20071227final_order_no_30481.pdf

Office of the Secretary
Service Date
December 27, 2007
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO INc. FOR AN
AMENDMENT TO ITS CERTIFICATE OF
PUBLIC CONVENIENCE AND NECESSITY
NO. 143 AND FOR AN ACCOUNTING
ORDER
ORDER NO. 30481
CASE NO. UWI-07-
On September 28 2007, United Water Idaho Inc. (United Water; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) requesting approval of a
July 26 2007 Purchase and Sale Agreement (Agreement) between United Water and the City of
Kuna. The subject matter of the Agreement is the sale by United Water to the City of a non-
contiguous water system presently serving Danskin Ridge, Saddle Ridge and Iron Horse
Subdivisions. Reference Case No. UWI-00-, Order No. 28377 (May 15, 2000).
December 14, 2007, a Settlement Stipulation between the Company and Commission Staff was
filed with the Commission with a compromise recommendation for the accounting treatment of
the sale proceeds. The Commission in this Order approves the sale and the recommended
accounting treatment.
Pursuant to Agreement, the purchase price is $375 000. United Water estimates that
the net proceeds at closing will be approximately $212 255. Kuna has agreed to assume the
Company s outstanding ohligations under the Non-Contiguous Agreement and Mainline
Extension Agreements with other third parties and to hold United Water harmless from further
obligations thereunder.
United Water contends that acquisition of the Danskin-Saddle Ridge system by Kuna
is consistent with the public convenience and necessity because the customers will obtain water
service from a dependable municipal supplier (Kuna) at rates that are lower than United Water
rates. In addition, when Kuna connects the Danskin-Saddle Ridge system with its existing
municipal system, the customers will experience improved redundancy for both domestic and
fire protection flows.
ORDER NO. 30481
United Water recommends proposed journal entries to account for the sale proceeds.
The Company further requests a determination that gain or profit associated with the transfer is
the property of United Water and that its customers do not have an interest therein.
United Water requests a Commission Order
Approving the modification of United Water s Certificate of Public
Convenience and Necessity No. 143 by eliminating the Danskin-Saddle
Ridge system therefrom;
Confirming that after the date of closing of the purchase and sale
transaction, United Water will have no further obligation to provide
domestic water service to the Danskin-Saddle Ridge system customers;
Confirming that following the assumption by Kuna of the Non-
Contiguous Agreement and the Mainline Extension Agreements, United
Water will have no further obligations thereunder;
Approving the Company s accounting proposal and determining that gain
arising from the transfer is the property of United Water.
The Company s Application in this case includes a map of the Danskin-Saddle Ridge
water system, a copy of the Agreement for Purchase and Sale between the Company and the City
of Kuna, and the supporting direct testimony of Gregory P. Wyatt, Vice President and General
Manager of United Water Idaho.
On October 10, 2007, the Commission issued a Notice of Application and Modified
Procedure in Case No. UWI-07-05. The deadline for filing written comments was November
2007. Comments were filed by the City of Kuna and Commission Staff.
Comments City of Kuna
The City of Kuna supports the purchase and is anxious to finalize the transaction
before year-end. The City states that additional water rights and water supply provided by the
system is critical in enabling the City of Kuna to meet the demands of growth.
Comments Commission Staff
The Commission Staff in its filed comments supports the sale but recommends a
different treatment of the associated gain. United Water, Staff notes, has argued that the
transaction be treated as a liquidation of a stand-alone water system, and as such, the Company
contends that the shareholders are entitled to the gain/profit/risk premium in the sale. While it is
true that the Danskin-Saddle Ridge system is non-contiguous, Staff notes that the Company is
ORDER NO. 30481
not liquidating itself as a whole. The Danskin-Saddle Ridge non-contiguous system is not a
legal entity separate from United Water. Further, the assets and expenses associated with
Danskin-Saddle Ridge are part of the rates charged to all customers of United Water, not a
separate entity. The rules and regulations establishing such non-contiguous systems are based on
average costs and revenues of United Water Idaho s system as a whole.
Staff notes that in 2006, Danskin-Saddle Ridge customers paying standard United
Water rates contributed approximately $260 per year each. Reimbursements made to the
developer are based upon an average contribution per customer of $335 as identified in the Non-
Contiguous Agreement (Exhibit C, Page 12 of 34). The revenue from customers required to
support the reimbursements to developers for Danskin-Saddle Ridge, Staff calculates, is
approximately 29% higher than the average revenue provided by Danskin-Saddle Ridge
customers. The Danskin-Saddle Ridge system, Staff concludes, has not provided sufficient
revenue to support the Company s investment. Staff further notes that $28 865 in investment
incurred by the Company to provide auxiliary power to the system and $39 160 spent when it
studied the need and possible method for uranium mitigation at the site were costs that were not
paid by the developer.
Staff considered three methods to treat the gain associated with the sale of the
Company s Danskin-Saddle Ridge non-contiguous system to the City of Kuna.The first
methodology treats the gain as regulated revenue to be passed through to customers during the
Company s next general rate case. This, as reflected in its comments, was Staffs initial
recommended treatment. The second methodology records the gain from the sale as an offset
(reduction) to United Water s regulated plant in service. As reflected in the post-comment
Stipulation filed with the Commission on December 14, it is now Staffs recommended
treatment.The third methodology allocates the gain from the sale from United Water
depreciable assets between United Water shareholders and ratepayers.
The first methodology treats the gain from this sale as regulated revenue to
be passed through to customers during the Company s next general rate case
similar to the most recent sale of a UWI non-contiguous system (Carriage
Hill). Commission Order No. 29625 dated November 9, 2004 in Case No.
UWI-04-03. . . .
Staff recommends that the gain from this sale (estimated at $212 255
according to the Company s Exhibit C) be established in a deferral account
and amortized over a period of three years. This amortization period is to
ORDER NO. 30481
reflect the average time between recent rate cases. The amortization each
year would be approximately $71 000 based upon a gain of$212 255.
In addition to treating the gain in this case similarly to that ordered in the
most recent sale of a UWI non-contiguous system, this treatment recognizes
that UWI's ratepayers also support the operations of non-contiguous systems
such as Danskin-Saddle Ridge to the degree that revenues from those
customers do not meet the revenue requirement (recovery on investment
operating expenses and taxes) demanded by that system. According -to UWI
audit responses, the Danskin-Saddle Ridge project would need to earn
approximately 45% more revenues that it currently does in order for the
system to be "self-supporting" and earn UWI's overall authorized rate of
return. According to UWI, the Danskin-Saddle Ridge system is currently
earning approximately 3% return on rate base. This is well below the
357% return authorized in Case No. UWI-04-, Order No. 29838, page
28 and the approved settlement in Case No. UWI-06-, Order No. 30104.
The second methodology, Staffs Stipulation recommendation, records the
entire gain from the sale as an offset (reduction) to UWI's regulated Plant in
Service in the Company s next general rate case. Similar to the first
methodology, this accounting holds the Company s remaining customers
after the sale harmless by treating the gain as a reinvestment in the system.
In this methodology customers are held harmless by reducing UWI's
regulated Plant in Service by offsetting capitalized water rights in the amount
ofthe gain from this sale (estimated at $212 255 according to the Company
Exhibit C). This treatment recognizes that resolution of certain water rights
issues between the parties was a consideration in agreeing to the sale. The
reduction in return due to the reduced rate base produces the benefit to
customers. In the first year this reduced revenue requirement would be
approximately $30 000.
The third methodology considered develops ratios where the depreciated
portion of the depreciable asset is allocated to the ratepayers and the
undepreciated portion of the asset is allocated to UWI shareholders. Under
this methodology, the ratepayers' share of the gain , at a minimum, should be
equal to the ratio that accumulated depreciation is to the net book value of the
system s depreciable assets. That ratio is represented as below.
Accumulated Depreciation
Net Book Value of Depreciable Assets
$ 14,265
$135 255
Thus, as a minimum, the ratepayers should be entitled to 11 % of the gain
after UWI is first made whole or approximately $23 000 based upon Exhibit
C of its Application. Staff has reduced Exhibit C's Net Company Investment
($71 072 and $76 673) by the Net Company Investment attributable to land
($12,490). Under this methodology the "ratepayer" gain would be credited to
ORDER NO. 30481
Account 253.xx Other Deferred Credits - Danskin sale gain. The
unamortized amount in this account would be deducted from rate base
thereby reducing rate base by the gain amount. Should the Commission
adopt this methodology, Staff recommends a three-year amortization period.
This amortization period is to reflect the average time between recent rate
cases. The amortization each year would be approximately $7 500. This
methodology is similar to that used for disposition of the gain on the sale of
the Centralia steam generating plant in Case Nos. A VU-99-6 and P AC-
99-2 (Order Nos. 28297 and 28296).
This methodology evaluates only the proceeds associated with rate base
investment that UWI has made and that is being depreciated. This
methodology ignores the contributions and advances associated with the
system. Originally, a majority of the Danskin-Saddle Ridge water system
was contributed and only became rate based as advances were refunded. In
this case a majority of the assets were contributed as opposed to entirely rate
based. UWI made no investment as to contributed amounts and only
minimal investment otherwise. In determining how the gain is to be shared
it is reasonable to consider who has borne the financial burdens and risks.
This methodology does not do that and is therefore inappropriate.
Settlement Stipulation
On December 14, 2007, a Settlement Stipulation was filed with the Commission. In
the Stipulation the Company agrees that gain from the sale be treated in the general manner
described by Staff as treatment option 2. The Settlement Stipulation represents a compromise of
the positions of both parties.
Pursuant to Stipulation, the following accounting treatment of the sale proceeds is
proposed:
The actual net proceeds, after elimination of all associated utility plant in
service, associated accumulated depreciation, construction work
progress, advances, contributions associated amortization of
contributions, closing expenses including legal expenses, and all
associated transaction expenses, to be recorded as an "other deferred
credit" liability on the Company s balance sheet in account 253., titled
Deferred Regulatory Liability.
The deferred credit would then be amortized, or written off, over 36
months (3 years) beginning with the month of the sale closing, with the
offsetting credit recorded to income statement account 421.
Miscellaneous Non-Utility Income.
ORDER NO. 30481
The unamortized balance remaining in the deferred regulatory liability
account would be recognized as a deduction from rate base in any
subsequent general rate case.
Staff and United Water believe that the Stipulation accounting treatment results in an
equitable sharing between shareholders and ratepayers in the sale proceeds by providing that a
portion of the proceeds will be recognized as below the line income to United Water and a
portion of the proceeds will be recognized as a reduction from rate base in United Water s next
general rate case.
Commission Findings
The Commission has reviewed the filings of record in Case No. UWI-07-
including the July 26, 2007 Purchase and Sale Agreement between United Water and the City of
Kuna, the supporting testimony of Company witness Greg Wyatt, the filed comments and
recommendations of Commission Staff and the subsequent Settlement Stipulation between
United Water and Commission Staff. Based on our review of the record, the Commission
continues to find it reasonable to process the Company s Application in Case No. UWI-07-
pursuant to Modified Procedure. IDAP A 31.01.01.204.
The Commission finds the terms of the July 26, 2007 Purchase and Sale Agreement
between United Water and the City of Kuna including the purchase price of $375 000 to be fair
just and reasonable and in the public interest. The City of Kuna, we note, has annexed certain
lands that surround the Danskin-Saddle Ridge system, significantly limiting United Water
ability to expand its system in that area. Consummation of the sale and transfer of the Danskin-
Saddle Ridge water system to the City of Kuna we find will result in lower rates and improved
system redundancy for affected customers. It will also result in tangible supply benefits to the
City's municipal water system and aid the City in its ability to meet the demands of growth. We
find it reasonable to approve the sale and the amendment of the Company s Certificate of Public
Convenience and Necessity No. 143 to eliminate the Danskin-Saddle Ridge and Iron Horse
Subdivisions therefrom. The Company is directed to submit an amended Certificate reflecting
this change.
The Commission acknowledges that after the date of closing of the purchase and sale
transaction between United Water and the City of Kuna, United Water will have no further
obligation to provide domestic water service to the Danskin-Saddle Ridge and Iron Horse
ORDER NO. 30481
Subdivisions. We further acknowledge that, following the assumption by Kuna of the Non-
Contiguous Agreement and the Mainline Extension Agreements, United Water will have no
further obligations thereunder.
The Commission further finds it reasonable to approve the stated Settlement
Stipulation accounting treatment of sale proceeds and determines the accounting treatment to be
fair, just and reasonable. In determining the reasonableness of the proposal we considered the
estimated dollar amount of the net proceeds ($212 255), the present accounting treatment of the
non-contiguous system and the proposed alternative accounting treatments.We make no
findings regarding the appropriateness of the approved accounting treatment for future sales by
United Water of its other non-contiguous water systems. Our decision in those cases will be
based on the developed record and facts.
Recognizing that the sale of the Company s non-contiguous system to Kuna has not
yet closed, the Commission expects that the actual gain on the sale will differ from that
estimated in the Company s original Application. The Company is directed to file a copy of the
closing documents and a copy of the accounting entries with this Commission within seven days
from the completion of the sale. It is also expected that the Company in its next rate case filing
will ensure that all components associated with the sale are excluded from that filing including
but not limited to rate base components including overheads and expenses such as legal
expenses.
ORDER
In consideration of the foregoing and as more particularly described and qualified
above, IT IS HEREBY ORDERED and the Commission does hereby approve the sale by United
Water to the City of Kuna of the non-contiguous water system presently serving the Danskin-
Saddle Ridge and Iron Horse Subdivisions pursuant to the terms set forth in the July 26, 2007
Purchase and Sale Agreement between United Water and the City of Kuna. The Company is
directed to file an amended Certificate No. 143 reflecting this change in service area.
IT IS FURTHER ORDERED and the Commission does hereby approve the
Settlement Stipulation filed with the Commission on December 14 2007 between United Water
and Commission Staff as pertains to the July 26, 2007 Purchase and Sale Agreement and the
accounting for and distribution of related sale proceeds.
ORDER NO. 30481
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. 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 ;;L
1f.o..
day of December 2007.
\3l~
MACK A. REDFORD, PRESIDENT
J~ ~~
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Je / D. Jewel
~mission Secretary
bls/O:UWI-07-05 sw
ORDER NO. 30481