20160609Comments.pdf

NEIL PRICE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6864
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
IN THE MATTER OF THE APPLICATION OF
PACKSADDLE WATER SYSTEMS,INC. FOR
APPROVAL OF ITS PURCHASE OF THE
WATER SYSTEM AND A CORRESPONDING
NAME CHANGE
itICEIVED
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. PKS-W-15.0I
COMMENTS OF THE
COMMISSION STAFF
coMES NOW the Staff of the Idaho Public Utilities commission,by and through its
the Notice ofattorney of record, Neil Price, Deputy Attorney General, and in response to
Application and Notice of Modified Procedure issued in Order No. 33525,
comments.
submits the following
BACKGROUND
Packsaddle Water Systems, Inc. ("Packsaddle" or "Company") has submitted an
Application requesting Commission approval of its purchase of the water system, formerly
owned by Packsaddle Estates Water Corporation, and corresponding name change.
Packsaddle argues that because it functions in a manner similar to a homeowners
association ("HOA") and is a "mutual non-profit organization represented by board members in
a democratically-run corporation," the Commission may approve its purchase of the water
system without a Certificate of Public Convenience and Necessity ("CPCN") transfer. As a
STAFF COMMENTS JUNE 9,2076
non-profit corporation, Packsaddle believes that it should not be classified as a public utility
subject to Commission regulation.
Packsaddle estimates that the former owner, Packsaddle Estates Water Corporation,
operated the water system for the subdivision named Packsaddle Creek Estates for nearly 40
years. The subdivision is located in Teton County, Idaho.
Packsaddle explained that the previous owner of the water system was a for-profit
corporation run by a single person. According to Packsaddle, the for-profit corporation did not
permit the subdivision's water customers a vote or have input concerning the operation of the
water system.
Packsaddle's Application includes a copy of its Articles of Incorporation filed with the
Idaho Secretary of State. The Company states that it has no By-Laws. The Company alleges
that each of its customers is a voting member. The Company states that it has a four-member
Board of Directors and Officers serving without compensation.
Packsaddle explained in its Application that the formation of the new corporation was
necessary due to the poor health of the previous owner who was unable to attend to the
maintenance and operation of the water system. Packsaddle states that the former owner
requested that the residents assume those responsibilities.
Packsaddle states in its Application that the new corporation serves the same functions as
a homeowners association ("HOA").
The Company included a copy of the Purchase/Sales Agreement and Quitclaim Deed
transferring the pump house and the land upon which it is situated to Packsaddle.
Packsaddle claims that l00Yo of all fees collected from approximately 30 subdivision
customers will be used for the operation and maintenance of the water system. The Company
believes that this will allow for the growth of a fund for emergencies and capital improvements
at the rate of approximately $500 per month.
Packsaddle attached a copy of a letter it sent to all customers giving them notice of the
purchase of the water company by the new non-profit corporation.
Packsaddle states that it is aware of all Idaho Department of Environmental Quality
(IDEQ) environmental requirements and has access to individuals with the requisite knowledge
and expertise to maintain compliance with said requirements.
STAFF COMMENTS JUNE 9,2016
STAFF ANALYSIS
Staff reviewed the documents provided by Packsaddle in the Application and in response
to Staff production requests. Staff believes the Company's request to approve the transfer and
determine if the new entity is a utility not regulated by the Idaho Public Utilities Commission
(IPUC) should be evaluated based on the requirements in ldaho Code $ 61-328, the structure of
the entity and the level of voting power by customers.
Idaho Code $ 6l-328
Staff evaluates all sales or transfers based on the intent of ldaho Code $ 6l-328.1 In this
case, Staff believes the intent has been satisfied. There is only one water system serving this
area and the prior owner was no longer willing and able to operate or maintain the system.
Packsaddle Water Systems, Inc. has purchased the water system and has been operating it since
October 1,2015. Customer rates are not at issue in this case and will not increase due to the
transfer. In fact, customer payments will be available to operate, maintain and improve the
system rather than pay management or potential income taxes. Staff believes the sale and
transfer is in the public interest and Packsaddle Water Systems, Inc. has the intent and financial
ability to operate the water system.
Amended and Restated Articles of Incorporation
Article III of the Amended and Restated Articles of Incorporation expresses the
Company's intent to provide fiscally responsible operation and dedicate all money to operation,
repair and improvements to the water systems. Article III does not give the corporation power to
assess its members or enforce assessments.
Article VII of the Amended and Restated Articles of Incorporation states each customer
member and each member has one vote for each issue addressed at a public meeting. A
I ldoho Code $ 6l-328 establishes that state-regulated utilities must obtain approval from the Commission before
the sale or transfer of ownership in any generation, transmission, or distribution plant. Section 61-328 provides the
Commission authority to authorize the sale or transfer of ownership upon the finding that: (a) the transaction is
consistent with the public interest; (b) the cost of and rates for supplying service will not be increased by reason of
such transaction; and (c) the applicant for such acquisition or transfer has the bona fide intent and financial ability to
operate and maintain said property in the public service.
STAFF COMMENTS JLINE 9,2016
simple majority prevails. Staff analysis and customer comments question the adequacy of this
level of input. The ability to vote on Board members is addressed under Article X.
Article X of the Amended and Restated Articles of Incorporation establishes the initial
Board of Directors and describes the election, compensation and replacement of individuals
serving on the Board of Directors. The Initial Board of Directors has four members and each
serves without pay, salary or compensation. The number of Directors may be increased by a
majority vote of the existing directors. If a Director resigns, all the remaining Directors must
agree on a replacement. To be a utility not regulated by the IPUC, Staff believes the Board of
Directors must be elected by the members to allow adequate member control. Article X does not
require Directors to be elected by member votes. Staff does not believe Packsaddle Water
Systems, Inc. qualifies as a utility exempt from regulation by the IPUC and recommends
Packsaddle Water Systems Inc. remain a regulated utility. This recommendation is also
consistent with comments from customers.
Regulatory ltems
If the Commission accepts Staff recommendations, there are several important
accounting items that Packsaddle should know as a regulated utility. These items do not directly
impact the decision to regulate Packsaddle or transfer the Certificate so they are included as
Attachment A.
Customer Notification
On May 20,2016, the Commission issued a press release regarding Packsaddle Water
System's Application. The Company provided email addresses for the majority of its customers
to the Commission Staff. On May 24,2016, Commission Staff sent an email containing links to
the Commission press release, the public case file, and the formal case comment form using the
email list provided by the Company.
Customer Comments
As of June 9,2016, six written comments from five different customers have been
received. Customers objected to the formation of the Company and stated that the attendees at
the meeting held by the Company in July 2015 following formation of the Company in May
2015 did not represent a majority of the homeowners. All customer comments maintained that
STAFF COMMENTS JI-INE 9,2016
"there is no homeowner's association" or "organization 'like' a homeowner's association" as
indicated in the Company's Application and the Commission's press release.
Customer Complaints and Inquiries
Since March 2015, the Commission has received six separate complaints and inquiries
regarding the continued operation of the system and the sale and transfer of the system by
Packsaddle Estates Water Company. One of Packsaddle Water System's incorporators asked for
further information regarding the Commission's formal case process. Three customers identified
themselves as seasonal customers who live out of state. They expressed concerns about the
newly-created Company and asked whether the Commission would continue to provide
oversight.
A complaint filed in April 2016 was from a customer who had been notified by letter that
the Company had decided it would no longer allow customers to disconnect and later reconnect
service on a seasonal basis. Instead, all customers would be required to maintain service year-
round and pay the required monthly charge. Seasonal customers can choose under the current
tariff to have service disconnected and pay the Seasonal Customer Reconnect Fee when they
choose to re-establish service. Staff contacted the Company and explained that it could not
change its rates or policies without approval of the Commission. The Company stated that there
were only two customers who chose to pay the Seasonal Customer Reconnect Fee rather than
pay the monthly fee year-round. The Company contacted the affected customers to explain that
the seasonal disconnection option would remain in effect as approved by the Commission.
In May 2016, in response to the Commission's press release, a customer called to discuss
the transfer and sale of the Company and the possibility that the Company would no longer be
regulated. The customer was concerned that the new Company would not be regulated.
Tariff Revisions and Other Required Documents
The Packsaddle Estates Water Company tariff currently on file with the Commission has
an effective date of January 9,1996. Since then there have been changes in the Commission's
Rules and Regulations. If the Commission decides to transfer the Certificate of Public
Convenience and Necessity from Packsaddle Estates Water Corporation to Packsaddle Water
Systems, Inc., the new Company will need to file an updated tariff under the new name. Neither
Packsaddle nor Staff is recommending rate changes. Commission Staff is willing to work with
STAFF COMMENTS JUNE 9,2016
the Company directly to revise the Company tariff, including its Rules and Regulations, as well
as its Explanation of Rates, Rules Summary and billing and collection documents to ensure
compliance with the Commission's Utility Customer Relations Rules.
Summary
Staff recognizes that there has been confusion about the regulatory status of the newly-
formed water company. While it appears that the incorporators of Packsaddle Water Systems
intentions were to assume management of an aging water company from an owner with failing
health and operate it as a not for profit company, its representation that the company's operation
would be similar to that of a homeowners' association implied that customers were involved with
and supported creation of the new company. However, based on the complaints, inquiries and
comments the Commission has received, it is apparent that customers have concerns about the
company and whether the Commission's regulatory oversight will continue.
Staff also recognizes that the new company is not familiar with standard regulatory
accounting practices, the Commission's Rules and Regulations, or operation of a water utility in
general, but that it has been willing to accept guidance from Staff and has taken reasonable steps
to maintain water service to customers.
Based on its consideration of all of these factors, Staff recommends that the Commission
approve the sale of Packsaddle Estates Water Company to Packsaddle Water System and transfer
the existing CPCN to Packsaddle Water System. Staff also recommends that the rates and
polices of the Company not be changed at this time. The Commission Staff is willing to work
with the Company to help it fulf,rll its regulatory obligations. The Commission Staff is also
willing to provide assistance if the Company wishes to involve customers in further discussions
about utility regulation, modification of existing rates and policies, or other issues of concern to
customers.
RECOMMENDATIONS
L Staff recommends that the Commission approve the sale and transfer of the Company.
2. Staff recommends the Commission find Packsaddle Water Systems, Inc. continues to
be a regulated utility, subject to the jurisdiction of the Idaho Public Utilities Commission and
transfer CPCN No. 320 to Packsaddle Water Systems, Inc.
6STAFF COMMENTS JUNE 9,2016
3. Staffrecommends that the Packsaddle Water Systems, Inc. file a revised and updated
tariffincorporating the currently approved rates and charges and reflecting the change in
Company ntrme.
4. Staffrecommends that the Company submit its Explanation of Rates, Rules Summary
and billing and collection documents for Staffreview and approval.
Respecttully submitted this 1fy day ofJune 2016.
Technical Staff: Chris Hecht
JohnNobbs
i:umisc,/comments/pkswl 5. lnpjncwh comments
7
Deputy Attorney General
STAFF COMMENTS JI-'NE 9,2016
ATTACHMENT A
REGULATORY ITEMS
Packsaddle Water Systems, Inc.
Transactions Involving Regulated Assets
Transactions with regulated assets are not widely understood. Generally, the status of a
regulated asset is subject to regulatory jurisdiction and follows the asset during its life. In this
purchase, Packsaddle received several regulated assets including Plant in Service. In responses
to Staff Production Requests, various terms such as deposits, funds, cash or other information
were used to describe specific regulated assets. In the following sections, Staff identifies each
asset, describes the available information, summarizes the history leading to its regulatory status
prior to the sale and identifies the status of each asset after the sale.
Plant in Service
In Order No.26296, the Commission found the initial water system plus the cost of Well
No. 2 installed in 1994, totaled $21,341.43 and was expected to be recovered through the sale of
lots. Staff notes this finding establishes a Contribution in Aid of Construction (CIAC) account.
To determine Rate Base, CIAC is a reduction to Plant in Service. The Annual Reports of
Packsaddle Creek Estates Water Company erroneously reported Depreciation Expenses using an
Income Tax Depreciation Life equaling seven years. The seven years may represent a tax life
but is not long enough to determine regulatory depreciation rates.
On April 6,2015, Staff was contacted by the previous owner requesting guidance in
recording and reporting customer contributions to replace a defective well pump. Staff was
informed a replacement pump was required for customers to receive water and the Contractor
doing the installation required an $8,000 deposit.
Pump Surplus Funds
Asset No. 4 on Company Exhibit A of the Purchase and Sale Agreement is described as
surplus from the pump repair totaling $2,700. Staff notes the letter to customers, dated October
7,2015, solicited customer contributions of $250 for the pump. When contributions are used to
purchase Plant in Service, these funds will be accounted for as CIAC. Staff recommends
Packsaddle maintain a list of contributors with the amounts and dates. Staff notes Packsaddle
will be required to maintain a separate General Ledger subaccount for all CIAC funds. Staff
recommends a member of management contact Staff Auditors for information on CIAC and the
calculation of Revenue Requirement.
In Response to Staff s First Production Request No. 3, Packsaddle states the previous
owrer had "... no deposits on hand at the time of the sale but did have funds on hand collected
from customers for monthly water use." In the sale, this $2,700 was identified as part of the
initial pump contributions and was transferred to Packsaddle as part of the sale. The evidence
identifies these funds as CIAC or as a liability for future water service. Staff believes Mr.
Attachment A
Case No. PKS-W-15-01
Staff Comments
06109/16 Page I of 2
Vostrejs' description is reasonable. Staff believes this $2,700 is a liability for future water
service. Staff recommends the Company contact Staff for information on the appropriate
accounting if needed.
Prepaid Fees
Asset No. 5 on Company Exhibit A describes this amount as "... prepaid fees to be
credited to customers on account." Prepaid Fees are a liability for future water service.
Packsaddle Water Systems, Inc. must maintain the regulatory accounting for these funds with the
5650.56 remaining a liability for water service. The Company is encouraged to contact Staff
Auditors for additional information as needed.
Revenue Requirement
Packsaddle Water Systems, Inc. is a non-profit corporation. Although Staff recommends
to Company remain regulated, a return on Rate Base and potential income taxes would not be
included in the Revenue Requirement. At this time there also is no Depreciation Expense
included in the Revenue Requirement since all Plant in Service is reduced to zero by CIAC.
Staff believes the Revenue Requirement will produce Total Annual Revenues approximately
equal to estimated cash operating expenses. Staff also believes the Company's expressed
anticipation of accumulating funds for future use is a worthwhile goal. The information in the
Application reveals all administrative and accounting functions are performed without pay or
compensation and will allow a reserve to be established. Packsaddle Water Systems, Inc. has
contracted for maintenance service.
Tariff rates
The current tariff was effective on June 3,1996, and contains recurring and non-recurring
charges. One of the non-recurring charges is the Seasonal Customer Reconnection Fee equaling
$130. The purpose of this fee is to recover portions of operating expenses not collected from
seasonal customers through regular monthly rates. Staff s analysis of the anticipated Expenses
indicates annual fixed charges for 32 full time customers is approximately $140. The current
rates will be retained unless a subsequent case is filed with the IPUC requesting changes.
Attachment A
Case No. PKS-W-15-01
Staff Comments
06/09/16 Page2 of 2
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 9TH DAY OF JUNE 2016, SERVED
THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE NO.
PKS-W-15.01, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
ROBERT A VOSTREJS
TREASURER
PACKSADDLE WATER SYSTEMS
PO BOX 71
DRIGGS ID 83422
CERTIFICATE OF SERVICE