20041115Vol I Oral Argument.pdf

ORIGINAL
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IK THE MATTER OF THE APPLICATION OF
UNITED WATER IDAHO, INC. FOR AN
AMENDMENT TO ITS CERTIFICATE OF
PUBLIC CONVENIENCE AND NECESSITY NO.
142 AND FOR AN ACCOUNTING ORDER.
HEARING BEFORE
CASE NO.
UWI-W-04-
. ORAL ARGUMENT
- -
COMMISSIONER DENNIS S. HANSEN (Presiding)
COMMISSIONER MARSHA H. SMITH
COMMISSIONER PAUL KJELLANDER
PLACE:Commission Hearing Room
472 West Washington Street
Boise, Idaho
DATE:January 27, 2004
VOLUME I - Pages 1 - 51
.J
HEDRICK
1,
, \.. \
COURT REPORTING
gel't'(~ tIu ed/f(/f((JJ(/~ $itee 1978
c.:
c:."
-~.,~:::,-,(j'):;::",..., '
"h"C) ""
1 ~~
;",
. i
;'::;) '
;';:: f'"'l
'\;'"
z. ' ~:;?i
:;~j '-..",,:~ ~ ..~(.:....
rrl
.-.."" "-......
:\i..,,"'"
~"'' '" ':;"(""""
Ui (~:~: 7-if; N r:;~
(:)
CJ"\ t~ c~4,'"
POST OFFICE BOX 578
BOISE, IDAHO 83701
208-336-9208
For the Staff:SCOTT WOODBURY , Esq.
Deputy Attorney General
472 West WashingtonBoise, Idaho 83702
For Uni ted Water Idaho:McDEVITT & MILLER, LLP
by DEAN J. MILLER, Esq.
420 West Bannock StreetBoise, Idaho 83702
HEDRICK COURT REPORTING
P. O. BOX 578, BOISE, ID
APPEARANCES
83701
BOISE , IDAHO, MONDAY, NOVEMBER 1 , 2004, 9:30 A.
ThisCOMMISSIONER HANSEN:Well, good mornlng.
lS the time and place set by the Idaho Public Utili ty
Commission for oral arguments in Case No. UWI-W-04-03, known as
In the matter of the Application of United Water, Incorporated
for an amendment to its Certificate of Public Convenience and
Necessi ty No. 142, and for an accounting order.
m Commissioner Dennis Hansen and I'll be
chairman of today ' s hearing.At my -- for the record, at my
left is Commissioner Marsha Smi th , and at my right
Commissioner Paul Kj ellander.
Maybe we can start, first, by taking the
appearances of the parties.We can start wi th Uni ted Water.
Thank you, Mr. Chairman.MR. MILLER:
Dean J. Miller of McDevi tt and Miller, for the Applicant.
Also with me is Gregory P. Wyatt, the general
manager of Uni ted Water Idaho.
COMMISSIONER HANSEN:Than k you.
Staff?
MR. WOODBURY:Scott Woodbury, Deputy Attorney
General, for Commission Staff.
COMMISSIONER HANSEN:Thank you.
Well the order of events today, we will start
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE, ID
COLLOQUY
83701
wi th Uni ted Water where you filed for the oral argument and
ll first go wi th you, and then we ll allow the Staff to come
next.And then after the Staff , we will allow Uni ted Water to
make any closing comments that you care to make.
So wi th that, if we re ready, we ll begin.
Uni ted Water.
Thank you very much, Mr. Chairman,MR. MILLER:
Members of the Commission , and thank you for your time.I know
it's valuable.
I believe that the posi tions of the parties are
well laid out in the Pleadings that are
--
have been filed and
are before you, so I won t review those in detail and I will
try to be brief.
The
--
one of the reasons for requesting oral
argument was to have the opportuni ty to respond to any
questions or concerns that you might have, which is difficul
sometimes in a Decision Meeting for that.
Let me say also preliminarily, the Company always
regrets it when it finds itself in a posi tion adverse to the
Staff , and our usual effort is to obviously resolve things
wi thout becoming adverse to the Staff, but in this case,
regrettably, as we demonstrate in our Reply Comments and the
Affidavit of Mr. Wyatt, we do think that the Staff position
suffers from legal policy and factual deficiencies.
What I want to do in these oral comments,
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE, ID
ARGUMENT
83701
wi thout, agaln, revlewlng all the Pleadings, is suggest to the
Commission that you can
--
that you can decide this case
wi thout reaching the legal issue of ownership of sale proceeds,
and wi thout establishing legal precedent in that area, and
wi thout adopting some broad policies that would be applicable
to all future cases with respect to division of sale proceeds.
What I think you can do in this case is find that on the unique
facts of this circumstance, the transaction as it is proposed
is not only not adverse to the public interest and the
ratepayers are not harmed, but it accomplishes several things
that are in the public interest and that are in the best
interest of the Carriage Hill ratepayers, and it accomplishes
at least five things:
First, it sol ves the problem of the second source
of supply in the Carriage Hill subdivision and assures that the
Carriage Hill customers in that subdivision will have a safe
and adequate source of drinking water supply, as required by
the Department of Environmental Quality.
Second, the customers in the Carriage Hill
subdivision will receive service at a lower rate.The Ci ty
Nampa , as established in the Pleadings, has rates that are
lower, currently, than Uni ted's, and probably lower than
United's after its next rate case, which is imminent.
Third, it allows for the orderly growth of the
Nampa municipal water system.If the transaction were to fail,
HEDRICK COURT REPORTING
P. O. BOX 578, BOISE, ID
ARGUMENT
83701
the likely result is that there would be an island, the
Carriage Hill subdivision served by one utility, surrounded by
another utility.
Fourth, it results in the retirement or
satisfaction of a debt that is legally due and owing.
Now, in this point, the crux of the Staff'
position is a suggestion that the Commission ignore the
interests of Nampa, of United Waterworks, and of Carriage Hill
as if they did not exist, and decide the case based on a
hypothetical circumstance, a reali ty that does not exist; but,
in fact , the
--
in reali ty, Uni ted Water, the Ci ty, and the
developers do exist, and they have interests.And while the
Commission may not have an affirmative duty to protect the
interests of those parties, it can certainly recogni ze the
legi timacy of their interests and look for a solution that does
not harm their interest.The transaction , as United has
proposed it, does not harm any party s interest.The solution
proposed by the Staff harms the interest every party for the
purpose of givlng the other ratepayers windfall sale
proceeds which the ratepayers have legal equi table
interest.
And I'd also like to point out or say that
Staff's perception that United Water management has some kind
of a conflict of interest also overlooks the reali ty that
management owes duties both to ratepayers and shareholders, and
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE, 10
ARGUMENT
83701
it is not a conflict to cause a debt legally owing to
shareholders to be repaid, and that can be accomplished wi thout
expense or burden to ratepayers.
The fifth thing the transaction accomplishes
that it protects United Water s general body of ratepayers from
any risks in a number of ways:
First, Uni ted's rules and regulations governlng
noncontiguous expansion which are approved by the Commission
were specifically designed to insulate ratepayers from
speculative risks, and those rules worked as they were intended
in this case.When the development of the Carriage Hill
proj ect fal tered, Uni ted's customers were not as ked for a
bailout.In fact, Uni ted did not begin making any investment
until there was revenue to support the investment, and the
proposed division of proceeds as proposed by the Company fully
reimburses that investment.
Second, as acknowledged in the Staff comments,
the Carriage Hill proj ect came into being and occurred after
United Water s last general rate case, so current rates do not
include any recovery of investment or expense associated wi
Carriage Hill.And if all goes as planned, as I'll discuss
a moment, by the time of United Water s next general rate case,
any investment associated wi th Carriage Hill would be off its
books so it will not be recovered in future rates.
Third, our proposed accounting treatment reduces
HEORICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
the revenue requirement associated wi th Carriage Hills to zero.
Customers will not pay any rates that include any component for
the Carriage Hill investment.
Fourth, the proposed accounting treatment uses
part of the sale proceeds to cover all the direct costs of the
transaction, so none of those will find their way into Uni ted'
rates.I parenthetically would say that the Staff, in its
comments, in its Exhibit B , proposes some minor adjustment to
those coverages of direct costs, and while we could probably
quibble with those, for the purpose of accommodation, we would
not obj ect to an Order that covers the cost in those ways.
Fifth, in preparing its upcoming general rate
case , Uni ted is removlng all the revenue and variable expense
associated with Carriage Hill from its books, so there will be
no lingering revenue or expense effects in Uni ted's rates going
forward.
1 7 So, I would agaln point you to the fact that this
lS a unlque set of circumstances.The Commission can approve
the transaction as proposed without establishing a legal
I think it'precedent, wi thout adopting some broad policy.
clear from the Pleadings there are no other existing proj ects
in which United Waterworks acts in a financial capacity.
Uni ted Water does not anticipate that would happen agaln.So,
there are no other cases on the horizon that would be
implicated by an approval of the transaction as proposed.
HEDRICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
Let me just conclude with one final item:As the
Commission recalls, the transaction as proposed includes an
approximate $28 000 risk premium, or what we call risk premlum,
which is an amount over and above the amount necessary to
retire all the costs.Initially, United had proposed that that
risk premium be recorded on the books of Uni ted Waterworks.
For the purpose of accommodation and if the Commission thinks
it more appropriate, the Company is going to record that risk
premium on the books of Uni ted Water Idaho so that it would
show as revenue on the local Company books, not on the parent
Company books.
So, members of the Commission, for these reasons,
we respectfully request that the transaction be approved
proposed.And as I indicated, one of the purposes for
requesting this oral argument was the abili ty to respond to any
questions or concerns you might have , so with that, we will
1 7 conclude these remarks and would be happy to respond to any
questions.
Thank you.Thank you veryCOMMISSIONER HANSEN:
Let's see if we have any questions from themuch.
Commissioners.
Any questions?Questions?
Okay, none.Then we will move now to the Staff.
Mr. Woodbury.
MR. WOODBURY:Thank you, Mr. Chairman,
HEDRICK COURT REPORTING
O. BOX 57 8, BO IS E , I D
ARGUMENT
83701
Commissioners , Counsel, Mr. Wyatt.
The Company contends that to acknowledge the
interest of ratepayers in this case is to treat all other
parties unfairly, and Staff disagrees wi th that contention.
The Company contends that there is no policy
matter precedent that needs to be determined this case,
and Staff disagrees with that contention.
Staff contends that Uni ted Water customers have
an equi table right to a share in the proceeds of the sale of
the Carriage Hill water system.The reason that customers are
enti tIed to a share of the gain is that the distribution system
and the water source was not the resul t of Company capi tal
investment, nor was it the resul t of a gift.
Pursuant to Commission-approved rules and
regulations regarding noncontiguous systems, there lS a
requirement that
--
of contribution and advance by the
1 7 The Carriage Hill system was conveyed to thedeveloper.
Company free of liens and encumbrances.The advanced plant
servlce, or AIAC, on the Company books was 354,000.The
The contributedcontributed plant in serVlce was 177 000.
plants for the distribution system, the advanced plant, is for
the source supply.The advance aid construction
reimbursed at the rate $800 per connected lot.
Now,the required the requirement
contribution in advance serves two purposes.The Company
HEDRICK COURT REPORTING
O. BOX 578, BO IS E , I D
ARGUMENT
83701
not required to make capi tal investment.And for the
ratepayer, CIAC, the contributed moneys, do not become part of
the Company s rate base, and the advance moneys do not become
eligible for Company rate base until a customer is connected
and the refunds are made.
Looking at the purposes of contribution and
advance in this case, both of which we find are satisfied, the
result is that United Water was not out of pocket and assumed
no risk , and the ratepayers were not out of pocket.So how
should the sale proceeds be distributed if it's not
Company-supplied investment , it's not yet rate based, it's not
being depreciated?So the facts are not the same as in the
Boise Water case.However , Staff contends the ratepayers have
an equitable interest and have as much claim to the net sale
proceeds as Uni ted Water.
Staff contends that, for the Commission, this is
a case of first impression.The Company did not come by the
contributed advanced properties save for its Certificate and
Commission-approved rules and regulations.But for the
existence of its customers, the Company would not have
Certificate.
Uni ted Water owns the Carriage Hill facilities
outright.They are conveyed free of lien and encumbrance.
United Water is not a surety on the Carriage Hill
The Carriage Hill facili ties will be transferred to thenote.
HEORICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
City of Nampa , free and clear.The Ci ty of Nampa has no
obligation to repay the Carriage Hill note.
So then we ask what's happening here.
Carriage Hill developers who are in defaul t will
have their note to Uni ted Waterworks paid off by Uni ted Idaho.
Uni ted Waterworks receives satisfaction of the developer
obligation and in the amount of around 308,000.The Company
has conceded that the premium should be booked on United Water
Idaho s books rather than flow to Uni ted Waterworks.Uni ted
Water s other customers are then left holding the short end of
the stick.And so Uni ted Water has the opportuni ty to get
asked what is the short end of the stick.
Uni ted Water has the opportuni ty to provide a
posi ti ve benefi t to its ratepayers and is not doing so.The
Carriage Hill facilities were not security for the developer
note.You could question as to whether Uni ted Water would have
been as quick to pay off a developer note to an unaffiliated
lender , and I can t believe that that would happen.
The Boise Water case is distinguishable.
Ratepayers did not purchase the land in that case; the Company
did.
Other authori ty ci ted by the Company in its -- in
its comments are distinguishable on the same basis.The Ci ty
of Lexington , Philadelphia Suburban, Maine Water Company, in
all of those cases, ratepayers contributed nothing to the
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE, 10
ARGUMENT
83701
acquisition cost and the property was purchased by the
shareholders or the Company.
In the Maine water case, the Court recognized a
well-defined exception to the New York Telco case.And that'
ci ted authori ty where, essentially, ratepayers are assumed not
to -- property devoted to public utili ty service is privately
owned by the utili ty and not customers.Customers pay for
service and acquire no interest in utili ty property.
Ratepayers don t have an interest in the proceeds of sale of
nondepreciated property.
The exception to that case is that in certain
circumstances -- and this was recognized by the Idaho Supreme
Court -- customers paYlng bills for service do, indeed, acquire
in the property of the privately-owned utility an equi table
interest that is enti tIed to consideration at rate making.
That exception is depreciable property.And we don t have that
here either except for the booking amount that, as far as --
Staff had proposed three different types of allocation , one of
which we looked at depreciation and made those calculations.
But, United Water also cites Boise Water for
saying not having paid the cost of purchasing nondepreciable
property, ratepayers are not allowed to reap the rewards or
losses on its sale or other transfer.
But where is the equi ty in permi tting Uni ted
Water to benefi t from what can only be called a windfall to
HEORICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
them?The Company made no capi tal investment, it assumed no
risk.
To follow Uni ted Water s reasonlng, there is
window between rate cases wherein the Company can be the
beneficiary of Commission-approved rules requiring contribution
and advances, and if it can sell the contributed property for
market value wi thin this window , it can pocket the sale
proceeds wi th no obligation to share.I ask the Commission
whether that was the intention in the rules requiring
contribution and advances, and I suggest the answer is, "No.
The facts in this case prevent the Commission
provide the Commission wi th an opportuni ty to prevent an
unintended and unjust consequence, and to achieve a fair, just,
and equi table resolution.
Staff proposed three methods of allocation of net
The first one was comparative risk , and thesale proceeds.
Company addressed that in their comments.And this was an
allocation in relation to how the risks are borne by each
United Water criticized Staff's comparative riskparty.
analysis.The Company concluded that Uni ted Water s customers
are exposed to zero risk and under a risk reward analysis would
deny them a share of the proceeds, but Uni ted Water s analysis
is also flawed.
Granted, customers are insulated from risk.The
distribution and source of supply were provided by contribution
HEORICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
and advances.Uni ted Water makes no investment except through
refunds and meters, and not until there is revenue to support
the investment.Also, present rates do not include a return on
the Carriage Hill investment.However, so too was the Company
insulated from risk.Oistribution and source of supply was
provided by contribution and advances, not Utili ty-supplied
funds.Apart from meters and chlorination equipment, the
Company had no out-of-pocket investment.Uni ted Water was also
exposed to zero risks.Staff's analysis was correct:The
relative risks of the Company and the shareholders were similar
and approximately equal.
Staff also proposed a depreciation ratio where
the
--
we developed a ratio of accumulated depreciation which
is a little over $2 000 compared to net book value, and that
resulted in a sharing percentage for ratepayers of 8.849
percent of the net sale proceeds wi th respect to the
depreciated property.Those were moneys that would be rate
based by the Company because of repayment of advances.This
method, the Company contends, has the possible virtue of not
offending the rule of Boise Water.Staff contends that the
rule of Boise Water is not applicable because we re not talking
about contributed property wi th respect to the advances and
contributions.
Staff's third proposal was to spli t proceeds from
the contributed property 50/50 between ratepayers and
HEORICK COURT REPORTING
P. O. BOX 578, BOISE, 10
ARGUMENT
83701
shareholders , and allocate proceeds from depreciable assets
according wi th the depreciation ratios established.
Under the three proposals advanced in Staff'
comments, Staff recommends the third proposal.Under that
proposal, ratepayers would receive $161,209, and United Water
would receive $175,047.
Now, United Water has the opportunity in this
case to provide a posi ti ve benefi t to its ratepayers and is not
doing so as proposed.Uni ted Water is not stepping up to the
plate, while it could be contended that it's blinded by its
relationship to United Waterworks.Uni ted Water has no
contractual obligation to pay off the developer s promissory
note.It's the Commission s duty in this case, Staff believes,
to put the Company s priori ties as a regulated utili ty in
order.
Carriage Hill was not an investment from supplied
capi tal, it was contributed advanced property.That's the
distinguishing factor.That's what distinguishes it from all
the authori ties ci ted by
--
by the Company in its comments.
This is one opportuni ty, a unique opportuni ty, when customers
can realize a tangible, positive benefit from the sale by the
Company of what is low-cost or no-cost property.This is sharp
contrast, we would state, to the Company s impending rate case
when customers will be asked to bear the cost of what will be
high-cost Columbia water treatment plant.
HEORICK COURT REPORTING
BOX 578,BOISE,83701
ARGUMENT
Staff asks the Commission to recognize the
equi table right of customers to contributed advanced property,
and
--
and I think we have nothing further to say.
Than k you.Let's see if weCOMMISSIONER HANSEN:
have any questions from the Commissioners.
Commissioner?Thank you very much.I have none.
And, now, Mr. Miller, do you have any closing
comments you d like to make?
I do, and I think I can make themMR. MILLER:
very briefly, and , essentially, it's this:I think
Mr. Woodbury s argument proves our point, because the Staff
does acknowledge that Uni ted Water customers had no risk.The
noncontiguous expansion system fully insulated Uni ted'
customers from any risk.The only thing that Staff seems to
then be able to say lS that what Uni ted customers have is an
opportuni ty for Uni ted Water to make them a gift that Uni ted
Water is not legally obligated to make.
Now , whether as a matter of broad policy in other
cases the Commission wants to examine the question of sale
proceeds sharing, that can be done , but it brings me back to
the point on the facts of this case.Viewed simply on their
facts, the proposal results in a number of posi ti ve benefits
for all parties.This is not a case of the Company cheating
somehow between rate cases and trying to obtain money and hide
it from the Commission.This lS a case in which the Company
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE, 10
ARGUMENT
83701
has tried to resolve a very difficul t problem in a way that
leaves all of the parties whole and no party harmed.So on the
facts of this case, the proposal of the Company does not harm
ratepayers.
Whether in the future the Commission wants to
address the question of whether the Company is somehow
obligated to make a gift it's not legally obligated to make,
that could be addressed some other time, but for now, this
transaction could be approved as proposed.The interests of
all of the affected parties are not harmed, and a number of
posi ti ve benefi ts are obtained.
We would submit it on that basis.
Let's see if weHEARING OFFICER:Thank you.
have any
--
I do have one question, and if I understand
correctly, Mr. Woodbury mentioned one proposal where it would
split, like 165,000 I think you mentioned would go to the
ratepayers and 175, 000 would go to the stockholders.And I
guess my question is, to me, it looks like maybe trying to find
common ground between both.Your comments on that , could --
guess you re opposed to it, but why?
Thank you, Mr. Chairman.MR. MILLER:In an
effort at accommodation, we have proposed that the so-called
risk premium could be recorded on United Water Idaho s books as
opposed to Uni ted Waterworks ' books, which is, in dollar terms
roughly equi valent to Staff's second proposal of providing the
HEORICK COURT REPORTINGP. O. BOX 578, BOISE, ID
ARGUMENT
83701
sale proceeds based on the ratio of depreciated property to
nondepreciated property.So in an effort at accommodation, the
Company would be willing to do that.
The proposal for a 50/50 split , we believe, could
not legally be accomplished or could not legally be compelled
based on the
--
our reply comments and the analysis there.
That proposal also would likely result in the transaction
collapsing.
As the reply comments of the Ci ty of Nampa
indicate, it's important from Nampa ' s point of view that when
the transaction closes, there not be any
--
pardon me -- any
lingering debt associated wi th the system.The Staff proposal
would not permi t the repayment of the debt that's due and
owlng, so it would likely result in the transaction collapsing.
Is there any other questionCOMMISSIONER HANSEN:
from the Commissioners?
I guess this bringsWell, thank you very much.
us to close of our oral hearing, and I appreciate those that
have participated.And wi th that, this hearing will be
There was just one other thing MR. MILLER:
forgot to mention.I just wanted to confirm whatI regret it.
is the Commission s Record for Decision in this case, and I
believe it would be the Application as filed, the testimony
Mr. Wyatt
--
we filed recently a Stipulation stating that that
could be in the Record of Oecision
--
it would be the Staff
HEDRICK COURT REPORTING
O. BOX 57 8, BO IS E ,
ARGUMENT
83701
comments, Uni ted Water s reply comments, the Affidavi t of
Mr. Wyatt, and the reply comments of the City of Nampa.
just to clarify what the record is before you.
I believe that is correct.COMMISSIONER HANSEN:
Is there any other business that needs to be
brought before us?
We have nothing.MR. MILLER:
COMMISSIONER HANSEN:Okay.With that then, this
hearing is adj ourned.
(The hearing adjourned at 10: 02 a.
HEORICK COURT REPORTINGP. O. BOX 578, BOISE, 10
ARGUMENT
83701
AUTHENTICATION
This is to certify that the foregoing is a
true and correct transcript to the best of my abili ty of the
proceedings held in the matter of the Application of United
Water Idaho, Inc., for an Amendment to its Certificate of
Public Convenience and Necessity No. 142 and for an accounting
Order, Case No. UWI-W-04-3, commencing on Monday, November 1
2004, at the Commission Hearing Room, 472 West Washington
Boise, Idaho, and the original thereof for the file of the
Commission.
"'Z",,,.,
"~I
......~~~
At,.
~~""""
" V
.;. ,..
"Ii ' ~
I ~OT -t.
~.*-.. ....
~cft.\118L\t
..
/Ii
, '
Ji
"..... .,p
OF I'D
,,"......."
WENDY J. MURR otary Public
in and for th State of Idaho,
residing at Meridian, Idaho.
My Commission expires 2-2008.
Idaho CSR No.4 7 5
HEDRICK COURT REPORTING
O. BOX 57 8, BO IS E ,
AUTHENTICATION
83701