20070119Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
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BOISE ID 83702-5983
Attorney for the Commission Staff
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 THESTATE OF IDAHO
CASE NO. SPL-O6-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to the Notice of
Modified Procedure and Order No. 30193 issued on November 30 2006, submits the following
comments.
BACKGROUND
On August 14 2006, Spirit Lake East Water Company (Spirit Lake, Company) filed a
general rate case Application requesting authority to increase its rates and charges for water service.
The Company requested approval to increase its rates from $12 to $24 for the first 9 000 gallons of
water usage, and from $.10 to $.20 for every 100 gallons of water used by a customer over 9 000
gallons per month. In addition, the Company asked for approval of an increase in the connection
fee for new service from $1 200 to $2 500. The Company proposed an effective date of September
STAFF COMMENTS JANUARY 19 2007
2006 for the new rates. The Commission suspended the proposed effective date in Order No.
30119 issued August 29 2006.
The Commission granted a Certificate of Public Convenience and Necessity (No. 293) to
Spirit Lake in February 1983 , although the water system began operating in 1977. Spirit Lake
currently provides service to 287 customers in Kootenai and Bonner Counties, Idaho. The
Application states that the Company s rates for consumption have not changed since initially
approved by the Commission in November 1983. In June 2004, the Commission approved an
increase in the Company s connection fee from $650 to $1 200. The Company states that the
500 connection fee it now proposes is the actual cost it incurs in connecting a new customer to
the water system. The Company is requesting the new service connection fee to cover the amount
actually paid to outside contractors who perform the connection work.
In 1982 the water distribution system owned by Hanson Properties, Inc. (HPI) was turned
over to Spirit Lake, a wholly owned subsidiary ofHPI. In November 1994, HPI became Hanson
Industries, Inc. (HI), a Sub S Corporation, and Spirit Lake became a C Corporation. HI remained
the majority owner of Spirit Lake, with the remaining ownership held by Raymond and Lois
Hanson.
HI is involved in the mining industry, real estate development and property management.
According to HI personnel, HI financed the construction of the water system, as well as its
operation since inception. HI handles all accounts payable and receipts for Spirit Lake. Spirit Lake
does not have a bank account separate from that of HI. Transactions are periodically moved
through journal entries from HI to the water company general ledger. Spirit Lake s fiscal year is
November 1 through October 31.
Spirit Lake s office is located in Spokane, Washington along with that of HI. Spirit Lake
has no direct employees. Instead, HI personnel provide accounting, billing, customer service, water
operator and maintenance services for Spirit Lake.
System Description and Service Problems
Spirit Lake s water system consists of one well with a 500 gpm, 100 horsepower pump
which lifts water approximately 600 feet to a concrete reservoir. The reservoir is a reinforced
concrete, above-ground cylinder with a total available capacity of 192 400 gallons. Three booster
pumps deliver water from the reservoir to the mains and branches of the system at a set pressure of
45 psig. The booster pumps are housed in a below-ground concrete caisson. System control valves
STAFF COMMENTS JANUARY 19 2007
chlorinator and bladder type pressure tanks are housed in a building next to the reservoir. A small
shed abutting the frame building is used to house a 75 kW diesel generator set for back-up power
supply.
The Company s service territory covers an area of approximately six square miles. The
system s mains and branches contain 126 585 feet of pipe, most of it PVC pipe, in sizes varying
from 1 inch to 10 inches in diameter. Approximately 527 feet of pipe is galvanized steel. Because
customer stub outs and valves were not installed on the mains and branches when the system was
built, every new customer added to the system requires a tap into a main that is under pressure.
As of December 2006, the system serves 287 active customers in the Spirit Lake East and
Treeport subdivisions. There are also 18 dormant customers (meters locked) connected to the
system. The subdivisions are largely built out, with thirteen customer hook-ups in fiscal year 2005
and three new hook-ups in 2006. The service area terrain is mostly flat with the high point being in
the northwest and the lowest point (45 to 50 feet lower than most of the service area) being the
Treeport subdivision at the northeast comer of the service area.
Following a seven-day outage in OCtober of 2004, the Idaho Department of Environmental
Quality directed the Company to install a second well to serve the system because of well pump
failure. During the course of discussions with the Company, DEQ noted numerous additional
deficiencies in the water system. These included some items identified in an October 2004
engineering report commissioned by the Spirit Lake East Homeowners Association and the North
Kootenai Water District.
Staff believes there are three maintenance items that require attention and thus affect the
Company s rate request. The most important is unidentified leakage from the system; second is the
failure of the recently installed back-up power supply that is exacerbated by the system leakage;
third is repair of the flat roof over the water storage reservoir.
System Leakage
Leakage in the Spirit Lake system is more than 1-1/2 gallons for every gallon used, which is
well beyond the recognized maximum acceptable levels of 10-15%. System well production
customer use and leakage parameters are presented in the table below. By any standard the leakage
problem is severe, and appears to be increasing faster than customer usage, indicating that the
volume of water leaking from the system as a percent of total production is increasing.
STAFF COMMENTS JANUARY 19 2007
% Increase
ITEM MEASURED 2005 2006 2006/2005
Well Production 381 105 105 30.
Metered to Customers 604 148 23.
Gallons Leaked 778 958 36.
Ratio Well Production to 2.47Gallons Metered
Ratio Gallons Leaked per 1.47 1.62 10.4
Gallon Used
Staff initially was concerned that the recorded high volume of water produced may be an
error in measurement of well production. Staff therefore corroborated the meter data by reviewing
the electrical consumption and comparing it to the well meter data. The well pump meter data and
electricity usage confirm Staffs calculation of the well production and leakage numbers.
Given the seriousness of the leakage problem, Staff recommends the Company be directed
to prepare a plan to locate and repair system leaks. Once the significant leaks and repair costs have
been identified, the Company could submit an application for a surcharge or other rate mechanism
if necessary to provide the funding to make the needed repairs. For this case, Staff recommends
that the cost of excess electricity consumed due to excessive leakage be disallowed in the
Company s revenue requirement. Excess electricity cost is that which is required to pump water in
excess of the metered usage plus 10%. Staff made allowance for the power cost associated with
pumping. Staff calculates the pro-rata share of electricity to be disallowed to be 55% of the test
year total electric bill assuming a reasonable exchange rate of about 12%.
Stand-by Power Generator
During the fall of2005 the Company installed a 55 horsepower (approx. 75 kW) diesel
standby generator serving the water system. Since then there have been two power outages where
the generator was needed. In both instances, but for different reasons, the generator set failed.
Additionally, the generator does not provide enough electricity to run the pump to keep the
reservoir supplied during an outage.
Staff calculated the amount of time, under different conditions, that water service will be
available from the reservoir during a power outage without refilling from the well pump. The
reservoir provides system run time of only 3.8 hours under worst-case conditions (summer peak).
ST AFF COMMENTS JANUARY 19 2007
the system leakage were only 10%, rather than 150%, the system run time in a power outage is
extended to 6.1 hours. The two most recent outages lasted 11 hours and 37 hours. Under these
circumstances the existing generator has very limited usefulness. The results of Staffs calculations
are shown in Attachment A.
Elimination of system leakage is the priority, and will improve available operating time
during a power outage. However, given the location of the water system and the duration of recent
power outages, Staff recommends that the Company investigate the possibility of acquiring a larger
back-up generator capable of operating the entire system.
Reservoir Roof Repair
A flat roof covers the water storage reservoir. Although the roof currently does not leak
water ponding on the roof presents a potential water quality issue. Water sitting on the flat surface
will freeze and thaw, leading to leaks in the roof. The sitting water could then contaminate the
reservoir below. Staff recommends the Company be directed to repair the roofto prevent ponding
of surface water to assure a safe, reliable water supply.
STAFF REVENUE REQUIREMENT ANALYSIS
Audit
Staff examined the books and records of the Company for the fiscal year ending October 31
2005 and selected transactions for the fiscal year ending October 31 , 2006. Staff also reviewed the
2002 Staff audit and selected transactions/data from 2002 through 2006. A field audit was
conducted in November 2006 at the Company s offices in Spokane. The purpose of the audit was
to verify the accuracy of the revenues, expenses and rate base amounts included in the Company
Application and to determine if the Company s rate increase request is reasonable. The audit
included (but was not limited to) examination of general ledger accounts and supporting invoices
employee timecards, payroll records, billing records, verification of physical plant and property,
comments submitted by customers, Idaho Department of Environmental Quality (DEQ) records and
discussions with the HI's employees. Spirit Lake does not employ an independent auditor to audit
its financial statements; however, it does employ an accounting firm to prepare its federal and state
tax returns.
STAFF COMMENTS JANUARY 19 2007
Revenues, Expenses and Rate Base
The Company proposes using the actual test year data from its 2005 fiscal year. The
Application s revenues and expenses are based upon the actual recorded performance of the
Company for 2005 and are comparable to the 2005 annual report filed with the Commission with
certain adjustments discussed below.
Revenues
The primary source of revenue for Spirit Lake is the sale of water to residential customers
and in fiscal year 2005 this revenue totaled almost $48 000. In addition, the Company billed
$18 000 of revenue for hook-up fees. The Company included within its Application adjustments to
remove hook-up costs and revenues from its operating revenues and expenses. Staff proposes that
annual test year revenues be further adjusted as discussed in "Adjustment E for Annual Revenue
and "Adjustment F to Impute Revenue.
Expenses
The Company reported total expenses of $96 833 in its 2005 report to the Commission. The
Company removed hook-up costs of$30 075 from its operating expenses as explained in the rate
base discussion below. The Company also adjusted its depreciation expense to reflect the changes
to rate base that it proposes. Finally, the Company annualized water-testing expenses so that the
test year includes the average yearly cost of water testing expenses. Staff proposes that annual test
year expenses be further adjusted by Adjustments A through D, Adjustments F through I, and
Adjustment K as discussed later in these comments.
Rate Base
The Company s proposed $160 529 rate base is comprised of the following components:
utility plant in service ($961 201) less contributions in aid of construction ($70 050) and
accumulated depreciation ($740 750); a working capital component ($7 073) using the 1/8th
operating and maintenance expense method; and an inventory of spare parts ($3 055) required by
DEQ.
Spirit Lake s rate base is comprised of improvements and repairs made to the system. The
original cost of the developer installed system including the well and distribution system were
considered contributed property under Commission Rule 103, Policies and Presumptions for Small
Water Companies. The rate base in the Company s Application includes plant in service recorded
by the Company as restated to reflect Staff s audit of the Company s records in 2002, capital
additions since 2002, and post test-year (pro forma) additions (Company Exhibit 1 , Schedule A).
STAFF COMMENTS JANUARY 19 2007
The plant, accumulated depreciation and contributions in aid of construction reported in the
Company s FY '01 annual report netted to zero. Staffs 2002 audit review encompassed multiple
fiscal years and determined some items expensed in several years actually replaced capital items
originally put in service by the Company and therefore should have been considered part of rate
base. The Company s Application includes those items identified by Staffs 2002 audit.
The Company has also adjusted rate base (more specifically, plant in service) to capitalize
the hook-up costs during 2001 - 2005 that exceeded the corresponding hook-up fees. The Company
has not been recording the hook-up fee as contributions in aid of construction nor has it been
capitalizing the cost associated with the hook-up. Order No. 18466 issued November 22, 1983 in
Case No. U-1139-, implies that ratemaking treatment for hook-ups would be considered original
plant investment to serve the lots developed. Instead, the Company has been reporting the hook-up
fees as other water sales revenue and the cost associated with the hook-up has been reported and
recorded as an operating expense.
Staff further adjusted the rate base proposed by the Company by Adjustments Hand J as
discussed later in these comments.
Adjustments and Accountine Issues
Based upon its review, Staff made the following adjustments to the Company s proposed
revenues, expenses and rate base, as shown on Attachment C. These adjustments have been
incorporated into Staff s calculation of its proposed revenue requirement and resulting increase in
revenues as shown on Attachment B.
Adjustment A to Power and Chemical Costs
The Company s Application includes $16 570 power and $694 chemical costs (Exhibit No.
, Schedule B, Column H, Lines 7 and 8). These costs are to pump and treat water from the
Company s well. Staff identified substantial water loss in the system by comparing the customers
metered water usage, as reflected in the Company s billing data, to the metered water pumped by
the well reflected in the Company s well logs. Because of the significant water loss in the system
the Company uses substantially more power and chemicals than would otherwise be needed. Based
upon the level of water loss, Staff recommends that power costs be reduced by 55% or $9 114 and
that chemical costs be reduced by $470. These adjustments reduce operating expenses by $9 583.
STAFF COMMENTS JANUARY 19 2007
Adiustment B to Professional Services Costs - Engineering and Legal Expenses
The Company s records indicate that its Application includes $6 863 engineering and $8 444
legal expenses for a total of $15 307 for the 2005 test year. No professional services costs (other
than for water testing) were reported for the Company in its 2002 and 2003 Annual Reports to the
Commission. In the Company s 2004 Annual Report, $2 500 for professional services costs (other
than for water testing) was reported, which was an engineering expense.
Staff recommends that a portion of the engineering and legal costs not be included for
annual recovery in customer rates for three reasons. First, certain costs relate to the potential sale or
transfer of the system from the Company s owners to another party. Staff believes these costs
should be borne entirely by the Company s owners, not its customers. Second, other costs relate to
repairs mandated by DEQ with which the Company did not comply, resulting in duplicated costs for
a second approved repair. Third, the remaining costs relate to activities (a system study and
improvements) that span more than one period. These costs should therefore be amortized and not
recovered from ratepayers annually.
The Company identified engineering costs in 2004, 2005 and 2006 for (1) preparation of an
engineering study report for analysis during the Company s discussions regarding transfer of the
system from Spirit Lake s owners, (2) communications with the Company and other parties
regarding the study, (3) field visits, and (4) communications with DEQ regarding engineering issues
including a Plan of Correction and other DEQ mandates.
Invoices supporting both the engineering and legal costs were reviewed by Staff. Staff s
review of these invoices, the engineering studies referenced, and DEQ documents identified that
946 of the engineering and $5 413 of the legal costs contained within the Company
Application relate to sale or transfer of the system or to duplicate repairs of the reservoir.
In addition, the remaining $6 948 ($15 307 - $8 359) engineering and legal costs reasonably
attributed to the regulated operations should be amortized, at a minimum, over three years. In
addition to being costs where benefits are received in more than one fiscal year, these costs are
greater than the costs incurred by the Company during the previous three years combined and
should not be included within the customers' rates for recovery on an annual basis. Staff proposes
an amortization period of three years. Staff recommends that $2 316 engineering and legal costs be
included for recovery on an annual basis. As a result, Staff reduced the Company s test year
expenses by $12 991 ($15 307-316).
STAFF COMMENTS JANUARY 19 2007
Adiustment C to DEQ Fees
The Company s Application contains $1 842 for annual fees paid to DEQ (Exhibit No.
Schedule C, Column C, Line 9A). This amount is overstated by $750 due to the Company posting
both an annual payment for the 2006 DEQ assessment and three quarterly payments of the 2005 fee
(the first quarterly payment was processed in fiscal year 2004) during the 2005 test year. Staff
removed $750 (the amount of the 2005 quarterly payments) from total expenses so that the fees
reflect only the 2006 annual assessment.
Adiustment D to Water Testing Expenses
The Company s Application includes almost $900 for the average cost of water testing
required by DEQ (see Company Water Testing Schedule and Cost Worksheet that follows Exhibit
No.6). Because not all water tests are performed every year, and several of the tests that are
performed less frequently are quite costly, it is more equitable to use the average yearly water
testing expenses when setting rates. This method, annualization of water testing expenses, is
Commission practice and was most recently approved for another small water company in Case No.
CAP-06-1 (Order No. 30198 dated December 12, 2006). However, as noted by HI personnel
from 2005 through 2007 DEQ waived certain tests that Spirit Lake included in its Application.
Staff removed the costs associated with those tests. This adjustment reduces test year operating
expenses by $577.
Adiustment E for Annual Revenue
The Company s Application includes annual revenue (excluding hook-up fees) of$47 903.
However, that revenue includes only eleven months of minimum monthly customer charges.
During October 2004, the Company experienced a significant outage due to pump failure. As a
result, the Company credited customers ' bills for one month. According to its 2004 Annual Report
the Company had 273 active customers as of October 31 , 2004. This is representative of the
customers affected by the outage in 2004. Staff increased revenues by $3 276 (273 x $12) so that
the test year reflects an annual (twelve months) billing at the tariff rate in effect during the test year.
Adiustment F to Impute Revenue
The revenues for Spirit Lake are generated through billing under the existing tariffs on file
with the Commission. The Company includes in its Applicationthe revenue billed customers for
water consumption and minimum monthly charges during the 2005 test year. During test year
2005 , there were 13 new customers connected to the system. Because these new customers were
not connected to the system for the entire test year only a partial year s water consumption and
STAFF COMMENTS JANUARY 19 2007
corresponding revenue for these customers is included in the Company s Application. Staff
identified the additional fiscal year 2006 water consumption and revenue associated with these
hook-ups and recommends that the Company s test year revenues be increased by $1 610 so the test
year revenue more closely reflects those customers ' annual revenue level.
Adjusting revenues to reflect increased water consumption also requires adjustment to the
Company s power expenses for pumping that water. Staff calculated the average power cost per
gallon in the test year, adjusted the average to reflect the water loss discussed in Adjustment A, and
multiplied that by the increased water consumption. As a result, Staff increased power costs by
$158. The increased chemical costs for treating the additional water consumption is de minimis and
should be reflected in existing supply levels and expense.
Adiustment G for Rate Case Expenses
While the Company has amortized over a three-year period an estimated rate case expense
of $5 000 (Exhibit No.6), it did not include the $2 207 annual amortization of rate case costs in its
requested revenue requirement. Staff, in this adjustment, included within its recommended revenue
requirement a three-year average of the actual rate case costs provided by the Company. Most
recently in Case No. CAP- W -06-1 (Order No. 30198 dated December 12, 2006), the Commission
approved a three-year amortization of rate case expenses as appropriate for recovery through
Capitol Water Company s rates. To reflect this treatment, Staff has increased Spirit Lake s test year
expenses by $1 977 ($5 931/3 years).
Adiustment H for Plant no Longer in Service
The Company included costs for a pump that was replaced in 2004. While the costs for the
pump currently in service should remain in the case, the costs associated with the pump it replaced
should be removed from plant in service, accumulated depreciation and depreciation expense.
The National Association of Regulatory Utility Commissioners Uniform System of
Accounts for Class C Water Utilities requires that when plant is retired, accumulated depreciation
be charged and plant in service be credited with the entire recorded original cost of plant retired
regardless of the amount of depreciation that has been accumulated for the item. Accumulated
depreciation is also credited with the salvage value recovered from plant retired.
The Company s Application includes $21 392 in utility plant and $1 070 in depreciation
expense for this pump. The Company valued at $1 806 two items salvaged when this pump was
retired (replaced). Staff in this adjustment decreased utility plant by $21 392, accumulated
depreciation by $19 586 ($21 392-806), and depreciation expense by $1 070.
STAFF COMMENTS JANUARY 19 2007
Adiustment I for Out of Period Expense (Restocking Charge)
The Company in its Application has expensed in its 2005 test year a restocking charge
incurred before the beginning of the test year, which is November 2004. In addition to relating
a prior fiscal year s activity, this charge is not considered appropriate as it does not represent goods
or services used in providing water service to its customers. For both these reasons, Staff has
reduced Materials and Supplies - Operation and Maintenance Expense by $462.
Adiustment J to Working Capital
Staff accepts the Company s method of calculating working capital as one-eighth of annual
Operating and Maintenance (O&M) expenses. Due to Staffs adjustments to operating expenses
the same methodology results in an adjustment to the resulting working capital to reflect the
adjusted O&M levels. Adjustment J, as shown on Staff Attachment C, decreases working capital in
Staffs proposed rate base by $2 685. This is the same type of adjustment most recently approved in
Case No. CAP-06-1 by Order No. 30198 dated December 12 2006.
Adiustment K to State and Federal Income Tax
This adjustment reflects the income tax effect of all the preceding Staff adjustments to the
Company s net income. While individual adjustments may not affect income taxes, cumulatively
the adjustments result in taxable income and require that State and Federal Income Tax be increased
by $700 and $1 545, respectively.
Costs Omitted from the Company s Application
The Company incurred costs in 2005 and 2006 that were inadvertently left out of its
Application. One of the largest items is associated with a used generator that HI bought and
installed at Spirit Lake s facilities. In 2005 Spirit Lake recorded a market cost of $12 360 for the
generator provided by HI. Transactions between affiliated companies should be recorded at cost.
Staff requested the cost basis of this generator and was informed that it was part of a larger, non-
itemized purchase by HI and therefore, no cost basis could be provided for the generator. Because
of the lack of cost data, the Company s plant in service should not be increased now or in the future
to reflect the cost ofthis generator. The Company did include in its Application costs to install the
generator. Staff did not adjust these costs in the Company s rate base calculation.
Maintenance and Transportation Expenses
The Company incurred significantly higher maintenance and transportation expenses for the
test year 2005 (November 2004 through October 31 2005) when compared to previous fiscal
years. Employee timecards and payroll records support the labor costs. The transportation costs are
STAFF COMMENTS JANUARY 19 2007
derived from the number of trips to Spirit Lake s system and the Internal Revenue Service mileage
rate. Although these costs are greater than in previous fiscal years, Staff recommends that the
Company be allowed to include these expenses in rates. The system water operator is now required
by DEQ to travel to the system facilities at least weekly. Both DEQ and customers have expressed
concern regarding the past maintenance of the system. For these reasons Staff recommends that the
Company continue a higher level of maintenance in the future than it did in the past.
Customers have indicated an interest in the Company having a sinking fund that would
replace equipment on a periodic scheduled basis. Non-cash expenses, such as depreciation expense
could be used for such a purpose.
Capital Structure
The Company s capital structure is 100% common equity. Staff agrees with the Company
requested return on equity of 12%. This is the same return on equity recently approved for Capitol
Water Corporation by Order No.3 0 19 8 in Case No. CAP - W -06-
Revenue Requirements
Staff s calculation of the proposed revenue requirement for Spirit Lake is shown on
Attachment B. After the adjustments proposed above, Staffs recommended rate base for Spirit
Lake is $156 038. Applying the 12% rate of return produces a return on rate base (or income
required) of$18 725. Staffs adjustments to revenues and expenses result in net income after taxes
of$8 052. Comparing this net income with the income requirement of$18 725 , Spirit Lake
income deficiency is $10 673. After applying the net (income) to gross (revenue) multiplier for
income taxes, the total revenue increase recommended by Staff is $13 751.
Staff proposes a revenue increase of$13 751 or 28.71% compared to the request by the
Company for an increase of $47 866, nearly 100%. Staff s revenue requirement identifies the
revenues to be recovered through customer rates excluding hook-up fees. The determination of the
costs to be recovered through hook-up fees is discussed in the "Connection Fees" section of Staffs
comments.
Staff Recommendations for Tariffs
Staff reviewed and analyzed the Company s metered water sales for the test year. The
results of that analysis are presented in Attachment D. The water consumption pattern is normal for
STAFF COMMENTS JANUARY 19 2007
a panhandle subdivision and the amounts used by the customers do not warrant any consumption
issues such as conservation being part of the tariff structure.
Staff proposes an increase from $12.00 to $13.00 in the minimum monthly charge, which
includes the first 9 000 gallons of use, and that the commodity charge be increased from $0.10 to
$0.13 per hundred gallons over 9 000 gallons. The table below compares the present, Company
proposed and Staff proposed tariffs and the average monthly bill for each of the three tariffs. The
difference between the Company s proposed tariff increase of 100% and the resulting average
monthly bill increase of 127% is due to differing assumptions about the amount of water in excess
of9 000 gallons per month the customers use. The Staff proposed tariff provides revenue of
$61 902, slightly more than the requirement of $61 ,654.
Staff s proposed tariff structure moves the split of revenue between minimum charge
revenue and commodity charge revenue from the present 75/25 split to a 70/30 split. This is
consistent with revenue splits of other similar companies and requires larger water users to pay
slightly more.
Calculations Spirit lake Tariff Comparison
assume 280
customers per the Test Year Company Proposed Staff ProposedCompany
Application Tariff Tariff % Increase Tariff % Increase
Minimum Charge $12.$24.100.00%$13.33%
Charge for Water
over 9,000 $0.$0.100.00%$0.30.00%
Gal/Month
~verage Bill $14.$32.127.00%$18.42 29.00%
Connection Fees
The Company requested an increase in its fee to connect new customers from $1 200 to
500. In 2004, when the Company requested an increase in the connect fee, the Commission
approved an increase from $650 to $1 200 for new connections.
Staff reviewed the contractor invoices provided by the Company for connecting new
customers. In the test year there are eleven invoices for connecting new customers for a flat charge
of $2 500. There are no details included in those invoices. Because the Company did not submit
any cost justification including data about equipment, labor or material costs for the fixed rate, Staff
cannot support the proposed $2 500 charge. Staffs review of the most recent invoices for new
STAFF COMMENTS JANUARY 19 2007
connections from a different contractor who performed on a time and materials basis indicates that a
more appropriate cost is $1 600.
Staff recommends an increase in the New Customer Connection Tariff to $1 600.
Consumer Issues
Spirit Lake filed a Customer Notice with its Application for Approval of Increase in Rates
and Changes for Water Service. Included in the customer s August 15 2006 billing statements was
a copy of the Notice, in compliance with the Utility Customer Relations Rules (IDAP
31.21.02102).
Timberlake High School Library was the host site for a Consumer Workshop on November
2006. Thirty-seven customers attended the workshop. Customers voiced concerns regarding
poor water quality, low system pressure, inadequate maintenance of the water system, lack of
justification for the requested rate increase, and failure by the Company to provide fire hydrants or
fire protection access. A majority of the attendees were well-informed members of the Spirit Lake
East Homeowners Association and the homeowners from the Treeport Subdivision, which is not
represented in the Spirit Lake East Homeowners Association. Both groups have been in contact
with DEQ and Hanson Industries during the past several years to address service and water quality
issues with Spirit Lake.
Customers also voiced dissatisfaction with the notice provided for the workshop, and
indicated a notice posted on the Homeowners Association web site would have generated a larger
turnout. On October 19, 2006, the Commission issued a press release regarding the workshop to the
Coeur D' Alene and Sandpoint newspapers. Staff also provided a copy of the press release to the
Homeowners Association s president via email on October 20 2006.
The Commission has received twenty-one written comments and a petition with 56 customer
signatures regarding this rate case. Several comments received after the initial workshop requested
that an additional workshop or a hearing be held. Ten comments were in support of an increase
provided that a plan showing substantial investment to improve water quality and pressure would be
implemented. Eleven comments reflected opposition to the proposed rate increase based on past
failure of the Company to adequately maintain and improve the system over the years. A few
comments supported an increase in rates to finance an additional well rather than relying on only
the one that the Company currently has. Three customers requested that, contingent upon the
granting of a rate increase, some of the funds be directed into a Capital Improvement Fund account.
STAFF COMMENTS JANUARY 19 2007
Several comments requested backflow devices be required on all existing and future homes to help
prevent contamination within the system. Four comments addressed the Company s request to
increase the hookup fees. . All felt that the fees should represent the true cost of providing the
connection rather than become a means for the Company to increase profit. Five comments
requested installation of fire hydrants. One customer stated that the Homeowners Association had
sought permission to install fire hydrants at no cost to the Company but the request has gone
unanswered. Additionally, almost every comment expressed frustration with the Company s lack of
response to water and service quality issues. The petition addressed many ofthose same issues and
requested a second workshop and/or hearing.
The Commission received nineteen complaints regarding the Company from January 1
2004 to January 8 2007. Six of the complaints concerned extended water outages in October 2004.
Other complaints concerned poor water quality, a billing dispute and objections to this proposed
rate increase. Five complaints were received during the December 2006 outage referencing the
failure of the back-up generator to adequately handle the system needs, stating that the Company
was not diligent in maintaining the back-up battery. Complainants also expressed concern that a
boil order mailed to customers during the busy holiday season, in the middle of a major storm
resulted in the notice reaching residents two or more days after the system had been flushed with
chlorine. These customers requested a more timely notification process for boil orders. A similar
request was also made in one of the 2004 service outage complaints. It appears the Homeowners
Association web site would be a good avenue for notifying customers in addition to mailing notices
to customers.
A review of Spirit Lake s forms, notices and billing statement show the Company is now in
compliance with all of the Utility Customer Relations Rules (IDAPA 31.21.01000 et seq.) and
Utility Customer Information Rules (IDAP A 31.21.02000 et seq.). Before December 2006
customers were required to call an out-of-state long distance number (509-922-5252) in order to
reach Hanson Industries to discuss outages, emergencies and billing questions. At the request of the
PUC Staff, the Company obtained a toll free number (866-869-8518). All customer notices now
reflect the new contact number.
Hanson Industries' receptionist handles all incoming customer calls. Billing questions are
directed to the Company controller, while emergencies are forwarded to the certified operator.
Hanson Industries does not track the number of busy signals customers encounter, customer service
average handling time or first call resolution rate. The Company has reported six customer
STAFF COMMENTS JANUARY 19 2007
complaints filed directly with it for year ending 2005. Two complaints were regarding quality of
the water service while the remaining four were disputing high water consumption bills. The
Company made no disconnections for nonpayment of bills in 2005 and one request for payment
arrangements.
STAFF RECOMMENDATIONS
Revenue Requirement
Staff recommends that the Commission approve the adjustments made by Staffresulting in a
revenue requirement of$61 654 for Spirit Lake. This requires increasing the Company s revenues
by $13 751 or 28.71 %.
Tariffs
Staff recommends that the Commission approve a customer tariff consisting of a $13.
minimum monthly charge to include the first 9 000 gallons of use and a commodity
charge of $0.13 per hundred gallons over 9 000 gallons to meet the revenue requirement.
Staff recommends that the Commission approve an increase in the New Customer.
Connection Tariff to $1 600.
Repairs and Improvements
Staff recommends the Company be directed to provide a plan and schedule to locate and
repair system leaks.
Staff recommends the Company investigate the possibility of acquiring a back-up power
supply of sufficient size to supply and operate the entire water system during power
outages.
Staff recommends that the Company be directed to provide a plan and schedule to repair
the reservoir roof to prevent ponding.
STAFF COMMENTS JANUARY 19 2007
Customer Issues
Staff recommends that the Commission schedule another workshop and/or a hearing at a
suitable time, to provide more information to the Company s customers due to an
overwhelming request by the customers in both subdivisions.
Staff recommends the Company respond to the Homeowners Association regarding
installation of fire hydrants and/or other emergency fire suppression access.
Staff recommends that the Company work with the Homeowners Association and Water
Association to provide a more timely boil order disbursement.
Respectfully submitted this CI \J-.-
\ \
day of January 2007.
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Harry Hall
Patricia Harms
Tammie Estberg
i:umisc:comments/splwO6.1 wsphhhte
STAFF COMMENTS JANUARY 19 2007
ATTACHMENT A
System Operating Time Available From the Reservoir
The relationship between the back-up power supply and the system leakage is an
important one. The size of the generator selected for the system does not allow for the well
pump to run during a power outage. Only the booster pumps that draw from the reservoir
pressurize the system can be run from the standby generator. Because the system leakage is a
much larger draw on the reservoir than customer demand, the ability of the reservoir to provide
capacity to meet demand through an outage without running the well pump is diminished.
During the 36-hour power outage mentioned above, the reservoir drained quickly by gravity and
was too low for the Company to run the booster pumps when, approximately 18 hours into the
outage, they were able to start the generator.
During the two most recent outages the stand-by generator failed to provide power. In
the first instance, an II-hour outage, improper control settings resulted in the generator set not
working. During the second outage that lasted more than 36 hours, failure of both the main and
back-up batteries resulted in the engine set not running.
SPIRIT LAKE EAST WATER - OPERATING TIME PROVIDED BY THE
SYSTEM RESERVOIR, WITH EXISTING LEAKAGE
Reservoir Drawdown Available When Full 192 000 Gallons
Low Level 000 Gallons
Winter Period Oct 1- Mar 31 Operating Time Available
A vg. Flow, Reservoir Full 20 hours
Peak Flow, Reservoir Low 7 hours
Summer Months Jull- Sep30
A vg. Flow, Reservoir Full 11 Hours
Peak Flow, Reservoir Low 8 Hours
OPERATING TIME PROVIDED LEAKAGE IS REDUCED TO 10 %
Winter Period Oct 1- Mar 31
Avg. Flow, Reservoir Full 72 hours
Peak Flow, Reservoir Low 24 hours
Summer Months Jull- Sep30
A vg. Flow, Reservoir Full 18 Hours
Peak Flow, Reservoir Low 1 Hours
Attachment A
Case No. SPL-06-
Staff Comments
1/19/07
SPIRIT LAKE EAST WATER COMPANY
SPL-06-
Calculation of Revenue Requirement
Test Year Ended October 31 2005 with Pro Forma Adjustments
Company Staff
Proposed Proposed
Adjusted Adjusted
Test Year Test Year
Rate Base (Ex #1 , Sch C, Line 11)160 529 156 038
Required Rate of Return (Ex 3, Line 7)12%12%
Income Required (Line 1 X Line 2)263 725
Income (Loss) Realized (Ex 2, Sch C, Line 32)(17 887)052
Income Deficiency (Line 3 less Line 4)151 673
Net to Gross Multiplier 128.84%128.84%
Gross Revenue Deficiency 866 751
Actual Revenue Billed 903 903
Revenue Increase Percentage Required 99.92%28.71%
Gross-up Factor Calculation:10 Net Deficiency11 PUC Fees12 Bad Debts13 Total (Line 10 - Line 11 - Line 12)14 State Tax ~ 8% (Line 13 x .08)15 Federal Taxable (Line 13 - Line 14)16 Federal Tax ~ 15% (Line 15 x .15)17 Net After Tax (Line 15 - Line 16)18 Net to Gross Multiplier (Line 10/Line 17)
100.0000%
0.2486%
5000%
99.2514%
9401%
91.3113%
13.6967%
77.6146%
128.8417%
Attachment B
Case No. SPL-06-
Staff Comments
1/19/07
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2
ATTACHMENTD
Water Consumption
System metered water sales for the test year were analyzed. The system s 287customers
used a total of 32 868 569 gallons in the test year. System consumption patterns are similar to
those of other small water companies in the Idaho Panhandle (Bar Circle S and Bitterroot) as
shown in the charts below.
000
16,000
g 12 000
X 10 000
5 8,000
(ij(!) 6 000
000
000
000
I/)
.2 30 000
iij
000
000
Spirit lake East
Quarterly System Water Consumption
000
III System Water
ConsumPtio
000
000
1st Quarter 2nd Quarter 4th Quarter3rd Quarter
Spi rit lake East
2005 Quarterly Water Consumpti on per Customer
112005 Water
Consumption
per Customer
1st Quarter 3rd Quarter 4th Quarter2nd Quarter
Attachment D
Case No. SPL-06-
Staff Comments
1/19/07 Page 1 of
Individual customer consumption follows the same pattern, with minor differences. The
main difference is that the maximum use by anyone customer is lower than in comparable North
Idaho subdivisions, in spite of the fact that lots in East Spirit Lake are larger than those in the
other subdivisions. One reason customers in east Spirit lake use less water is that East Spirit
Lake is heavily wooded while the other North Idaho systems are located on the open Rathdrum
Prairie, resulting in customers in the other subdivisions having more area to water. The low per
customer consumption figure indicates that tariff design aimed at conservation is not appropriate.
Attachment D
Case No. SPL-06-
Staff Comments
1/19/07 Page 2 of 2
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 19TH DAY OF JANUARY 2007
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. SPL-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
TO THE FOLLOWING:
ROBERT J. BOYLE
SPIRIT LAKE EAST WATER COMPANY
15807 E. INDIANA AVE.
SPOKANE, WA 99216-1814
EMAIL: admin~hansonind.com
JOHN R. HAMMOND JR.
BATT & FISHER LLP
PO BOX 1308
BOISE, ID 83701
EMAIL: irh~battfisher.com
SECRETARY
CERTIFICATE OF SERVICE