20200915Comments.pdf

DAYN HARDIE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83120
BOISE, IDAHO 83120-007 4
[phone]
IDAHO BAR NO. 9917
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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Street Address for Express Mail:
II33I W CHINDEN BVLD, BLDG 8, SUITE 2OI-A
BOISE, ID 83714
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
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CASE NO. SUZ-W-20-01
COMMENTS OF THE
COMMISSION STAFF
STAFF OF the Idaho Public Utilities Commission, by and through its Attorney of
record, Dayn Hardie, Deputy Attorney General, submits the following comments.
BACKGROUND
On June 22,2020, Suez Water ("Company") filed a Petition requesting a Commission
order permitting the Company to no longer collect the federal and state income tax gross-up
amount related to the Contribution in Aid of Construction ("CIAC"). The Company proposes to
change the CIAC income tax collection method by paying the tax itself and recovering its costs
to serve the new development(s) through rates paid by the new customers served. The Company
also requested to update its tariffsl to reflect the proposed changes. The Company requested its
Petition be processed by Modified Procedure.
I The Company is proposing to modify Tariff Sheet Nos. 27, 33,36,43, and 45
STAITF COMMENTS SEPTEMBER 15,20201
The Company's tariffs include charges and rules that apply when a developer requests the
Company connect its water system to new individual, industrial, or commercial developments.
Certain charges and allowances relate to main extensions requiring special facilities. These
charges are designed to recover the Company's construction costs, annual overhead expenses,
and depending on current tax law, federal and state income tax associated with the developer's
CIAC.
From 1996 through2017, federal tax law exempted CIAC from a water utilities' taxable
income. The2017 Tax Cuts and Jobs Act ("TCJA") removed this exemption. As a result, the
Company has included CIAC in its annual taxable income since January l, 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-1g-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 assets. 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 Company states it has conducted a study that shows its existing rates for water
service will generate sufficient revenue from customers in a new development to cover the
Company's ClAC-related tax expenses from that development.2 The Company thus proposes 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 ClAC-related taxes. The Company states its
proposal ensures development will pay for the additional costs it imposes, and existing customers
will not subsidize the development through rate increases.
The Company proposes to cease grossing-up contributed property on the effective date of
the final order in this case. CIAC would become taxable upon transfer of ownership to the
Company. The Company would refund the tax gross-up 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 gross-up payment.
2 See DirectTestimony of Cathy Cooper at 5-7.
STAFF COMMENTS 2 SEPTEMBER 15,2020
STAFF REVIEW AND ANALYSIS
Staff has reviewed the Company's Application and the direct testimony of Company
witnesses Jarmila Cary and Cathy Cooper. Based on its review, Staff supports the request to
cease collection of state and federal income taxes associated with the taxability of CIAC and
revise the Company's tariffs. Under the Company's proposal, the additional growth on the
Company's system will pay for itself and generate additional revenue which will benefit all
customers, while spreading costs over alarger customer base.
The collection of federal and state income tax associated with the taxability of CIAC has
a negative impact for SUEZ customers because it has become a barrier to growth. This
collection of the tax gross-up is driving large developers to seek alternatives for water service.
This includes seeking service from municipalities or setting up a new water system to serve the
development. Because the taxability of CIAC does not apply to publicly-owned municipal water
providers, the Company is at a competitive disadvantage in attracting growth to its service
territory.
High upfront costs appeared to be a concern even prior to the CIAC gross-up tax being
paid by developers. The Company indicated it had received complaints regarding high overhead
and inspection fees included in main extension costs even before adding the CIAC gross-up.
Cathy Copper DI at 3. Because of these issues, Staff reviewed the Company's current water
main extension policy to better understand if the policy fits within its proposal and if there are
any identifiable issues. Staff did not identify any critical issues but plans to continue
investigating the company's main extension policy in the future.
With less development, there are fewer new customers providing additional revenue to
help cover costs. The Company asserts that new developments will bring new customers, which
benefits existing customers by creating a larger customer base to spread costs among. The
Company provided several examples where developers, cities, and schools experienced negative
impacts from the additional CIAC tax gross-up charges. The Company's analysis of developer
projects completed from January 2016 through March 2O2O demonstrates that the developer
projects generate sufficient annual revenues to cover the incremental revenue requirement to
serve these new customers and the CIAC tax obligation.
The Company asserts that the requirement for developers to fund the tax obligation for
CIAC is "ultimately detrimental to the Company's existing customers." Jarmila Cary at 10.
3STAFF COMMENTS SEPTEMBER 15,2020
Therefore, to remove barriers to future development and keep customer rates low, the Company
is proposing to adopt the "no CIAC gross-up" method. The Company would pay the taxes on the
CIAC rather than collecting the funds for the tax from developers. The income tax effect will be
recorded in the accumulated deferred income tax ("ADIT") accounts, 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 a25-year period. The Company provided revised
tariffs to reflect the change in methodology.
Based on development activity since 20L4, the associated tax obligation collected would
be between $1 and $2 million annually. This is approximately lVo of the Company's rate base
investment of $180 million. The average annual revenue from the 2016 through March 2020
developer constructions projects is higher than the incremental revenue requirement needed to
serve customers and to cover the CIAC tax gross-up amount.
Staff reviewed the Company's analysis of developer-funded construction projects and
confirms that the average annual revenue from development projects is more than sufficient to
cover the incremental operating cost of serving those customers and also the revenue
requirement of the CIAC tax gross-up amount. The proposed25-year amortization period is
consistent with the Modified Accelerated Cost Recovery System tax depreciation life for water
utilities and matches the actual tax depreciation life.
Tariff Changes and Customer Comments
Staff has reviewed the proposed tariff changes. Staff believes that the changes clearly
convey the intent of the Application, by removing all references to the gross-up for income tax.
As of Monday, September 14,2020,23 public comments have been received, all in
support of eliminating the tax gross-up on CIAC. While the majority of the comments are from
developers, there is also a letter from24 homeowners in a community that is considering SUEZ
for its water. In addition, the Independent School District of Boise also supports the request by
SUEZ to eliminate the tax gross-up on CIAC. The Building Contractors Association of
STAI]F COMMENTS SEPTEMBER 15,20204
Southwestern Idaho, Inc. on behalf of the over 400 member companies sums up the concerns of
all the public comments when it states, "Eliminating the fee will help to keep costs more
consistent regardless if the water system is owned by a private company or a government entity,
reduce the disincentive to use a private water system in new developments, and help make
housing more affordable. "
STAFF RECOMMENDATIONS
Staff recommends that the Commission approve the Suez Water Idaho's requested
change in methodology that removes the tax gross-up for state and federal income taxes
associated with all CIAC and its revision to the tariffs to reflect the change.
Respectfully submitted this lsb day of September 2020.
Hardie
Deputy Attorney General
Technical Staff: Kathy Stockton
Michael Eldred
Bentley Erdwurm
i:umisc/commentVsuzw20. I dhklsmebe comments
STAFF COMMENTS 5 SEPTEMBER 15,2020
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 15TH DAY OF SEPTEMBER 2020,
SERVED THE FOREGOING COMMENTS OF THE COMIVIISSION STAFF, IN
CASE NO. SUZ-W-20-01, BY E-MAILING A COPY THEREOF TO THE
FOLLOWING:
MICHAEL C CREAMER
PRESTON N CARTER
GTVENS PURSLEY LLP
POBOX2720
BOrSE D 83701-2720
E-MAIL: mcc @ givenspursley.com
MARSHALL THOMPSON
SUEZ WATER IDAHO INC
8284 W. VICTORY RD
BOISE ID 83709
E-MAIL: marshall.thompson@ suez.com
prestoncarter @ givenspursley.com
SECRET Y
CERTIFICATE OF SERVICE