Oregon John A. Kitzhaber, MD, Governor

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-9 OREGON PUBLIC UTILITY COMMISSION ATTENTION: FILING CENTER PO BOX SALEM OR 90- RE: Docket No. UW In the Matter of SUNRIVER WATER LLC Request for a General Rate Revision.

1 February, 0 Oregon John A. Kitzhaber, MD, Governor Public Utility Commission 0 Capitol St NE, Suite Mailing Address: PO Box Salem, OR 90- Consumer Services Local: (0) -00 Administrative Services (0) -9 OREGON PUBLIC UTILITY COMMISSION ATTENTION: FILING CENTER PO BOX SALEM OR 90- RE: Docket No. UW In the Matter of SUNRIVER WATER LLC Request for a General Rate Revision. Enclosed for electronic filing in the above-captioned docket is the Public Utility Commission Staff s Direct Testimony in Support of the Stipulation. /s/ Lois Meerdink Lois Meerdink Regulatory Operations Division Filing on Behalf of Public Utility Commission Staff (0) Lois.Meerdink@state.or.us Cc: UW Service List - Parties

2 PUBLIC UTILITY COMMISSION OF OREGON UW STAFF TESTIMONY OF DUSTIN BALL In the Matter of SUNRIVER WATER LLC Request for a General Rate Increase February, 0

3 CASE: UW WITNESS: Dustin Ball PUBLIC UTILITY COMMISSION OF OREGON STAFF EXHIBIT 00 Direct Testimony In Support of the Stipulation February, 0

4 Docket UW Staff/00 Ball/ Q. PLEASE STATE YOUR NAME, POSITION, AND BUSINESS ADDRESS. A. My name is Dustin Ball. I am a Senior Financial Analyst in the Corporate Analysis and Water Regulation Section of the Utility Program with the Public Utility Commission of Oregon. My business address is 0 Capitol Street NE Suite, Salem, Oregon 90. Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND WORK EXPERIENCE. A. My Witness Qualification Statement is included as Exhibit Staff/0. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. My testimony introduces and supports the overall stipulation entered into by the Stipulating Parties. Q. WHO ARE THE PARTIES IN THIS DOCKET? A. The parties to this docket are: Sunriver Water LLC (Sunriver or Company) and Commission Staff (Staff). The Company and Staff are hereafter referred to as the Stipulating Parties. Q. DID THE STIPULATING PARTIES REACH AN AGREEMENT ON REVENUE REQUIREMENT AND RATE DESIGN? A. Yes. The Stipulating Parties reached an agreement on all issues in this docket. Tables and below highlight the stipulated revenue requirement and rate design.

5 Docket UW Staff/00 Ball/ Q. PLEASE PROVIDE A SUMMARY OF REVENUE REQUIREMENT AND RATES BASED ON THE STIPULATED RATE DESIGN? A. The following table highlights the stipulated revenue requirements of $,, for non-golf course operations, and $, for golf course operations. Table Summary of Revenue Requirement Revenue Requirement Percent Increase Over Test Year Revenue Non-Golf Course (Test Year = $,0,0) Company $,,.9% Staff Analysis $,9,9.99% Stipulated $,,.% Golf Course (Test Year = $,0) Company $,90.0% Staff Analysis $,0.99% Stipulated $, 9.9% 9 0 The Staff analysis and the stipulated revenues differ due to several adjustments made at the December 0, 00, settlement conference. Upon receiving clarifying explanations and supporting documentation, Staff made corrections to its wages and salaries calculation, revised the amortization period of legal expenses, and also made changes to rate base. The corrections to wages and salaries include revising the amount of capitalized labor during the test period as well as accounting for pay raises for employees who obtained additional job certifications during 00. The amortization of legal expenses was revised to reflect a year amortization of legal costs associated with a snow removal case (UCB 0, Commission Order

6 Docket UW Staff/00 Ball/ 9 0 No. 0-0) rather than the year amortization originally proposed. For rate base, Staff adjusted the original rate base calculation to include inventory, and 00 capital addition amounts that were mistakenly left out of the original filing, and also to revise the allocations of certain plant items. Additionally, Staff and the Company agreed on three modifications to the company s proposed tariffs and rules. These include, removing the language from Rule which refers to the placing of a lien of personal property, updating the interest rate shown in Schedule, and adding language to Schedule to clarify that multifamily hookups will be charged at the lowest base rate times the number of dwellings, plus consumption. The following table highlights the stipulated monthly base rates as well as the associated commodity rates. Table Stipulated Rates Base Rate Commodity Rate Residential, Multifamily, Commercial, and Irrigation Customers / & / $0. $.9 per,000 gal $. $.9 per,000 gal. $. $.9 per,000 gal $. $.9 per,000 gal $. $.9 per,000 gal $. $.9 per,000 gal Flat Rate $9.9 Golf Course $,99. $0. per,000 gal Q. HAVE CUSTOMERS EXPRESSED CONCERNS WITH STAFF? A. Yes. At the November, 00, Open House/Prehearing Conference customers expressed the following concerns: Rate of Return and Net Income;

7 Docket UW Staff/00 Ball/ Timing of Rate Case and Proposed Percentage Increase; and Golf Course Rates; These issues will be discussed later in testimony under Issue, Customer Concerns. Q. DID YOU PREPARE AN EXHIBIT FOR THIS DOCKET? A. Yes. Exhibit Staff/0 contains the following five documents: Revenue Requirement Staff/0, page - Summary of Adjustments Staff/0, page - Plant and Depreciation Staff/0, page Revenue Sensitive Costs Staff/0, page Residential, Multifamily, Commercial, and Irrigation Rate Design Staff/0, page Golf Course Rate Design Staff/0, page Q. HOW IS YOUR TESTIMONY ORGANIZED? A. My testimony is organized as follows: Issue, Description and Regulatory History of Sunriver... Issue, Summary of Sunriver's Rate Application Issue, Staff s Analysis of Sunriver's Filing..... Issue, Customer Concerns... Issue, Summary of the Stipulation... ISSUE, DESCRIPTION AND REGULATORY HISTORY OF SUNRIVER Q. PLEASE DESCRIBE SUNRIVER S WATER COMPANY. A. Sunriver is an investor-owned water utility in Sunriver, Oregon, which provides water service to roughly,000 residential customers, commercial customers, irrigation customers, and three golf courses. The system was originally constructed in 9 and began providing water service in 99. Sunriver is owned by Sunriver Resort LLP.

8 Docket UW Staff/00 Ball/ Q. PLEASE PROVIDE A SUMMARY OF SUNRIVER S REGULTORY HISTORY WITH THE COMMISSION. A. Sunriver s last rate case was UW, which resulted in an overall increase in revenues of. percent for residential, commercial, irrigation, and flat rate customers and. percent for golf course customers. The final order in the docket, Order No. 0-, was issued on December, 00. ISSUE, SUMMARY OF SUNRIVER S RATE APPLICATION Q. PLEASE DESCRIBE SUNRIVER S RATE PROPOSAL AS FILED IN ITS APPLICATION. A. The Company filed tariffs on September, 00, requesting to increase annual revenues by $,. According to Sunriver, its request represented an increase of percent above the Company s -month revenues ending December, 009. Additionally, the Company requested a rate of return of 0 percent on rate base. The Company calculated that average residential customer rates would increase from $. to $0., average commercial rates would increase from $.0 to $., average irrigation rates would increase from $. to $0., and average golf course rates would change from $,. (for months) to $,. (for months). According to the Company, Sunriver requires a rate increase because of rising annual inflationary costs, increased investment in plant assets, and not meeting its authorized rate of return during 009.

9 Docket UW Staff/00 Ball/ ISSUE, STAFF S ANALYSIS OF SUNRIVER S FILING Q. PLEASE DESCRIBE THE RESULTS OF YOUR ANALYSIS OF SUNRIVER S FILING. A. My initial review of the Application indicated that Sunriver should collect $,9,9 in revenues from non-golf course operations, and $,0 from golf course operations. Additionally, my analysis resulted in total revenue deductions for non-golf operations of $,09,9 and $9,9 for golf operations, resulting in net income of $09,9 and $,09, respectively. As a result of additional information presented at the December 0, 00, settlement conference, I updated my analysis to show $,, and $, in revenue requirement and total revenue deductions of $,,0 and $9, resulting in net income of $0,0 and $,90, respectively. Q. PLEASE EXPLAIN WHY THE REVENUES, REVENUE DEDUCTIONS, AND NET INCOME FOR NON-GOLF AND GOLF COURSE OPERATIONS ARE STATED SEPERATELY. A. As established in UW, there is a separate revenue requirement calculation performed for non-golf course operations and for golf course operations. The reason for separating the two was that Well # contains contaminants causing the water to have a green tint. These contaminants include materials such as iron and manganese that, according to the EPA, do not represent a health hazard but do cause the appearance of the water to be offensive. As a result, during UW, Well # was separated from the residential water system and is used exclusively for golf course irrigation and is the basis of the dual revenue

10 Docket UW Staff/00 Ball/ 9 0 requirements for this water system. These two revenue requirements are separated based on direct and allocated plant and expenses. Q. PLEASE EXPLAIN IN MORE DETAIL HOW SHARRED EXPENSES ARE ALLOCATED BETWEEN THE GOLF COURSE AND NON-GOLF COURSE REVENUE REQUIREMENTS. A. Staff used the three allocations which were developed in UW (see UW, Staff/00, Dougherty -). These consist of direct billing when possible, a meter allocation (99.9% non-golf and 0.0% golf) for billing functions, and a -factor allocation (9.% non-golf and.% golf) for determining management and other non-billing functions. Q. PLEASE EXPLAIN THE DIFFERENCE BETWEEN THE COMPANY S PROPOSED RATE BASE AND YOUR RATE BASE RESULTS. A. A comparison of the Company s proposed rate base and my calculated rate base is shown in Table below. Table Rate Base Comparison Utility Plant In Service Depreciation Reserve Net Utility Plant Working Cash Total Rate Base Non-Golf Sunriver Proposed $,,099 $,09,9 $,,0 $, $,0, Staff s Proposed $,00,9 $,90, $,, $,0 $,09, Stipulated $,0, $,99,90 $,09,9 $, $,,99 Golf Sunriver Proposed $0,9 $,9 $9, $,99 $0, Staff s Proposed $, $, $, $, $9, Stipulated $9,9 $9,9 $90, $, $9,

11 Docket UW Staff/00 Ball/ Staff made several adjustments to the rate base proposed by Sunriver in its original filing. These include plant life/basis adjustments, adjustments to allocations of plant items between the water and sewer systems, adjustments to capitalize items which were mistakenly expensed during the test period, and adjustments to include items in rate base which were mistakenly omitted from the original filing. Staff made adjustments to true up between the forecasted and actual amounts for new plant placed into service and also identified a pickup which was included in rate base at the total purchase price rather than net of insurance proceeds which were used to offset the purchase. In examining the company s rate base, Staff also identified items such as billing software, computer equipment, GSI mapping software, and a snow blower which are used jointly by the water and sewer companies, but allocated solely to the water system. The plant allocations of the identified items were adjusted to ensure that water customers only pay their portion of the items and that they do not subsidize expenses of the sewer system. Rate base was also adjusted to appropriately capitalize the purchase of computer equipment as well as amounts associated with capital projects. Staff removed these items from the expense accounts and capitalized, which resulted in an increase to rate base. Additionally, at the settlement conference rate base was increased for inventory of $0, which was not included in the

12 Docket UW Staff/00 Ball/ original filing as well as $0, in new plant items which were placed in service during 00. Working cash ($, and $,) was calculated as / of the total operating expenses. Q. WHAT DO YOU RECOMMEND AS A RATE OF RETURN ON THE COMPANY S RATE BASE? A. I recommended, and the stipulating parties agreed to, a rate of return (ROR) of 9.0 percent. Staff s recommendation is based on a 0 percent return on equity (ROE), subject to a 0 basis point (0. percent) reduction due to Sunriver maintaining a capital structure consisting of 00 percent equity and 0 percent debt. Staff is aware of customer concerns that an assigned return on equity (ROR) of 9.0 percent is high during these economical times. However, Staff routinely recommends a 0 percent ROE in water rate cases and this is equivalent or lower than authorized ROE in recent energy rate cases. In Order 0- at, the Commission stated: In the typical case, we balance the interests of ratepayers and investors in setting the return on equity at a rate that is: a) commensurate with the return on investments in other enterprises having corresponding risks; and b) sufficient to ensure confidence in the financial integrity of the utility, allowing the utility to maintain its credit and attract capital. (ORS.00). Because small water utilities do not have the same access to capital as large energy utilities, normally have small reserves due to cash flow, and have substantial costs related to infrastructure improvements, it is important that

13 Docket UW Staff/00 Ball/ Sunriver receives an adequate authorized rate of return to encourage future investment in order to provide adequate service at fair and reasonable rates. When multiplying the ROR of 9.0 percent to a rate base of $,09,9 and $9,, the recommended net income is $0,0 for non-golf course operations, and $,90 for golf course operations. Q. PLEASE EXPLAIN THE STIPULATED ADJUSTMENTS TO THE COMPANY S PROPOSAL. A. The stipulated adjustments are shown in Staff/0, Ball/-. During my analysis, I made several adjustments to Sunriver s forecasted 0 expenses. The following is a brief explanation of significant adjustments. Miscellaneous Revenues Test period miscellaneous revenues were increased by $,9 to reflect additional revenue amounts which were mistakenly not included in the original rate case filing. Salaries and Wages Sunriver had allocated its two current office assistant positions 90 percent to the water system and the remaining 0 percent to the sewer system. Upon reviewing the daily task of each employee, Staff revised the current water allocation of these employees from 90 percent to percent. In its forecasted 0 salaries and wages expense, Sunriver included an adjustment for two new employees, a new GIS/Map Tech and a new Office Assistant/Clerk. While Staff is satisfied that there is a need for both of the new employee s, Staff made adjustments to allocate the new GIS/Map Tech

14 Docket UW Staff/00 Ball/ percent to the water system and the Office Assistant/Clerk 0 percent to the water system. Additionally, as a result of the new employee s Sunriver is not expected to incur overtime labor at the same level as was paid during the base period. Staff adjusted the base period accordingly. Staff also made an adjustment removed 0 percent of managements bonus/incentive pay. Payroll Tax Upon arriving at an adjusted salaries and wage expense, Staff recalculated payroll taxes to allow the company to properly recover Social Security tax, Medicare tax, and state and federal unemployment taxes associated with the salaries and wage expense attributable to the water system. Postage In conjunction with the new Office Assistant/Clerk position, Sunriver will no longer outsource its mailing services. As a result, Staff made an adjustment to reduce Sunriver s postage expense by $,9 to reflect these cost savings. Contract Svcs - Legal Over the course of several years leading up to the rate case, Sunriver was in a legal dispute concerning the clearing of snow from fire hydrants (UCB 0, Commission Order No. 0-0). These fees totaled in excess of $0,000, a large portion of which were incurred during the 009 test period. As part of the stipulation, Staff and the Company agreed to amortize $,9 in legal expenses over a period of four years equaling $0, per year.

15 Docket UW Staff/00 Ball/ Contract Svcs Elec/Mechanical and Computer/Electronic Expenses In reviewing the individual expense items booked to these accounts, Staff identified several items which were either associated with capital projects, or were in themselves capital expenditures. Staff made adjustments to remove these items from expense accounts and to capitalize them as a component of rate base. This reduced Sunriver s forecasted Contract Svs Elec/Mechanical expense by $, and reduced the forecasted Computer/Electronic expense by $,. General Liability and Workers Compensation Insurance Staff made adjustments to reduce the company s forecasted general liability and workers compensation insurance expenses by $, and $,9, respectively. These adjustments were based on a review of the actual policy documents and reflect an appropriate allocation of the expenses between the water and sewer companies. ISSUE, CUSTOMER CONCERNS Q. PLEASE LIST THE CUSTOMER CONCERNS THAT WERE BROUGHT TO YOUR ATTENTION AT THE NOVEMBER, 00, OPEN HOUSE/PREHEARING CONFERENCE AND THROUGHOUT THE RATE CASE PROCESS. A. The following highlights customer concerns and Staff s responses to these concerns:

16 Docket UW Staff/00 Ball/ Rate of Return and Net Income Customers expressed concern about the Company s rate of return, and the resulting net income, given the current economic climate. Staff explained that the Company has the opportunity to earn a return on its investment that is consummate to similar utilities. It was also explained that it is beneficial to have financially sound utility which earns an adequate rate of return to fund future improvements to the utility. The stipulating parties agree that the stipulated 9.0 percent rate of return is fair and reasonable. Timing of Rate Case and Proposed Percentage Increase At the Open House and through written correspondence, customers voiced concerns regarding what they viewed as a significant percentage increase to their rates during tough economic times. At the Open House, Staff explained that it would do a thorough review of the rate application to ensure that customers do not receive an unjustified rate hike. However, it was also explained that the utility has a right to recover its costs, and that if costs are increasing rate relief may be justified in order for the utility to recover such costs. As shown in table below, the stipulating parties agreed to rates which are approximately percent lower than those originally requested by Sunriver. Additionally, over four years have passed since Sunriver last rate increase, which was effective January, 00.

17 Docket UW Staff/00 Ball/ Golf Course Rates Another major concern of customer s was the appearance that the golf course was receiving a substantial rate decrease, while all other customer classes were receiving rate increases. With the water company and golf course s having the same ultimate owner, this was an issue that was carefully examined by Staff and discussed in detail at the open house. In UW (Sunriver s last rate case) golf course rates were set using a forecasted annual consumption of roughly million gallons. Using this figure, the stipulated consumption charge was set at $0. per,000 gallons. This forecast proved to be extremely low, and during 009 the golf course users consumed roughly million gallons, over double the amount on which rates were set. As a result, golf course customers paid significant consumption charges which inflated the test period revenues as well as the current golf course average rates. Additionally, the stipulated golf course rates are calculated based upon moving from month billing cycle (the irrigation season) to a month billing cycle. In the past, golf course customers only paid the base rate plus consumption charges during the moth irrigation season. The stipulated agreement would move the golf course to a month billing cycle where even if no water was pumped during the month non-irrigation season, they would still pay the base rate. As shown in table below, the stipulated agreements will increase the golf course rates by roughly. percent annually.

18 Docket UW Staff/00 Ball/ 9 0 ISSUE, SUMMARY OF THE STIPULATION Q. PLEASE DESCRIBE THE REVENUE REQUIREMENT STIPULATED TO BY THE STIPULATING PARTIES. A. The Stipulating Parties agreed to a. percent increase over the 009 revenue requirement for non-golf operations and a 9.9 percent increase for golf course operations. These increases result in a revenue requirement of $,, for non-golf operations and $, for $9, for golf operations. Q. PLEASE DESCRIBE THE STIPULATED RATE DESIGN. A. As discussed above, the stipulated rate design includes separate cost of service calculations for non-golf course operations and for golf course operations. With the exception of flat rate customers, all customer classes will be charged a monthly base rate, plus a consumption charge. Q. PLEASE COMPARE THE CURRENT, AND STIPULATED RATES. A. A summary of the rates is shown in Table below. Table - Summary of Rates Current Monthly Base Rate Sunriver Proposed Monthly Base Rate Stipulated Monthly Base Rate Residential, Multifamily, Commercial, and Irrigation / & / $9. $. $0. $.0 $.09 $.. $.0 $.9 $. $. $0.90 $. $9.0 $9. $. $.0 $.90 $. Flat Rate $. $.0 $9.9 Variable Rate per,000 Gals $.0 $. $.9

19 Docket UW Staff/00 Ball/ Golf Course $,99. $,99. $,99. Variable Rate per,000 Gals $0. $0.0 $. The following table highlights the differences in average rates. Table - Summary of Rates Average Current Rates Sunriver Proposed Average Rates Sunriver Proposed Percent Increase/ Decrease Stipulated Average Rates Percent Increase Current - Stipulated Residential / & / $. $0. 0.9% $.00.% $. $. 0.9% $.9.%. $9. $0. 9.% $.0.% Commerci al / & / $.0 $. 0.% $9.9.09% $.0 $. 0.% $0..%. $. $0.9 0.% $.0.% $.9 $.9 9.9% $..% $0. $9.0.% $9.9.% $. $..9% $.0.0% Irrigation / & / $. $.9.% $.9.% $. $. 9.% $0.9 0.%. $.0 $..% $..% $. $0..% $.90.0% $. $..9% $0.9.% Flat Rate $. $.0.% $9.9.% Golf Course $,. (-month) $,. (-Month) 0.9% (annualized) $,9.9 (-Month) Q. ARE THE RESULTING RATES FAIR AND REASONABLE? A. Yes..% (annualized) Q. DID THE PARTIES STIPULATE TO AN EFFECTIVE DATE FOR THE NEW RATES? Current golf course rates are based on months of service, while under the stipulation rates will be based on months of service.

20 Docket UW Staff/00 Ball/ 9 0 A. Yes. The participating parties support an effective date of April, 0, for the stipulated rates. Q. DID THE PARTIES AGREE TO ANY OTHER PROVISIONS THAT ARE INCLUDED IN THE STIPULATION? A. Yes. The parties agreed that irrigation and golf course users will be billed base rate charges each month ( months per year) and that commodity charges will be billed for the month after usage occurs. Q. WHAT IS YOUR RECOMMENDATION REGARDING THE STIPULATION? A. Staff recommends the Commission admit the Stipulation into the UW record and adopt the Stipulation in its entirety. The Stipulation calls for rates to be effective April, 0. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes.

21 CASE: UW WITNESS: Dustin Ball PUBLIC UTILITY COMMISSION OF OREGON STAFF EXHIBIT 0 Witness Qualifications Statement February, 0

23 CASE: UW WITNESS: Dustin Ball PUBLIC UTILITY COMMISSION OF OREGON STAFF EXHIBIT 0 Exhibits in Support of Testimony February, 0

33 UW Service List (Parties) PUBLIC UTILITY COMMISSION DUSTIN BALL PO BOX SALEM OR 90- PUC STAFF--DEPARTMENT OF JUSTICE JASON W JONES ASSISTANT ATTORNEY GENERAL BUSINESS ACTIVITIES SECTION COURT ST NE SALEM OR jason.w.jones@state.or.us SUNRIVER WATER LLC TERRY D PENHOLLOW VICE PRESIDENT P.O. BOX 99 SUNRIVER OR 90 tpenhollow@sunriver-resort.com THOMAS SAMWEL PO BOX 09 SUNRIVER OR 90 tsamwel@sunriver-resort.com

Oregon John A. Kitzhaber, MD, Governor

Oregon John A. Kitzhaber, MD, Governor October 0, 0 Public Utility Commission 0 Fairview Industrial Dr. SE Salem, OR 0 Mailing Address: PO Box 0 Salem, OR 0-0 Consumer Services -00--0 Local: (0) -00 Administrative