20071130Comments.pdf

SCOTT WOODBU~Y
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895
r:.L",.~
2: 53
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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 )
)
CASE NO. UWI-W-07-5
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilties Commission, by and through its
Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of
Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on
October 10,2007, submits the following comments.
BACKGROUND
On September 28,2007, United Water Idaho Inc. (United Water; Company) fied an
Application with the Idaho Public Utilties 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 ofa non-contiguous water
system presently serving Danskin Ridge, Saddle Ridge and Iron Horse Subdivisions (Danskin-Saddle
Ridge system). Reference Case No. UWI-W-00-2, Order No. 28377 (May 16,2000).
STAFF COMMENTS 1 NOVEMBER 30, 2007
Pursuat to the Purchase and Sale Agreement fied with the Commission, the purchase price for
the Danskin-Saddle Ridge system is $375,000. United Water estimates that the net gain at closing will
be approximately $212,255. Kuna has agreed to assume the Company's outstanding obligations under
the Non-Contiguous Agreement and Main Line Extension Agreements with other third paries and to
hold United Water harless from fuher 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's 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.
United Water recommends proposedjoumal entries to account for the sale. The Company
fuher 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
. Approvingthe 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 wil have no fuher 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 Main Line Extension Agreements, United Water wil
have no fuher 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 Applicatiort 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,
proposed journal entries, a notice to customers, and the supporting direct testimony of Gregory P.
Wyatt, Vice President and General Manager of United Water Idaho.
STAFF COMMENTS 2 NOVEMBER 30, 2007
ANALYSIS
Staff has reviewed United Water's Application requesting approval to sell its non-contiguous
Danskin-Saddle Ridge water system to the City of Kuna. Staff supports this sale and recognizes
Kuna's ability to provide adequate water service at a reasonable price. The $375,000 purchase price
for the system was the culmination of an ars length negotiation between UWI and the City of Kuna.
Staffs comments primarily address the Company's proposed treatment of the gain associated with this
sale.
The Danskin-Saddle Ridge system was established in 1999 through a Residential or Multiple
Family Housing Non-contiguous Water System Agreement (Non-contiguous Agreement) between
UWI and the developers. The Commission approved the Non-contiguous Agreement in Case No.
UWI-W-00-2 (Order No. 28377 dated May 16,2000). The Commission found that the submitted Non-
contiguous Agreement with the owner/developer of Danskin Ridge and Saddle Ridge Subdivisions and
UWI to be acceptable with certain clarifications. Those clarifications included that the developer was
to pay for any additional well and related equipment required and necessary to serve customers within
Danskin Ridge and Saddle Ridge Subdivisions and that the reimbursement period be limited to 15
years.
The distribution system and water source was contributed to UWI as par ofthat Non-
contiguous Agreement. UWI booked the system value to plant in service for rate base treatment with
two contra balances. The first contra balance that reduces rate base is for the value of the distribution
system (mains, services and hydrants) and is entitled contributions in aid of constrction. The second
contra balance that reduces rate base is for the source supply (wells) and is entitled advances in aid of
construction.
In accordance with the Non-contiguous Agreement, UWI reimburses the developers at a rate of
$800 per lot once a customer connects to the system and begins taking service. The reimbursement
rate was established in Case No. UWI-W-98-1, Order No. 27718, as the average embedded per
customer cost of supply improvements within UWI's entire Idaho service area. The total
reimbursement amount is limited to the lesser of the total number of connected lots or the total advance
in aid of construction. Reimbursements are also limited to a maximum of 15 years.
The reimbursement described above reduces the amount originally recorded to advances in aid
of construction and as a result increases UWI's depreciable rate base. At the same time, UWI's rate
base is increased by its cost to install meters when a customer connects to the system. UWI's rate base
STAFF COMMENTS 3 NOVEMBER 30, 2007
also increased by $28,865 when it provided auxiliary power to the system and by $39,160 when it
studied the need and possible method for uranium mitigation at the site. These costs (approximately
$70,000) were not paid by the developer.
In 2006, Danskin-Saddle Ridge customers paying standard UWI rates each contributed
approximately $260 per year per customer. The 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 of34). Therefore, the revenue from customers required to support the reimbursements to
developers for the Danskin-Saddle Ridge system is approximately 29% higher than the average
revenue provided by Danskin-Saddle Ridge customers. The $800 reimbursement was appropriately
paid based upon the rules and regulations in place at the time the Non-contiguous Agreement was
executed, but the revenue comparison indicates that the Danskin-Saddle Ridge system has not provided
sufficient revenue to support the Company's investment.
The Danskin-Saddle Ridge system is included in UWI's curent rate calculation for all
customers ofUWI. Two general rate cases have occured since the approval of the Danskin-Saddle
Ridge non-contiguous water system. UWI does not curently have a general rate case proceeding
before the Commission.
The Company has argued the transaction should be treated as a liquidation of a stand-alone
water system and as such, the shareholders are entitled to the gain/profit/risk premium in the sale.
While it is true that Danskin-Saddle Ridge is a non-contiguous system, the Company is not liquidating
itself as a whole. The Danskin-Saddle Ridge non-contiguous system is not a legal entity separate from
UWI. Further, the assets and expenses associated with Danskin-Saddle Ridge are par of the rates
charged to all customers ofUWI, not a separate entity. As noted previously, the rules and regulations
for establishing such non-contiguous systems are based on averaged costs and revenues of the United
Water Idaho system as a whole.
Staff considered three methods to treat the gain associated with the sale of its Danskin-Saddle
Ridge non-contiguous system to the City ofKuna. The first methodology treats the gain as regulated
revenue to be passed through to customers during the Company's next general rate case and is Staff s
recommended treatment. The second methodology records the gain from the sale as an offset
(reduction) to UWI's regulated Plant in Service. The third methodology allocates the gain from the
sale ofUWI's depreciable assets between UWI's shareholders and ratepayers.
The first methodology, Staffs recommendation, 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
STAFF COMMENTS 4 NOVEMBER 30, 2007
most recent sale of a UWI non-contiguous system (Cariage Hil). The sale of Cariage Hil was the
subject of Commission Order No. 29625 dated November 9, 2004 in Case No. UWI-W-04-03. In that
case, the Commission found that:
Both Staff and the Company present proposals for the allocation of the sale proceeds.
While other allocation methods have merit, we find the Company's proposal to simply
unwind the financial obligations to be reasonable. In so doing, we find it unecessary
to address the legal and property right arguments advanced by Staff and the
Company.... We fuher find it reasonable and direct United Water to book the $28,138
amount originally proposed as a risk premium distributed to United Waterworks as
regulated revenue to be passed through to customers in the Company's upcoming
general rate case. With such accounting, we find that the Company's remaining
customers are held harmless.
The risk premium referenced in Order No. 29625 was an amount proposed by UWI to be paid
to its parent, United Waterworks (UWW), above and beyond the satisfaction ofUWW's loan to the
developers of the non-contiguous system being sold. In Greg Wyatt's UWI-W-04-03 testimony this
risk premium was also referred to as profit in the sales price of the system. Similarly, if the Danskin-
Saddle Ridge transaction is simply unwound then the profit/gain in the sale price should be treated as
regulated revenue in the Company's next general rate case. As the Company does not.have a curent
general rate case before the Commission, 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 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 curently does in order for the
system to be "self-supporting". and ear UWI's overall authorized rate of retur. According to UWI,
the Danskin-Saddle Ridge system is currently earing approximately 3% return on rate base. This is
well below the 8.357% return authorized in Case No. UWI-W-04-4, Order No. 29838, page 28 and the
approved settlement in Case No. UWI-W-06-2, Order No. 30104.
The second methodology 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,
STAFF COMMENTS 5 NOVEMBER 30, 2007
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 harless by reducing UWI's
regulated Plant in Service by offsetting capitalized water rights in the amount of the gain from this sale
(estimated at $212,255 according to the Company's Exhibit C). This treatment recognizes that
resolution of certain water rights issues between the paries 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 1 1 % 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 $76,673) by the Net Company Investment
attributable to land ($ 1 2,490). Under this methodology the "ratepayer" gain would be credited to
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. AVU-E-99-6 and PAC-E-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 refuded. 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 otherwse. In determining how the gain is to be shared, it is
STAFF COMMENTS 6 NOVEMBER 30, 2007
reasonable to consider who has borne the financial burdens and risks. This methodology does not do
that and is therefore inappropriate.
RECOMMENDATIONS
Staff does not object to the sale of the Danskin-Saddle Ridge water system to the City of Kuna.
However, Staff recommends that the gain from that sale be accounted for as discussed in this
document.
Staff recommends that the gain be credited to ratepayers by treating the gain on the sale as
regulated revenue that is deferred and amortized over a three-year period. As discussed in Staffs
comments, treating the gain on the sale as regulated revenue is consistent with the Commission's most
recent order relating to the sale of a non-contiguous water system (Order No. 29625 dated November
9,2004 in Case No. UWI-W-04-03).
Staffrecoimends that UWI be required to fie (1) a copy of the Closing Documents and (2) a
copy of the accounting entries with this Commission within seven days from the completion of the
sale.
Staff recommends that the final disposition of the sale be audited as part of UWI' s next general
rate case as the sale has not closed at the date of these comments and it is expected that the actual gain
on the sale wil differ from that estimated in the Company's original Application.
Staff recommends that UWI, in its next rate fiing, ensure that all components associated with
this sale are excluded from that fiing including but not limited to: rate base components including
overheads and expenses such as legal expenses.
Respectfully submitted this ?:"" day of November 2007.
~
Technical Staff: Patricia Hars
i/umisc/comments/uwiw07.5swph
STAFF COMMENTS 7 NOVEMBER 30, 2007
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 30TH DAY OF NOVEMBER 2007,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. UWI-W-07-05, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO THE
FOLLOWING:
GREGORYP. WYATT
UNITED WATER IDAHO INC
PO BOX 190420
BOISE ID 83719-0420
DEAN J MILLER ESQ
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
Jorl~SECRETARY ~
CERTIFICATE OF SERVICE