20030630_517.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
WORKING FILE
FROM:MICHAEL FUSS
DATE:JUNE 27, 2003
RE:CAPITO WATER CO MP ANY
CASE NO. CAP-02-
REQUEST
On May 27 2003, Capitol Water Corporation (Capitol Water; Company) requested the
Commission to authorize the expenditure of the remaining approximately $100 000 of the
$507 000 loan and surcharge previously authorized in Order No. 29035. Attached to the request
was the Company s Water Distribution Analysis Report (Report) with improvement
recommendations and an accounting of the correcting entries for the prior surcharge authorized
in Case No. CAP-96-
BACKGROUND
On May 22, 2002, the Commission issued Order No. 29035 authorizing the Company to
incur indebtedness in the amount of $507 000 and implement a $3.10 residential flat rate
surcharge and a metered commercial surcharge of 23.60% to recover these costs from customers.
Order No. 29035 at 11.
In addition to authorizing this indebtedness for the reconstruction of Well No.5 and
related improvements, the Commission ordered the Company to submit written quarterly status
reports to apprise the Commission of the monies expended, construction progress and any testing
results. !d. The first quarterly report was also to include a separate schedule detailing the final
legal and accounting expenses associated with the filing. Id. The Company was further directed
to include a schedule depicting the status of the loan balancing account in its Annual Report. Id.
DECISION MEMORANDUM - 1 -JUNE 27 2003
All financial activity associated with the surcharge was to be tracked through a balancing
account. The Company was directed to complete an analysis of its plant accounts and file
corrected entries that remove the investments recorded in error from the prior surcharge
authorized in Case No. CAP-96-1. Id. at 12.
The Commission s Order also included a requirement for the Company to file a network
analysis and further improvement recommendations prior to proceeding beyond the
improvements directly associated with the new Well No.5 installation. Id. On May 27 2003
Capitol Water Corporation filed the present Report to satisfy this requirement, outline the current
system status and recommend a lO-year capital improvement program.
STAFF ANALYSIS
The Company s Report was prepared by Montgomery Watson Harza (MWH) and further
analyzed by Scanlan Engineering. It includes a study of the system demand and analyzes the
distribution system, storage capacity, and pumping requirements. It includes three capital
improvement recommendations, a I-year plan, a 5-year plan and a 10-year plan. The Report
provides an excellent foundation for the Company s decision making. Unfortunately, the Report
does not take into consideration the limited financial resources of Capitol Water.
Scanlan Engineering further analyzes the Report and refines the recommendations to
implement the recommended improvements based on safety considerations and Capitol Water
financial capabilities. Scanlan Engineering points out that little benefit occurs unless nearly all
of the 4-inch mains that are currently equipped with hydrants are replaced at an estimated cost of
$301 155. Scanlan Engineering further notes that the system lacks standby power to its wells
and states: "Since the water system has no storage tanks, the entire system will depressurize in
the event of a sustained power outage, which could allow contaminants to enter the water
system. Depressurization is a particular concern for non-chlorinated water systems such as CWC
(Capitol Water Corporation).
Capitol Water requests the authorization to make the following water system
improvements as recommended by Scanlan Engineering.
Install back-up power at CWC Well No.4 in 2003. This well can produce
approximately 2000 gpm under normal system pressures. As such, the well is
1 Scanlan Engineering letter dated May 19, 2003.
DECISION MEMORANDUM - 2 -JUNE 27, 2003
capable of meeting the entire average winter demand plus a 1 500 gpm fire flow.
Estimated cost to install back-up power is $75 000.
Initiate aquifer recharge activities in the fall of 2003 at Well No.6 in an effort to
improve water quality for use during summertime demand peaks. High quality water
from Wells 3, 5 or 7 could be injected into Well No.6 during fall, winter, and spring
months, and then recovered during peak demand periods in the summer months.
Estimated costs for the recharge project (piping, water quality analysis, permitting,
etc.) are $20 000.
Modify the capital improvement plan from the Report, so that remaining
improvements can be implemented over a 10-year period. Specifically, the Capital
Improvement Plan (CIP) would provide a long-term plan for upgrade of 4-inch water
mains and other distribution system improvements. The plan should identify the total
footage of water mains to be upgraded, the location of the mains, estimated costs, and
the schedule for implementation. The plan should also include back-up power for at
least one additional well and replacement of Well No.3 or Well No.2. Funding for
the work will need to be determined based on the proposed plan.
While Staff agrees with the evaluation provided by the Company s consultants and the
recommended system improvements, the Company s accounting and reporting of surcharge
revenues and expenditures remain inadequate. Staff has been working with the Company to
correct deficiencies in the Company s records accounting for the surcharges. The Company has
had difficulty implementing an accounting procedure in conformance with the Commission
directives in prior Orders. Recently, the Company enlisted the assistance of its external
accounting firm to help it bring the Company s accounting records and reporting requirements
into compliance with those Orders. Staffs audit of the Company s earlier records and the
worksheets of the external accountant do not match up. Staff is working with the external
accounting firm to reconcile the differences.
Although Staff does not believe the Company has expended any surcharge funds in an
unauthorized manner, Staff cannot recommend further expenditures of the Company s borrowed
2 Scanlan Engineering letter dated May 19, 2003.
DECISION MEMORANDUM - 3 -JUNE 27, 2003
funding until accounting for the surcharges is improved and all expenditures to date are
accounted for.
STAFF RECOMMENDATION
Staff recommends that the Commission direct Capitol Water Company to file a separate
report accounting for all surcharge revenues and expense incurred to date.
Staff recommends that the Commission instruct Capitol Water to expend no more
surcharge funds on projects not already approved in prior Orders until it has filed the
accounting report.
Staff recommends that the Commission authorize the expenditure of surcharge funds on
the projects recommended by Scanlan Engineering only after the recommended
accounting report is filed and has received a favorable audit report by Staff.
Staff has discussed these recommendations with the Company and the Company is in agreement.
COMMISSION DECISION
Does the Commission wish to adopt Staff s recommendation to withhold authorization of
further expenditures pending a favorable review of the Company s surcharge accounting?
)::
ichael Fuss
udmemos/capwO2.1mf
DECISION MEMORANDUM - 4 -JUNE 27 2003