20030723_558.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:JOHN HAMMOND
DATE:JULY 18, 2003
SUBJECT:IN THE MATTER OF THE APPLICATION OF CDS STONERIDGE
UTILITIES, LLC FOR APPROVAL OF AN AMENDMENT TO ITS
CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY TO
INTERCONNECT WITH AND ACQUIRE THE SERVICE TERRITORY
OF HAPPY VALLEY RANCHOS, INc. AND TO IMPLEMENT A
SURCHARGE. CASE NO. SWS-03-
On March 17 2003, CDS Stoneridge Utilities LLC (Stoneridge; Company; SU) filed
an Application seeking Commission authorization to acquire the service territory of Happy
Valley Ranchos, Inc. (HVR), a homeowners association water system, to complete an
interconnection between the existing Stoneridge water system and the neighboring HVR system
to amend its Certificate of Public Convenience and Necessity (CPCN) to include the HVR
customers within the Stoneridge service territory and to implement a surcharge on the rates for
connecting HVR customers to service the debt that will be incurred to complete the
interconnection proj ect.
The Commission by Order No. 29254 suspended the Company s Application and
ordered Stoneridge to continue charging only its current customers existing Commission-
approved rates and charges until a Commission Order is issued accepting, rejecting or modifying
the Company s Application and HVR customers are provided water service by Stoneridge.
Order No. 29254 at 1. The Commission also issued Notice of Application, Notice of Public
Workshop, Notice of Modified Procedure, and Notice of Written Comment Deadlines. !d. The
Commission Staff submitted its written comments on July 7, 2003. Fourteen HVR customers
also filed written comments.
DECISION MEMORANDUM
THE APPLICATION
Stoneridge Utilities requests approval to interconnect its water system with the
neighboring water system. HVR initiated discussions with SU regarding the possible
interconnection of the two systems in order to obtain better quality water. The HVR system
supply is of limited quantity and has experienced water quality problems in the form of high iron
concentration that requires fairly expensive filtration. In comparison Stoneridge has two wells
with large quantities of good quality water (600 and 800 gallons per minute), an existing
chlorination system and a substantial amount of storage. After comprehensive negotiations
between the two companies, SU agreed to interconnect subject to Commission approval and
receipt of Idaho Department of Environmental Quality (DEQ) financing.
Stoneridge Utilities is working with DEQ for approval of the interconnection. It has
also requested a loan from the State Drinking Water Revolving Fund to finance the engineering
and construction of the interconnection. The Company has obtained the services of James A.
Sewell and Associates consulting engineers to assist them with project engineering and agency
review. The Company s engineering consultant filed a report with the Commission and DEQ
entitled "CDS Stoneridge Utilities LLC. & Happy Valley Ranchos Water System Connection
2003 Engineering Report" on May 15, 2003. The engineering report provides the detailed
engineering calculations for the design of the interconnection project and some minor HVR
system upgrades.It also includes a detailed cost estimate for the proj ect as well as a
recommended recovery method for the construction costs. The report estimates the total project
cost to be $213 500. Stoneridge Utilities has requested an equivalent loan amount from the State
Drinking Water Revolving Fund that is administered by DEQ to pay for all of the
interconnection costs. The Company proposes to recover the financing costs by implementing a
surcharge of $12.65 per month from each customer benefiting from the interconnection.
Presently that includes only the existing HVR water customers. However, the Company also
proposed to apply the surcharge to any new customers connecting to the system downstream of
the booster pump station serving the HVR system. The surcharge is intended to recover only the
debt service costs (principal and interest) to amortize the State Revolving Fund loan over 20-
years.
Once the interconnection is complete, the Company proposes to merge the operations
of the HVR system with the Stoneridge system. Stoneridge will cancel the existing HVR rates
DECISION MEMORANDUM
and charges and begin charging the HVR customers all existing Stoneridge Utilities approved
rates and charges plus the surcharge. The Company is not proposing any changes in rates at this
time to the existing Stoneridge Utilities customers. The following is a comparison of the existing
HVR and SU rate schedules together with the surcharge proposed to collect the debt service
costs:
Existing Happy Valley RanchosBase Charge $ 5.Base Charge $ 24.
$ 2.
$ 5.
$ 8.
Existing loan surcharge
including the fITst
per 1000 gal for the next
per 1000 gal for the next
per 1000 gal for over
Monthly
000 gallons
000 gallons
000 gallons
000 gallons
Existing Stoneridge RatesBase Charge $ 14.00 Monthly
Commodity Charge $ 0.30 per 1000 gal
Proposed Happy Valley Ranchos RatesBase Charge $ 14.00 Monthly
Commodity Charge $ 0.30 per 1000 gal
Proposed Surcharge $ 12.65 Monthly
Finally, Stoneridge stated that on March 28, 2003 , a notice of its Application was
provided to all customers on both water systems. A copy of that notice is attached to the
Application as Exhibit H.
COMMENTS
1. Commission Staff
The Commission Staff reviewed the engmeenng report, performed an onsite
investigation of the physical system, had lengthy discussions with DEQ, Stoneridge, its engineer
and held a public workshop at the Stoneridge Event Center in Blanchard, Idaho on June 23
2003. Staff found the interconnection project is composed of approximately 3500 lineal feet of
inch transmission main, a fire hydrant, associated valves and fittings. Because the HVR
system is higher in elevation, a duplex 150 gallon-per-minute 125-psi booster pump station is
required between the two systems. The booster station is scheduled adjacent to the existing
Stoneridge 315 000-gallon reservoir. Staff also found that the project also includes some minor
system improvements to the HVR system. Staff noted the HVR system s existing 32 000-gallon
storage tanks are to be cleaned and additional system flushing blow-offs are to be installed.
DECISION MEMORANDUM
The project is scheduled to begin construction once the DEQ loan is finalized and the
project receives agency approval. The initial project construction schedule anticipated
completion by fall of 2003 but because of likely weather concerns a more realistic schedule will
be final project completion in spring of 2004. Once the interconnection project is completed and
water can begin flowing, the existing HVR well will be disconnected from the system and
properly abandoned. Given the amount of iron residue and iron bacteria in the HVR system
additional tank cleaning and improved flushing ability provided by the interconnection will be
needed to achieve water quality approaching that of the Stoneridge system. It may take as much
as a year or more of working with the HVR system before the majority of the iron will be
completely removed.
contamination.
Therefore, the two systems will remain isolated to avoid cross
Staff also found that the existing Stoneridge supply and storage appears to be
adequate to serve both systems as Stoneridge is designed for a much larger customer base.
Therefore, there remains excess storage and pumping capacity available to serve additional
customers. If at some point in the future water production becomes a problem, Staff noted that
the Stoneridge system is located over the Rathdrum Prairie Aquifer. This aquifer is known to
contain huge reserves of high quality water. However, it is evident that the HVR system is not
located over the same aquifer. HVR has attempted four times to find higher quality water and
has been unsuccessful. Therefore, Staff believed the proposed interconnection and merger ofthe
Stoneridge and HVR systems was the most practical and technically feasible method of
providing a satisfactory water supply to the HVR homeowners.
Staff also found that the engineering report was professionally completed and the
engineer has answered all of its questions regarding service supply and design. The proposed
interconnection design appears capable of adequately serving the HVR system without
detrimentally affecting service to the existing Stoneridge customers. DEQ has reviewed the
proposed project and found it sufficiently favorable to recommend an interest rate reduction for
the requested loan. DEQ is proposing an interest rate reduction to 2% from the traditional 3.75%
revolving fund loan rate because the project consolidates two systems and it believes will
provide significant public benefit. At the public workshop, customers in attendance spoke in
favor of the merger and were generally in agreement with the surcharge rates proposed. Based
DECISION MEMORANDUM
on the foregoing, Staff believed the project solves problems for the HVR customers without
harming customers of Stoneridge.
In regard to the surcharge to cover the costs of the project Staff and Stoneridge agreed
that the surcharge should neither harm nor benefit the Company. Staff recommended that it only
be authorized to recover the project financing costs. In addition, Staff recommended that the
actual surcharge be implemented only after construction is completed, the loan is closed, all costs
are known and service is rendered to HVR customers. Even though Staff believed that all
interconnection construction and financing costs should be included in the surcharge calculation
Staff cautioned the Company and its engineer to make every attempt to control construction
costs. The proposed surcharge is the third surcharge estimate provided to the HVR customers
and the costs have increased with each estimate. One customer at the public workshop expressed
concern about the increasing costs but still supported the interconnection because of the
significant benefits that resulted from the project. Staff recommended that the Company provide
Staff with the results of the project construction bids and resulting surcharge estimate. The
additional information should provide Staff with an additional degree of certainty for final
construction costs. If costs have increased significantly from those proposed additional review
might be warranted before construction costs are expended.Staff recommended that the
Commission keep the case open and reserve final approval of the surcharge amount until
construction is completed, the interconnection is operational and all financing costs are known
and measurable.
Staff recommended that the surcharge should be charged to all customers taking
service downstream of the interconnection between the Stoneridge and the HVR system.l Any
new customers that connect to the HVR side of the system would also pay the surcharge. Staff
recommended that these additional proceeds be used to prepay principal on the loan. Principal
prepayment would help shorten the life of the loan and the surcharge.Staff believed that
attempting to adjust surcharge rates with each new customer connection would be overly
burdensome for the Company and would not provide sufficient benefit for the level of effort.
1 The location of the interconnection between the Stoneridge and the HVR system is agreed to be the booster pump
station adjacent to the existing Stoneridge concrete water storage reservoir.
DECISION MEMORANDUM
Staff stated it will continue to work with the Company to establish proper accounting
procedures for recording surcharge funds and expenditures. Staff will further assist the
Company to properly record the improvements and revenues in the Company s annual reports.
The Commission in Case No. GNR-98-, Order No 28206, approved the existing
SU rates of $14 per month plus $.30 per 1000 gallons. These rates were based on 23 residential
customers, 2 commercial customers, the condominium association and the golf course. The
number of customers has grown slowly since the rate case. Currently there are 36 residential and
13 commercial customers and by interconnecting the HVR system, SU will add the 86 HVR
residential customers. Water companies generally experience economies of scale with increases
in number of customers and Staff believed that Stoneridge will likely experience unit cost
savings as a result of the acquisition of these 86 customers. Therefore, Staff recommended that
the Stoneridge rates be reviewed in two years from the time of the interconnection to ensure that
the Company is not over earning from the addition of the HVR customers.
Staff has also reviewed the effect of the surcharge together with the existing
Stoneridge rates on HVR customers. The existing SU rates are significantly below the existing
HVR rates. Even with the proposed surcharge the cost to HVR customers may be less than their
existing rates depending on customer usage. The greatest rate increase for HVR customers
would be at a usage of 20 000 gallons per month. The increase at 20 000 gallons is less than
$4.00 per month for a much improved water supply. HVR customers using more than
approximately 22 000 gallons per month would see a rate decrease, and those using from 7 800
to 21 700 would see an increase of less than $4.00 per month.
The Commission sent individual notice of the proposed merger to each customer of
both Stoneridge and HVR. A public workshop attended by 11 customers, representatives of the
Commission Staff, both water companies and DEQ was held June 23, 2003 in Blanchard.
Fourteen customers of the HVR water system have filed written comments. Those comments are
now part of the official case record.
If the merger is approved, residents of HVR water system will become customers of
Stoneridge Water Company. Staff found that Stoneridge Utilities is in compliance with the rules
and regulations of the Commission, including the Utility Customer Relations Rules, (IDAP A
31.21.01.000), Utility Customer Information Rules, (IDAPA 31.21.02.000) and Small Water
Company Policies, (IDAP A 31.36.01.000). The portion of the existing HVR homeowners
DECISION MEMORANDUM
association by-laws applicable to the water system will be superceded by Stoneridge Utilities
tariffs. Stoneridge has prepared a rules summary, which will be sent to all customers following
approval of the merger. IPUC rules can be reviewed at the local office of Stoneridge Water
Company, or on line at http://www.puc.state.id.uslRules.htm
Stoneridge s current tariffs can be found on the Commission s website. However, the
current tariffs will not include the surcharge for HVR water customers until the Commission has
determined the appropriate surcharge. Staff will work with Stoneridge to prepare a new tariff
showing the surcharge for HVR water system customers at the completion of this case.
The Stoneridge development is operated and controlled under a number of different
organizations. The parent company has added a strictly utility-limited liability company since
the initial certificate was issued and has operated the utility solely through this company since its
inception. Staff believed that this organization will facilitate the review of utility finances and
potentially avoid the commingling of funds between the development company, golf course, or
any other of the operations and the water utility.
Based on its review and comments Staff recommended:
1. The Commission approve Stoneridge s acquisition of the HVR water
system.
2. The Commission approve the interconnection project and authorize debt
financing from the State Drinking Water Revolving Fund when approved
by DEQ.
3. The Commission reserve approval of the surcharge until all financing
costs are known.
4. The Commission require Stoneridge to file the construction bid costs and
revised surcharge calculation once bids are received.
5. The Commission authorize the use of existing Stoneridge Utilities rates for
all former HVR customers and apply a surcharge only to those customers
downstream of the booster pump station adjacent to the existing
Stoneridge storage reservoir once service is provided to them.
6. The Commission require that all surcharge funds be used exclusively for
the payment or prepayment of the State Drinking Water Revolving Fund
loan.
7. The Commission change the name on Certificate No. 395 from CDS
Stoneridge Associates-Land LLC. to CDS Stoneridge Utilities, LLc.
DECISION MEMORANDUM
8. The Commission amend Certificate No. 395 to include the HVR's service
territory within Stoneridge s certificated area.
2. Customer Comments
As stated previously, the Commission received comments from fourteen (14) HVR
customers that would be affected by this project. The majority of these HVR commenters
supported Commission approval of this project because they felt that they would receive better
quality water from the Stoneridge system once the interconnection was completed. Several
commenters also noted that more than 82% of all HVR water users supported merger with the
Stoneridge system. Finally, a few commenters also were pleased that their rates would not
increase significantly or at all after the project was completed and water service was provided.
Some commenters did raise concerns about the cost of the interconnection project.
One commenter was opposed to paying for a fire hydrant that would only serve the lower tiers of
the HVR development. Another requested a hearing to investigate the costs that would be
incurred to effectuate this project. Although this customer/commenter supports the project she
requests that the Commission investigate the costs.
COMMISSION DECISION
Does the Commission wish to consider the merits of Stoneridge s Application based
on the written record or does it wish to grant the request of the HVR customer who asked for a
hearing to investigate the costs of the interconnection project?
If the Commission wishes to consider the merits of this Application based on the
written record does it wish to approve it based on the recommendation made by the Commission
Staff?
M:SWSWO30Uh2
DECISION MEMORANDUM