20201030Final_Order_No_34829.pdf

ORDER NO. 34829 1

Office of the Secretary
Service Date
October 30, 2020
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF SUEZ WATER’S
PETITION FOR AUTHORIZATION TO
ELIMINATE COLLECTION OF GROSS-
UP PAYMENTS ASSOCIATED WITH
CONTRIBUTIONS IN AID OF
CONSTRUCTION
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CASE NO. SUZ-W-20-01

ORDER NO. 34829

On June 22, 2020, SUEZ Water Idaho, Inc. (“Company”) asked the Commission to
authorize the Company to stop collecting the federal and state income tax gross-up amount related
to the Contribution in Aid of Construction (“CIAC”) received from developers. The Company
proposed changing the CIAC income tax collection method by paying the tax itself and recovering
its costs to serve new developments through rates paid by the new customers. The Company also
asked to update its tariffs to reflect the proposed changes.1 The Company requested its Petition be
processed by Modified Procedure.
On July 29, 2020, the Commission issued a Notice of Petition and Notice of Modified
Procedure establishing a public comment period and Company reply deadline. Order No. 34738.
On August 6, 2020, the Company supplemented its Petition by including the redlined
version of its proposed tariff updates.
Commission Staff filed timely comments. Several written public comments were
received. The Company responded to Staff, City of Boise City (“Boise City” or “City”), and the
public comments.
Now, having reviewed the record, the Commission approves the Company’s Petition.
BACKGROUND
The Company’s tariffs include charges and rules that apply when a developer requests
the Company to connect the Company’s water system to new individual, industrial, or commercial
developments. Certain charges and allowances relate to main extensions requiring special
facilities. These charges allow the Company to recover its construction costs, annual overhead
expenses, and depending on current tax law, federal and state income tax associated with the
developer’s CIAC.

1 The Company is proposing to modify Tariff Sheet Nos. 27, 33, 36, 43, and 45.
ORDER NO. 34829 2

From 1996 through 2017, federal tax law exempted CIAC from water utilities’ taxable
income. The 2017 Tax Cuts and Jobs Act (“TCJA”) removed this exemption. As a result, the
Company has included CIAC in its annual taxable income since January 1, 2018.
In May 2018, the Commission directed the Company to account for the taxability of
CIAC by grossing-up developers’ contributions. See Order No. 34074, Case No. GNR-U-18-01.
Effective June 1, 2018, the Company’s tariffs have included a table illustrating the basis for
calculating the tax gross-up factor so the charges would reflect the net present value of CIAC-
related cash flows and the future tax deductibility of contributed asset. The tariffs’ “special
facilities charges” to developers include the gross-up factor and offset the Company’s increased
tax liability from CIAC under the TCJA.
THE PETITION
The Company stated it has conducted a study that shows its existing rates for water
service will generate sufficient revenue from new development customers to cover the Company’s
CIAC-related tax expenses from that development. Direct Testimony of Cathy Cooper at 5-7. The
Company thus proposed to modify the method of CIAC payment approved in Order No. 34074
and update the Company’s tariffs so developers no longer pay for future CIAC-related taxes. The
Company stated its proposal ensures development will pay for the additional costs it imposes, and
existing customers will not subsidize developments through rate increases.
The Company proposed to cease grossing-up contributed property on the effective date
of the final order. CIAC would become taxable upon transfer of ownership to the Company. The
Company would refund the tax gross-up to the developer for any project that closes on or after the
effective date. If the Company has incurred a tax liability on a project that closed before the
effective date, then the Company would retain the developer’s gross-up payment.
THE COMMENTS
Comments from Staff and 24 public comments were filed regarding the Company’s
proposal to pay the CIAC tax gross-up instead of collecting it from developers. The Company filed
reply comments.
1. Staff Comments
Staff reviewed the Company’s Petition and supporting testimony. Staff believed the
growth of the Company’s system would pay for itself and generate additional revenue to benefit
all customers. According to Staff, ending the CIAC tax gross-up will bring new developments and
ORDER NO. 34829 3

new customers to connect to the Company’s system, helping spread costs over larger customer
base.
Staff noted that collection of CIAC tax was potentially a barrier to growth, in some
instances preventing the Company from growing its customer base. Staff stated the CIAC tax
collection had driven large developers to explore alternative water sources, including municipal
and private systems.
Staff reviewed and discussed the accounting treatment of the proposed changes to the
Company paying CIAC taxes. Staff stated:
The income tax effect will be recorded in accumulated deferred income tax
(“ADIT”), which will reduce ADIT in future rate cases. Future tax depreciation
funded by non-grossed up CIAC will cause the deferred tax asset to reverse over
its tax life, increasing ADIT liabilities as the tax benefit of the additional
depreciation is realized over time. This future depreciation reduces current tax
expense and incrementally reduces the revenue requirement in future rate cases,
since the ADIT is a reduction to rate base. The associated tax on CIAC would be
included in rate base and the deferred tax balances would be amortized over a 25-
year period.

Staff reviewed development activity from 2014 through present, observing the
associated annual tax obligations were between $1 and $2 million—about 1% of the Company’s
rate base investment. Staff stated that from 2016 through March 2020, the average revenue from
developer projects exceeded the incremental revenue requirement to serve customers and cover
the CIAC tax gross-up amount. Staff confirmed the average annual revenue from developer
projects would exceed the incremental costs of serving the new customers and the revenue
requirement of the CIAC tax gross-up.
2. Boise City Comments
Boise City criticized the Company’s proposal and sought clarification on the impacts
to existing customers. Boise City was concerned the general rate base could subsidize the costs the
Company proposes to incur to avoid charging CIAC taxes to developers. Boise City stated “[i]t is
unclear how [the Company] intends to recover the full amount of the CIAC income tax collection
solely from the new customers within the new development and not from the general customer
rate base.” Boise City was unpersuaded by the Company’s explanation that the increased annual
revenue generated beyond the revenue requirement supported the concept that new development
projects would pay the CIAC tax obligation.
ORDER NO. 34829 4

Boise City indicated it had trouble understanding how the entire rate base would not
end up paying for the additional CIAC tax obligation for new development through the Company’s
rate of return. The City inquired “how can general customers be assured that the funds needed to
pay the CIAC tax obligation will be paid for by the rate of return or Company profit margin and
not other revenue sources?”
The Company’s Petition stated the proposed modification would provide a savings to
existing customers. However, the City said no tangible evidence existed supporting the statement
or quantifications showing how it would be achieved. The City requested additional information
to support this suggestion.
Boise City mentioned it was concerned with the Company’s outreach efforts. The City
noted the substantial public comments filed by developers and those who would otherwise benefit
from the Company paying the CIAC tax compared to general rate paying customers. Boise City
was concerned the Company may not have offered the same outreach to general customers and
stated general customers should be given the same notification and opportunity to provide input.
The City requested the Commission direct the Company to provide additional detail
about how current customers would be prevented from subsidizing the cost of the CIAC tax
obligation including assurances that rate of return from new customers would be held separately
and used solely to pay for CIAC and an explanation of the proposed timeline for paying the tax
obligations.
3. Public Comments
The Commission received 23 public comments from individuals, developers, and
developer-adjacent businesses interested in the Company’s proposal to cease collection of the
CIAC tax gross-up from developers. The Independent School District of Boise City (“School
District”) also filed comments. All public comments supported the Company’s proposal.
The overall tone of the public comments was supportive, encouraging the Commission
to approve the Company’s request. Several commenters suggested the addition of the CIAC tax
was aiding the rapid increase in housing costs in the Company’s service area. Commenters said
that some developers had postponed potential developments until rents rose enough to cover the
additional costs. Commenters also noted the financial inequity between receiving the Company’s
service and municipal service due to addition of the CIAC tax.
ORDER NO. 34829 5

The School District filed comments supporting the Company’s request to stop
collecting CIAC tax gross-up. The School District pointed to invoices from several projects it had
commissioned since Order No. 34074 was issued that included CIAC tax gross-up. The School
District requested the Commission end the Company’s authority to impose the CIAC tax gross-up
on tax exempt public entities for three reasons: (1) The School District pointed out that it is not a
developer based on the language in the Company’s tariff and should not be charged CIAC tax for
its non-development projects.2 The School District cited four recent projects it had been invoiced
$141,749 for the CIAC tax gross-up but argued based upon the language of Order No. 34074, it is
precluded from being charged the CIAC tax since it is not a developer; (2) the School District
argued that as a tax exempt public agency, incurrence of the CIAC tax gross-up shifted the
Company’s tax burden to taxpayers; and (3) the School District argued that it was not a “person”
for purposes of the CIAC applicability under 26 C.F.R. 10118.2(a)(1) and therefore should not be
burdened with the CIAC tax gross-up based on this.3
4. Company Reply
The Company replied to Staff and Boise City. The Company reiterated that CIAC has
become a barrier to growth and the revenue from eliminating the tax gross-up would sufficiently
cover the incremental cost of serving new customers and the revenue requirement of the CIAC tax
gross-up amount.
In response to Boise City’s concerns, the Company noted that the City did not oppose
the Petition but had concerns about how the Company would account for the income tax collections
from new customers. The Company stated that Staff explained the additional revenue from new
customers would cover the tax through the Company’s approved rates and the income tax effect
would be recorded in the ADIT account would be amortized over 25 years. The Company also
noted that it processed its Petition in full compliance with the Commission’s rules of procedure
and Order No. 34738. The Company mentioned that several members of the public filed comments
supporting the Petition, indicating the Company’s outreach efforts were appropriate.

2 “Rules and Regulations Governing the Rendering of Services” No. 55; Sheet No. 19
3 “Federal regulation defines CIAC as ‘any amount of money or other property received from a person (whether or
not a shareholder) by a regulated public utility that provides water or sewage disposal services.’ See 26 C.F.R.
10118.2(a)(1). A ‘Person’ is ‘an individual, a trust, an estate, a partnership, an association, a company or a
corporation.’ See 26 C.F.R. 10269.1(d).” Independent School District of Boise City Comments at 4.
ORDER NO. 34829 6

COMMISSION FINDINGS AND DECISION
The Company is a water corporation as defined by Idaho Code § 61-125 and a public
utility subject to the Commission’s jurisdiction under Idaho Code § 61-129. The Commission has
jurisdiction over the issues in this case pursuant to Idaho Code §§ 61-501 and 61-503. Based upon
our review of the record, including the Petition, exhibits, direct testimony, and comments, we find
it reasonable to authorize the Company to discontinue collection of CIAC tax gross-up from
developers and instead pay the CIAC-related tax expense itself, as requested in the Company’s
Petition.
We appreciate the public input in this case. This Commission is mindful of unintended
consequences that sometimes result from an action. While we approve the Company’s Petition,
and believe doing so will benefit existing customers and permit the Company to expand its
customer base, we are also cognizant that the Company has filed Case No. SUZ-W-20-02. In that
general rate case, the consequences of the Company’s CIAC tax policies can be examined
alongside the Company’s other tariffs. The City has an opportunity to participate in the Company’s
general rate case if it wishes to further examine the Company’s CIAC tax gross-up policies.
ORDER
IT IS HEREBY ORDERED that the Company’s Petition to stop collecting the CIAC
tax gross-up from developers and instead pay the tax itself is approved, effective upon the issuance
of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order regarding any matter
decided in this Order. Within seven (7) days after any person has petitioned for reconsideration,
any other person may cross-petition for reconsideration. See Idaho Code § 61-626.
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ORDER NO. 34829 7

DONE by order of the Idaho Public Utilities Commission at Boise, Idaho this 30th
day of October 2020.

__________________________________________
PAUL KJELLANDER, PRESIDENT

__________________________________________
KRISTINE RAPER, COMMISSIONER

_________________________________________
ERIC ANDERSON, COMMISSIONER

ATTEST:

_________________________________
Jan Noriyuki
Commission Secretary

I:\Legal\WATER\SUZ-W-20-01\Order\SUZW2001_final_dh.docx