20080506Statement of Position.pdf

,j ORIGINAL..
Dean 1. Miler ISB #1968
McDEVIT & MILLER LLP
420 West Banock Street
P.O. Box 2564-83701
Boise, il 83702
Tel: [phone]
Fax: [phone]
joe (gmcdevitt-miller.com
RECEIVED
08 MAY -6 AM iO: 53
IDAHO tJUbLl'~
UTiLITIES COMMIŠSION
Attorneys for United Water IdaM Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMSSION
McKAY CONSTRUCTION CO., INC.,
COMPLAINANT
and
SCHMIDT CONSTRUCTION CO., INC.,
COMPLAINAN
Cas No. UWI-W-08-01
STATEMENT OF POSITION
vs.
UNITED WATER IDAHO INC.
RESPONDENT
Introduction
As explained in more detail below, developers of residential subdivisions within United
Water Idaho's ("United Water" or "Company") service area are permtted to choose contractors
for the installation of water facilties from a list of pre-qualified contractors maintained by
United Waterl. In January of 2008, United Water, believing that a list of ten contractors was
adequate and that addition of more contractors would unnecessarily increase costs, determned to
cap the number of pre-approved contractors at ten (10). In November and December of 2007
Schmidt Construction Co., Inc., ("Schmidt") and McKay Construction Inc., ("McKay")
i The short-hand description ofthis program is "labor in lieu of cash" because developers are permitted to provide
their chosen contractor to perform mainline instalations, rather than paying United Water to install the facilities.
STATEMENT OF POSITION-l
submitted applications to be included on the pre-approved contractors list. Because the number
of approved contractors had reached ten, Schmidt and McKay were notified on February 1, 2008,
that they would not be included on the approved contractor list. Also, in late 2007 four other
contractors submitted applications. They, too, were notified that United Water would not add
additional contractors for the year 2008.
Schmidt and McKay have filed "formal complaints" with the Commssion.
In this Statement of Position, United Water explains that, in the exercise of its business
judgment, it decided to cap the number of approved contractors at ten in order to constrain the
cost of administering the labor in lieu program.
Background
For many years United Water, with Commssion approval, employed a single contractor,
Owyhee Construction Inc., to install water facilities in residential subdivisions. The rationale for
permtting a single provider was tied to the method by which construction of facilities in
residential subdivisions was funded, known as the "guaranteed revenue and escrow method".
Under that system, the Company (then Boise Water) would construct the main extension and
necessary facilties at its cost. The developer and Company would sign an agreement in which
the developer placed in escrow a sum that when combined with anticipated revenues from the
development would provide the Company for five years with the rate of return on the new
project as authorized by the Commission. Developers paricipating in the escrow program paid
only a fraction of the costs of construction of a new water plant. In that circumstance, it was
thought fair that the Company be allowed to use the contractor of its choice when it was
responsible for so large an amount of the total costs of construction. (See Order No.23522, Case
No. BOI- W -89-3, In the Matter of the Investigation Upon the Commission's Own Motion of the
STATEMENT OF POSITION- 2
Policies of Boise Water Corporation Concerning Line Extension Refunds). In contrast,
developers of commercial or industrial developments fully funded those projects by
contributions in aid of construction. Since developers of those projects provided the entire
funding, they were not bound by the sole contractor method and could exercise choice in
selection of a contractor.
Developers of residential subdivisions were unhappy with the sole contractor method and
believed that a system of labor in lieu of cash would lower costs and promote efficiency. See
Testimony of Ramon Yorgason and Ted Johnson, Case No. BOI- W -89-3.
In 1996, the Idaho Supreme Court decided the case of Building Contractors Association
of Southwestern Idaho vs. IPUC, 128 Idaho 534, 916 P.2d 1259 (1996), which held that certain
aspects of the Company's line extension polices were discriminatory. That decision made
necessary a comprehensive review of the Company's connection fee and line extension policies,
which the Commission undertook in case No.UWI-W-96-4, In the Matter of the Connection Fees
of United Water Idaho Inc., and other Related Issues Including Rate Design.
In that case, developers again argued for elimination of the sole contractor method and
for a labor in lieu of cash method. See Testimony of Ramon Yorgason.
Case UWI-W-96-4 was resolved by a settlement. The essential terms were that the
guaranteed revenue and escrow method would be eliminated. Instead, developers would
contribute the entire cost of extending the distribution system. United Water supported
elimination of the guaranteed revenue and escrow method because, over the years, it had become
difficult to administer. In addition, since developers would now contribute the entire cost of
extending the system, the rationale for use of a sole contractor lost much of its force.
STATEMENT OF POSITION- 3
Accordingly, United Water agreed to implement a labor in lieu system making it possible for
developers to exercise choice in selecting a contractor.
However, if multiple providers were to be allowed, United Water had two concerns.
First, United Water desired to insure that only competent contractors be eligible to install
systems that affected public health. Accordingly, the Settlement Agreement provided that a
contractor must meet the Pre-Qualification Contractor Requirements that were then applicable to
commercial and industrial developments.
Second, United Water was concerned that expanding the labor in lieu system to
residential developments could increase administrative costs and burdens and could increase
inspection and compliance costs. Accordingly, the Settlement Agreement provided that United
Water should implement systems and procedures as are necessary to control administrative and
inspection costs.
The Final Order in Case No.UWI-W-96-4, Order No. 26898, approved the terms of the
Settlement Agreement.
Standard of Review
As President Redford noted at the Commission Decision Meeting on April 15,2008,
while United Water is a regulated utility, it is stil a private corporation. This means that while
the Commission has absolute authority with respect to United Water's retail rates, the
Commission grants substantial deference to the judgment of the Company's management in the
operations of its business. There are numerous examples of instances where the Commssion has
declined to second-guess the business judgment of the utilty. See e.g. Case No. PAC-E-99-2,
Order No. 28296 (Decision to sell interest in Centralia generating facilty was within the
business judgment of the utility); Case No. UWI- W -96-7, Order No. 27616 (Decision to lease
STATEMENT OF POSITION- 4
rather than purchase motor vehicles was within the business judgment of the utility); Case No.
BOI-W-89-3, Order No. 23522 (Decision to require $5 milion insurance coverage rather than $2
milion for labor in lieu contractors was a reasonable business judgment).
Determining the size of the contractor pool is a matter upon which United Water may
exercise its business judgment. United Water's Rules and Regulations, as approved by the
Commssion, are silent as to the size ofthe pool. Rule 67 provides only, "Applicant's contractor
shall comply with Section 1 and Section 2 of the Company's Requirements for Labor in Lieu of
Cash Contractors." Because the size of the pool is not defined by United Water's Rules and
Regulations, United Water may exercise its business judgment to determne and adjust the size
of the pool as circumstances warrant.
Thus, the question before the Commission is whether United Water's decision to limit the
number of eligible labor in lieu contractors to 10 for the year 2008, for the purpose of
constraining costs, was within the range of reasonable business judgment.
United Water's Decision to Cap the Number of Pre-Approved Contractors at Ten Was a
Reasonable Business Judgment
A. A pool of ten (l0) qualified contractors is adequate.
As noted above, residential subdivision developers prefer a labor in lieu system,
believing it promotes price competition and choice of suppliers.
When the labor in lieu program was initiated in 1997, there were six approved
contractors. Since then, the number of approved contractors has grown to ten.
Based on its experience in managing the labor in lieu program over the past ten years,
United Water believes a pool of ten qualified contractors is sufficient to create price competition
and to provide a sufficient choice of suppliers. By way of ilustration, attached hereto as Exhibit
STATEMENT OF POSITION- 5
A, is a listing for the years 2004 through 2008 of contractor projects, setting out the footage of
mainline pipe installed and the cost of installation2. This ilustrates that developers are, in fact,
choosing from multiple suppliers and there are a suffcient number of suppliers to meet
developer demands.
During the time United Water has been administering the labor in lieu program it has not
encountered an experience in which a developer has been unable to obtain a bid for a developer's
project. United Water has not received from any developer a complaint that the number of
contractors is inadequate. To United Water's knowledge the Commission has not received any
complaint from developers alleging there is an insuffcient supply of contractors.
Additionally, as is well known, the residential housing construction market is
experiencing a marked downturn compared to the years 2005 and 2006. As shown on Exhibit A,
the year-by-year total number of developer projects was:
2004: 73
2005: 80
2006: 83
2007: 66
2008 153
Thus, for the foreseeable future, the level of demand for contractors from developers is likely to
be significantly less than in years when a pool of ten contractors was adequate to meet demand.
Accordingly, based on its experience, United Water believes that a pool of ten
contractors is adequate to provide a choice of suppliers at competitive prices.
2 The actual names of the contractor companies are not listed on Exhibit A for confidentiality reasons. Rather, they
are referred to as "Contractor A", "Contractor B" etc.3 The number of projects for 2008 is as of April 30, 2008. Because developers usually prefer to commence projects
in the spring of each year, it is apparent that the number of projects in 2008 wil be well below the number in
previous years.
STATEMENT OF POSITION- 6
B. Increasing the pool of qualified contractors would increase cost and administrative
burden without a commensurate benefit to United Water or its customers.
The managerial effort and cost of administering the labor in lieu program is substantial.
If United Water is not permitted to maintain an appropriate contractor cap, then in addition to
McKay and Schmidt, United Water wil have to contend with an unknown number of additional
contractors, some of whom may be experienced, and some of whom may not.
As anyone contractor is added to United Water's approved list there is also an added
administrative burden that is not passed on to developers. The initial burden is in the time
necessary to review submitted pre-qualification packages. During the review process there is a
substantial amount of correspondence between United Water and the applicant, and between
United Water and the applicant's references. If the decision is made to add a contractor then
there is a one day training seminar conducted by United Water which the contractor must attend.
This training session involves several United Water personneL. The contractor is instructed on
how to provide estimates for projects in a format which United Water is able to use for preparing
contracts for each project, protocol for notification for inspection, installation procedures based
on "United Water Special Specifications and Standard Drawings", safety expectations and
inspections, "as-built" instructions for mapping individual service and fire hydrant tickets, final
job walk instructions and completion of final "Contributed Water Facilities" forms. Each of these
items is involved in every developer funded main line extension project and is unique to United
Water. None of this added administrative time and cost is passed on to any specific developer
simply because there is no paricular associated developer project against which the charges
could apply. These costs therefore become par of the overall construction overhead charged to
all capital improvement projects resulting in increased rate base and eventually increased rates
STATEMENT OF POSITION-7
for all customers. In addition, it has been United Water's experience that new contractors
require additional administrative time and effort to monitor and ensure that the items referenced
above are actually accomplished in a complete, accurate, and timely fashion as the new
contractor begins to perform work.
United Water maintains a separate fie on each approved contractor. These fies contain
correspondence between the contractor and the Company, insurance requirement verification,
annual review data, and other pertinent items. Every time United Water makes a change in its
"Special Specifications and Standard Drawings" this results in correspondence to each contractor
and two new sets of specifications are sent to each contractor for there use. Each contractor's
insurance requirements are renewed at varous times of the year requiring administrative time
tracking and extra administrative cost. Since these costs are not related to anyone project none
of these administrative costs are charged directly to any specific developer's project.
United Water has also implemented an annual contractor review process to evaluate
contractor performance and to control administrative cost. Once a year, usually in March, United
Water meets with each contractor and reviews their previous years work. United Water has
developed a tracking process for each project preformed by the contractor during the year and
scores the contractor in a variety of categories. The tracking process and annual review provides
an opportunity for performance feedback to each contractor with the intent to improve future
work flow and best utilze United Water's human rescores by eliminating unnecessary iterations
of administrative and inspection work. These annual reviews require preparation and
administrative time from several United Water personneL. Attached hereto as Exhibit B is a
United Water business Record entitled "Contractor Project Evaluation Results.,,4 As indicated
by Exhibit B, the tracking process is rigorous and time consuming. The administrative time spent
4 As with Exhibit A, actual names of the contracting companies are not disclosed for confidentiality reasons.
STATEMENT OF POSITION- 8
preparng for and meeting with each contractor every year is another area of cost which cannot
be charged directly to any single developer project. Obviously, the more contractors United
Water has on its approved contractor list, the more cost wil be incurred in preparng for and
performing these annual reviews. United Water believes its decision to cap the approved
contractor list at ten contractors is a prudent one.
Conclusion
For the reasons stated herein United Water respectfully requests that the Commission
determine that the decision to cap the number of eligible contractors at ten was a reasonable
exercise of United Water's business judgment, aimed at controllng the cost of the labor in lieu
program. Alternatively, if the Commission desires to hear oral argument, United Water is
prepared to do so. Alternatively, if the Commission determines that a further factual record
should be developed, United Water requests that a pre-hearing conference be convened.
DATED this ~ day of May, 2008.
Respectfully submitted,
McDEVITT & MILLER LLP
DtV2Dean J. Miler
McDevitt & Miler LLP
420 W. Bannock
Boise, ID 83702
Phone: [phone]
Fax: [phone]
Counsel for United Water Idaho Inc.
STATEMENT OF POSITION- 9
CERTIFICATE OF SERVICE
I hereby certify that on the liay of May, 2008, I caused to be served, via the methodes)
indicated below, true and correct copies of the foregoing document, upon:
Jean Jewell, Secretary
Idaho Public Utilties Commssion
472 West Washington Street
P.O. Box 83720
Boise, il 83720-0074
j jewell cq puc.state.id. us
Hand Delivered
U.S. Mail
Fax
Fed. Express
Email
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McKay Construction Inc.
P.O. Box 2450
Eagle, il 83616
Hand Delivered ~'-
U.S. Mail X.
Fax ~'-
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Hand Delivered ~
~U.S. Mail
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Schmidt Construction Co., Inc.
4662 Henry Street, Suite B
Boise, il 83709
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STATEMENT OF POSITION- 10
Contractor # of Projects Feet Installed Project Totals
2004
Contractor A 7 9160 $340,184
Contractor B 1 2400 $74,687
Contractor C 8 3715 $292,558
Contractor 0 20 33480 $1,214,659
Contractor E 3 7255 $254,040
Contractor F 14 16000 $736,374
Contractor G 12 20929 $754,218
Contractor H 4 33530 $1,565,006
Contractor I 4 12435 $41,607
2005
Contractor A 5 16360 $932,794
Contractor B 2 3255 $181,280
Contractor C 10 8930 $64,560
Contractor 0 19 43079 $1,783,491
Contractor E 25 27640 $1,431,610
Contractor F 13 28800 $1,178,624
Contractor G 2 4835 $168,261
Contractor H 4 7775 $314,765
200
Contractor A 6 8555 $525,548
Contractor B 3 7445 $383,509
Contractor C 8 7215 $460,685
Contractor 0 11 12960 $756,813
Contractor E 17 4460 $2,258,110
Contractor F 19 26255 $1,690,135
Contractor G 9 24390 $1,182,555
Contractor H 5 24780 $1,292,892
Contractor I 2 11570 $555,431
Contractor J 3 4030 $325,144
2007
Contractor A 5 4455 $283,182
Contractor B 2 2765 $207,48
Contractor C 5 2520 $184,826
Contractor 0 6 6165 $385,754
Contractor E 18 62265 $3,060,661
Contractor F 11 31230 $2,133,433
Contractor G 9 14455 $825,891
Contractor H 4 6815 $340,365
Contractor I 3 5175 $455,225
Contractor J 3 2355 $267,649
2008
Contractor A 1 2520 $108,692
Contractor B 2 1760 $98,919
Contractor C 0 0 $0
Contractor 0 1 890 $37,653
Contractor E 2 810 $44,757
Contractor F 2 2605 $161,120
Contractor G 3 4875 $276,454
Contractor H 3 15805 $729,099
Contractor I 1 560 $26,321
Contractor J 0 0 $0
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