20180405Comments to Teton Water.pdf

KARL T. KLEIN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5156
RECEIVED
I; -'iiC ;JUBLIC' ' ;ii.1:,i3i,{iJlSSl0i{
Street Address for Express Mail
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE INVESTIGATION
INTO THE IMPACT OF FEDERAL TAX CODE
REVISIONS ON UTILITY COSTS AND
RATEMAKING.
CASE NO. GNR.U.I8-01
COMMENTS OF THE
COMMISSION STAFF TO
TETON WATER'S TAX
REPORT
The Staff of the Idaho Public Utilities Commission comments as follows on Teton Water
and Sewer Company's tax report filed in response to Order No. 33965.
BACKGROUND
On December 22, 2017 , the President signed the Tax Cuts and Jobs Act of 2017 (the
"Tax Act") into law with the effective date of January l, 2018. The Tax Act reduced the federal
corporate tax rate from35%o to 2lYo, which significantly decreases tax expenses for many
utilities. The Tax Act also reduced the first level of income tax for many other filers from 15%
to l2%o. Commission-regulated utilities include tax expenses in their revenue requirements. The
Commission then uses the revenue requirement to set fair, just, and reasonable rates. The
Commission initiated this case to investigate whether to adjust utilities' rates and charges to
reflect that the Tax Act has decreased the utilities' income tax expenses and revenue
requirement. See Order No 33965. The Commission directed certain rate-regulated utilities to
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1STAFF COMMENTS APRIL 05,20I8
file a report by March 30,2018, that advises the Commission on how the Tax Act affects them.
Id.
UTILITY REPORT
Teton Water & Sewer Company (Teton Water or the Company) is a public utility that is
part of this investigation. It provides domestic water services to 291 customers in the Teton
Springs Golf and Casting Club Unit Development in Teton County, Eastern Idaho.
On February 2,2018, the Company filed a report and provided a financial statement to
show how the Tax Act affected its tax expense. The Company's report stated that Teton Water is
a Limited Liability Company. Accordingly, for tax purposes, the Company's net income passes
to the Company's owner and is taxed at the personal rate. The Company is, therefore, not
affected by the Tax Act's decrease to the federal corporate tax rate. Instead, the Tax Act affects
the personal tax rate bracket of the Company's owner.
Since the Company provides both water utility service and sewer service, and the
Commission only regulates water utilities and not sewer companies, the Company filed a Profit
and Loss financial statement covering the water utility side of its business for the operating
financial period from January through December 2017. See Attachment A. The statement shows
the Company generated $158,776 of total income, and incurred $115,953 in operating expenses
and$24,626 in other expenses. The Company's net income was $18,197 .
The Company identifies scenarios showing the impact of the Tax Act. At the Pre-Tax
Act Personal tax rate of 25%o (201612017), the tax expense would be $4,549, at the Post-Tax Act
Personal tax rate of 22o/o (201 8), the tax expense will amount to $4,003. The revenue
requirement tax rate, when set at l5o/o, would cause a tax expense of $2,730. The Company
stated the Tax Act will not materially affect the Company's tax expense, and therefore rates
should not decrease.
STAFF ANALYSIS
Staff thoroughly reviewed the Company's Profit and Loss financial statement and tax
circumstances in the light of the Tax Act. In summary, upon reviewing the Company's filing,
Staff determined the Tax Act will lower the Company's tax expenses by $468 per year. Because
the amount is so small, Staff recommends that the Commission not direct the Company to spread
that benefit to customers through a water-rate decrease. Rather, Staff recommends that the
2STAFF COMMENTS APRIL 05, 2018
Commission order the Company to increase its annual contribution to the Emergency Reserve
Fund, established in Case No. TTS-W-08-01 (Order No. 30718), by $468. Staff s analysis and
recommendations are further explained below.
The Company's filing reflects a net income of $ I 8,197 . However, Staff disagrees with
the classification for ratemaking purposes, and believes a different balance is more appropriate
for some accounts on the Company's Profit and Loss financial statement. Staff also identifies
the tax-impact scenarios differently. Attachment B illustrates the Staff s position and
adjustments proposed for the Company's filing.
In the o'Other Expenses" section of the Profit and Loss financial statement, the Company
reported Interest Expense on Long-Term Debt of $17,691. While the Company may have paid
these expenses, the Company does not have debt approval from the Commission under Idaho
Code $61-901 et. seq. Even if the Company had debt authority, the cost would be recovered in
the Company's overall rate of return and not as an operating expense. The overall rate of return
used to establish rates was based on a higher return on equity component and rate. Therefore, for
ratemaking purposes, interest expenses should not be included. The effect of removing these
expenses is illustrated on Attachment B, Column B.
In the Ordinary Income/Expense section of the Profit and Loss statement, the Company
reported $ 1,1 80 of income associated with the Water On/Water Off Service Fees account. The
Company assessed these fees based on its tariff for voluntarily turning customers'water service
on and off. These revenues are naturally unpredictable. Staff thus recommends that, for
ratemaking purposes, this revenue should be shown as a three-year average. That average results
in $1,423 for Water On/Off Service Fees, as illustrated on Attachment C. The netted increase of
$243 is illustrated on Attachment B, Column C.
The Company's Profit and Loss Statement states that Water Connection Fees were
$11,204. These are one-time hookup fees assessed to new customers and are unpredictable. In
addition, the Company reported that, as of March 22,2018, it had no connections planned and no
contact from realtors, builders, or property owners. Staff recommends these be removed for
ratemaking purposes, as reflected on Attachment B, Column D. Hookup fees are now taxable
under the Tax Act, so Teton Water should revise its hookup fee tariff to reflect the tax gross up.
Staff will work with the Company to properly amend this tariff provision.
Lastly, Staff disagrees with the analytical tax scenarios presented on the Company's
Profit and Loss financial statement of a Pre-Tax Act rate of 25%o and Post-Tax Act rate of 23Yo.
JSTAFF COMMENTS APRIL 05,2018
Teton Water is a Limited Liability Company, which has been organized in the State of Idaho on
November 21,2012. See Order No. 32685 (Case No. TTS-W-12-01). For tax purposes, the
Company follows the Internal Revenue Service (IRS) rule for "Owner of Single-Member LLC."
As a single-member LLC, the Company has elected not to be treated as a corporation, which
renders the LLC a "disregarded entity," and the LLC's activities are reflected on the owner's
federal tax return. Because personal tax returns are proprietary, Staff assumes that autility
company's income is the first income the owner receives and uses the IRS schedule appropriate
to a single payer. Therefore, Staff recommends the Commission use the IRS tax schedule for an
individual to establish tax rates for this Company. See Attachment D. Using this table, Staff
calculated that the Company's tax for 2017 tobe $3,273. See Attachment B, line 6. Using the
similar table from the 2017 Tax Act, Staff calculated the Company's tax expense to be $2,805, as
shown on line 7. This results in a reduction of $468, as shown on line 8.
Staff does not believe this small change warrants reducing customer rates. As noted
above, the Company has an Emergency Reserve Fund that was established in its last rate case,
Case No. TTS-W-08-01. Staff thus recommends the Commission order the Company to increase
its contribution to that Emergency Reserve Fund by $a68 annually, to a total contribution of
$7,435 annually.
STAFF RECOMMENDATIONS
Based on Staff s review of the Company's Profit and Loss Statement and the tax rates
included in the Tax Cuts and Jobs Act of 2017, Staff recommends that the Commission
recognize the tax savings for Teton Water to be $468 annually. Staff further recommends that
the Commission order the Company to contribute $468 annually from tax savings to its
surcharge account for the Emergency Reserve Fund.
4STAFF COMMENTS APRIL 05,2018
Respectfully submitted this q* day of April20l8,
Attomey General
Technical Staff: Joe Terry
Johan Kalala-Kasanda
i:umisc/comments/gnrul 8. lkkjtjk comments teton
5STAFF COMMENTS APRIL 05,2018
4:0rl PM
01t2u18
Cash B!si3
Ordinary lncomorExpense
lncome
800.000 .Wator lncomo
600.481 'Water Metered Salos Rosidontlal
600.462 'Wator Moterod Saloe Commorclal
600.453 .Wate. Motered Saleg Mult-Famlly
600.475 . Water On , Watet Olf Service Fe
600.476' W.ter Connectlon Feeg
Total 600.000 . Water lncome
Total lncome
Gross Prolit
Exponio
700.000 . Water Expense
700.615 'Wator. Purchaood Power
700.616 . W.tor. Fuel for Power Product
700.618 . tYator. Chemlcalg
700.621 'l/lrator- ilaterlal & SuppllosO&|,
700.627 'w8tor. ilaterials & Supplleg€&A
700,631 . tftIater - Conlrct Srvlce-Profenl
001 .Reguhtory Expenre -IPUC
700.631 .Wator - Contrct Srvico-Profunl - Othor
Total 700.631 . Wator - Contrct Srvice-Profrnl
700.635' Walsr. Contrct Srvice-Teetlng
700.636 . Wator - Contract Srvlce - Other
700.6{1 .Water. Rents
700.656 . l,Yator - lnsurance Expenses
Total 700.000 . wator ExPonse
720,000 . WS - Unallocated Erponsas
720,610 . Unal,ocatod - Bank Fees
720,620. Unallocatod - Opor.ting Expense
720.630 .Unallocatod . Postago
720.640 . Unallocated . Tolephono
Total 720.000 ,ws - unallocatod
Total Expenso
Net Ordinary lncome
Other Exponso
800.403 . Wat6r.D€prsciation Expense
800,408 .Taxas & Fees
800.010 .water. Regul.tory Foos (IPUC)
800.011 .Wator. Propsfty T.xet
800.013 .Wator. Other Taxes - DEQ
Total 800.408 .Taxos & Feog
900.000 . lntorost Expenae
900.100 . lnt3relt Exp on Long-Term Dobt
Total 900.000 . lnterest Expense
Total Other Exponso
Not lncomo
Pre-Tax Act Per*onal Tax Rats (201U2A171 -284h
Poat-Tax Act Psrsonal Tax Rate 12018'r -22%
Revenue Requirement T8x Rate - 15%
Teton Water & Sewer Co.
Profit & Loss
January through December 20't7
102,872.84
7,648.00
35,872.00
1,180.00
11,203.56
158,776.40
158,776.40
158.776.40
11,133.41
267.92
6,635.60
18,416.01
492.45
0.00
15,686.40
15,686.40
693.00
52.760-42
699.60
3,476.00
110,260.81
2,771.34
20-24
259.07
2.641.45
5,692.10
115,952.91
42.823.49
144.00
329.00
5,294.20
1,168.00
-6ffi6',17,691 . 13
17.691.13
24.626.33
,8,1 97.1 7
4,549.29
4,003.38
2,729.58
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Attachment A
Case No. GNR-U-18-01
Staff Comments to
Teton Water's Tax Report
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Attachment B
Case No. GNR-U-18-01
staff comments to
Teton Water's Tax Report
04/05/18
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Teton Water Company
Water on/off service feesYear
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1,180
7,416
1,672
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$ 4,268
3 Year Average $
Filed amount
Adj
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1,180
$ 243
Attachment C
Case No. GNR-U-18-01
Staff Comments to
Teton Water's Tax Report
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Attachment D
Case No. GNR-U-18-01
Staff Comments to
Teton Water's Tax Report
04105118
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 5th DAY OFAPRIL2018, SERVED
THE FOREGOING COMMENTS OF THE COMMISSION STAFF TO TETON
WATER'S TAX REPORT, IN CASE NO. GNR-U-18-01, BY MAILING A COPY
THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
JON PINARDI MANAGING PAR
TETON WATER & SEWER
COMPANY LLC
PO BOX 786
DRIGGS TD 83422
CERTIFICATE OF SERVICE