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DECISION MEMORANDUM TO: COMMISSIONER KJELLANDER COMMISSIONER SMITH COMMISSIONER HANSEN JEAN JEWELL RON LAW LOU ANN WESTERFIELD TONYA CLARK DON HOWELL DAVE SCHUNKE MICHAEL FUSS RANDY LOBB BOB SMITH MARGE MAXWELL LYNN ANDERSON GENE FADNESS WORKING FILE FROM: SCOTT WOODBURY DATE: JUNE 13, 2002 RE: CASE NO. MNV-W-02-1 (Morning View Water)APPLICATION FOR RATE INCREASE On April 26, 2002, Nolan Gneiting, President of Morning View Water Co, Inc. (Morning View; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting authority to increase rates for water service by $30 a month, an increase of 136%. Current authorized tariff rates for Morning View are a $22 per month flat-fee plus a public drinking water fee of $6.67 per year. Base rates have not been changed since June 21, 1990. The Company alleges that its fees and expenses have increased and includes three years of accounting data with its Application. Morning View provides water service to 56 customers. The Company proposed effective date of June 1, 2002 was suspended by Commission Order No. 29027. On May 15, 2002, the Commission issued Notices of Application and Modified Procedure in Case No. MNV-W-02-01. The deadline for filing written comments was June 5, 2002. Comments were filed by Commission Staff (see attached) and a number of the Company's customers. The comments can be summarized as follows: Commission Staff Based on its investigation Staff recommends that an annual revenue requirement of $22,028 be approved for Morning View Water. This equates to an increase in pro forma gross revenues of 49% or $7,244. In developing its recommendation Staff's intent was to annualize and normalize certain items (revenue, water testing expense, etc.) and provide for expenses not actually incurred but reasonable (management allowance $4,160 (4 hrs/wk at $20/hr.); maintenance allowance $2,496 (4 hrs/wk at $12/hr)). Based on its analysis of seasonal water usage; Staff recommends that the monthly rates for Morning View Water be established by lot size as follows: Lot Size Monthly Rate 0 Acre - 0.4 Acre (2 customers) $22.00 0.4 Acre - 0.8 Acre (30 customers) $29.75 0.8 Acre and Larger (24 customers) $37.50 Staff notes that Morning View Water has not filed an annual report with the Commission since 1991. Mr. Gneiting owns three separate business entities. (1) Morning View Water Co. (utility), (2) Morning View Homes (Real Estate Company), and (3) LandCo Building and Development Co. (land development and home construction). Staff notes that Mr. Gneiting does not adequately segregate his various business activities and accounts. In the course of its investigation, Staff discovered that the Certificate issued Morning View has a typographical error identifying the service territory to be within Section 30 Township 4 North, Range 38 East. The Range is incorrect and should be 39 East. Staff also learned that the water system has expanded beyond the service area approved by the Commission. On May 31, 2002, the Company filed a letter requesting a revision to its Certificate to include the expansion area. In its comments Staff includes an analysis of the Company's results of operations, rate base, depreciation and revenue requirement, and rates and system design. Staff adjustments include items that should be capitalized as investment rather than expenses, personal expenses of the owner, expenses that should be shared with other business entities and property taxes. The rate base determined by Staff is $6,373.66. The depreciation expense on these assets is $596.79 annually. A 12% return on the rate base produces a return requirement of $764.84. The tax gross-up on the return results in a pre-tax requirement of $978.99. The pro forma 2001 operating expenses of $20,452.24 and the depreciation expense of $596.79 are added to the return to produce a total revenue requirement of $22,028.02. Staff notes that if the $22,028 calculated annual revenue requirement is recovered from all 56 customers by a uniform customer charge, such as the $22 per customer charge per month rate currently in place, the rate would increase to $32.78 per month. This is an increase of $10.78 per month or 49%. The rate design proposed by Staff based on lot size results in zero increase for the 2 customers on quarter acre lots, a 35% increase for the 30 customers on ½ acre lots and a 70% increase for the 24 customers on one acre lots. Staff notes that complete equity in water bills is only achieved when every customer is metered and every customer pays only for the water he or she uses. The estimated cost for metering is approximately $300 per service. Should additional water supply be needed or water pressure fall to unacceptable levels, even with such practices such as alternate day lawn watering, Staff would recommend that all customers be metered. Staff recommends that Morning View consider planning on this transition in the next two or three years. Staff in its comments makes the following additional recommendations: 1. Cancellation of the "Schedule 1-public drinking water fee" tariff. The DEQ fee has been incorporated in the over-all revenue requirement recommended by Staff. 2. Approval of a $25 reconnection charge (Schedule 2-Miscellaneous Charges). 3. To avoid prolonged outages when the large well (400 gpm) equipment is in need of repair, Staff recommends that the Company's 150 gpm well be connected into the system and be operational within 30 days. Last winter customers were without water for two or three days. 4. Staff recommends that Morning View be required to bring its bills and disconnect notices into compliance with the Commission's Customer Relations Rules and Customer Information Rules. 5. Staff recommends that the Company cease its practice of assessing a "finance charge" or late payment fee on last-due bills. The Company has the ability to discontinue service for nonpayment. 6. Staff recommends that the Company discontinue use of its presently drafted "Utility Agreement." The Agreement goes beyond the scope of an application for service and contains inaccurate information. The Company agrees to discontinue use of the "Utility Agreement." 7. Staff recommends that the Commission correct the Company's existing Certificate No. 314 to properly identify the Company's original service area to be within Section 30, Township 4 North, Range 39 East. 8. Staff recommends that the Commission notice the Company's intent to amend its Certificate No. 314 to include the North ½ of the Northwest Quarter of Section 30, Township 4 North, Range 39 East (the expansion area). Customer Comments As reflected in Staff's comments, three petitions from customers of Morning View Water have been received. One petition was signed by 39 households; each of the other two petitions were signed by 19 individuals. The total number of signatures on the three petitions is 77. A more recent customer list shows that the Company has 56 customers. Some customers readily acknowledged signing multiple petitions. In addition, 11 written comments were filed. Many customers request that the Commission hold a hearing in this case. Customers expressed concern with the magnitude of the requested increase. They are also concerned about a lack of water pressure, the number of times water is totally off, the slowness of repair when there is a problem, the safety of the water supply, and the validity of the system costs as reported by the Company. Commission Decision Staff recommends that a workshop and hearing (for public testimony) be scheduled in Rigby or another location near Morning View's service territory prior to any change in rates. Staff also recommends that the Company's proposal to amend its Certificate to include the additional areas served be Noticed. Staff recommends that a deadline be established for Company reply comments. Does the Commission agree with Staff's proposed procedure? Scott Woodbury Vld/M:MNVW0201_sw2