20070514reconsideration_order_no_30315.pdf

Office ofthe Secretary
Service Date
May 14, 2007
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF SPIRIT LAKE EAST WATER COMPANY
FOR AUTHORITY TO INCREASE ITS
RATES AND CHARGES FOR WATER
SERVICE IN THE STATE OF IDAHO
CASE NO. SPL-06-
ORDER NO. 30315
On April 3 , 2007, the Commission issued Order No. 30279 in this case approving a
modest rate increase for Spirit Lake East Water Company. The Commission also found that
Spirit Lake is not currently maintaining the facilities necessary to 'promote the safety, health
comfort and convenience of its patrons, employees and the public, and as shall be in all respects
adequate, efficient, just and reasonable ' as required by Idaho law.Order No. 30279 p. 12
quoting Idaho Code ~ 61-302. The Commission accordingly found it reasonable and appropriate
to adjust the Company s return on equity until such time as the improvements are made to the
system to solve the problems identified by Staff and customers." Order No. 30279 p. 10. The
Commission approved a rate of return on equity of 6%, but stated "if Spirit Lake were providing
an adequate, reliable water supply to its customers, the Commission would approve a return on
equity of 12%." Order No. 30279 p. 10.
The Commission also disallowed the cost of a back-up generator in rate base. The
generator is intended to operate in the event of a power outage to power three booster pumps that
pump water from a reservoir tank. The Commission did not allow the cost of this generator in
rate base, however, as it was "undisputed that Spirit Lake could not provide a cost basis for the
generator because it originally was part of a larger purchase by Hanson Industries " the major
shareholder of Spirit Lake. Order No. 30279 p. 10. There was also evidence the generator failed
to operate when needed on several occasions. Order No. 30279 pp. 3-4. We noted, especially in
an affiliate transaction, the utility has the burden to provide clear evidence of the cost of an item
to include it in rate base. Id.
On April 24, 2007, Spirit Lake filed a Petition for Reconsideration and a Petition to
Amend Pinal Order No. 30279. In its Petition for Reconsideration, Spirit Lake requests that the
Commission reconsider its decision to disallow any cost for the generator in the Company s rate
base. In its Petition to Amend Pinal Order No. 30279, the Company asks the Commission to
ORDER NO. 30315
amend the final Order to provide "that in the event of a Commission approved transfer of
ownership of the Spirit Lake water system to a third party, the return on equity for the new
owner will be raised from 6% to 12%, or, in the least, that the Commission will entertain a new
owner s request to raise the return on equity to 12%." Petition to Amend Final Order No. 30279
The Commission in this Order denies the Petition for Reconsideration and the
Petition to Amend Pinal Order No. 30279. We also direct the Company to file a specific plan to
complete necessary system improvements. The plan must provide dates for starting and
completing identification and repair of system leaks and to complete installation of a new
generator.
PETITION FOR RECONSIDERATION
In its Petition for Reconsideration, Spirit Lake argues that the Commission
determination to not include a rate base value for the generator is "unreasonable, unlawful
erroneous, unduly discriminatory and not in conformance with the facts of record and/or
applicable law, resulting in a revenue requirement and rates which are confiscatory." Petition for
Reconsideration p. 1. In support of its argument, Spirit Lake noted that installation of the
generator was approved by the Department of Environmental Quality following water system
outages in 2004. Installation of the generator was complete by April 28 , 2006. Spirit Lake
obtained the generator from Hanson Industries, Inc., which had previously obtained the generator
from Kaiser Aluminum as part of Kaiser s Chapter 11 bankruptcy proceeding. The generator
was purchased as part of a larger transaction, and Spirit Lake conceded that "no specific cost
value for the generator was set forth in the purchase and sale agreement or for any fixture
improvement or item of personal property" in the transaction between Hanson Industries and
Kaiser Aluminum.
Spirit Lake asserts that when the generator was transferred from Hanson Industries to
Spirit Lake, the parties assigned a value of $12 360 to the generator. The Company states in its
Petition for Reconsideration that it "in good faith attempted to demonstrate the reasonableness of
this value by submitting estimates for the cost Spirit Lake would incur if it were to obtain a
generator of similar capacity from another source.Petition for Reconsideration p. 3. Spirit
Lake attached exhibits to its Petition for Reconsideration to support its argument that the
ORDER NO. 30315
generator was placed in service as part of the Company s discussions with DEQ, and documents
demonstrating the transaction between Hanson Industries and Kaiser Aluminum.
The Commission finds that the additional argument and documents provided by
Spirit Lake do not demonstrate that its determination to disallow a value for the generator in rate
base was erroneous. The Commission did allow in rate base costs associated with installing and
repairing the generator because the record established that those costs were actually incurred by
the Company. See Order No. 30279 pp. 9-10. It is undisputed, however, that there is no
evidence in the record demonstrating that Spirit Lake actually paid anything for the generator.
No cost or value was placed on the generator when Hanson Industries obtained it as part of a
much larger real estate and personal asset transaction with Kaiser Aluminum. When Hanson
Industries, the majority shareholder of Spirit Lake, provided the generator to Spirit Lake, the
parties assigned a value to it of $12 360. Petition for Reconsideration p. 3. The Company did
not provide evidence it paid Hanson Industries for the generator at the time of transfer. Spirit
Lake did provide evidence that the generator has a replacement value some where between
000 and $12 000. There is no evidence, however, that Spirit Lake paid that amount, or any
amount, when it obtained the generator from Hanson Industries.
As we noted in Order No. 30279 , transactions between affiliate companies will be
carefully scrutinized to assure ratepayers that only necessary and reasonable expenses are
included for recovery in rates. See Order No. 30279 p. 9, citing Boise Water Corp. v. Idaho
Public Utilities Commission, 97 Idaho 832, 555 P.2d 163 (1976). In any affiliate transaction
the burden is on the utility to provide clear evidence of the cost of an item to include it in rate
base.Order No. 30279 p. 10, citing General Telephone Co. of the Northwest, Inc. v. Idaho
Public Utilities Commission 109 Idaho 942, 712 P.2d 643 (1986). On the record in this case
where there is no evidence Spirit Lake incurred a cost when it acquired the generator in an
affiliate transaction, we cannot conclude that the decision to disallow any value for the generator
in rate base was erroneous.
PETITION TO AMEND FINAL ORDER NO. 30279
In its Petition to Amend Pinal Order No. 30279, Spirit Lake states that it is
investigating the possibility of transferring its water system to a qualified party. The Company
asked the Commission to amend its final Order to provide that in the event of a transfer of
ownership to a third party, the return on equity for a new owner will be raised from 6% to 12%
ORDER NO. 30315
, at the least, the Commission will consider a new owner s request to raise the return on equity
to 12%.
The Commission stated in Order No. 30279 that "if Spirit Lake were providing an
adequate, reliable water supply to its customers, the Commission would approve a return on
equity of 12%." Order No. 30279 p. 10. Because of considerable problems with water delivery
and reliability, the Commission determined "to adjust the Company s return on equity until such
time as the improvements are made to the system to solve the problems identified by Staff and
customers.Id. Accordingly, it should be clear that a return on equity of 12% may be approved
when necessary improvements are made to the system, whether the improvements are made by
Spirit Lake or a new owner of the system. We stated that the Commission "expects Spirit Lake
to promptly address the leakage and generator problems, and the Commission will respond as
quickly as possible if the Company requests recovery of the costs in rates after making the
necessary improvements." Order No. 30279 p. 11. The Commission stated the rate ofreturn on
equity may be reset to 12% "when service improves to an acceptable level." Id.
The Commission in Order No. 30279 provided a lengthy discussion of the
considerable evidence demonstrating that Spirit Lake is not providing the level of service
required by Idaho law. See Order No. 30279 pp. 3-7. It was solely the deficiencies in Spirit
Lakes' level of service that led to the decision to allow a 6% return of equity instead of a 12%
return on equity. It should be clear that correction of the water system deficiencies, so that Spirit
Lake has facilities to provide "adequate, efficient, just and reasonable" water service to its
customers, may justify a return on equity of 12%. See Order No. 30279 p. 12, quoting Idaho
Code ~ 61-302.
PLAN OF CORRECTION
The Commission directed Spirit Lake in Order No. 30279 to "provide a written plan
to the Commission within 14 days ofthe service of this Order, explaining its plan to install a new
generator and to address the system leaks." Order No. 30279 p. 12. Spirit Lake did file a written
response within the 14 days, but that response falls short of the specifics the Commission expects
in a plan to correct system deficiencies. The response, filed April 17, 2007, is dated February 8
2007 and appears to include only information previously provided. Specifically, the statement
provided by Spirit Lake fails to demonstrate a definite commitment to complete a leak analysis
by a specific date, or to install a new generator by a specific date. The Commission directs the
ORDER NO. 30315
Company to provide such a plan to the Commission within seven days from the service date of
this Order. If Spirit Lake fails to provide a plan that demonstrates a commitment to complete
necessary improvements within a specific time period, the Commission will issue an Order to
Show Cause why remedies authorized by statute, including daily fines, should not be entered
against the Company. See Idaho Code ~9 61-706, 61-707.
ORDER
IT IS HEREBY ORDERED that the Petition for Reconsideration and the Petition to
Amend Final Order No. 30279 are denied.
IT IS FURTHER ORDERED that Spirit Lake is directed to file a detailed written
plan and schedule showing start and completion dates within seven days of the service date of
this Order, demonstrating a commitment to install a new generator and address system leaks as
directed by the Commission in Order No. 30279.
THIS IS A PINAL ORDER DENYING RECONSIDERATION.Any party
aggrieved by this Order or other final or interlocutory Orders previously issued in this Case No.
SPL-06-01 may appeal to the Supreme Court of Idaho pursuant to the Public Utilities Law
and the Idaho Appellate Rules. See Idaho Code 9 61-627.
ORDER NO. 30315
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this 'ItA
day of May 2007.
MARSHA H. SMITH, COMMISSIONER
. .
, 0
ATTEST:
)e D. Jewell
mission secr
bls/O:SPL-06-01 ws5
ORDER NO. 30315