29104.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF MORNING VIEW WATER CO., INC. TO REVISE AND INCREASE RATES CHARGED FOR WATER SERVICE )
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CASE NO. MNV-W-02-1

ORDER NO. 29104

Application
On April 26, 2002, Nolan Gneiting, President of Morning View Water Co, Inc. (Morning View; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting authority to increase rates for water service by $30 a month, an increase of 136%. Current authorized tariff rates for Morning View are a $22 per month flat-fee plus a public drinking water fee of $6.67 per year. Base rates have not been changed since June 21, 1990. The Company alleges that its fees and expenses have increased and includes three years of accounting data with its Application. Morning View provides water service to 56 customers. The Company-proposed effective date of June 1, 2002 was suspended by Commission Order No. 29027.
In this Order the Commission approves an annual revenue requirement of $21,212 (a 43% increase) and a flat rate design based on lot size, i.e., 1/4 acre $22.00 per month; 1/2 acre $28.85 per month; 1 acre $35.70 per month. The Commission also approves an additional $5.00 per month customer surcharge to fund a contingency reserve account. The reserve account will assure more reliable service for customers by providing a fund for future unanticipated major repairs. It may also be used to retire an outstanding amount owed for well repair. We further approve in this Order an amended certificated area conforming with the Company’s existing area of service.
Staff Investigative Report and Comments
On May 15, 2002, the Commission issued Notices of Application and Modified Procedure in Case No. MNV-W-02-1. The deadline for filing written comments was June 5, 2002. On May 31, 2002, the Company, by way of Amended Application, filed a letter requesting that its Certificate of Public Convenience and Necessity No. 314 be amended to include all areas presently served. Reference Commission Rules of Procedure, IDAPA 31.01.01.112.
Comments on the Company’s proposal to revise and increase rates and amend its Certificate were filed by Commission Staff and a number of the Company’s customers. The comments can be summarized as follows:
Commission Staff – Investigative Report and Recommendations
Based on its investigation, Staff recommends that an annual revenue requirement of $22,028 be approved for Morning View Water. This equates to an increase in pro forma gross revenues of 49% or $7,244. In developing its recommendation, Staff annualized and normalized certain items such as revenue, water testing expense, etc. and provided for expenses not actually incurred but reasonable such as a management allowance of $4,160 and a maintenance allowance of $2,496. Based on its analysis of seasonal water usage, Staff recommends that the monthly rates for Morning View Water be established by lot size as follows:
Lot Size No. of Customers Monthly Rate 1/4 Acre 2 $22.00 1/2 Acre 30 $29.75 1 Acre 24 $37.50
Staff notes that Morning View Water has not filed an annual report with the Commission since 1991. Mr. Gneiting owns three separate business entities. (1) Morning View Water Co. (utility), (2) Morning View Homes (real estate company), and (3) LandCo Building and Development Co. (land development and home construction). Staff states that Mr. Gneiting does not adequately segregate his various business activities and accounts. In the course of its investigation, Staff discovered that the Certificate issued to Morning View has a typographical error identifying the service territory to be within Section 30, Township 4 North, Range 38 East. The Range is incorrect and should be 39 East. Staff also learned that the water system has expanded beyond the service area approved by the Commission. On May 31, 2002, the Company filed a letter requesting a revision to its Certificate to include the expansion area. Reference IDAPA 31.01.01.112.
In its comments Staff includes an analysis of the Company’s results of operations, rate base, depreciation, revenue requirement, rates and system design. Staff adjustments include items that should be capitalized as investment rather than expensed, personal expenses of the owner, expenses that should be shared with other business entities, and property taxes. The rate base recommended by Staff is $6,373.66. The depreciation expense on these assets is $596.79 annually. A 12% return on the rate base produces a return requirement of $764.84. The tax gross-up on the return results in a pre-tax requirement of $978.99. The pro forma 2001 operating expenses of $20,452.24 and the depreciation expense of $596.79 are added to the return to produce a total revenue requirement of $22,028.02.
Staff notes that recovery of the $22,028 recommended annual revenue requirement from all 56 customers using a uniform flat rate would require an increase from the current rate of $22 per month to $32.78 per month. This is an increase of $10.78 per month or 49%. The rate design proposed by Staff based on lot size results in zero increase for the 2 customers on 1/4 acre lots, a 35% increase for the 30 customers on ½ acre lots and a 70% increase for the 24 customers on one acre lots. Staff notes that complete equity in water bills is only achieved when every customer is metered and every customer pays only for the water used. The estimated cost for meter installation is approximately $300 per service location. Staff notes that metering is indicated in those instances where additional water supply is needed or when water pressure falls to unacceptable levels. Although not yet there, Staff recommends that Morning View consider planning to transition to meters in the next two or three years.
In its comments, Staff makes the following additional recommendations:
Cancellation of the “Schedule 1—public drinking water fee” tariff. The DEQ fee has been incorporated in the over-all revenue requirement recommended by Staff so a separate fee is not necessary.

Approval of a $25 reconnection charge (Schedule 2—Miscellaneous Charges).

That the Company’s 150 gpm well be connected to the system and be operational within 30 days to avoid prolonged outages when the large well (400 gpm) equipment is in need of repair.

That Morning View be required to bring its bills and disconnect notices into compliance with the Commission’s Customer Relations Rules and Customer Information Rules.

That the Company cease its practice of assessing a “finance charge” or late payment fee on past-due bills. No such fee has been approved by the Commission.

That the Company discontinue use of its presently drafted “Utility Agreement.” The Agreement goes beyond the scope of an application for service and contains inaccurate information.

That the Commission correct the Company’s existing Certificate No. 314 to properly identify the Company’s original service area to be within Section 30, Township 4 North, Range 39 East.

That the Commission notice the Company’s intent to amend its Certificate No. 314 to include the North ½ of the Northwest Quarter of Section 30, Township 4 North, Range 39 East (the expansion area).

Customer Comments
Three petitions from customers of Morning View Water have been received. In addition, 11 written comments were filed. Many customers requested that the Commission hold a hearing in this case. Customers expressed concern with the magnitude of the requested increase. They are also concerned about a lack of water pressure, the number of times water is totally off, the slowness of repair when there is a problem, the safety of the water supply, and the validity of the system costs as reported by the Company.

On June 20, 2002, the Commission issued an Amended Notice of Application, established a deadline for Morning View Water to file Reply Comments, and scheduled a July 15, 2002 public workshop and hearing in Rigby, Idaho.
Company Reply
On July 2, 2002, Morning View Water filed a reply in response to Staff’s recommendations. In its Reply the Company alleges that the Commission has not provided proper funding for the operation of the Company. Specifically the Company contends:
There have been no funds for doing the testing as required by the Department of Environmental Quality (DEQ). The Company has borrowed heavily to perform these tests. There have been no funds for maintaining the system. There is now due and payable a bill in the amount of Four-Thousand Two-Hundred Thirteen Dollars ($4,213.00) from Teton Water Works, LLC, Shelley, Idaho. There is no money to pay this. In the event anything goes wrong with the system, there are no funds for repairs. Please heed this warning for the good of the customers of Morning View Water Co. To build sufficient reserves, each customer should pay at least $5 per month. If not, and the system goes down, it will set until it has been properly funded. All credit has been revoked because of Morning View Water Company’s prior experiences with vendors. Five Dollars ($5.00) per month is not going to break anyone and is going to make repairs possible.…

There is no provision for mileage. There are many trips to Idaho Falls required throughout the year. Sometimes as many as four or five monthly trips are required to pick up pipe, valves, or other items for the operation of this system. The mileage rate allowed by the IRS is $0.34 per mile.

Commission Staff Supplemental Comments
In Supplemental Comments filed with the Commission on July 15, 2002, the Commission Staff addresses the concerns raised by Mr. Gneiting in his Reply. Regarding the proposed surcharge, Staff states its belief that it is appropriate for small water systems to establish a contingency reserve for future unanticipated major repairs. Staff neither supports nor opposes the surcharge approach nor does it express an opinion on the magnitude of such a surcharge. Staff notes that a $5.00 per month surcharge would produce annual revenue of $3,360 with the existing 56 customers on the system.
However, because Staff treated the replacement pump as a capitalized item (rate based), should the Commission decide Mr. Gneiting’s proposal is appropriate and should the surcharge be authorized for payment of the $4,213 bill for well repair, Staff recommends that the pump cost be removed from the calculation of revenue requirement. The removal of the pump from rate base produces an adjusted revenue requirement of $21,212.39 to which any approved surcharge would produce additional revenue.
Staff continues to support rates by lot size. The reduced revenue requirement could be recovered with a quarter-acre lot rate of $22.00 per month, a half-acre lot of $28.85 per month and a one-acre lot rate of $35.70 per month. Any surcharge approved by the Commission would be in addition to these rates.
Should a reserve surcharge be approved, Staff recommends that certain restrictions be imposed. The funds collected from the surcharge, Staff contends, should be deposited monthly to a separate interest bearing bank account. Use of the funds should be restricted to unusual extraordinary unforeseen major repairs and replacements. Staff would support the use of these funds to install meters on the system as proposed in Staff’s earlier comments. Staff recommends that the Company be required to file a report annually with the Commission providing detail of all funds collected and details of each specific major repair paid for with surcharge funds. Given the reporting history of the Company (no annual report since 1991), Staff recommends that any approved surcharge be subject to annual adjustment and reauthorization by the Commission. Failure to provide the required report would result in the elimination of the surcharge. If the Commission authorizes the surcharge, Staff recommends that the Company be directed to identify the surcharge as a separate item on its customers’ bills. Staff recommends that the balance of the reserve account be capped at $10,000. When that reserve amount is reached, the surcharge should be eliminated subject to reactivation, with Commission approval, when the balance of the account falls below $5,000.
Regarding Mr. Gneiting’s contention that there is no provision for mileage in Staff’s recommendations, Staff notes that its calculated revenue requirement includes $99.00 of auto expense based upon actual costs recorded during the test year 2001. Assuming an average of two round trips (22 miles) per month between Rigby and Idaho Falls at $0.34 per mile produces an annual allowance of $179.52. This is $80.52 more than the auto expense included in Staff’s calculated revenue requirement. Staff notes that Mr. Gneiting does not quantify how many trips are required each year. He indicates only that some months (not all) four or five trips are required.
Regarding the alleged unresponsiveness of the Commission to the Company’s requests for additional revenue, Staff details its communications with Mr. Gneiting and notes the Company’s repeated failure to supply the necessary records and supporting financial data for its rate increase requests. Staff contends that it has been more than cooperative with Mr. Gneiting and has tried to provide counsel, advice and assistance. Staff, however, states that it cannot operate in a vacuum void of data.
Hearing—Public Testimony
On July 15, 2002, the Commission traveled to Rigby, Idaho and following a workshop put on by Commission Staff and the Company, received testimony from the customers of Morning View Water. The expressed concern of many customers is an uneasiness regarding the Company’s management and office practices and its ability to provide reliable, consistent service and safe drinking water. Customers want to see the water system brought up to required standards with a second well pump put in place and perhaps an emergency generator for back-up. Outdoor watering practices and landscaping requirements were discussed; also discussed was the prospect of metering to control abuse and allocate costs. Finally, but not of any lesser importance, issues of affordability were raised and questions as to why Morning View’s water should be priced higher than the water of other area providers.
Pursuant to a scheduling deadline set at hearing, the Commission also received additional written comments from customers. In those comments the Commission was encouraged to check the cost and bookkeeping figures of the Company.
Company Comments
In responding to some of the customer’s concerns at hearing, Mr. Gneiting stated “we’re making every effort we can to get the second well on. It’s just a matter of a couple pieces of pipe. Tr. p. 30.… regarding dirt in the water, I have installed a sand trap—anything collected is now flushed out. Tr. p. 31.… People don’t understand the cost—price relationship. Water just doesn’t come out of a faucet anymore. It’s tested…. I haven’t been paid one cent in 16 years, not a cent, out of that water company, in fact, I subsidized it.” Tr. p. 30.…”
Ms. Diane Perry, a professional bookkeeper hired by the Water Company, states that she’s “changed a lot of the procedures within the office, the way they’re recorded—we’re separating all the accounts, the disbursement accounts, so that there is no cross-funding.…” Tr. p. 53.
“There is not enough money to operate the business,” Ms. Perry states. “Nolan is very frugal with how he spends his money—he does not go with the first person he contacts. If he does pay more, she states it’s because he doesn’t have the credit.” Tr. p. 54.
“Nolan needs an increase,” Ms. Perry states, “to have the funds to have someone who knows what they are doing to do the water reports, PUC reports, reports for the state, the water testing, the financial reports for taxes, etc.” Tr. p. 56.
Commission Findings
The Commission has reviewed and considered the filings of record in Case No. MNV-W-02-1 including the filed petitions and comments of Morning View customers and the transcript of proceedings. We have also reviewed and considered Staff’s investigative report, comments, and recommendations regarding Morning View’s operations, rate base, depreciation, revenue requirement, rates and rate design and Staff’s recommended adjustments regarding the Company’s requested surcharge.
While we appreciate that some of Morning View’s customers oppose a rate increase, this Commission would fail in its regulatory duty to both customers and the utility if we did not respond to what we find is the demonstrated revenue requirement of the water company. Without reasonable and sufficient revenue funded by rates to conduct operations, it would be difficult for Morning View to provide its customers with safe, reliable and adequate water service. Reference Idaho Code § 61-302. Adequate service for a water company requires a level of competence and expertise in system engineering, business management and operation. That expertise can be either in-house or contract labor. On that note, we find the Company’s recent efforts in retaining an office manager and bookkeeper to be encouraging. We can only hope that this evidences a commitment on the part of Mr. Gneiting to comply with Commission Rules and filing requirements. Mr. Gneiting has not filed an annual report with the Commission since 1991. Failure to file required reports is unacceptable and will no longer be overlooked. This State’s filing requirements (annual reports, water testing, etc.) are not intended as a source of irritation to the Company. There is a purpose. The reports provide the State agencies with a snapshot of utility operations, business health and water quality. They also assist us in identifying potential problems before they become critical. We cannot properly perform our statutory duty and provide regulatory oversight without information from the Company.
Regarding the Company’s requested rate increase, we find Staff’s proposed adjustments (including denial of the Company’s request for an additional mileage allowance) and recommendations to be reasonable. We also find it reasonable to authorize an additional $5.00 per month customer surcharge to fund a contingency reserve account. The reserve account will assure the Company’s ability to provide more reliable service by providing a fund for extraordinary and unforeseen major repairs and replacements. It may also be used for payment of the Company’s outstanding bill of $4,213 for pump replacement. The surcharge is to be separately identified on billing statements. The surcharge revenue is to be deposited into a separate account. A surcharge report is to be filed with the Company’s annual report providing detail of all surcharge funds collected and disbursed. The detail provided should also include a description and justification for all monies disbursed. The surcharge is subject to annual adjustment and reauthorization. The surcharge is to cease when the reserve account balance reaches $10,000 and may be reactivated with the Commission’s approval when the account falls below $5,000.
We accordingly approve an annual revenue requirement for Morning View of $21,212.39, with components as calculated and set forth in Attachment A (Pro Forma Operating Results, Rate Base and Revenue Requirement) to this Order. Included in the calculations, we approve a rate base of $2,160.66 and an authorized rate of return of 12%. We approve a test year ending December 31, 2001 for Morning View and operating expenses of $20,452.24. We find the $10,000 annual salary requested by Mr. Gneiting to be unreasonable for the part-time operation of a water system of this size. While there are 149 lots that are platted, there are only 56 customers presently connected to the system. Included in the operating expenses that we find reasonable is a managerial allowance of $4,160 (4 hours/week at $20/hour) and a maintenance allowance of $2,496 (4 hours/week at $12/hour).
Recognizing that the difference in customers’ annual water consumption on a flat rate water system is most influenced by outdoor sprinkling and irrigation use, we find it appropriate to adopt a rate design based on lot size. The base rates that we find reasonable are as follows:
1/4 acre lot (less than 0.4 acre) $22.00 per month
1/2 acre lot (0.4 to 0.8 acre) $28.85 per month
1 acre lot (0.8 acre and larger) $35.70 per month
We note that a more precise allocation of costs to customers can only occur with metering. It is also difficult to send conservation pricing signals to customers on a flat rate water system. Therefore, we direct the Company to prepare a plan for transitioning to metering (including time and estimated costs) and present it to the Commission for approval. We also note with some concern that the water practices of customers may be controlled by a Homeowner Association requirement regarding lawns. We encourage the Association to rethink its landscaping policies and perhaps allow less water intensive practices such as xeriscape.
Finding the Company to be in agreement, we also find Staff’s additional recommendations as set forth above (Additional Recommendation Item Nos. 1-8) including Certificate amendment, reconnect fee and well connect requirement to be fair and reasonable and without further comment therefore adopt and/or require same of the Company.
The Commission appreciates the many concerns raised by Morning View customers. Some of those concerns we have addressed. The rates we approve and the reserve account we authorize should assist the Company in its efforts to perform required testing and to provide safe water and reliable consistent service.
One customer commented that the Company seems to be doing better, but only, he stated, because it has been pressured to do so. Testimony reflects that the Company is improving in its communication with customers and in its accounting practices. As regulators, the Commission pledges that its Staff will be looking over the Company’s shoulder. If it fails to provide required reports or to comply with Commission rules, it will be made to answer. The Consumer Assistance Division of the Commission can be contacted if the Company is unresponsive to customer inquiries or service complaints.
Finally, we note that in pricing the Company’s water this Commission looks at its costs and expenses and we look at its capital investment. We do not look at the price of water of nearby homeowner associations that may have the benefit of voluntary labor; nor do we consider municipal water companies that may subsidize the costs of water through taxes. Such comparisons are unfair and cannot be used by this Commission to determine a fair and reasonable rate for Morning View water. In establishing rates for water, we follow the requirements of both statutory and case authority. Neither cities nor homeowner associations are bound by such constraints.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has authority and jurisdiction over the Morning View Water Co., Inc., a water utility, and the issues raised in Case No. MNV-W-02-1 pursuant to Title 61 of the Idaho Code and the Commission’s Rules of Procedure, IDAPA 31.01.01.000 et seq.
O R D E R
In consideration of the foregoing and as more particularly described above, IT IS HEREBY ORDERED and the Commission does hereby approve an annual revenue requirement for Morning View Water Co., Inc. of $21,212 and a flat rate design based on lot size (1/4 acre $22.00/month; 1/2 acre $28.85/month; 1 acre $35.70/month). The Commission also approves a $5.00 per month customer surcharge to fund a contingency reserve account. The Company is directed to file tariff sheets consistent with this Order for an effective date of September 1, 2002.
IT IS FURTHER ORDERED and the Company is required to cancel the Schedule 1—Public Drinking Water Fee tariff. The rates we approve include such a fee.
IT IS FURTHER ORDERED and the Commission does hereby approve a $25.00 reconnection charge (Schedule 2—Miscellaneous Charges).
IT IS FURTHER ORDERED and the Company is directed to connect its 150-gallon per minute (gpm) well to the Morning View water system and to have it operational within 30 days.
IT IS FURTHER ORDERED and the Company is required to bring its bills and disconnect notices into compliance with the Commission’s Utility Customer Relations Rules (IDAPA 31.21.01) and the Commission’s Customer Information Rules (IDAPA 31.21.02).
IT IS FURTHER ORDERED and Morning View is required to cease its practice of assessing a “finance charge” or late payment fee on past due bills.
IT IS FURTHER ORDERED and Morning View is required to discontinue use of its presently drafted “Utility Agreement.”
IT IS FURTHER ORDERED that the Company’s existing Certificate No. 314 is amended to properly identify the Company’s original service area to be within Section 30, Township 4 North, Range 39 East and to include by way of amendment its expansion area, i.e., the North 1/2 of the Northwest 1/4 of Section 30, Township 4 North, Range 39 East. The Company is directed to file an Amended Certificate conforming with the Order.
IT IS FURTHER ORDERED and the Company is required to inform its customers of the Commission’s approved rates and policies.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61-626.

DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of August 2002.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

bls/O:MNVW0201_sw3
ORDER NO. 29104 1

Office of the Secretary
Service Date
August 29, 2002