2000605_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS
RON LAW
LOUANN WESTERFIELD
STEPHANIE MILLER
TONYA CLARK
DON HOWELL
BEV BARKER
BOB SMITH
MARGE MAXWELL
RANDY LOBB
WORKING FILE

FROM: SCOTT WOODBURY

DATE: JUNE 5, 2000

RE: CASE NO. UWI-W-00-3 (United Water)
AGREEMENT FOR PURCHASE AND SALE
M&M MOUNTAIN VIEW ACRES SUBDIVISION WATER COMPANY, INC.

On March 31, 2000, an Application in Case No. UWI-W-00-03 was filed with the Idaho Public Utilities Commission (Commission) by United Water Idaho Inc. (United Water) for an Order approving the purchase by United Water of water service properties owned by M&M Mountain View Acres Subdivision Water Company, Inc. (M&M). Reference Idaho Code § 61-526; Commission Rules of Procedure, IDAPA 31.01.01.112. The purchase price is $20,800. United Water further requests approval of certain rate and ratemaking matters including the right of United to include in rate base and future rate proceedings the full purchase price of the assets and related acquisition costs (legal expense) in the amount of $2500.
United Water provides water service to approximately 65,000 customers within the Idaho counties of Ada and Canyon and operates under Certificate of Public Convenience and Necessity No. 143 (as Amended). M&M provides potable water service to approximately twenty-four (24) residential customers within the M&M Mountain View Acres Subdivision in Nampa, Canyon County, Idaho. M&M is a non--profit Idaho corporation whose members also comprise the Company’s customer base.
The $20,800 purchase price will be applied against an existing M&M indebtedness in the approximate amount of $32,670 to the Idaho Department of Water Resources, leaving an unpaid loan balance of approximately $11,870 which will be paid by M&M out of cash reserves.
As represented in the Application, the M&M water distribution system is unmetered. The current monthly rate is $28.50. United proposes to provide unmetered service pursuant to tariff Schedule 1-E, presently a flat bi-monthly charge of $50.36. In all other respects, United Water will provide service in accordance with the rules and regulations applicable to its service territory. Revenue collected from M&M’s customers based on the proposed rate, the Company contends, will be such that United Water’s current customers will not be burdened by the purchase of M&M’s assets.
As represented, the current owners of M&M desire to convey the M&M domestic water system to United Water because increasingly complex regulatory requirements make it difficult or impossible for the M&M Homeowners Association to operate this system. None of the homeowners are qualified to receive required operator certificates. None of the homeowners have the necessary training or experience to comply with the EPA Information Reporting Rule. None of the homeowners have the necessary training or experience to perform the testing requirements of the federal Safe Drinking Water Act.
Included in the Company’s Application is a map and legal description of the proposed boundary expansion including the underlying Agreement for Purchase and Sale and a copy of the proposed applicable Schedule 1-E Flat Rate Service Tariff. United Water contends that the requested expansion of its Certificate No. 143 and service territory is consistent with the public convenience and necessity. United Water contends that public interest does not require a hearing to consider the issues presented. The Company requests that the Application be processed under Modified Procedure.
Commission Notices of Application and Modified Procedure in Case No. UWI-W-00-3 were issued on April 17, 2000. The deadline for filing written comments was May 4, 2000. The Commission Staff was the only party to file comments (attached). Reply comments were filed by the Company on May 30, 2000 (attached).
At the request of Staff, United Water provided consumption data for the M&M system which has been operated by the Company’s unregulated affiliate through a service contract. The total annual system consumption was 2,225 ccf and 2,259 ccf for 1998 and 1999, respectively. Staff calculates the average consumption to be approximately 93 ccf per customer per year. For comparison purposes, the average UWI residential customer consumption is reportedly about 209 ccf per year. Staff notes that the tariff Schedule No. 1E bi-monthly charge was established based on average consumption of United Water residential customers.
Staff performed a series of financial analyses to evaluate the proposed purchase. Staff determined that the acquisition as proposed by United Water does not generate sufficient revenue to meet the Company’s authorized rate of return. Based on its analysis, Staff concludes that, under proposed rates, a subsidy is required of existing United Water customers for Company investment (purchase price, acquisition costs, and distribution system modification costs) in M&M in excess of $20,650. Staff recommends that investment in excess of $20,650 be borne by Company shareholders.
In reply comments, the Company submits an amendment to the agreement for purchase and sale reducing the purchase price from $20,800 to $20,650. The Company reiterates its request that it be permitted to also recover $2,500 in related acquisition costs (attorney fees, etc.). Recovery of this amount is justified, the Company asserts, because the purchase serves public policy—i.e., it trends towards consolidation and avoids the proliferation of small water systems, which lack the expertise and resources to provide safe and reliable water service. In the absence of cost recovery United Water states that the Company will not earn its permitted return on investment.
Staff notes that the Company in a previous 1996 filing (Case No. UWI-W-96-2) regarding M&M indicated an estimated cost of $14,400 to repair and modify the distribution system (e.g., install shut-off valves, control valves and blow-out assemblies). The repairs were identified as necessary to allow for system repairs, line flushing and system disinfection. In this Application the Company proposes no additional system repairs or modifications. Based on four years of operation history by United Water operations (previously EM2) the Company states that the required investment previously identified by the Company ($14,400) is no longer needed or essential.
Staff also notes that additional investment may be required to install disinfection equipment. The Company notes that the EPA ruling on groundwater disinfection is not due until May 2002 and implementation is not likely until well into the year 2004. The Company states that it has no current plans to install chlorination or disinfection equipment.
Commission Decision
• Does the Commission continue to find Modified Procedure to be appropriate in Case No. UWI-W-00-3?
• Does the Commission find it reasonable to approve purchase of the M&M Water Company under the terms proposed, i.e., $20,650? $20,650 is the maximum investment that will cashflow under proposed rates and provide the Company with its authorized rate of return (currently 9.12%).
• Does the Commission find it reasonable to approve an acquisition premium of $2,500. If the $2,500 is included with the $20,650 purchase price, the rate of return is 7.74%, well below the authorized 9.12%.
• What are the Commission’s thoughts regarding future investment required for disinfection equipment? If the developer is not responsible for this cost, then it is a cost that will be borne by the Company’s other customers. (In the Barber Water case the Company estimated $5,000 for well inspection and disinfection equipment.)
• Does the Commission find that the Company’s affiliate operational history provides a sufficient basis for dispensing with the previously identified and required system repairs or modifications ($14,400)?
• Does the Commission find service to M&M customers under the proposed flat tariff (Schedule No. 1E, Unmetered Service), presently a bi-monthly charge of $50.36, to be reasonable?

Scott D. Woodbury
Deputy Attorney General

bls/M:uwiw003_sw2

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