VIII. Remaining Issues

In this investigation we stated we would determine whether:

· The terms and conditions of Union Pacific's service are just and reasonable;

· Union Pacific should file tariffs for furnishing water; and

· Union Pacific's abandonment of service would be in the public interest.

A. Water Rate

Union Pacific currently charges customers $4.00 per thousand gallons of water used. Union Pacific requests that the Commission establish a new rate of $21.42 per thousand gallons. ORA proposes a rate of $11.80 per thousand gallons for residential customers.

Union Pacific determined its total costs as follows:

Operating Costs	$152,752
Depreciation	$20,543
Return on Capital (9%)	$55,468
TOTAL COST	$228,763

1. Operating Cost

Union Pacific used 1999 recorded costs of $152,752 to determine its operating costs. For comparison purposes, Union Pacific provided incomplete cost data for 1997 and 1998 as well as eleven months of recorded cost information ($149,750) for 2000. Union Pacific broke down its operating costs into 10 cost categories and provided background description for such costs. (Appendix B summarizes Union Pacific's costs from 1997 through November 2000.)

ORA challenges Union Pacific's request of approximately $34,000 for water-hauling costs. ORA believes that higher rates will encourage conservation and eliminate the need for water-hauling. In cross-examination, ORA's witness clarified that it did not claim that any of Union Pacific's other operating costs were unreasonable or unnecessary.

We will reject Union Pacific's proposed water-hauling costs. We agree with ORA that a rate increase should promote conservation. Further, in 2000 Union Pacific's water-hauling costs showed a steep declining trend from the costs incurred in 1999. Thus, for ratemaking purposes we will reduce Union Pacific's proposed operating costs by $34,698 to $118,054.

2. Depreciation and Return on Capital

Union Pacific reports $616,313 in capital expenditures incurred in 1997 and 2000. In 1997, Union Pacific asserts it incurred capital improvement costs of $609,226 for replacement of a water line from its storage tank to customer meters. In 2000, Union Pacific states it incurred capital improvement costs of $7,087 for replacement of a water line over Three Peaks Ranch.

Union Pacific also asserts that it made these capital expenditures to bring the water system into compliance with DHS requirements and address the deteriorating condition of 100 year old line. Union Pacific provided a letter from DHS concerning the water line that was the subject of the year 2000 improvement. The letter confirms a conversation with a property owner (not Union Pacific) and primarily emphasizes health issues over drinking water quality.

ORA acknowledges that replacement of the water line in 1997 may have improved the quality of the water by reducing iron content. However, ORA contends that capital expenditures should be disallowed because the railroad benefited from the improvement. In cross-examination, the ORA witness acknowledged that the line was over a hundred years old and also admitted to having no knowledge as to the condition of the line that was replaced. Further, the ORA witness testified that he had no basis or facts to challenge the necessity of the capital expenditure. At hearing, the following questioning of ORA's witness took place concerning Union Pacific's 1997 capital expenditure for replacing a line:

Q What is the basis for your testimony that this cost represents a benefit to the operation of the railroad, so that it should be borne exclusively by Union Pacific?

A [T]he water system is a high-expense system. And any improvement to the lines or - would have to be a reasonable and prudent change in the lines. And at this point - at that time - at that time of the report, prior to the report, even if it was an old line, I believe that the line could have served the people of the community.

Q Were you aware of how old the water line was?

A Not a specific age, no.

Q Do you have an understanding that that water line was over 100 years old?

A Looking at the dates, yes.

Q Do you have an understanding as to the condition of that water line?

A No.

[Objection Omitted]

Q Are there any other facts that form the basis of your opinion in Paragraph 4.6 of Exhibit 1 that cost versus benefit represents a benefit to the operation of the railroad, such that the railroad should bear the total cost?

A No.

Q So the sum and substance of that testimony is that, one, this is a highly expensive water system to operate, and two, any improvement would have had to have been reasonable?

A Not any improvement; necessary improvements.

Q Any necessary improvements would have had to have been reasonable. Do you have any factual basis today to claim that this was not a necessary expense?

A Not that the railroad has provided me.

Q Has anyone else provided you -

A No.

Q Do you have any facts as you sit here today to support your contention that it was not a reasonable expense?

A No.

Q And just so I understand your prior response regarding the necessity of the improvement, you have no facts to indicate that this was not a necessary improvement, correct?

A That's correct.

Although, ORA and several other parties opposed Union Pacific's capital expenditures as possibly too expensive and not in line with costs incurred by other similar size utilities, no specific facts were offered to challenge the necessity or reasonableness of Union Pacific's capital expenditures. The record supports a finding that Union Pacific's capital expenditures of $609,226 were necessary and reasonable.

Union Pacific appears to use a 30 year life for its capital expenditures and thus calculates an annual depreciation expense of $20,543, which appears reasonable.

Union Pacific uses a return of 9% and calculates an annual return on capital of $55,468. No party challenged Union Pacific's return on capital. Union Pacific's 9% return of $55,468 appears reasonable.

3. Water Consumption

Union Pacific projected water consumption of 10,680,854 gallons for year 2000.⁶ However, Union Pacific contends in its initial testimony (exhibit 3) that water consumption should be adjusted in calculating rates to account for the fact that one customer, the Edwards Family (which owns the Three Peaks Ranch), receives approximately 48,000 gallons of free water per month. Further, Union Pacific believes water consumption should be adjusted if the Commission finds that Union Pacific is not obligated to serve particular customers.

ORA established during cross-examination of Union Pacific's witness, Mr. Lyon, that Union Pacific provided free water to customer Edwards in exchange for the railroad having access across the Edwards property. Lyon testified during ORA's cross-examination that such access provides a benefit to the railroad by giving it access to railroad property that the railroad may not be able to get to on its own right-of-way roads. Lyon testified that the water system might also benefit because "a piece of the water line" goes across the Edwards property and serves two customers, including Edwards.

Union Pacific clearly benefits from providing free water to Edwards. Union Pacific admits use of a right-of-way for its own railroad operations. Union Pacific's claim that the customers of the water system benefit from giving

free water to Edwards is not persuasive. Union Pacific's lack of detail on the necessity of running a line on the Edward's property in order to serve the Cummings Ranch is not persuasive. The situation is analogous to the railroad bartering water for a service or benefit. To the extent Edwards takes water from the Keene Water System, Union Pacific should pay for the cost of such water since it receives a benefit from Edwards.

We will use Union Pacific's projected consumption of 10,680,854 gallons in 2000 to establish water rates.

4. Water Rates

Based on the following costs:

Operating Cost	$118,054
Depreciation	$20,543
Return on Capital (9%)	$55,468
TOTAL COST	$194,065

and water consumption of 10,680,854 gallons per year, we authorize Union Pacific to file tariffs to establish interim water rates of $18.17 per thousand gallons, which will be subject to refund pending Union Pacific's next general rate case for the Keene Water System.

B. Abandonment of Service

Although we stated in the OII we would consider abandonment of service, Union Pacific did not submit sufficient testimony to address the impact on customers from abandonment. Union Pacific may file an application to transfer the system.