keough_dh.doc

December 7, 1999

Honorable Shawn Keough
PO Box 101
Sandpoint, ID 83864

Re: Regulation of Sewer Companies

Dear Senator Keough:

At the conclusion of the 1999 Legislative Session, you forwarded an inquiry to the Commission regarding the regulation of sewer companies. Attached to your letter was a letter from a constituent, Stoneridge Resort, asking about rate relief from “for profit sewer companies.” More specifically, the Resort’s manager complained that companies, which provide both water and sewer service, very often shift costs to the sewer operation because the Commission regulates the rates for water service. In other words, such dual-function companies may shift costs to the unregulated sewer activity “knowing that the IPUC cannot look into this [function].” After reviewing your inquiry and conducting some research, the Commission has asked me to respond to your letter.

As mentioned in the Resort’s letter, the Commission is not authorized to regulate the rates for sewer service or sewage treatment in Idaho. From the inception of the Public Utilities Act in 1913, the Commission has not been granted regulatory authority over sewer systems. There appear to be several reasons for this situation.

First, from a historical context, the regulation of sewage treatment or service was not deemed to be a public utility service because the disposal of sewage traditionally was the responsibility of individual homeowners and businesses (e.g., outhouses and septic fields). As the population of Idaho grew and communities became more urbanized, sanitation concerns about the proper treatment of sewage also arose. Consequently, municipalities and special sewer districts were empowered to treat and properly dispose of sewage. See Idaho Code §§ 50-332, 50-1020, 50-1029(c), 50-1703 for municipalities and Idaho Code § 42-3201 et seq. for special sewer districts. This historical perspective may be the reason that even in those states that regulate sewer service, there are only a few such companies operating as “for-profit” sewer companies.

Another reason that private sewer systems have not proliferated in Idaho may be the lack of publicly available funds for the construction of sewer systems. For example, Idaho’s Water Pollution Control Account provides funds for the 20% match necessary to obtain federal funding for the construction of treatment facilities. These funds are only available to municipalities and non-profit associations or corporations. Consequently, the lack of public funding sources may dampen the need for privately-owned, for-profit sewer systems.

Twenty-eight states regulate the rates for sewer systems with most of the regulatory states located in the Mid-West and East. None of the Pacific Northwest states regulate sewers. Three neighboring states (Montana, Nevada and Utah) do regulate a few sewer systems. For example, Montana regulates one utility that offers both water and sewer services. Utah regulates two utilities that offer both sewer and water services and one sewer-only company.

Returning to Idaho, there is no central source of information regarding the number of privately-owned sewer systems in Idaho. While DEQ maintains a central database on water systems, there is no such “centralized” database for sewer systems. After canvassing the DEQ regional offices, there appears to be at least four privately-owned “for-profit” sewer systems. The privately-owned systems (including Stoneridge) all provide regulated water service as well.

Expansion of the Commission’s regulatory authority for sewer systems should be cautiously examined for several reasons. First, the Commission is unable to assess whether for-profit sewer companies do in fact charge their customers unreasonable rates. While the Commission recognizes the potential for a company to shift costs from regulated water services to unregulated sewer services, we do not have any direct evidence of this occurring. Second, as indicated above, there may be only four dual-function companies in Idaho. Third, the Commission wonders if regulating sewer service might be too much of a “cure” given the uncertainty of whether sewer companies charge unreasonable rates. Regulating a previously unregulated industry may add significant “costs” to a company’s operation, especially for systems with only a few customers. Our experience with small water companies allows us to conclude that the “cost of regulatory compliance” often represents a significant expense to small companies. In recognition of this problem, the Commission utilizes “relaxed” regulations as in the case of the Commission’s Rules for Small Water Companies, IDAPA 31.36.01.000.

There may be some protection for potential sewer customers. Local authorities are apprised of the creation of for-profit sewer systems at the time construction permits are issued. In addition, prospective purchasers of subdivision property (where systems are more likely created) should be aware of the type of sewer/sanitary system required by the city or county as noted on the plat of the property. Idaho Code § 50-1326.

If you have any questions or would like to discuss this matter further, please contact me at [phone].

Sincerely yours,

Ron Law
Executive Administrator

cc: Commissioners
Honorable Shawn Keough
12/07/99Page 2

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