2001719_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
GENE FADNESS
LYNN ANDERSON
RANDY LOBB
DAVE SCHUNKE
RICK STERLING
TERRI CARLOCK
BOB SMITH
TONYA CLARK
BEVERLY BARKER
WORKING FILE

FROM: SCOTT WOODBURY

DATE: JULY 19, 2001

RE: CASE NO. UWI-W-01-1 (United Water)
GOLDEN DAWN/BARBERTON
PETITION FOR INSTALLATION OF INDIVIDUAL METERS

On December 27, 2000, a Petition for Installation of Individual Water Meters was filed with the Idaho Public Utilities Commission (Commission) by nearly one-half of United Water Idaho’s (UWI; United Water; Company) customers in the Barberton/Golden Dawn (Barber) service area (previously served by Barber Water Company). As reflected in their Petition
Per UWI, we are the only individual home sites within UWI’s customer base that don’t have our own water meters. The current master meter average billing method, which replaced Barber Water’s billing, is unjustifiably high when compared to other UWI customer bills. It doesn’t give residents ability to manage/reduce their water usage to minimize financial impact. We believe these meters should have been installed prior to any change in billing calculations. Unjustifiably high master meter billing has placed unreasonable economic burdens on many senior citizens residing within our community. We wish to be responsible for managing water usage at our home sites like all other individual UWI customers. Finally, we believe master meters prevent us from giving support to PUC’s position regarding water conservation.

We request the PUC to correct the above concerns by directing UWI to install individual water meters at each of our home sites for the least possible expense to us.

On January 25, 2001, the Commission initiated a formal docket for investigating the metering request of Barberton/Golden Dawn service area customers. United Water Idaho was directed to file comments and a written reply to its customers’ concerns regarding water usage and master metering in the Barberton/Golden Dawn area, the Company’s billing of said customers since date of acquisition and the ramifications of their request for metering. The Commission directed the Company in its comments to specifically address the projected cost of providing individual meters to Barberton/Golden Dawn service area customers and proposals for cost recovery. Recognizing that only half of the Barberton/Golden Dawn customers have requested metering, the Commission also directed the Company to address the issue of selective metering and its ramifications. The Company was also to detail what efforts the Company has made to identify and curtail abusive watering practices of area customers.
On February 14, 2001, the Company responded to the Barber area customers’ Petition for Metering. Subsequent filings by both Barber area customers and the Company served to clarify the respective positions. The customers contend that their support of the acquisition was based on a Company estimate of future bills ($38/bi-monthly). That estimate unfortunately bears little resemblance to actual consumption and rates. The Company’s present bill/revenue analysis projects an annual bill to Barber customers of $410.61 ($68.43 bi-monthly). That compares to a system average of $338.69 ($56.44 bi-monthly) and the current flat rate Tariff 1E of $325.74 ($54.29 bi-monthly).
On May 14, 2001, the Commission issued a Notice of Public Workshop (May 31, 2001) and established a June 8 comment deadline. In its Notice the Commission made the following findings:
The Commission has reviewed and considered the filings of record in Case No. UWIW-01-1 including the Petition, the Company’s Response and related comments. United Water has offered several alternatives regarding the metering of Barberton/Golden Dawn customers. The Commission Staff has reviewed those options. The following is a description of each of the possible outcomes to this case together with the related pros and cons.

1. Do not install meters and leave the current billing practice in place. Currently all customers share equally the cost of water for everyone.

Pro: Billing system already in place
Some conservation incentive present

Con: Low-use customers subsidize high-use customers

2. Switch customers to United Water’s current non-contiguous Flat Rate of $54.29 bi-monthly (Tariff Schedule 1E)

Pro: Rate schedule already in place
Customers know in advance what their water bill will be
Con: No conservation incentive
Inability for customers to reduce their bill through reduced consumption

3. Install meters on all customer connections

Pro: Customers have control of their water consumption and therefore their bill.
Conservation incentive is present.
Con: Expensive. Total estimated cost is $152,508.

If meters are installed the Commission must determine a reasonable and equitable method of paying for the installation. The Commission is considering three methods:

A. Each customer pays for the cost at the time of the installation. The installation cost per customer is $652 plus a tax gross-up (1.68 times) for a total cost per customer of $1,095. The tax-gross up is applicable only in the instance of customer contributions (i.e., customer contribution advance; company investment—customer surcharge).

Pro: No impact on the other customers of the Company.
Con: The required up-front payment may create a financial hardship.

B. Each customer pays for the cost of installation through a bi-monthly surcharge on their water bill over a period of three (3) years.

Pro: No impact on the other customers of the Company.
Con: Bi-monthly cost to customers is estimated to be between $70 and $90 in addition to each customers bi-monthly water bill.

C. United Water incurs the full cost.

Pro: No up-front cost to customers
Con: Future basic water rates will be higher than they would otherwise be.

All other United Water customers subsidize the cost of installation.

The public workshop in Boise was well attended. The meeting was informational and customers had the opportunity to ask questions and express their concerns and preferences. Written comments were filed by Commission Staff and a great many of the Company’s Barberton/Golden Dawn customers. Reply comments were filed by the Company on June 22, 2001. The comments can be summarized as follows:
Staff Comments
Staff believes that master metering has failed to achieve most of the objectives hoped for at the time of United Water’s acquisition of the Barber system. Although the method has proven relatively simple and easy to implement, it has not been viewed as equitable for customers or promoted conservation. High volume users continue to be undeterred in their consumption; low volume users are facing high bills they cannot control. Low use customers will continue to subsidize high use customers, Staff states, as long as consumption is evenly allocated to all 234 customers. Staff is convinced that individual metering is the only alternative to achieve fairness and to promote conservation.
Staff opposes selective metering. Staff does not believe that selective metering will alleviate allegations of unfairness, it will not eliminate subsidization and will not promote conservation. Staff agrees with the Company that selective metering could ultimately prove more costly because of the added cost of installing meters piecemeal and the added cost in complexity of billing and meter reading.
Staff believes that the most equitable solution is to retrofit the entire system with meters on all customer service lines. Staff in its comments discusses the alternatives identified by the Commission in its Notice.
Staff notes that under normal circumstances, when new customers are served by United Water, developers of subdivisions are required to contribute to costs of all new distribution facilities including meter boxes and meter settings. Because developers recover their investments through the sale of lots, new customers indirectly pay the full cost of meter boxes and settings. Barberton/Golden Dawn customers are asking that they not be required to pay these costs. Splitting the cost of installing meters, Staff states, would recognize that Barberton/Golden Dawn customers have some responsibility to pay the costs just as other United Water customers have done, while also recognizing that most Barberton/Golden Dawn customers are not capable of paying the full cost either up-front or through a multi-year surcharge.
Staff contends that if Barberton/Golden Dawn customers do not pay the metering costs themselves the resultant subsidy is a hidden cost of purchase that was not previously considered when the system was acquired by United Water. Staff expresses some concern that similar situations could occur in the future, should for example the Company acquire Capitol Water Corporation which serves approximately 2,750 customers, of which only 200 commercial customers are metered. Because of experience gained with the acquisition of the Barber Water system, Staff believes that individual metering should be considered as a prerequisite to future acquisition by United Water of any unmetered water system. The experience with Barber Water, Staff notes, has shown that even with a relatively homogeneous group of customers, master metering can be an unacceptable alternative to providing meters for individual customers.
Staff notes that approximately 80 to 90 customers attended the public workshop held on May 31, 2001. Based on written comments received to date from 124 households, Staff’s assessment is that virtually all customers offering an opinion favor installation of meters. As expected, customers overwhelmingly desire that United Water pay for the full cost of installation and include the investment in rate base. Customers appear somewhat split on the question of whether to install meters as soon as possible or whether to pay a flat rate until meters are installed in two to three years.
As the Commission considers the metering question, Staff believes that it should be mentioned that a “collateral agreement” was entered into by the Company at the time of the Barber Water purchase. The collateral agreement was neither disclosed nor presented to the Commission. As reflected in the collateral agreement (copy attached) United Water agrees to reconvey the water storage reservoir (and the related real property on which it sits) back to David and Ann Triplett, the owners of Barber Water Company, in the event the property is no longer used and useful to United Water in the operation of the domestic water system. The reconveyance will be at no cost to Tripletts.
The apparent simultaneous/contemporaneous execution of the agreement, Staff contends, is cause for regulatory concern given the following language in the underlying purchase agreement that was presented to the Commission for its approval.
Paragraph 15(e).
This Agreement embodies the entire agreement between the parties hereto with respect to the subject matter hereof.

Staff contends that the collateral agreement can be reasonably construed as providing additional consideration for the underlying purchase agreement. Staff recommends that the Commission recognize this collateral agreement at this time and credit the value of the (soon to be) abandoned reservoir site against the cost of meter installation within the Barberton/Golden Dawn service area. Should the Commission determine that it would be appropriate to assign the value and credit that value against the cost of meter installations, Staff would recommend that the Commission hire an independent land appraiser to determine the value and that the cost of the appraisal be paid by United Water. Any discount in the meter installation costs, Staff contends, should be borne by United Water’s investors.
Staff recommends that the Commission order United Water to install meters as soon as possible. Staff recommends that the full cost of installing meters be capitalized, accrue interest and be included in rate base in the Company’s next general rate case.
Although Staff believes that the cost of installing meters should rightfully be borne by Barberton/Golden Dawn customers, Staff recognizes that the cost would be extremely burdensome to many customers whether billed up-front or as a multi-year surcharge. The demographics of this relatively small group of customers, Staff states, are far different than that of the remaining UWI customers. Staff also recognizes that these customers have unwillingly become customers of a different water company with much higher rates. Customers, Staff contends, have not noticed much difference in service, but are suddenly faced with much higher bills. If customers had not been misled about expected future water costs, Staff believes far more opposition would have been voiced when the sale to United Water was proposed. Customers, Staff states, see themselves as victims – first because of the higher rates after the sale of the system to United Water, and now because of the possibility of being required to pay for meters.
Staff recommends that the Commission discount the costs of metering by an amount equal to the appraised value of the reservoir lot to be conveyed by United Water to the Tripletts, former Barber Water Company owners.
United Water Reply
United Water accepts Staff’s ultimate recommendation (that meters be installed as soon as possible and that the full cost of installing meters be capitalized, accrue interest and be included in rate base), upon the condition that interest on the investment be permitted to accrue until the time of the next general rate case. The Company contends that Staff’s recommendation to discount the investment allowed in rate base is incorrect.
The Company disputes Staff’s assertion that rate basing of an investment in meters would be a “hidden cost of purchase” that was not previously considered. United Water, the Company notes, continually adds customers through various means and routinely makes investments to improve or repair portions of the system. These investments are routinely allowed in rates. The Commission in such instances makes no effort to distinguish between new and old customers. There is no sound reason, the Company contends, to treat customers who come onto the system through acquisition differently. Barber customers, the Company notes, have been on the system for almost a year and a half. They are no longer “new.” It makes more sense, therefore, the Company states, to view the investment in meters as a system improvement rather than a hidden cost of purchase.
United Water cautions against adoption of a blanket policy requiring metering as a part of acquisitions. If meters are so important, the Company queries, why is Capitol Water not ordered to install them now, with, of course, an adequate allowance for cost recovery? Analysis of Capitol Water’s Annual Report indicates to United Water that metering may increase Capitol Water’s rate base by as much as 1.5 times its current level. Having said that, United Water concurs with Staff’s final conclusion that each case will need to be examined on a case by case basis, leaving open the possibility that it may be in the best interest of all to permit some level of subsidy by all customers on the system.
The Company notes that of the written ballots submitted by Barber customers at the workshop, of 127 responses received, 64 customers (50%) support a flat rate first, then meters, while only 46 customers (36%) support meters now.
United Water notes that its acquisition of Barber Water was approved by the Commission only after full public notice and opportunity for comment. While customers may not have noticed much difference in service, United Water contends that customers are receiving better service than before. The water served is now safe and clean, as was not the case before. The water is provided at constant pressures, as was not the case before. Customers have access to a customer service department on a 40 hour per week basis, as was not the case before. United Water provides emergency repair service 24 hours per day, 7 days per week, as was not the case before. Customers have access to free conservation programs, kits and information, as was not the case before. The system is integrated into United Water’s telemetering and monitoring apparatus, as was not the case before.
United Water contends that it did not intentionally, or otherwise, mislead customers about expected future costs. Because the system was previously unmetered United Water did not have any ability to predict likely bills at the time of acquisition.
Regarding Staff’s recommendation for metering, the Company states that if the Commission believes interest accrual is not appropriate, then the Company recommends the option of a flat rate until such time as the Company receives approval in its next general rate filing. United Water would commit to install meters before the conclusion of that case with the understanding that the investment would be included in rates.
If United Water were required to state a preference between the two options, this would be United Water’s choice. Under the “meters now” option, the Company would be forced to defer already budgeted capital projects to free up funds for this project. Flat rates now with meters later would be the least cost option as it would not involve accruing interest. The Company recognizes that this option does not provide an immediate metering solution. Accordingly, the Company is guided by the judgment of the Commission.
Regarding Staff’s comments with respect to the “collateral agreement,” United Water states that it is appropriate to keep in mind certain principles of utility law and accounting. First, it is well settled in Idaho that the gain or loss on non-depreciable property (land) is assigned to the utility’s shareholders. Reference Boise Water Corp. v. IPUC, 99 Idaho 158 (1978). Second, for ratemaking purposes land is normally carried on the utility’s books at its original cost, not its fair market value. Third, when land is retired because it is no longer used and useful, its cost is removed from the company books and rate base and becomes, in effect, property of the shareholders. Finally, if the utility is not afforded sufficient compensation for use of its property in the public service, the state has confiscated the property without paying just compensation in violation of the Fifth Amendment of the U.S. Constitution. See Capitol Water Company v. IPUC, 44 Idaho 1 (1926).
With this background in mind, the Company states it can be seen that the collateral agreement was appropriate, that it did not need Commission approval and there was thus no requirement that it be submitted to the Commission.
As established by the Affidavit of Jeremiah Healy, the book value of the land in question on United Water’s books is $1,188. United Water has obtained a preliminary estimate from Owyhee Construction of the cost to demolish and remove the reservoir and regrade the property to useable condition. Owyhee estimates this work would likely cost approximately $23,000. The land (1.660 acres) is not platted and subdivided and does not have utility service. By Affidavit of Daniel Brown, the Company notes that the Barber reservoir and land would never have been used to serve the long term needs of Harris Ranch and eventual acquisition of another reservoir site would have been necessary even if United Water still owned the Barber reservoir.
Staff’s remedy, the Company contends, is confiscatory on its face. The correct remedy, the Company states is not to confiscate part of United Water’s investment on the unrelated issue of meter installation, as Staff proposes, but to disallow the investment in the new reservoir at such time the Company requests its inclusion in rates on the grounds, if it could be proven in a contested evidentiary procedure, that the investment was not necessary or needed.
The Company reminds the Commission that under the Harris Ranch Backbone Plant Agreement, the developers advanced the cost of the reservoir site and United Water later makes refunds as revenue producing customers are connected, thus insulating existing customers from risk. It will be some time in the future, the Company speculates, before any portion of this investment starts to appear in rate base.
At the time United Water’s Application to purchase Barber Water was pending before the Commission, the Company states the circumstances were this: the property had an original cost value of $1,188 and was subsequently recorded at that value on United Water’s books. If the property is eventually retired, United Water states that it would be shareholder property of de minimis value. The Company did not know when it would acquire a substitute reservoir site, much less at what price or on what conditions. Consequently, the Company maintains that there was nothing to disclose that could have any bearing on the Commission’s decision on whether to approve the purchase price for the acquisition of the Barber system. Accordingly, United Water recommends that the Commission reject Staff’s recommendation to confiscate a portion of United Water’s investment in meter installation.
COMMISSION DECISION
Barberton/Golden Dawn customers have requested metering. Should customers be metered? Should customers be metered now or later? Should customers be made to pay for the cost of metering (up-front or over time) or should the cost of metering be rate based? If now and if investment is to be rate based, is it appropriate that interest accrue on Company investment until rate based? If later and if investment is to be rate based, is it appropriate that a flat rate be instituted until meters are installed? Should any adjustment to the metering cost be made as a result of the “collateral agreement”?

Scott D. Woodbury

bls/M:uwiw0101_sw3

DECISION MEMORANDUM 10