.
42.
65.
123.
185.
258.
2004
EAG-04-
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Exhibit 6 page 2
Tariff No.Page Sheet 31
2nd RevisedI . P . U . C. No.
Cancel ing Sheet 31 , 1 st Revised
Name of Utility
EAGLE WATER COMPANY, INC.(Approval Stamp)
RATE SCHEDULE No.
NON-RECURRING CHARGES
RECONNECTION CHARGE:
CONDITION: When it becomes necessary to disconnect service for failure
of the customer to comply with the Company s rules and regulations under this
tariff including default (non-payment) as defined in this tariff, a charge will be
made to restore service.
CHARGE:$18.60 Regular business hours Monday through Friday
$37.20 After business hours, Weekends and Holidays
Issued 2004 Effecti ve 2004
I ssued by EAGLE WATER COMPANY, INC.
Ti tIe
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Exhibit 6 page 3
Tariff No.age Sheet 32
1 st RevisedI . P . U . C. No.
Cancel ing Sheet 32, Original
Name of Utility
EAGLE WATER COMPANY, INC.(Approval Stamp)
RATE SCHEDULE No.
RATES FOR PRIVATE FIRE SPRINKLER AND HOSE SERVICE
AVAILIBILlTY:
To all customers who have sprinkler systems andlor inside hose connections for fire.
fighting purposes.
RATES:
For service through a separate line for fire fighting purposes.
For 3" service or smaller
For 4" service
For 6" service
For 8" service
For 10" service
Monthl
8.49
12.
31.
52.48
81.
MISCELLANEOUS:
Provided that if the installation of a private fire service shall require an extension
of the existing mains of the company, the cost of such extension shall be borne by
the customer.
All private fire services shall be equipped with an approved backflow device or assembly
and sealed gate valves or thermal automatic openings.
Meters may be placed on fire services by the utility at any time, however, metered rates
will not apply unless imprpoer use of water is disclosed, and if such be the case, usage
will be billed to the customer under Rate Schedule No.
Issued 2004 Effective 2004
Issued by EAGLE WATER COMPANY, INC.
Title
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Exhibit 6 page 4
Eagle Water Company, Inc.
Comparative Balance Sheets
For the Three Years Ended December 31,
ACCT #DESCRIPTION
ASS ETS
2001 2002 2003
101 Utility Plant in Service 880,275 900 109
335 379 395
544 850 520 714
068 936
915 795
990 734
63,973 154,465
504 504
354 536
997 793 246 156
108.1 Accumulated Depreciation
Net Utility Plant
131 Cash
141 AcctslNotes Receivable - Customers
142 Other Receivables
Total Current Assets
184 Deferred Rate Case Exp s AIR DeShazo, Jr.
186 Other Deferred Charges AIR Construction
Total Assets
924 628
423,743
500,885
754
613
360
100 727
007 615
609,227
LIABILITIES & CAPITAL
224 Other Long - Term Debt 530 44,409 926
231 Accounts Payable 142 597 210,721
232 Notes Payable 764 905 873
236.Accrued Other Taxes Payable (Payroll)548 32,429 812
236.12 Accrued Income Taxes Payable
237-40 Accrued Debt, Interest & Dividends Payable 985 292 700
271 Contributions in Aid of Construction 180,267 311 629 2,420 103
Total Liabilities 376 236 520 261 787 135
201-3 Common Stock 000 000 20,000
207-13 Miscellaneous Capital Acc ts - Paid in Capital 63,702 63,702 63,702
215 Unappropriated Retained Earnings 537 855 642 193 738 390
Total Equity Capital 621 557 725 895 822 092
Total Liabilities and Capital 997 793 246,156 609,227
EAG-04-
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Exhibit 7