28505.pdf

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.
CASE NO. UWI-OO-
ORDER NO. 28505
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 7.80%.
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
gaJlons per day, 77 deep wells and 24 reservoirs with storage capacity of30.7 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 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, United
ORDER NO. 28505
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 ofthirty (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 1
2000. The following parties appeared by and through their respective counsel:
United Water Idaho Inc.Dean 1. 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 of return of
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
ofthe 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 of this 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 COOJOO 1
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-97-6 (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
ORDER NO. 28505
economic alternatives. In this case testimony regarding changes in water supply and peak day
demand and evidence oftransmissionldistribution 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
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 Proposed
UWI request Adjustment
Accumulated Depreciation on Advances $134 853
Redwood Creek $472 684 ($271 506)
Spurwing $ 52 837 ($52 837)
Raintree $828 943 ($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. As
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 ofthe 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.
ORDER NO. 28505
United Water opposes the adjustment contending that the practice of charging
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 Brief p. 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 s 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.
ORDER NO. 28505
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. Staff contends that
the Redwood Creek facilities are not needed to serve the needs of customers in the Company
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 $7 371 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 A1O5-$56 127). Tr. p. 175.
The Company objects to Staffs proposed adjustment and contends that it is inappropriate
to assess Redwood Creek on a stand alone basis. Post-Hearing Briefp. 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
ORDER NO. 28505
Island Woods and should not be required to subsidize Redwood Creek investment by giving up
same. Tr. p. 630.
Findings:
The Company in this case seeks to rate base its investment in Redwood Creek. While
we find Staff s 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
Al 06)), 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 Staff s 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
ORDER NO. 28505
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 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 Briefp. 11.
Findings:
The Commission finds the Company s reasoning regarding Spurwing to be 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 Staff s
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
EM2), 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
ORDER NO. 28505
Company has incurred significant expense obligations that it did not have prior to the purchase, i.e.
billing and collection costs, meter reading costs (except four 6" meters), distribution costs, O&M
on distribution facilities, and depreciation 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 Staff s contention that its relationship with EM2 provided EM2
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 of the 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.
ORDER NO. 28505
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 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
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
RevenuelInvestment 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 - W -97 -4 Eagle
City Contract (Supplemental Water & Fire Service; Backup Water for Emergency Situations), Order
ORDER NO. 28505
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. 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
Adjusted total plant in service
Less accumulated depreciation
$174 900 704
(91 753)
$174 808 951
Per Company Exh. 34, p. 1
Less portion of Redwood Creek
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
Accumulated deferred income tax
Pre 1971 investment tax credits
850 608)
(26 908 211)
628 595
(73 443)
(6,456,432)
(19 808)
Contributions in aid of construction
Utility plant acquisition adjustment
Raintree acquisition adjustment
Add (per Company Exh. 20, p. 1)
Deferred charges
Working capital
Total Rate Base
946 112
239 324
$ 98 862 937
ORDER NO. 28505
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.
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:
Update PUC Assessment rate
($3 200)
($4 250)
$ 5 282
Depreciation on Software Project COOJO01
Depreciation on Chlorine Equipment Project COOBOO 1
The Staff has further agreed to the following proposed adjustments reflecting the use of corrected
and updated expense information:
Adjust updated purchase Power Costs
Adjust updated Employee Health Costs
Depreciation on Updated Collector #3 Project COOAO06
$102 106
($33 821)
$ 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 ~ 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-
ORDER NO. 28505
W -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 ofthe 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 service. Post-Hearing Brief
p. 15. The AFUDC rate requested by the Company is the same rate as its requested cost of capital
, 9.15%. Tr.173. (RequestedaccountingtreatmentTr.
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
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 s 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
ORDER NO. 28505
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 information to corporate
shareholders, a Securities and Exchange Commission regulation and reporting requirement. Exhibit
111 , p. 1; Tr. pp. 684, 685; Post-Hearing Brief p.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 27, 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 Brief pp. 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 fmds 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
ORDER NO. 28505
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 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
ORDER NO. 28505
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 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% ofUWI 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% of UWI rates--effective January 1 , 2000). Tr. p. 35. Staff
contends that the proposed third year rates (effective January 1 2001) better reflect the known and
measurable changes that will take effect during the first year ofthe 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 ofthis year experience a related revenue deficiency.
The Company notes that the Commission in South CountylUWI Order No. 27798 stated:
The rate phase-in is designed to permit customers to "assess their water usage, to possibly adjust
ORDER NO. 28505
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:
The Commission does have a long standing preference for historical test years. We 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
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 of
2.25% 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
206 079 that is $30 875 less than the test year actual tax of $1 236 954. Staff did not object
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.
ORDER NO. 28505
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. 11 , Col. 4, I. 4
South County Revenue
Total Revenues
$26 412 890
$ 136.118
$26 549 008
Operating Expense per Company Exh. 11 , 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 COOA 106 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
ORDER NO. 28505
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
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. 594
56.81 %
12%
43.07%
52%
00%
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;
ORDER NO. 28505
2. Use ofthe 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 of8.585%-0616%. Exh.1O8
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 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 Staff s 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 fmancial
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
ORDER NO. 28505
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 Staff s 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 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
Composite
Cost
52%
Rate of
Return
4.272%
Minority Interest
Common Equity
56.81 %
12%00%
10.60%
006%
565%43.07%
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
Net Operating Income Required
Net Operating Income Realized
Net Operating Income Deficiency
Gross-up factor
Revenue Increase required
Percent Increase
$98 862 937
843%
$ 8 742 831
$ 7 512 483
$ 1 230 348
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-00-1 pursuant to the authority and power
granted under Title 61 of the Idaho Code and the Commission s Rules of Procedure, IDAP A
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-00-
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-00-1. 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 5lL
day of September 2000.
Lf~
MARSHA H. SMITH, COMMISSIONER
ATTEST:
J?~/~
Myrna J. W ers
Commission Secretary
bls/O:uwiwOOl sw5
ORDER NO. 28505