27617.pdf

Office of the Secretary
Service Date
July 10, 1998
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INc. FOR
AUTHORITY TO REVISE AND INCREASE
RATES CHARGED FOR WATER SERVICE.
CASE NO. UWI-97-
ERRATUM N OTI
On July 6, 1998, IPUC Order No. 27617 was issued by this Commission. The following
change(s) should be made to that Order:
Page 54, Order Section, paragraph 3
READS:
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code ~ 61-
117 A grants intervenor funding to the Idaho Citizens Coalition in the amount of
955 and to Ms. Sharon Ullman in the amount of $4.696.. United Water Idaho
Inc. is directed to pay the intervenors within twenty-eight (28) days from the date
this Order.
SHOULD READ:
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code ~ 61-
117 A grants intervenor funding to the Idaho Citizens Coalition in the amount of
955 and to Ms. Sharon Ullman in the amount of $3.416.22. United Water Idaho
Inc. is directed to pay the intervenors within twenty-eight (28) days from the date
this Order.
DATED at Boise, Idaho, this/O Zilay of July 1998.
4~ (2~/
Myrna J. Walters - Commission Secretary
bls/O-uwiw976.err
Office of the Secretary
Service Date
July 6, 1998
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO INC. FOR
AUTHORITY TO REVISE AND INCREASE
RATES AND CHARGES FOR WATER
SERVICE.
CASE NO. UWI-97-
ORDER NO. 27617
SYNOPSIS
This is a final Order in Case No. UWI-97-6 determining the revenue requirement and
setting interim rates for United Water Idaho Inc. (United Water; Company). By this Order, the Idaho
Public Utilities Commission (Commission) authorizes United Water to increase its revenues by
581 989 or approximately 7.15%.
SUMMARY
On November 3, 1997, United Water filed an Application with the Commission for
authority to increase its rates and charges for water service. At hearing, the Company reduced its
requested revenue increase from $3 424 516 (15.47%) to $3 134 039, (14.27%).
Also at issue in this case pursuant to Commission direction are the identified service and
water quality issues raised in the filings and submitted investigative reports in Case
No. UWI-96-6 (In the Matter of the Investigation of United Water Idaho Inc and its Ability to
Provide Adequate Service and Water Quality). The identified water quality problem addressed in
Case No. UWI-96-6 was the presence of iron and/or manganese in United Water s ground water
wells at levels exceeding the secondary maximum contaminant levels (SMCLs) listed in the federal
Safe Drinking Water Act (SDW A). Although secondary contaminants are classified as non-health
threatening, the presence of high levels of iron and manganese can result in aesthetic problems
including foul odor, poor taste and discoloration.
United Water serves approximately 57 350 customers in the city of Boise and
surrounding areas. The Company s sources of supply consist of the Marden Water Treatment Plant
71 deep wells and 29 reservoirs with storage capacity of 27.4 million gallons. The combined
production capacity of all wells and the treatment plant is approximately 82 million gallons per day.
ORDER NO. 27617
United Water states that it seeks additional revenues to recover increased operating
expenses and costs associated with plant additions, and to produce a fair rate of return. The
Company contends that the proposed changes in its rates and charges are just and reasonable and are
necessary for the Company to continue to provide adequate and reliable service to its customers.
Pursuant to Order No. 27229 issued November 20, 1997, the proposed schedule of rates
and charges in Case No. UWI-97-6 was suspended for a period of thirty (30) days plus five (5)
months from the adjusted proposed effective date of December 14, 1997. Upon a finding of good
cause the suspension period was extended by the Commission in Order No. 27556 until July 1, 1998
and further extended until July 6 1998, by Order No. 27609. Reference Idaho Code ~ 61-622.
Public hearing in this case was held in Boise, Idaho on April 22-, 1998. The following
parties appeared individually and/or by and through their respective counselor representative:
United Water Idaho Inc.Dean 1. Miller, Esq.
Walton F. Hill, Esq.
Idaho Citizens Coalition Al Fothergill
Sharon Ullman Pro Se
Commission Staff Scott D. Woodbury, Esq.
The Coalition of United Water Customers, Eagle Water Company, Hidden Springs Community,
LLC and Hidden Springs Water Co., although previously granted intervenor status, neither
participated in nor appeared at the hearing.
At hearing, United Water proposed a rate base of $84 144 467, a reduction of $56 274
from the rate base of$84 200 741 contained in its original Application. By this Order, we make the
following adjustments to that proposed rate base: (1) elimination of United Water s investment in
the Northwest Pipeline * (2) elimination of a portion of the Company s investment in Island Woods
(3) elimination of a portion of the Company s investment in Redwood Creek/Floating Feather, * and
(4) elimination of the Company s investment in the Boise River Diversion project.* We approve a
rate base for United Water of $80 424 286.
United Water is allowed to begin amortization of these investments with the amortization expense
included in the revenue requirement. Discussed more fully later in this Order.
ORDER NO. 27617
We also make numerous adjustments to the Company s proposed operating results as
explained below.
We adopt a return on equity for United Water of 10.75% and an overall rate of return of
12%. This yields a revenue deficiency of $1 581 989, which pending conclusion of the cost of
service/rate design phase of the Company s rate case, we allocate by a uniform percentage increase
in rates and charges for all customers. Water usage on and after July 1, 1998 will be billed at the
rates approved in this Order.
By this Order we also award Intervenor Funding to the Idaho Citizens Coalition in the
amount of$6 955 and to Ms. Sharon Ullman in the amount of$3 416.22.
The Commission has reviewed the filings of record in Case No. UWI-97-6 including
the transcript of proceedings, exhibits and post-hearing briefs. The Commission has also reviewed
its Orders in Case No. EUW-94-1 (Eagle Area Certificate Case), UWI-95-2 (Garden City
Exchange) and other Orders specifically referenced herein.
FINDINGS
I. Test Year
United Water proposes a historical test year ending June 30, 1997 with operating
adjustments to both rate base and operating results for post test year changes. Staff and Intervenors
object to some of the adjustments but no party objected to the proposed test year.
We find:
The use of a historical test year ending June 30, 1997 is reasonable for the purposes of
this rate case.
ll. Rate Base
United Water in its Application proposed an adjusted rate base of $84 200 741.
Reference Exhibit 4, Schedule 1 , p. 2. As set forth in Company rebuttal Exhibit 20, the Company
proposes a restated rate base of$84 144 467. Tr. p. 1000.
The Company has agreed to and incorporated the following Staff proposed adjustments
in its rebuttal rate base calculation:
ORDER NO. 27617
Eliminate equity gross-up AFUDC
Retire Data Point computer equipment
($54 753)
($ 5 021)
Undisputed acquisition projects proposed for rate base treatment are $137 600 for the Company
Banbury Subdivision, and $576 740 for the Warm Springs Mesa.
Also undisputed as now being "used and useful", is the proposed rate basing of the Pierce
Park/Gary Lane main installation in the amount of$252 937. This project was previously disallowed
in Case Nos. BOI-93-1 (Order No. 25062) and BOI-93-3 (Order No. 25640). Tr. pp. 43-48.
Expressing concern with the costs the Company was incurring in its competition with Garden City,
the Commission previously ordered the Company to enter into special facilities contracts as a way
of financing line extensions. The Company did not do so and now states that it became apparent
following the Commission s Order that it would be impossible to fulfil the Commission
requirement as developers would seek to obtain service from Garden City rather than enter into such
an agreement. Tr. pp. 44 45. The Pierce Park main, the Company states, has now become a vital
link to provide adequate service to a major service area. In 1995 the main was connected to the
Hidden Hollow Reservoir in Seaman s Gulch which provides water storage for fire protection and
peak demand. The main now provides direct benefit, the Company states, to approximately 5 000
customers, to customers added west of Gary Lane, to customers between Gary Lane and Pierce Park
and to all customers in the west main service zone. Tr. pp. 46, 47. The Company notes that as a
result of its investment not being included previously in rate base, it has already forgone
approximately $190 000 of revenue. Tr. p. 48.
We find:
This is the third attempt by the Company to rate base its Pierce Park investment.
Recognizing the system benefits now flowing from the Company s investment, the Commission
agrees that it is now reasonable to allow a rate base addition in the requested amount, $252 937. In
our prior decisions denying rate base treatment, we sought to protect the Company s customers from
the then adverse and uneconomic consequences related to the Company s competition with Garden
City. Those concerns have been addressed with the North State acquisition.
ORDER NO. 27617
The following proposed adjustments in Case No. UWI-97-6 remain disputed:
Amt. incl. in Proposed
UWI request Adjustment
North State acquisition adjustment $577 664 ($577 664)
Northwest Pipeline $940 000 ($940 000)
Island Woods $260 751 ($ 73 400)
Redwood Creek/Floating Feather $890 269 ($824 250)
Three years capitalized corporate overhead $787 735 ($787 735)
Boise River diversion (Intervenors)882 531 ($1 882 531)
Book value one vehicle (Co Rebuttal)500
Transp. adj. for leased vehicles (Incl. Co. Reb. Adj.($ 12 505)
ORDER NO. 27617
North State Acquisition Adjustment
The facility and customer exchange between Garden City and United Water was
approved in Case No. UWI-95-2. The incremental increase in rate base requested in this case to
reflect that transaction is the $673 530 depreciated investment paid for the North State Area less the
$95 966 exchanged Millstream facilities already in rate base. Tr. p. 614. The exchange of service
areas was a discretionary decision made by the Company and municipal authorities. Tr. p. 517. In
the exchange case Staff recommended that none of the Company s investment in Garden City
facilities be allowed in rate base because the purchased plant was previously contributed, i., the
assets were originally contributed to public service by developers and/or customers. In this case
Staff maintains its opposition to rate base treatment. Tr. pp. 516, 613. If the Garden City system
had been owned by another public utility, as was Warm Springs Mesa, the transfer, Staff contends
would have been subject to the accounting instructions contained in the Uniform System of Accounts
(USOA) adopted by the Commission. The USOA requires that assets be recorded at the original cost
when first devoted to public service, that accumulated depreciation at the date of transfer also be
recorded, and that any excess costs be recorded as an acquisition adjustment on the books of the
purchasing utility. Inclusion of the acquisition adjustment in rate base would usually be based upon
an analysis of the effect on customers. Despite the fact that the selling entity is a municipality, Staff
contends that this basic principal should be adhered to. Tr. pp. 517, 518. Assessing the
consequences of the exchange, Staff concludes that inclusion of the adjustment cannot be justified.
Tr. pp. 518, 519. Before the exchange, the Company had 382 Millstream customers supporting a
net rate base of $95 000; after the exchange they had 898 customers supporting a rate base of
$673 530. Tr. pp. 966, 967.
United Water notes that in Case No. UWI-95-2 the Commission Staff made the same
arguments for denial of rate base treatment. In that case, it states, the Company was directed by the
Commission to make a calculation in its next general rate filing to show how the revenue would
support the investment. The Company now argues that if the Commission s intent was to disallow
the investment it could and should have done so in that case. Had the Commission done so, the
Company states, it would have terminated the trade. Tr. p. 870.
Staff, utilizing a developed investment model, Exhibit 105, contends that North State
revenue supports a Company investment in the Garden City exchange area of $583 164. Staff
ORDER NO. 27617
Exhibit 105 uses a customer count of516, the 898 North State Area customers utilized by Company
witness Gradilone in determining test year revenue (Exhibit No., Schedule 3 , pp. 29-30) minus the
382 Millstream customers given up by United Water in the exchange. Staff contends that North
State revenues support very little expense or investment for the water supply needed to serve the
North State area (estimated 1 MGD peak demand-Tr. p. 615). Tr. pp. 614, 676, 871. In Case
No. UWI-95-2 the Company indicated that supply for the North State area would be met in part
by purchase of water from Garden City. Exhibit 106. The purchase of water from Garden City
required an interconnection investment of approximately $52 000 and is at a contract rate for all
purchased water of 3 5 ~ per 1 000 gallons. The annual revenue requirement associated with water
purchases for the North State Area, Staff calculates, would support a water supply capital investment
of approximately $187 000. Tr. pp. 616, 617, 801.
United Water contends that proper analysis demonstrates that North State revenue
supports the exchange and any related additional investment. Tr. pp. 869, 870. The Company
contends that Staff used the wrong customer count. The Company contends that additional
customers have been added to the number acquired bringing the customer count to 927, calculating
a total revenue supported investment of$1 568 000.
We find:
In our Order approvIng the underlying exchange of servIce areas in Case
No. UWI-95-, a majority of the Commission was persuaded that the exchange was in the public
interest and made sense from a system and engineering planning perspective. We believed that the
realignment of service areas with municipal and area of impact boundaries would serve to eliminate
a disturbing pattern of checkerboard growth and uneconomic investment. Our approval also gave
effect to the stated desires of the elected representatives of both Garden City and Boise City. Order
No. 26562.
In its underlying Application in Case No. UWI-95-, United Water in its prayer for
relief requested that the Commission authorize it to include in its rate base the consideration paid
to Garden City under the exchange agreement. In our Order ultimately approving the exchange, we
specifically stated "United Water has failed to convince us however that we should preapprove the
amount of the purchase price for rate base purposes outside of a general rate case. The Company
has the burden of demonstrating the prudence of its investment in these facilities when it seeks to
ORDER NO. 27617
include them in rate base." We also noted United Water s "commitment to hold harmless the
Company s other customers, both from the consequence of the rates and from the exchange
transaction as a whole." Order No. 26562. Our position regarding rate base treatment was reiterated
in our denial of the Company s subsequent Petition for Clarification. Order No. 26646.
United Water now states that the spirit of our prior Orders provided it with some
assurance of rate base treatment and that if the Commission was inclined to deny it such treatment
it should have done so then. We caution the Company that it acts at its own peril in attempting to
read into a specific denial of requested relief, some assurance of future acceptance.
Staff recommends that we consider the entirety of the Company s purchase investment
in the North State Area facilities to be an acquisition premium and deny rate base treatment of same.
The record in this case and the related acquisition case clearly support a finding that the facilities
transferred to United Water were originally contributed to Garden City rather than purchased. It
therefore follows that the purchase price paid by United Water was at a cost which was in excess of
the original cost of the property when first devoted to the public service, less applicable accrued
depreciation. It is therefore, reasonable to regard the Company s purchase price as an acquisition
adjustment. The Company recommends rate base treatment of its investment, yet as we noted in the
acquisition case, the Company acknowledges that its proposal is contrary to established regulatory
policy. Order No. 26646.
As a regulatory rule or policy, the position advanced by Staff in this case regarding
presumption of contributed capital and accounting treatment is generally accepted. We find
however, that it is also the starting point from which we entertain arguments for exception or
different treatment. Each acquisition is reviewed on its own merit. Analysis of the acquisition cost
regarding rate base treatment permits an assessment by this Commission of the benefits flowing from
the transaction and the impact on the Company s other customers. An acquisition adjustment is one
of several incentive mechanisms that this Commission can use to encourage water industry
restructuring. In addition to the stated public policy benefits announced in our approval of the
acquisition, we find that the acquisition brings efficiencies of service and improved operations
management and technological expertise to the North State customers. We also find in reviewing
the cases related to the phase-in of rates for the North State area that the exchange and related facility
improvements have enhanced water pressure and water quality for North State customers. We find
ORDER NO. 27617
that the transaction provides both present and future benefit to affected customers, municipal
planning authorities, and United Water itself Based on our review of the record in this case and the
underlying certificate case, we find it reasonable to conclude that the price ultimately paid by United
Water to Garden City was the result of arms length negotiation and was a fair and reasonable price.
We are satisfied that the revenue generated by the North State customers supports the exchange and
related investment. For all these stated reasons, we find it reasonable to look beyond the contributed
nature of the acquired facilities and approve an increase in rate base in the amount of $577 664 for
the North State Area investment.
ORDER NO. 27617
Northwest Pipeline
United Water calculates that the main service level, which includes the downtown Boise
area and the area northwest of the downtown area, has a supply capacity deficiency of six (6) million
gallons per day (MGD), a deficiency that requires new water supply facilities. Exhibit 17. To
reduce this deficiency, the Company has constructed a 3.5 mile pipeline at a cost of $940 000 to
connect the Hidden Hollow storage reservoir in Seaman s Gulch with the Floating FeatherlRedwood
Creek water system west of Eagle, a system with a present supply surplus of 2-3 million gallons per
day. Tr. pp. 41, 617. Test well drilling in 1997 to locate a new water supply in the State Street Area
resulted in the discovery that both the water quantity and quality necessary to serve customers in the
main service level was not available. This lack of supply, the Company states, hampered its ability
in the summer and fall of 1997 to fill its Hidden Hollow reservoir. To prevent further service-related
problems, the Company stated it was faced with the necessity of locating, developing and delivering
water to the Hidden Hollow reservoir before peak usage in 1998. To avoid further unsuccessful
attempts at locating a supply, the Company decided to tap into a source of known quantity and
quality. Tr. p. 41.
Staff contends that the constructed pipeline was not needed, that there was no urgency,
that the supply deficiency was no greater in 1997 than in past years (Exhibit 107; Tr. p. 618); that
with a planned 8 MGD Marden treatment plant expansion scheduled to come on line in May 1999
the deficiency is short term (Tr. pp. 630, 826-828); that the Company failed to utilize during 1997
peak requirements other supply resources available to it: e., the Swift No., which the Company
was not using because of aesthetic water quality problems, (Tr. p. 813); Garden City contract supply
rights (Tr. pp. 819-824); and available supply from other service levels (Tr. p. 621). In addition
Staff notes that other main service level wells completed since 1997 have been brought on line and
are now available-27th Street Well, Tr. pp. 653 , 819; also Swift No.3. Supplies less costly than
the pipeline, Staff contends, could also have been constructed (the Company previously estimated
that new supply could be developed for approximately $300 000/MGD-Tr. pp. 617, 654). Staff
questioned the Company about parallels between the Southeast Boise Water Supply Project pipeline
which the Company now contends was developed as a temporary water supply, and the northwest
pipeline. Staff notes that current and future development and related water supply contracts in the
Eagle area may require the Redwood Creek/Floating Feather water supplies (Tr. pp. 618, 619). Staff
ORDER NO. 27617 10-
also queried why the Company would not have considered bridging what Staff perceives to be a
short-term supply deficit with conservation measures, i., alternate day sprinkling. Tr. pp. 809
810 959, 960-962. Finally, Staff notes that a lengthy distribution pipeline constructed ahead of
development places a substantial portion of the cost of new development on the backs of existing
ratepayers rather than through developer contributions, as the line extension rules would otherwise
reqUIre. Tr. pp. 620, 678, 679.
Coincident to the need for new supply in the main service level, Staff notes, construction
of the northwest pipeline will make nearly $850 000 worth of investment in the Eagle area used and
useful, will provide reservoir back up and emergency fire protection to the Eagle municipal water
system and will make lower cost service available to a large undeveloped area that would simply not
be possible without the pipeline. However, none of these reasons, Staff states, should be regarded
as justification for making existing customers pay for the pipeline project through rates. Tr. p. 622.
The Company does not agree with Staff's contention that the supply capacity deficiency
is short term. Tr. pp. 959-960. It is not unreasonable, the Company contends, to have a system
supply capability greater than demand. The nature of the beast, it states, is that wells are mechanical
and there are going to be times when they are out of service. Tr. p. 960. It is also not unreasonable
the Company admits, to ask customers to conserve water-indeed, it did that in 1994. Tr. p. 961.
United Water by way of rebuttal introduced Exhibit 31 to show supply and design constraints in the
United Water system. Tr. pp. 841-846. One critical area of constraint the Company contends is
Collister Road west to Horseshoe Bend Road and between State Street and Hill Road. Tr. p. 843.
Prior to construction of the northwest pipeline, the Company states there were limitations on the
ability of the distribution system to transmit water adequately to the Hidden Hollow Reservoir.
Tr. p. 844. The import-export capability of the distribution system, the ability to move water from
one pressure level to another, is also limited, the Company states, to 6 - 7 million gallons per day.
Tr. p. 846. The Company questions, because of distribution losses, whether the Marden expansion
will be able to beneficially impact identified main service level areas of need. Tr. p. 845. The
Company disputes any obligation to provide the City of Eagle with any waters other than fire flow.
Tr. pp. 962-964.
The Company contends that Swift Well No.1 should not have been listed by the
Company in response to a Staff production request as a source of supply in the main service level
ORDER NO. 27617 11-
west of 36th Street. It should instead have been noted that it was to be held in reserve for emergency
conditions, i., when the Company would otherwise be faced with restricting or curtailing water
usage. Tr. pp. 813 , 814. The Company presently plans to use Swift No.1 as an aquifer storage and
recovery (ASR) project, injecting high quality water into the aquifier and pumping it out during
demand periods. It expects the ASR project to be fully operational by summer year 2000.
Tr.p.817.
We find:
The Company has failed to persuasively demonstrate that its decision to construct
pipeline was for its customers a prudent decision, that it was the best economic and planning
alternative available to it or that it was even needed at this time. It is undisputed that by completing
the pipeline the Company is able to transport surplus water from the Eagle area to Hidden Hollow
Reservoir; that its ability to do so provides it with an additional resource to reduce or mitigate
capacity deficiencies in the main service level; that it provides a benefit to customers outside the
Eagle area; and that it is otherwise "used and useful." It is also undisputed that the Floating Feather
well waters will provide the Company with a supply of high quality water for its main service level
water without elevated levels of iron and/or manganese.
Despite the foregoing findings, our decision in this matter is directed by the Company
failure to avail itself of what we find to be other, more economic alternatives. We refer of course
to the Company s decision to forego contractual rights in its Garden City supply contract; to forego
the use during critical periods of peak demand of its Swift No.1 well; to ignore the additional main
service level well capacity brought on line since 1997, capacity additions which most certainly had
to have been planned; to forego the full utilization of water transport capability between service
levels; to fully recognize that the main service level supply deficiency would be mitigated to a large
degree by the planned 1999 Marden expansion; to forego the planned use of demand conservation
measures (e., alternate day sprinkling) to bridge what can be reasonably perceived to be a short-
term supply deficiency.
Although the Commission will not allow the investment to be rate based at this time
we will allow the Company to recover amortization of its investment in recognition that it is used.
Embedded in the Company s case is $18 800 of depreciation expense that we will allow to remain
for this purpose.
ORDER NO. 27617 12-
Redwood Creek/Floating Feather
The service to Redwood Creek was authorized by the Commission in the Company
Eagle area certificate case. Reference Case No. EUW-94-1. The source capacity for the area is
0 MGD. Currently usage for domestic and fire protection is 2.17 MGD. The Redwood Creek
project is a combination of purchased existing facilities and new facilities constructed by the
Company. Tr. p. 611.
Utilizing a developed investment model (Exhibit 104) and Company derived input (27
customers; $457 annual revenue per customer), Staff determined that of the $890 269 investment
requested in rate base by the Company for the Redwood Creek/Floating Feather acquisition, only
$66 019 of investment is supported by related revenue. Tr. p. 613. Staff therefore recommends that
$824 250 of the requested net rate base increase for Redwood Creek be disallowed. Tr. p. 613.
United Water in rebuttal contends that it is reasonable to use actual or projected rather
than test year customer numbers and revenue in justifying the rate basing of its investment expense.
Exhibit 15 , Tr. pp. 854-856. Utilizing current customer numbers (52) and revenue ($409 annual
revenue per customer) the Company contends that $114 000 of investment is supported. United
Water contends however that Staff's model is inappropriate for determining rate base in the
Redwood Creek/ Floating Feather area. The Company recommends inclusion of the entire $890 269
based on its planning determination that the surplus water was needed to supply customer demand
in the Company s main service level, and its construction of a pipeline to transport the water. The
investment, it states, is now linked to the Company s integrated system, and is now used and useful.
Tr. pp. 856, 858. Staff challenges the prudence of the Company s decision to construct the pipeline
to connect the Redwood Creek/Floating Feather area to the Company s main service level.
We find:
In assessing this investment, we rely on the Company s prior assurances in Case
No. EUW-94-1 that it would not be asking its existing customers to subsidize its Eagle area
investment. We also find that Staff's investment model is acceptable for calculating the amount of
investment supported by revenue and the amount of related subsidy.
The Company contends that because it has constructed three and one-half miles of main
line and connected the heretofore isolated Redwood Creek/Floating Feather System with its greater
integrated water system, that its entire investment in the Eagle area facilities has now been made
ORDER NO. 27617 13-
used and useful" and should be rate based. As explained above, the Commission has denied
ratebase treatment for the main line. Despite the physical connections of Redwood Creek with the
Floating Feather Well, it is clear that the pipeline was intended to primarily access water supply
provided by the Floating Feather well. Accordingly, we find it reasonable for rate base purposes to
separate the Floating Feather well from the rest of the Company s Redwood Creek investment.
Beyond that however, there is reason to question the Company s pipeline investment, its timing and
its reasonableness as discussed above. Based on our analysis and decision to deny rate base
treatment of the pipeline, we find that Staff's investment model analysis is appropriate for Redwood
Creek/Floating Feather.
Included in the Company s depreciation expense is $27 646 related to the Redwood
Creek/Floating Feather well investments. Of this amount, $11 927 is related to the Floating Feather
well. We will allow the $11 927 expense to remain in the revenue requirement calculation to
provide for amortization ofthe Company s investment in the well. We do this in recognition ofthe
fact that the Floating Feather well is presently being used as a source supply for the northwest
pipeline.
ORDER NO. 27617 14-
Island Woods
Service to Island Woods was authorized by the Commission in the Company s Eagle area
certificate case. Reference Case No. EUW-94-, Order No. 26337. Island Woods is an
independent water system that is not connected to the Company s larger distribution system.
Tr. p. 43. United Water paid $276 150 and $103 850 respectively for Island Woods supply and
distribution facilities. Tr. p. 42. The source capacity ofIsland Woods wells is 2.6 million gallons
per day or 1 800 gallons per minute. Current demand requirements for source are 62% of current
capacity, 1 000 gallons per minute for fire flow and approximately 120 gallons per minute for peak
hour domestic service. Tr. p. 43. The Company proposes including its entire Island Woods
investment in distribution in rate base, reasoning that with 81 Island Woods customers in September
1997 the Company s Line Extension Rule in effect at that time would have supported an investment
of$I13 400. Based on its demand analysis, the Company proposes including only 62% of its supply
investment in rate base, with the remainder being placed in plant held for future use. Tr. p. 43.
Utilizing a developed investment model (Exhibit No. 103) and Company derived input
(84 customers; $435 annual revenue per customer) Staff determined that of the $260 751 requested
for rate base by the Company for the Island Woods water system, only $187 351 of investment is
supported by related revenue. Tr. p. 613. As described by Staff, the model determines the
incremental increase in revenue requirement due to increased operating expenses, taxes and
depreciation expense. The increased revenue requirement is then compared to the incremental
increase in annual revenue generated from the new customers to determine if the Company will earn
its authorized return on investment. If insufficient new revenue is generated, then, Staff contends
investment must be reduced or the general body of ratepayers will be required to subsidize the
acquisition. Staff therefore recommends that $73 400 of the requested net rate base increase for
Island Woods be disallowed. Tr. p. 613.
United Water in rebuttal contends that it is reasonable to use actual or projected rather
than test year customer numbers and revenue in justifying rate basing its investment expense.
Exhibit 14; Tr. pp. 852, 948, 949. With projected numbers the Company argues that ratebasing its
entire requested investment is justified. Utilizing current customer numbers (90) and revenue ($491
annual revenue per customer) the Company contends that $230 800 of investment is supported. The
ORDER NO. 27617 15-
Company proposes no pro forma adjustment to either its customer numbers or revenue numbers in
this case. Tr. pp. 643, 950.
The Company further contends that rather than look at Company acquisitions on a stand-
alone basis regarding any subsidy that may be required, the Commission should consider the overall
materiality of the subsidy or determine in light of other benefits that may be associated with the
transaction, that some immaterial amount of subsidy might be acceptable. Tr. pp. 637, 638.
We find:
In our final Order No. 26337 in Case No. EUW-94-, the Commission approved the
Company s requested certificate. Our recitation of facts in that Order reflects the following
language: Commission Staff, based on its analysis of project economics, area growth and projected
revenue, characterized United Water s investment in the Eagle area as speculative. United Water
admitted that Eagle area revenue in the near term might be insufficient to cover Eagle area
investment. Existing UWI customers, United Water nevertheless assured the Commission, would
not be asked to subsidize the new customers in the Eagle area.
In our findings, we stated
, "
A regulated water utility is at risk in extending into, acquiring
property and investing in non-contiguous areas without a prior certificate." Order No. 26337.
Despite its prior assurances to the Commission and its customers, the Company is now
before us arguing that we should not consider the customer numbers used by the Company in its test
year revenue calculations but instead higher actual or projected numbers to assess the investment
supported by revenue; the Company also asks us to consider whether some immaterial amount of
subsidy might be acceptable. We cannot adopt the Company s proposal. Our previous approval was
done in reliance on Company assurances that the costs of the acquisition would not adversely impact
other customers. We also find that we must be consistent in the use of customer numbers and
revenues and expenses to avoid unreasonable mismatches. We find that Staff's investment model
presents an acceptable methodology for determining revenue supported investment. $73 400 is not
an immaterial amount. We accept Staffs proposed adjustment and approve rate basing of $187 351
of the Company s Island Woods investment in this proceeding.
ORDER NO. 27617 16-
Capitalized Corporate Overhead.
Because of a perceived potential for interaffiliate subsidies, Staff proposes to remove
capitalized overhead costs charged to construction projects for a three-year period ending June 1997
for fees and expenses charged to United Water Idaho by United Water Resources and the M&S
Company. Reference Exhibit 118, pp. 1 2; Tr. pp. 520, 521.
The capitalized overhead adjustments in this case, the Company states, are engineering
costs incurred through the M&S Company on behalf of the customers of United Water Idaho.
Tr. p. 992. United Water points out that Staff's adjustment would effectively eliminate overheads
that were already approved by the Commission in the 96-3 case, which was based on a test year of
1995 (Tr. p. 569), and would deny the Company an opportunity to earn a return on the value of
services capitalized in this case. Tr. p. 570. Referring to Staff Exhibit 118, the Company notes that
since 1994 the rate of overhead accrual has actually gone down, that overheads were accruing at a
rate of3.5% through the 1994 period, 3.4% in the 1995 period and from 1996 to present have ranged
from 2.4% and now are at about 2.9%. Tr. pp. 572, 573.
We find:
The Company s argument in this instance is persuasive. Staff was unable to provide any
evidence ofinterafEiliate subsidies charged to United Water. Although it appears that the overheads
are percentage loading and not based on time, it is also clear that affiliate services were provided to
Idaho. The established record does not support the Staff proposed disallowance.
ORDER NO. 27617 17-
Boise River Intake
The Boise River intake project is comprised of 2900 feet of 30 inch discharge main
through the Surprise Valley Canyon wall cut for Highway 21 and a river diversion structure. The
purpose of the intake/transmission main is to supply Boise River water to service water
treatment plant. The Company anticipates that diversion waters will be required to meet projected
southeast Boise demand in year 2005. The southeast Boise area lacks adequate ground water and
has been designated a Ground Water Management Area. It is also an area targeted for significant
growth (residential, commercial and industrial) in Boise City s Comprehensive Plan and other
planning documents, with current and future customer growth projections exceeding 8% per year.
Tr. pp. 25-31.
To meet future demand in southeast Boise the Company explored four potential sources
of supply: (1) wells within the area (no available supply), (2) wells outside the area (Southeast Boise
Water Supply Project limited by capacity and time), (3) the Marden water treatment plant (design
capacity and transmission constraints), and (4) a new water treatment plant. Tr. pp. 31-33. Based
on its analysis, the Company concluded that a new water treatment plant, located in the vicinity of
the Columbia bench was the only viable alternative source of supply for the area. The most feasible
site for a river intake and pumping station was determined to be the site of an existing pumping
station used by the Harris family for irrigation. Tr. pp. 33-35.
The Company s decision to go forward with the river intake project at this time, it states
was based on a number of factors: (1) opportunity to utilize an existing diversion, (2) avoidance of
perceived legal challenges to a new diversion, (3) opportunity to join and share construction costs
with Micron Technology, lR. Simplot Company and Surprise Valley L'td Partnership, who
independently were working on a proposal to upgrade the existing river diversion, (4) timing of
construction dictated by forces over which United Water did not have control-Micron/Surprise
Valley needed water by spring of '98; mandate of Idaho Department of Transportation and (5) its
obligation to serve. Tr. pp. 35-38.
The Company states that it saw no other viable alternative for future water service to the
southeast Boise area. If the structure was not completed at this time, it states, it would have been
impossible to install facilities at a later date. Tr. p. 39. Recognizing that there is no immediate need
for the diversion waters to meet demand, the Company notes that the facilities constructed are only
ORDER NO. 27617 18-
those which could not be delayed until the treatment plant is built-, no pumps, electrical
equipment or other mechanical equipment have been installed. Tr. pp. 37, 38.
Except upon a finding of an "extreme emergency , the Commission is prohibited under
Idaho Code ~ 61-502A from setting rates for any utility that grant a return on construction work in
progress (CWIP) or property held for future use which is not currently used and useful in providing
utility service. United Water contends that its investment in this instance was incurred in response
to an "extreme emergency" and "undertaken in response to a mandate from government to either
install the facilities now or be precluded from ever installing them." The Company did concede that
the only written document that it has from the Idaho Department of Transportation is a permit
which said that this line construction will be done prior to paving ofthe roadway." Tr. p. 973. As
represented, the Company perceived that it had no viable alternative and therefore concluded that
it had no choice but to make the investment now. Tr. pp. 39, 81. The Company denies that its
decision to construct was based merely on its opportunity to share construction costs. Tr. p. 38. The
Company maintains that it is reasonable that existing customers share in the cost of planning and
development; that the length of time to develop a new source of surface supply is five to seven years.
Tr. pp. 880, 881 , 948. It thus requests that its investment be included in rate base. The annual
revenue requirement associated with its investment is approximately $306 000. Tr. p. 624.
The Idaho Citizens Coalition opposes including the Boise River diversion in rate base
until it is "used and useful." Reference Idaho Code ~ 61-502A. The installed facilities, it states, are
not providing water service to customers, there are no pumps installed, there is no related water
treatment plant, indeed the Company does not even have water rights that would allow it to operate
the diversion. Tr. p. 691. The Company, the Coalition states, has built ahead of need and actual use.
This is a plant designed for future use. Tr. p. 692. The Coalition maintains that a lower cost
business opportunity does not constitute an "extreme emergency ; that United Water assured the
City of Boise that it would not seek to include the project in rate base until it was fully used and
useful (reference Exhibit No. 110); that intergenerational equity demands that current customers not
be required to pay for facilities that will not be required until the year 2005 (see Tr. p. 878); and that
normal market conditions would impose a similar discipline on competitive business. Tr. pp. 693-
695.
ORDER NO. 27617 19-
We find:
The Company in this case presents us with no physical evidence or documentation of a
mandate ITom government" of such a nature that we could find the "extreme emergency" exception
to Idaho Cock ~ 61-502(a) exists. Its professed beliefthat it was subject to such a mandate and that
it would have been precluded in the future from ever installing facilities at the Highway 21 cut is
not supported by persuasive evidence. Based on Company demand forecasts there will be no need
for the facilities until the year 2005. This is a pipe that goes nowhere and is not hooked up to
anything. The Company s investment is not presently "used and useful." Rate basing is therefore
prohibited under Idaho Code ~ 61-502(A).
We find, however, that the Company s decision to install facilities now may be of future
benefit to its customers. We do not wish to discourage the Company from making decisions that
make good business sense. Certainly, in this instance, the opportunity to share construction costs
and utilize an existing diversion with others was an incentive to action. We, therefore, find it
reasonable to allow amortization of the Company s present investment in the Boise River intake
project so that this investment will be recovered. We note that the Company s calculation of
depreciation expense in this case includes an allowance for this project, of$37 651. That expense
allowance is approved in this Order to provide for the recovery of this investment.
ORDER NO. 27617 20-
Transportation Adjustment for Leased Vehicles
Restore Book Value One Vehicle to Rate Base
Staff proposes an adjustment to make a correction for a change in the Company s plans
for replacing a vehicle and eliminate some capitalized costs of the Company s vehicle leasing
program. Tr. p. 515. The adjustment removes from rate base the extra costs the Company incurred
through its vehicle leasing program. Tr. pp. 522, 526, 527; Exhibit 119, p. 1. By this adjustment
Staff continues to challenge the Company s switch from ownership of its vehicle fleet to leasing, the
Company s failure to present a persuasive cost/benefit analysis of lease versus own, and to articulate
and credit customers with offsetting savings.Reference Order No. 26671 , UWI-96-
Tr. pp. 522-524. Company assumptions regarding vehicle residual values, Staff contends, are
artificially low and adjusted to favor leasing. The actual experience ofUWI over the last few years
Staff maintains, demonstrates unequivocally that the residual values are wrong and that leasing is
more costly to the Company. Tr. pp. 524, 525; Exhibit 119, p. 2; Exhibit 118.
The methodology employed by the Company in its cost/benefit analysis in this case
(Exhibit 22) is essentially the same methodology presented in UWI-96-3. Tr. p. 1079. United
Water interprets the Commission Order in Case No. UWI-96-3 as generally accepting the
Company s cost benefit analysis. Tr. pp. 104-106, 1081. The Company s analysis, it states, has
been presented and accepted by the majority of the states in which United Water operates. The
Company disputes Staff's continuing contention that its cost/benefit analysis is flawed and
superficial, arguing rather that it is instead well thought out and comprehensive. Tr. pp. 1008-1010;
Exhibits 22, 23. The Company further disputes Staff's contention that its vehicle residual values
have been adjusted to favor leasing and contends that Staff analysis is not based on utility vehicles
which experience extremely hard service lives. Tr. p. 1010.
We find:
Pursuant to a policy that seeks to take advantage of economies of scale, the Company
continues its transition from vehicle ownership to leasing. We recognize that cost savings may be
achieved with a uniform program in multiple states of operation. Weare satisfied that the attendant
costs and benefits were considered and weighed by the Company. Owning and leasing are both
reasonable and viable alternatives. Although the related expenses may vary, we find that the
ORDER NO. 27617 21-
Company is not legally constrained to choose the least cost alternative. The expense incurred should
be authorized if it is determined to be otherwise reasonable.
In this case, Staff disagrees with the Company s projected residual values contending that
they do not comport with the Company s actual resale experience. We are seemingly being asked
to judge projections and estimates under a leasing scenario with records developed under an
ownership scenario, and to then make a decision as if the own versus lease cost equation can be
simply reduced to the amount realized on resale. We think not. The Company s proposed lease
expense and related rate base adjustment has not been shown to be unreasonable. We reject Staff's
proposed leasing adjustment. We approve restoring the $3 500 book value of one vehicle to rate
base.
ORDER NO. 27617 22-
Rate Base Calculations
Following are the calculations for United Water s approved rate base:
Plant in Service
Per Company Ex. No. 20, Page 1
Less Northwest Pipeline
Less Portion of Island Woods
Less Portion of Redwood Creek
Less Boise River Diversion Project
Adjusted Total Plant in Service
Less: (per Company Ex. No. 20, Page 1)
Accumulated Depreciation
Customer Advances for Construction
Contributions in Aid of Construction
Utility Plant Acquisition Adjustment
Accumulated Deferred Income Taxes
Net Adjustment for Island Woods (Co proposal)
Pre 1971 Investment Tax Credits
Add: (From Co. Ex. No. 20, Page 1)
Deferred Charges
Working Capital
ORDER NO. 27617 23-
$137 099 238
(940 000)
(73 400)
(824 250)
882 531)
$133 379 057
(27 573 584)
112 097)
(19 725 787)
(208 028)
384 478)
(99 476)
(22 594)
281 195
890 078
~80.286
ill Operating Results
As reflected in its initial Application the increase in annual revenue requested by the
Company was $3 424 516 or 15.47%. As set forth in Company rebuttal Exhibit 20 a revised annual
revenue increase of$3 134 039 or 14.27% is requested. Tr. pp. 1000, 1001.
The Company has agreed to and incorporated into its rebuttal Exh. 20 results of
operations, the following Staff proposed adjustments to operating expense:
Ad valorem adjustment-(Co. Post Hng Exh 33)($13 265)*
Correct info collection rule (SDW A) test schedule ($ 2 810)
Correct purchase water double count ($ 1 800)
Correct employee health insurance $ 9 634
Correct employee thrift plan 446)
Correct telemetry expense ($ 7 123)
The Commission Staff has further agreed to reverse a proposed Exhibit 115 , Column K ($3 947)
payroll tax adjustment, as Staff agrees that it is a duplication of an adjustment already made by the
Company. Tr. pp. 104, 1021-1023.
Also agreed to is a ($168) adjustment to correct the Company s PUC annual regulatory
fee assessment to the 1998 actual amount. Tr. p. 157. The pro forma annual IPUC assessment
expense is $51 807. We find the substitution of actual expense for estimated expense to be
reasonable.
On May 18, 1998, the Company submitted a second amended Exhibit No.5 Schedule 1
p. 7 setting forth amended power cost calculations based on test year usage and Idaho Power
Company rates as of 5/16/98. Reference Order No. 27516. The related corrected adjustment
increases test year expense by $74 484, rather than the decrease of $31 807 originally proposed and
included in the Company s rebuttal Exh. 20 operating expenses. The effect of the amended
calculation is an increase of $106 291 to the operating expenses reflected in Exh. 20. This
adjustment affects the operating ratio adjustment calculation. The pro forma annual purchased
power cost is $1 110 698. We find the use of current electric rates in the Company s power cost
calculations to be reasonable.
*Corrected adjustment number based on the actual 1998 market value appraisal of $70 956 346
ORDER NO. 27617 24-
Eliminate Depreciation Expense Equity Gross-
Staff made an adjustment to rate base to eliminate the capitalized AFUDC gross up. The
Company agreed with the adjustment and reflected the $54 753 rate base adjustment in rebuttal
Exh. 20. Tr. p. 1039. The depreciation expense associated with the amount removed from rate base
must also be removed from expenses. The depreciation expense adjustment is $1 617 ($80 857 rate
base, 50 yearlife).
We Find:
Staff's uncontested $1 617 adjustment to depreciation expense is proper and makes the
capitalized AFUDC gross-up revenue neutral as provided by FAS 109. (Exh. No. 26).
ORDER NO. 27617 25-
Adjust Transportation Expenses
United Water s transportation expense reflects 43 leased vehicles with an average lease
term of approximately 3.5 years. This proposed adjustment carries through Staff's correction related
to the Company s switch from ownership of its vehicle fleet to leasing, proposes to eliminate lease
expense in excess of historical expense with ownership, and reduces the Company s proposed level
of operating lease expense from $286 800 to $171 402. Exh. 119 p.1; Tr. pp. 527, 529.
The Company disputes Staff's criticism of its lease versus own cost/benefit analysis and
believes that the Staff proposed 40.24% reduction in expense allowance for leased vehicles is
unreasonable. Tr. p. 1010. Staff's seeming reliance on the fact that the Company s transportation
overhead rate has increased from 6.5% to 11.5% from 1994 to 1997 as an indication that leasing is
more expensive than vehicle ownership, the Company states, is erroneous in that the Staff ignores
the other side of the equation, the fact that owned vehicles also require a return on rate base and the
associated income tax impact. Tr. p. 1011. See additional Company analysis, Exhibit 24
Tr. pp. 1012-1018. On rebuttal the Company proposed a $21 400 reduction in the level of
transportation expense requested based on expected lease residual values flowing back to the
Company on approximately 12 vehicles/yr from American Leasing Corp. Tr. pp. 1008, 1018;
Exh. 20, p. 3.
We Find:
F or reasons expressed in our related rate base discussion above, we find vehicle
ownership and leasing are both viable options available to the Company. We find the Company
decision to switch from vehicle ownership to leasing to be a reasonable business choice. Staff has
not demonstrated that the Company s transportation and vehicle lease expenses are unreasonable.
The Company on rebuttal proposes a $21 400 reduction in lease expense to reflect projections that
its leasing company will realize 20% more for the Company s vehicles than the residual value
utilized in calculating the lease payment. We approve the adjusted expense level of$265 400.
ORDER NO. 27617 26-
Adjust PUC Rate Case Expense
Under the Company s proposal, test year expense is increased by $115 654 for the
amortization of current rate case expense and the unamortized balance of two prior proceedings, the
connection fee case (UWI-96-4) and the water quality (UWI-96-6) investigation. Exhibit 5
Schedule 1 , p. 18. The Company estimates that the current rate case will cost approximately
$300 000 to which $36 813 , the unamortized balances from the prior proceedings, is added to reflect
a total unamortized balance of$336 813. The $336 813 is divided by two years to reflect an annual
amortization of $168 407. Deducting test year expense of $52 753 produces an adjustment of
$115 654. Tr. p. 124.
Staff as detailed in Exhibit 120 adjusts UWI's estimated rate case expense to split these
costs between customers and shareholders. Staff further adjusted expenses for other PUC cases to
amortize these non-recurring charges over a five (5) year period rather than two (2) as requested by
the Company. Tr. pp. 530-532.
The Company agrees on rebuttal that a five-year amortization period for the deferred
regulatory expense related to the connection fee and water quality cases is reasonable due to the non-
recurring nature of such cases. Tr. p. 1023. The Company did not however make any adjustment
in its rebuttal exhibits to recognize its agreement. The Company notes that through its efforts to
control costs, its current estimated rate case expense is lower than costs actually incurred in its last
general rate filing. Tr. pp. 1024, 1025. Company witness Healy disputes Staff's contention that a
double counting of his rate case costs has occurred, stating that the costs of his time related to rate
case functions is not included in the deferred rate case cost, it is only reflected in the Company
O&M expense. Tr. p. 1025.
The Company notes that during the discovery process it provided Staff and intervenor
Sharon Ullman with a break down of estimated rate case expense and also copies of actual invoices
bills and contracts supporting actual costs received to date. Tr. p. 1027. Neither Staff nor
Ms. Ullman, the Company states provided any analysis or reasoning supporting their conclusion that
rate case expense was too high. Tr. pp. 1027-1031.
We find:
The Commission finds the Company s estimated general rate case expense to be
reasonable. We understand said expense to include both the revenue requirement and cost of
ORDER NO. 27617 27-
service/rate design phases. We understand that embedded in its estimate are attorney fees and
intervenor funding. We find no justification for requiring the Company to split rate case expense
between customers and shareholders. United Water and Staff propose amortizing the costs of the
current rate case over a two year period. We find that a three year amortization for rate case expense
provides a more responsible matching of costs to the time period in which they are incurred. We
accept the reasonableness of a five year amortization period for the deferred regulatory expense
related to the make whole, connection fee and water quality cases, $36 813. We further allow the
Company total general rate case expense of $300 000 amortized over three years. The following
table reflects the rate case expense adjustment of($61 044) to the pro forma test year.
United WaterIdaho
Staff Adjustment to
Rate Case Expense Amortization
1. CUlTent Rate Case Expense (Ex 5, Sch 1 , Pg 18)$300 000
Ratio of Expense to customers 100.00%
Expense to be passed through to customers $300
Amortization period in years
Annual Amortization Expense $100 000
6. Other Case Expenses (Ex 5, Sch 1, Pg 18)$36 813
Amortization period in years
Annual Amortization Expense
9. Total Amortization Expense $107 362.
10. Test Year Amortization Expense (Ex 5, Sch 1 , Pg 18)753
11. Required Adjustment to Test Year $54 609.
12. Company proposed Adjustment (Ex 5, Sch 1, Pg 18)115 654
13. Adjustment to Company s Performa test year ($61.044)
ORDER NO. 27617 28-
Adjust Operating Ratio Adjustment
This Staff proposed adjustment as detailed in Exhibit 121 is intended to synchronize
expenses related to the effects of customer growth and weather with the Company s variable
operating expenses that are sensitive to these changes. Tr. pp. 532, 533.
The Company agrees with Staff s methodology, except for one point. Staff, it contends, has
substituted the level of transportation expense on line 3 , column b of Exhibit 121, thus lowering the
ratio of growth related expenses to revenue. The calculation of this adjustment, the Company
contends, cannot be made until a level of transportation expense is decided. Tr. pp. 1032, 1033.
We find:
Having made our decisions in this Order regarding the authorized level of transportation
expense and power supply cost, a recalculation of the operating ratio adjustment under the agreed
methodology results in a decrease in Company operating expenses, as reflected in Company rebuttal
Exh. 20, in the amount of($739).
ORDER NO. 27617 29-
Reverse Adjustment for M&S Fees
Services provided to United Water Idaho from United Water Management and Services
(M&S) are provided pursuant to an agreement between the companies. Test period level of
Management and Service charges were $868 565. The Company states, however, that due to
recording variations, this level is not representative of the annual expense. The 1997 charge which
contains seven months actual data and five months projected data, indicates a pro forma level of
Management and Service charges of $948 643 or $80 078 higher than the test year level. This higher
figure, the Company contends, reflects the level of services received. Tr. pp. 121, 122. Because it
is simply a budgeted number and not based on known and measurable expense, Staff reverses this
adjustment by the Company. Tr. p. 533.
The Company on rebuttal contends that Staff has identified no cost or charge that is
unreasonable, excessive or imprudent. Staff's adjustment, it states, is simply the amount by which
the Company has adjusted the test year level of expense, and is not the product of any logic
reasoning or calculation. Tr. p. 1033.
United Water contends that utility management has both the obligation and right without
Commission second guessing or micro management to manage the business and overall expenses
within categories if the overall result within the category is not unreasonable. Tr. pp. 549, 550. By
way of rebuttal, the Company in Exhibit 25 presents a schedule depicting UWI Management and
Service fee expense as a percentage of total operations and maintenance expense. The 1991 through
1996 actual average is 10.73%. Tr. pp. 555, 1033-1035. Staff on cross admitted that it had no
testimony or information to indicate that management/service fees at this relationship or level in
comparison to O&M generally is unreasonable. Tr. p. 555. The Company also presents other
possible scales of reference for use in evaluating the significance of the proposed
management/service fees. Tr. pp. 556-558. Suspicion alone, the Company contends, should not
trigger a disallowance. Tr. p. 559.
We find:
In examining payments to affiliates we apply the rule announced by our Supreme Court
in Boise Water Corp. v. Idaho Public Utilities Comm.97 Idaho 832, 555 P.2d 163 (1976) and
General Telephone Companyv. Idaho Public Utilities Comm.109 Idaho 942, 712 P.2d 643 (1986)
ORDER NO. 27617 30-
Although the company may have established actual incurrence of these
operating expenses, that fact alone does not establish a prima facie case of
reasonableness with respect to payments to affiliates. (Citations omitted).
Charges arising out of intercompany relationships should be scrutinized with
care.
97 Idaho at 836-837.
In this case we find that the Company proposed adjustment for budgeted increases in fees
paid to the M & S Company is a projection not based on actual known and measurable data. It is
simply a 5% increase percentage assessment over year end 1996 annual expense. A mere statement
that the higher figure reflects the level of services received does not establish the reasonableness of
the increased payment to M & S. We therefore find that Staff's proposed adjustment is proper.
ORDER NO. 27617 31-
Adjust Depreciation Expense IT and Master Plan
The Company in its case used a 10-year life for calculating depreciation expense on its
investment in the Information Technology (IT) program and the Master Plan. The IT system, the
Company states, replaces a 20-year old main frame that was essentially obsolete. The conversion
to a new information system, Staff contends, is not a normal occurrence and it is unreasonable to
expect that in ten years the Company will scrap all of its technological equipment and software and
start over from scratch. Tr. pp. 531 , 533. Likewise, Staff contends, that the Master Plan is an
unusual long-term project. Staff proposes that both investments be depreciated over a 20-year
period. Staff's adjustment is simply a 50% reduction in the Company s pro forma depreciation
adjustment.
On rebuttal, the Company contends that the ten year life proposed for its investment in
Information Technology is based on a realistic assumption of service life, given the rapidly evolving
nature of computer equipment. Citing Pennsylvania PUC concurrence Tr. pp., 1040-1042. The
replaced main frame equipment, the Company reminds the Commission, was a system that was
added to, upgraded, retired and modified during the course of its 20 plus years. Tr. p. 1042. Reason
would suggest, the Company contends, that a 20-year depreciation period for IT equipment is based
on flawed logic.
Regarding its Master Plan, the Company on rebuttal notes that, although its master
engineering and operations plan is intended to provide guidance to the Company for many years, the
plan contemplates a five-year update cycle to keep it fresh and responsive to the dynamic growth in
the Company s service area. Key aspects of operations, the Company contends, can change
substantially over a ten-year period. For instance, ten years ago UWI did not anticipate that
southeast Boise would be designated a Ground Water Management Area. The conclusions of the
Treasure Valley Hydrologic Study may have a potential similar impact in the next ten years. For
these reasons, the Company contends that a ten year depreciable life is reasonable. Tr. p. 1044.
We find:
The Company s argument for using a 10-year life for calculating depreciation expense
on its investment in its Information Technology program and Master Plan is persuasive. Staff's
proposed adjustment is rejected.
ORDER NO. 27617 32-
Replacing Employee with Contractor
On rebuttal the Company proposes an adjustment to reflect the removal of a proposed
new employee (a locator) and attendant labor, benefit and transportation costs as reflected in its
direct case and the replacement of this function with contract expense. A locator s job is to "mark-
out" mains and service locations for others who are excavating. The Company states that in 1997
it received approximately 68 "mark-out" requests per day. The Company has one employee
dedicated to this function who is unable to perform the number requested. Tr. p. 51. Contract
expense is estimated to be $58 240 based on the historical level oflocator requests, a $13 013
increase over the $45 227 proposed employee costs. Exhibit 21; Tr. pp. 1003, 1004. The Company
maintains that "the long-term benefit to the customer is clear." Tr. p. 1004.
By unattested faxed copy of a post-hearing agreement dated June 22, 1998 , it is
represented that the Company has purportedly contracted with one Melvin L. Cook dba Mel'
Locating Company, N amp a, Idaho for locator services. Compensation is at the rate of $8.00 for each
underground facility located and marked by contractor. The Company reserves the right to increase
or diminish the amount of work to be done with regard to the services to be performed.
We find:
The Company s proposed rebuttal adjustment is an out of test year adjustment for an
expense that is not actual but estimated. No money has been spent. We find that it is not sufficiently
known and measurable. We find that the post-hearing contract will not be included as a record
exhibit. The hearing record is closed. We therefore find it reasonable to deny the Company
proposed adjustment for contract expense.
ORDER NO. 27617 33-
Adjustment for Salary and Benefits Survey Participation
In the discovery phase of this case, Ms. Ullman requested that the Company provide a
copy of the Western Management Group 1997 Idaho Cross-Industry Salary and Benefit Survey
results, a survey in which UWI participated. The Company responded that it was contractually
precluded from disclosing or sharing the results. In Order No. 27449 the Commission indicated that
it expected the Company to make an adjustment to reflect removal from its revenue request, the
expense incurred due to its participation in the Western Management Group Salary and Benefit
Survey. The Company reports that no adjustment is indicated, as the billing was paid in July 1997
outside the test year period. See Exhibit 30; Tr. p. 1054..
We find:
In as much as the Company s payment to the Western Management Group did not fall
within the test year period, we find that there is no need for an adjustment, as proposed.
Depreciation Expense Adjustments-Redwood Creek/Island Woods
We find:
Having disallowed a portion of the Company requested rate base for Redwood Creek and
Island Woods, the Commission finds that the proportionate related depreciation expense included
in the Company s case should be removed. For Redwood Creek, that amount is $15 719; for Island
Woods the amount is $1 468.
Depreciation Expense Adjustment-Capitalized Corporate Overhead
We find:
Having disallowed Staff's proposed adjustment related to capitalized corporate overhead
we also disallow the proposed $16 242 elimination of related depreciation.
ORDER NO. 27617 34-
Operating Results Calculation
Following is the calculation of United Water s operating results based on the revenues
and expenses approved in this Order.
OPERATING RESULTS SCHEDULE
Revenues Per Company Exhibit 20, Page 3 , Column 0
Eliminate Micron Reuse/Efficiency Adjustment *
Net Revenues
Operating Expenses Per Co Ex 20, Page 3, Column 0
Correct for:
Ad Valorem Tax (Co. Post Hearing Exhibit)
Pumping Power (Co Post Hearing Exhibit)
Micron Reuse/Efficiency Adjustment
PUC Regulatory Fees
Rate Case Amortization Expense
M&S Co. proforma adjustment
Locator Expense
Adjust Depreciation Expense- Redwood Creek
Adjust Depreciation Expense- Island Woods
Adjust Depreciation for Equity Gross-up of AFUDC
Recalculate Operating Ratio
Total Adjusted Operating Expenses
Operating Income Before Income Tax
Idaho Income Tax
Federal Income Tax
Net Utility Operating Income
See following VI C discussion re: Micron ReusefEfficiency Adjustment.
ORDER NO. 27617 35-
$21 962 493
173 482
$22 135 975
322 231
709
106 291
594
(168)
(61 044)
(80 078)
(58 240)
(15 719)
468)
617)
(739)
$14 224 752
911 223
311 466
205 827
$6.393.930
IV Rate of Return
Capital Structure
United Water Idaho Inc. is wholly-owned by United Water Works (formerly General
Waterworks Corp.), which is wholly-owned by United Water Resources, Inc. Tr. p. 252. The actual
capital structure ofUWI is 100% equity. Tr. p. 288. Interest expense is allocated to UWI. United
Water Idaho Inc.'s common stock is not traded.
One of the issues in this proceeding is the capital structure that should be adopted for the
regulated United Water Idaho Inc. Testimony on this issue was presented by Frank J. Hanley (AUS
Consultants) for the Company and Terri Carlock for Commission Staff. Post-hearing briefs were
also submitted. The following schedule sets forth the related recommendations of each:
COl\1PONENT
CAPITAL
STRUCTURE
RATIO (UWI)RATIO (STAFF)
Long-term debt
Minority Interest (Preferred
Stock)
54.98%52.
14%
Common Equity 44.88%40.
TOTAL 100.00%100.00%
Reference UWI Exhibit 13, Schedule 8; Staff Exhibit 101, Schedule 17.
United Water employs the actual June 30, 1997 consolidated capital structure of its
corporate parent, United Water Works (UWW). Tr. p. 248. The Company represents that this is
appropriate because of the following:
1. UWW provides all of the external capital required by United Water;
No equity capital has been injected into UWW by its parent United
Water Resources (UWR) since the April 1994 merger and thus
UWW is not financially dependent on UWR;
UWR provides no financial guarantees, pledges, or any of its assets to
any lender for the benefit ofUWW;
No capital ofUWR other than UWW could be used to finance United
Water s rate base;
ORDER NO. 27617 36-
UWW capital structure ratios are reasonable vis-a.-vis a proxy group of
five water companies represented as generally similar in risk to United
Water;
UWW capital structure ratios are consistent with those required by
Standard and Poor s (S&P) for a water utility to maintain an A bond
rating with an "average" business position, i., the business position of
UWW. (S&P's total debt to total capital criterion for a water company
in an average business position to obtain an "A" bond rating is 52%
implying, the Company states, a total equity ratio of 48%. Tr. p. 301.)
Tr. p. 248.
In BOI-93-, the Company s last general rate case, the Commission adopted a
hypothetical rate structure for United Water s predecessor, Boise Water Company. Reference Order
No. 25640. Commission Staff in this case rejects the Company s UWW capital structure and
recommends continued use of the hypothetical capital structure approved in BOI-93-3. Tr.
479. Staff contends that its proposal is consistent with the Value Line water industry (Tr. pp. 462
479) and S&P financial benchmark (Tr. p. 485) for a total debt to total capital ratio to maintain the
S&P bond rating. Staff states that the stock is traded at the United Water Resource level with United
Water Resource controlling the payout ratio, and thus the retained earnings and common equity ratio
for United Water Works. Tr. pp. 492-493; 499-503. This control, Staff contends, has the potential
to skew the capital structure ratios lending further support for the use of the hypothetical capital
structure for rate making purposes. Tr. pp. 495, 496.
The Company notes that at the time of the Commission s Order in BOI-93-3 there was
uncertainty regarding the corporate relationships and resulting capital structure as indicated by the
following Commission language: "Because the common equity ratio of GWC is expected to be 40%
for 1994 and because United's common equity is expected to approximate 40% in the near term, we
find that to be a reasonable equity ratio." Tr. pp. 288-290. The Company, citing various legal and
regulatory principles, suggests that use of a hypothetical capital structure is appropriate only if the
actual capital structure (UWW) is "clearly unsound or extravagantly conservative." Tr. p. 272. In
support of the reasonableness of its position, the Company cites a recent Pennsylvania Commission
case that found that for a sister subsidiary of UWW, United Water Pennsylvania, Inc., it was
reasonable and appropriate to use UWW's capital structure. Tr. pp. 752-753. With only two
exceptions (UWI's BOI-93-3 and a case involving United Water Delaware now on appeal to the
ORDER NO. 27617 37-
Supreme Court of Delaware) in recent history, the Company states that the subsidiaries ofUWW and
the former General Waterworks Corp. have been consistently regulated in their rate cases, both
before and after the merger, on a basis ofUWW's capital structure. UWI Brief, pp. 3-
It is to be noted that UWR's consolidated capital structure consists of 55.20% long-term
debt, 8.51% preferred stock and 36.29% common equity. Exhibit 13, Schedule 3. The hypothetical
debt ratio of 52% proposed by Staff, is less than the current debt ratio for UWR of 55.2% and the
water utility industry average of 56.5%. The 52% debt ratio is also the same as the ratio stated for
an "A" rated utility as set forth in Standard & Poor s Financial Benchmarks (Exhibit 13 , Schedule
, p. 3 of 4). Exhibit No. 101 , Schedule 15 also reflects these comparisons. UWW's debt is rated
A" by S&P and UWR's credit rating is "Tr. p. 297. The 8% minority interest in the
hypothetical capital structure is consistent with the 8.5% preferred stock held by UWR.
United Water Idaho does not directly raise funds in the market. The debt funds are issued
at the United Water Works level and the equity funds are retained through earnings or, as contended
by Staff, raised at the United Water Resources level. Therefore, the actual capital structure shown
on the books of United Water Idaho, Staff contends, has been provided by and supported by one of
the parent entities. The UWI capital structure, Staff states, could be double leveraged to reflect this
relationship. Rather than double leverage, however, Staff contends that a hypothetical capital
structure is more appropriate. Tr. pp. 461, 462. The Company states that Staff's hypothetical capital
structure is essentially the same as utilizing double leveraging. This is disputed by Staff, which
presents but does not recommend an example of a double leveraged capital structure for UWI. Staff
Brief Exhibit A.
The average capital structure ratios for the two proxy groups are depicted in Company
Exhibit 13 , Schedule 3, page 2. They are for the proxy group of five water companies, 52.19% long-
term debt, 1.88% preferred stock, 45.93% common equity capital; and for the proxy group of six
Value Line water companies, 55.15% long-term debt, 2.58% preferred stock, and 42.27% common
equity capital. Tr. p. 760. The Value Line water industry average capital structure consists of39.
in 1997 and is projected to be 40% in 1998. Exhibit 101 , Schedule 15.
The Company represents that its primary proxy group of five water companies (Exhibit
, Schedule 5) is a better and more meaningful proxy than the group of six Value Line water
companies. (Exhibit 12, Schedule 6), which was used by the Company as a check and relied upon
ORDER NO. 27617 38-
by Staff. Tr. pp. 280-283. The Value Line check group of six is dismissed by United Water as
irrelevant in this case because the companies are much larger and more geographically diverse than
United Water Idaho. Tr. pp. 756, 282. Excluding the purported nonrepresentative American Water
Works and United Water Resources, Inc. which make up over three-fourths of the total capitalization
of the group, Tr. p. 481 , the 9/30/97 average capital structure for the remaining companies in the
Value Line group would be 53.92% long-term debit, 0.94% preferred stock, and 45.14% common
equity. Tr. p. 760.
We find:
The Company s argument for moving away from the hypothetical capital structure that
we used in BOI-93-3 to the actual capital structure of its corporate parent, United Water Works
(UWW) is persuasive. UWW is the entity that issues the debt for United Water Idaho. The UWW
capital structure is currently within a reasonable range for utilities of comparable risk.
ORDER NO. 27617 39-
Cost of Capital
The principal proxy group of five water companies upon which the Company bases its
recommended common equity cost rate yields a common equity range including 10.5% (two-stage
growth DCF model); 11.6% (Risk Premium Model); 10.5% (Capital Asset Pricing Model) and
12.6% (Comparable Earnings Analysis). Exh. 13" Sch. 7, p. 4.
United Water in rebuttal Exh. 13 , Sch. 8 proposes the following cost of capital and rate
of return.
Long Term Debt
Minority Interest
Common Equity
Overall Rate of Return
Capital Structure
54.98%
14%
44.88%
100.00%
Cost Rate
80%
00%
11.5%
Weighted Cost
29%
01%
16%
9.46%
The Company recommends a common equity cost rate of 11.50%. A point that includes
a 20 basis point business risk adjustment, that it contends is appropriate to reflect UWI's extremely
small size and the following four major risk factors:
Micron reuse program (sales to Micron represent approx 2% of United
Waters total annual revenue).
Weather-Company realizes about 70% of annual revenue May-
October; 12" annual rainfall; 87% of customers residential.
Surface water rights are difficult to acquire and increasingly costly.
Cost of power may increase with deregulation.
Tr. pp. 265-268, 776, 777.
Staff in Exh. 101 , Sch. 17 recommends the following cost of capital and rate of return.
Long Term Debt
Minority Interest
Common Equity
Overall Rate of Return
Capital Structure
52.
40.
100.00%
Cost rate Weighted cost80% 4.06%00% .40%
10.25%-11.25% 4.10%-50%
56%-96%
Differentials due to size and ultimate risk of the utility, Staff contends, should be
reflected in the cost of common equity when a point within the reasonable return or equity range is
ORDER NO. 27617 40-
chosen. Staff contends that there is less risk inherent in the capital structure proposed by United
Water, and ifadopted, Staff would recommend 10.75% as a reasonable return on equity. Tr. p. 464.
Staff also rejects the Company s contention that a business risk adjustment is required. Tr. p. 460.
StaffExh. 101, Sch. 11 is a comparison schedule of thirteen (13) water company returns
on equity for 12 months ending September 30, 1997. The returns range from 8.0% to 14.4%, with
an average of 10.8%. Staff calculates the discounted cash flow (DCF) required return on common
equityintherangeof8.5%-10.7%. Exh.1O1 , Sch 13. Staff also restates Company witness Hanley
Exh. 12, Sch. 1 , p. 2 onExh. 101 , Sch.14 reflecting calculations shown as not meaningful by Hanley.
For the five water company proxy group recommended by United Water, the single-stage growth
DCF rate is shown as 9.8% (Exh. 12, Sch. 12) and the two-stage growth DCF rate is 10.5% (Exh.
, Sch. 16
, p.
l).
Staff contends that any point within the range of 10.25% - 11.25% is reasonable for a
return on equity. Tr. p. 464.
We find:
United Water contends that the use ofUWW's capital structure is appropriate in the
determination of the cost of capital for United Water Idaho. We approve that capital structure. The
Company and Staff are in agreement on the cost rates for long-term debt and minority interest. The
cost of debt has been adjusted for the debt refinancing in January and February of 1998. We find
the respective rates reasonable and appropriate to use.
The Company also believes a 20 basis point business risk adjustment is required. We do
not agree. The Company identifies four unique factors that it contends contribute to its increased
riskiness. Regarding the Micron reuse program, the Company may present testimony and a related
adjustment in the next phase of this case, if it can demonstrate that Micron s conservation program
will result in a significant, known and measurable reduction in consumption. The potential for
increased power costs due to deregulation, is highly speculative, especially in Idaho where electric
restructuring has not been approved. Power costs are an operating expense for United Water. In this
case, we have permitted an adjustment for an out of test year increase in power costs. Regarding the
riskiness of surface water rights, we find that the Company in this case presents no evidence that it
will have difficulty in securing water rights. Tr. p. 81. Regarding weather, the Company receives
ORDER NO. 27617 41-
an adjustment for weather normalization. The Company will have the opportunity to address rate
design in the next phase of its case.
In considering the record, and the business, financial and regulatory risks of United
Water, we find that a return on equity of 10.75% using the Company s proposed capital structure is
a midrange return that fairly compensates the shareholders for the risks they assume by investing in
United Water Idaho. We find that such a return also reflects our consideration of the quality of
service and management provided by United Water.
To summarize, United Water s approved capital structure and overall rate of return are
as follows:
COST OF CAPITAL
Debt 54.98%
Cost Weighted
Rate Cost
80%29%
00%01%
10.75%82%
Component Ratio
Minority Interest 14%
Common Equity 44.88%
Required Rate of Return on Rate Base 12%
ORDER NO. 27617 42-
Revenue Requirement
The Company s additional revenue requirement, which we find to be fair, just and reasonable, is
593 095 calculated as follows:
Rate Base
Rate of Return
Net Operating Income Required
Net Operating Income Realized
Net Operating Income Deficiency
Gross-up factor
Revenue Increase required
Percent Increase
$80 424 286
12%
334 695
393 930
$940 764.
1.6816
581 989
15%
ORDER NO. 27617 43-
VI Miscellaneous
A. Timing of rate increase - Motion to Strike
On March 19, 1998, United Water filed a Motion with the Commission seeking to strike
identified portions of the prefiled testimonies of Thomas Power and Sharon Ullman. Specifically,
the Company sought to strike the portion of each testimony that proposed to defer the rate
adjustment and recovery of any determined revenue deficiency until after completion of the cost
service and rate design phase of this case.
United Water contends that this issue has been decided; that in authorizing the bifurcation
of the case, the Commission implicitly accepted the Company s proposal to begin recovery of any
revenue deficiency found to exist in the revenue requirement phase of its rate case through an
immediate uniform percentage increase. United Water contends that the Commission is without
authority to extend the suspension period and that to delay any recovery would be to deny the
Company an opportunity to earn its authorized rate of return, and would require it to perform its
public service obligation without adequate compensation. Citing Idaho Code 61-622; Citizens Uti!.
Co. v. Idaho Public Uti!. Comm.99 Idaho 164, 579 P.2d 110 (1978).
The intervenors argue that the statutory suspension period preproposes that the Company
has filed a complete rate case, i., a case including "appropriate cost of service studies." Reference
IDAPA 31.01.01.121.01.e. Dr. Power asserts that the bifurcated approach is merely a strategy of
the utility to hold down public outcry and thereby enhance the possibility of a larger recovery. The
Idaho Citizens Coalition contends that moving to strike testimony with which one disagrees is nQ1
an appropriate way to seek to affect the outcome of this case. The Coalition contends that United
Water can argue its position regarding the timing of a rate increase (if any) in its rebuttal testimony,
through its witnesses at the public hearings, through cross-examination of opposing witnesses, or
it can make those arguments in brief It also has the opportunity, it states, to call for reconsideration
if it does not like the Commission s decision about the size and timing of any rate increase that is
approved.
The Commission denied the Company s Motion in Order No. 27461 , finding that the
Commission s Order and Notices required no clarification, and apprising the Company that the
Commission as fact finder and decision maker, was inclined to admit all relevant and arguably
ORDER NO. 27617 44-
reliable evidence and that it possesses the expertise to assess the relative probative value of evidence
admitted.
At the hearing the Company renewed its Motion to Strike. Tr. pp. 404, 714.
We find:
For reasons expressed in Order No. 27461 , we continue to find it reasonable to deny the
Company s Motion to Strike. As to the intervenors underlying argument, we find that it was
somewhat presumptuous of the Company to assume that it would not be necessary to present a full
rate case, including cost of service and rate design. The Commission s Rules indicate what a general
rate case filing should include. IDAP A 31.01.01.121. The Commission could have dismissed the
Company s filing as incomplete. IDAPA 31.01.01.121.03. Nevertheless, we instead found its
proposal to bifurcate to be an administratively efficient and judicious use of resources and a
procedure that provided the Commission and parties a better opportunity for focused and thoughtful
analysis and consideration of all the issues. Order No. 27293. We further found the proposed
procedure to be a sequentially logical one and indicated the Company would be required to file a
separate cost of service and rate design application within 30 days following the final Order in this
proceeding. While we did not directly address the issue of the timing of any authorized increase in
our prior Order, we find it reasonable and fair to allow the increase to go into effect now that a
revenue deficiency has been found to exist.
B. UWI Motion to File Late Filed Exhibit No. 33-
On June 11 , 1998, United Water filed a Motion seeking to introduce the Company
Idaho State Tax Commission 1998 Market Value Appraisal. In Exhibit 5 , Schedule 3, page 1, the
Company estimated that the appraised market value for 1998 would $70 624 792. The proposed late
filed Exhibit 33 provides the Commission with the 1998 actual appraised market value, $70 956 346.
We find:
The Commission notes that the appraised market value is used in determining the
Company s ad valorem tax obligation, which is part of revenue requirement calculations. We find
that an actual known and measurable market value is preferable to an estimated number and
therefore find it reasonable to grant the Company s Motion and admit the late filed Exhibit 33.
ORDER NO. 27617 45-
C. UWI Rebuttal Adjustment- Micron Reuse/Efficiency Program
At hearing the Commission granted a Staff Motion to Strike regarding Company rebuttal
testimony and related exhibits dealing with an adjustment it proposed for Micron consumption. Tr.
pp. 726-731 , 790-793. The Commission agreed the information regarding the projected change in
Micron consumption was filed too late for the other parties to have an appropriate and meaningful
chance to respond. The Commission granted the Company leave, however, to bring the issue back
to the Commission as part of the cost of service/rate design phase of its rate case. Tr. p. 793.
We find:
The Commission reaffirms its decision granting Staff's Motion to Strike.
Company s proposed adjustment is accordingly rejected.
The
ORDER NO. 27617 46-
D. Ullman Challenges Re: Reasonableness ofUWI Wage/Salary/Benefit Expense
Citing specific examples including the salary-benefit package of the Company s president
and wages for meter readers, Ms. Ullman contends that the salary, wages and benefits offered by the
Company are excessive and not comparable to area averages. No specific adjustments were
proposed.
We find:
Based on the information presented and studies reviewed, we are unable to find that the
Company s salaries, wages or benefits are unreasonable.
adjustment in the Company s operating expenses.
We accordingly make no related
ORDER NO. 27617 47-
VII Service and Water Quality (UWI-96-
The Commission in Order No. 27229 determined that the identified service and water
quality issues raised in the filings and submitted investigative reports in Case No. UWl-96-6 (In
the Matter of the Investigation of United Water Idaho Inc. and its Ability to Provide Adequate
Service and Water Quality) were also at issue in this case. Staff Exhibit 112. The water quality
issue identified in the 96-6 case was the presence of iron/manganese in the Company s source waters
at levels exceeding the secondary maximum contaminate levels (SMCLs) listed in the federal Safe
Drinking Water Act (SDW A). Secondary contaminates are classified as non-health threatening by
the Environmental Protection Agency (EP A) and the State Division of Environmental Quality
(DEQ). The problem manifests in the water as objectionable color, taste and odor.
Of the Company s 61 ground water wells included in Staff's report , 23 produced water
that contained iron and/or manganese that exceeded the voluntary SMCLs. Those wells represented
approximately 35% of the Company s total rated supply capacity. The problem is generally most
acute during the summer months as demand increases.
The primary focus of the Company in dealing with customer water quality complaints
is to reduce the amount of water supplied to the system from problem wells. The Company also
sequesters at each problem well to keep the iron and manganese in solution. Additionally, the
Company has proceeded with other possible solutions to replace existing problem supplies including
investigating the use of aquifer storage and recovery (ASR), identifying aquifers of high quality
water, and redrilling and replacing existing wells.
Staff in its report estimated that the Company in its effort to improve the aesthetic
characteristics of its water was spending in excess of $460 000 per year which represented about
3% of the Company s revenue collected from customers. Exhibit 12, page 16. In the instant case
Staff identifies $346 494 as revenue requirement related to improving aesthetic water quality.
The water quality improvement alternatives implemented or proposed by the Company
are water system alternatives. Staff notes additionally that there are also in home water treatment
alternatives that customers can implement, including mechanical gravity and pressure filters, iron
and sulphur traps, ozone treatment, chlorine and charcoal filters, and reverse osmosis filters.
Staff concludes that the cause of water quality complaints within the Company s service
area seems to be due primarily to high levels of iron and manganese introduced into the system to
ORDER NO. 27617 48-
varying degrees by existing production wells. However, it states, other factors such as the presence
of iron bacteria, the layout of the distribution system, system flushing activities of the Company and
the proximity of other wells of high quality seem to greatly influence how, where and when
problems occur. In addition, customer perceptions, tolerances and expectations, it states, as well as
Company communications and customer service drive the number of actual complaints that are used
to determine the extent of the problem.Given the subjective nature of aesthetic customer
complaints, Staff contends that it is difficult to determine how serious the problem is, how it is best
addressed and how much money should be spent.
Addressing Staff's attempt to quantify the Company s aesthetic water quality costs
United Water contends that 100% of its revenue requirement is a result of supplying or improving
water service to its customers, which includes its basic ability to serve, its compliance with EP A and
DEQ standards, and its attempts to provide its customers with aesthetically acceptable water. Tr.
pp.
874-876. Arguably the standard that the Company should adopt in the aesthetic area, it contends
is compliance with SDW A secondary standards. However, this approach it states may not always
give the customers the best value added for the additional cost. Economy and efficiency, it states
must also be considerations. The measurement of success in its efforts, it states, may very well be
reducing the number of customer complaints concerning the aesthetic water quality. Tr. p. 876.
In a November 1997 Status Report filed with the Commission regarding specific action
plans to address water quality concerns, the Company represented that 1) it anticipated making
application to DEQ and Water Resources by February 1998 for ASR pilot approval; the Company
now expects to make formal application in July. Tr. p. 967; 2) that it would post on its web site in
1998 a general information notice explaining the underlying quality issues regarding iron and
manganese the Company has put the notice together and has distributed it as a bill stuffer; not on
web site yet, Tr. p. 968, and 3) that it was preparing a Consumer Confidence Report on overall water
quality that it expected would be available by April 1998; the Report is not yet completed. Tr. p. 968.
ORDER NO. 27617 49-
We find:
We acknowledge the continuing efforts of United Water to reduce the number of
customer complaints related to the presence of secondary contaminates (iron and manganese) in its
supply waters and to better educate its customers regarding the nature of the problem and potential
solutions, including in home measures customers may take themselves. We encourage the Company
to continue with its efforts. We note, as the Company and Staff have suggested, in any cost/benefit
analysis of mitigation measures there is a point beyond which additional money should not be spent.
We also note that it is reasonable for the Company to use its supply waters from problem wells
during short-term periods of emergency, when to not do otherwise would result in a curtailment of
supply and an inability to fill its reservoirs.
ORDER NO. 27617 50-
VIll Intervenor Funding
Timely Petitions for Intervenor Funding were filed by Idaho Citizens Coalition and
Sharon Ullman. Reference IDAPA 31.01.01.161. United Water on June 4 filed a response and
objection to the Petitions for Intervenor Funding. Each petitioner thereupon filed a reply, Ms.
Ullman on June 9 and the Idaho Citizens Coalition on June 19.
Citizens Coalition
The Petition of the Idaho Citizens Coalition requesting $6 955 comports with the
requirement of Rule 161 of the Commission s Rules of Procedure. Dr. Power s testimony for the
Coalition dealt with three issues: (1) the Boise River diversion, (2) the timing of any approved
increase in rates and (3) methods for controlling the ongoing costs associated with the expansion of
the water system. The Coalition s positions on each of the issues, it states, differed materially from
Staff, which either took no position or different positions on each.
United Water questions the materiality of the Coalition s contribution in this case. The
Company, as it did in its repeated Motions to Strike, reiterates its understanding of Order No. 27556
interpreting the Commission s language as a rejection of the Coalition s proposal to defer any
change in rates until completion of the rate design and cost of service phase of the Company s rate
case. The Company concludes in rather summary fashion that in any event, Dr. Power s proposal
runs contrary to clear Idaho law.
The Company challenges Dr. Power s testimony on the Boise River diversion as being
largely duplicative of Staff's evaluation , albeit conceding that Dr. Power placed more emphasis on
the "extreme emergency" provision of Idaho Code ~ 61-502A. The Company characterizes
Dr. Power s testimony as flawed by his "continued insistence that construction of the diversion was
a voluntary business decision and his refusal to acknowledge that construction was necessitated by
a mandate from government. . . .
The Company dismisses Dr. Power s discussion of geographically deaveraged rates as
a means of addressing growth and the number of customers being served and the location of those
customers in places with relatively high costs to serve as a theoretical exercise relating more directly
to rate design, and suggests that the Commission consider deferring the Coalition s Intervenor
Funding request until the conclusion of that proceeding.
ORDER NO. 27617 51-
Sharon Ullman
The Petition of Ms. Ullman requesting $4 696.22 comports with the requirements of Rule
161 of the Commission s Rules of Procedure. Ms. Ullman in this case addressed and challenged the
reasonableness of Company salaries and benefits, overhead costs, rate case expense, requested rate
of return, the timing of any authorized rate increase, the comparative cost of UWI water with other
area water providers, the used and useful standard, ad valorem tax expense, attorney fees, and
administrative matters. Ms. Ullman states that the positions she advanced on almost all of the issues
addressed were different than those addressed by Commission Staff.
United Water disputes Ms. Ullman s contention that she somehow represents the public
or is acting on behalf of United Water s customers and recommends that her request be denied.
Authority to represent the public cannot be a process of self-anointment, the Company contends, but
must be conferred by those whose interests are purportedly represented. Individual citizens are
certainly entitled to express opinions on issues pending before public bodies, the Company states
but in the absence of some delegated authority from others, they do so in their own name.
Ms. Ullman by way of response contends that to the extent her interests are
indistinguishable from ratepayers generally, the validity of her representative participation is proved.
She reminds the Company and Commission that her full participation in Commission proceedings
as an affected customer is encouraged by Idaho Code ~ 61-617A. Ms. Ullman reminds Mr. Miller
the Company s attorney, that when he himself was a member ofthe Commission, the Commission
declared "Ms. Ullman s participation in this case was insightful, well prepared and helpful to this
Commission. Her effectiveness and knowledge of an arcane subject were impressive. We appreciate
her involvement." Ms. Ullman has participated in numerous United Water (Boise Water) cases, and
in the most recent case was granted Intervenor Funding.
We find:
Pursuant to Idaho Code ~ 61-117 A, the maximum award of intervenor funding that may
be made in anyone case is $25 000. We find that the participation of both the Idaho Citizens
Coalition and Ms. Sharon Ullman materially contributed to our decision in this case. The testimony
of the Coalition was detailed and well reasoned. The testimony of Ms. Ullman offered a different
perspective. The intervenors advanced positions differing materially from those of Staff on issues
of concern to all of United Water s customers. We find that it would constitute a significant
ORDER NO. 27617 52-
financial hardship for the intervenors if they are not awarded funding. We find it reasonable to
award the Coalition $6 955 , the full amount requested. Ms. Ullman has requested $4 696.22.
Included within her itemization of expense is 113 hours $40/hour. While Ms. Ullman may feel
that the number of hours was reasonable to spend, we find that it exceeds a reasonable level of
expense for purpose of intervenor funding. The number of hours we find reasonable are the total
consultinglresearch hours itemized by the Coalition in this case, i., 81 hours. Making that
adjustment, we authorize an award to Ms. Ullman of$3 416., 81 hours ~ $40/hour, plus copying
($129.26) and postage ($46.96).
United Water is instructed to pay these amounts within 28 days from the date of this
Order. The Company is further directed that these costs, which we find to be an embedded part of
authorized rate case expense, should be amortized over three years.
ORDER NO. 27617 53-
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over United Water Idaho Inc.
a water utility, and its Application in Case No. UWI-97-6 pursuant to the authority and power
granted under Title 61 of the Idaho Code and the Commission s Rules of Procedure, IDAPA
31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission hereby authorizes United Water Idaho Inc. to increase
its revenues by $1 581 989 or approximately 7.15%. The Company is directed to file amended tariff
sheets for rates and charges in compliance with the terms of this Order. The rate increase that we
authorize is effective for service rendered on and after July 1 , 1998.
IT IS FURTHER ORDERED and United Water Idaho Inc is directed to file with the
Commission Secretary a separate cost of service and rate design application within thirty (30) days
from the date of this Order.
IT IS FURTHER ORDERED and the Commission pursuant to Idaho Code ~ 61-117A
grants intervenor fundingto the Idaho Citizens Coalition in the amount of $6 955 and to Ms. Sharon
Ullman in the amount of$4 696.82. United Water Idaho Inc is directed to pay the intervenors within
twenty-eight (28) days from the date of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. UWI-97-
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 or in interlocutory Orders previously issued in this Case
No. UWl-97-6. 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. 27617 54-
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this G U
day ~98.
Dissenting (See Attached)
DENNIS S. HANSEN, PRESIDENT
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RALPH LSON, COMMISSIONER
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MARSHA H. SMITH, COMMISSIONER
ATTEST:
:d;~ Myrna J. Wa.rf"er
Commission Secretary
vldlO:UWI-97-sw6
ORDER NO. 27617 55-
DISSENT OF COMMISSIONER DENNIS S. HANSEN
Order No. 27617, Case No. UWI-97-
I disagree with parts of the majority opinion and the amount of revenue increase granted
to United Water Idaho Inc.
NORTH STATE ACQUISITION
First, I do not believe that the North State acquisition adjustment of $577 664 should be
included in rate base. The North State/Garden City exchange was a discretionary decision made
the Company and municipal authorities. Tr. p. 517. The Company s investment in Garden City
facilities should not be allowed in rate base on the grounds that the purchased plant was previously
contributed, i., that the assets were originally contributed to public service by developers and or
customers at no cost to Garden City.
As pointed out in the testimony of Staff witness Lobb, the revenues generated by the
customers within the North State area, are only sufficient to cover the costs associated with the
purchase price of the distribution system, $577 664, and cover operating expenses. With the
increase in the customer base (new North State customers minus Millstream customers lost), the
revenues generated are sufficient to cover either the investment cost or the source of supply costs.
However, I am not convinced that the revenues are sufficient to cover both the costs associated with
the acquisition adjustment and the source of supply necessary to provide service to the customers.
By allowing this expense, the general body of customers is being asked to subsidize the water supply
costs of the North State area. I don t think it is fair that the general body of customers are required
to subsidize either United Water Company s investment in Garden City or the water supply costs.
The Company, in Case No. UWI-95-, as noted in our Order No. 26562, made a
commitment to hold harmless the Company s other customers from the consequences of the
transaction. As noted in the testimony of Staff witness Smith, this transaction accelerates the timing
of a new water source and absent a contribution from rates to support source of supply investment
imposes a cost subsidy on the Company s other customers. I concur with the language on page 6
of this order expressing the rationale to disallow inclusion of the North State acquisition adjustment.
This reasoning provides sufficient evidence to disallow recovery of the acquisition adjustment.
ORDER NO. 27617 56-
CAPITALIZED CORPORATE OVERHEAD
Another area of concern in this order is the acceptance of capitalized corporate overhead
of $787 735. Given the information provided, there is no basis to know whether these overheads
reflect a fair allocation of the costs to United Water Idaho by United Water Resources. The Staff
contends that an audit trail was difficult to follow in the records provided by United Water Idaho.
Complicating the audit in this case and the reliability of test year data was a mid-test year change
by the Company in its accounting and time reporting systems and procedures.
An audit should be conducted before the full amount is granted in rate base. To me, what
may appear to be a good corporate decision of United Water Resources, Inc. may not necessarily be
the most economical decision for the Idaho operation in isolation. What I am saying is that corporate
decisions may produce inter-corporate subsidies among the operating units. Staff identified the
Company s vehicle lease program and ramifications of a municipal condemnation of a United Water
Resource subsidiary in Rio Rancho, New Mexico as activities that raised flags regarding the
affiliated web of ' companies and the related operating consequences affecting United Water Idaho.
BOISE RIVER INTAKE
The Boise River intake is another expenditure that should not be included in the general
customer s bill. This $1.9 million expense by the Company is an investment into the future, which
the Company says may be needed by the year 2005. Recognizing that there is no immediate need
for the diversion waters to meet demand now or for several years into the future, I oppose allowing
the amortization of the Boise River diversion in expenses paid by customers until it is used and
useful. This is a case where the Company has built ahead of its needs. The Company does not even
have water rights that would allow it to operate the diversion. This type of future investment without
any advance knowledge being given to the Commission, should not be allowed. . . it makes the
Commission not obligated in any way.
I do not believe the "supposedly" lower cost business opportunity for United Water Idaho
constitutes an "extreme emergency." Also, in a letter concerning the project (Exhibit 110), Mr. Carl
Ellsworth of the Public Works Department with the City of Boise, states that he was assured by
United Water Idaho that they would not include their share of the capital costs of this project in rate
base until the project is being fully used.
ORDER NO. 27617 57-
NORTHWEST PIPELINE
I also disagree with the majority decision allowing United Water Idaho to recover
amortization of its investment in the Northwest Pipeline. First, there was no urgency. The
deficiency was no greater in 1997 than in past years. Second, with a planned 8MGD Marden
treatment plant expansion scheduled to come on line in May 1999, the deficiency is short term. The
Company also failed to utilize other supply resources available to it, such as the Swift No.3 well
Garden City contract supply rights, conservation measures during 1997 peak requirements.
Lengthy distribution pipeline constructed ahead of development places a substantial
portion of the cost of new development on the backs of existing ratepayers rather than through
developer contributions, as the line extension rules would otherwise require.
ORDER NO. 27617 58-