20070614Comments.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
MORNING VIEW WATER COMPANY, INC.
FOR AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN THE STATE OF IDAHO.
CASE NO. MNV-O6-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Application and the Notice of Modified Procedure issued on March 15 2007, submits the following
comments.
BACKGROUND
On December 8 2006, Morning View Water Company, Inc. filed a one-page rate case
request seeking authority to increase its rates approximately 40%. The Company issued a notice to
its customers with its March bills notifying them that it is seeking a 35% increase. If approved, a
35% increase would result in an increase in the monthly bills of customers with 1/4 acre of $7.
customers with Yz acre of$IO., and customers with I acre of$12.50.
To meet continued operation needs, the Company requests a revenue requirement increase
of approximately 35%. The Commission approved a rate increase for the Company in 2002, and
STAFF COMMENTS JUNE 13 2007
implemented a surcharge of$5.00 per month to fund a contingency reserve account (with the total
amount in the reserve account capped at $10 000). Order No. 29104.
STAFF ANALYSIS
Audit
Staff examined the books and records of the Company for the fiscal year ending December
, 2006. Staff also reviewed the Staffs Comments and Attachments to the Company s Rate Case
filed in 2002. Case No. MNV-02-, hereafter referred to as the 2002 Rate Case. A field audit
was conducted in April 2007 at the Company offices in Rigby, Idaho. The purpose of the audit was
to obtain and verify the Company s revenues, expenses and rate base amounts for the calendar years
2005 and 2006. Financial information for previous years was not complete and therefore not
reliable. Staff used the information obtained to determine if a rate increase for the Company was
reasonable. The audit included (but not limited to) examination of the general ledger accounts and
supporting invoices, employee payroll records, verification of physical plant and property,
comments submitted by customers, and discussions with Company employees. The Company has
one full time employee who does all of the accounting.
Revenues, Expenses and Rate Base
The Company did not file sufficient financial records to support its request for a rate
increase. The Company provided financial information when Staff did its on-site audit. Staff found
that the financial records for the years 2002, 2003 and 2004 were not complete or the Company was
unable to retrieve adequate documentation. However, the financial records for 2005 and 2006 were
substantially complete and the documentation supporting those financial records were readily
retrievable. Therefore, Staff used the financial records for 2005 and 2006 as the basis for
determining the Company s history of revenues, expenses and rate base.
Revenues
The Company receives revenues for the sale of-water to residential customers. It also
receives revenues from the customers at the rate of $5.00 per month per customer as a surcharge.
This surcharge will be discussed later in these comments. The Company received $35 , 422.60 in
2005 and $36 , 256.68 in 2006 from water charges. The Company currently charges flat monthly
rates; therefore, without a change in rates or customer levels, the revenue will not change
STAFF COMMENTS JUNE 13, 2007
significantly in the future. The Company has seen growth in its customers. It reported 56
customers in the 2002 Rate Case, and now it has between 97 to 100 customers.
Expenses
The Company provided financial information reflecting annual expenses for 2005 in the
amount of$36 823.96 and for 2006 in the amount of37 772.23. Staff used the 2006 annual
expenses as test year expenses and made appropriate adjustments. Attachment A sets forth the
Company s expenses for 2005 and 2006 with Staff s adjustments and then the recommended annual
expenses to be reflected in this rate case. Staff recommends that the annual expenses for the
Company be set at $38 498.
Adjustments to Annual Expenses
Based upon its review, Staff made the following adjustments to the Company s 2006 annual
expenses to obtain the recommended annual expenses for the revenue requirement.
Staff continues to recommend the normalized annual water testing expenses for the
Company be $750.00 (line 1). Staff stated when making that recommendation in the
2002 Rate Case:
(T)he frequencies of specific water tests vary. Some tests are
required monthly. Other have a frequency of quarterly,
annually, semi annually, every 3 years, and every 6 years.
This adjustment spreads the cost of each test over its required
frequency. Over time, the average annual testing expense is
$750 for each water source.
The Commission accepted the $750 and there is no reason to change this normalized
expense level at this time.
The $600 expenses in 2006 for Professional Fees were not an expense of the water
company. The professional fees were incurred for Landco Building Company, an
affiliate company owned by Mr. Gneiting. Therefore these expenses were removed
from revenue requirement (line 4).
The Maintenance and Repairs account for 2006 included the purchase of a pump in
the amount of$3 200.65. This amount was removed from expenses (line 6) because
the pump was purchased from the surcharge account and should not have been
included in annual expenses. In addition, the pump has not been placed into service.
While the pump will be properly included in plant in service when the facilities are
STAFF COMMENTS JUNE 13 2007
required, it will never be included in rate base to earn a return because the plant will
be offset by the surcharge payment.
The Maintenance and Repairs account included an expense for $400 that belonged to
Landco Building Company. This amount was excluded from the recommended
expense amount (line 7).
The Office Supplies account included the purchase of a computer for $806.04. This
purchase should be capitalized (see Attachment B , line 3) and has been removed
from the 2006 Supplies Expense account (line 9 of Attachment A).
The Permits and Licenses account (line 11) included an expenditure in the amount of
$645 for permits that should have been paid by Landco Building Company.
Although slightly more than the amount of the Company s 2006 expenditures of
$229., Staff finds $250 of expenses to be reasonable.
The Insurance account (line 12) included a premium payment in the amount of$500
for vehicles owned and operated by Landco Building Company. The balance of the
insurance expenses of $200 was recommended to be an appropriate Company
expense.
The 2002 Rate Case included Company rent expense of $950. The rent
circumstances and expense of $950 included in the 2002 revenue requirement has
not changed, and therefore this amount is included in the recommended expenses.
The Company is not current in its obligation to pay the Internal Revenue Service for
employee withholding and employer s contribution. This obligation is approximately $3 933.88 for
2005 and $3 417.75 for 2006. The Company s obligation for any future employer costs and
obligations to the Internal Revenue Service for employee s withholding is reflected in the annual
operating expenses Staff included in the revenue requirement recommendation. The recommended
revenue requirement should provide sufficient funding to the Company to meet any future
obligations for this expense. The debt incurred by the Company representing its obligations to the
Internal Revenue Service are the responsibility of the Company, and no provision is included in the
recommended rates to pay for the past obligation.
Rate Base
The Company s net rate base as determined in the 2002 Rate Case, Order No. 29104, was
160.66 ($2 626.95 plant less $428.27 accumulated depreciation). This beginning point is shown
on Attachment B, line 1. Since 2002, most capital expenditures have been paid for with funds from
STAFF COMMENTS JUNE 13 , 2007
the surcharge account and are not included in rate base. The only exceptions to use of the surcharge
funds are an upgrade to an electrical panel in 2005 in the amount of$I 269.00 (line 2) and the
purchase of a new computer in 2006 for $806.00 (line 3). The gross rate base for the Company is
now $4 701.95 (line 4) and Accumulated Depreciation is $2 604.90 (line 8). The annual
depreciation expense is now $439.27 (Column F).
Capital Structure
The Company s capital structure is 100% common equity. The Company did not include a
request for return on equity. Staff recommends 12% as a reasonable rate of return. The
Commission in several recent small water cases has adopted a 12% rate of return. (Falls Water
Company in Case No. FLS-05-, Order No. 30027; Capitol Water Company in Case No. CAP-
06-, Order No. 30198; Spirit Lake East in Case No. SPL-06-, Order No. 30279.
Revenue Requirement
Staff s calculation of the proposed revenue requirement for the Company is shown on
Attachment C, Column B. The Company s net rate base of $2 097.05 (line 5) produces a return of
$251.65 (line 7) at the recommended rate of return of 12% (line 6). This return must be grossed-up
to account for federal and state taxes that would need to be paid on this revenue. The net to gross
multiplier is 127.3% (see Attachment B beginning on line 14). When the gross-up factor is applied
to the return of$251., the Company must earn revenue of$320AO (line 9). This amount added to
the annual operating expenses of$38,498 (line 10) and annual depreciation expense of $439.27
(line 11), results in a Company total revenue requirement of $39 257.70 (line 12). The Company
received revenues of $36 256.68 (line 13) in 2006; therefore the Staff recommended increase
001.02 (line 14).
Contingency Reserve Account
The Company was authorized by the Commission in the 2002 Rate Case to charge each
customer a surcharge of $5.00 per month to fund a contingency reserve account. In Order No.
29104, the Commission stated the following finding concerning this 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
STAFF COMMENTS JUNE 13 , 2007
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.
The Company has been collecting the surcharge since January 2003. The Company does separately
identify the surcharge on the billing statement. It has not filed any report or accounting on the
funds collected or disbursed, except as requested as part of this audit. Staff found that the Company
did maintain good records of the contingency fund account, and was able to audit the funds
collected and disbursed. Since January 2003, the Company has collected and deposited $15 735
and the account has earned $10.02 in interest through May 31 2007. The Company has spent $14
646., leaving a balance of$I 098.52 in the account as of May 31 2007. The proceeds from the
account were disbursed for the following purposes:
Capital Expenditures
5/20/2003 Pump purchase
9/2/2003 Pulling pump from casing
1/19/2005 Soft start of pumps
7/12/200530 hp pump motor
6/13/2006 Pump end for 30 hp pump
357.
520.
000.
200.
905.
982.$ 8 982.
4,495.
157.
971.
623.$ 5 623.
40.40.
$ 14 646.
Loan Payments (See note below)
31 payments of $145.
1 payment of $157.
payment of $971.
Service Charges
8 service charges (Q) $5.00 ea.
Total
The Commission in the 2002 Rate Case approved the Company s payment of an outstanding obligation in the
amount of$4 213 for pump replacement. The Company borrowed the money from Wells Fargo Bank and paid
the obligation in full. The Company then used the Contingency Account as the source of funds to repay the loan.
It appears from the Company s records and bank statements that the surcharge collected was
regularly deposited in the Company s bank account and then once a month a check from the
Company account was deposited in the contingency fund's separate account. This occurred through
STAFF COMMENTS JUNE 13 2007
May 2006. Since May 2006, the Company has not deposited any ofthe surcharges collected even
though it continued to collect the $5.00 per month per customer through this same period.
Staff noted that when the Company was depositing the surcharge in the contingency fund
account that the amount deposited monthly by the Company represents the surcharge collected from
83 to 91 customers. The Company now reports that it has 97 to 100 customers.
The Company has not deposited the surcharge amounts collected from June 2006 through
May 2007. If the Company had an average of97 customers that amount is $5 335 (97 customers x
$5 x 11 months).
Water Supply/Metering
Water supply is a pressing issue for the Company, a problem that can be addressed in part
by metering. Metering would allow the Company and its customers to manage their water usage
more effectively. It would help pressure and supply problems and address related customer issues.
The Company was directed in Order No. 29104 to "prepare a plan for transitioning to
metering (including time and estimated costs) and present it to the Commission for approval." This
has not happened.
It is Staff s understanding that meters have been offered to the Company at no cost from
Idaho Rural Water Association and this offer is still open. The Company has also indicated that all
but 12 of the lots have meter boxes in place. It would seem that installation of the meters could be
accomplished without great expense and the Company should proceed as previously directed by the
Commission to prepare a plan for metering the system. The Company should obtain bids for the
installation of meters for all their existing customers, estimate the cost for the complete installation
and the increased cost for meter reading. The total cost with an implementation schedule should
then be provided to the Commission for review. Staff would propose that the surcharge be
increased to cover the estimated reasonable meter installation cost. Meter rates could be set at that
time, based on the prior 12 months ' water consumption, and implemented following meter
installati on.
Completion of the back up well is also a priority that will address water supply and related
customer concerns. It would provide a back up supply, improving reliability and pressure. This
should be completed as soon as possible.
STAFF COMMENTS JUNE 13 , 2007
Rate Design
In the absence of meters, Staff continues to support rates based on lot size. The Staff-
proposed revenue requirement of$39 257.70 represents an 8.277% increase over current rates.
Staff is therefore proposing an increase of 8.277% to the existing rates resulting in the following
monthly rates:
1/4 acre lot
Yz acre lot
1 acre lot
$23.
$31.24
$38.
CONSUMER ISSUES
The Company filed an Application for approval ofthe increase in rates on December 8
2006. A notice to Morning View Water Company s customers was filed February 27, 2007 with
the Commission. Customers received notice with their March billing statements in compliance with
the Utility Customer information rules (IDAP A 31.21.02102).
Since 2003 , the Commission has received 28 complaints regarding Company water service
quality. In addition, Company provided records reflect 133 complaints regarding the loss of water
and low water pressure during the 2006 calendar year. Moreover, as part of this case the
Commission has received 9 written comments regarding Company activities and service quality.
Finally, on April 12, 2007 a consumer workshop took place in the conference room in the Rigby
city library. Seventeen people attended the workshop including the owner, Company secretary and
a representative from the Idaho Rural Water Association.
The common complaints provided through customer input included water quality, extended
water service outages and failure of the Company to notify customers of planned outages or provide
timely explanation of repair time for unexplained outages. In addition, customers expressed
concerns about water pressure, particularly during the summer. The problem is exacerbated given a
homeowner covenant that requires customers to maintain large lawns and as new homes are
connected to the system. Finally, customers expressed concern about the Company s use of the
monthly surcharge account to make system improvements when no meters, shut off valves or back
up water supplies are available to limit the number and duration of system outages.
Staffs recommendations to better utilize the surcharge revenues by installing individual
customer meters will address many of the concerns expressed by customers. System outages should
decline, pressure should increase and both water volumes and quality should improve. The
Company should also be able to complete additional source of supply with surcharge revenue even
STAFF COMMENTS JUNE 13, 2007
with installation of the meters given the relatively low cost of metering. While outages should
decline with metering and additional source of supply, the Company should provide customers
advance notice when outages are planned. The Company should also implement a method for
advising customers about the cause and expected time when repairs will be completed. One
alternative method the Company could use is leaving a message on its answering machine.
CONCLUSIONS AND RECOMMENDATIONS
It is recommended that the Company deposit monthly in the Contingency Reserve Account
all the surcharges collected from its customers. Additionally, Staff recommends that at the time of
the next audit, Staff will verify that the $5 335 of surcharge collected by the Company but not
deposited will be reflected in the Contingency Funds Account and available for capital
improvements and repairs.
It is recommended that an annual revenue requirement of$39 258 be approved. This
represents a $3 001 increase over the Company s 2006 revenue.
Staff recommends that the monthly rates be increased by 8.27%.
Staff recommends that the Company be directed to complete the back up well as soon as
possible and to present to the Commission a plan for the installation of meters for all their existing
customers within 60 days of this Order.
Staff recommends the Company provide advance notice of planned outages and implement
a system for advising customers about the status of repairs following unplanned outages.
Respectfully submitted this '1l1 day ofJune 2007.
527 :;:y ~=u
Scott Woodbury
Deputy Attorney General
Technical Staff: Joe Leckie
Dave Schunke
Beverly Barker
i:umisc:comments/mnvwO6.swjl7
STAFF COMMENTS JUNE 13 , 2007
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A
Morning View Water Company
MNV-06-Rate Case
Schedule of Rate Base with Revenue Requirement
Life
Rate Base
1 As of 12/31/05 626,
Additions in 2005 269,
Additions in 2006 806.
Total Rate Base 12/31/06 4,701.
Accumulated Depreciation
5 As of 12/31/05 165.
Depreciation Expense 2006 439.
7 Acc. Dep as of 12/31/06 604.
Return on Rate Base
8 Net Rate Base 12/31/06
9 Rate of Return
10 Return
11 Tax Gross-up
12 Gross up on Return
097.
12%
251.
127,
320.40
Gross Up Multiplier:
13 Beginning
14 State Tax (Q) 7.
15 Federal Taxable
16 Federal Tax (Q) 15%
17 Net After Tax
18 Net to Gross Multiplier
100,0000%
6000%
92.4000%
13.8600%
78.5400%
127.3237%
Annual Depreciation Annual
Depreciation Expense DepreciaitonExpense expired Expense
404.00 $
404.00 $
24.
253.
161.
439.
428.27 $
253.
161.
843.27 $
Attachment B
A TT ACHMENT
CASE NO. MNV-W-06-
STAFF COMMENTS6/13/07
Morning View Water Company
MNV-06-01 Rate Case
Revenue Requirement Calculation and Comparision to 2002 Rate Case
MNV-02-MNV-06-
2 Number of Customers
3 Rate Base 626.701.
4 Accumulated Depreciation (466.29)604.90)
5 Net Rate Base 160.097.
6 Rate of Return 12%12%
Return 259.28 251.
8 Gross-up for taxes
9 Grossed-up Return on Rate Base 331.320.40
10 Annual Operating Expenses 20,452.38,498,
11 Depreciation Expense 428.439.
12 Total Revenue Requirement 212.257.
13 Revenue Received in 2006 256.
14 Revenue Deficit 001.
Attachment C
ATTACHMENT C
CASE NO. MNV-W-06-
STAFF COMMENTS6/13/07
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 13TH DAY OF JUNE 2007
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. MNV-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
TO THE FOLLOWING:
NOLAN W GNEITING
MORNING VIEW WATER CO INC
PO BOX 598
RIGBY ID 83442
FAXED 6/13/07 208-745-0041
SECRETARY
CERTIFICATE OF SERVICE