20151005final_order_no_33390.pdf

Office of the Secretary
Service Date
October 5,2015
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER Of THE JOINT )
APPLICATION OF UNITED WATER IDAHO )CASE NO.UWI-W-15-02
INC.AND THE CITY OF BOISE,IDAHO FOR )
APPROVAL OF AN AGREEMENT FOR )
REPLACEMENT AND OPERATION OF FIRE )
HYDRANTS AND RELATED RATEMAMNG )ORDER NO.33390
TREATMENT )
On April 10,2015,United Water Idaho Inc.(“United Water”)and the City of Boise,
Idaho (“Boise”or “City,”and jointly “Applicants”)filed a joint Application seeking
Commission approval of their agreement to transfer responsibility for the operation,
maintenance,and replacement of fire hydrants located within Boise’s municipal boundaries from
the City to United Water (“Agreement”).United Water further seeks approval of certain
ratemaking treatment to recover the increased costs associated with the transfer.Both Applicants
prefiled testimony in support of the Application and Agreement.
On May 12,2015,the Commission issued a Notice of Application and Notice of
Modified Procedure requesting written comments.Comments were filed by Commission Staff
and by one customer.Boise and United Water each filed reply comments on August 13,2015.
As set out in greater detail below,we approve the transfer Agreement.
THE JOINT APPLICATION
Boise currently owns and maintains more than 6,700 fire hydrants within the city
limits.In July 2014,the Applicants entered into the Agreement to transfer ownership and
operation of those hydrants located within the utility’s service area to United Water.The
Agreement calls for Boise to provide an annual report to United Water of hydrants approaching
the end of their 40-year life and thus need replacing.Ownership of the hydrants will be
transferred when United Water replaces and thereafter maintains those hydrants.The Applicants
estimate that approximately 16$hydrants will be replaced annually over the next 40 years,at
which point the full transfer of ownership of all eligible hydrants will be completed.
The Applicants list several purposes for the Agreement.More specifically,they
claim that it is “generally to provide operations consistent with other communities in the state;to
create equity among taxpayers and ratepayers;to make available capital funding for fire
protection infrastructure and other essential services;to conform with the intent of the franchise
ORDER NO.33390 1
agreement;and to vest ownership of the hydrants with the entity that owns the infrastructure
connected to the hydrants with the experience and expertise to maintain them.”Application at 3.
In addition to approval of the transfer of ownership,United Water seeks approval of
two ratemaking measures.First,it requests that the costs associated with the transfer be fully
included in rate base (not using a typical 13-month average),and recovered in any subsequent
general rate proceedings over the life of the Agreement.Second,the utility seeks Commission
approval to continue the calculation and accrual of post-closing “allowance for funds used during
construction”(AFUDC)on the hydrant investment until such a time that those investments are
fully accounted for and included in rates in a subsequent general rate case.United Water
estimates that “the annual revenue requirement associated with the initial capital investment [will
be]approximately $765,000.”Id.According to United Water,this initial cost will increase
annual rates by approximately $1.45 per costumer in the first year.Id.at 4.
The Agreement provides that each party has the right to declare the Agreement “null
and void”should the Commission not approve the Agreement,including the accounting
treatment requested by United Water.Application Exh.1 at ¶2.The Agreement will become
effective 30 days after the Commission issues a final and non-appealable Order.The Applicants
intend that the terms of the Agreement be incorporated in a new franchise agreement between the
City and United Water.Id.at ¶6.
THE COMMENTS
The Applicants advanced several reasons in support of their Application.In general,
they maintain that the Agreement to transfer the hydrants is in the public interest.As set out
below,Commission Staff expressed several concerns about the Agreement.Based upon its
review,Staff concluded that the benefits of the transaction were insufficient to justify approval
of the Agreement.
There was one public commenter who insisted the transfer of the hydrants does not
justify a rate increase.Boise and United Water both filed replies generally maintaining their
previous positions,and encouraging the Commission to approve the Agreement.
A.Consistency with Other communities in the State
The Applicants first assert that approval of the Agreement will create consistency
with other communities within the State.They argue that the current arrangement is inconsistent
with other Idaho communities because in Boise,the entity that provides the water for fire
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protection (United Water)does not own the fire hydrants.Rather,in Boise,the hydrants are
owned and maintained by the City.
Staff agrees with the Applicants that it is ordinarily the case in Idaho that ownership
of hydrants typically resides with the provider of water service.However,Staff points out that in
most Idaho communities,it is the municipality that operates/owns the water system and the
hydrants.Unlike most Idaho communities however,Boise was,and is,served by regulated water
companies such as United Water.Staff maintains that even if the Agreement is approved,Boise
will remain unique among Idaho communities because it will not own its fire hydrants or water
system.Staff concludes that creating consistency is not a significant reason for approval of the
Agreement.
In response,the Applicants again emphasize creating consistency with other Idaho
communities —where the water provider owns the entire water system,including the hydrants.
For clarity,Boise admits that it “would very much like to own and operate the entire water
system located within Boise’s corporate limits,”noting “numerous governance issues and lost
opportunities.”Boise Reply at 4.In spite of that stated desire,Boise’s elected officials
determined that going forward,ownership and maintenance by United Water “is the most
efficient and safe way to provide water service and fire protection.”Id.at 5.
Commission findings:We find that creating consistency with other municipalities
is,by itself,not a sufficient reason for approval of the Agreement.The City and its water
utilities have operated under the current system for decades and achieved a Class III fire rating —
the same as would be maintained under United Water ownership.
B.Equity among Water Customers
The Applicants next contend that approval of the Application will improve equity
among the various classes of water customers.They note that under the current scheme,the City
covers its hydrant expenses from Boise’s General Fund which is supported primarily by
customer property taxes.They insist that some water customers,including federal and state
governments,non-profits,and other tax-exempt entities are exempt from paying property taxes.
Because these tax-exempt entities do not pay property taxes,the Applicants assert that an
inequity arises between water customers who pay and do not pay property tax.In an effort to
remedy this inequity,the Applicants believe it is appropriate to transfer the hydrants to United
ORDERNO.33390 3
Water’s ownership so that all water users will then contribute to the hydrant expenses through
their utility rates.
Staff raises two concerns with this reasoning.First,Staff is concerned that approval
of the Agreement may result in greater inequity between some ratepayers,leaving some United
Water customers paying substantially different amounts for hydrants under United Water
ownership than under City ownership,regardless of their fire protection needs.For example,
Staff compares a hypothetical large office building with relatively low water usage,high
property value,and more costly requirements for fire protection,to a hypothetical homeowners’
association with lots of landscaping associated with relatively high water usage,but with low
property value and little or no requirements for fire protection.Id.Staff suggests that a
ratepayer needing little fire protection may pay significantly more for hydrants than a ratepayer
with greater and more costly fire protection needs.Id.
Second,Staff points out that while governments,non-profits,and other tax-exempt
entities do not pay property taxes,these entities all pay the 3%franchise fee that is assessed on
all United Water customers pursuant to Idaho Code §50-329A.When collected,these franchise
fees are deposited into the City’s General Fund.Staff asserts that the franchise fees provide
ample revenue to the City —more than two and half times greater than the City’s annual hydrant
budget.Over the past five fiscal years,Boise has collected a total of $5.37 million (an average
of $1 .075 million per year)in franchise fees from United Water ratepayers.Id.at 7.This annual
amount exceeds the $450,000 Boise currently budgets for hydrant maintenance and replacement.
Id.at 4.Staff suggests that a reduction in United Water’s franchise fee may be the simplest and
easiest way to improve equity for the increase in costs that will be borne by ratepayers if the
Agreement is approved.
In response,Applicants continue to stress that the proposed transfer will create more
equity among ratepayers.Responding to Staffs hypothetical,Boise dismisses it as an “extreme
scenario,”and not “probable.”Boise Reply at 5.United Water admits that “future recovery of
hydrant related costs could impact different customers in different ways,”but insists that “is not
a reason to reject the Agreement.”United Water Reply at 8.The City also characterized Staffs
comments as an impermissible intrusion into Boise’s budgeting and expenditure of franchise
fees.Boise Reply at 5-6.
ORDER NO.33390 4
Commission findings:The Commission rejects the Applicants’contention that
suggesting a reduction in franchise fees “is asking the Commission to rewrite the Code to
prohibit the collection of franchise fees paid by the customer when the franchise fees may be
used by the City to fund services ...with which Commission disagrees.”City Reply at 11.This
Commission has no intention of encroaching on the City’s use and management of franchise fees
collected from United Water customers.However,it is worth noting that there have been prior
cases where utilities and municipalities have adjusted franchise fees to accomplish mutual goals.
See Order No.29634 at 5.It is certainly true that the City could ameliorate the financial impact
of this Agreement on city residents should it choose to do so.
All United Water customers currently share the expense for maintenance of hydrants
outside the Boise City limits.Inclusion of Boise City hydrants will simply increase all
customers’bills without a corresponding decrease in franchise fees.So,all United Water
customers will experience an increase in their water bill and Boise City’s United Water
customers will still continue to pay a 3%franchise fee.Therefore,we are not persuaded that the
Agreement will significantly improve “equity”among water users.
C.Benefits to Ratepayers
According to the Applicants,if the Agreement is approved by the Commission,
United Water customers will benefit by having the oversight and maintenance of the hydrants
managed by United Water,which has added experience and expertise because of its role in the
operation and maintenance of the City’s water distribution system.The Applicants contend that
having United Water take over responsibility for the hydrants will allow the Company to
integrate the operation and maintenance of those hydrants into its tracking systems (GIS &work
management),contract preparation and bid processes,and current industry practices and
standards to ensure operational efficiency.United Water Reply at 7 (citing Wyatt Response to
Staff Production Request No.3).Further,they contend that United Water has better financial,
technical,and operational resources to ensure that hydrants are maintained,repaired and/or
replaced more quickly without the delay of coordinating those efforts with City personnel.The
Applicants conclude that water customers would benefit over time through enhanced overall fire
protection system integrity stemming from United Water’s expertise,technical and financial
resources,and ability to respond promptly to and resolve any potential hydrant issues.
ORDER NO.33390 5
Staff opines that both the City and United Water have sufficient capabilities to
properly operate and maintain fire hydrants regardless of the proposed Agreement.Staff points
out that even if the Agreement is approved,Boise will continue to maintain responsibility for
those hydrants it will own over the projected 40-year transition period,and other hydrants
outside of United Water’s service area.Further,Staff notes that Boise has maintained a Class III
fire rating for over 24 years while maintaining its own hydrants and that the City anticipates that
rating to continue regardless of future hydrant ownership.
Commission findings:We find that United Water will be able to maintain and
replace Boise fire hydrants at a more efficient and higher level of expertise.United Water
personnel are trained in American Water Works Association procedures and industry best
practices for operation and maintenance of fire hydrants.United Water Reply at 6.
Furthermore,it is United Water’s responsibility to provide sufficient pressure and a
supply of water for fire protection.Hydrants are an integral part of the utility’s fire protection
responsibilities.It is in the public interest to provide adequate and efficient fire protection.
Accordingly,approval of the Agreement is a fair and reasonable way to enable United Water to
improve efficiency of providing safe and reliable water for fire suppression to Boise residents.
D.Costs to United Water Ratepayers
Applicants state that the annual revenue requirement for transferring the hydrants per
customer in the initial year would be approximately $0.24 per hi-monthly bill.Application at 4.
Staff calculates that this number is a reasonable initial estimate for the first year only.As set out
in the Agreement,each year for the next 40 years,United Water will invest an additional
$765,000 in the hydrant program.Thus,every year,United Water’s revenue requirement will
increase in order for the Company to recover a return on rate base,depreciation,O&M expenses,
and taxes.As a result,the total annual revenue requirement in the first year is approximately one
dollar per customer,but after 40 years,the total annual revenue requirement will increase to
more than $26 per customer.Staff Comments at 11.These calculations are undisputed.See
United Water Reply at 4,and Boise Reply at 12.
Staff asserts that the cost of owning and maintaining hydrants would be much lower if
the City were to retain ownership.As an investor-owned utility,United Water,unlike Boise,is
allowed to earn a return on its investment in the hydrants.United Water will also pay taxes on
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its earnings,further increasing the cost to customers,as well as pay property taxes,while the
City is tax-exempt.
Applicants do not dispute that ratepayers will pay for United Water’s replacement of
the hydrants.However,they continue to insist that the cost is minimal,the gradual transfer
allows for a measured impact,and the costs borne out of the sale are fair in exchange for the
efficiency of service provided by United Water ownership.
Commission Findings:While we recognize customers will experience an increase in
service rates,we find the increase is offset by improved fire protection and efficiencies for City
residents.Likewise,in light of all the circumstances,we find that the present and future public
interest will be served by allowing the transfer of ownership of fire hydrants to United Water.
E.Ratemaking Issues
As part of the Agreement,United Water requests that the Commission utilize two
accounting treatments relating to the transaction.First,that the hydrants be included in rate base
at their full investment and not use a 13-month average rate base.United Water reasons that
“investments in new and replacement fire hydrants within the City of Boise will not,in and of
themselves,generate any new or additional revenue,”and that a “customary 13-month averaging
methodology could result in the full amount of the investment not being recognized in rates.”
Wyatt Direct at 7.Second,United Water requests that “the Commission allow the Company to
continue the calculation and accrual of post-closing [allowance for funds used during
construction (AFUDC)]on the investments anticipated by the Agreement until such time as
those investments are fully accounted for and included in rates in subsequent general rate case
determinations over the life of the Agreement.”Wyatt Direct at 6.
Staff agrees with the first request that the costs associated with the transfer be fully
included in rate base (not 13-month average),and recovered in a subsequent general rate case.
Staff opposes the second request for post-closing AFUDC,noting that the filing of rate cases is
within the discretion of each utility,and under the circumstances United Water could have
included this request in its current general rate case.In response to Staff’s comments regarding
AFUDC,United Water withdrew its request for post-closing AFUDC accrual.United Water
Reply at 9.
Commission Findings:Because United Water’s investment in new and replacement
hydrants within Boise City will not generate new or additional revenue,it is reasonable for
ORDER NO.33390 7
United Water to include the transfer costs in rate base (not 13-month average).In determining
the reasonableness of the proposal,we considered the estimated annual revenue requirement
($765,000),and how that amount compounds over the ensuing years.We make no findings
regarding the appropriateness of the approved accounting treatment for any other part of United
Water’s business.In this regard,specific approval of rate making caused by this case shall be
considered in subsequent general rate cases.
SUMMARY
Having reviewed the arguments advanced by the Applicants and Staff,and based
upon the particular facts of this case,the Commission finds that the Applicants have met their
burden of showing that approval of the Agreement is fair,just and reasonable;and transferring
responsibility for the operation,maintenance and replacement of fire hydrants to United Water is
in the public interest.Over time,United Water customers located within the City will benefit
from improved efficiency by having the utility install,maintain and own the fire hydrants.
Hydrants are simply part of the utility’s fire protection responsibility.These improvements are
consistent with the public interest.
ORDER
IT IS HEREBY ORDERED that the Joint Application of United Water and the City
of Boise for approval of an Agreement transferring fire hydrant ownership and related
ratemaking treatment is granted.Any rate changes resulting from approval of the Agreement
shall be addressed in United Water’s next general rate case.
THIS IS A FINAL ORDER.Any person interested in the Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order with regard to any
matter decided in 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.
ORDER NO.33390 $
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of October 2015.
PAUL KJELLAND ,PRESIDENT
O7’%L
MARSHA H.SMITH,COMMISSIONER
KRITFNE RAPER,CO MISSI NER
ATTEST:
Jn D.Jewell
mmission S cretary
O:UWI-W-I 5-02bk2
ORDERNO.33390 9