20060110UWI response staff's objection clerk's record.pdf

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Attorneys for United Water Idaho Inc.
OR\G\NAL
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
UNITED WATER IDAHO INC.SUPREME COURT
DOCKET NO. 32431
Appellant
IPUC Case No. UWI-O4-
vs.
IDAHO PUBLIC UTILITIES COMMISSION
RESPONSE TO STAFF'
OBJECTION TO CLERK'
RECORD
Respondent.
COMES NOW United Water Idaho Inc.
, ("
United Water " the "Company ) and responds
to Staffs Objection to Agency Record as follows, to wit:
Prior Orders
Staffs Objection requests that prior Commission Order No. 25062 (Case No. BOI-93-
1) be included in the Agency Record.
United Water is not certain that inclusion of this prior order in the Record is necessary.
United Water assumes, and is prepared to stipulate, that the Supreme Court may take judicial
notice of prior orders without their inclusion in the record. See Idaho Code 9-101:
Courts take judicial notice of the following facts:
(3). Public and private official acts of the legislative, executive and judicial
departments ofthis state and ofthe United States.
RESPONSE TO STAFF'S OBJECTION TO CLERK'S RECORD - 1
Further, the Idaho Appellate Rules discourage inclusion of un-necessary material in the Record.
Idaho Appellate Rule 19
, "
Request for additional transcript or agency record " provides:
If the court concludes that a party or attorney has vexatiously or unreasonably
increased the cost of litigation by inclusion of irrelevant materials, the court may
deny that portion of the costs the court deems to be excessive and/r impose
monetary sanctions. Notice and an opportunity to respond shall be provided
before sanctions are imposed.
, however, the Commission is inclined to include one prior order relating to United
Water (or its predecessors), then it should include all relevant prior Orders. Attached hereto are
Order Nos. 25640, Case No. BOI-93-, Order No. 27617, Case No. UWI-97-, and Order
No. 28505, Case No. UWI-OO-l. If the rate case order from the 1993 case is to be included
as requested by Staff, these subsequent rate case orders should be included as well.
Notice of Intent to File General Rate Case
Staffhas additionally requested that United Water s Notice ofIntent to File General Rate
Case dated November 30, 2005 be included in the Record. In support ofthis, Staff asserts, only
vaguely, that the Notice is "
.. .
relevant and necessary for a full adjudication of this matter on
appeal, specifically regarding Appellant's statement of issues in the Notice of Appeal concerning
constitutional taking of property." (Staff Objection, Pg. 3).
United Water respectfully contends that the Notice ofIntent is irrelevant to the issues in
the pending appeal.
Dated this -i- day of January, 2006.
Attorneys for United Water Idaho Inc.
RESPONSE TO STAFF'S OBJECTION TO CLERK'S RECORD - 2
CERTIFICATE OF SERVICE
I hereby certify that on the day of January, 2006, I caused to be served, via the
method(s) indicated below, true and correct copies of the foregoing document, upon:
Weldon B. Stutzman
Donovan E. Walker
Deputy Attorneys General
IDAHO PUBLIC UTILITIES COMMISSION
O. Box 83720
Boise, ID 83720-0074
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Clerk of the Courts
IDAHO SUPREME COURT
O. Box 83720
Boise, ID 83720-0101
Hand Delivered
S. Mail
Fax
Fed. Express
Email
RESPONSE TO STAFF'S OBJECTION TO CLERK'S RECORD - 3
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
BOISE WATER CORPORATION TO REVISE
AND INCREASE ITS RATES CHARGED FOR
WATER SERVICE.
CASE NO. BOI-93-
ORDER NO. 25640
SYNOPSIS
This is a final Order determining the revenue requirement and setting new rates
for Boise Water Corporation (Boise Water; Company). By this Order, we authorize Boise
Water to increase its revenues by $3 665,144 or approximately 22.59%.
SUMMARY
On December 16 1993, Boise Water filed an Application for authority to increase
its rates and charges for water service. The Company revised that filing in early 1994 and
now seeks to increase its rates by $6 348 575 or approximately 43.52%. Included with the
Company s Application was a cost of service study recently performed on behalf of Boise
Water. Based on that study, the Company proposes revising and increasing the numberof
customer classes.
On January 7 , 1994 , the Commission issued Order No. 25326 suspending Boise
Water s proposed rates for a period of 30 days plus five months from the proposed
effective date of January 15 , 1994. On May 31 , 1994 through June 2 , 1994, the
Commission conducted an evidentiary hearing in this case.
0 \
ORDER NO. 25640
Appearances were made by the following parties:
BOISE WATER CORPORATION:Walton F. Hill , Esq.
General Water Works Management
& Service Company
2004 Renaissance Blvd.
King of Prussia, PA 19406-2758
Kenneth Bergquist, Esq.
910 Main Street, STE 348
Sonna Big.
Boise, ID 83701
COMMISSION STAFF:Lori Mann
Deputy Attorney General
Idaho Public Utilities Commission
PO Box 83720
Boise , ID 83720-0074
COALITION OF BOISE WATER
CUSTOMERS
(CBWC):
Peter J. Richardson , Esq.
Davis , Wright, Tremaine
999 Main Street, STE 911
Boise, ID 83702
IDAHO CITIZENS COALITION
(ICC):
AI Fothergill
9220 W Wright Street
Boise , ID 83709
SHARON ULLMAN Appearing Pro Se
9687 W Desert Ave.
Boise, ID 83709
Boise Water proposes a rate base of $69 630 392. By this Order, we make the
following adjustments to that proposed rate base: (1) the elimination of Boise Water
investment in the Pierce Park/Gary Lane line extension; (2) the disallowance of prospective
capital expenditures; (3) the elimination of a post-closing allowance for funds used during
construction (AFUDC) related to the Marden Street treatment plant, and; (4) the elimination
of that portion of Boise Water s investment in the Marden Street plant relating to excess
capacity. We approve a rate base for Boise Water of $67 218 005.
ORDER NO. 25640
We also make numerous adjustments to the Company s proposed operating
results including: (1) an adjustment to test year consumption data to reflect the usage of
new customers connected to the system during the test year; (2) the weather normalization
of test year consumption data as proposed by Staff; (3) the elimination of lost revenues
related to conservation; (4) the elimination of an inflation adjustment; (5) the elimination of
prospective expenses, and (6) a reduction of the Company s rate case expense.
We adopt a return on equity for Boise Water of 11.25% and an overall rate of
return of 9.51%. This yields a revenue deficiency of $3 665 144, which we allocate by
equal percent increase to the Company s commodity charge for all customers. We direct
the Company to begin compiling customer class specific usage data to aid in the future
implementation of class specific rates. By this directive, we do not endorse the Company
customer class definitions.
The current bimonthly customer minimum bill for a 3/4 inch or smaller meter is
$16., which includes 1 000 cubic feet of water usage. We hereby reduce the customer
minimum to $12.00 for a 3/4 inch or smaller meter and eliminate the 1 000 cubic foot
allowance. Customers will henceforth be billed for all water usage at the rates approved in
this Order. The bimonthly customer minimum bill for all other meter sizes will be reduced
proportionately and their usage allowances are also eliminated.
We modify the seasonal rate structure adopted in Boise Water's last general rate
case. The summer commodity price will remain approximately 25% above the non-
summer price. The summer period will change from the current split, four months to five
months from May 1 to September 30. We increase the Company s hookup fees for its
smallest meters from the current level of $190 to $1 200. Hookup fees for all other meter
sizes will be increased proportionately. For prospective customers connected to a
separate irrigation system , however, there shall be a discounted hook-up fee of $465 for
3/4 inch and smaller meters. Larger metered customers shall receive proportional
discounts. Finally, we award intervenor funding to ICC in the amount of $13 790.37 and to
CBWC in the amount of $11 ,209.63.
ORDER NO. 25640
FINDINGS
1. TEST YEAR
Boise Water proposes a test year ending December 31 , 1993 with operating
results adjusted through June 30 , 1994. Staff objects to some of the adjustments but all
parties agree with the proposed test year.
We find:
The use of a test year ending December 31 , 1993 is reasonable forthe purposes
of this rate case. As discussed later, however, we do not allow prospective adjustments to
operating results which are not known and measurable.
II. RATE BASE
Calculation
Boise Water calculates its rate base as of December 31 , 1993 adjusted for
budgeted changes. In Order No. 25062 issued in the last general rate case we ordered
Boise Water to present, as an option , a 13 month average calculation of rate base in this
case.
We find:
According to Staff, Boise Water s rate base would be $1 163 281 lower if
calculated based on a 13-month average as opposed to year end. While it might be
advantageous to ratepayers to have a lower rate base, no party challenges Boise Water
proposal to utilize a year end rate base. Boise Water s customer base and its investment
in plant are both growing rapidly. A year-end calculation of rate base for a utility
experiencing rapid growth is, in this case , a more accurate reflection of that utility
investment in plant. In light of the foregoing and the absence of objection, we find that a
year-end calculation of rate base for Boise Water is fair, just and reasonable.
Marden Street Plant
Boise Water s Ranney collectors accumulate water percolated down from the
surface near the Boise river. They currently have a capacity of approximately 5.3 million
gallons per day (MGPD). It was recently determined that the water from the Ranney
ORDER NO. 25640
collectors was not potable without treatment. The Marden Street plant was constructed to
treat the water from the Ranney collectors. It currently has a capacity of 8 MGPD with an
ability to expand to 16 MGPD in the future.
CBWC objects to the inclusion of any Marden investment in rate base on several
grounds. First, the Coalition argues that Marden is not a cost-effective acquisition when
compared with other resources. Witness Reading uses the $15.9 million investment in
Marden to calculate a $2 million investment per MGPD. By the Company s own statement
he argues, other treatment plants could be constructed at $1.2 million per MGPD. Second
Reading argues that Marden is over sized. In spite of the Company s contention that the
entire plant will serve existing customers, he argues that the additional 8 MGPD in potential
capacity is being held for future use even though current system customers are being
asked to pay for 83% of the cost of the project, but receiving only half of its capacity.
Reading characterizes Marden s excess capacity as plant held for future use without any
assurance as to its necessity. He contends that it is inappropriate to ask existing
ratepayers to underwrite Boise Water s gamble that the excess capacity of Marden will
ever be used and useful.
Reading recognizes that there are economies of scale in constructing a plant
with excess capacity but contends that the benefits of these economies will be realized
only if the demand for water in southeast Boise occurs as predicted by the Company.
Reading points out that Boise Water does not have water rights to supply
Marden at its full 16 MGPD capacity. In fact, he argues, the Company does not even have
sufficient water rights to run Marden at a full 8 MGPD during the winter months. Reading
argues that the majority of surface water rights that Boise Water owns are from an
irrigation company and are available only in the summer. He suggests that what the
Company is attempting to do is to take surface irrigation water, process it through an
expensive water treatment plant , and use it to fulfill summer irrigation demand. Again
Reading argues that Boise Water may never obtain the necessary surface water rights to
run Marden at its full capacity and existing ratepayers should not be asked to pay for that
portion of the excess capacity which is not used and useful. Reading argues that Boise
Water never even considered separate irrigation systems as an alternative option when it
decided to build the Marden Street plant. He recommends that the Commission allow into
ORDER NO. 25640
rate base only that portion of Marden that is in fact used and useful; that is, only the plant
necessary as replacement for the current Ranney collectors, Le., the first 8 MGPD.
In rebuttal , Boise Water argues that it was faced with the loss of the Ranney
collectors under the Safe Drinking Water Act (SDWA) unless it took immediate action. The
only viable option , the Company contends , was to construct Marden. Along those lines,
the design of potential, future excess capacity into Marden was a prudent and fiscally
responsible decision.
Furthermore, Boise Water argues that separate irrigation systems were not and
are not a viable alternative to the construction of Marden to meet the immediate source of
supply needs within the main service level that would have been created by the loss of the
Ranney collectors. First, the Company could not have forced the existing customers within
the service level to install costly, separate irrigation systems. Furthermore , the work could
not have been accomplished by July, 1993 when the Ranney collectors would have been
taken out of service if not treated.
Boise Water disputes Reading s contention that the cost of Marden is $2 million
per MGPD. The $1.2 million per MGPD estimate provided by the Company is based upon
the estimate of $18.2 million for the upgraded 16 MGPD Marden plant. The cost per
MGPD of a new surface water treatment plant is directly related to the size or production
capacity of the plant. The larger the capacity the lower the cost per MGPD. Boise Water
argues that there is no deliberately constructed excess capacity in the plant. It is strictly an
8 MGPD plant that will be totally utilized to serve existing customers with an option to
expand to 16 MGPD in the future, the Company contends. Boise Water concedes
however, that approximately $530,000 of its total investment in Marden relates to the
option to expand the plant's capacity to 16 MGPD.
We find:
No party to this proceeding, including CBWC , disputed Boise Water s argument
that the Ranney collectors would be lost under the SDW A unless a treatment plant was
constructed. Given the significance of the Ranney collectors, we believe that the Company
would have been derelict in failing to preserve that resource unless another more cost-
effective option were available. We are not convinced by CBWC's arguments that
separate irrigation systems presented such an alternative. The Ranney collectors are used
ORDER NO. 25640
to meet the supply needs within the main service level. Separate irrigation systems were
not a viable option for this existing customer base.
We also cannot accept CBWC's contention that Marden is not used and useful.
As the Company points out, the plant was constructed with a capacity of 8 MGPD with an
option to expand to 16 MGPD. The entire capacity of the plant is currently being used.
With the exception of the approximate $530 000 of the Company s investment attributable
to the option to expand to 16 MGPD , therefore, we find that the Company s investment in
Marden was prudent and that the plant is used and useful and should be included in rate
base. We find that, although the $530 000 invested in the option to expand the capacity of
Marden in the future was a prudent investment, it is not yet used and useful and should be
classified as plant held for future use. Although the investment in the option to expand the
capacity will not be allowed in rate base, the Company will be allowed to amortize the
$530 000 investment over the life of the plant.
Post Closina Marden AFUDC
Boise Water proposes including $533 096 in post closing AFUDC costs related
to Marden in rate base. The costs are calculated for the period May 1 , 1994, when the
treatment plant was expected to be placed into service, to August 31 , 1994, when Boise
Water anticipates that its new rates will go into effect.
Staff opposes the inclusion of post closing Marden AFUDC into rate base.
Witness Pline argues that Boise Water is asking the Commission to perfectly match the
Company s investment in Marden and its return on that investment even though, over the
life of the project, there will be many instances when the amount of the plant which is
included in rate base and earning a return will not match the actual book value of the plant.
Staff contends that there is seldom an attempt to perfectly synchronize earnings
and investment. Just as there is a period of time between placing a plant in service and
including its costs in rate base, there is a period of time between a plant's retirement and
its removal from rate base. Theoretically, these two time frames and the excess and
deficient revenue earned over the life of the plant offset each other. Recognizing post
closing AFUDC costs increases the utility s revenue requirement and increases the rate
base used to calculate a rate of return. Staff could not find any instance in which the
Commission allowed post closing AFUDC.
ORDER NO. 25640
In rebuttal, Boise Water argues that even Staff does not deny that capital costs
associated with Marden continue even after it is placed in service. The Company asserts
that other jurisdictions have allowed post closing AFUDC in rate base and so has this
Commission in the treatment of Idaho Power Company s conservation investments.
We find:
We agree with Staff that during the life of a plant there will be many instances
when the amount in rate base will not match the actual book value of the plant. Over the
life of the plant , however, the utility is made whole. That is why this Commission has not
historically allowed post closing AFUDC. Boise Water did not provide any rationale for
departing from the traditional manner in which we treat this cost. The Company s assertion
that the Commission has allowed post closing AFUDC for Idaho Power conservation
investments is erroneous. The interest on investment was allowed as an incentive to
initiate the conservation programs. It is not an investment in backbone plant. We hereby
disallow post closing AFUDC for Marden.
Pierce Park Lane Line Extension
As in the last Boise Water general rate case, the Company requests that a
portion of its investment in the Pierce Park/Gary Lane main line extension be allowed in
rate base. Boise Water never collected the costs of the main line extension from
developers through its existing tariffs or through the special facilities charge as the
Company originally proposed. It argues that the line extension should still be allowed in
rate base because, due to growth in the area, it is already serving 296 out of a potential
800 customers. The Company argues, therefore , that at least three-eighths of the main
line cost should be allowed to be recovered from ratepayers. The Company also contends
that the hookup fees paid by customers connecting to the main line cover some of the main
line costs.
Staff argues that the line extension should be entirely disallowed from rate base.
Staff contends that Boise Water originally agreed to recover the cost of the line extension
from developers through a special facilities charge. The Commission noted this in Order
No. 24109. The Commission also noted that if Boise Water wished to expand into that
ORDER NO. 25640
area, that it did so at the risk of having to compete with Garden City. Staff argues that
Boise Water found itself in a bidding war with Garden City and that is why it never
attempted to recover the cost of the main line through the relatively more expensive special
facilities charge. Now, Staff argues, Boise Water expects existing ratepayers to fund the
cost of the main line when the Company violated its own agreement to recover those costs
from developers.
Finally, Staff points out that all revenue generated by customers served,
including hook-up fees, must be applied to the revenue requirement associated with the
facilities within the subdivision and not to the cost of the main line extension.
We find:
In both Case Nos. BOI-91-2 and BOI-93-1 we expressed concern that
Boise Water s decision to move into the Pierce Park Lane area and compete with Garden
City might have an adverse financial impact on existing ratepayers. In Order No. 25062
issued in Case No. BOI-93-, we ruled:
In spite of our explicit mandate, issued January 24, 1992
Boise Water has failed, without explanation , to submit
special facilities contract relating to the Pierce Park line
extension project. . . . The fact is simply that, as we stated in
BOI-91-, we have a valid concern whether the Company
ratepayers have been adequately protected from costs Boise
Water has incurred in competing with Garden City. We find
therefore , that the Company s investment in the Gary Lane
project should not be included in rate base until a special
facilities contract previously required for the project has been
submitted.
Order No. 25062 at p. 7.
Boise Water never filed the special facilities contract nor any supporting
documentation as directed in Order No. 25062. We find no reason, therefore, to alter our
decision made in the Company s last general rate case. The Company s investment in the
Pierce Park Lane line extension shall not be included in rate base. This results in a net
adjustment to the Company s proposal (after subtracting depreciation) of $273 000.
Prospective Capital Expenditures
Boise Water has included in rate base a number of capital expenditures which
are included in the Company s 1994 budget but, at the conclusion of the Staff's field audit
in March , 1994, had not yet been made. These expenditures range from transmission
ORDER NO. 25640
main replacement to the acquisition of new office furniture. Staff proposes summarily
disallowing all prospective capital expenditures from rate base on the basis that they are
purely budget estimates subject to modification and cancellation and should not be allowed
except under extenuating circumstances. Staff contends that the Commission has never
accepted pure budget estimates of minor projects as known and measurable rate base
adjustments regardless of their composite valuation. The prospective capital expenditures
Staff recommends disallowing from rate base total $1 673 760.
In rebuttal , Company witness Walker testified that many of these particular
projects have been put to beneficial service while the remainder will be put to beneficial
service by the end of May 1994.
We find:
We cannot allow Boise Water to include in rate base capital expenditures which
are merely budgeted for and have not been placed into service. Furthermore, the purpose
of selecting a test year is to provide a cut off date which is necessary to establish rates in a
general rate case. While we do allow adjustments for known and measurable changes, the
items identified by Staff, as of the date of Staff's audit , were merely budgeted for and, as
such , were subject to modification and cancellation. Thus, they do not constitute known
and measurable changes and should be disallowed from rate base.
Workina Capital
The Company included in its updated filing a calculation for a working capital
allowance of $1 505 055 using the balance sheet adopted in the last general rate case. No
party other than Staff addressed this issue. Staff noted that the Company erred in some of
the account classifications and offered its own calculation which produced an allowance of
$863 000. In rebuttal , Boise Water proposed several adjustments to Staff's calculation
which Staff did not oppose. Staff's working capital adjusted for the unopposed Company
adjustments produces a working capital allowance of $1 ,389 724.
We find:
We hereby adopt a working capital allowance in the amount of $1 ,389,724 as
agreed to by Staff and the Company.
Rate Base Calculations
Following are the calculations for Boise Water s approved rate base:
ORDER NO. 25640
Plant in Service
Actual Year-End Plant in Service 85,184 159
Add Marden Street Plant 389 000
Less Marden Plant Held for Future (530 000)
Add Hulls Gulch Reservoir 631 000
Eliminate Investment in Pierce Park (283 000)
Adjusted Total Plant in Service $101 391 159
Less:
Actual Year-End Accumulated Depr.16,561,479
Remove Depr. on Pierce Park Line (10,000)
Correct Depr. on Marden Eng Fees (46,419)
Year-End Accum Amort of CIAC 634 123
Retirement Work in Prog Year-End (26,460)
Adjusted Accum Depr & Amort (18 112 723)
Less:
Actual Y.E. Customer Adv. for Const.308,748
Actual Year-End Contrib. in Aid of Const.077 065
Less Accum Amort of CIAC 634 123)
Less CIAC on Plant not in Servo (91 232)
Post Y.E. Marden St. Plant Contrib 280 000
(13 940,458)
Less Utility Plant Acquisition Adjustment (24 158)
Less Actual Year-End Deferred Inc. Tax 844 600\
Less Actual Y.E. Bal of Pre 1971 Invest Tax Cr.(27 948)
Less Unamortized Bal of After Tax Gain on Office 879)
Bldg.
Add Year-End Balance of Deferred Charges 395,888
Add Working Capital Allowance 389 724
Total Rate Base 218,005
III. OPERATING RESULTS
Weather Normalization for Test Year Consumption Data
Staff argues that the water consumption data for the test year is understated
because of the abnormally cool, wet summer of 1993. Staff notes that June and July of
that year were a combined 126% above normal precipitation and the summer period was
7% below average temperature. Staff presented an exhibit showing the decrease in
agricultural pumping for the period June through October 1993 compared to weather
normalized loads for the same period. Using a linear regression technique with water
ORDER NO. 25640
consumption per customer as the dependent variable and rainfall and temperature as the
independent variables, Staff calculates a proposed weather normalization adjustment of
987 000 ccf for the residential customer category and approximately 336 000 ccf for the
commercial customer category. Consequently, Staff proposes that total test year
consumption be increased from 14.2 million to 15.77 million ccf or 11
In its direct case, the Company weather normalized when it calculated its
claimed lost revenues due to conservation. Boise Water does not disagree with a weather
normalization adjustment but argues that it should be in the amount included in its direct
case. In rebuttal, Boise Water also proposes implementing a "revenue reconciliation
clause" which would compare actual to forecasted revenue and production costs and
surcharge or refund the difference to customers through a single annual billing adjustment
made as a charge or credit per ccf that relates to consumption during the November and
December billing periods.
Staff objects to the introduction of a new concept so late in the process depriving
them of the opportunity to study and analyze the proposal in detail. Staff also objects to
the proposal as the introduction of a new element into the case which is not appropriate
nor responsive in a rebuttal filing.
We find:
In order to account for the abnormal weather experienced during the Company
peak season of the test year, and to more accurately portray the Company s revenues , it is
necessary to normalize test year consumption data. Staff's method of normalization is
reasonable , relatively straight forward and is hereby adopted. The Company s proposed
weather normalization , while not entirely unreasonable , is unnecessarily complex. We
agree that Boise Water s higher R-squared correlation factor is due to its use of monthly
data rather than annual data and that the Company offers no more explanation of annual
consumption than Staff's method.
Regarding Boise Water s revenue reconciliation proposal , we find that
regardless of its merit, the evidentiary record in this case is not adequate to approve such a
mechanism. If the Company were serious about pursuing this , it should have made the
proposal in its direct filing so that all parties would have a reasonable opportunity to
respond. Boise Water is free to present this proposal in another filing. We agree with
ORDER NO. 25640
Power, however, that a revenue reconciliation mechanism would reduce the Company
risk and this should be reflected in the allowed rate of return.
Lost Revenues
Boise Water claims $378,547 in lost revenues resulting from its conservation
programs. The Company submitted its final conservation plan in August 1993. Company
witness Shiflet discussed Boise Water s various conservation programs. In the last rate
case, the Commission refused to allow Boise Water any lost revenues because the
Company had not filed its formal conservation plan and the statistical theory presented by
the Company s witness was unconvincing. Mainly, the Company had failed to account for
weather related variations in water usage.
In the present case , Boise Water offers the testimony of witness Maddaus who
using a linear regression modeling technique, attempts to account for weather variables in
calculating the effect that the Company s conservation programs have had on customer
usage.
Staff argues that Boise Water is not entitled to any lost revenues resulting from
its conservation programs. Staff witness Eastlake testified as to the general concept of lost
revenues. He argues that lost revenues should be allowed only where the conservation
plan as a whole is of material size relative to the overall costs and/or revenues of the utility
involved. More importantly, he argues that the hypothesized savings and the
accompanying lost revenues must be the result of actions undertaken directly by the utility.
Eastlake asserts that the Commission cannot condone retroactive ratemaking
nor should it compensate the utility for all the ordinary risks of doing business that might
cause sales to decline. Eastlake contends that lost revenue recovery is not meant to be an
automatic revenue stabilizer for water companies. Furthermore , income generation is not
the major goal of conservation programs. Eastlake argues that lost revenues which occur
as a result of new codes or regulations should be accounted for through a rate case which
reactively asks for a rate increase to reflect known and measurable sales declines due to
such codes. Alternatively, such code impacts could be dealt with specifically in sales
forecasts which, again , are incorporated in base sales levels in a general rate case.
Eastlake notes that 76% of the savings set out in Boise Water s conservation
plan come from federal regulations included in the Energy Policy Act. He argues that the
so called "plumbing code" portion of the plan, although it will result in some savings, should
ORDER NO. 25640
not be eligible for any lost revenue consideration because it is entirely outside the control of
Boise Water. Eastlake concludes that, given the uncertain nature and small size of the
savings associated with the Company initiated programs and the equally small amount of
costs that were incurred in conservation programs , the Commission should disallow any
consideration of lost revenues in the present case but allow discussion of the issue in the
future.
Staff witness Lobb argues that the actual 1993 test year consumption already
reflects any reduced consumption that might have occurred as a result of the Company
conservation programs. In other words, the conservation claimed to have occurred in 1993
is reflected in lower actual consumption. The revenue requirement is spread over this
lower consumption total resulting in rates that are higher. By subtracting estimated 1993
conservation from actual 1993 consumption , the Company is double counting the effect of
conservation, Lobb argues. He asserts that this adjustment is both retroactive and an
inappropriate pro forma adjustment to test year consumption.
Furthermore, Lobb argues that the bulk of the Company s conservation plan
involves the installation of low flush toilets and low flow shower heads in new construction.
He posits that this is an inappropriate adjustment to an historic test year because the water
savings would relate to future customers not yet served. Other proposed conservation
measures, including a pilot audit program designed to determine water savings and an
education program , do not provide known and measurable water savings and, therefore
are inappropriate test year pro forma adjustments, he contends.
The Coalition of Boise Water Customers also opposes the allowance of lost
revenues related to conservation. CBWC's witness Reading objects to the Company
calculation of lost revenues because it uses a "pre-conservation" base line period that ends
in 1990 so that the years 1991 through 1993 are part of the adjustment period. This is
done in spite of the fact that the Company had no official water conservation program until
1994.
Furthermore, to the extent that the Company did have elements of a
conservation plan in place in the early 1990's, Reading argues that it has presented no
evidence that the reduced usage in those years is a direct result of conservation measures.
Reading suggests that Boise Water s customers have had the good sense to curtail their
water consumption during drought years.
ORDER NO. 25640
Finally, Reading argues that the Company s approach to calculating lost
revenues is retroactive and, to be empirically verifiable, the loss of revenues must be tied
to an explicit forward looking methodology as ordered by the Commission in the last
general rate case. Reading argues that the Company s conservation plan does not attempt
to measure the results of its implementation or to quantify the way in which any given
program has contributed to any alleged decrease in usage.
Reading criticizes the Company s linear regression calculations as failing to take
into account other factors that might affect water use including the public s general
awareness of the drought conditions existing in southern Idaho. Reading also argues that
other factors exist which affect water usage including new appliances which are more water
efficient, the effect of prior rate increases on customers' usage behavior and the fact that
lot sizes in new construction are typically smaller resulting in less per account usage.
Reading also notes that the Company s interim water conservation plan did not
begin until mid 1991 and the official plan has just gone into effect. In spite of this
significant savings are being attributed to Company actions in calendar years 1991-1993
without documentation.
The Idaho Citizens Coalition also opposes lost revenues due to conservation.
ICC witness Power argues that even if Boise Water s contentions are correct and the
Company conservation programs have reduced consumption , this reduction
consumption by customers is already reflected in the test year consumption data. When
that lower consumption level is used to set rates in this case , any lost revenues associated
with that 1993 conservation will automatically be made up. Power argues that Boise Water
cannot use both the actual 1993 consumption levels that include the impact of
conservation and ask for this conservation adjustment to be made. Power contends that
Boise Water is attempting to employ retroactive ratemaking by setting rates for the future
that will allow it to recover revenues it thinks it ought to have been allowed to earn last year
but which the Commission denied.
Power criticizes Boise Water s linear regression technique for failing to provide
confidence intervals for the estimates of the effects of the water conservation programs.
He contends that this leaves the Commission with a request that it use an estimate of
unknown statistical reliability to bill customers for conservation impacts which may be zero.
ORDER NO. 25640
Power notes that customer usage actually began to decline prior to the
implementation of the Company s conservation plan. He suggests that it is simply
impossible to quantify all the factors that determine water usage and , consequently, it is
impossible to accurately calculate the effect of Boise Water s conservation programs.
Power recommends that the Commission continue to insist that Boise Water
pursue all cost effective conservation programs, but until all those programs involve very
specific measures with substantial impacts that can be reliably measured, lost revenue
recovery should be disallowed. In rebuttal, Boise Water contends that Staff fails to
recognize that the Company correctly predicted reduced consumption in the last rate
proceeding but was not permitted to recover lost revenues.
We find:
In Order No. 25062 issued in Boise Water s last general rate case, we rejected
the Company s request for lost revenues because the Company had not yet filed its
conservation plan. We also found that its statistical theory, which was based upon the
assumption that all variation in water usage not related to rainfall was due to conservation
was not convincing. See Order No. 25062 pp. 9-10.
In the present case, Boise Water employed a linear regression technique for
calculating lost revenues. In the Company s last general rate case, we rejected the use of
such a technique stating:
In short, Boise Water's analysis left far too many questions
unanswered and failed to present quantifiable , verifiable evidence to
convince us that the Company s conservation efforts are responsible
for lost revenues of the magnitude claimed by Boise Water or, for that
matter, any lost revenues at all.
Order No. 25062 at p. 10.
We went on to rule:
However, to receive such treatment, programs must be identified and
approved in advance of implementation. They must also be capable
of yielding reasonably measurable results. We do not believe that
linear regression methods such as those presented in this case
provide the measurement needed.
Id. at p. 11.
In assessing any utility s request for lost revenue, one must first examine the
conservation programs the utility claims are responsible for the lost revenues. We now
ORDER NO. 25640
have the benefit of analyzing Boise Water s conservation plan filed following the last
general rate case. While the plan contains some programs that are desirable, the bulk of it
appears to relate to building codes , i.e., the new plumbing code and installation of low-flow
showerheads. In Order No. 25062, we informed the Company that we would consider lost
revenues "only on a prospective basis and only to programs that have measurable costs
and benefits." Order No. 25062 at p. 11.
While the installation of low-flow showerheads and the education of young
children regarding water conservation is certainly desirable from a public policy standpoint,
it does not rise to the level necessary to justify the recovery of lost revenues. Furthermore
we agree with Staff and ICC that Boise Water s analysis is defective in its failure to account
for the fact that reduced consumption during the test year is already reflected in
consumption data. Finally, the Company does appear to be taking credit for lost revenue
prior to the filing of the conservation plan and/or for non-Company programs which may
result in future conservation. The Company s request for lost revenues, both future and
historical , is denied.
We note that we have allowed $93,150 in the Company s revenue requirement
relating to conservation expenditures incurred during the test year. We further encourage
the Company to continue with its effort to educate the public regarding the need for water
conservation and the implementation of drought tolerant landscaping. Boise Water is
commended for its achievements in this regard.
Inflation
Boise Water has included an adjustment for inflation in its revenue requirement.
Staff notes that the Commission has consistently disallowed adjustments for future inflation
as being speculative , unknown and unmeasurable.
We find:
In Order No. 25062, we disallowed the Company s inflation adjustments stating
that "not only is the adjustment not known and not measurable, there is no way to
determine with any degree of certainty what increased costs are due solely to inflation.
Order No. 25062 at p. 16 (citing Order No. 23420, Case No. BOI-90-1).
The Company has not presented any new evidence or arguments supporting its
request for an inflation adjustment. Consequently, it is denied.
ORDER NO. 25640
Prospective Expenses
Staff recommends disallowing two expenses as being prospective. The first,
laboratory expense, is based upon the 1994 budget plan, Staff contends.
The second, relates to Boise Water s replacement of Company-owned vehicles
with leased vehicles.
In rebuttal, Boise Water provided the Commission with a letter evidencing the
receipt of the leased vehicles in question.
We find:
The laboratory expense appears to have been merely budgeted as of the date of
Staff's audit and , as such , is not yet known and measurable. It is disallowed.
The leased vehicle expense, as evidenced by documentation, is now known and
measurable and will be allowed. We note that the asset and depreciation accounts have
been adjusted appropriately to reflect this transaction.
Amortization of Intervenor Funding and Rate Case Expense
Boise Water proposes amortizing the costs of the current case and the
remaining unamortized balance from prior cases over a two-year period. The Company
notes that it has filed three rate cases in the past four years and that a two-year
amortization is a fair reflection of the frequency with which the Company files its rate cases.
Staff proposes a five-year amortization of the costs incurred in preparing the
cost-of-service study and a three-year amortization for all other intervenor funding and rate
case expenses.
We find:
In Order No. 25062 issued in the last general rate case, we approved a two-year
amortization for the Company s rate case and intervenor funding expenses. Order No.
25062 at p. 15. Given the growth that Boise is currently experiencing and the frequency
with which Boise Water has filed its rate cases in the recent past, it appears that a two-year
amortization is a more reasonable matching of costs to the time period in which they are
incurred. We hereby adopt a two year amortization of all intervenor funding and rate case
expenses, including the cost-of-service study.
Amount of Rate Case Expense
ORDER NO. 25640
Boise Water claims that it incurred $296 599 in rate case expense for this
proceeding. Of this amount, $32 500 relates to the cost of service study and $170,400 is
the amount paid to Boise Water s affiliate, General Waterworks Management & Services
Company (GWM&S Co.
Staff argues that the mere fact that the Company has incurred a cost is not prima
facie evidence that the cost was either reasonable or necessary. The rate case expenses
incurred by the Company in this case are budget estimates, Staff contends, which have not
been audited. Absent an opportunity to audit those costs, Staff argues that it is impossible
to make a recommendation as to their reasonableness. Staff notes that the estimated
costs in this case are far in excess of the costs incurred in Boise Water's last two rate
cases. The costs allowed by the Commission in the last case were $206 750. In the prior
case they were $95 905. This year s estimated rate case expense is nearly 50% more
than that authorized by the Commission in the last case.
In rebuttal , Boise Water points out that it submitted a cost-of-service study in this
case and that all of the rate case expenses were prudently incurred.
We find:
Because we encouraged Boise Water to submit a cost-of-service study, we
believe that it is appropriate to allow the Company what appear to be reasonable costs
incurred in preparing that study. The $32 500 will be allowed as a reasonable operating
expense. We disallow, however, the claimed expense of $170,400 paid by Boise Water to
its affiliate, GWM&S. In examining payments to affiliates we apply the rule announced by
our Supreme Court in Boise Water Corp. v. Idaho Public Utilities Commission 97 Idaho
832 , 555 P.2d 163 (1976) and General Telephone Company v. Idaho Public Utilities
Commission 109 Idaho 942 712 P.2d 643 (1986):
Although the company may have established actual incurrence of these
operating expenses, that fact alone does not establish a prima facie case of
reasonableness with respect to payments to affiliates. (citations omitted).
Charges arising out of intercompany relationships between affiliated
companies should be scrutinized with care.
97 Idaho at 836-837.
Here, Boise Water provided only monthly billing summaries submitted by
GWM&S. These summaries are lacking in detail and any meaningful review or audit of
them was impossible. By proving only that the payments were actually made to the affiliate
ORDER NO. 25640
without further evidence of reasonableness , Boise Water failed to make its prima facie
case for inclusion of these costs in rates. Accordingly, the $170,400 paid to GWM&S is
disallowed.
We find, however, that the other claimed rate case expenses are reasonable and
allow a total rate case expense of $126 199.
Operatina Results Calculation
Following is the calculation of Boise Water s operating results based on the
revenues and expenses approved in this Order.
Revenues
Actual Revenues at Dee 31 , 1993 052 004
Uncontested Adjustments 781 520
Annualize for Customer Growth Per Co.131 782
Staff Proposed Additional Growth Adj.149 395
Conservation Adjustment
Weather Normalization Adjustment 107.351
Total Adjusted Revenues 222 052
O&M Expenses
Per Books at Dee 31 , 1993 301 742
Uncontested Adjustments 776 884
Adjust for Actual 94 PUC Assessment (108)
Customer Growth Adj Per Co.910
Additional Growth Adj Per Staff 20,467 377
Inflation Adjustment
Laboratory Expense
Leased Vehicle Expense 920
Normalize Intervenor Funding 212
Normalize Conservation Exp Per Co.(28,997)
Normalize Conservation Exp Per Staff Adjust 943 946
Uncollectible Accts Exp Adjust Per Above Rev.731
1/2 of Normalized Rate Case Exp Per Co.148,300
Rebutt.
Less 1/2 of Remaining Bal Prior Case (85 200)
ORDER NO. 25640
Add 1/2 of Remaining Bal Prior Case 96,998
Less Test Yr Actual Rate Case Amort (83 873)224
Staff Proposed Weather Normalization 87,592
Total O&M Expenses 346 520
Depreciation Exp at Dee 31 , 1993 925,720
Pro forma Adjustment to Match Rate Base 687,049
Total Depreciation Exp.612 769
Ad Valorum Tax at Dee 31 , 1993 985 380
Staff Proposed Adj to Match Rate Base 202,506
Total Ad Valorum Tax 187 886
Uncontested Payroll Taxes 283,515
Net Operating Income Before Income Tax 791 362
State Income Taxes 1 73
Federal Income Taxes 521 ,409
Adjusted Net Operating Income 200 780
Realized
IV. RATE OF RETURN
Capital Structure
Boise Water uses the capital structure of its parent, General Waterworks
Corporation , which is wholly owned by GWC Corp (GWC). General Waterworks' capital
structure consists of 51.93% long-term debt, 0.25% minority interest and 47.82% common
equity.
Staff recommends a hypothetical capital structure which is consistent with the
capital structures of GWC and United Water Resources. These two corporations recently
merged. Staff's recommended capital structure consists of 52% debt, 8% minority interest
and 40% common equity. In the last rate case, the Commission approved a capital
structure of 50.25% debt, .29% minority and 49.46% common equity. Staff'
recommended capital structure has changed because the Company financing
requirements for compliance with the SDWA are behind them and because of the merger
ORDER NO. 25640
between GWC and United Water Resources. Staff argues that its proposed capital
structure is more reflective of GWC and United's actual capital structures.
The Coalition of Boise Water Customers also notes that GWC's merger with
United Water Resources had an effect on the capital structure. Witness Reading notes
that, according to Value Line GWC's common equity ratio was 40.5% in 1993 and is
expected to be 40.0% for 1994. The common equity ratio of United Water Resources was
36.0% for 1993 and is expected to be 36.5% for 1994 and 40.0% for the period 1996
through 1998. Thus, Reading notes , United Water Resources, which is purchasing GWC,
has a common equity ratio four percentage points lower than the soon to be dissolved
GWC. Reading recommends , therefore , that the Commission use United's 40% common
equity ratio rather than the 47.82% proposed by the Company.
In rebuttal , Boise Water argues that it is a subsidiary of General Waterworks
Corporation and that it obtains its financing from that entity, not GWC. The Company
argues that it is inappropriate to use the capital structure of either GWC or United Water
Resources.
We find:
Because the stock of General Waterworks Corporation is not publicly traded, we
find that it is more appropriate to utilize the capital structure of the newly merged GWC and
United Water Resources. Because the common equity ratio ofGWC is expected to be 40%
for 1994 and because United's common equity ratio is expected to approximate 40% in the
near term, we find that to be a reasonable equity ratio. We also adopt Staff's debt and
minority ratios of 52% and 8%, respectively.
II.Cost of Capital
Boise Water proposes the following cost of capital and rate of return:
Capital Cost Rate Weighted Cost
Structure Rate
LonQ-term debt 51.93%94%65%
Minority Interest 25%00%01%
Common Equity 47.82%11.25%38%
Overall Rate of 100.00%10.04%
Return
Staff recommends the following cost of capital and rate of return:
ORDER NO. 25640
Capital Cost Rate Weighted Cost
Structure Rate
LonQ-term debt 52.00%87%61%
Minority Interest 00%00%.40%
Common Equity 40.00%10.75%30%
Overall Rate of 100.00%31%
Return
In the last general rate case, Staff recommended an overall rate of return of
91 %. The justification for a lower overall return in this case , Staff asserts, is due to the
fact that the long-term cost of debt has decreased from 9.36% in the last case to the
current rate of 8.87%. Additionally, Staff calculates a slightly lower return on equity under
both the comparable earnings method and the discounted cash flow method.
The Coalition of Boise Water Customers recommends a return on equity of
10.4% as it did in the Company s last general rate case. The Coalition agrees with
Company testimony that there have been no significant intervening events affecting cost of
capital since the last general rate case.
We find:
Staff's analysis supporting a return on common equity of 10.75% is convincing.
The fact that Boise Water is now relatively free of the economic risks presented by the
SDWA further justifies a reduction in the Company s return on common equity. There are
several overriding factors, however, which convince us to leave the authorized return on
equity at 11.25%.
First, our decision to normalize the effects of weather on test year consumption
data arguably places the Company at somewhat greater financial risk than if some type of
revenue tracker mechanism were in place. Second, it has been less than a year since we
adopted a seasonal rate structure for Boise Water. Thus, our experience with the resulting
effects it may have on revenues is limited. Finally, we are adopting a capital structure
which is significantly different than the one approved in the last general rate case. The
structure approved in this Order results in a lower overall rate of return.
Thus, we find that a return on equity of 11.25% fairly compensates the
Company s shareholders for the risks they assume by investing in Boise Water.
ORDER NO. 25640
We note that Staff proposes a cost rate of 8.87% for long-term debt. The
Company originally proposed 8.94% but this was based on data as of September 30, 1994.
The 8.87% rate is based on year-end data and, therefore , is the appropriate rate to use.
To summarize, Boise Water s approved capital structure and overall rate of
return are as follows:
Capital Cost Rate Weighted Cost
Structure Rate
Lona-term debt 52.87%61%
Minority Interest .40%
Common Equity 40.11.25%50%
Overall Rate of 100.00%51%
Return
V. REVENUE REQUIREMENT
The Company s additional revenue requirement, which we find to be fair, just and
reasonable, is $3,665 144 as follows:
1. Rate base
2. Rate of return
3. Required return on rate base
4. Less: Operating income
5. Operating income deficiency
6. Gross-up factor
Revenue increase required
$67 218 005
0951
392,432
200,780*
191 652
67232
665,144
* The operating income reflects the resulting tax consequences for every adjustment.
VI. REVENUE ALLOCATION AND RATE DESIGN
Cost of Service Study
Boise Water included a cost of service study in its rate case filing. As a result of
that study, the Company has proposed that the following customer classes be adopted in
this case: residential , commercial, industrial , public authority and private fire service.
Boise Water proposes two different rate designs with two different effective
dates. The first rate design would take effect immediately and would remain in effect for
ORDER NO. 25640
the rest of 1994. The second design would become effective on January 1 , 1995 and
remain in effect indefinitely.
Under the first design, the Company proposes to eliminate the current customer
allowance and to assess a customer charge based on meter size and the results of the
cost-of-service study. The current winter/summer commodity rate differential of 25% is
maintained but requires different customer classes to pay different commodity rates. The
proposed class specific commodity rates would range from $1.175 per ccf (Le., 100 cubic
feet) for summer use for the residential class to $0.70 per ccf for winter use for the
industrial class. The summer period would continue to be based on the timing of individual
customer billing.
The Company s proposed second design is similarto the first design with respect
to the elimination of the customer allowance, implementation of new customer charges and
the introduction of commodity rate differentials between customer classes. A premium is
charged , however, for water consumption in the summer when it exceeds winter usage.
For all classes except residential , winter usage is each customer s actual usage in prior
winter months. For residential customers "winter usage" is established for all customers at
24 ccf bi-monthly. This second rate design would also create a single summer period, with
customers' usage prorated between summer and winter rates when their billing periods
overlapped the two seasons. The summer/winter differential is increased from a uniform
25% to a uniform $., resulting in a percentage differential ranging from 41 % to 60%.
Staff believes that the method of cost allocation used by the Company is a
reasonable manner in which to allocate costs, but that the results of the study indicating
that revenue requirement should be shifted from one customer class to another are based
upon general rather than Company-specific allocation factors and assumptions.
addition, the definitions of "residential" and "commercial" classes are not based on specific
water use characteristics but on the Company s existing definitions contained in its tariffs.
Staff believes that uniform rates among the existing customer classes could reasonably be
continued given the variability in the cost of service allocation factors and the potential for
inappropriate classification of customers.
Staff recommends the implementation of a single rate design characterized by
the elimination of the customer allowance without increasing the existing minimum
customer charge. Staff's rate design also includes a summer/winter commodity rate
ORDER NO. 25640
differential with the first summer block based on the winter usage of each individual
customer, including residential customers. Existing commodity rates are increased
uniformlly to generate the additional revenue required without distinction among customer
classes. As with the Company s second rate design , a fixed summer season would be
established with customer bills prorated when usage for a single bill overlapped the
seasons. Staff proposes a summer season of June 1 through September 30 as proposed
by the Company.
Staff notes that if the Company s recommendations are adopted , changes in
minimum customer charges could range from a decrease of 38.5% for customers with a
ten inch meter to an increase of 22.73% for customers with a one inch meter. Staff
believes that characterizing customer classes by the structure used rather than by water
consumption may result in unfair treatment with water value being based on the nature of
end use. Furthermore, a combination of revenue requirement shift, revenue requirement
increase and rate design changes may result in unreasonably large increases in residential
rates. Under the Company s proposal , commercial and public sector rates could actually
decline while residential rates could increase considerably. Staff recommends, therefore
that the Company s current uniform rate structure across existing customer classes be
continued.
Staff believes that only one rate design should be implemented as a result of this
case, as opposed to the Company s two step approach. Staff also recommends
eliminating the customer allowance without increasing the minimum bi-monthly customer
charges. Staff asserts that increasing the bi-monthly minimums in conjunction with the
elimination of the allowance would place an unfair burden on lower income ratepayers.
Staff also recommends that a summer/winter commodity rate differential be
established in the same ratio as exists today. Staff proposes a first block in the summer
charged at the winter rate and based on each individual customer s winter bi-monthly
usage rather than for commercial customers only as recommended by the Company. Staff
contends that this design would fairly charge all customers for their excess usage
regardless of customer class.
The Coalition of Boise Water Customers criticizes Boise Water's cost-of-service
study as containing subjective judgments and assumptions taken from other unidentified
water systems without establishing that the characteristics of those systems are similar to
ORDER NO. 25640
Boise Water s. Furthermore , CBWC argues that Boise Water s summer commodity rate
differential has no discernable connection to the costs of Boise Water s system.
CBWC witness Reading notes that the implementation of separate irrigation
systems will change the basic relationship of usage among the various customer classes.
The effect that this will have, however, is unknown at this time because no serious effort to
implement separate irrigation has been made.
At this time , Reading recommends against splitting Boise Water's customers into
separate classes for three reasons. First, many of the inputs to the cost-of-service study
are based on assumptions relating to other water systems whose characteristics may not
be similar to Boise Water s. Second , the installation of separate irrigation systems will
significantly alter usage patterns among different customer classes which will affect the
cost of serving those various classes. Third , the industrial class, as proposed by Boise
Water, contains only one customer.
The Idaho Citizens Coalition recommends that the Commission eliminate the
free water in the minimum bill as proposed by Boise Water. ICC witness Power believes
however, that Boise Water should not be allowed to effectively double the fixed bi-monthly
charge as it moves from a minimum bill of free water to a bi-monthly customer charge.
Power asserts that the fixed charge should not be used as a dumping ground for Boise
Water s fixed costs but, rather, should only collect those costs that are avoidable if a
customer were to cease to take service. Power concludes that the bi-monthly customer
minimum charge, given the elimination of the 1000 cubic foot allowance, should be
reduced to reflect the current implicit fixed charge of about $8.50.
Power asserts that the seasonal rate differential should be continued and
increased. He argues, however, that the summer block rate structure proposed by Boise
Water is inappropriate because it leaves too many customers entirely within the low price
block. Power suggests that the primary reason for a blocked rate structure is to protect
basic consumption from higher rates and that a method of appropriately sizing the initial
block for the residential class is to set it at 100% of the customer s historic average winter
usage , not 130%. Finally, he contends that a block rate structure is not needed for non-
residential summer rates and that seasonal rates for all consumption provides the proper
price signal, reflecting higher summer costs while providing offsetting lower rates for winter
usage. In any event, rate design should not insulate high load factor customers from all
ORDER NO. 25640
exposure to the higher summer rate. Thus, if the Commission decides to establish blocked
summer rates for non-residential customers, Power asserts, the initial block could be set at
75% of the historical usage, not 100% as proposed by Boise Water.
We find:
We hereby adopt the following rate design for Boise Water: A $12 bi-monthly
customer charge (for meter sizes 3/4 inch and smaller), the elimination of the 1000 cubic
foot usage allowance , a 25% seasonal rate differential and no blocked rates nor customer
class differentials at this time.
Regarding the customer charge, we find that it is unreasonable to effectively
double the implicit fixed charge as proposed by the Company and Staff. Reducing the bi-
monthly minimum charge to $8.50 as suggested by Power, however, would mean that
none of the revenue requirement increase is assigned to the minimum charge. Given the
magnitude of the increase approved in this Order, we find that to be unreasonable.
Balancing many factors such as revenue requirement, conservation goals , proper price
signals, cost of service, and customer expectations and equity, we find a $12.00 bi-monthly
customer charge to be reasonable for customers with 3/4 inch and smaller meters.
Customers with larger meters will be increased proportionately in their bi-monthly minimum
charges. (See attachment A).
We continue to support the concept of a seasonal differential in rates on the
basis that it sends the appropriate price signal to customers regarding the relative cost of
meeting peak demand. We also note that none of the parties to this proceeding opposed
the continuation of a seasonal rate differential. We find that the appropriate summer
season is May 1 through September 30 for all customers with rates to be prorated for
customers whose billing cycles overlap the two seasons and we caution the Company to
maintain consistent billing cycles. In balancing all factors , we find it reasonable to apply a
25% premium on summer usage rates above winter rates. This yields a summer
commodity rate of $1.011 per ccf and a winter rate of $0.809 per ccf.
We find that a block rate structure based on individual customer winter usage is
inappropriate for several reasons. First, such a block rate design adds complexity,
administrative costs, chances for billing errors and potential for customer confusion all
without any proof that it will result in more equitable bills. Thus , it should be used only
when necessary to accomplish specific pricing or demand objectives. We find that the
ORDER NO. 25640
proposed block rate structure has the potential to undermine our goal of summer
conservation. Furthermore , the supposed equity of blocked rates is diminished by the
winter rate increase that necessarily results from a lower first block rate in the summer.
The filing of Boise Water cost-of-service study presents the first real
opportunity this Commission has had to seriously consider establishing customer classes
for the Company. The Company is commended for its efforts in preparing the study and
proposing revenue allocation based partially on that study. Nonetheless , we share the
concerns expressed by Staff and intervenors that the study is based on assumptions and
data that may not be relevant to Boise Water. We are mindful that it is impossible to have
class specific data until you have customer classes. We do not believe that it would be
appropriate, however, to establish rate differentials among customer classes until we have
had the opportunity to review class specific data. For example, we are not convinced there
is justification to charge different rates for customers in single family dwellings versus
customers in duplexes, or for customers engaged in a retail business versus those
engaged in manufacturing. Customer classes should be based on distinct usage or cost
patterns, not on type of building or nature of business. The Company is directed to sample
annual , peak month and peak day water usage patterns of a cross-section of customers to
determine if existing customer classifications are representative of customers within those
classes. This will enable us , during the course of the next general rate case, to more fully
analyze the appropriateness of establishing rate differentials among customer classes.
ORDER NO. 25640
VII. MISCELLANEOUS
Hookup Fees
Boise Water proposes increasing the existing hookup fee for 3/4 inch and
smaller meters from one that covers the cost of new supply to one that covers the cost of
supply, booster pumping and storage. The Company proposes a hookup fee of $465 per
customer to recover the following: $83.33 for storage , $13.89 for boosters and $250 for
new supply (the per customer cost of a new well), plus a 34% tax gross-up.
Staff argues that the Company s recommendation is good in principle but will
significantly over charge some customers and grossly under charge others. According to
the cost of service study, and excluding taxes, the embedded cost per customer for supply
and boosters is $150, while the embedded cost of storage is $57. Therefore , the
difference between the hook-up fee proposed by the Company and the embedded cost
recovered through existing rates is approximately $140. Thus, Staff suggests a $465
hookup charge would over recover from small , individual residential and commercial
customers. Staff notes that the Company intends to charge a single hookup fee regardless
of customer category, meter size or method of connection.
Staff believes that the $250 new supply cost per customer calculated by the
Company is inappropriate because the cost of supply varies depending on a given
customer s location. For example, recent studies indicate that ground water is very limited
in southeast Boise and that groundwater supplies north of the Boise River between
Broadway and Highway 55 are impractical. If the Company uses the Marden Street
treatment plant to capture surface water in the future, as it suggests, the cost of providing
new supply in much of the service area will increase from $250 per customer for a new well
to $1 944 per customer for a water treatment plant. Thus, in areas where ground water
supplies are unavailable , a hookup fee of $465 is clearly insufficient to recover the costs of
serving new customers. In areas where ground water is available, the cost of new supply
will actually be lower than that proposed by the Company.
Staff believes that hookup fees should be designed to take into account the
following factors: (1) the location of the new customer and the cost of the most likely new
resource required to serve growth in that area; (2) the method of connection , either through
escrow or individual contribution , and; (3) the existence of separate irrigation systems.
ORDER NO. 25640
Staff recommends hookup fees ranging from $2 740 for residential escrow
customers in high supply cost areas to $0 for small, individual or commercial customers
located in low supply cost areas. Staff also recommends hookup fee discounts for
installation of separate irrigation systems because they reduce the amount of water
customers will require from the Company during peak periods. Staff concedes that its
hookup fee recommendations, in conjunction with existing differences based on meter size
will result in a very complex fee structure and, consequently, limits its recommendations to
customers with small meters.
The Coalition of Boise Water Customers recommends a service connection fee
set at $2 100 for a new hookup without a separate irrigation system and $465 for new
customers with separate irrigation. According to witness Reading, these two hookup fees
reflect the true cost of water supplies both from wells and the treatment plant. Reading
also recommends that the difference between the two fees (Le., $1 635 per customer) be
applied to the $6.8 million portion of the Marden Street treatment plant the Coalition
recommends be disallowed from rate base. This would mean that when Boise Water
system has added approximately 4 200 new customers without separate irrigation systems
the $6.8 million will have been accounted for. Reading argues that his approach provides
an incentive for separate irrigation. Developers who choose to build in areas where
separate irrigation is unavailable, he asserts , are making a conscious decision and should
be willing to accept the consequences of that decision.
The Idaho Citizens Coalition supports an increase in Boise Water s hookup fee.
Witness Power expresses concern that Boise Water s hookup fee is based upon the
replacement of plant at its historical cost when, in fact, new plant costs more. Power
suggests that the hookup fee be raised to a level that fully funds the incremental capital
costs of adding a new customer to the system that are not covered in current rates. He
recommends that this Commission order Boise Water to calculate the appropriate hookup
fee in this manner and impose that fee on all new customers.
In rebuttal , Company witness Booe states that the Boise City Council has voted
to proceed with drafting an ordinance which would require pressurized irrigation systems
substantially all new subdivisions. Thus, Booe believes that local governments will enact
legislation which should satisfy separate irrigation concerns. He expresses concern that
ORDER NO. 25640
under Staff's hookup fee proposal , only Boise Water s customers would be subjected to
the higher connection costs.
Booe agrees with Staff that hookup fees should recover the difference between
new supply costs and any embedded cost that rates are recovering, but admits that the
Company s proposed hookup fees do not include embedded costs of water supplies as
proposed by Staff. He agrees with Staff's proposal but objects to different hookup fees for
different customers on several grounds. First, it would be impossible to accurately
delineate on a map between high and low water supply areas. Second , it would cause
confusion among customers who are being treated differently. Third , the high cost Marden
Street plant is a replacement facility that serves existing customers.
Booe opposes a discounted hookup fee for customers with separate irrigation
systems because those customers may still rely upon Boise Water for irrigation needs
during drought years or off season when surface water is unavailable.
We find:
All parties to this case recommend an increase in Boise Water s hookup fee.
The Staff proposal is intriguing and may more closely reflect cost of service on an
individual basis. We find , however, that there is no feasible method of delineating between
customers based on their geographical locations within the Boise Water service area. Any
such delineation , by necessity, would be arbitrary and could result in neighbors paying
different hookup fees. We find that, as a whole, a uniform hookup fee is fairer to all
customers. We note that rate design is necessarily based on averages of individual
customer costs.
According to the evidence presented, the cost of supply per customer is $250 if
served by a well. This amount increases, however, to $1 944 if the customer is served
from a water treatment plant. We find that a reasonable approach is to use the
approximate average of these two numbers plus an amount for storage and boosters and
calculate a hookup fee of $1 200. We approve a hookup fee for Boise Water in this
amount for 5/8 inch and 3/4 inch meter sizes and note that it is roughly the mid-point of
Staff's recommended range of $0 to $2 740. We further find that hookup fees for
customers with larger meters should be increased in the same proportion. See Attachment
. Our decision to significantly increase Boise Water s hookup fee should help to protect
ORDER NO. 25640
existing ratepayers from the costs associated with growth and to ensure that growth pays
for itself.
We agree with the Coalition that a discount should be offered to new customers
who are connected to separate irrigation systems. We realize that customers with separate
systems may, at some point, rely on Boise Water for their irrigation needs. On the whole
however, they will contribute much less to the Company s peak than customers without
separate systems. We find that $465 is a reasonable hookup fee for 3/4 inch meter, and
smaller, customers connected to a separate irrigation system. Larger metered irrigation
customers connected to a separate system will receive proportional discounts.
We find that offering an incentive for the development of separate irrigation
systems is consistent with past Commission directives to the Company and is good public
policy. When untreated surface water can be used for irrigation instead of drinking water
our scarce and valuable water resources are better utilized. In Order No. 25062, issued in
Boise Water s last general rate case, we noted that: "(i)rrigation during the hot, arid
summer months of southern Idaho constitutes a significant usage of water. The economic
rationale for pursuing dual (separate) water systems is that the need for expensive
treatment facilities, such as the Marden Street plant, may be deferred." Order No. 25062 at
p. 30. As we noted earlier, it now appears that the various entities pursuing separate
irrigation systems have had some success. The Company is directed to continue taking an
active role in this regard.
Boise Water s Biddina Procedures
In Order No. 25062 , the Commission directed Staff to investigate Boise Water's
bidding practices, to determine industry standards and to present its recommendations to
the Commission in the present case. Staff conducted its review and concludes that Boise
Water s practices appear to be consistent with industry standards. Although Boise Water
has what could be considered a closed bidding process in terms of the number of labor
contractors who qualify for the sole source contract and in terms of local purchases of
materials , Staff could find no evidence that costs are higher as a result of these practices.
Staff did make several recommendations: that the Commission order Boise
Water to keep contracts for at least five years after they are awarded , that the Company
conduct periodic reviews of local labor and material unit prices to determine the
competitiveness of existing contracts, and that the Company be required to prequalify more
ORDER NO. 25640
contractors for bidding on the sole source contract now held by Owyhee Construction
Company.
We find:
Insufficient evidence was presented in this case to substantiate suspicions that
Boise Water s bidding practices are somehow unfair or discriminatory. We will adopt the
recommendations of Staff regarding the retention of contracts for five years and the
conducting of reviews of local labor and material unit prices. In addition, the Company is
directed to prequalify more contractors for bidding on the sole source contract.
Monthly Vs. Bi-monthly Billina
Staff proposes that Boise Water convert to a monthly billing cycle. Staff notes
that Boise Water s rates are increasing substantially and when those rates are lumped
together every two months it constitutes more of a financial burden than if they are split in
half, as would be the case for monthly billing. Staff witness Barker also notes that
monthly billing cycle would eliminate the perceived or actual inequities resulting from
seasonal rates that start and end at different times depending on a customer's billing cycle.
Staff believes that the monthly reading of meters will also allow the Company to collect
better information about its customers' consumption for future use from month to month
and give customers more timely information about their consumption.
Staff concedes that a monthly billing cycle will cost more than a bi-monthly billing
cycle. The Company estimates that a monthly billing cycle would increase its annual
expenses by $595,200 and would require additional capital expenditures of $53 090.
Staff's estimate of the increased cost is $463,000 in expense and capital expenditures of
$36,461. In spite of the increased costs, Staff advocates the implementation of a monthly
billing cycle for the reasons stated above. Staff suggests that the Company could consider
phasing in the monthly billing cycle, although it is not clear whether this would reduce its
costs.
In rebuttal , Boise Water joins in Staff's proposal to convert to a monthly billing
period, but states that there may be a greater need for additional labor than estimated by
Staff.
We find:
ORDER NO. 25640
We do not dispute the potential benefits that could be obtained from converting
to a monthly billing cycle. We find , however, that the increased costs associated with the
conversion do not justify the benefits. Perhaps the cost/benefit ratio will be more favorable
when , and if, the Company implements a more technologically advanced meter reading
system. We also note that public testimony on this issue was overwhelmingly opposed to
the conversion. We find, therefore, that Boise Water should remain on a bi-monthly billing
cycle.
ORDER NO. 25640
INTERVENOR FUNDING
Applications for intervenor funding were timely filed by ICC and CBWC. ICC
submits the following expenses:
Consulting Fees:
Thomas Power
AI Fothergill
158 hours em $70 to $5 per hour =
24 hours em $40 per hour
$11 850.
960.
$12 810.Subtotal
Expenses
Thomas Power Federal Express
Taxi
Meals
Telephone
Motel
Airfare
$ 31.
37.
51.
32.
41.
537.
$ 730.Subtotal
Other Expenses
Telephone
Postage
Printing
$ 23.
17.
210.
$ 250.
$13,790.
Subtotal
Total Fees &
Expenses
CBWC submits the following expenses:
Legal Fees
Composite $20 322.
Expert Witness Fees
Ben Johnson
Associates
$21 827.
Expenses
Telephone
Telecopy Charges
Copying
Postage
23.
156.
637.
25.
ORDER NO. 25640
Subtotal
Total Fees &
Expenses
$ 852.
$43 001.
We find.
Pursuant to Idaho Code ~ 61-117 A, the maximum award of intervenor funding
that may be made in anyone case is $25 000. We find that both ICC and CBWC
materially contributed to the decision rendered by us in this case. ICC provided valuable
input on Boise Water s proposed lost revenue adjustment, the Company s cost-of-service
study and the appropriate hookup fee. CBWC also provided valuable evidence concerning
the lost revenue adjustment as well as the Company s Marden Street treatment plant, its
hookup fees, its proposed rate design , treatment of special contracts , bidding practices
and its cost of capital.
In addition, we find that, in many respects, the recommendations made by ICC
and CBWC differed materially from those made by the Commission Staff and that the
testimony in participation of the two intervenors addressed issues of concern to all of Boise
Water s customers. Finally, we find that it would constitute a significant financial hardship
for the intervenors if they are not awarded the amounts of funding set forth below.
In dividing the available funding between the two intervenors, we find that it is
reasonable to pay each intervenor its out-of-pocket costs. We therefore award ICC costs
in the amount of $980 and CBWC costs in the amount of $852.63.
Regarding the remaining funding available, we believe that it is reasonable to
fully fund ICC's requested fees in the amount of $12 810. ICC was able to cover a wide
range of issues at very reasonable cost. Mr. Power s testimony on the issues of lost
revenues, revenue allocation and hookup fees was detailed and well reasoned. Mr.
Fothergill's modest hourly rate is very reasonable given the value of his contribution to this
proceeding. CBWC also provided valuable testimony on issues of lost revenues, revenue
allocation and cost of capital. We award CBWC the remaining available funding of
$10,357.
ORDER NO. 25640
Boise Water is instructed to pay these amounts within 28 days from the date of
this Order. The Company is further directed that these costs , like the rate case expense,
should be amortized over two years.
We would like to, again , note that although she chose not to request intervenor
funding, Ms. Ullman s participation in this case was helpful to the Commission. We also
express our gratitude to the public witnesses who offered their testimony at the hearing.
CONCLUSION OF LAW
The Idaho Public Utilities Commission has jurisdiction over Boise Water
Corporation and its Application pursuant to the authority and power granted it under Title
61 of the Idaho Code and the Commission s Rules of Procedure , IDAPA 31.01.01000
seq.
ORDER
IT IS HEREBY ORDERED that Boise Water Corporation be and hereby is
authorized to file tariffs of rates and charges in compliance with the terms of this Order, to
be effective for service rendered on and after three working days after receipt by this
Commission.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues
finally decided by this Order) or in interlocutory Orders previously issued in this Case No.
BI-93-3 may petition for reconsideration within twenty-one (21) days ofthe service date
of this Order with regard to any matter decided in this Order or in interlocutory Orders
previously issued in this Case No. BI-93-3. Within seven (7) days after any person has
petitioned for reconsideration , any other person may cross-petition for reconsideration.
See Idaho Code 9 61-626.
ORDER NO. 25640
DONE by Order of the Idaho Public Utilities Commission at Boise , Idaho this
day of July 1994.
MARSHA H. SMITH , PRESIDENT
DEAN J. MillER, COMMISSIONER
RALPH NELSON , COMMISSIONER
ATTEST:
Myrna J. Walters
Commission Secretary
vld/O-BO I-W -93-3. bp
ORDER NO. 25640
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
BOISE WATER CORPORATION TO REVISE
AND INCREASE ITS RATES CHARGED FOR
WATER SERVICE.
CASE NO. BOI-93-
ERRATUM NOTICE
On July 14, 1994, IPUC Order No. 25640 was issued by this Commission. The
following change should be made to that Order:
Page 10, paragraph 1 , line 1
READS:
a test year is to provide a cut off date which is necessary to establish rates in a
general rate case. . . .
SHOULD READ:
The purpose of a test year is to provide a cut off date which is necessary to
establish rates in a general rate case. . . .
DATED at Boise, Idaho, this day of August , 1994.
CHRIS MASCHMANN - ASSISTANT COMMISSION SECRETARY
bls/O-BOIW933. ERR
ORDER NO. 25640
~u._- -. ~- ~-_._-
Service Date
July 6, 1998
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INC. FOR AUTHORITY)
TO REVISE AND INCREASE RATES AND
CHARGES FOR WATER SERVICE.
CASE NO. UWI-97-
ORDER NO. 27617
SYNOPSIS
This is a final Order in Case No. UWI- W -97 -6 determining the revenue requirement and
setting interim rates for United Water Idaho Inc. (United Water; Company). By this Order, the
Idaho Public Utilities Commission (Commission) authorizes United Water to increase its revenues
581 989 or approximately 7.15%.
SUMMARY
On November 3, 1997, United Water filed an Application with the Commission for
authority to increase its rates and charges for water service. At hearing, the Company reduced its
requested revenue increase from $3 424 516 (15.47%) to $3 134 039, (14.27%).
Also at issue in this case pursuant to Commission direction are the identified
service and water quality issues raised in the filings and submitted investigative reports in
Case No. UWI-96-6 (In the Matter of the Investigation of United Water Idaho Inc and its
Ability to Provide Adequate Service and Water Quality). The identified water quality
problem addressed in Case No. UWI-96-6 was the presence of iron and/or manganese
in United Water s ground water wells at levels exceeding the secondary maximum
contaminant levels (SMCLs) listed in the federal Safe Drinking Water Act (SDWA).
Although secondary contaminants are classified as non-health threatening, the presence of
high levels of iron and manganese can result in aesthetic problems including foul odor
poor taste and discoloration.
United Water serves approximately 57 350 customers in the city of Boise and
surrounding areas. The Company s sources of supply consist of the Marden Water
Treatment Plant, 71 deep wells and 29 reservoirs with storage capacity of 27.4 million
ORDER NO. 27617
gallons. The combined production capacity of all wells and the treatment plant is
approximately 82 million gallons per day.
United Water states that it seeks additional revenues to recover increased
operating expenses and costs associated with plant additions, and to produce a fair rate of
return. The Company contends that the proposed changes in its rates and charges are
just and reasonable and are necessary for the Company to continue to provide adequate
and reliable service to its customers.
Pursuant to Order No. 27229 issued November 20, 1997 , the proposed schedule
of rates and charges in Case No. UWI-97-6 was suspended for a period of thirty (30)
days plus five (5) months from the adjusted proposed effective date of December 14, 1997.
Upon a finding of good cause the suspension period was extended by the Commission in
Order No. 27556 until July 1 , 1998 , and further extended until July 6 , 1998, by Order
No. 27609. Reference Idaho Code 9 61-622.
Public hearing in this case was held in Boise , Idaho on April 22-, 1998. The
following parties appeared individually and/or by and through their respective counselor
representative:
United Water Idaho Inc.Dean J. Miller, Esq.
Walton F. Hill , Esq.
Idaho Citizens Coalition AI Fothergill
Sharon Ullman Pro Se
Commission Staff Scott D. Woodbury, Esq.
The Coalition of United Water Customers, Eagle Water Company, Hidden Springs
Community, LLC and Hidden Springs Water Co., although previously granted intervenor
status, neither participated in nor appeared at the hearing.
At hearing, United Water proposed a rate base of $84 144 467, a reduction of$56 274
from the rate base of $84 200 741 contained in its original Application. By this Order, we make the
following adjustments to that proposed rate base: (1) elimination of United Water s investment in the
Northwest Pipeline, * (2) elimination of a portion of the Company s investment in Island Woods, (3)
United Water is allowed to begin amortization of these investments with the amortization expense included
in the revenue requirement. Discussed more fully later in this Order.
ORDER NO. 27617
elimination of a portion of the Company s investment in Redwood Creek/Floating Feather, * and (4)
elimination of the Company s investment in the Boise River Diversion project.* We approve a rate
base for United Water of$80 424 286.
We also make numerous adjustments to the Company s proposed operating results as
explained below.
We adopt a return on equity for United Water oflO.75% and an overall rate of return of
9.12%. This yields a revenue deficiency of$1 581 989, which pending conclusion of the cost of
service/rate design phase of the Company s rate case, we allocate by a uniform percentage increase in
rates and charges for all customers. Water usage on and after July 1 , 1998 will be billed at the rates
approved in this Order.
By this Order we also award Intervenor Funding to the Idaho Citizens Coalition in the
amount of$6 955 and to Ms. Sharon Ullman in the amount of$3 416.22.
The Commission has reviewed the filings of record in Case No. UWI-97-6 including
the transcript of proceedings, exhibits and post-hearing briefs. The Commission has also reviewed
its Orders in Case No. EUW-94-1 (Eagle Area Certificate Case), UWI-95-2 (Garden City
Exchange) and other Orders specifically referenced herein.
FINDINGS
I. Test Year
United Water proposes a historical test year ending June 30, 1997 with operating
adjustments to both rate base and operating results for post test year changes. Staff and Intervenors
object to some ofthe adjustments but no party objected to the proposed test year.
Wef'md:
The use of a historical test year ending June 30, 1997 is reasonable for the purposes of
this rate case.
II. Rate Base
United Water in its Application proposed an adjusted rate base of $84 200 741.
Reference Exhibit 4, Schedule 1 , p. 2. As set forth in Company rebuttal Exhibit 20, the Company
proposes a restated rate base of$84 144 467. Tr. p. 1000.
ORDER NO. 27617
The Company has agreed to and incorporated the following Staff proposed adjustments in
its rebuttal rate base calculation:
Eliminate equity gross-up AFUDC
Retire Data Point computer equipment
($54 753)
($ 5 021)
Undisputed acquisition projects proposed for rate base treatment are $137 600 for the Company
Banbury Subdivision, and $576 740 for the Warm Springs Mesa.
Also undisputed as now being "used and useful", is the proposed rate basing of the Pierce
Park/Gary Lane main installation in the amount of$252 93 7. This project was previously disallowed
in Case Nos. BOI-93-1 (Order No. 25062) and BOI-93-3 (Order No. 25640). Tr. pp. 43-48.
Expressing concern with the costs the Company was incurring in its competition with Garden City,
the Commission previously ordered the Company to enter into special facilities contracts as a way of
financing line extensions. The Company did not do so and now states that it became apparent
following the Commission s Order that it would be impossible to fulfil the Commission
requirement as developers would seek to obtain service from Garden City rather than enter into such
an agreement. Tr. pp. 44, 45. The Pierce Park main, the Company states, has now become a vital
link to provide adequate service to a major service area. In 1995 the main was connected to the
Hidden Hollow Reservoir in Seaman s Gulch which provides water storage for fire protection and
peak demand. The main now provides direct benefit, the Company states, to approximately 5 000
customers, to customers added west of Gary Lane, to customers between Gary Lane and Pierce Park
and to all customers in the west main service zone. Tr. pp. 46, 47. The Company notes that as a
result of its investment not being included previously in rate base, it has already forgone
approximately $190 000 of revenue. Tr. p. 48.
Weimd:
This is the third attempt by the Company to rate base its Pierce Park investment.
Recognizing the system benefits now flowing from the Company s investment, the Commission
agrees that it is now reasonable to allow a rate base addition in the requested amount, $252 937. In
our prior decisions denying rate base treatment, we sought to protect the Company s customers from
the then adverse and uneconomic consequences related to the Company s competition with Garden
City. Those concerns have been addressed with the North State acquisition.
ORDER NO. 27617
The following proposed adjustments in Case No. UWI-97-6 remain disputed:
Amt. incl. in Proposed
UWI Adjustment
request
North State acquisition adjustment $577 664 ($577 664)
Northwest Pipeline $940 000 ($940 000)
Island Woods $260,751 ($ 73,400)
Redwood Creek/Floating Feather $890 269 ($824 250)
Three years capitalized corporate overhead $787 735 ($787 735)
882 531 ($1 882 531)
Boise River diversion (Intervenors)500
Book value one vehicle (Co Rebuttal)($ 12 505)
Transp. adj. for leased vehicles (lne!. Co. Reb.
Adj.
ORDER NO. 27617
North State Acquisition Adjustment
The facility and customer exchange between Garden City and United Water was approved
in Case No. UWI-95-2. The incremental increase in rate base requested in this case to reflect that
transaction is the $673 530 depreciated investment paid for the North State Area less the $95 966
exchanged Millstream facilities already in rate base. Tr. p. 614. The exchange of service areas was a
discretionary decision made by the Company and municipal authorities. Tr. p. 517. In the exchange
case Staff recommended that none of the Company s investment in Garden City facilities be allowed
in rate base because the purchased plant was previously contributed, i., the assets were originally
contributed to public service by developers and/or customers. In this case, Staff maintains its
opposition to rate base treatment. Tr. pp. 516, 613. Ifthe Garden City system had been owned by
another public utility, as was Warm Springs Mesa, the transfer, Staff contends, would have been
subject to the accounting instructions contained in the Uniform System of Accounts (USOA) adopted
by the Commission. The USOA requires that assets be recorded at the original cost when first
devoted to public service, that accumulated depreciation at the date of transfer also be recorded, and
that any excess costs be recorded as an acquisition adjustment on the books of the purchasing utility.
Inclusion of the acquisition adjustment in rate base would usually be based upon an analysis of the
effect on customers. Despite the fact that the selling entity is a municipality, Staff contends that this
basic principal should be adhered to. Tr. pp. 517 518. Assessing the consequences of the exchange
Staff concludes that inclusion of the adjustment cannot be justified. Tr. pp. 518, 519. Before the
exchange, the Company had 382 Millstream customers supporting a net rate base of$95 000; after
the exchange they had 898 customers supporting a rate base of $673 530. Tr. pp. 966, 967.
United Water notes that in Case No. UWI-95-2 the Commission Staff made the same
arguments for denial of rate base treatment. In that case, it states, the Company was directed by the
Commission to make a calculation in its next general rate filing to show how the revenue would
support the investment. The Company now argues that if the Commission s intent was to disallow
the investment it could and should have done so in that case. Had the Commission done so, the
Company states, it would have terminated the trade. Tr. p. 870.
Staff, utilizing a developed investment model, Exhibit 105, contends that North State
revenue supports a Company investment in the Garden City exchange area of$583, 164. Staff Exhibit
105 uses a customer count of516, the 898 North State Area customers utilized by Company witness
Gradilone in determining test year revenue (Exhibit No., Schedule 3, pp. 29-30) minus the 382
ORDER NO. 27617
Millstream customers given up by United Water in the exchange. Staff contends that North State
revenues support very little expense or investment for the water supply needed to serve the North
State area (estimated 1 MGD peak demand-Tr. p. 615). Tr. pp. 614 676 871. In Case No. UWI-
95-2 the Company indicated that supply for the North State area would be met in part by purchase
of water from Garden City. Exhibit 106. The purchase of water from Garden City required an
interconnection investment of approximately $52 000 and is at a contract rate for all purchased water
of 35~ per 1 000 gallons. The annual revenue requirement associated with water purchases for the
North State Area, Staff calculates, would support a water supply capital investment of approximately
$187 000. Tr. pp. 616, 617, 801.
United Water contends that proper analysis demonstrates that North State revenue
supports the exchange and any related additional investment. Tr. pp. 869, 870. The Company
contends that Staff used the wrong customer count. The Company contends that additional
customers have been added to the number acquired bringing the customer count to 927, calculating a
total revenue supported investment of $1 ,568 000.
Wef'md:
In our Order approvIng the underlying exchange of servIce areas in Case
No. UWI-95-, a majority of the Commission was persuaded that the exchange was in the public
interest and made sense from a system and engineering planning perspective. We believed that the
realignment of service areas with municipal and area of impact boundaries would serve to eliminate
a disturbing pattern of checkerboard growth and uneconomic investment. Our approval also gave
effect to the stated desires of the elected representatives of both Garden City and Boise City. Order
No. 26562.
In its underlying Application in Case No. UWI-95-, United Water in its prayer for
relief requested that the Commission authorize it to include in its rate base the consideration paid to
Garden City under the exchange agreement. In our Order ultimately approving the exchange, we
specifically stated "United Water has failed to convince us however that we should preapprove the
amount of the purchase price for rate base purposes outside of a general rate case. The Company has
the burden of demonstrating the prudence of its investment in these facilities when it seeks to include
them in rate base." We also noted United Water s "commitment to hold harmless the Company
other customers, both from the consequence of the rates and from the exchange transaction as a
ORDER NO. 27617
whole." Order No. 26562. Our position regarding rate base treatment was reiterated in our denial of
the Company s subsequent Petition for Clarification. Order No. 26646.
United Water now states that the spirit of our prior Orders provided it with some
assurance of rate base treatment and that if the Commission was inclined to deny it such treatment it
should have done so then. We caution the Company that it acts at its own peril in attempting to read
into a specific denial of requested relief, some assurance of future acceptance.
Staff recommends that we consider the entirety of the Company s purchase investment in
the North State Area facilities to be an acquisition premium and deny rate base treatment of same.
The record in this case and the related acquisition case clearly support a finding that the facilities
transferred to United Water were originally contributed to Garden City rather than purchased. It
therefore follows that the purchase price paid by United Water was at a cost which was in excess of
the original cost of the property when first devoted to the public service, less applicable accrued
depreciation. It is therefore, reasonable to regard the Company s purchase price as an acquisition
adjustment. The Company recommends rate base treatment of its investment, yet as we noted in the
acquisition case, the Company acknowledges that its proposal is contrary to established regulatory
policy. Order No. 26646.
As a regulatory rule or policy, the position advanced by Staff in this case regarding
presumption of contributed capital and accounting treatment is generally accepted. We find
however, that it is also the starting point from which we entertain arguments for exception or
different treatment. Each acquisition is reviewed on its own merit. Analysis ofthe acquisition cost
regarding rate base treatment permits an assessment by this Commission of the benefits flowing from
the transaction and the impact on the Company s other customers. An acquisition adjustment is one
of several incentive mechanisms that this Commission can use to encourage water industry
restructuring. In addition to the stated public policy benefits announced in our approval of the
acquisition, we find that the acquisition brings efficiencies of service and improved operations
management and technological expertise to the North State customers. We also find in reviewing the
cases related to the phase-in of rates for the North State area that the exchange and related facility
improvements have enhanced water pressure and water quality for North State customers. We find
that the transaction provides both present and future benefit to affected customers, municipal
planning authorities, and United Water itself. Based on ourreview of the record in this case and the
underlying certificate case, we find it reasonable to conclude that the price ultimately paid by United
ORDER NO. 27617
Water to Garden City was the result of arms length negotiation and was a fair and reasonable price.
Weare satisfied that the revenue generated by the North State customers supports the exchange and
related investment. For all these stated reasons, we find it reasonable to look beyond the contributed
nature of the acquired facilities and approve an increase in rate base in the amount of$577 664 for
the North State Area investment.
ORDER NO. 27617
Northwest Pipeline
United Water calculates that the main service level, which includes the downtown Boise
area and the area northwest of the downtown area, has a supply capacity deficiency of six (6) million
gallons per day (MGD), a deficiency that requires new water supply facilities. Exhibit 17. To reduce
this deficiency, the Company has constructed a 3.5 mile pipeline at a cost of$940 000 to connect the
Hidden Hollow storage reservoir in Seaman s Gulch with the Floating FeatherlRedwood Creek water
system west of Eagle, a system with a present supply surplus of 2-3 million gallons per day.
Tr. pp. 41 , 617. Test well drilling in 1997 to locate a new water supply in the State Street Area
resulted in the discovery that both the water quantity and quality necessary to serve customers in the
main service level was not available. This lack of supply, the Company states, hampered its ability
in the summer and fall of 1997 to fill its Hidden Hollow reservoir. To prevent further service-related
problems, the Company stated it was faced with the necessity oflocating, developing and delivering
water to the Hidden Hollow reservoir before peak usage in 1998. To avoid further unsuccessful
attempts at locating a supply, the Company decided to tap into a source of known quantity and
quality. Tr. p. 41.
Staff contends that the constructed pipeline was not needed, that there was no urgency,
that the supply deficiency was no greater in 1997 than in past years (Exhibit 107; Tr. p. 618); that
with a planned 8 MGD Marden treatment plant expansion scheduled to come on line in May 1999
the deficiency is short term (Tr. pp. 630, 826-828); that the Company failed to utilize during 1997
peak requirements other supply resources available to it: e., the Swift No., which the Company
was not using because of aesthetic water quality problems, (Tr. p. 813); Garden City contract supply
rights (Tr. pp. 819-824); and available supply from other service levels (Tr. p. 621). In addition
Staff notes that other main service level wells completed since 1997 have been brought on line and
are now available-27th Street Well, Tr. pp. 653, 819; also Swift No.3. Supplies less costly than
the pipeline, Staff contends, could also have been constructed (the Company previously estimated
that new supply could be developed for approximately $300 000/MGD- Tr. pp. 617, 654). Staff
questioned the Company about parallels between the Southeast Boise Water Supply Proj ect pipeline
which the Company now contends was developed as a temporary water supply, and the northwest
pipeline. Staff notes that current and future development and related water supply contracts in the
Eagle area may require the Redwood Creek/Floating Feather water supplies (Tr. pp. 618, 619). Staff
also queried why the Company would not have considered bridging what Staff perceives to be a
ORDER NO. 27617 10-
short-term supply deficit with conservation measures, i., alternate day sprinkling. Tr. pp. 809 810
959, 960-962. Finally, Staff notes that a lengthy distribution pipeline constructed ahead of
development places a substantial portion of the cost of new development on the backs of existing
ratepayers rather than through developer contributions, as the line extension rules would otherwise
reqUIre. Tr. pp. 620, 678, 679.
Coincident to the need for new supply in the main service level, Staff notes, construction
ofthe northwest pipeline will make nearly $850 000 worth of investment in the Eagle area used and
useful, will provide reservoir back up and emergency fire protection to the Eagle municipal water
system and will make lower cost service available to a large undeveloped area that would simply not
be possible without the pipeline. However, none of these reasons, Staff states, should be regarded as
justification for making existing customers pay for the pipeline project through rates. Tr. p. 622.
The Company does not agree with Staff s contention that the supply capacity deficiency is
short term. Tr. pp. 959-960. It is not unreasonable, the Company contends, to have a system supply
capability greater than demand. The nature of the beast, it states, is that wells are mechanical and
there are going to be times when they are out of service. Tr. p. 960. It is also not unreasonable, the
Company admits, to ask customers to conserve water-indeed, it did that in 1994. Tr. p. 961.
United Water by way of rebuttal introduced Exhibit 31 to show supply and design constraints in the
United Water system. Tr. pp. 841-846. One critical area of constraint the Company contends is
Collister Road west to Horseshoe Bend Road and between State Street and Hill Road. Tr. p. 843.
Prior to construction of the northwest pipeline, the Company states there were limitations on the
ability of the distribution system to transmit water adequately to the Hidden Hollow Reservoir.
Tr. p. 844. The import-export capability of the distribution system, the ability to move water from
one pressure level to another, is also limited, the Company states, to 6 - 7 million gallons per day.
Tr. p. 846. The Company questions, because of distribution losses, whether the Marden expansion
will be able to beneficially impact identified main service level areas of need. Tr. p. 845. The
Company disputes any obligation to provide the City of Eagle with any waters other than fire flow.
Tr. pp. 962-964.
The Company contends that Swift Well No.1 should not have been listed by the
Company in response to a Staff production request as a source of supply in the main service level
west of 36th Street. It should instead have been noted that it was to be held in reserve for emergency
conditions, i., when the Company would otherwise be faced with restricting or curtailing water
ORDER NO. 27617 11-
usage. Tr. pp. 813 814. The Company presently plans to use Swift No. 1 as an aquifer storage and
recovery (ASR) project, injecting high quality water into the aquifier and pumping it out during
demand periods. It expects the ASR project to be fully operational by summer year 2000. Tr. p. 817.
Wefmd:
The Company has failed to persuasively demonstrate that its decision to construct a
pipeline was for its customers a prudent decision, that it was the best economic and planning
alternative available to it or that it was even needed at this time. It is undisputed that by completing
the pipeline the Company is able to transport surplus water from the Eagle area to Hidden Hollow
Reservoir; that its ability to do so provides it with an additional resource to reduce or mitigate
capacity deficiencies in the main service level; that it provides a benefit to customers outside the
Eagle area; and that it is otherwise "used and useful." It is also undisputed that the Floating Feather
well waters will provide the Company with a supply of high quality water for its main service level
water without elevated levels of iron and/or manganese.
Despite the foregoing findings, our decision in this matter is directed by the Company
failure to avail itself of what we find to be other, more economic alternatives. We refer of course to
the Company s decision to forego contractual rights in its Garden City supply contract; to forego the
use during critical periods of peak demand of its Swift No.1 well; to ignore the additional main
service level well capacity brought on line since 1997, capacity additions which most certainly had to
have been planned; to forego the full utilization of water transport capability between service levels;
to fully recognize that the main service level supply deficiency would be mitigated to a large degree
by the planned 1999 Marden expansion; to forego the planned use of demand conservation measures
(e., alternate day sprinkling) to bridge what can be reasonably perceived to be a short-term supply
deficiency.
Although the Commission will not allow the investment to be rate based at this time
we will allow the Company to recover amortization of its investment in recognition that it is used.
Embedded in the Company s case is $18 800 of depreciation expense that we will allow to remain
for this purpose.
Redwood Creek/Floating Feather
The service to Redwood Creek was authorized by the Commission in the Company
Eagle area certificate case. Reference Case No. EUW - W -94-1. The source capacity for the area is
0 MGD. Currently usage for domestic and fire protection is 2.17 MGD. The Redwood Creek
ORDER NO. 27617 12-
project is a combination of purchased existing facilities and new facilities constructed by the
Company. Tr. p. 611.
Utilizing a developed investment model (Exhibit 104) and Company derived input (27
customers; $457 annual revenue per customer), Staff determined that ofthe $890 269 investment
requested in rate base by the Company for the Redwood Creek/Floating Feather acquisition, only
$66 019 of investment is supported by related revenue. Tr. p. 613. Staff therefore recommends that
$824 250 of the requested net rate base increase for Redwood Creek be disallowed. Tr. p. 613.
United Water in rebuttal contends that it is reasonable to use actual or projected rather
than test year customer numbers and revenue in justifying the rate basing of its investment expense.
Exhibit 15, Tr. pp. 854-856. Utilizing current customer numbers (52) and revenue ($409 annual
revenue per customer) the Company contends that $114 000 of investment is supported. United
Water contends however that Staffs model is inappropriate for determining rate base in the
Redwood Creek/ Floating Feather area. The Company recommends inclusion ofthe entire $890 269
based on its planning determination that the surplus water was needed to supply customer demand in
the Company s main service level, and its construction of a pipeline to transport the water. The
investment, it states, is now linked to the Company s integrated system, and is now used and useful.
Tr. pp. 856 858. Staff challenges the prudence of the Company s decision to construct the pipeline
to connect the Redwood Creek/Floating Feather area to the Company s main service level.
Weimd:
In assessing this investment, we rely on the Company s prior assurances in Case
No. EUW-94-1 that it would not be asking its existing customers to subsidize its Eagle area
investment. We also find that Staffs investment model is acceptable for calculating the amount of
investment supported by revenue and the amount of related subsidy.
The Company contends that because it has constructed three and one-half miles of main
line and connected the heretofore isolated Redwood Creek/Floating Feather System with its greater
integrated water system, that its entire investment in the Eagle area facilities has now been made
used and useful" and should be rate based. As explained above, the Commission has denied
ratebase treatment for the main line. Despite the physical connections of Redwood Creek with the
Floating Feather Well, it is clear that the pipeline was intended to primarily access water supply
provided by the Floating Feather well. Accordingly, we find it reasonable for rate base purposes to
separate the Floating Feather well from the rest of the Company s Redwood Creek investment.
ORDER NO. 27617 13-
Beyond that however, there is reason to question the Company s pipeline investment, its timing and
its reasonableness as discussed above. Based on our analysis and decision to deny rate base
treatment of the pipeline, we find that Staff s investment model analysis is appropriate for Redwood
Creek/Floating Feather.
Included in the Company s depreciation expense is $27 646 related to the Redwood
Creek/Floating Feather well investments. Of this amount, $11 927 is related to the Floating Feather
well. We will allow the $11 927 expense to remain in the revenue requirement calculation to
provide for amortization of the Company s investment in the well. We do this in recognition of the
fact that the Floating Feather well is presently being used as a source supply for the northwest
pipeline.
ORDER NO. 27617 14-
Island Woods
Service to Island Woods was authorized by the Commission in the Company s Eagle area
certificate case. Reference Case No. EUW-94-, Order No. 26337. Island Woods is an
independent water system that is not connected to the Company s larger distribution system.
Tr. p. 43. United Water paid $276 150 and $103 850 respectively for Island Woods supply and
distribution facilities. Tr. p. 42. The source capacity ofIsland Woods wells is 2.6 million gallons
per day or 1 800 gallons per minute. Current demand requirements for source are 62% of current
capacity, 1 000 gallons per minute for fire flow and approximately 120 gallons per minute for peak
hour domestic service. Tr. p. 43. The Company proposes including its entire Island Woods
investment in distribution in rate base, reasoning that with 81 Island Woods customers in September
1997 the Company s Line Extension Rule in effect at that time would have supported an investment
of$113 400. Based on its demand analysis, the Company proposes including only 62% of its supply
investment in rate base, with the remainder being placed in plant held for future use. Tr. p. 43.
Utilizing a developed investment model (Exhibit No.1 03) and Company derived input
(84 customers; $435 annual revenue per customer) Staff determined that ofthe $260 751 requested
for rate base by the Company for the Island Woods water system, only $187 351 of investment is
supported by related revenue. Tr. p. 613. As described by Staff, the model determines the
incremental increase in revenue requirement due to increased operating expenses, taxes and
depreciation expense. The increased revenue requirement is then compared to the incremental
increase in annual revenue generated from the new customers to determine if the Company will earn
its authorized return on investment. If insufficient new revenue is generated, then, Staff contends
investment must be reduced or the general body of ratepayers will be required to subsidize the
acquisition. Staff therefore recommends that $73 400 of the requested net rate base increase for
Island Woods be disallowed. Tr. p. 613.
United Water in rebuttal contends that it is reasonable to use actual or projected rather
than test year customer numbers and revenue in justifying rate basing its investment expense.
Exhibit 14; Tr. pp. 852 948 949. With projected numbers the Company argues that ratebasing its
entire requested investment is justified. Utilizing current customer numbers (90) and revenue ($491
annual revenue per customer) the Company contends that $230 800 of investment is supported. The
Company proposes no pro forma adjustment to either its customer numbers or revenue numbers in
this case. Tr. pp. 643, 950.
ORDER NO. 27617 15-
The Company further contends that rather than look at Company acquisitions on a stand-
alone basis regarding any subsidy that may be required, the Commission should consider the overall
materiality of the subsidy or determine in light of other benefits that may be associated with the
transaction, that some immaterial amount of subsidy might be acceptable. Tr. pp. 637, 638.
Wermd:
In our final Order No. 26337 in Case No. EUW-94-, the Commission approved the
Company s requested certificate. Our recitation of facts in that Order reflects the following
language: Commission Staff, based on its analysis of project economics, area growth and projected
revenue, characterized United Water s investment in the Eagle area as speculative. United Water
admitted that Eagle area revenue in the near term might be insufficient to cover Eagle area
investment. Existing UWI customers, United Water nevertheless assured the Commission, would
not be asked to subsidize the new customers in the Eagle area.
In our findings, we stated
, "
A regulated water utility is at risk in extending into, acquiring
property and investing in non-contiguous areas without a prior certificate." Order No. 26337.
Despite its prior assurances to the Commission and its customers, the Company is now
before us arguing that we should not consider the customer numbers used by the Company in its test
year revenue calculations but instead higher actual or projected numbers to assess the investment
supported by revenue; the Company also asks us to consider whether some immaterial amount of
subsidy might be acceptable. We cannot adopt the Company s proposal. Our previous approval was
done in reliance on Company assurances that the costs of the acquisition would not adversely impact
other customers. We also find that we must be consistent in the use of customer numbers and
revenues and expenses to avoid unreasonable mismatches. We find that Staffs investment model
presents an acceptable methodology for determining revenue supported investment. $73 400 is not an
immaterial amount. We accept Staffs proposed adjustment and approve rate basing of $187 351 of
the Company s Island Woods investment in this proceeding.
ORDER NO. 27617 16-
Capitalized Corporate Overhead.
Because of a perceived potential for interaffiliate subsidies, Staff proposes to remove
capitalized overhead costs charged to construction projects for a three-year period ending June 1997
for fees and expenses charged to United Water Idaho by United Water Resources and the M&S
Company. Reference Exhibit 118, pp. 1 , 2; Tr. pp. 520, 521.
The capitalized overhead adjustments in this case, the Company states, are engineering
costs incurred through the M&S Company on behalf of the customers of United Water Idaho.
Tr. p. 992. United Water points out that Staffs adjustment would effectively eliminate overheads
that were already approved by the Commission in the 96-3 case, which was based on a test year of
1995 (Tr. p. 569), and would deny the Company an opportunity to earn a return on the value of
services capitalized in this case. Tr. p. 570. Referring to Staff Exhibit 118, the Company notes that
since 1994 the rate of overhead accrual has actually gone down, that overheads were accruing at a
rateof3.5% through the 1994 period, 3.4% in the 1995 period and from 1996 to present have ranged
from 2.4% and now are at about 2.9%. Tr. pp. 572, 573.
We f'md:
The Company s argument in this instance is persuasive. Staff was unable to provide any
evidence of interaffiliate subsidies charged to United Water. Although it appears that the overheads
are percentage loading and not based on time, it is also clear that affiliate services were provided to
Idaho. The established record does not support the Staff proposed disallowance.
ORDER NO. 27617 17-
Boise River Intake
The Boise River intake project is comprised of 2900 feet of 30 inch discharge main
through the Surprise Valley Canyon wall cut for Highway 21 and a river diversion structure. The
purpose of the intake/transmission main is to supply Boise River water to a future service water
treatment plant. The Company anticipates that diversion waters will be required to meet projected
southeast Boise demand in year 2005. The southeast Boise area lacks adequate ground water and has
been designated a Ground Water Management Area. It is also an area targeted for significant
growth (residential, commercial and industrial) in Boise City s Comprehensive Plan and other
planning documents, with current and future customer growth projections exceeding 8% per year.
Tr. pp. 25-31.
To meet future demand in southeast Boise the Company explored four potential sources
of supply: (1) wells within the area (no available supply), (2) wells outside the area (Southeast Boise
Water Supply Project limited by capacity and time), (3) the Marden water treatment plant (design
capacity and transmission constraints), and (4) a new water treatment plant. Tr. pp. 31-33. Based on
its analysis, the Company concluded that a new water treatment plant, located in the vicinity of the
Columbia bench was the only viable alternative source of supply for the area. The most feasible site
for a river intake and pumping station was determined to be the site of an existing pumping station
used by the Harris family for irrigation. Tr. pp. 33-35.
The Company s decision to go forward with the river intake project at this time, it states
was based on a number of factors: (1) opportunity to utilize an existing diversion, (2) avoidance of
perceived legal challenges to a new diversion, (3) opportunity to join and share construction costs
with Micron Technology, J.R. Simplot Company and Surprise Valley L'td Partnership, who
independently were working on a proposal to upgrade the existing river diversion, (4) timing of
construction dictated by forces over which United Water did not have control-Micron/Surprise
Valley needed water by spring of '98; mandate of Idaho Department of Transportation and (5) its
obligation to serve. Tr. pp. 35-38.
The Company states that it saw no other viable alternative for future water service to the
southeast Boise area. If the structure was not completed at this time, it states, it would have been
impossible to install facilities at a later date. Tr. p. 39. Recognizing that there is no immediate need
for the diversion waters to meet demand, the Company notes that the facilities constructed are only
ORDER NO. 27617 18-
those which could not be delayed until the treatment plant is built-, no pumps, electrical
equipment or other mechanical equipment have been installed. Tr. pp. 37, 38.
Except upon a finding of an "extreme emergency", the Commission is prohibited under
Idaho Code ~ 61-502A from setting rates for any utility that grant a return on construction work in
progress (CWIP) or property held for future use which is not currently used and useful in providing
utility service. United Water contends that its investment in this instance was incurred in response to
an "extreme emergency" and "undertaken in response to a mandate from government to either install
the facilities now or be precluded from ever installing them." The Company did concede that "the
only written document that it has from the Idaho Department of Transportation is a permit which said
that this line construction will be done prior to paving of the roadway." Tr. p. 973. As represented
the Company perceived that it had no viable alternative and therefore concluded that it had no choice
but to make the investment now. Tr. pp. 39, 81. The Company denies that its decision to construct
was based merely on its opportunity to share construction costs. Tr. p. 38. The Company maintains
that it is reasonable that existing customers share in the cost of planning and development; that the
length of time to develop a new source of surface supply is five to seven years. Tr. pp. 880, 881
948. It thus requests that its investment be included in rate base. The annual revenue requirement
associated with its investment is approximately $306 000. Tr. p. 624.
The Idaho Citizens Coalition opposes including the Boise River diversion in rate base
until it is "used and useful." Reference Idaho Code ~ 61-502A. The installed facilities, it states, are
not providing water service to customers, there are no pumps installed, there is no related water
treatment plant, indeed the Company does not even have water rights that would allow it to operate
the diversion. Tr. p. 691. The Company, the Coalition states, has built ahead of need and actual use.
This is a plant designed for future use. Tr. p. 692. The Coalition maintains that a lower cost
business opportunity does not constitute an "extreme emergency"; that United Water assured the City
of Boise that it would not seek to include the project in rate base until it was fully used and useful
(reference Exhibit No. 110); that intergenerational equity demands that current customers not be
required to pay for facilities that will not be required until the year 2005 (see Tr. p. 878); and that
normal market conditions would impose a similar discipline on competitive business. Tr. pp. 693-
695.
Weimd:
ORDER NO. 27617 19-
The Company in this case presents us with no physical evidence or documentation of a
mandate from government" of such a nature that we could find the "extreme emergency" exception
to Idaho Code 9 61-502(a) exists. Its professed belief that it was subject to such a mandate and that
it would have been precluded in the future from ever installing facilities at the Highway 21 cut is not
supported by persuasive evidence. Based on Company demand forecasts there will be no need for
the facilities until the year 2005. This is a pipe that goes nowhere and is not hooked up to anything.
The Company s investment is not presently "used and useful." Rate basing is therefore prohibited
under Idaho Code 9 61-502(A).
We find, however, that the Company s decision to install facilities now may be of future
benefit to its customers. We do not wish to discourage the Company from making decisions that
make good business sense. Certainly, in this instance, the opportunity to share construction costs and
utilize an existing diversion with others was an incentive to action. We, therefore, find it reasonable
to allow amortization of the Company s present investment in the Boise River intake project so that
this investment will be recovered. We note that the Company s calculation of depreciation expense
in this case includes an allowance for this project, of$3 7 651. That expense allowance is approved
in this Order to provide for the recovery of this investment.
ORDER NO. 27617 20-
Transportation Adjustment for Leased Vehicles
Restore Book Value One Vehicle to Rate Base
Staff proposes an adjustment to make a correction for a change in the Company s plans
for replacing a vehicle and eliminate some capitalized costs of the Company s vehicle leasing
program. Tr. p. 515. The adjustment removes from rate base the extra costs the Company incurred
through its vehicle leasing program. Tr. pp. 522, 526, 527; Exhibit 119, p. 1. By this adjustment
Staff continues to challenge the Company s switch from ownership of its vehicle fleet to leasing, the
Company s failure to present a persuasive cost/benefit analysis oflease versus own, and to articulate
and credit customers with offsetting savings.Reference Order No. 26671 , UWI-96-
Tr. pp. 522-524. Company assumptions regarding vehicle residual values, Staff contends, are
artificially low and adjusted to favor leasing. The actual experience ofUWI over the last few years
Staff maintains, demonstrates unequivocally that the residual values are wrong and that leasing is
more costly to the Company. Tr. pp. 524 525; Exhibit 119, p. 2; Exhibit 118.
The methodology employed by the Company in its cost/benefit analysis in this case
(Exhibit 22) is essentially the same methodology presented in UWI-96-3. Tr. p. 1079. United
Water interprets the Commission Order in Case No. UWI-96-3 as generally accepting the
Company s cost benefit analysis. Tr. pp. 104-106 1081. The Company s analysis, it states, has been
presented and accepted by the majority of the states in which United Water operates. The Company
disputes Staffs continuing contention that its cost/benefit analysis is flawed and superficial, arguing
rather that it is instead well thought out and comprehensive. Tr. pp. 1008-1010; Exhibits 22, 23.
The Company further disputes Staffs contention that its vehicle residual values have been adjusted
to favor leasing and contends that Staff analysis is not based on utility vehicles, which experience
extremely hard service lives. Tr. p. 1010.
We rmd:
Pursuant to a policy that seeks to take advantage of economies of scale, the Company
continues its transition from vehicle ownership to leasing. We recognize that cost savings may be
achieved with a uniform program in multiple states of operation. Weare satisfied that the attendant
costs and benefits were considered and weighed by the Company. Owning and leasing are both
reasonable and viable alternatives. Although the related expenses may vary, we find that the
ORDER NO. 27617 21-
Company is not legally constrained to choose the least cost alternative. The expense incurred should
be authorized if it is determined to be otherwise reasonable.
In this case, Staff disagrees with the Company s projected residual values contending that
they do not comport with the Company s actual resale experience. Weare seemingly being asked to
judge projections and estimates under a leasing scenario with records developed under an ownership
scenario, and to then make a decision as if the own versus lease cost equation can be simply reduced
to the amount realized on resale. We think not. The Company s proposed lease expense and related
rate base adjustment has not been shown to be unreasonable. We reject Staffs proposed leasing
adjustment. We approve restoring the $3 500 book value of one vehicle to rate base.
ORDER NO. 27617 22-
Rate Base Calculations
Following are the calculations for United Water s approved rate base:
Plant in Service
Per Company Ex. No. 20, Page 1
Less Northwest Pipeline
Less Portion of Island Woods
Less Portion of Redwood Creek
Less Boise River Diversion Project
Adjusted Total Plant in Service
Less: (Per Company Ex. No. 20, Page 1)
Accumulated Depreciation
Customer Advances for Construction
Contributions in Aid of Construction
Utility Plant Acquisition Adjustment
Accumulated Deferred Income Taxes
Net Adjustment for Island Woods (Co proposal)
Pre 1971 Investment Tax Credits
Add: (From Co. Ex. No. 20, Page 1)
Deferred Charges
Working Capital
(73,400)
ORDER NO. 27617 23-
$137 099 238
(940 000)
(824 250)
(1.882.531)
$133 379,057
(27 573 584)
112 097)
(19 725 787)
(208 028)
384,478)
(99,476)
(22 594 )
281 195
890.078
$80.424.286
III Operating Results
As reflected in its initial Application the increase in annual revenue requested by
the Company was $3,424 516 or 15.47%. As set forth in Company rebuttal Exhibit 20 a
revised annual revenue increase of $3 134 039 or 14.27% is requested. Tr. pp. 1000
1001.
The Company has agreed to and incorporated into its rebuttal Exh. 20 results of
operations , the following Staff proposed adjustments to operating expense:
Ad valorem adjustment-(Co. Post Hng Exh 33) ($13 265)
Correct info collection rule (SDWA) test schedule ($ 2 810)
Correct purchase water double count ($ 1 800)
Correct employee health insurance $ 9,634
Correct employee thrift plan
($
446)
Correct telemetry expense ($ 7 123)
The Commission Staff has further agreed to reverse a proposed Exhibit 115 , Column K
($3 947) payroll tax adjustment , as Staff agrees that it is a duplication of an adjustment
already made by the Company. Tr. pp. 104, 1021-1023.
Also agreed to is a ($168) adjustment to correct the Company s PUC annual
regulatory fee assessment to the 1998 actual amount. Tr. p. 157. The pro forma annual
IPUC assessment expense is $51 807. We find the substitution of actual expense for
estimated expense to be reasonable.
On May 18, 1998, the Company submitted a second amended Exhibit No.
Schedule 1 , p. 7 setting forth amended power cost calculations based on test year usage
and Idaho Power Company rates as of 5/16/98. Reference Order No. 27516. The related
corrected adjustment increases test year expense by $74,484, rather than the decrease of
$31 807 originally proposed and included in the Company s rebuttal Exh. 20 operating
expenses. The effect of the amended calculation is an increase of $106,291 to the
operating expenses reflected in Exh. 20. This adjustment affects the operating ratio
adjustment calculation. The pro forma annual purchased power cost is $1 110 698. We
find the use of current electric rates in the Company s power cost calculations to be
reasonable.
*Corrected adjustment number based on the actual 1998 market value appraisal of$70 956 346ORDER NO. 27617 -24-
Eliminate Depreciation Expense Equity Gross-
Staff made an adjustment to rate base to eliminate the capitalized AFUDC gross up. The
Company agreed with the adjustment and reflected the $54 753 rate base adjustment in rebuttal
Exh. 20. Tr. p. 1039. The depreciation expense associated with the amount removed from rate base
must also be removed from expenses. The depreciation expense adjustment is $1 617 ($80 857 rate
base, 50 year life).
We Find:
Staffs uncontested $1 617 adjustment to depreciation expense is proper and makes the
capitalized AFUDC gross-up revenue neutral as provided by FAS 109. (Exh. No. 26).
ORDER NO. 27617 25-
Adjust Transportation Expenses
United Water s transportation expense reflects 43 leased vehicles with an average lease
term of approximately 3.5 years. This proposed adjustment carries through Staff's correction related
to the Company s switch from ownership of its vehicle fleet to leasing, proposes to eliminate lease
expense in excess of historical expense with ownership, and reduces the Company s proposed level
of operating lease expense from $286 800 to $171,402. Exh. 119 p.1; Tr. pp. 527, 529.
The Company disputes Staffs criticism of its lease versus own cost/benefit analysis and
believes that the Staff proposed 40.24% reduction in expense allowance for leased vehicles is
unreasonable. Tr. p. 1010. Staffs seeming reliance on the fact that the Company s transportation
overhead rate has increased from 6.5% to 11.5% from 1994 to 1997 as an indication that leasing is
more expensive than vehicle ownership, the Company states, is erroneous in that the Staff ignores
the other side of the equation, the fact that owned vehicles also require a return on rate base and the
associated income tax impact. Tr. p. 1011. See additional Company analysis, Exhibit 24
Tr. pp. 1012-1018. On rebuttal the Company proposed a $21 400 reduction in the level of
transportation expense requested based on expected lease residual values flowing back to the
Company on approximately 12 vehicles/yr from American Leasing Corp. Tr. pp. 1008, 1018;
Exh. 20, p. 3.
We Find:
For reasons expressed in our related rate base discussion above, we find vehicle
ownership and leasing are both viable options available to the Company. We find the Company
decision to switch from vehicle ownership to leasing to be a reasonable business choice. Staff has
not demonstrated that the Company s transportation and vehicle lease expenses are unreasonable.
The Company on rebuttal proposes a $21 400 reduction in lease expense to reflect projections that its
leasing company will realize 20% more for the Company s vehicles than the residual value utilized
in calculating the lease payment. We approve the adjusted expense level of $265 400.
ORDER NO. 27617 26-
Adjust PUC Rate Case Expense
Under the Company s proposal, test year expense is increased by $115 654 for the
amortization of current rate case expense and the unamortized balance of two prior proceedings, the
connection fee case (UWI-96-4) and the water quality (UWI-96-6) investigation. Exhibit 5
Schedule 1 , p. 18. The Company estimates that the current rate case will cost approximately
$300 000 to which $36 813, the unamortized balances from the prior proceedings, is added to reflect
a total unamortized balance of$336 813. The $336 813 is divided by two years to reflect an annual
amortization of $168 407. Deducting test year expense of $52 753 produces an adjustment of
$115 654. Tr. p. 124.
Staff as detailed in Exhibit 120 adjusts UWI's estimated rate case expense to split these
costs between customers and shareholders. Staff further adjusted expenses for other PUC cases to
amortize these non-recurring charges over a five (5) year period rather than two (2) as requested by
the Company. Tr. pp. 530-532.
The Company agrees on rebuttal that a five-year amortization period for the deferred
regulatory expense related to the connection fee and water quality cases is reasonable due to the non-
recurring nature of such cases. Tr. p. 1023. The Company did not however make any adjustment in
its rebuttal exhibits to recognize its agreement. The Company notes that through its efforts to control
costs, its current estimated rate case expense is lower than costs actually incurred in its last general
rate filing. Tr. pp. 1024, 1025. Company witness Healy disputes Staffs contention that a double
counting of his rate case costs has occurred, stating that the costs of his time related to rate case
functions is not included in the deferred rate case cost, it is only reflected in the Company s O&M
expense. Tr. p. 1025.
The Company notes that during the discovery process it provided Staff and intervenor
Sharon Ullman with a break down of estimated rate case expense and also copies of actual invoices
bills and contracts supporting actual costs received to date. Tr. p. 1027. Neither Staff nor
Ms. Ullman, the Company states provided any analysis or reasoning supporting their conclusion that
rate case expense was too high. Tr. pp. 1027-1031.
We Imd:
The Commission finds the Company s estimated general rate case expense to be
reasonable. We understand said expense to include both the revenue requirement and cost of
service/rate design phases. We understand that embedded in its estimate are attorney fees and
ORDER NO. 27617 27-
intervenor funding. We find no justification for requiring the Company to split rate case expense
between customers and shareholders. United Water and Staff propose amortizing the costs of the
current rate case over a two year period. We find that a three year amortization for rate case expense
provides a more responsible matching of costs to the time period in which they are incurred.
accept the reasonableness of a five year amortization period for the deferred regulatory expense
related to the make whole, connection fee and water quality cases, $36 813. We further allow the
Company total general rate case expense of $300 000 amortized over three years. The following
table reflects the rate case expense adjustment of ($61 044) to the pro forma test year.
United Water Idaho
Staff Adjustment to
Rate Case Expense Amortization
1. Current Rate Case Expense (Ex 5 , Sch 1 , Pg 18)$300 000
Ratio of Expense to customers 100.00%
Expense to be passed through to customers $300
Amortization period in years
Annual Amortization Expense $100 000
6. Other Case Expenses (Ex 5, Sch 1, Pg 18)$36 813
Amortization period in years
Annual Amortization Expense
9. Total Amortization Expense $107 362.
10. Test Year Amortization Expense (Ex 5, Sch 1 , Pg 18)753
11. Required Adjustment to Test Year $54 609.
12. Company proposed Adjustment (Ex 5 , Sch 1 , Pg 18)115 654
13. Adjustment to Company s Performa test year ($61.044)
ORDER NO. 27617 28-
Adjust Operating Ratio Adjustment
This Staff proposed adjustment as detailed in Exhibit 121 is intended to synchronize
expenses related to the effects of customer growth and weather with the Company s variable
operating expenses that are sensitive to these changes. Tr. pp. 532, 533.
The Company agrees with Staff s methodology, except for one point. Staff, it contends, has
substituted the level of transportation expense on line 3 , column b of Exhibit 121 , thus lowering the
ratio of growth related expenses to revenue. The calculation of this adjustment, the Company
contends, cannot be made until a level of transportation expense is decided. Tr. pp. 1032, 1033.
We rmd:
Having made our decisions in this Order regarding the authorized level of transportation
expense and power supply cost, a recalculation of the operating ratio adjustment under the agreed
methodology results in a decrease in Company operating expenses, as reflected in Company rebuttal
Exh. 20, in the amount of ($739).
ORDER NO. 27617 29-
Reverse Adjustment for M&S Fees
Services provided to United Water Idaho from United Water Management and Services
(M&S) are provided pursuant to an agreement between the companies. Test period level of
Management and Service charges were $868 565. The Company states, however, that due to
recording variations, this level is not representative of the annual expense. The 1997 charge which
contains seven months actual data and five months projected data, indicates a pro forma level of
Management and Service charges of$948 643 or $80 078 higher than the test year level. This higher
figure, the Company contends, reflects the level of services received. Tr. pp. 121 122. Because it is
simply a budgeted number and not based on known and measurable expense, Staff reverses this
adjustment by the Company. Tr. p. 533.
The Company on rebuttal contends that Staff has identified no cost or charge that is
unreasonable, excessive or imprudent. Staff s adjustment, it states, is simply the amount by which
the Company has adjusted the test year level of expense, and is not the product of any logic
reasoning or calculation. Tr. p. 1033.
United Water contends that utility management has both the obligation and right without
Commission second guessing or micro management to manage the business and overall expenses
within categories if the overall result within the category is not unreasonable. Tr. pp. 549 550. By
way of rebuttal, the Company in Exhibit 25 presents a schedule depicting UWI Management and
Service fee expense as a percentage of total operations and maintenance expense. The 1991 through
1996 actual average is 10.73%. Tr. pp. 555 , 1033-1035. Staff on cross admitted that it had no
testimony or information to indicate that management/service fees at this relationship or level in
comparison to O&M generally is unreasonable. Tr. p. 555. The Company also presents other
possible scales of reference for use in evaluating the significance of the proposed
management/service fees. Tr. pp. 556-558. Suspicion alone, the Company contends, should not
trigger a disallowance. Tr. p. 559.
Weimd:
In examining payments to affiliates we apply the rule announced by our Supreme Court
Boise Water Corp. v. Idaho Public Utilities Comm.97 Idaho 832, 555 P .2d 163 (1976) and General
Telephone Company v. Idaho Public Utilities Comm.109 Idaho 942, 712 P.2d 643 (1986)
ORDER NO. 27617 30-
Although the company may have established actual incurrence of these
operating expenses, that fact alone does not establish a prima facie case of
reasonableness with respect to payments to affiliates. (Citations omitted).
Charges arising out of intercompany relationships should be scrutinized with
care.
97 Idaho at 836-837.
In this case we find that the Company proposed adjustment for budgeted
increases in fees paid to the M & S Company is a projection not based on actual known
and measurable data. It is simply a 5% increase percentage assessment over year end
1996 annual expense. A mere statement that the higher figure reflects the level of services
received does not establish the reasonableness of the increased payment to M & S.
therefore find that Staff's proposed adjustment is proper.
ORDER NO. 27617 31-
Adjust Depreciation Expense IT and Master Plan
The Company in its case used a 1 O-year life for calculating depreciation expense
on its investment in the Information Technology (IT) program and the Master Plan. The IT
system , the Company states, replaces a 20-year old main frame that was essentially
obsolete. The conversion to a new information system, Staff contends , is not a normal
occurrence and it is unreasonable to expect that in ten years the Company will scrap all of
its technological equipment and software and start over from scratch. Tr. pp. 531 , 533.
Likewise, Staff contends, that the Master Plan is an unusual long-term project. Staff
proposes that both investments be depreciated over a 20-year period. Staff's adjustment
is simply a 50% reduction in the Company s pro forma depreciation adjustment.
On rebuttal, the Company contends that the ten year life proposed for its
investment in Information Technology is based on a realistic assumption of service life
given the rapidly evolving nature of computer equipment. Citing Pennsylvania PUC
concurrence Tr. pp., 1040-1042. The replaced main frame equipment, the Company
reminds the Commission , was a system that was added to , upgraded, retired and modified
during the course of its 20 plus years. Tr. p. 1042. Reason would suggest, the Company
contends, that a 20-year depreciation period for IT equipment is based on flawed logic.
Regarding its Master Plan , the Company on rebuttal notes that, although its
master engineering and operations plan is intended to provide guidance to the Company
for many years, the plan contemplates a five-year update cycle to keep it fresh and
responsive to the dynamic growth in the Company s service area. Key aspects of
operations , the Company contends, can change substantially over a ten-year period. For
instance, ten years ago UWI did not anticipate that southeast Boise would be designated a
Ground Water Management Area. The conclusions of the Treasure Valley Hydrologic
Study may have a potential similar impact in the next ten years. For these reasons, the
Company contends that a ten year depreciable life is reasonable. Tr. p. 1044.
We find:
The Company s argument for using a 10-year life for calculating depreciation
expense on its investment in its Information Technology program and Master Plan is
persuasive. Staff's proposed adjustment is rejected.
ORDER NO. 27617 32-
Replacing Employee with Contractor
On rebuttal the Company proposes an adjustment to reflect the removal of a
proposed new employee (a locator) and attendant labor, benefit and transportation costs
as reflected in its direct case and the replacement ofthis function with contract expense. A
locator s job is to "mark-out" mains and service locations for others who are excavating.
The Company states that in 1997 it received approximately 68 "mark-out" requests per day.
The Company has one employee dedicated to this function who is unable to perform the
number requested. Tr. p. 51. Contract expense is estimated to be $58 240 based on the
historical level of locator requests, a $13,013 increase over the $45 227 proposed
employee costs. Exhibit 21; Tr. pp. 1003, 1004. The Company maintains that "the long-
term benefit to the customer is clear." Tr. p. 1004.
By unattested faxed copy of a post-hearing agreement dated June 22, 1998, it is
represented that the Company has purportedly contracted with one Melvin L. Cook dba
Mel's Locating Company, Nampa, Idaho for locator services. Compensation is at the rate
of $8.00 for each underground facility located and marked by contractor. The Company
reserves the right to increase or diminish the amount of work to be done with regard to the
services to be performed.
We find:
The Company s proposed rebuttal adjustment is an out of test year adjustment
for an expense that is not actual but estimated. No money has been spent. We find that it
is not sufficiently known and measurable. We find that the post-hearing contract will not be
included as a record exhibit. The hearing record is closed. We therefore find it reasonable
to deny the Company proposed adjustment for contract expense.
ORDER NO. 27617 33-
Adjustment for Salary and Benefits Survey Participation
In the discovery phase of this case , Ms. Ullman requested that the Company
provide a copy of the Western Management Group 1997 Idaho Cross-Industry Salary and
Benefit Survey results, a survey in which UWI participated. The Company responded that
it was contractually precluded from disclosing or sharing the results. In Order No. 27449
the Commission indicated that it expected the Company to make an adjustment to reflect
removal from its revenue request, the expense incurred due to its participation in the
Western Management Group Salary and Benefit Survey. The Company reports that no
adjustment is indicated, as the billing was paid in July 1997 , outside the test year period.
See Exhibit 30; Tr. p. 1054..
We f'md:
In as much as the Company s payment to the Western Management Group did not fall
within the test year period, we find that there is no need for an adjustment, as proposed.
Depreciation Expense Adjustments-Redwood CreeklIsland Woods
We f'md:
Having disallowed a portion of the Company requested rate base for Redwood Creek and
Island Woods, the Commission finds that the proportionate related depreciation expense included in
the Company s case should be removed. For Redwood Creek, that amount is $15 719; for Island
Woods the amount is $1 468.
Depreciation Expense Adjustment-Capitalized Corporate Overhead
We f'md:
Having disallowed Staff s proposed adjustment related to capitalized corporate overhead
we also disallow the proposed $16 242 elimination of related depreciation.
ORDER NO. 27617 34-
Operating Results Calculation
Following is the calculation of United Water s operating results based on the revenues
and expenses approved in this Order.
OPERATING RESULTS SCHEDULE
Revenues Per Company Exhibit 20, Page 3, Column 0
Eliminate Micron Reuse/Efficiency Adjustment
Net Revenues
Operating Expenses Per Co Ex 20, Page 3 , Column 0
Correct for:
Ad Valorem Tax (Co. Post Hearing Exhibit)
Pumping Power (Co Post Hearing Exhibit)
Micron Reuse/Efficiency Adjustment
PUC Regulatory Fees
Rate Case Amortization Expense
M&S Co. proforma adjustment
Locator Expense
Adjust Depreciation Expense- Redwood Creek
Adjust Depreciation Expense- Island Woods
Adjust Depreciation for Equity Gross-up of AFUDC
617)
Recalculate Operating Ratio
Total Adjusted Operating Expenses
Operating Income Before Income Tax
Idaho Income Tax
Federal Income Tax
Net Utility Operating Income
See following VI C discussion re: Micron Reuse/Efficiency Adjustment.ORDER NO. 27617 -35-
$21 962,493
173.482
$22.135.975
322 231
709
106,291
594
(168)
(61 044)
(80,078)
(58 240)
(15 719)
(1,468)
(739)
$14 224 752
911 223
311 ,466
1.205.827
$6.393.930
IV Rate of Return
Capital Structure
United Water Idaho Inc. is wholly-owned by United Water Works (formerly General
Waterworks Corp.), which is wholly-owned by United Water Resources, Inc. Tr. p. 252. The actual
capital structure ofUWI is 100% equity. Tr. p. 288. Interest expense is allocated to UWI. United
Water Idaho Inc.' s common stock is not traded.
One of the issues in this proceeding is the capital structure that should be adopted for the
regulated United Water Idaho Inc. Testimony on this issue was presented by Frank J. Hanley (AUS
Consultants) for the Company and Terri Carlock for Commission Staff. Post-hearing briefs were
also submitted. The following schedule sets forth the related recommendations of each:
COMPONENT
CAPITAL
STRUCTURE
RATIO (UWI)RATIO (STAFF)
Long-term debt
Minority Interest (Preferred
Stock)
54.98%52.
14%
Common Equity 44.88%40.
TOTAL 100.00%100.00%
Reference UWI Exhibit 13, Schedule 8; Staff Exhibit 101, Schedule 17.
United Water employs the actual June 30, 1997 consolidated capital structure of its
corporate parent, United Water Works (UWW). Tr. p. 248. The Company represents that this is
appropriate because of the following:
1. UWW provides all of the external capital required by United Water;
No equity capital has been injected into UWWbyits parent United
Water Resources (UWR) since the April 1994 merger and thus
UWW is not financially dependent on UWR;
UWR provides no financial guarantees, pledges, or any of its assets to
any lender for the benefit ofUWW;
No capital ofUWR other than UWW could be used to finance United
Water s rate base;
ORDER NO. 27617 36-
UWW capital structure ratios are reasonable vis-a.-vis a proxy group
five water companies represented as generally similar in risk to United
Water;
UWW capital structure ratios are consistent with those required by
Standard and Poor s (S&P) for a water utility to maintain an A bond
rating with an "average" business position, i., the business position of
UWW. (S&P's total debt to total capital criterion for a water company
in an average business position to obtain an "A" bond rating is 52%
implying, the Company states, a total equity ratio of 48%. Tr. p. 301.
Tr. p. 248.
In BOI-93-, the Company s last general rate case, the Commission adopted a
hypothetical rate structure for United Water s predecessor, Boise Water Company. Reference Order
No. 25640. Commission Staff in this case rejects the Company s UWW capital structure and
recommends continued use of the hypothetical capital structure approved in BOI-93-3. Tr. p.
479. Staff contends that its proposal is consistent with the Value Line water industry (Tr. pp. 462
479) and S&P financial benchmark (Tr. p. 485) for a total debt to total capital ratio to maintain the
S&P bond rating. Staff states that the stock is traded at the United Water Resource level with United
Water Resource controlling the payout ratio, and thus the retained earnings and common equity ratio
for United Water Works. Tr. pp. 492-493; 499-503. This control, Staff contends, has the potential
to skew the capital structure ratios lending further support for the use of the hypothetical capital
structure for rate making purposes. Tr. pp. 495 , 496.
The Company notes that at the time of the Commission s Order in BOI-93-3 there was
uncertainty regarding the corporate relationships and resulting capital structure as indicated by the
following Commission language: "Because the common equity ratio ofGWC is expected to be 40%
for 1994 and because United's common equity is expected to approximate 40% in the near term, we
find that to be a reasonable equity ratio." Tr. pp. 288-290. The Company, citing various legal and
regulatory principles, suggests that use of a hypothetical capital structure is appropriate only if the
actual capital structure (UWW) is "clearly unsound or extravagantly conservative." Tr. p. 272. In
support of the reasonableness of its position, the Company cites a recent Pennsylvania Commission
case that found that for a sister subsidiary of UWW, United Water Pennsylvania, Inc., it was
reasonable and appropriate to use UWW's capital structure. Tr. pp. 752-753. With only two
exceptions (UWI's BOI-93-3 and a case involving United Water Delaware now on appeal to the
ORDER NO. 27617 37-
Supreme Court of Delaware) in recent history, the Company states that the subsidiaries ofUWW and
the former General Waterworks Corp. have been consistently regulated in their rate cases, both
before and after the merger, on a basis ofUWW's capital structure. UWI Brief, pp. 3-
It is to be noted that UWR's consolidated capital structure consists of55.20% long-term
debt, 8.51 % preferred stock and 36.29% common equity. Exhibit 13, Schedule 3. The hypothetical
debt ratio of 52% proposed by Staff, is less than the current debt ratio for UWR of 55.2% and the
water utility industry average of 56.5%. The 52% debt ratio is also the same as the ratio stated for an
A" rated utility as set forth in Standard & Poor s Financial Benchmarks (Exhibit 13 , Schedule 7
, p.
3 of4). ExhibitNo. 101 , Schedule 15 also reflects these comparisons. UWW's debt is rated "A" by
S&P and UWR's credit rating is "" Tr. p. 297. The 8% minority interest in the hypothetical
capital structure is consistent with the 8.5% preferred stock held by UWR.
United Water Idaho does not directly raise funds in the market. The debt funds are issued
at the United Water Works level and the equity funds are retained through earnings or, as contended
by Staff, raised at the United Water Resources level. Therefore, the actual capital structure shown on
the books of United Water Idaho, Staff contends, has been provided by and supported by one of the
parent entities. The UWI capital structure, Staff states, could be double leveraged to reflect this
relationship. Rather than double leverage, however, Staff contends that a hypothetical capital
structure is more appropriate. Tr. pp. 461 462. The Company states that Staff's hypothetical capital
structure is essentially the same as utilizing double leveraging. This is disputed by Staff, which
presents but does not recommend an example of a double leveraged capital structure for UWI. Staff
Brief Exhibit A.
The average capital structure ratios for the two proxy groups are depicted in Company
Exhibit 13 , Schedule 3 , page 2. They are for the proxy group of five water companies, 52.19% long-
term debt, 1.88% preferred stock, 45.93% common equity capital; and for the proxy group of six
Value Line water companies, 55.15% long-term debt, 2.58% preferred stock, and 42.27% common
equity capital. Tr. p. 760. The Value Line water industry average capital structure consists of39.
in 1997 and is projected to be 40% in 1998. Exhibit 101 , Schedule 15.
The Company represents that its primary proxy group of five water companies (Exhibit
, Schedule 5) is a better and more meaningful proxy than the group of six Value Line water
companies. (Exhibit 12, Schedule 6), which was used by the Company as a check and relied upon by
Staff. Tr. pp. 280-283. The Value Line check group of six is dismissed by United Water as
ORDER NO. 27617 38-
irrelevant in this case because the companies are much larger and more geographically diverse than
United Water Idaho. Tr. pp. 756, 282. Excluding the purported nonrepresentative American Water
Works and United Water Resources, Inc. which make up over three- fourths of the total capitalization
of the group, Tr. p. 481, the 9/30/97 average capital structure for the remaining companies in the
Value Line group would be 53.92% long-term debit, 0.94% preferred stock, and 45.14% common
equity. Tr. p. 760.
Wefmd:
The Company s argument for moving away from the hypothetical capital structure that
we used in BOI-93-3 to the actual capital structure of its corporate parent, United Water Works
(UWW) is persuasive. UWW is the entity that issues the debt for United Water Idaho. The UWW
capital structure is currently within a reasonable range for utilities of comparable risk.
ORDER NO. 27617 39-
Cost of Capital
The principal proxy group of five water companies upon which the Company bases its
recommended common equity cost rate yields a common equity range including 10.5% (two-stage
growth DCF model); 11.6% (Risk Premium Model); 10.5% (Capital Asset Pricing Model) and
12.6% (Comparable Earnings Analysis). Exh. 13" Sch. 7, p. 4.
United Water in rebuttal Exh. 13, Sch. 8 proposes the following cost of capital and rate of
return.
Long Term Debt
Minority Interest
Common Equity
Overall Rate of Return
Capital Structure
54.98%
14%
44.88%
100.00%
Cost Rate
80%
00%
11.5%
Weighted Cost
4.29%
01%
16%
9.46%
The Company recommends a common equity cost rate of 11.50%. A point that includes a
20 basis point business risk adjustment, that it contends is appropriate to reflect UWl's extremely
small size and the following four major risk factors:
Micron reuse program (sales to Micron represent approx 2% of United
Waters total annual revenue).
Weather-Company realizes about 70% of annual revenue May-
October; 12" annual rainfall; 87% of customers residential.
Surface water rights are difficult to acquire and increasingly costly.
Cost of power may increase with deregulation.
Tr. pp. 265-268, 776, 777.
Staff in Exh. 101 , Sch. 17 recommends the following cost of capital and rate of return.
Long Term Debt
Minority Interest
Common Equity
Overall Rate of Return
Capital Structure Cost rate
52.
40.
100.00%
Weighted cost80% 4.06%00% .40%
10.25%-11.25% 4.10%-50%
56%-96%
Differentials due to size and ultimate risk of the utility, Staff contends, should be
reflected in the cost of common equity when a point within the reasonable return or equity range is
chosen. Staff contends that there is less risk inherent in the capital structure proposed by United
ORDER NO. 27617 40-
Water, and if adopted, Staffwouldrecommend 10.75% as a reasonable return on equity. Tr. p. 464.
Staff also rejects the Company s contention that a business risk adjustment is required. Tr. p. 460.
Staff Exh. 101 , Sch. 11 is a comparison schedule of thirteen (13) water companyretums
on equity for 12 months ending September 30 1997. The retums range from 8.0% to 14.4%, with an
average of 10.8%. Staff calculates the discounted cash flow (DCF) required return on common
equity in the range of8.5% -10.7%. Exh. 101 , Sch 13. Staff also restates Company witness Hanley
Exh. 12, Sch. 1 , p. 2 on Exh. 101 , Sch.14 reflecting calculations shown as not meaningful by Hanley.
For the five water company proxy group recommended by United Water, the single-stage growth
DCF rate is shown as 9.8% (Exh. 12, Sch. 12) and the two-stage growthDCF rate is 10.5% (Exh. 12
Sch. 16, p.1).
Staff contends that any point within the range of 10.25% - 11.25% is reasonable for a
return on equity. Tr. p. 464.
Weimd:
United Water contends that the use ofUWW's capital structure is appropriate in the
determination of the cost of capital for United Water Idaho. We approve that capital structure. The
Company and Staff are in agreement on the cost rates for long-term debt and minority interest. The
cost of debt has been adjusted for the debt refinancing in January and February of 1998. We find the
respective rates reasonable and appropriate to use.
The Company also believes a 20 basis point business risk adjustment is required. We do
not agree. The Company identifies four unique factors that it contends contribute to its increased
riskiness. Regarding the Micron reuse program, the Company may present testimony and a related
adjustment in the next phase of this case, ifit can demonstrate that Micron s conservation program
will result in a significant, known and measurable reduction in consumption. The potential for
increased power costs due to deregulation, is highly speculative, especially in Idaho where electric
restructuring has not been approved. Power costs are an operating expense for United Water. In this
case, we have permitted an adjustment for an out of test year increase in power costs. Regarding the
riskiness of surface water rights, we find that the Company in this case presents no evidence that it
will have difficulty in securing water rights. Tr. p. 81. Regarding weather, the Company receives an
adjustment for weather normalization. The Company will have the opportunity to address rate
design in the next phase of its case.
ORDER NO. 27617 41-
In considering the record, and the business, financial and regulatory risks of United
Water, we find that a return on equityoflO.75% using the Company s proposed capital structure is a
midrange return that fairly compensates the shareholders for the risks they assume by investing in
United Water Idaho. We find that such a return also reflects our consideration of the quality of
service and management provided by United Water.
To summarize, U ni ted Water s approved capital structure and overall rate of return are as
follows:
COST OF CAPITAL
Component
Cost
Ratio
Debt 54.98%
Weighted
Rate Cost
80%4.29%
00%01%
10.75%82%
12%
Minority Interest 14%
Common Equity 44.88%
Required Rate of Return on Rate Base
ORDER NO. 27617 42-
Revenue Requirement
The Company s additional revenue requirement, which we find to be fair, just and reasonable, is
593 095 calculated as follows:
Rate Base
Rate of Return
Net Operating Income Required
Net Operating Income Realized
Net Operating Income Deficiency
Gross-up factor
Revenue Increase required
Percent Increase
$80,424 286
12%
334 695
6.393,930
$940 764.
1.6816
581 989
15%
ORDER NO. 27617 43-
VI Miscellaneous
A. Timing of rate increase Motion to Strike
On March 19, 1998, United Water filed a Motion with the Commission seeking to strike
identified portions ofthe prefiled testimonies of Thomas Power and Sharon Ullman. Specifically,
the Company sought to strike the portion of each testimony that proposed to defer the rate adjustment
and recovery of any determined revenue deficiency until after completion of the cost of service and
rate design phase of this case.
United Water contends that this issue has been decided; that in authorizing the
bifurcation of the case , the Commission implicitly accepted the Company s proposal to
begin recovery of any revenue deficiency found to exist in the revenue requirement phase
of its rate case through an immediate uniform percentage increase. United Water
contends that the Commission is without authority to extend the suspension period and
that to delay any recovery would be to deny the Company an opportunity to earn its
authorized rate of return , and would require it to perform its public service obligation
without adequate compensation. Citing Idaho Code 61-622; Citizens Uti/. Co. v. Idaho
Public Uti/. Comm.99 Idaho 164 , 579 P.2d 110 (1978).
The intervenors argue that the statutory suspension period preproposes that the
Company has filed a complete rate case , i.e., a case including "appropriate cost of service
studies." Reference IDAPA 31.01.01.121.01.e. Dr. Power asserts that the bifurcated
approach is merely a strategy of the utility to hold down public outcry and thereby enhance
the possibility of a larger recovery. The Idaho Citizens Coalition contends that moving to
strike testimony with which one disagrees is not an appropriate way to seek to affect the
outcome of this case. The Coalition contends that United Water can argue its position
regarding the timing of a rate increase (if any) in its rebuttal testimony, through its
witnesses at the public hearings, through cross-examination of opposing witnesses, or it
can make those arguments in brief. It also has the opportunity, it states, to call for
reconsideration if it does not like the Commission s decision about the size and timing of
any rate increase that is approved.
The Commission denied the Company s Motion in Order No. 27461 , finding that the
Commission s Order and Notices required no clarification, and apprising the Company that the
Commission as fact finder and decision maker, was inclined to admit all relevant and arguably
ORDER NO. 27617 44-
reliable evidence and that it possesses the expertise to assess the relative probative value of evidence
admitted.
At the hearing the Company renewed its Motion to Strike. Tr. pp. 404, 714.
Welmd:
For reasons expressed in Order No. 27461 , we continue to find it reasonable to deny the
Company s Motion to Strike. As to the intervenors underlying argument, we find that it was
somewhat presumptuous of the Company to assume that it would not be necessary to present a full
rate case, including cost of service and rate design. The Commission s Rules indicate what a general
rate case filing should include. IDAP A 31.01.01.121. The Commission could have dismissed the
Company s filing as incomplete. IDAPA 31.01.01.121.03. Nevertheless, we instead found its
proposal to bifurcate to be an administratively efficient and judicious use of resources and a
procedure that provided the Commission and parties a better opportunity for focused and thoughtful
analysis and consideration of all the issues. Order No. 27293. We further found the proposed
procedure to be a sequentially logical one and indicated the Company would be required to file a
separate cost of service and rate design application within 30 days following the final Order in this
proceeding. While we did not directly address the issue of the timing of any authorized increase in
our prior Order, we find it reasonable and fair to allow the increase to go into effect now that a
revenue deficiency has been found to exist.
B. UWI Motion to File Late Filed Exhibit No. 33
On June 1998, United Water filed a Motion seeking to introduce the Company
Idaho State Tax Commission 1998 Market Value Appraisal. In Exhibit 5, Schedule 3, page the
Company estimated that the appraised market value for 1998 would $70 624 792. The proposed late
filed Exhibit 33 provides the Commission with the 1998 actual appraised market value, $70 956 346.
Welmd:
The Commission notes that the appraised market value is used in determining the
Company s ad valorem tax obligation, which is part of revenue requirement calculations. We find
that an actual known and measurable market value is preferable to an estimated number and
therefore find it reasonable to grant the Company s Motion and admit the late filed Exhibit 33.
ORDER NO. 27617 45-
C. UWI Rebuttal Adjustment- Micron Reuse/Efficiency Program
At hearing the Commission granted a Staff Motion to Strike regarding Company rebuttal
testimony and related exhibits dealing with an adjustment it proposed for Micron consumption. Tr.
pp. 726-731 , 790-793. The Commission agreed the information regarding the projected change in
Micron consumption was filed too late for the other parties to have an appropriate and meaningful
chance to respond. The Commission granted the Company leave, however, to bring the issue back to
the Commission as part of the cost of service/rate design phase of its rate case. Tr. p. 793.
We find:
The Commission reaffirms its decision granting Staff's Motion to Strike. The Company
proposed adjustment is accordingly rejected.
ORDER NO. 27617 46-
D. Ullman Challenges Re: Reasonableness ofUWI Wage/Salary/Benefit Expense
Citing specific examples including the salary-benefit package of the Company s president
and wages for meter readers, Ms. Ullman contends that the salary, wages and benefits offered by the
Company are excessive and not comparable to area averages. No specific adjustments were
proposed.
Wefmd:
Based on the information presented and studies reviewed, we are unable to find that the
Company s salaries, wages or benefits are unreasonable. We accordingly make no related
adjustment in the Company s operating expenses.
ORDER NO. 27617 47-
VII Service and Water Quality (UWI-96-
The Commission in Order No. 27229 determined that the identified service and water
quality issues raised in the filings and submitted investigative reports in Case No. UWI- W -96-6 (In
the Matter of the Investigation of United Water Idaho Inc. and its Ability to Provide Adequate
Service and Water Quality) were also at issue in this case. Staff Exhibit 112. The water quality
issue identified in the 96-6 case was the presence of iron/manganese in the Company s source waters
at levels exceeding the secondary maximum contaminate levels (SMCLs) listed in the federal Safe
Drinking Water Act (SDW A). Secondary contaminates are classified as non-health threatening by
the Environmental Protection Agency (EP A) and the State Division of Environmental Quality
(DEQ). The problem manifests in the water as objectionable color, taste and odor.
Of the Company s 61 ground water wells included in Staffs report, 23 produced water
that contained iron and/or manganese that exceeded the voluntary SMCLs. Those wells represented
approximately 35% ofthe Company s total rated supply capacity. The problem is generally most
acute during the summer months as demand increases.
The primary focus of the Company in dealing with customer water quality complaints is
to reduce the amount of water supplied to the system from problem wells. The Company also
sequesters at each problem well to keep the iron and manganese in solution. Additionally, the
Company has proceeded with other possible solutions to replace existing problem supplies including
investigating the use of aquifer storage and recovery (ASR), identifying aquifers of high quality
water, and redrilling and replacing existing wells.
Staff in its report estimated that the Company in its effort to improve the aesthetic
characteristics of its water was spending in excess of $460 000 per year which represented about
3% of the Company s revenue collected from customers. Exhibit 12, page 16. In the instant case
Staff identifies $346 494 as revenue requirement related to improving aesthetic water quality.
The water quality improvement alternatives implemented or proposed by the Company
are water system alternatives. Staff notes additionally that there are also in home water treatment
alternatives that customers can implement, including mechanical gravity and pressure filters, iron
and sulphur traps, ozone treatment, chlorine and charcoal filters, and reverse osmosis filters.
Staff concludes that the cause of water quality complaints within the Company s service
area seems to be due primarily to high levels of iron and manganese introduced into the system to
varying degrees by existing production wells. However, it states, other factors such as the presence
ORDER NO. 27617 48-
ofiron bacteria, the layout of the distribution system, system flushing activities ofthe Company and
the proximity of other wells of high quality seem to greatly influence how, where and when problems
occur. In addition, customer perceptions, tolerances and expectations, it states, as well as Company
communications and customer service drive the number of actual complaints that are used to
determine the extent of the problem. Given the subjective nature of aesthetic customer complaints
Staff contends that it is difficult to determine how serious the problem is, how it is best addressed
and how much money should be spent.
Addressing Staffs attempt to quantify the Company s aesthetic water quality costs
United Water contends that 100% of its revenue requirement is a result of supplying or improving
water service to its customers, which includes its basic ability to serve, its compliance with EP A and
DEQ standards, and its attempts to provide its customers with aesthetically acceptable water. Tr. pp.
874-876. Arguably the standard that the Company should adopt in the aesthetic area, it contends, is
compliance with SDW A secondary standards. However, this approach it states may not always give
the customers the best value added for the additional cost. Economy and efficiency, it states, must
also be considerations. The measurement of success in its efforts, it states, may very well be
reducing the number of customer complaints concerning the aesthetic water quality. Tr. p. 876.
In aN ovember 1997 Status Report filed with the Commission regarding specific action
plans to address water quality concerns, the Company represented that 1) it anticipated making
application to DEQ and Water Resources by February 1998 for ASR pilot approval; the Company
now expects to make formal application in July. Tr. p. 967; 2) that it would post on its web site in
1998 a general information notice explaining the underlying quality issues regarding iron and
manganese the Company has put the notice together and has distributed it as a bill stuffer; not on
web site yet, Tr. p. 968, and 3) that it was preparing a Consumer Confidence Report on overall water
quality that it expected would be available by April 1998; the Report is not yet completed. Tr. p. 968.
ORDER NO. 27617 49-
We fmd:
We acknowledge the continuing efforts of United Water to reduce the number
customer complaints related to the presence of secondary contaminates (iron and manganese) in its
supply waters and to better educate its customers regarding the nature ofthe problem and potential
solutions, including in home measures customers may take themselves. We encourage the Company
to continue with its efforts. We note, as the Company and Staffhave suggested, in any cost/benefit
analysis of mitigation measures there is a point beyond which additional money should not be spent.
We also note that it is reasonable for the Company to use its supply waters from problem wells
during short-term periods of emergency, when to not do otherwise would result in a curtailment of
supply and an inability to fill its reservoirs.
ORDER NO. 27617 50-
VIII Intervenor Funding
Timely Petitions for Intervenor Funding were filed by Idaho Citizens Coalition and
Sharon Ullman. Reference IDAPA 31.01.01.161. United Water on June 4 filed a response and
objection to the Petitions for Intervenor Funding. Each petitioner thereupon filed a reply, Ms.
Ullman on June 9 and the Idaho Citizens Coalition on June 19.
Citizens Coalition
The Petition of the Idaho Citizens Coalition requesting $6 955 comports with the
requirement of Rule 161 of the Commission s Rules of Procedure. Dr. Power s testimony for the
Coalition dealt with three issues: (1) the Boise River diversion, (2) the timing of any approved
increase in rates and (3) methods for controlling the ongoing costs associated with the expansion of
the water system. The Coalition s positions on each ofthe issues, it states, differed materially from
Staff, which either took no position or different positions on each.
United Water questions the materiality of the Coalition s contribution in this case. The
Company, as it did in its repeated Motions to Strike, reiterates its understanding of Order No. 27556
interpreting the Commission s language as a rejection ofthe Coalition s proposal to defer any change
in rates until completion of the rate design and cost of service phase ofthe Company s rate case. The
Company concludes in rather summary fashion that in any event, Dr. Power s proposal runs contrary
to clear Idaho law.
The Company challenges Dr. Power s testimony on the Boise River diversion as being
largely duplicative of Staffs evaluation, albeit conceding that Dr. Power placed more emphasis on
the "extreme emergency" provision of Idaho Code ~ 61-502A. The Company characterizes
Dr. Power s testimony as flawed by his "continued insistence that construction ofthe diversion was a
voluntary business decision and his refusal to acknowledge that construction was necessitated by a
mandate from government. . . .
The Company dismisses Dr. Power s discussion of geographically deaveraged rates as a
means of addressing growth and the number of customers being served and the location of those
customers in places with relatively high costs to serve as a theoretical exercise relating more directly
to rate design, and suggests that the Commission consider deferring the Coalition s Intervenor
Funding request until the conclusion of that proceeding.
Sharon Ullman
ORDER NO. 27617 51-
The Petition of Ms. Ullman requesting $4 696.22 comports with the requirements of Rule
161 of the Commission s Rules of Procedure. Ms. Ullman in this case addressed and challenged the
reasonableness of Company salaries and benefits, overhead costs, rate case expense, requested rate of
return, the timing of any authorized rate increase, the comparative cost ofUWI water with other area
water providers, the used and useful standard, ad valorem tax expense, attorney fees, and
administrative matters. Ms. Ullman states that the positions she advanced on almost all of the issues
addressed were different than those addressed by Commission Staff.
United Water disputes Ms. Ullman s contention that she somehow represents the public
or is acting on behalf of United Water s customers and recommends that her request be denied.
Authority to represent the public cannot be a process of self-anointment, the Company contends, but
must be conferred by those whose interests are purportedly represented. Individual citizens are
certainly entitled to express opinions on issues pending before public bodies, the Company states, but
in the absence of some delegated authority from others, they do so in their own name.
Ms. Ullman by way of response contends that to the extent her interests are
indistinguishable from ratepayers generally, the validity of her representative participation is proved.
She reminds the Company and Commission that her full participation in Commission proceedings as
an affected customer is encouraged by Idaho Code 9 61-617 A. Ms. Ullman reminds Mr. Miller, the
Company s attorney, that when he himself was a member of the Commission, the Commission
declared "Ms. Ullman s participation in this case was insightful, well prepared and helpful to this
Commission. Her effectiveness and knowledge of an arcane subject were impressive. We appreciate
her involvement." Ms. Ullman has participated in numerous United Water (Boise Water) cases, and
in the most recent case was granted Intervenor Funding.
Weimd:
Pursuant to Idaho Code 9 61-117 A, the maximum award of intervenor funding that may
be made in anyone case is $25 000. We find that the participation of both the Idaho Citizens
Coalition and Ms. Sharon Ullman materially contributed to our decision in this case. The testimony
of the Coalition was detailed and well reasoned. The testimony of Ms. Ullman offered a different
perspective. The intervenors advanced positions differing materially from those of Staff on issues of
concern to all of United Water s customers. We find that it would constitute a significant financial
hardship for the intervenors if they are not awarded funding. We find it reasonable to award the
Coalition $6 955 , the full amount requested. Ms. Ullman has requested $4 696.22. Included within
ORDER NO. 27617 52-
her itemization of expense is 113 hours
(q?,
$40/hour. While Ms. Ullman may feel that the number of
hours was reasonable to spend, we find that it exceeds a reasonable level of expense for purpose of
intervenor funding. The number of hours we find reasonable are the total consulting/research hours
itemized by the Coalition in this case, i., 81 hours. Making that adjustment, we authorize an award
to Ms. Ullman of$3 416.22, 81 hours (q?, $40/hour, plus copying ($129.26) and postage ($46.96).
United Water is instructed to pay these amounts within 28 days from the date ofthis
Order. The Company is further directed that these costs, which we find to be an embedded part of
authorized rate case expense, should be amortized over three years.
ORDER NO. 27617 53-
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over United Water Idaho Inc., a
water utility, and its Application in Case No. UWI-97-6 pursuant to the authority and power
granted under Title 61 of the Idaho Code and the Commission s Rules of Procedure, IDAPA
31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission hereby authorizes United Water Idaho Inc. to increase its
revenues by $1 581 989 or approximately 7.15%. The Company is directed to file amended tariff
sheets for rates and charges in compliance with the terms ofthis Order. The rate increase that we
authorize is effective for service rendered on and after July 1 , 1998.
IT IS FURTHER ORDERED and United Water Idaho Inc is directed to file with the
Commission Secretary a separate cost of service and rate design application within thirty (30) days
from the date of this Order.
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code ~ 61-117A
grants intervenor funding to the Idaho Citizens Coalition in the amount of$6 955 and to Ms. Sharon
Ullman in the amount of$4 696.82. United Water Idaho Inc is directed to pay the intervenors within
twenty-eight (28) days from the date of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. UWI-97-
may petition for reconsideration within twenty-one (21) days of the service date of this Order with
regard to any matter decided in this Order or in interlocutory Orders previously issued in this Case
No. UWI-97-6. Within seven (7) days after any person has petitioned for reconsideration, any
other person may cross-petition for reconsideration. See Idaho Code ~ 61-626.
ORDER NO. 27617 54-
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of June 1998.
Dissentin See
DENNIS S. HANSEN, PRESIDENT
Attached)
RALPH NELSON, COMMISSIONER
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Myrna J. Walters
Commission Secretary
vld/O:UWI-97-5W6
ORDER NO. 27617 55-
DISSENT OF COMMISSIONER DENNIS S. HANSEN
Order No. 27617, Case No. UWI-97-
I disagree with parts of the majority opinion and the amount of revenue increase granted
to United Water Idaho Inc.
NORTH STATE ACQUISITION
First, I do not believe that the North State acquisition adjustment of$577 664 should be
included in rate base. The North State/Garden City exchange was a discretionary decision made by
the Company and municipal authorities. Tr. p. 517. The Company s investment in Garden City
facilities should not be allowed in rate base on the grounds that the purchased plant was previously
contributed, i., that the assets were originally contributed to public service by developers and or
customers at no cost to Garden City.
As pointed out in the testimony of Staff witness Lobb, the revenues generated by the
customers within the North State area, are only sufficient to cover the costs associated with the
purchase price of the distribution system, $577 664, and cover operating expenses. With the
increase in the customer base (new North State customers minus Millstream customers lost), the
revenues generated are sufficient to cover either the investment cost or the source of supply costs.
However, I am not convinced that the revenues are sufficient to cover both the costs associated with
the acquisition adjustment and the source of supply necessary to provide service to the customers.
By allowing this expense, the general body of customers is being asked to subsidize the water supply
costs of the North State area. I don t think it is fair that the general body of customers are required to
subsidize either United Water Company s investment in Garden City or the water supply costs.
The Company, in Case No. UWI-95-, as noted in our Order No. 26562, made a
commitment to hold harmless the Company s other customers from the consequences of the
transaction. As noted in the testimony of Staff witness Smith, this transaction accelerates the timing
of a new water source and absent a contribution from rates to support source of supply investment
imposes a cost subsidy on the Company s other customers. I concur with the language on page 6 of
this order expressing the rationale to disallow inclusion of the North State acquisition adjustment.
This reasoning provides sufficient evidence to disallow recovery of the acquisition adjustment.
ORDER NO. 27617 56-
CAPITALIZED CORPORATE OVERHEAD
Another area of concern in this order is the acceptance of capitalized corporate overhead
of$787 735. Given the information provided, there is no basis to know whether these overheads
reflect a fair allocation of the costs to United Water Idaho by United Water Resources. The Staff
contends that an audit trail was difficult to follow in the records provided by United Water Idaho.
Complicating the audit in this case and the reliability of test year data was a mid-test year change by
the Company in its accounting and time reporting systems and procedures.
An audit should be conducted before the full amount is granted in rate base. To me, what
may appear to be a good corporate decision of United Water Resources, Inc. may not necessarily be
the most economical decision for the Idaho operation in isolation. What I am saying is that corporate
decisions may produce inter-corporate subsidies among the operating units. Staff identified the
Company s vehicle lease program and ramifications of a municipal condemnation of a United Water
Resource subsidiary in Rio Rancho, New Mexico as activities that raised flags regarding the
affiliated web of companies and the related operating consequences affecting United Water Idaho.
BOISE RIVER INTAKE
The Boise River intake is another expenditure that should not be included in the general
customer s bill. This $1.9 million expense by the Company is an investment into the future, which
the Company says may be needed by the year 2005. Recognizing that there is no immediate need for
the diversion waters to meet demand now or for several years into the future, I oppose allowing the
amortization ofthe Boise River diversion in expenses paid by customers until it is used and useful.
This is a case where the Company has built ahead of its needs. The Company does not even have
water rights that would allow it to operate the diversion. This type offuture investment without any
advance knowledge being given to the Commission, should not be allowed. . . it makes the
Commission not obligated in any way.
I do not believe the "supposedly" lower cost business opportunity for United Water Idaho
constitutes an "extreme emergency." Also, in a letter concerning the project (Exhibit 110), Mr. Carl
Ellsworth of the Public Works Department with the City of Boise, states that he was assured by
United Water Idaho that they would not include their share of the capital costs of this project in rate
base until the project is being fully used.
ORDER NO. 27617 57-
NORTHWEST PIPELINE
I also disagree with the majority decision allowing United Water Idaho to recover
amortization of its investment in the Northwest Pipeline. First, there was no urgency. The
deficiency was no greater in 1997 than in past years. Second, with a planned 8MGD Marden
treatment plant expansion scheduled to come on line in May 1999, the deficiency is short term. The
Company also failed to utilize other supply resources available to it, such as the Swift No.3 well
Garden City contract supply rights, conservation measures during 1997 peak requirements.
Lengthy distribution pipeline constructed ahead of development places a substantial
portion of the cost of new development on the backs of existing ratepayers rather than through
developer contributions, as the line extension rules would otherwise require.
Dennis S. Hansen, Commissioner
ORDER NO. 27617 58-
~.u~~ ~. ~.~ ~~~.~~
Service Date
July 10, 1998
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INC. FOR AUTHORITY )
TO REVISE AND INCREASE RATES
CHARGED FOR WATER SERVICE.
CASE NO. UWI-97-
ERRATUM NOTICE
On July 6 , 1998, IPUC Order No. 27617 was issued by this Commission. The
following change(s) should be made to that Order:
Page 54 , Order Section , paragraph 3
READS:
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code
61-117 A grants intervenor funding to the Idaho Citizens Coalition in the
amount of $6 955 and to Ms. Sharon Ullman in the amount of $4.696.
United Water Idaho Inc. is directed to pay the intervenors within twenty-eight
(28) days from the date of this Order.
SHOULD READ:
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code
61-117 A grants intervenor funding to the Idaho Citizens Coalition in the
amount of $6,955 and to Ms. Sharon Ullman in the amount of ~3.416.
United Water Idaho Inc. is directed to pay the intervenors within twenty-eight
(28) days from the date of this Order.
DATED at Boise, Idaho, this day of July 1998.
Myrna J. Walters - Commission Secretary
bls/O-uwiw976.err
Office of the Secretary
Service Date
September 6, 2000
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INC. FOR
AUTHORITY TO REVISE AND INCREASE
RATES AND CHARGES FOR WATER
SERVICE.ORDER NO. 28505
CASE NO. UWI-00-
SYNOPSIS
This is a final Order determining the revenue requirement and setting rates for United
Water Idaho Inc. (United Water; Company).By this Order, the Idaho Public Utilities
Commission authorizes United Water to increase its revenues by $2 070 325 or approximately
80%.
SUMMARY
United Water serves approximately 65 051 customers within Ada and Canyon
Counties, Idaho. The Company s sources of water supply in its interconnected core area
(approximately 140 square miles) consist of the Marden Water Treatment Plant with a
production capacity of 16 million gallons per day, 77 deep wells and 24 reservoirs with storage
capacity of 30.7 million gallons. The combined production capacity of all wells and the
treatment plant is approximately 100.3 million gallons per day (MGD). The Company also
serves four satellite systems with 8 wells that produce 5.5 MGD.
On February 2, 2000, United Water filed an Application with the Commission for
authority to increase its rates and charges for water service. United Water stated that additional
revenues were necessary to recover increased operating expenses and costs associated with plant
additions, and to produce a fair rate of return. The Company contended that the proposed
changes in its rates and charges are just and reasonable and are necessary for the Company to
continue to provide adequate and reliable service to its customers.
At hearing, the Company reduced its requested revenue increase from $3 057 100
(11.57%) to $2 901 696 (10.99%). Exh. 34, p. 3. Staff in post-hearing exhibits recommended a
834 356 (6.91%) increase. Rev. Exh. 114; Tr. p. 720. Because cost of service and rate design
issues were recently examined in the second phase of the Company s last general rate case
ORDER NO. 28505
United Water Case No. UWI-98-3 (Order No. 28043, May 26, 1999), the Commission in a
prehearing order determined that a cost of service study was not required in this case. Reference
Order No. 28313.
Pursuant to Order No. 28291 issued February 23 , 2000, the proposed schedule of
rates and charges was suspended for a period of thirty (30) days plus five (5) months from the
adjusted proposed effective date of March 3 2000. Reference Idaho Code ~ 61-622.
Public hearing in this case was held in Boise, Idaho on July 11-, 2000 and August
2000. The following parties appeared by and through their respective counsel:
United Water Idaho Inc. Dean J. Miller, Esq.
Commission Staff Scott D. Woodbury, Esq.
The Coalition of United Water Customers, although previously granted intervenor status, neither
participated in nor appeared at the hearing.
At hearing, United Water proposed a rate base of $98 881 234. By this Order, we
make the following adjustments to that proposed rate base: (1) elimination of accumulated
depreciation on advances, (2) reduction of Redwood Creek investment, and (3) reduction of
Raintree investment. We approve a rate base for United Water of $98 862 937. We also make
numerous adjustments to the Company s proposed operating results as explained below.
We adopt a return on equity for United Water of 10.6% and an overall rate ofretum
of 8.843%. This yields an increased revenue requirement of $2 070 325 , which we authorize be
recovered by a uniform percentage increase in rates and charges for all customers. Water usage
on and after September 5, 2000 will be billed at the rates approved in this Order.
This Order is based upon our review of the record in this case including the transcript
of proceedings, exhibits and the Company s post-hearing brief. The Commission has also
reviewed its Orders in Case No. EUW-94-1 (Eagle Area Certificate Case), Case No.UWI-
97-4 (Eagle City Contract) and other Orders specifically referenced herein.
ORDER NO. 28505
FINDINGS
I. Test Year
United Water proposes a historical test year ending September 30, 1999 with
operating adjustments to both rate base and operating results for post test year changes. Staff
objects to some of the adjustments but did not object to the proposed test year.
Findings:
The use of a historical test year ending September 30, 1999 with proforma
adjustments is reasonable for the purposes ofthis rate case.
II. Rate Base
United Water in its Application proposed an adjusted rate base of $98 992 133.
Reference Exh. 15, p. 1. As set forth in Company rebuttal Exhibit 34, p. 1 , the Company
proposes a restated rate base of $98 881 ,234.
The Company has agreed to and incorporated the following Staff proposed
adjustments in its rebuttal rate base calculation:
Update Collector #3 project COOA106
Eliminate Chlorine Equipment Project COOBO01
Eliminate Software Project COOJO01
Reduce Water Rights Project C98AO04
$60 100
($85 000)
($16 000)
($70 000)
Undisputed acquisition projects proposed for rate base treatment are $58 000 for Barber Water.
Also undisputed is the proposed rate basing of the "northwest pipeline" in the amount
of $940 000. This project was previously disallowed in Case No. UWI-97-(Order
No. 27617). Also unopposed by Staff is rate basing the remainder of the Company s net
investment in Island Woods in the amount of $140 271 , the $73,400 previously disallowed in
Case No. UWI-97-6 plus additional investment of $66 871.
Findings:
In Case No. UWI-97-6 the Company failed to persuasively demonstrate to the
Commission that its decision to construct the northwest pipeline was for its customers a prudent
decision, that it was the best economic and planning alternative available to it or that it was even
needed. It was not contested in that case that the pipeline was otherwise "used and useful." Our
decision was directed by the Company s failure to avail itself of what we found to be other more
economic alternatives. In this case testimony regarding changes in water supply and peak day
ORDER NO. 28505
demand and evidence of transmission/distribution system constraints persuasively demonstrated
that the northwest pipeline is not only used and useful but is now needed to meet the West Main
service level requirements. The Commission agrees that it is now reasonable to allow a rate base
addition for the northwest pipeline in the requested amount of $940 000.
The Commission also recognizes that customer growth in the Island Woods
subdivision, a part of the Company s 1994 expansion into the Eagle area, now provides sufficient
additional revenue to support the Company s previously excluded and additional investment.
We find it reasonable to allow a rate base addition for Island Woods in the amount of$140 271.
The following proposed adjustments remain disputed:
Amt. incl. in
UWI request
Accumulated Depreciation on Advances
Redwood Creek
Spurwing
Raintree
$472 684
$ 52 837
$828 943
Proposed
Adjustment
$134 853
($271 506)
($52 837)
($828 943)
Advances for Construction-Depreciation Expense Adjustment
Commission Staff in its direct testimony proposed a $218 637 reduction in revenue
requirement related to depreciation expense on property advanced by developers. Exh. 112.
reflected in post-hearing Exhibit 2 and Staff Revised Exhibit 111 the Company and Staff agree
that a more appropriate estimated figure for adjustment to depreciation expense, if accepted
would be $134 853 rather than $218 637. Tr. p. 496. Staffs proposal is a change in depreciation
practice for United Water.The appropriateness of the practice has never heretofore been
specifically addressed or challenged. Tr. p. 695. Staff contends that because the capital for these
projects is not provided by investors and because advanced property is not included in rate base
that depreciation charged to customers is inappropriate. Exhibit 112; Tr. p. 683. Allowing
depreciation on plant constructed with advances, Staff contends, places the risk of speculative
development on current customers. Tr. p. 682. Advanced property does not qualify for rate base
treatment until the advance is returned to the developer. Tr. p. 683. There is also a potential for
unrefunded advances to roll-over to a contribution at the time the repayment period ends. Tr. p.
695.
United Water opposes the adjustment contending that the practice of charging
ORDER NO. 28505
depreciation on advances has been routinely followed and should not be changed in the context
of a single utility s rate case. Tr. p. 493. The Company notes that when a utility receives an
advance, it also incurs a liability of repayment. It is the utility s investors, the Company
contends, who eventually supply the capital that funds the repayments, and depreciation, it
argues, is obviously appropriate with respect to investor-supplied capital. Post-Hearing Briefp.
26. Finally, the Company contends that the recommended change in accounting policy, if
accepted, would have adverse consequences, i., (1) diminished cash flow, (2) temporary
mismatch between rate and book treatment, and (3) would be time consuming and require
significant administrative effort. Tr. pp. 494, 495.
The NARUC Uniform System of Accounts for Class A water utilities while
specifically addressing depreciation practice with regard to contributed property (Account 403
Depreciation Expense; Account 271 , Contributions in Aid of Construction) provides no direct
guidance on depreciation practices with regard to advanced property (Account 252, Advances for
Construction). Tr. p. 497. Some states, the Company reports, permit depreciation expense on
advanced property, others do not. Tr. p. 494. This adjustment would increase the Company
rate base by $134 853 and decrease depreciation expense by the same amount.
Findings:
The Commission finds that the Company s practice of charging customers for
depreciation on advances is a practice that should end because advanced property is neither
included in rate base nor is it funded with utility investor capital until the advance is refunded.
We find it reasonable to address the issue in this case. We find Staffs proposed $134 853
adjustment to be reasonable.
Redwood Creek
Redwood Creek was acquired by United Water in 1994 when the Company expanded
its service territory into the Eagle area. Tr. p. 236. The Company s growth projections for the
Eagle area were challenged by Staff in that case as being unrealistic. In support of its proposed
acquisition, the Company assured the Commission that other customers would never be required
to subsidize its Eagle area investment. Reference Case No. EUW-94-, Order No. 26337.
In this case United Water seeks to rate base the balance of its remaining
undepreciated capital investment in Redwood Creek, $472 684. Staff points out that test year
revenue generated from Redwood Creek customers does not fully support the overall investment.
ORDER NO. 28505
Staff contends that the Redwood Creek facilities are not needed to serve the needs of customers
in the Company s integrated system. Staff recommends that Redwood Creek facilities continue
to be viewed on a stand alone basis and that Redwood Creek rate base be limited to $302 400
the amount of supported investment. Tr. p. 628. Staff recommends that $271 506 of the
Redwood Creek facilities costs be excluded from rate base as unsupported investment and that
371 of depreciation expense associated with the unsupported investment be eliminated. Tr.
pp. 629, 630. Included in the unsupported Redwood Creek investment is a recent replacement
pump designed specifically, the Company states, to deliver water to the Floating Feather booster
pump that supplies the northwest pipeline. (Work Order No. C98 A105-$56 127). Tr. p. 175.
The Company objects to Staffs proposed adjustment and contends that it
inappropriate to assess Redwood Creek on a stand alone basis. Post-Hearing Brief p. 13. The
Company maintains that the pump investment was required to serve the needs of its integrated
system and that it would be confiscatory to deny recovery of this investment. Tr. pp. 179 , 180.
Redwood Creek, the Company contends, is no longer a satellite system. Its facilities and well
have been connected by the northwest pipeline to the Company s integrated system. The
Redwood Creek facilities, the Company states provide back up to the Company s greater
integrated system, necessary redundancy, system pressure stabilization, and fire protection.
Because Redwood Creek facilities benefit the integrated system, the Company contends that all
investment in the Redwood Creek facilities is now used and useful. Tr. pp. 156, 174, 180.
Should the Commission continue to find it reasonable, however, to view Redwood
Creek on a stand alone basis, the Company maintains that it is appropriate to apply surplus
revenues from Island Woods to the Redwood Creek deficiency. Island Woods, an Eagle area
water system that was acquired at the same time as Redwood Creek, is with this case fully rate
based and generates revenue greater than required to support the Island Woods investment. Tr.
p. 179. The maximum investment that should be excluded from rate base, the Company
contends should be no more than $53 800 to $77 900. See Exhibits 20, 21 , 22; Tr. pp. 176-181.
Staff disagrees with the Company contending that the Company s other customers are entitled to
realize the benefit and additional revenue from Island Woods and should not be required to
subsidize Redwood Creek investment by giving up same. Tr. p. 630.
Findings:
ORDER NO. 28505
The Company in this case seeks to rate base its investment in Redwood Creek. While
we find Staffs proposal to treat Redwood Creek on a stand alone basis to be unreasonable, we
will require the Company to keep its commitment in Case No. EUW-94-1 when it acquired
Redwood Creek to hold its other customers harmless. It is also appropriate to recognize that
both Redwood Creek and Island Woods acquisitions were approved in the Company s Eagle area
certificate case. We therefore find it reasonable to consider revenues from Island Woods in
determining the amount of supportable investment for Redwood Creek rate base. Based on
approved combined revenues in this case for Redwood Creek and Island Woods, the
Commission calculates that the resulting revenues support $392 978 of the Company requested
$472 684 rate base investment. The amount we approve is in addition to the $56 127 for the
replacement pump, a post-acquisition expense that benefits the Company s greater integrated
system.
Having disallowed a portion of the Company requested rate base for Redwood Creek
the Commission finds that the proportionate related adjustments are a reduction in the
Company s plant in service of$91 573 and a reduction of $12 047 in accumulated depreciation.
The resulting net unsupported amount is $79 706.
Spurwing
The Spurwing development was served by the Company under special agreement.
Reference Case No. UWI-98-5. Staff proposes that $52 837 of capital investment associated
with Spurwing development be excluded from rate base. Tr. pp. 619, 630. Staff also proposes
eliminating associated depreciation expense in the amount of $2 723. Tr. pp. 630, 631. The
Spurwing investments at issue (i., telemetry/chemical feed equipment (C98 C109); pump (C99
A106)), Staff contends, should be regarded as part of the underlying water system acquisition
and as such should be nonrefundable developer contributed distribution plant or water supply
plant advanced by the developer, and subject to refund. Tr. p. 630.
The Company opposes Staffs adjustment. Spurwing, the Company maintains, is no
longer a non-contiguous system but is now part of the Company s integrated system. It was
connected, the Company states, to take advantage of the Spurwing well's production capacity to
supplement the Company s west bench service level supply. Tr. p. 435. It is in connection with
the integration and not the acquisition, that the Company on rebuttal states that it undertook the
two capital projects that Staff challenges. The projects, the Company contends, were for the
ORDER NO. 28505
benefit of the system generally and not for the benefit of the Spurwing subdivision. Tr. pp. 434-
35. Spurwing, it states, could have operated without this equipment. As such, the projects were
not property that should have been either advanced or contributed by the developer. Post-
Hearing Brief p. 11.
Findings:
The Commission finds the Company s reasomng regarding Spurwing to
persuasive. We find the capital investment to be part of integration expense and not acquisition
expense. We find that neither advances nor contributions from developers were required. We do
not adopt Staffs proposed adjustment.
Raintree
On November 3 , 1999, United Water purchased a domestic water distribution system
from Raintree Mutual Water Company, Inc. (Raintree). Agreement for Purchase & Sale - Post-
Hearing Exhibit 4. Raintree was a nonprofit company organized by developers to provide water
service to property under development. Tr. p. 158. The Raintree water system serves multiple
residential subdivisions and has no independent source of domestic water supply. Prior to the
purchase, the Raintree system was operated by United Water Idaho Operations, Inc. (previously
), an unregulated affiliate of United Water, pursuant to an Operations Agreement signed in
September 1995. Tr. p. 158. Water service and operations service began in early 1996. Tr. p.
158. United Water in this case seeks to rate base a net investment in Raintree of $828 942. Tr.
p. 160. At the time of purchase there were 830 Raintree customers. Tr. p. 164.
Staff opposes the Company s attempt to rate base Raintree and questions the
prudence of the Company s purchase decision. Tr. pp. 611 , 676-77. The Company s decision to
purchase Raintree, Staff maintains and the Company admits, was discretionary. Tr. p. 746. Staff
points out that before the purchase annualized revenue to United Water from water sales to
Raintree was $95 483 during the test year. Staff contends that the incremental revenue of
$58 783 that the Company will realize from the purchase does not support the investment
requested; it will only support an incremental investment of $246 000. Exhibit 122.
Additionally, Staff notes that before the purchase the Company s costs were simply those of
supplying water. With its purchase the Company has incurred significant expense obligations
that it did not have prior to the purchase, i., billing and collection costs, meter reading costs
(except four 6" meters), distribution costs, O&M on distribution facilities, and depreciation
ORDER NO. 28505
expense. Tr. p. 747. The Company s existing customers after the purchase, Staff contends, are
worse off. The Company before the purchase was already generating two-thirds of the total
revenue that would be generated after the purchase, yet the Company now has investment and
additional expense requirements. Tr. p. 616.
Staff also objects to the manner in which wholesale service was provided to Raintree
contending that Raintree developers received preferential treatment and that the Company
deviated from filed rates, line extension rules and regulations. Tr. pp. 619, 632, 634. This is the
only instance, Staff is aware of when United Water has allowed a new residential single family
development to interconnect to its system and resell general water services. Tr. p. 634. Staff
contends that the availability of wholesale service that allows the bypassing of existing tariff
rates and rules must be subject to Commission review and approval. Tr. pp. 634, 635.
The Company refutes Staffs reasoning. Up to the time of purchase, United Water
customers were receiving a substantial benefit for which they had no investment-this situation
it hypothesizes, could not be expected to continue indefinitely. Tr. p. 732. To justify its rate
base request, United Water evaluates the Raintree transaction as if it had entered into a main
extension agreement with developers for a fully developed single project in 1995, with full build-
out within five years. Tr. pp. 161 , 728; Revised Exhibit 7. The 1995 extension rules, it
maintains, were used as a benchmark in negotiating an arms length purchase. Tr. p. 191.
Extension rules for United Water changed in May 1997 after which time contribution of
distribution system facilities was required of developers. Tr. pp. 197, 726. The investment that
the Company would have made under the 1995 rules and regulations (guaranteed revenue
requirement method), the Company states, is greater than the amount eventually paid. Tr. pp.
130, 195 265, 744.
The Company disputes Staffs contention that its relationship with EM2 provided
2 and Raintree with any preference or advantage. Tr. p. 256. Line extension rules in 1995
did not apply, the Company contends, because no extensions were made. The Company simply
set meters on existing facilities. Tr. p. 261. From the outset ofthe organization of Raintree, the
Company maintains that it always intended to purchase the system. It is a cumbersome operating
practice, it states, to have a separate company enclosed within its system. Tr. p. 265.
United Water states that it regarded Raintree developers as sophisticated and
financially capable and a credible threat to create a separate water company within its service
ORDER NO. 28505
area. Tr. pp. 182-184, 191 256. Water was sold to Raintree, the Company maintains, at metered
tariff rates. The sale to Raintree it states, was no different than the sale of water to any other
customer. Tr. pp. 184, 185. Staff seems to suggest, the Company states, that in circumstances
when a customer of United Water intends to resell water purchased from United Water there
should either be a tariff or a Commission approved contract for wholesale service. This, the
Company states, is the same argument that Staff made in the Eagle case but it did not prevail.
Tr. p. 189. There is wisdom, the Company contends, in a policy that simply says as long as the
sale is at full tariff rates the Commission can be indifferent to the end use. Tr. pp. 190 249 250.
Findings:
The Staff did an admirable job of presenting a case for the imprudence of United
Water s purchase of Raintree. We cannot, however, find the purchase to be imprudent. While
United Water s customers enjoyed the benefit of revenue from the water supply agreement prior
to the purchase, that fact does not make the Company s decision to purchase Raintree
unreasonable. The prudency of a utility s investment or expense is determined by examining the
reasonableness of the utility s actions at the time the expense or investment was made. See
Rosebud Enterprises v. Idaho PUC 128 Idaho 633, 917 P.2d 790 (1995); Industrial Customers
of Idaho Power v. Idaho PUC Slip Op. (April 17, 2000).
We will determine the amount of investment to be rate based using the annual
Revenue/Investment Model presented by both Staff and the Company incorporating both
increased revenue and the Company s overall return as approved by this Order. With the
adjustment that we approve, we find that the Company s existing customers are no worse off
with the 1999 purchase than they would have been had the Company connected Raintree
developments in accordance with its line extension rules. We also find that the customers of
Raintree will benefit from the services the Company can provide.
We are not persuaded by the Company s argument that there was no reason to seek
Commission approval of the 1995 agreement to wholesale water for resale. See UWI-97-
Eagle City Contract (Supplemental Water & Fire Service; Backup Water for Emergency
Situations), Order No. 27121 , 9/08/97 (Exhibit 23). Tr. pp. 185 , 635, 636. The Company shall
file all future agreements for approval by the Commission.
We find it reasonable to consider the revenues that will be generated from our
decision in this case in determining the amount of supportable investment for Raintree rate base.
ORDER NO. 28505
The Commission calculates that resulting revenues support $755 500 of the Company requested
$828 942. The resulting unsupported amount that will not be allowed in rate base is $73 443.
Rate Base Calculations
Following are the calculations for United Water s approved rate base:
Plant in service
Per Company Exh. 34, p. 1
Less portion of Redwood Creek
Adjusted total plant in service
$174 900 704
(91 753)
$174 808 951
Less accumulated depreciation
Per Company Exh. 34
Advances
Redwood Creek
(40 598 443)
134 853
047
$134 357,408Net utility plant
Less (per Company Exh. 34, p. 1)
Customer advances for construction
Pre 1971 investment tax credits
850 608)
(26 908 211 )
628 595
(73 443)
456 432)
(19 808)
Contributions in aid of construction
Utility plant acquisition adjustment
Raintree acquisition adjustment
Accumulated deferred income tax
Add (per Company Exh. 20, p. 1)
Deferred charges
Working capital
Total Rate Base
946 112
239 324
$ 98 862 937
III. Operating Results
As reflected in its initial Application the increase in annual revenue requested by the
Company was $3 057 100 or 11.57%. As set forth in Company rebuttal Exhibit 34, p. 3 a
revised annual revenue increase of$2 901 696 or 10.99% is requested.
ORDER NO. 28505
The Company has agreed to and incorporated into its rebuttal Exhibit 34, p. 2 , Results
of Operations, the following Staff proposed adjustments to operating expense:
Depreciation on Software Project COOJO01 ($3 200)
Depreciation on Chlorine Equipment Project COOBO01 ($4 250)
Update PUC Assessment rate $ 5 282
The Staff has further agreed to the following proposed adjustments reflecting the use of corrected
and updated expense information:
Adjust updated purchase Power Costs $102 106
Adjust updated Employee Health Costs ($33 821)
Depreciation on Updated Collector #3 Project COOAO06 $ 1 200
Boise River Intake---AFUDC
In the Company s last general rate case, Case No. UWI-97-, United Water
requested rate base treatment of $1 882 531 in capital expenditures for construction of river
intake and installation of a transmission main. Tr. p. 165. The Commission disallowed the
Company s request stating:
Except upon on a finding of an extreme emergency, the Commission is
prohibited under Idaho Code 9 61-502(A) from setting rates for any utility
that grants a return on construction work in progress or property held for
future use which is not currently used and useful in providing utility
servIce.
Order No. 27617; Tr. p. 234.
As reflected in the prior hearing, the river intake facilities consist of "a pipe that goes
nowhere and is not hooked to anything." The Company anticipates that the facilities will be
utilized to divert surface water for a future water treatment plant in southeast Boise. Tr. p. 171.
There is no projected need for the facilities until the year 2005. Tr. p. 235. The Commission in
Case No. UWI-97-6 authorized recovery of amortization at the level of depreciation of the
construction costs in the amount of$37 651 per year. Order No. 27617; Tr. p. 166.
In this case, the Company requests "post-closing AFUDC" for a present net
investment of $2 555 658 in the river intake and pipeline and the deferral of the current
amortization until the project goes into service. AFUDC, the Company states, is a recognition of
the economic costs of unproductive capital, typically for construction expenditures not yet in
ORDER NO. 28505
servIce. Post-Hearing Brief p. 15. The AFUDC rate requested by the Company is the same rate
as its requested cost of capital, i., 9.15%. Tr. p. 173. (Requested accounting treatment Tr. pp.
172, 173; Post-Hearing Briefp. 16.
The Company admits that the underlying facts with respect to Boise River intake
have not changed; nor have the statutory requirements of Idaho Code ~ 61-502A. Tr. p. 234.
The Company maintains that application of the "used and useful" standard is unfair in instances
where the capital investment reduces future costs and/or maintains the Company s ability to
provide service in the future. (Citing Marden Treatment Plant as an example of how plant
constructed in advance benefits customers.) Tr. pp. 166, 167.
Although previously authorized, it is noted that the Company in this case includes no
amortization expense for river intake and pipeline in its revenue request, believing post-closing
AFUDC is more equitable. Tr. pp. 170, 171. The Company maintains that the Commission
authorized treatment deprives the Company of the opportunity to earn a return on its full
investment by reducing the amount of investment that will be included in rate base. Allowing a
level of depreciation expense does not relieve, the Company contends, but rather compounds the
unfairness. The Company s proposal for AFUDC treatment of its Boise River intake expenditure
is the same position as supported by Staff in Case No. UWI-97-6. Tr. p. 647.
Findings:
The Commission decided this issue in Case No. UWI-97-, Order No. 27617.
Neither the underlying facts nor the controlling statute have changed. The Company s demand
forecast continues to demonstrate no need for the facilities until the year 2005. The Company
investment in the East Boise River Diversion is still not "used and useful."
Recognizing the potential future benefit to customers we allowed amortization of the
Company investment and calculated a depreciation expense allowance of $37 651. The
Company in this case reports that its investment has increased from $1 882 531 to $2 555 658.
Recognizing its increased investment we find it reasonable to increase its depreciation expense
allowance from $37 651 to $51 113.
Investor Relations Expense
Staffs proposed adjustment removes from United Water operating expense, the
investor relations" amount of $82 575 recorded as United Water s allocated share of its
(heretofore) publicly traded parent company s (United Water Resources) expense of providing
ORDER NO. 28505
information to corporate shareholders, a Securities and Exchange Commission regulation and
reporting requirement. Exhibit 111 , p. 1; Tr. pp. 684, 685; Post-Hearing Briefp.27.
United Water Resources is now a wholly owned subsidiary of Suez Lyonnaise des
Eaux. The merger agreement that was announced on August 23, 1999 was consummated on July
, 2000, after receiving required regulatory approvals. Reference UWI letter filed with the
Commission Secretary on August 2, 2000.
Suez Lyonnaise is now the sole shareholder of United Water Resources.Staff
contends that with only one shareholder and because United Water Resources stock after the
merger will no longer be publicly traded, United Water Resources will no longer incur the costs
of providing shareholder information. Tr. p. 685.
The Company opposes this adjustment. Even though United Water Resources' stock
it states, will no longer continue to be listed on the New York Stock Exchange and the Company
will not be obligated to comply with associated SEC regulations, UWR is not being acquired by
a private entity. The new parent is and will continue to be publicly traded and will presumably
incur investor relations expense and the Company states it will likely allocate a share of that
expense to its subsidiaries. Tr. p. 491; Post-Hearing Briefpp. 27, 28. The Company contends
that Staffs proposed adjustment is speculative-a change in test year expense has not occurred
and is therefore not "known and measurable.Post-Hearing Brief p. 28.The Company
recommends that the expense amount remain unchanged.
Findings:
The Commission finds it reasonable to recognize the consummation of the merger of
the Company s parent, United Water Resources, with Suez Lyonnaise des Eaux. We also find it
reasonable to recognize that the Company will no longer incur the identified test year operating
expense for "investor relations." While we do not rule out that Suez Lyonnaise des Eaux might
choose to allocate a portion of its shareholder expense to its subsidiaries, we find that such
related expense is not known and measurable at this time. We will look at actual allocations in
the future. We find it reasonable to accept Staffs proposed adjustment and to remove $82 575
of "investor relations" operation expense.
M&S Audit
Staff recommends that the Commission consider retaining a management and
economics consulting firm to assist the Commission Staff in a study of the economic efficiencies
ORDER NO. 28505
or inefficiencies of the services provided to United Water Idaho by the Company s affiliate
United Water Resources Management and Service Company (M&S). The main question to be
answered by such a study, Staff contends, is not whether a charge is appropriate, but rather "can
the tasks be accomplished locally (in Idaho) at a lower cost"-also is allocation of cost to Idaho
fair and equitable? Tr. p. 673. The cost of such an audit is estimated by Staff to be
approximately $200 000 to $250 000. Tr. p. 693.
The Company cites numerous management audits performed at various times over the
last 22 years, all consistently coming to the same conclusion, i.
, "
allocation methods are quite
sophisticated, well documented, and services are provided at reasonable cost." Tr. p. 27. The
Company contends that no credible evidence has been presented in this case that an additional
study is warranted. Tr. p. 29. Staff itself, the Company notes, proposes no adjustments to M&S
charges or allocation procedures. Tr. p. 671. Obtaining the lowest price for functional area
services may not be the critical decision factor, the Company contends. Rather, the total overall
benefit must be considered (issues of quality, timeliness, experience, and professionalism). Tr.
pp. 33, 54. The Company identifies the following as an example of benefits of being part of a
larger corporation: (1) treasury functions (lower cost of debt); (2) lower insurance premiums;
and (3) economies of scale-purchase contracts, etc. Tr. p. 32. Outside services, the Company
speculates, would require careful oversight and related administrative expense. Tr. p. 33. The
Company states that it has performed no cost analysis of performing M&S type services in-
house. Tr. pp. 51 , 54. Nor has the Company analyzed whether contracting with affiliates is the
most cost effective method. Tr. pp. 67, 68.
Commissioner Hansen in cross-examination of Company witness Wyatt notes that the
costs in 1998 ofM&S for services was $1 306 824. For the 12-month period ending September
1999 the cost had increased to $1 409 948 , an 8% increase (citing employee relations up 29%;
customer and public relations up 59%; accounting/planning/taxes/audit up 24%). Tr. p. 70.
Findings:
On the facts presented in this case, we find no reasonable basis for initiating an
investigation and audit of services provided to United Water by its M&S affiliate. The
Commission will continue to look closely at the Company s dealings with its affiliate. We
expect the Company to look out for its customers and seek to obtain for them the best value for
the dollar and to provide service by employing the most cost efficient methods. As our Supreme
ORDER NO. 28505
Court observed in Boise Water Corp. v. Idaho Public Utilities Comm.97 Idaho 832, 555 P.2d
163 (1976) and General Telephone Company v. Idaho Public Utilities Comm.109 Idaho 942
712 P.2d 643 (1986):
Although the Company may have established actual incurrence of these
operating expenses, that fact alone does not establish a prima facie case of
reasonableness with respect to payments to affiliates. (Citations omitted). . .
. (T)he utility (has) the burden of proving reasonableness of its operating
expenses paid to an affiliate. . . .
97 Idaho at 836-37.
South County-Revenue Adjustment
Staff proposes to increase test year revenues by $136 118 to reflect projected South
County revenues in the third year (70% of UWI rates) of the acquisition rate phase-in. Tr. p.
641. The Company has adjusted test year revenue for South County customers in this case to
reflect the second year of the phase-in (60% ofUWI rates-effective January 2000). Tr. p. 35.
Staff contends that the proposed third year rates (effective January 2001) better reflect the
known and measurable changes that will take effect during the first year of the general rate
adjustment. Tr. p. 620.
The Company opposes the adjustment. Tr. pp. 35-40. Staff , it states, is proposing an
out of test year adjustment, contrary to a long standing Commission preference for historical test
periods. Citing In Re Utah Power Case No. 1009-, Order No. 13448 in which use of a future
test year was rejected. Post-Hearing Briefp. 21. If2001 rates go into effect now, the Company
states it will for the balance of this year experience a related revenue deficiency.
The Company notes that the Commission in South County/UWI Order No. 27798
stated: The rate phase-in is designed to permit customers to "assess their water usage, to possibly
adjust their water consumption habits and to connect (if available) to other irrigation sources.
Tr. p. 37. The average annual water consumption of South County customers is 324 ccf, while
for United Water the average is 220 ccf. Tr. p. 61. Although the third phase rates may be known
and measurable, the Company argues that the associated revenue is not. Higher rates may induce
customers to reduce consumption.Imputing future South County revenues, the Company
contends, is a mismatch of revenue and expense. Tr. pp. 35, 37, 62, 63.
Findings:
ORDER NO. 28505
The Commission does have a long standing preference for historical test years.
also recognize that revenues and expenses must be appropriately matched. However, we have
made numerous known and measurable adjustments in this case that go well beyond the end of
the test year for taxes, labor, employee benefits, power and other expenses. We have also used
rates that will be in effect after this Order is issued to determine the rate base allowances for the
Company s investment in Redwood Creek and Raintree. It is therefore, reasonable to include the
South County revenues at the third year rate for determining revenue requirement in this case.
Ad Valorem Taxes
The Company in its original application made an adjustment to reduce test year ad
valorem taxes in the amount of $30 875. This adjustment was made by estimating the appraised
value in the year 2000 by applying an average four (4) year growth factor in the appraised value
of2.25% to the 1999 appraisal of $67 964 422. The resulting estimated appraisal of $69 493 621
was multiplied by the most recent levy rate (1999 taxes) of 1.7355% producing an estimated tax
of$1 206 079 that is $30 875 less than the test year actual tax of$1 236 954. Staff did not object
to this adjustment. We note that even though the appraised value has been increased, the
resulting tax has decreased. This can only be due to a reduction in the tax mill levies assessed by
the many taxing districts.
At hearing, the Company offered Exhibit No. 32 as an update to its ad valorem tax
estimate based upon an agreement with the Idaho State Tax Commission (Exhibit No. 33)
regarding the year 2000 appraised valuation. That Exhibit produces an estimated ad valorem tax
expense of $1 240 940 which is $4 986 greater than the test year actual expense. Substituting
this expense estimate for the estimate included in the Company s original application increases
the test year expense by $35 861 from the base case filed with the application.
Findings:
We accept this Company proposed ad valorem tax adjustment using the August 2000
valuation as the most recent known and measurable calculation available at this time.
Operating Results Calculation
Following is the calculation of United Water s operating results based on the
revenues and expenses approved in this Order.
Revenue per Company Exh. Col. 4, I. 4 $26 412 890
ORDER NO. 28505
South County Revenue
Total Revenues
136.1 18
$26 549 008
Operating Expense per Company Exh. Col. 4, I. 14
Correct for:
Depreciation expense on Cancelled Project COOJO01
Depreciation expense on Project COOBO01 not yet
defined or started
Depreciation expense on Project COOA106 updated
cost estimate
Depreciation expense on Customer Advances
Eliminate Investor Relations Expenses
Adjust PUC regulatory fee
Depreciation expense on disallowed Redwood Creek
investment
Amortization of Boise River Intake Plant held for
future use
Ad Valorem Taxes
Depreciation expense on disallowed Raintree
investment
Adjust for Updated Employee Health Insurance
Adjust for Updated Purchase Power Costs
$17 128 657
200)
250)
$ 1 200
$ (134 853)
$ (82 575)$ 5 282
037)
113
861
$ (4 199)
$ (33 821)
102.106
Total Adjusted Operating Expenses $17 059 284
Operating Income before Taxes
Idaho Income Tax
Federal Income Tax
Net Utility Operating Income
$ 9 489 724
$ 279 872
$ 1,697,369
$ 7.512.483
IV. Rate of Return
Capital Structure - Cost of Capital
United Water Idaho Inc is wholly-owned by United Waterworks Company (formerly
General Waterworks Corp.) which is wholly-owned by United Water Resources, Inc. Tr. pp.
320, 321. Interest expense is allocated to UWI. United Water s common stock is not traded.
United Water Resources, Inc. is now wholly-owned by Suez Lyonnaise des Eaux.
United Water and Commission Staff agree to the appropriateness of using the
following capital structure and cost rates for long term debt and minority interest for regulatory
purposes.
Capital Structure
Debt 56.81 %
ORDER NO. 28505
Minority interest or preferred equity
Common equity
Exh. 18, Sch. 6, p. 1; Exh. 108, Sch. 14
Cost of Debt
Exh. 18, Sch. 6, p. 2; Exh. 108, Sch. 14
Cost of minority interest
Exh. 18 , Sch. 6, p. 2; Exh. 108, Sch. 14; Tr. p.
12%
43.07%
52%
00%
594
Findings:
The Commission finds the capital structure proposed by the Company and Staff to be
reasonable for ratemaking purposes. It is the actual capital structure of United Water s corporate
parent, United Water Works (UWW). UWW is the entity that issues the debt for United Water.
The proposed capital structure is within a reasonable range for utilities of comparable risk. The
Commission also finds the 7.52% cost of debt and 5% cost of minority interest are reasonable.
Cost of Equity
Staff in this case recommends a point estimate for cost of common equity of 10.6%.
Staff utilized a comparable earnings method (10.0%-11.0%) and discounted cash flow method
(8.6%-6%) analysis in determining a recommended range of 10.0%-11.0% with a point
estimate of 10.6%. Tr. p. 594.
The 10.6% return on equity point estimate utilized by Staff is based on the following
factors:
1. A review of the market data and comparable earnings shown on the
schedules in Exh. 108;
2. Use of the water utility group dividend yield in the United Water
Resource DCF calculation in Exh. 108, Sch. 13;
3. Average risk characteristics for UWI;
4. Favorable customer relations; and
5. Reasonable capital structure.
Staff recommends an overall weighted cost of capital in the range of 8.585%-0616%. Exh.
108, Sch. 14.
Staff on additional direct and cross contends that the 10.6% recommended return on
equity meets debt coverage requirements and will not result in a bond downgrade. Staff also
ORDER NO. 28505
stated that an equity adder as suggested in rebuttal is not required above the 10.6% which is 10
basis points above the 10.5% midpoint of the Staff recommended range of 10-11 %.
The Company recommends a common equity cost rate of 11.30%. The Company
recommendation is based on the common equity cost rates of discounted cash flow method
(DCF), risk premium model, capital asset pricing model (CAPM) and comparable earnings
analysis applied to proxy groups of four (avg. cost rate 10.9%) and six (avg. cost rate 11.4%)
Value Line water companies.
United Water contends that the Company is more risky than the average company in
each proxy group. The Company s unique business risks and small size, it argues, increase its
common equity risk by a minimum of 17 basis points, or 0.17%. The recommended range of
common equity cost rate, based on the two proxy groups relative to UWI is 11.07%--11.57%.
The Company recommends the use of a range midpoint estimate of 11.32% rounded down to
11.30%. The resultant overall cost of capital is 9.15%. Exh. 18, Sch. 1 , p. 1.
The Company contends on rebuttal that Staffs technical analysis on cost of equity is
flawed and creates a bias toward the low end of reasonable costs. In particular it argues that the
Staff range of DCF common equity cost rates is grossly substandard and would not maintain the
financial integrity of presently invested capital. Tr. pp. 399-400.
A DCF calculation is a dividend yield plus a growth rate to produce a discount rate or
required return on equity. Staff selects a value of 5% for use as the dividend yield. This
dividend yield, the Company maintains, is higher than the actual dividend yields of United Water
Resource or the proxy groups of water companies (Exh. 18 , Sch. 11 , p. 1). Post-Hearing Briefp.
17.
It also maintains that the Staffs comparable earnIngs method approach grossly
understates the appropriate indicated common equity cost rate. Finally, United Water argues that
Staff underestimates UWI's relative business risk. The Company contends that lack of any sort
of tracker mechanism makes the Company more risky and contends that a company that must
recover a portion of its fixed charge through its variable rates faces greater risk. Tr. pp. 601-603.
Findings:
United Water argues that Staffs DCF range is substandard and will not maintain the
financial integrity of United Water and will result in a downgrading from the A rating. We do
not accept this argument. The rate of return authorized by this Commission is only one factor
ORDER NO. 28505
considered by prudent investors and rating agencies when evaluating a utility s stock. We accept
Staffs uncontested testimony that the 10.6% point recommendation rather than the DCF range
produces an interest coverage ratio of 2.8 times and is within the range for A rated bonds.
Therefore, the authorized return alone will not result in a bond downgrading due to low interest
coverage.
We do not accept United Water s argument that Staff underestimated United Water
relative business risk. The Commission finds that United Water, despite not having a tracker
cost adjustment mechanism, is not as risky as an electric utility.In recent general rate
proceedings for Avista Corporation we allowed Avista a cost of equity of 10.75%. We accept
Staffs return on equity point estimate of 10.6% for United Water. We find that this return will
allow United Water a reasonable return on investment committed to serve the public. The
overall rate of return we approve is 8.843%.
Cost of Capital
To summarize, United Water s approved capital structure and overall rate of return
are as follows:
ORDER NO. 28505
COST OF CAPITAL
Component
Debt
Ratio
56.81 %
Composite
Cost
52%
Rate of
Return
272%
Minority Interest
Common Equity
0.12%
43.07%
00%
10.60%
006%
565%
Allowed Rate of Return on Rate Base 843%
V. Revenue Requirement
The Company s additional revenue requirement, which we find to be fair, just and
reasonable, is $2 070 325 calculated as follows:
Rate Base
Rate of Return
$98 862 937
843%
Net Operating Income Required
Net Operating Income Realized
Net Operating Income Deficiency
Gross-up factor
Revenue Increase required
Percent Increase
$ 8 742 831
$ 7.512.483
$ 1 230 348
1.683%
$ 2 070 325
80%
For use in calculating the revenue requirement, a point estimate consisting of a return
on equity of 10.6% and a resulting overall return of 8.843% was utilized.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over United Water Idaho Inc.
a water utility, and its Application in Case No. UWI- W -00-1 pursuant to the authority and power
granted under Title 61 of the Idaho Code and the Commission s Rules of Procedure, IDAPA
31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission hereby authorizes United Water Idaho Inc. to
increase its revenues by $2 070 325 or approximately 7.80%. The Company is directed to file
amended tariff sheets for rates and charges in compliance with the terms of this Order. The rate
increase that we authorize is effective for service rendered on and after September 5, 2000.
ORDER NO. 28505
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. UWI-OO-
1 may petition for reconsideration within twenty-one (21) days of the service date of this Order
with regard to any matter decided in this Order or in interlocutory Orders previously issued in
this Case No. UWI-OO-l. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code
61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of September 2000.
DENNIS S. HANSEN, PRESIDENT
MARSHA H. SMITH, COMMISSIONER
PAUL KJELLANDER, COMMISSIONER
ATTEST:
Myrna J. Walters
Commission Secretary
bls/O:uwiwOOl sw5
ORDER NO. 28505