HomeMy WebLinkAbout20060821_1653.pdfDECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEG AL
FROM:DONOV AN E. WALKER
DATE:AUGUST 22, 2006
SUBJECT:CASE NO. KHW-05-1; KOOTENAI HEIGHTS WATER SYSTEM'
APPLICATION FOR A CERTIFICATE OF PUBLIC CONVENIENCE
AND NECESSITY
On August 22 , 2005, Kootenai Heights Water System, Inc. (Kootenai Heights
Company) filed an Application for a Certificate of Public Convenience and Necessity
(Certificate) with the Idaho Public Utilities Commission (Commission). On September 30 2005
the Commission issued a Notice of Application and Modified Procedure establishing a deadline
for written comments of November 10, 2005. Order No. 29877. On November 1 , 2005, the
parties executed a Stipulation asking the Commission to suspend the written comment deadline
so that alternative organizational structures for the Company could be explored. The
Commission suspended the comment deadline, and directed the parties to report back to the
Commission in 60 days. Order No. 29909.
On January 20, 2006, Commission Staff reported that the Company wished to
proceed with its original Application. The Commission issued a Second Notice of Application
and Modified Procedure, setting a comment/protest deadline of March 9, 2006. Order No.
29960. Commission Staff was the only party to file comments, and recommended that the
Company be granted a Certificate of Public Convenience and Necessity. Staff also made several
recommendations pertaining to the Company s rates, billing, charges, and customer rules.
THE APPLICATION
The Company submitted various supplemental documents with its Application
including: a map of the proposed service area, a Water Service Agreement and Easement form
documents evidencing the incorporation of the Company, a copy of the contract with its Certified
DECISION MEMORANDUM
Operator, a copy of a Clarification-Modification of the Plat for Kootenai Heights, and a letter
from the Department of Environmental Quality (DEQ) evidencing conditional approval of the as-
built plans.
According to the Application the water system is currently in servIce with six
residential customers connected to the system. Application at 2. The Company states that the
system will ultimately serve 11 residential customers. Id. The requested service area for the
water system consists of Lots 7-18 of Kootenai Heights, with the well located on Lot 10.
Application at 1. The Company states that the cost to construct the system was $83,500
including the value of Lot 10. Application at 2. The average monthly consumption for the entire
system is 31 000 gallons, and the Company states that billing will start on October 1 , 2005. Id.
The Application states that proposed rates and charges, rules and forms are all contained within
the Water Service Agreement submitted with the Application. Id.
The Water Service Agreement and Easement (WSA) states that the system was
developed to provide water "to certain Lots in Kootenai Heights and for further development of
additional land and lots in the sole discretion of the Water Provider." WSA at 1. The WSA
further provides that each lot shall pay a hook-up fee of $5 000, and that rates will be $40 per
month up to 10 000 gallons, and $4 per thousand gallons used over 10 000 gallons per month.
WSA at 2. Each customer will be metered, with the cost of the meter and its installation paid by
the Company. Id. The Agreement states that monthly rates will not be increased for the first five
years. WSA at 2-3. Additionally, the Agreement states that monthly bills will not be sent, and
the lot owner shall pay the monthly fee on the 151 day of each month. WSA at 3. Billings will be
sent to customers twice a year, on or about May 1 and October 1 , for the purpose of computing
and billing any excess water usage over the allowed 10 000 gallons per month. WSA at 3-
STAFF COMMENTS
Commission Staff conducted a review of the Company s Application and financial
information. Staff also conducted an on-site inspection of the system. Staffs comments contain:
an overview of the water system; a technical review of the physical plant; a financial review with
a recommended rate structure; and a discussion of several customer relations/rules issues.
I. Overview of the Water Svstem
Kootenai Heights Water System consists of 11 residential lots with one lot used for a
well site and pump house. Floyd and Mickie McGee are the developers of the property and the
DECISION MEMORANDUM
officers and shareholders of Kootenai Heights Water System. The adjacent area is provided with
water service from the City of Kootenai, Idaho, which currently has a moratorium on allowing
water users located outside of its established boundaries from connecting to the city s water
system. There are no other domestic water suppliers close enough to provide water to the area.
The system consists of one four-inch, five horsepower well pump, with an eight-inch
casing, pumping from a depth of approximately 200 feet. There are three 100-gallon hydro-
pneumatic tanks to maintain pressure in the system. All equipment is located on the well lot (Lot
10). There is no other water storage in this system. Individual water meters have been installed
for each customer.
Kootenai Heights has a Water Service Agreement (WSA) that it proposes as the basis
for rates and policies concerning the operation of the water company. The WSA provides for a
water usage fee of $40 per month for 10 000 gallons, with excess gallons over 10 000 per month
billed at $4 per thousand gallons.
The McGees own additional property adjacent to the proposed service area, and plan
to develop this property in the future. Although not a part of this Application, if this property is
developed, the McGees would consider combining the water system of the anticipated
development with this system.
II. Technical Review of the Water Svstem
Staff determined that the well capacity, as shown from well records and pump data
as well as the three pneumatic storage tanks will be sufficient to serve the present customer base.
The Company has hired a certified operator to manage the water company and appears to have
the financial ability to maintain adequate service.
The Department of Environmental Quality (DEQ) approved the existing system in
January 2005, contingent upon full compliance with five items set out in the approval letter. As
of the time that Staff filed its comments, a DEQ engineer had advised Staff that all but one of the
five requirements had been met, and the remaining requirement would require several more
months of testing to determine compliance.Additionally, the Panhandle Health District
reviewed and inspected the system in February 2005. The system was found to be in substantial
compliance with IDAPA 58.01.08 , and nine required improvements, and two suggested
improvements, were communicated to the Company s certified operator.
DECISION MEMORANDUM
III. Financial Review of the Water Svstem
A. Rate Base - The Company has indicated in the documentation filed with the
Application that it incurred the following costs to develop the water system:
Well Installation
Distribution Lines
Well House
Pump, Pressure, Electrical
Engineering
Attorney Fees
Total
$ 11 370
$ 8 915
$ 6 000
$ 16 910
$ 1 800
$ 3,500
$ 48,495
Additionally, the Company is claiming the current fair market value ofthe well lot at $40 000.
Based on a review of the financial records and the historical relationship between the
developer and the water company, Staff believes the Company would not be entitled to recognize
any rate base in the establishment of rates for two reasons. First, Commission Rule 103 for small
water companies (IDAP A 31.36.01103) establishes a presumption that capital invested in the
water system by the developer is considered contributed capital and is excluded from rate base.
Rule 103 states:
In issuing certificates for a small water company or in setting rates for a
small water company, it will be presumed that the capital investment in
plant associated with the system is contributed capital, i., that this capital
investment will be excluded from rate base.
Second, the Company has received contributions in the nature of hook-up charges in
the amount of $55 000. This contribution is an offset to the cost of the system. ($48 495 plus any
allocation of original cost for the well lot.) The well lot is approximately 1/5 of an acre (9 130
square feet), and it is very unlikely that the original cost of this parcel is more than the difference
between the contributed hook-up fees and the cost of the water system. ($55 000 less $48 495 or
505.) The well lot is considered contributed capital under Rule 103 no matter the cost.
Staff proposes to reflect the hook-up fees as an offset to the plant-in-service account.
Until new plant is added subsequent to and independent of owner development, plant-in-service
and hook-up fees will continue to offset each other such that there will be no rate base or
depreciation expense to increase rates. Staff cautions that it is important to set these accounts up
properly now so system capital costs can be properly reflected in future rates. To the extent the
DECISION MEMORANDUM
Company wants to continue collecting a hook-up fee, Staff recommends that the Company file a
request for approval to include this charge in its tariff.
Attachment A, Section A to Staffs comments reflects proposed plant-in-service
accounts, reasonable depreciable lives and the annual depreciation. These items are offset by the
hook-up fees recorded as Contributions in Aid of Construction and the presumption that water
system capital is contributed by the owner/developer through the sale of lots. The amortization
of these contributions is shown in Section B.
Staff offered to assist the Company to set these accounts up properly, and to properly
book any future expansion if requested by the Company.
B. Annual ExpenseslRevenue Requirement - Since there is no rate base, Staff
examined the Company s annual operating expenses in order to set a just and reasonable rate.
Because there is no history of annual operating, maintenance, or administrative expenses, Staff
interviewed the Company s certified operator and received estimates from him concerning
annual expenses for the operation and maintenance of the system.
Based on the certified operator s estimates, Staff prepared a pro forma schedule of
annual expenses that the Company could reasonably incur in the operation of the water company.
Those estimates are included in the Schedule of Annual Expenses, and attached as Attachment B
to Staff Comments. Staff proposes to audit the Company s records for the two years ending
December 31 , 2007, in order to update the estimated annual operating, maintenance, or
administrative expenses based on actual expenses, revenues, and any additional investments
subject to recovery through rates. Because there is no rate base, no annual depreciation expense
is included in the revenue requirement. As discussed earlier, all water system investment is
recovered through the sale of lots and through hook-up fees.The total estimated annual
expenses for operating, maintenance and administrative functions total $3 820. Taxes including
property, federal and state are approximately $1 310 per year. Therefore, Staff recommends that
the total annual expense of $5 160 be set as the Company s annual revenue requirement.
C. Rates - The Company proposes a monthly rate of $40 per month plus $4 per
000 gallons for usage over 10 000 gallons. If every customer used no more than the allowed
000 gallons each month, the annual revenue generated by the Company at this rate would be
280.
DECISION MEMORANDUM
Staff compared the Company s proposed rates to those of nearby municipal and
private water systems, and the proposed rates were found to be somewhat higher. Staff believes
that a minimum charge allowance of 6 000 gallons per month is appropriate since the
surrounding communities of Sandpoint, Kootenai and Ponderay have tariff structures where
000 gallons is a set point. The most recent rate set by the PUC in the area was for Bitterroot
Water, located just south of Athol, Idaho (25 miles south of Sandpoint). The rates approved for
Bitterroot are a minimum charge of $21 per month and a commodity charge of $1.73 for every
000 gallons over 15 000 in a month. The City of Sandpoint Municipal Water Utility, which is
near the Company s proposed service area, established the following rates as of July 2004 for
residential use with a 3/4 inch connection: fixed monthly charge of $7, volume charge for every
000 gallons, with the first 6 000 gallons at $1.45 , 6 001-000 gallons at $1.70, and over
000 gallons at $1.95 per gallon. The Sandpoint tariff structure is much more progressive and
has higher commodity charges than have been set for other regulated water utilities in north
Idaho.
After consideration of the nearby water company rates and the Company s revenue
requirement, Staff recommends the following rates:
Fixed Monthly Charge
Volume Charge for Every 1 000 Gallons
Over 6 000 in a month
$25.
$ 1.90
These rates when applied as described in Staffs comments result in annual revenue of$5 181 , or
$21 more than the Staff proposed required revenue. The Company has installed individual
meters. Staff included expenses related to monthly meter reading and billing in the annual
revenue requirement. Monthly billing would provide a good price signal to customers with
regard to usage under Staffs proposed rate structures and Staff recommends that the Company
read meters and bill on a monthly basis.
IV, Customer Relations Issues
According to the Company s Application, purchasers of lots served by Kootenai
Heights Water System signed a contract entitled "Kootenai Heights Water Service Agreement
and Easement" (WSA) that includes a number of provisions regarding operation of the water
company that are covered by or are in conflict with the Commission s Utility Customer Relations
Rules, and should be included in the Company s tariff that is filed with the Commission. When
DECISION MEMORANDUM
asked on the Application Form to attach samples of the Company s bill statement, reminder
notice for termination of service, final notice for termination of service, rules summary, and
utility s general rules and regulations the Company states that all are within the Water Service
Agreement. Additionally, as previously noted , when asked to attach a description of proposed
rates and charges the Company refers to the WSA.
Kootenai Heights did not file a proposed tariff with its Application, nor has it
submitted copies of its proposed bill statements, disconnection notices, or other documents
necessary to conduct its day-to-day business. The Company did not provide evidence that it had
notified its customers of its Application to the Commission. As of March 6, 2006, when Staff
filed its comments the Commission had received no public comments. Staff recommends that
the Company be directed to file for review and approval the following documents: (1) tariff; (2)
sample bill; (3) disconnect notice; and (4) a summary of rules and rates. A model tariff for small
water companies is available, and Staff can provide examples of documents and guidance to the
Company upon request.
The Company s tariff should specify water rates, recurrIng and non-recurring
charges, and the terms and conditions of providing service. Paragraphs 3, 4, and 5 of the
Company s WSA conflict with the Commission s Customer Relations Rules and/or address
issues that are required to be in the Company s filed tariff. The Commission s Utility Customer
Relations Rules (IDAP A 31.21.01) govern the collection of deposits, billing, disconnection of
service, payment arrangements, and dispute resolution. Both the Utility Customer Relations
Rules and the Utility Customer Information Rules (IDAP A 31.21.02) govern the provision of
information to customers.
Paragraph 3 of the contract specifies that water shall be used "for household domestic
purposes in reasonable quantities" and that "Irrigation of yards shall be done at times of low
water usage, so as not to interfere with household water uses." Paragraph 4 specifies a $5 000
hook up fee. Paragraph 5 sets water rates and specifies under what conditions rates will increase.
Paragraph 5 also indicates that the Company will not bill its customers, but customers are
expected to pay by the 10lh of each month. Customers will be billed semi-annually for "excess
water usage over the allowed 10 000 gallons per month." Finally, Paragraph 5 establishes a $10
late payment fee and a $50 reconnection fee following termination for non-payment. No cost
support was provided to justify the $10 late payment fee or the $50 reconnection fee.
DECISION MEMORANDUM
Rule 201 of the Commission s Utility Customer Relations Rules (UCRR) requires
that customers be billed at regular intervals. Rule 202, UCRR, requires a longer interval between
billing and payment than proposed by the Company. The minimum specified period is 15 days
or 12 days after bills are mailed or delivered, if bills are mailed or delivered more than 3 days
after the billing date. Monthly billing of customers is the predominate billing interval used by
regulated utilities in Idaho. It is also the best way to give customers immediate feedback on how
much water they used and how much it cost. Staff recommends the Company be required to take
meter readings and bill customers each month.
Staff recommends that the Commission approve a $25 reconnection fee. If approved
the $25 fee would apply regardless of the time of day or day of week that service is reconnected.
Because the Company has so few customers, a simple fee structure makes sense. The fee is high
enough to discourage customers from not paying their bills and to compensate the Company for
costs associated with reconnection.
Staff recommends that the Company not be allowed to collect a $10 late payment fee.
Unlike regulated energy utilities , regulated water utilities are not prohibited from disconnecting
customers at certain times of the year. The Commission has allowed water utilities that are
unable to discontinue water service easily to assess a late fee for non-paying customers, as would
be the case with non-metered systems. However, that is not the case with Kootenai Heights.
Finally, a $10 flat rate fee is excessive. If the Commission chooses to allow the Company to
impose a fee on customers who pay late, Staff recommends that any late fee be set at 1 % per
month on any past due balance carried over from the prior month's bill; this would be consistent
with what the Commission has allowed other utilities to charge.
ST AFF RECOMMENDATIONS
Staff recommends that:
(1) The Company be granted a Certificate of Public Convenience and Necessity to
provide water service to the proposed service area, encompassing the 11 residential lots as
described in the Application, and that it continue to work to comply with the requirements of
DEQ and the Health District;
(2) The Company be directed to adopt and submit a tariff containing the following
rates and charges: a fixed monthly charge of $25 and a volume charge of $1.90 for every 1 000
gallons over 6 000 gallons per month, and a $25 reconnection fee;
DECISION MEMORANDUM
(3) The Company be directed to file a hook-up fee tariff if it chooses to continue
assessing the $5 000 hook-up fee;
(4) The Company be directed to take meter readings and bill customers on a monthly
basis;
(5) The Company s $10 late payment fee be eliminated. Staff does not recommend
any late payment fee, however, if the Commission wishes to authorize a late payment fee, Staff
would recommend a fee of 1 % of any past due balances carried over from the prior bill;
(6) The Company be directed to file for Staff review and approval the following
documents: (1) tariff; (2) sample bill; (3) disconnect notice; and (4) a summary of rules and
rates.
COMMISSION DECISION
Does the Commission wish to grant a Certificate of Public Convenience and
Necessity to Kootenai Heights Water System? Idaho Code ~ 61-526.
If so , what does the Commission authorize as just and reasonable rates, charges
rules, and regulations that the Company may charge and impose on its customers? Idaho Code
~~ 61-301 , 61-303. Does the Commission wish to impose any conditions upon the grant of a
Certificate in order to ensure the maintenance of adequate service by the Company? Idaho Code
~ 61-302.
Li.uJ
DONOV AN E. WALKER
M:KHW-O5-01 dw4
DECISION MEMORANDUM
KOOTENAI HEIGHTS WATER SYSTEM
Plant-in-Service and Contribution in Aid of Construction
A. Annalysis of Plant-in-Service and Annual Depreciation Expense
Plant-in-Service Depreciable Plant Annual
Life Investment Depreciation
Value
Well 094 483.
Distribution System 9,483 189.
Pump 987 899.
Pump House 382 182.
Total Investment 946
Total Annual Depreciation
Expense 755.
B. Analysis of Contribution in Aid of Construction and Annual Amortization
Amortization
Term in Years
CIAC Annual
Amortization of
CIAC
Amortization of Contribution
in Aid of Construction 000.00 755.
Attachment A
Case No. KHW-OS-
Staff Comments
03/09/06
KOOTENAI HEIGHTS WATER COMPANY
Pro-Forma Revenue Requirement '1iI
Pro Forma
Annual Est.
Revenues
Metered Sales 280
Expenses
Operation Expenses
Purchased Power 600
Supplies & Expenses 100
Water Testing 350
Other
Total Operation Expense 050
I Maintenance Expenses
Maintenance of Well lot 300
I Repairs of Water Plant 200
Other
- "
Total Maintenance Expense 500
Customer Accounts Expense
Meter Readinq labor 100
Accountinq and Collecting labor 300
Other
Total Customer Accounts Expense 400
Administrative & General Expenses
Administrative & General Salaries 600
Office Supplies & Other Expenses 200
Outside Services Employed
Certified Operator 600
Property Insurance 250
Requlatorv Commission Expenses 150
Miscellaneous General Expenses 100 .
Total Administrative & General Expenses 900
Total Operating, Maintenance and Administrative
Expenses 850 t
Taxes
Property Taxes 1200
Income Taxes
State of Idaho 50 -
Federal
Total Taxes 1310
"-~
Total Annual Expenses 160
NET INCOME (LOSS)120 '
, .
Attachment B
Case No. KHW-OS-
Staff ConTInents
03/09/06
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