BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION PREPARED TESTIMONY DON MALONE PUBLIC UTILITY AUDITOR ON BEHALF OF THE STAFF OF THE

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Jennifer Cross
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1 APR AM '00 BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE ) UNBUNDLING OF THE RATES ) OF WOODRUFF ELECTRIC 1 COOPERATIVE CORPORATION ) DOCKET NO U PREPARED TESTIMONY OF DON MALONE PUBLIC UTILITY AUDITOR ON BEHALF OF THE STAFF OF THE ARKANSAS PUBLIC SERVICE COMMISSION APRIL 28,2000

2 Pglof7 1 Q. Please state your name and business address. 2 A. My name is Don Malone. My business address is P.O. Box 00, Little Rock, Arkansas Q. By whom are you employed and what is your position? A. I am employed by the Arkansas Public Service Commission as a staff public utility 6 auditor. 7 TRAINING AND EXPERIENCE 8 Q. Please describe your educational background and professional experience. 9 A. I am a graduate of Arkansas State University with Bachelor of Science degrees in 10 accounting and finance. I am a Certified Public Accountant licensed to practice in the 11 State of Arkansas. To maintain my license I complete forty hours of continuing 12 professional education annually of audit, tax, general accounting, and computer 1 technology course work. Prior to joining the staff I held corporate, controller, cost analyst, and staff positions in manufacturing, cellular phone service, and public 15 accounting companies. 16 PURPOSE OF TESTIMONY 17 Q. What is the purpose of your testimony in this docket? A. I am presenting testimony in support of the operating expense adjustments made by Staff in this docket. These adjustments are shown in Staff Exhibit JH-5.

3 Pg2of7 1 SUMMARY OF ADJUSTMENTS TO OPERATING EXPENSE 2 Q. Please explain the pro forma adjustments to wages and salaries expense. 3 A. The fbnctionalized adjustments to the test year payroll expenses are shown in Exhibit JH-5, numbers IS-3(A), IS-(A), IS-S(A), IS-6(A), IS-7(A), and IS-S(A). The total of these adjustments increased payroll expense by $89,063. Payroll consists of wages, salaries, and bonuses paid to full and part time employees of the Company. Payroll was projected based on the the employees pro forma 99 hourly wage rate or salary, annualized straight time hours, and a four year average of overtime earnings. The difference between actual test year 98 payroll and the pro forma payroll equals the total payroll adjustment. Test year 98 payroll distribution percentages by account were used to distribute the pro forma payroll adjustment to the functional classes and capital accounts. Q. Did Staff use the same methods as the Company in calculating pro forma payroll adjustment? A. Staffs methodology differed from the Company s payroll calculation in that Staff based the pro forma payroll on the normal available straight time work hours per employee as opposed to the 98 actual hours worked and a four year average was used to calculate overtime requirements as opposed to 98 actual overtime. Staff and the Company used the same number of employees and the associated pro forma 20 pay rates in the calculations of pro forma payroll.

4 Pg3of7 1 Q. Please explain the adjustments to employee benefits expense. 2 A. The adjustments to employee benefits are shown in Exhibit JH-5 numbers IS-(E),(F), (G); IS-5(E),(F),(G); IS-6(E),(F),(G); IS-7(E),(F),(G); and IS-S(E),(F),(G). The total adjustment amount is an increase of $100,725 to expenses. Employee benefits offered by the Company include family medical insurance, employee life insurance, employee long term disability insurance, employee accidental death and dismemberment insurance, 01-(k) savings plan, and a retirement plan. Directors and attorneys of the Company are offered medical, life, & ADD insurance benefits at the same rates as full time employees. 01-(k) Savings Plan: The plan requires the employee to contribute 1% of base wages in order to receive a 3% of base pay contribution from the Company. A July 99 employee participation listing was used to project the employees that were eligible for the 3% company contribution. The adjustment is an increase of $10,9 16 to expenses. NRECA Retirement Pension Plan: The retirement plan is fully funded and has not required a full annual contribution for the last five years. The March 99 NRECA Benefits Bulletin stated that the required contributions to the fund for the pro forma year would be the equivalent of ten full months, or 83 YO. Therefore, Staff used 83 YO of a full annual contribution rate to calculate the required contribution by the Company to the retirement plan for the pro forma year. The adjustment is an increase of $93,355 to retirement plan expenses. Staffs methods differed from the Company s in that the Company used a 100 % contribution rate for the pro forma year.

5 Pgof Grow Insurance: The Company provides each full time employee, director, & attorney medical insurance at no cost. Family medical insurance is also offered to employees, directors, & attorney, but the cost of family coverage is split equally between the insured and Company. A July 99 group insurance vendor invoice was used to determine, by employee, the distribution between family and single coverage. This distribution was then used to calculate the total cost of medical insurance expense of the Company for the pro forma year. Staffs methodology differed from the Company s medical insurance calculation in that Staff calculated the expense by employee whereas the Company used a monthly cost and projected it to the entire year. The adjustment amount is a decrease of $3,56 to group insurance expenses. Staff believes these adjustments clearly reflect payroll and benefit costs due to known changes in the number of employees and the related base payroll and salary amounts. Q. Please explain the adjustment to post-retirement benefits accrual. A. Staff made adjustments IS-(H), IS-S(H), IS-6(H), IS-7(H), & IS-8(H) associated with WECC accounting for post-retirement benefits other than pensions in accordance with the Statement of Financial Standards No. 106 (FAS 106). Briefly, the statement requires Companies to record a liability to recognize the future cost of insurance benefits offered to employees after they retire. The amount of the liability is actuarially determined and is accrued annually by a Company. FAS 106 does not require a Company to 20 fund the accrued cost of benefits and, accordingly, WECC has not funded the obligation.

6 Pg5of However, in order to include those expenses in rates, the Commission s Order No. 2 of Docket No U requires that a Company either externally fund the obligation or submit a proposed hnding plan for Commission review and approval prior to including FAS 106 costs in rates. WECC has not submitted such a plan and 5 does not intend to externally fund the obligation. Therefore, Staff has excluded the 6 7 $20,9 15 FAS 106 accrual for the pro forma year. Q. Please discuss the adjustments concerning advertising, dues, donations, and other 8 expenditures. 9 A. Adjustments were made to remove certain advertising, dues, donations, and other 10 expenditures from the pro forma year. Staff adjustments IS-7(J) and IS-S(J) 11 decreased advertising expense in the amount of $56,178 for the pro forma year. These 12 two adjustments are primarily concerned with image advertising and Rural Arkansas Magazine expenditures. Dues, donations, and certain other expenditures were also 1 identified and removed during the audit process. Other expenditures adjusted for 15 the pro forma year included payments to civic clubs, chamber of commerce dues, 16 tickets to community functions, employee gifts, certain meals, donations, and dues 17 to various organizations. Staff adjustment IS-S(K) decreased expenses for dues, donations, and other expenditures in the amount of $7,62 for the pro forma year. Q. Explain Staffs adjustments regarding property and liability insurance expense. 20 A. Staff adjustments to property and liability insurance are based on the difference

7 Pg6of7 1 between 98 and 99 actual premiums paid and expensed. The "All Risk Blanket" 3 policy premiums increased and the "Electromagnetic Field Liability" policy premiums decreased, resulting in a $2,31 pro forma year insurance premium expense increase 5 as shown in adjustments IS-3(C), IS-(1), IS-5(1), IS-6(1), IS-7(1), and IS-8(1). 6 Q. Did Staff make any adjustments with regard to regulatory expenses? 7 A. Yes. The annual utility regulatory assessment adjustment was calculated based on the 98 test year assessment factor applied to pro forma year revenues. Adjustment IS-8(L) increases the utility regulatory assessment $17,80 for the pro forma year. Q. Please explain the uncollectible accounts adjustment. A. Adjustment IS6-(J), in the amount of $82,9, is the uncollectible accounts adjustment. The uncollectible accounts adjustment was calculated based on the uncollectible customer accounts actually written-off for the five year period ending December 98 expressed as a percentage of total revenues for this five year period. The uncollectible percentage is then applied to pro forma year operating revenues to arrive at pro forma uncollectible customer accounts expense. Staff agreed with the calculation of uncollectible expense as provided by the company. Q. Please explain the adjustment to G&A expense for power use associated with the Company's office usage.

8 Pg7of7 1 A. Adjustment IS-S(M) in the amount of $,527 was made by the Company to 2 remove the cost of power from G&A expenses and add it to wholesale power expense 3 for the pro forma year. Staff reviewed and agreed with the amount of the adjustment. Q. Does this conclude your testimony at this time? 5 A. Yes.

9 CERTIFICATE OF SERVICE I, Jan Sanders, hereby certify that a copy of the foregoing Testimony has been served on all parties of record by forwarding the same by first-class mail, postage prepaid, this fl day of April, Sgcretary of the Commission

BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION ) OF LIBERTY UTILITIES (PINE BLUFF WATER), ) INC. FOR GENERAL CHANGE OR ) MODIFICATION IN RATES, CHARGES, AND ) TARIFFS )