20081113Vol I Oral Argument.pdf

ORIGINAL.BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF TETON SPRINGS WATER AND SEWER
COMPANY, LLC FOR THE ISSUANCE OF
A CERTIFICATE OF CONVENIENCE AND
NECESSITY, FOR APPROVAL OF RATES
AND CHARGES FOR WATER SERVICE,
AND FOR APPROVAL OF RULES AND
REGULATIONS GOVERNING THE
RENDERING OF WATER SERVICE
BEFORE
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) CASE
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NO. TTS-W-08-01
ORAL ARGUMENT
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COMMISSIONER MACK A. REDFORD (presiding)5 ..
COMMISSIONER JIM D. KEMPTON ;,:; u:
COMMISSIONER MARSHA H. SMITH.
PLACE:Commission Hearing Room
472 West Washington
Boise, Idaho
DATE:November 7, 2008
VOLUME I - Pages 1 - 52
CSB REPORTING
Constance S. Bucy, CSR No. 187
23876 Applewood Way * Wilder, Idaho 83676
[phone] * [phone]
Email csbCiheritagewifi.com.
.1 APPEARANCES
2
3 For the Staff:Scott Woodbury, Esq.
4 Deputy Attorney General
472 West Washington
5 Boise,Idaho 83720-0074
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For Teton Springs McDEVITT & MILLER
7 Water & Sewer Company:by Dean J. Miller, Esq.
420 West Bannock Street
8 Boise,Idaho 83702
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CSB REPORTING APPEARANCES
(208 )890-5198
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1 BOISE, IDAHO, FRIDAY, NOVEMBER 7, 2008, 10: 00 A. M.
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4 COMMISSIONER REDFORD: This will be a
5 hearing before the Idaho Public Utilities Commission.
6 The date is November 7, 2008 and it's in the matter of
7 the application of Teton Springs Water and Sewer Company,
8 LLC for the issuance of a certificate of convenience and
9 necessi ty, for approval of rates and charges for water
10 service, and for approval of rules and regulations
11 governing the rendering of water service.I might add
12 that previously the Commission has approved and issued a
13 certificate of convenience and necessity for Teton
14 Springs Water and Sewer. The applicant has previously
15 requested oral argument in this matter by an appropriate
16 application and a notice of oral argument was issued on
17 the 28th day of October, 2008.
18 The purpose of the hearing is to take oral
19 argument from Teton Springs and it's my understanding,
20 gentlemen, that the oral argument is on issues addressed
21 in its reply comments, including whether Teton Springs
22 should be allowed an annual expense for the amortization
23 of contributed capital, and 2, whether Teton Springs
24 should be allowed to recover a portion of the annual
25 revenue requirement through an "availability charge," and
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1 whether Staff's proposed complete disallowance of rate
2 case expense is reasonable.
3 Are these the issues that I understand?
4 Are there any other issues to be raised at this time?
5 Mr. Miller.
6 MR. MILLER: Thank you, Mr. Chairman. In
7 our reply comments, we identify a number of issues that
8 are still unresolved and still before the Commission and
9 our Exhibit No. 10 attached to the reply comments
10 outlines those issues in a graphical or chart sort of
11 way. In deference, though, to the Commission's time and
12 schedule, we have requested oral argument only on those
13 three issues.
14 COMMISSIONER REDFORD: Okay.
15 MR. MILLER: Recognizing that there are
16 other issues still before the Commission.
COMMISSIONER REDFORD: Fine. I see that
18 Mr. Joe Miller is here and representing Teton Springs
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MR. MILLER: That's correct.
COMMISSIONER REDFORD: And so I think that
21 we'll formally take the appearances.
22 MR. MILLER: Thank you, Mr. Chairman.
23 Dean J. Miller of the firm McDevitt & Miller on behalf of
24 Teton Springs Water and Sewer Company. Also with me who
25 I'd like to introduce is Mr. John Pinardi who is the
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1 general manager of Teton Springs Water and Sewer Company
2 and Mr. Larry Crowley who is our rate consultant and
3 expert witness in the case.
4 COMMISSIONER REDFORD: Thank you.
5 MR. WOODBURY: Scott Woodbury, Deputy
6 Attorney General, for Commission Staff.
7 COMMISSIONER REDFORD: Okay, are there any
8 preliminary matters that we need to -- excuse me,
9 Commissioner Smith?
10 COMMISSIONER SMITH: I apologize for
11 interrupting, but my notebook does not seem to include
12 the reply comments of the Company, so when were they
13 filed?
14 MR. WOODBURY: They were filed on October
15 10th and then
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16 COMMISSIONER SMITH: Could we just take
17 maybe five minutes so I could go locate them because I
18 think that would probably be helpful?
COMMISSIONER REDFORD: Absolutely.
COMMISSIONER SMITH: Thank you.
COMMISSIONER REDFORD: I don't seem to
22 have them either. We'll go off the record.
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(Pause in proceedings.)
COMMISSIONER REDFORD: Okay, let's go back
on the record. We're back on the record. Mr. Miller, if
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1 you would like to, as you're the moving party, if you
2 would like to present your oral argument, please.
3 MR. MILLER: Thank you, Mr. Chairman. I'd
4 like to take the three issues that we've identified in
5 the following order: First, the issue of the
6 amortization expense for contributed capital; second, the
7 issue of rate case expense; and third, the issue of what
8 we have called an availability fee, so let me return to
9 the proposed amortization expense.
10 In our initial filing, we proposed an
11 expense that would amortize contributed property based on
12 established depreciation schedules. Staff in its
13 comments proposes to disallow that proposed expense based
14 on a strict application of rate of return regulation.
15 I'd like to start by observing that a strict application
16 of rate of return regulation is not required by statute.
17 There's no statute that says you have to do rate of
18 return regulation. It's not required by any regulation
19 or rule of the Commission; rather it's a practice that
20 has developed over time, and in some circumstances the
21 Commission has departed from a strict application of rate
22 of return regulation.
23 An example is the regulation of
24 competi ti ve exchange -- competi ti ve local exchange
25 telephone companies where the Commission does not apply
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1 any form of price regulation. Another example where the
2 Commission has departed from strict application of rate
3 of return regulation is with electric companies where the
4 Commission allows the recovery of a substantial portion
5 of operating expense outside of rate of return regulation
6 through purchased power cost adj ustments, so the first
7 point is that rate of return regulation in its classic
8 form is not required and the Commission has departed from
9 strict application rate of return regulation in other
10 events.
11 What is required by law is that rates be
12 just and reasonable and I'LL return to the concept of
13 just and reasonable rates in a few minutes. The second
14 point to make is that the fundamental assumption of rate
15 of return regulation is that the utility will be financed
16 by investor-supplied capital and rate of return seeks to
17 put a cap on the rate of return regulation to protect
18 customers from excessive profits and also to allow the
19 utili ty a reasonable return on the investor-supplied
20 capital.
21 There is, however, a class of utilities
22 that fall outside this fundamental assumption, utilities
23 that are not financed by investor-supplied capital, but
24 rather are financed by contributed capital, capital from
25 developers or customers, and it's our fundamental point
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1 that rigid application of rate of return regulation for
2 companies that fall outside the basic premise and
3 assumption of rate of return regulation leads to bad
4 resul ts. Essentially application, strict application, of
5 rate of return regulation to contributed property
6 utili ties leads to companies that can recover their
7 operating expense as it's determined at a particular
8 point in time and not much else.
9 What we have proposed is essentially a
10 minor adj ustment to classic rate of return regulation.
11 What we have proposed is the permission of an
12 amortization expense based on established depreciation
13 li ves for the various categories of plant in service, and
14 we recognize that under traditional accounting theory, an
15 amortization expense for contributed property probably
16 would not be allowed, but as I'll explain in a minute, I
17 think our proposal has several posi ti ve effects that the
18 Commission should embrace.
19 Recently in the Mayfield Springs case, the
20 Commission indicated that it was not opposed to the
21 concept of a sinking fund. There, however, the method by
22 which the fund, the sinking fund, was to be funded was
23 speculati ve and based on guesses. Our method so you
24 could look at our proposal as a different way of funding
25 a sinking fund. The advantage of our method is that it's
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1 based on established depreciation lives, not on
2 speculation about the future, but on the logic of
3 historical experience, and in our filing, Mr. Crowley
4 calculated our proposed expense based on depreciation
5 li ves used by United Water and which have been used by
6 the Commission in several occasions. These lives in turn
7 are based on extensive study and historical information
8 regarding the useful life of a water system, so the
9 proposal is not based on speculation; rather it's based
10 on logic and well-established historical experience, and
11 I think our proposal has a number of benefits.
12 The first is companies are, companies and
13 customers are, spared the risk of emergency surcharges.
14 The Commission knows from recent experience, for example,
15 wi th Atlanta Power the difficulty imposed on customers of
16 unexpected emergency surcharges. Our proposal is an
17 al ternati ve to emergency surcharges and would eliminate
18 the necessity for them. The second benefit is that
19 customers are spared the risk of poor service during the
20 period when they must await the approval of a surcharge.
21 The Commission's recent experience with
22 Eagle Water Company is an example of customers having to
23 li ve with poor service while a surcharge proceeding was
24 processed and litigated, and the third advantage is that
25 the Commission and the Staff are spared the regulatory
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1 effort associated with emergency surcharge cases, because
2 as I have indicated, our proposal is an al ternati ve to
3 emergency surcharges.
4 I have here the Commission's file from the
5 Eagle Water surcharge case and for the record, I'm
6 pointing to a stack of papers that is approximately six
7 inches tall and this sort of graphically illustrates the
8 amount of regulatory effort that was involved for a
9 surcharge in that circumstance. As I counted them, the
10 Commission issued approximately 19 Orders during the
11 course of that proceeding, and all the while customers
12 suffered poor service and the company was in financial
13 distress, and I acknowledge that there may be unique
14 features of Eagle Water Company, but its fundamental
15 problem was that it was largely a contributed property
16 utility. It did not have in the absence of a surcharge
17 the ability to borrow money to fund improvements. It did
18 not have in the absence of a surcharge ability to finance
19 themselves. A proposal such as ours would have made all
20 that expense and regulatory effort unnecessary.
21 Let me turn to two questions that I think
22 may be on your mind. The first is what about precedent.
23 As I noted, as we noted in our reply brief, the rule that
24 binds courts to rigidly follow precedent does not apply
25 wi th equal strength to regulatory commissions and that
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1 the Commission is free to depart from prior precedent if
2 it can provide a reasoned basis for doing so and I think
3 we have provided you a reasoned basis to the extent there
4 is Commission precedent to the contrary in this case from
5 departing from it.
6 The second question that may be on your
7 mind is if we give Teton Springs this requested relief,
8 won i t we have to do it for every water company and the
9 short answer to that is maybe you should. While each
10 case would have to be evaluated according to the
1 1 individual company circumstances, I believe to embrace a
12 proposal like ours would lead to a water industry in
13 Idaho that is better capitalized, is better able to
14 provide service to its customers and that it is less of a
15 regulatory burden to the Commission.
16 I started by commenting on the concept of
17 just and reasonable rates and also that the Commission is
18 not bound to follow any particular method of regulation
19 and it's free to adopt its regulatory methods to the
20 circumstances of individual companies.I think all of
21 what I have said on this topic is a long way of saying
22 that strict application of rate of return regulation to
23 contributed property water utili ties produces rates that
24 are not just and reasonable and our proposal fixes that.
25 Let me turn now to the question of the
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1 disallowance of rate case expense. The Commission Staff
2 in its comments proposed to disallow the entire amount of
3 rate case expense incurred by the Company in presenting
4 this case, primarily on the grounds, according to the
5 comments, that the Staff disagreed with our proposal that
6 I have just discussed with respect to amortization of
7 contributed property and since they disagreed with our
8 proposal suggested that the entire requested rate case
9 expense be disallowed, and in our reply comments, we
10 indicate for several reasons why that's an improper
11 adjustment.
12 In addition to what was set forth in the
13 reply comments, I'd like to indicate that using the
14 Commission's website, I searched for Commission Orders
15 containing the phrase rate case expense and I found that
16 since 1985 there have been -- the issue has arisen in 16
17 rate cases. By far the most common issue associated with
18 rate case expense is the length of time over which the
19 expense should be amortized. That has been the primarily
20 li tigated issues. In a few cases the amount of the
21 expense was contested, but only in cases involving
22 payments to affiliates did the Commission significantly
23 reduce the requested rate case expense, and in no case
24 was rate case expense completely disallowed.
25 In a recent case involving the Diamond Bar
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1 Water Company, the Commission said, "We have consistently
2 found that prudent and reasonable costs for a company to
3 file and litigate a rate case before us are an expense
4 properly recoverable in rates," and the Commission has
5 allowed the recovery of rate case expense even when the
6 utili ty did not prevail on its proposed issues. In a
7 1985 case involving Intermountain Gas, the Company filed
8 for a $2 million rate increase and even after making an
9 allowance for rate case expense, the Commission allowed
10 zero increase. In that case an intervenor then contended
11 that since the rate case was unsuccessful, the risk of
12 rate case expense should be on the shareholders, not on
13 the ratepayers and the Commission said, "The Coalition's
14 peti tion cites no authority to support departure from the
15 long accepted practice of allowing recovery of rate case
16 expense from ratepayers," and as we point out in our
17 reply comments, there are other deficiencies with the
18 Staff position.
19 First, it fails to recognize all the
20 effort that went into this case that was legitimate.
21 This I i 11 touch on in a moment. Mr. Crowley spent
22 extensi ve effort recasting the Company's books to conform
23 wi th the Uniform System of Accounts. Mr. Crowley
24 developed a separations model that allocates expense
25 between the water company and the sewer division and all
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1 of that effort will have enduring value. Teton Springs
2 is a new utility and all of that effort will carry
3 forward and be valuable into the future, and because
4 Mr. Crowley went to all that effort, the Staff audit was
5 greatly expedited. I understand it only took less than
6 two days to complete the audit because Mr. Crowley had
7 done all of the work to get the books in a professional
8 and appropriate condition for the audit, and we also
9 point out that the Staff proposal is bad for regulation.
10 If companies thought they risked disallowance of rate
11 case expense because they make a proposal to improve
12 regulation, companies would be less likely to make new
13 proposals for changes to regulation, so we strongly
14 believe, Members of the Commission, that the Staff's
15 proposed complete disallowance of rate case expense is
16 unreasonable and unsupported.
17 I'LL turn now finally to the issue of what
18 we've called an availability charge and that is that
19 Teton has proposed a rate element that would charge
20 unoccupied building lots a quarterly fee of $75.00 for
21 residential lots and $225 per quarter for commercial
22 lots, and you could label this rate element whatever you
23 want to label it, but for purpose of convenience, we have
24 labeled it as an availability charge. In its comments,
25 the Staff opposes this proposal, not apparently because
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1 it disagrees with its merits, but because the Staff
2 believes Commission precedent prohibi ts it. The Staff
3 comment says that the Commission in previous cases has
4 consistently ruled the concept of an availability charge
5 is not appropriate in designing rates.I'LL return to
6 the question of precedent in a moment, but first, let me
7 briefly summarize what we think are the benefits
8 associated with this proposal.
9 First, it recognizes the unique character
10 of a planned unit development. In a planned unit
11 development, the entire system must be constructed at the
12 front end, not in phases or in a gradual build-out as is
13 typical with many water utili ties, and as we point out in
14 Teton Springs i case, as of now, only 35 percent of the
15 lots wi thin the subdivision have constructed homes or
16 facilities on them. If the full burden of Teton Springs'
17 revenue requirement fell to 35 percent of the lots, it
18 would likely produce rates that would be objectionable,
19 so our proposal has the benefit of spreading the revenue
20 requirement as broadly as possible over as large of a
21 base as possible.
22 The second benefit of the proposal is that
23 it recognizes that Teton Springs' costs are largely
24 fixed. They're not variable. They do not vary with the
25 number of customers actually taking service and it
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1 provides an appropriate vehicle for the recovery of those
2 largely fixed costs which do not vary with either the
3 number of customers or the amount of consumption per
4 customer. The third benefit is that it tends to support
5 the financial viability of the Company. As you know, the
6 Company bills on a quarterly basis, so it has a very
7 uneven cash flow even when customers pay their bills, and
8 from a customer point of view, it assures the customers
9 that a viable water utility will be in place when those
10 lot owners do decide to connect to the system and it
11 recognizes, as I i ve indicated, that construction of homes
12 wi thin the planned unit development may stretch over a
long number of years and it may be a long time before
more than 35 percent of the lots have constructed homes.
Let me return to the question of
16 precedent. To my knowledge, the issue of an availability
17 charge has been presented to the Commission two times in
18 the last 25 years. Most recently in the Mayfield Springs
19 case, an intervenor proposed a charge to inactive
20 customers and the Commission in its Order indicated that
21 while the proposed charge was innovative, it took into
22 account matters that were beyond the Commission's
23 jurisdiction. Apparently, the intervenor tied his
24 proposed inactive charge to other things such as
25 homeowner's fees and common area questions that were
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1 beyond the Commission i s jurisdiction, so in our view, the
2 Mayfield Springs case is not on point because the
3 proposal there was founded in a logic much different than
4 the proposal we have made.
5 The other case was in 1982 involving
6 Hayden Pines area, the Hayden Pines Water Company, so to
7 my knowledge, those are the only two times the Commission
8 has been asked to address this, so unlike precedent in
9 the rate case expense area where the Commission has
10 decided the same issue the same way numerous times and
11 the Commission i s policy as a result has become part of
12 the fabric of its regulation and relied upon by people
13 knowledgeable of the Commission's policies and practice,
14 the precedent in this area has not become fully part of
15 the fabric of regulation. It's simply one case from
16 1982, and notwithstanding the Hayden Pines case, the
17 Commission has subsequently approved somewhat similar
18 charges for other utilities.
19 For example, the Commission has approved
20 monthly charges for inactive seasonal customers in
21 utilities with a seasonal customer base, and what makes
22 our case unique, I think, is that we cannot ignore the
23 national financial crisis that we find ourselves in.
24 Policy makers at all levels of government have thrown
25 away the rule book in an effort to find innovative ways
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1 to prevent business failures. The supplemental affidavit
2 of John Pinardi filed yesterday indicates that there will
3 be 47 foreclosure sales wi thin the Teton Springs planned
4 uni t development in January and February, and the concept
5 of utility death spiral is not out of the question.
6 That, of course, is the idea that as customers leave the
7 system, more and more of the fixed costs of the system
8 are forced on to the remaining customers causing
9 increased rates to them, causing potentially more and
10 more people to leave the system until, in theory, you
11 have found yourself with a utility with one customer, so
12 I think that just as regulators on the national level and
13 at other levels have acted in innovative ways to preserve
14 business viability, you have the opportunity to do the
15 same here, and I might say that trying to solve the
16 problem simply by setting the lowest possible rate really
17 won i t do the trick.
18 I think there are bigger forces at work
19 here that will swamp small bore solutions, so we think
20 that logic and good policy support our proposal for what
21 we've called an availability charge and would urge the
22 Commission to adopt it. Mr. Chairman, Members of the
23 Commission, that's what I had to say.If there are any
24 questions, I'd be happy to try and respond.
25 COMMISSIONER REDFORD: Commissioner Smith?
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1 Commissioner Kempton?
2 COMMISSIONER KEMPTON: Yes, I have one,
3 Mack, Mr. Chairman.
4 COMMISSIONER KEMPTON: Mr. Miller, your
5 approach is commendable in terms of bringing in the
6 current economy as a consideration, but I have to say
7 that during the time that I have been a Commissioner, and
8 I i ve only been here one year, that there has been
9 consistency or at least a move towards consistency with
10 minor variations on a theme in the contributed capital
11 issue, so I probably have questions later, so let's just
12 deal with that one right now.
13 MR. MILLER: All right.
14 COMMISSIONER KEMPTON: That single one.
15 How is it that you would feel that water, a water system
16 being included as a part of a buyer's consideration on
17 raw property developed only to the extent that the basics
18 are there, the roads would be there, the gravel
19 structures, the curbing that's required, a few things
20 like that that i s in the land use planning documents, but
21 wouldn i t you assume that as a part of that system that a
22 buyer would not be inclined to purchase if there wasn't a
23 water system that was already in at that time and that
24 you as a seller would include that as a part of the cost
25 of the property?
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1 MR. MILLER: Yes, Mr. Chairman. We've
2 acknowledged in our filing that the investment in the
3 water system was probably recovered in the sale of lots
4 to customers and in that sense, it's contributed, so we
5 have not tried to be at all disingenuous on that point.
6 Our point is that notwithstanding the fact that it has
7 been contributed, the strict application of rate of
8 return regulation results in rates that are inadequate to
9 support a viable utility.
10 COMMISSIONER KEMPTON: Based on the fact,
11 Mr. Miller, that you don't have acquired capital; is that
12 correct?
13 MR. MILLER: Don't have invested capital,
14 that's correct.
15 COMMISSIONER KEMPTON: Right, and are you
16 now then categorizing the amortized depreciation as a
17 sinking fund? I mean, is that the analogy that we i re
18 supposed to attribute to your presentation?
19 MR. MILLER: We suggested in our comments
20 that revenue from the amortization expense be treated
21 separately, just like the statute requires the creation
22 of a depreciation reserve so that the Commission can
23 moni tor the size of the reserve. At such point as the
24 Commission or the Staff thinks that the reserve has
reached an adequate level, rates can be readj usted to
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1 phase back or for a period of time eliminate the rate
2 element that is associated with the amortization so that
3 the amounts recovered through this expense are not just
4 money that Mr. Pinardi is going to put in his pocket;
5 rather we proposed a separate accounting for the
6 maintenance of essentially a depreciation reserve which
7 is the same thing as a sinking fund which would permit
8 regulatory oversight and the use of those revenues only
9 for appropriate purposes.
10 COMMISSIONER KEMPTON: Appropriate
11 purchases or purposes as set by lock box criteria?
12 MR. MILLER: I'm sure the Company would be
13 very pleased with an Order indicating that they're to be
14 used only for repair and maintenance of the system and
15 that as a part of the Company's annual report that it
16 account for any expenditures from the reserve.
17 COMMISSIONER KEMPTON: Expenditures for
18 purposes of the proj ect --
19 MR. MILLER: That's right.
COMMISSIONER KEMPTON: -- of the water and
21 it would also be used, I assume, to balance customers who
22 may be abandoning ship because of the economy?
23 MR. MILLER: We had not proposed to use
24 revenues from that expense item to offset other losses;
25 rather our proposal to guard against losses from, as you
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1 say, abandoning ship is the availability charge.
2 COMMISSIONER KEMPTON: I have no further
3 questions, Mr. Chairman.
4 COMMISSIONER REDFORD: I have a couple of
5 questions. How many lots have been sold?
6 MR. MILLER: Mr. Chairman, it's my
7 understanding that from the original developer, the
8 original developer has sold all the lots to at least one
9 ini tial purchaser and a number of lots have changed hands
10 from the initial purchaser to subsequent purchasers.
11 There are currently, I believe, approximately 190 active
12 customers and approximately 380 lots that do not yet
13 have -- are not yet taking active service.
14 COMMISSIONER REDFORD: When you just
15 talked about the developer, who was the developer?
16 MR. MILLER: It was a company known as
17 Teton Springs Golf and Casting, a limited liability
18 company. Mr. Pinardi has just corrected me with respect
19 to your first question and I believe the correct
20 information is that 562 out of 601 lots have transferred
21 from the developer to an initial purchaser.
22 COMMISSIONER REDFORD: And is Mr. Pinardi
23 part of the development company?
24 MR. MILLER: No.
25 COMMISSIONER REDFORD: Okay, and the
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1 developer has retained title in those lots that have not
2 been sold?
3 MR. MILLER: That's correct,
4 Mr. Chairman.
5 COMMISSIONER REDFORD: And you were
6 talking about 47 whose lots are in foreclosure. Are
7 those lots bare ground or do they have improvements?
8 MR. MILLER: Mr. Chairman, I asked
9 Mr. Pinardi that question this morning and although we
10 could do a study or some research to find out, what we
11 have at this point is the report from the local title
12 company that indicates pending foreclosure sales, but the
13 ti tle, the report from the title company does not
14 indicate whether the lots are improved or unimproved. If
15 it's important, we could certainly do a lot by lot
16 visual.
17 COMMISSIONER REDFORD: No, just kind of a
18 rough estimate.
19 MR. MILLER: So our estimate is that the
20 number of lots in foreclosure are probably in the same
21 proportion as the development generally with respect to
22 how many are developed and how many aren't.
23 COMMISSIONER REDFORD: The developer
24 ini tially provided all the capital improvements; is that
25 correct?
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1 MR. MILLER: That's correct.
2 COMMISSIONER REDFORD: And so your client
3 purchased the water system or how did he acquire it?
4 MR. MILLER: Mr. Chairman, the water
5 system initially was part of the development company.
6 There was then an effort to create a water and sewer
7 district as the Commission recalls and that effort went
8 on for some period of time and ended in failure. The
9 Company in consultation with its legal counsel and with
10 me then concluded that the only way it could legally
11 provide water service was to become a public utility, so
12 at that time the water and sewer assets were transferred
13 out of the development company into the separately
14 created water and sewer company.
15 COMMISSIONER REDFORD: Which is the
16 Company we're talking about?
17 MR. MILLER: That's us.
COMMISSIONER REDFORD: Was there
19 consideration for that transfer?
20
21
MR. MILLER: No.
COMMISSIONER REDFORD: So your client got
22 all the benefits of the development, of the capital costs
23 for the infrastructure?
24
25
MR. MILLER: It received the assets and
also received the obligation to operate them and to
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1 provide service to the customers that are served by them.
2 COMMISSIONER REDFORD: If you know, what
3 is the viability of the development with 47 foreclosures?
4 Does it look like the development will continue or will
5 it just kind of wither, if you know?
6 MR. MILLER: The most I know is that the
7 Company is committed to sustained effort to attempt to
8 make it work.I think as Commissioner Kempton indicated,
9 we are in such an uncertain financial time that I don't
10 think anybody can say with certainty what's going to
11 happen with any business in the future.
12 . COMMISSIONER REDFORD: Does the Company
13 have lines of credit, any short-term or long-term
14 financing?
15 MR. MILLER: As we indicated in
16 Mr. Pinardi' s supplemental affidavit yesterday, after the
17 filing of the Staff comments, Mr. Pinardi went to three
18 different lending institutions in order to obtain a line
19 of credit financing for the water utility, because as you
20 know, the utility charges on a monthly basis , receives
21 revenue on a monthly basis, but incurs expense -- pardon
22 me, on a quarterly basis, but incurs expense on a monthly
23 basis and accordingly, it has uneven cash flow and a need
24 for financial support to compensate for that uneven cash
25 flow and under the rates and charges proposed by the
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1 Commission Staff, all three of the lending institutions
2 declined to provide any support to the utility.
3 COMMISSIONER KEMPTON: On the what?
4 MR. MILLER: Based on the rates and
5 charges proposed by the Commission Staff, all three of
6 the lending institutions declined to provide any
7 financial support to the utility.
8 COMMISSIONER REDFORD: If you know, did
9 they, did the financiers make a determination under what
10 basis they would loan or is it just they won't loan to
11 this type of an operation? I'm trying to figure out if
12 we should accept some of your proposals, would that make
13 it more likely that you could get short- or long-term
14 financing?
15 MR. MILLER: If I could, Mr. Chairman,
16 perhaps if we take a break at some point, I could consult
17 wi th Mr. Pinardi to see if he has any additional
18 information on that point.
19 COMMISSIONER REDFORD: Okay, we can do
20 that later. I don't have any further questions.
21 Commissioner Smith?
22
23
COMMISSIONER SMITH: No.
COMMISSIONER REDFORD: Does the Staff have
24 anything to provide? Mr. Woodbury?
25 MR. WOODBURY: Yes, thank you,
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1 Mr. Chairman. I appreciate this opportunity to, I guess,
2 address the issues raised by the Company. Staff's
3 revenue requirement and I think -- I guess I'd preface it
4 by saying Staff is generally comfortable with the issues
5 as they're framed in the written filing. Staff's revenue
6 requirement proposal in this case was $127,000. The
7 Company, Teton Springs, comes back on rebuttal requesting
8 259,000. That's a difference of $131,000, about twice
9 what Staff was recommending, but I would indicate putting
10 this into context, two-thirds of that difference is the
11 amortization requested, $89,000, and maybe if we could
12 take up the amortization of contributed capital first.
13 The Company doesn't, as indicated doesn't,
14 contest that almost the entirety of its plant in service
15 is contributed. Customers have already paid for that
16 plant in service. Staff in its comments indicates that
17 the system installed is well designed and constructed.
18 We're at the front end of this resort development and as
19 far as the number of customers and the proposed
20 undeveloped lots, only one-third of the developed lots
21 are presently active customers. We have 278 paying
22 customers at this point under the residential, commercial
23 and multi family. The Company has an additional 401
24 lots. The multi family is one of the customer classes,
25 big lots probably, but there are just two units for multi
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1 family. 73 or 74 are presently occupied and an
2 addi tional 70 remain, so if you are to look at the
3 $89,000, $89,140 as the proposed amortization amount,
4 that's the amortized depreciation on the total Company
5 investment in plant. You know, how is it reasonable to
6 collect that if approved? You know, if you were to
7 collect that from the existing customers, the paying
8 customers, because I see these as far as recovery of this
9 amount to be inextricably entwined with the availability
10 charge, but if you just use the active customers, then
11 customers would pay an additional $320 per year. That's
12 an incredibly large amount for that 278 customers, and if
13 you were to -- if you were to spread that against all of
14 the undeveloped lots, also, it would be 131, but you have
15 to make that jump in logic to assume that it's reasonable
16 to assess an availability charge.
17 The Company recommends treatment similar
18 to a depreciation reserve account. What it has proposed
19 it states is not dissimilar to a sinking fund. I think
20 that this is a timing issue with respect to the existing
21 customers. They're asked to pay, if you just assess it
22 on active customers, the amortization of the plant
23 installed and then if you were to go down that path,
24 we're talking about generational equity. There's very
25 li ttle likelihood -- I mean, the Company says this is for
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1 contingencies, this is for emergency replacement. There
2 are other ways to treat that type of emergency and
3 perhaps with the number of active customers, it's more
4 reasonable to require the Company to come in in the event
5 of an emergency and identify costs that would have to
6 occur and request an emergency surcharge, and I think,
7 also, with respect to the customers, they have -- the
8 Water Company provides culinary domestic water. In
9 addi tion, they have an irrigation charge that they pay on
10 a quarterly basis for outdoor irrigation, plus their
11 sewer charges and so these customers, this may be a high
12 end resort, but we're talking about a significant amount
13 of money.
14 In Staff's proposal and Staff had a
15 different rate design than the Company and Staff
16 determined that it was reasonable to spread its revenue
17 requirement based upon the size of line, supply line, and
18 Staff had recommended a quarterly charge to customers of
19 $103. If you were to accept all of the Company's
20 proposed additions, you would be essentially doubling
21 that and customers would be paying around 200, $206 per
22 quarter, so I think that the amortization of contributed
23 capital issue is untimely.
24 I don't deny that it's reasonable or that
25 a company would want to have a sinking fund for this
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1 purpose. It certainly affects the timing of them going
2 into the market and obtaining funding, but I think given
3 the phase of development in this particular resort this
4 should not be accepted at this point in time. The
5 availabili ty charge, Staff doesn't disagree with the
6 Company that if you were to spread revenue requirement
7 over a greater customer base, then the amount to the
8 indi vidual customers would be less, but we have -- the
9 Commission has addressed this previously in the Hayden
10 Pines case. That was Order No. 17536 that I think Staff
11 attributed it to a different company but used the correct
12 Order number and the Commission said that a water
13 availability charge is inequitable. A public utility is
14 not an entity given the Constitutional right to levy a
15 tax and any charge assessed must relate to a service or a
16 product rendered and so adopting or following that
17 language, you would have to identify the service or
18 product rendered to an undeveloped lot where water was
19 not being provided, in fact there was no connection.
20 The rate case expense is the third issue
21 identified by the Company. I think Staff could have been
22 more articulate in its position in that case. I think
23 they were looking at the Company's filing, the
24 consulting, the attorney fees and felt that the bulk of
25 that was related to the availability charge and the
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1 amortization arguments of the Company. Staff didn't
2 identify a number that should be recovered and doesn't
3 identify one now, but we think that the total amount
4 requested which was I think for rate case expense 45,000
5 in this case spread over three years is excessive for a
6 company of this size.
7 One additional issue that was raised in
8 the Company's reply that I would like to address now
9 outside the three is the meter reading expense that the
10 Company recommends per year and that's $9,333. I would
11 indicate that with 278 customers in reading those meters
12 four times a year, you're talking about over, a little
13 over, $11.00 per meter read and assuming five minutes per
14 meter, maybe $132 per hour. That seems quite excessive
15 for a cost even though they have apparently a contract
16 amount to support that proposed contract.
17 The one exception that I think is perhaps
18 not addressed in the filings, the written filings, is the
19 revenue consequences under Staff's proposal of
20 disconnecting, a customer disconnecting for a portion of
21 the year, a seasonal disconnect. The reconnect ion charge
22 proposed by Staff in such an instance would not make the
23 Company whole. Staff recommends pretty much a standard
24 reconnect charge during business hours and outside of
25 business hours, so if there is no availability charge as
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1 Staff recommends against, the Company would incur a
2 revenue shortfall and I would indicate that additional
3 information is required to determine the percentage of
4 customers disconnecting and number of months of
5 disconnect, and so with respect to Eagle Water and Teton
6 Springs and the comparison, I think Mr. Miller
7 acknowledges that Eagle Water is not Teton Springs.
8 Certainly you've got different types of utili ties.
9 They're not developed in the same manner. I think what
10 is in common, though, is the contributed capital which
11 both companies face and it's something that this
12 Commission deals with, but I don't think that with
13 respect to the amortization that's something that we need
14 to address at this point in time.
15 I don't know if the Company has a
16 five-year plan or a twenty-year plan with respect to
17 proposed replacement of its capital plant, but we can
18 address that down the road. I think that's all the
19 comments I have at this point.
20 COMMISSIONER REDFORD: Commissioner Smith?
21 COMMISSIONER SMITH: Just to clarify the
22 record, I'm looking at Staff, the Attachment F to the
23 Staff comments that was filed
24 MR. WOODBURY: Yes.
25 COMMISSIONER SMITH: -- September 5th and
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1 when you were speaking, you noted that Staff's
2 recommended quarterly rate was $103.
3 MR. WOODBURY: $103 for residential
4 customers.
5 COMMISSIONER SMITH: Right.
6 MR. WOODBURY: Yes.
7 COMMISSIONER SMITH: And then you said
8 that if we did the amortization expense, that would
9 almost double that number.
10 MR. WOODBURY: No, if you adopted all of
11 the Company's proposals which is about a difference of
12 131,000. Staff's revenue requirement was 127, the
13 Company's proposing an additional 131, so it's
14 amortization plus the other. Amortization was
15 three-quarters of the difference or two-thirds of the
16 difference, excuse me.
17 COMMISSIONER SMITH: All right. I looked
18 at the Company's proposed number as 150, but, of course,
19 to achieve their revenue requirement, they include the
20 inactive lots.
21 MR. WOODBURY: They assess -- the Company
22 would collect half of its revenue requirement from
23 unimproved lots.
24
25
COMMISSIONER SMITH: Thank you.
COMMISSIONER REDFORD: Commissioner
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1 Kempton.
2 COMMISSIONER KEMPTON: Mr. Chairman, Mr.
3 Miller or Mr. Pinardi, I don't know which would choose to
4 answer this, but going back to the transfer of the
5 capital assets and responsibility, when this subdivision
6 was established and the intent was to bring in and
7 develop a water district and I assume they didn't get
8 enough people voting for it to make that work and I can
9 understand that, I've worked with districts before, when
10 the Company transferred the capital, Mr. Pinardi, to you,
11 was there any provision in that transfer that removed the
12 liabili ty and responsibility of the developer in case of
13 a lack of financing as you're facing now with the three
14 financial institutions you've gone to and been refused;
15 in other words, if you fail, do they fail to some extent?
16 MR. PINARDI: For clarification, when the
17 developer transferred those assets over, this process was
18 recommended to us by our attorney of how to accomplish
19 this so that we would prepare ourselves for this
20 certification process. The developer and the partners in
21 that LLC are completely, wholly separate, so they would
22 bear no liability going forward for the failure of the
23 water and sewer.
24 MR. MILLER: And pardon me, if I could
25 just add, they have no obligation to and have indicated
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1 an inability and unwillingness to provide financial
2 support to the utility. From their point of view, the
3 utili ty is a stand-alone, separate entity, that it has to
4 stand on its own financially.
5 COMMISSIONER KEMPTON: So in the case of a
6 failure of the water utility, what do the developers have
7 left?
8 MR. MILLER: In terms of a --
9 COMMISSIONER KEMPTON: Investment.
10 MR. MILLER: In terms of a viable
11 subdivision property?
12 COMMISSIONER KEMPTON: Yes.
13 MR. PINARDI: May I?
14 COMMISSIONER KEMPTON: Yes.
15 MR. PINARDI: We have -- and I do work for
16 the developer as well, so for point of clarification, my
17 responsibili ties, I'm the director of operations working
18 for the developer and I'm the director for the water and
19 sewer LLC. We own 39 undeveloped sites. Thirty-four are
20 residential and five are commercial, so from a viability
21 of the development failing, the developer really doesn't
22 have any risk at this point. We've conveyed the vast
23 maj ori ty of the 601 lots that we began with. The risk is
24 really to those people that purchased the real estate and
25 have either built or have not built at that point in
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1 time. The developer as -- we're very fortunate. We hit
2 the timing pretty darn well in Teton County and the
3 developer is on their way out. They're divesting of
4 everything and they're pretty much done, so there's
5 really not any at risk if the water and sewer company
6 were not to be a viable business concern for them and
7 they have no intent of funding it from essentially their
8 own pockets at this point going forward. They're done as
9 developers, with the exception of those 39 lots which in
10 today's environment mayor may not ever sell
11 COMMISSIONER KEMPTON: What's the general
12 lot size?
13 MR. PINARDI: They range from -- well,
14 about a half acre. We have half-acre lots, three-quarter
15 acre lots. We have zero lot line, cabin lots, commercial
16 lots, but if you were to combine them all together, you
17 would say they're probably half an acre is the average.
18 It's a mixed use PUD, so we have a lot of different
19 variations.
20 COMMISSIONER KEMPTON: And the sewer
21 system, that's separately -- it's separate from our
22 considerations here. Is it whole or is it not whole? Do
23 you have the financing available for that through the
24 regulatory processes that establish your ability to
25 charge fees?
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1 MR. MILLER: As you know, Commissioner,
2 the provision of sewer service is not regulated in the
3 State of Idaho, and the sewer operation is part of the
4 utili ty, Teton Springs Water and Sewer Company, although
5 we have developed a model to allocate the costs and
6 expense between the two divisions in a way that water
7 will not subsidize the sewer and in a way that the books
8 of the Company will always be available to Staff for
9 audi t to be sure that only charges that are appropriate
10 are being made to the water system.
11 COMMISSIONER KEMPTON: Do the homeowners,
12 have the homeowners discussed, to your knowledge, any
13 intention to go with single wells, personal wells and
14 septic systems or if they went with single wells, can
15 they connect to the sewer system?
MR. PINARDI: Those are not permitted
17 under the covenants or the development agreement with
18 Teton County, so everybody by covenant is required to be
19 connected to the domestic system and the sewer system.
20 COMMISSIONER REDFORD: Mr. Miller, excuse
21 me, Commissioner Kempton, I have a little procedural
22 issue. This was to be oral argument and we now have
23 Mr. Pinardi in effect testifying. I don't have any
24 difficul ty with allowing it, but I think that we do need
25 to expand ita little to accept the comments of Mr.
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1 Pinardi, so if you wouldn't mind, I'd like to swear
2 Mr. Pinardi in so that his previous and post information
3 can be a part of the record.
4 MR. MILLER: I think that's a good idea,
5 Mr. Chairman.
6 COMMISSIONER REDFORD: Mr. Pinardi, would
7 you raise your right hand?
8
9 JON PINARDI,
10 produced as a witness at the instance of Teton Springs
11 Water and Sewer Company, having been first duly sworn,
12 was examined and testified as follows:
13
14 COMMISSIONER REDFORD: I think probably we
15 as the Commission stimulated some of the discussion with
16 Mr. Pinardi, but, you know, given the flexibility that we
17 have, I don't think that it's a difficulty, so if you
18 have any -- if we have any other questions or if you have
19 anything else you'd like, Mr. Pinardi, to say, then that
20 will be acceptable, understanding that in the event that
21 there are questions by Staff or if anything extraordinary
22 comes out of that testimony, we may have to postpone some
23 of the testimony into another hearing so the Staff will
24 have an opportunity to prepare for any cross-examination.
25 Mr. Woodbury, do you have any difficulty
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1 with that, what I've just stated?
2 MR. WOODBURY: I would have a clarifying
3 question given the most recent reply filed by Mr. Pinardi
4 and his apparently attempting to get a line of credit
5 with area lenders, they rej ected it on the basis of
6 Staff's proposed revenue requirement. I would inquire as
7 to whether he inquired whether the lenders would be
8 comfortable with the revenue requirement proposed by the
9 Company and would have extended a line of credit based on
10 any greater amount, I guess, than recommended by Staff.
11 COMMISSIONER REDFORD: Go ahead. Excuse
12 me, Mr. Miller, I'm sorry.
13 MR. MILLER: I was wondering,
14 Mr. Chairman, there are a couple of matters that are
15 essentially pending from Mr. Pinardi and I believe the
16 Staff has concluded its oral presentation, so I'm
17 wondering if we might take a quick break to allow me to
18 talk with Mr. Pinardi about the questions that are
19 pending for him and also to hopefully shorten up any
20 reply oral argument I would have.
21 COMMISSIONER REDFORD: Okay, how long do
22 you need, Mr. Miller?
23
24
25
MR. MILLER: Ten minutes.
COMMISSIONER REDFORD: Okay, we'll convene
back at, oh, about 22 after.
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MR.MILLER:All right.
COMMISSIONER REDFORD:Thank you.
MR.MILLER:Thank you.
(Recess. )
COMMISSIONER REDFORD:Let's go back on
the record.Before we went off the record,Mr.Miller
2
3
4
5
6
7 wanted a little bit of a recess to confer with his client
8 about some of the issues that have been previously
9 raised. Have you completed your -- wait a minute, I
10 think you had given -- there was a question on the table,
11 right, from you?
12 MR. WOODBURY: I posed -- yes, I was
13 discussing the subsequent filing by Mr. Pinardi regarding
14 his attempt to get, I guess, bridge financing to cover
15 the revenue between the quarterly billings and there was
16 some indication that the lender did not find Staff's
17 proposed revenue requirement sufficient to extend a line
18 of credit and I was just inquiring as to whether the
19 discussion stopped there or whether the lender indicated
20 how much revenue they would require in order to extend
21 that line of credit.
COMMISSIONER REDFORD: Okay, Mr. Miller.
MR. MILLER: Yes, and thank you for the
24 accommodation to permit a short break. If Mr. Pinardi.25 was called to testify on that point, he would testify
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1 that he spoke with representatives of the Bank of Jackson
2 Hole, Rocky Mountain Bank and First Bank of the Tetons
3 and explained to representatives of those institutions
4 the revenue that would be generated by the Staff
5 recommendation and the return of $7,000 that would be
6 generated by the Staff recommendation and that each of
7 those representatives of the financial institutions
8 indicated that that level of revenue, and if you want to
9 call it profit, would be far below what would be
10 necessary to support any form of line of credit
11 financing.
12 The conversation did not go further,
13 however, to discuss what would be necessary to support a
14 line of credit financing. It was only on the adequacy of
15 the Staff proposal, so I don't today have information for
16 you from financial institutions of what would be in their
17 view an adequate revenue stream and reserve for
18 contingencies and level of profit that would support
19 lending.
20 COMMISSIONER REDFORD: I guess I speak for
21 the Commission on this question, the request for
22 application for certificate is rather recent and the
23 Company has been providing services for a number of years
24 and I guess what we're questioning is you've been
25 charging $240 a quarter for several years, have you
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1 provided an accounting to the Staff as far as where that
2 money went? Was it absolutely necessary to cover all the
3 reserves or expenses? You know, we're a bit perplexed
4 that the Company has kind of a zero balance sheet if you
5 talk about contributed capital and revenues.
6 MR. MILLER: Mr. Chairman, the Commission
7 Staff has not requested an accounting of revenues
8 received prior to the certificate application, so that
9 has not been developed. If the Commission is interested,
10 we could certainly --
11 COMMISSIONER REDFORD: I would like to
12 know where it is and maybe we could -- what revenues were
13 collected from the inception to the date that the
14 application was provided and I'd like to have a balance
15 sheet, if I could, and I don't know whether they had
16 provided any kind of an audited financial statement for
17 tax returns or whatever, but any financial information
18 you can give to us.
19 MR. MILLER: I might review with you, if I
20 brought it with me, the water and sewer Company was not
21 established until 2007, 2008.
22 COMMISSIONER SMITH: Right, it was
23 incorporated, according to the Secretary of State, on
24 August 8th, 2005.
25 MR. MILLER: And the assets were
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1 transferred over just before this application was
2 filed.
3 COMMISSIONER REDFORD: Well, why don't you
4 gi ve us an update as far as for a late-filed exhibit as
5 far as -- give us a financial tracking, if you could,
6 from the date the water system was turned over and from
7 the date that the Company was incorporated, would that be
8 acceptable?
9 MR. MILLER: I think we understand your
10 request and I think we can comply with it.
11 COMMISSIONER REDFORD: Thank you. Are
12 there any questions for Mr. Woodbury?
13 COMMISSIONER SMITH: I think I asked mine.
14 COMMISSIONER REDFORD: Mr. Kempton?
15 COMMISSIONER KEMPTON: No.
16 COMMISSIONER REDFORD: I have a couple of
17 questions, Mr. Woodbury. I think it's fairly well
18 acknowledged that the United States and Idaho is going
19 through some financial crisis and it seems to me that
20 probably even if you presented an appropriate or a loan
21 application that demonstrated that the Company had the
22 abili ty to retire the debt, there is some question
23 whether or not money would have been available and my
24 question is in the area of necessary and reasonableness.
25 Do you think that we go beyond or should we go beyond
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1 that to make sure that in fact customers have service?
2 Desperate times sometimes require, you know,
3 extraordinary actions and I'm just wondering if we were
4 to take the Staff's proposal and if it produced a rate of
5 return that you've offered and if the Company stopped
6 becoming viable, could not obtain loans and this
7 certainty of their future was in doubt, do you think the
8 Commission has a responsibility to step in for not only
9 the good of the Company, but as far as the good of the
10 customers on innovative things like availability, a
11 sinking fund, amortization and so on? I know that's kind
12 of a large issue, but what flexibility do you think we
13 have?
14 MR. WOODBURY: I think you have some
15 considerable flexibility regarding trying to assure that
16 the Company continues to be viable and that -- it is a
17 balancing as far as the Commission's obligations to both
18 customers and to the Company. You know, I think that
19 what we have here, though, is we have plant in service in
20 the ground and apart from that, it appears somewhat of an
21 empty shell. You know, the obligation to provide water
22 was transferred to an entity and the Company is here
23 asking for an amortization fund and perhaps -- or a
24 sinking fund. You know, we're told that it's having
25 trouble commanding just a bridge loan or line of credit
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1 and so it seems that the developer in transferring it,
2 you know, it's an empty shell. Perhaps if he were
3 willing to have maybe disgorged some of his profits and
4 established a sinking fund to maintain the viability of
5 the Company up front, we wouldn't be having these
6 discussions, you know, but the Company is here asking for
7 the customers to provide that loan in lieu of a bank.
8 COMMISSIONER REDFORD: So it's your
9 posi tion that there should have been an operating fund
10 transferred with the sale?
11 MR. WOODBURY: That would have been the
12 best way to handle it.
13 COMMISSIONER REDFORD: I'm just wondering,
14 we're handling this matter as far as a modified
15 procedure, do you think that we should transfer this from
16 modified procedure to have a full evidentiary hearing?
17 MR. WOODBURY: Well, I believe that the
18 Staff and the Company have developed a sufficient record
19 for Commission handling of this case. We did in our
20 ini tial notice establish an intervention deadline and
21 there were no intervenors. Staff did have a workshop
22 that it conducted over in eastern Idaho and nobody
23 attended. We have established notice of the application
24 and we, I think, only received maybe three or four now
25 customer comments. I don't think that it's reasonable to
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1 presume as Mr. Miller did in his reply that because
2 customers have not commented they agree with the
3 Company's proposals. I think that we have a resort
4 communi ty and the people are not in touch, although I
5 believe that notice of the initial application was
6 provided by the Company to customers and so I don't know.
7 I mean, we could have a hearing, but I'm not sure what we
8 could expect to achieve.
9 COMMISSIONER REDFORD: Okay. Well, as
10 the--
11 MR. WOODBURY: As far as developing a
12 record for the Commission decision.
13 COMMISSIONER REDFORD: As the presiding
officer, I don't think I'm quite knowledgeable enough yet
15 to deliberate on this until I receive the information
16 which Mr. Miller has offered and I think the way we ought
17 to leave this is that once we receive the information, if
18 we have further questions, we will convene another oral
19 argument to take those up. I just want to encourage
20 everybody to be as forthright as possible as to the
21 entire transaction which includes the development, the
22 cost of the system, what was transferred, if there was
23 any consideration and, you know, I'd like to know whether
24 the developers are also members of the board of the water
25 and sewer company. It just seems difficult for me and I
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1 know some of the other Commissioners is that we've got
2 the skeleton of a system and nothing else and it just
3 seems to me that we need to take into consideration the
4 operating expenses and the operating revenues from the
5 date it was transferred, and we want to be as
6 accommodating as possible and I think, Mr. Miller, that,
7 you know, these times require extraordinary measures and
8 we want to make sure that we have all the facts before we
9 go down the road as far as amortization, availability and
10 so on.
11 I had one other question which you might
12 be able to answer. You know, inasmuch as the
13 availabili ty charges are kind of anomalous, aren't they
14 kind of a contribution to equity by the customers and
15 don't the customers in some way obtain some equitable
16 rights, because, I mean, after all, it just doesn't fit
17 as far as I'm concerned. You don't have to answer that
18 question right now, but you might give it -- also, I had
19 a question about is there a homeowner's association now
20 or how is the Company structured as far as the
21 residences? I'd like to know kind of the involvement of
22 the developer and the Water Company and the customers.
23 Do either of the Commissioners have a
24 question?
25 COMMISSIONER KEMPTON: Mr. Chairman, I
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1 have a couple along the same line because I like Scott's
2 terms. To me, this is almost a shell utility, because in
3 the transference of acquiring the utility, the owner,
4 owner /manager essentially accepted a condition where all
5 of the benefits of the acquired capital in the front end
6 that would go into enticing people to buy property are
7 lost to the water utility because it becomes contributed
8 capi tal and therefore of no value in having a return on
9 equi ty, and the 12 percent that we typically allow small
10 companies for return on equity usually mean that it's a
11 profi table company only if it has some capital assets
12 that have been acquired and this one has none, so it
13 starts out with nothing, it can utilize nothing from the
14 past developer's actions. The developer can walk away
15 from this. The residential owners are left with the
16 property. They apparently have some sort of a commitment
17 in the homeowner's language that would prohibit them from
18 drilling wells and I question whether that can be
19 sustained in circumstances like this.
20 I think that the whole basis of this
21 utili ty is phantom in nature and the skeleton that we're
22 left to work with has no bones that will allow a 12
23 percent return on equity to even apply, so maybe there
24 does have to be ingenuity in how we define the rate case
25 for it, but I'm not willing to move on to the options
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1 that the courts have given the Commission to move away
2 from precedent until I have more information to base that
3 kind of a decision on and right now I don't think we have
4 it, so I'm more inclined, Mr. Chairman, to move to a more
5 complete hearing process or to get additional information
6 that can be accumulated in this process, the modified
7 procedure.
8 COMMISSIONER REDFORD: Okay, Commissioner
9 Smith, you get the last word.
10 COMMISSIONER SMITH: No.
11 COMMISSIONER REDFORD: No words?
12 COMMISSIONER SMITH: No words.
13 COMMISSIONER REDFORD: Okay, do either the
14 Staff or the Company have any questions? I think we've
15 tried to be clear enough to understand what it is we're
16 looking for and so the prerogative of the Chair is that
17 we'll order that we receive further exhibits from the
18 Water Company and that the Staff have an opportunity to
19 look at those exhibits and comment; is that acceptable?
MR. MILLER: It is.
COMMISSIONER REDFORD: If there's nothing
22 else to come before the Commission at this time, we'll
23 stand adj ourned.
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MR. MILLER: I did have --
COMMISSIONER REDFORD: Wait a minute,
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1 we're not adj ourned.
2 MR. MILLER: I f you would permit one
3 comment on one aspect of Mr. Woodbury's presentation. As
4 I understood it, the Staff position now is that some
5 level of rate case expense should be approved which is a
6 departure from the previous position that no level of
7 rate case expense should be approved. I'd just like to
8 observe that the rule is clear that once the utility
9 proves that it has incurred an expense, except for
10 payments to utili ties, the burden shifts to the other
11 party to prove that the expense is unreasonable. Staff's
12 comment that the expense seems high is not evidence and
13 in my opinion has not shifted the burden back to us to
14 li tigate the reasonableness of the rate case expense.
15 Addi tionally, I'd point out as I've
16 previously indicated that much of the work that was done
17 in this case is due to the fact that this is a new
18 utili ty. It was necessary to recast all of the books and
19 records to conform with the Uniform System of Accounts.
20 It was necessary to develop a separations model between
21 sewer and water. I'd also say that when Teton Springs
22 approached me about filing a case, I said to them that
23 there's sort of two ways you can file a water rate case.
24 You can send in a two-page letter and a shoebox full of
25 your records and let the Staff figure it out for you or
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1 you can make a professional, competent presentation of
2 your case.
3 The first approach is obviously less
4 expensi ve. The second is more respectful to the
5 Commission and Teton Springs chose the second, so it
6 seems to me in the absence of evidence, there's no reason
7 to shift the burden back to the utility to establish the
8 reasonableness of that expense, and I think we understand
9 the Commission's concerns on the transfer issues and
10 associated issues and I think that we could have a reply
11 or a supplemental filing in two weeks.
12
13
COMMISSIONER REDFORD: Well, that will be
fine, Mr. Miller. You know, it's advisable that you get
14 it in as quickly as you can, so I'll set a two-week
15 deadline for the further exhibits and I' 11 give the Staff
16 another week after that if it wants to respond. With
17 your statement as far as the burden shifting, I agree
18 with you to the extent that the final decision rests with
19 us and regardless of what the Staff's comments are, that
20 doesn't dispose of the issue as far as, well, you didn't
21 rebut it and therefore it's good, and so, Commissioner
22 Smi th, do you have anything further you'd like to say?
23 COMMISSIONER SMITH: Yes, just two things.
24 First of all, I understand that the initial start-up of a
25 new company necessarily involved a whole lot of expenses
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1 that won't be ongoing which, of course, in regulatory
2 terms leaves us with a dilemma, because when you're
3 setting ongoing rates, it's for the expenses that will be
4 incurred in the future and if this is a one-time start-up
5 fee, then it doesn't seem appropriate to put it in an
6 ongoing rate since we never know whether you're going to
7 be in in five years or ten years or fifteen years, so I
8 think you need to address that concern, also, and I just
9 want to say that my big concern is who has the fiduciary
10 duty to this Water Company since it appears that the
11 developer is inextricably entwined even with the current
12 operator of the Water Company with the development
13 company, so whose job was it to look out for the Water
14 Company and see that they got a fair shake in the
15 transfer of assets and the set-up of the Company? That's
16 my issue.
MR. MILLER: And with respect to that
18 issue, that's what we will address in our subsequent
19 filing. With respect to your first point, of course,
20 that seems to me to be a length of amortization issue.
21
22
COMMISSIONER SMITH: Me, too.
MR. MILLER: And we have proposed a period
23 of time. If the Commission thinks that those benefits
24 ought to be spread over a longer period of time, then in
25 its judgment the Commission could adopt a different
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1 amorti zation period.
2
3 Mr. Woodbury?
4
5 Thank you.
6
7
8
COMMISSIONER REDFORD: Anything further,
MR. WOODBURY: Nothing, Mr. Chairman.
COMMISSIONER REDFORD: Mr. Kempton?
COMMISSIONER KEMPTON: No.
COMMISSIONER REDFORD: Okay, well, hearing
9 nothing further, we'll stand adj ourned. Thank you.
10 MR. MILLER: All right, thank you very
11 much for your time.
12 (The Hearing adjourned at 11:50 a.m.)
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1 AUTHENTICATION
2
3
4 This is to certify that the foregoing
5 proceedings held in the matter of the application of
6 Teton Springs Water and Sewer Company, LLC for the
7 issuance of a certificate of convenience and necessity,
8 for approval of rates and charges for water service, and
9 for approval of rules and regulations governing the
10 rendering of water service, commencing at 10: 00, on
11 Friday, November 7, 2008, at the Commission Hearing Room,
12 472 West Washington Street, Boise, Idaho, is a true and
13 correct transcript of said proceedings and the original
14 thereof for the file of the Commission.
15
16
C! ::.
CONSTANCE S. BUCY
Certified Shorthand Reporter
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