19850225Final Order No 19493.pdf

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of the Secretary
.. Service Date
fEe a 5 1985
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF HAYDEN PINES WATER COMPANY FOR
AN ORDER APPROVING REVISED RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO. .
CASE NO. U-1121-
ORDER NO. 19493
PROCEDURAL HISTORY
On April 12. 1984. Hayden pines Water Company (Company or
Applicant) filed an application requesting approval to increase
rates for its Twin Lakes Service Area. formerly the Howard Water
Works.The Applicant requested that its proposed rates be effec-
tive on and after May 15. 1984.On April 30. 1984. by Order No.
18840. the Commission suspended the effective date of Applicant'
proposed rates for a period of 30 days plus 5 months from May 15.
1984.
On June 25. 1984 Staff filed a motion asking the Commis-
sion to expand the Company's application into one for general rate
relief.Staff argued that income associated wi th the addi tion of
the Twin Lakes service area to the Hayden pines Water Company
would not be adequately considered if the Company's application
was approved as filed.On August 7. 1984 the Applicant agreed to
extend the suspension period for an addi tional 90 days.
September 19. 1984 in response to Staff's motion to expand the
Company's original application. the Company filed an amended
application seeking revised rates and charges for the Company'
entire service area.Finally. on November 5. 1984. the Applicant
ORDER NO. 19493
submitted a final revision of its original application seeking
general rate relief for its entire service area.
On October 11. 1984. several residents of the Applicant I s
Twin Lakes service area filed a complaint against the Applicant
alleging inadequate water pressure and requesting that the Commis-
sion order Hayden pines Water Company to upgrade its system to
correct the alleged inadequate water pressure problems.I n the
Notice of Application and Notice of Hearing filed on November 27.
1984 the complainants were made parties to this proceeding.
addi tion. Staff and the Applicant were ordered to address the
issues raised by the complainants.
The public hearing in this matter was held on January
1985 at the North Idaho College in Coeur d 'Alene. Idaho.
APPEARANCES
FOR THE APPLICANT:Moffatt. Thomas. Barrett &
BlantonBy: Morgan W. Richards. Jr.. Esq.
O. Box 829Boise. ID 83701
FOR THE STAFF:Peter Richardson. Esq.
Deputy Attorney General
472 West Washington StreetBoise. Idaho 83702
FINDINGS OF FACT
Rate Base
The Company's original filing in this case proposed a
total rate base. including the Twin Lakes Service area. of
$1.024.677.
$893.185.
The Company subsequently reduced this figure to
ORDER NO. 19493
Staff's rate base calculation began wi th the book figures
for the Company's operations.The Company I s books indicated a
total rate base of $845.000.Staff made three ad justments to that
figure to reflect additional metering investment in the Twin Lakes
service area. a depreciation expense error. and adjusted test year
depreciation expenses to arrive at a total proposed rate base
figure of $879.000.
On rebuttal testimony Mr. Bud Ford for the Company testi-
fied that Hayden pines added a new pump in December the investment
in which was not included in Staff's calculations.According to
Mr. Ford that addi tional expense explains the difference between
the Company's rate base figure and the Staff's rate base figure.
Tr. 109.
The Staff I s rate base figure did not include the cost of
the Company's new pump.We therefore begin our rate base calcula-
tion wi th the base figure of $893.185 that includes the pump.
find that the Company's proposed rate base must be reduced by
$129.860 due to improper booking of meter installation charges.
The Company has been including meter installation costs in its
rate base since 1980.The Company was specifically ordered not to
do so in Case No. U-1121-7 by Order No. 15996 issued on November
21. 1980.We have therefore reduced the Company I s rate base by
the amount of meter installation costs that it has been booking as
rate base since Order No. 15996 was issued.We therefore find the
Company's rate base to be $763.325.
ORDER NO. 19493
I I RESULTS OF OPERATIONS
Staff calculated the Company's resul ts of operations as
follows--test year revenues $346.050; test year revenue deductions
$233.748; test year net operating income $112.302.Staff made
four adjustments to the figures found in the Company's books to
arrive at its net operating income figure.First. Staff increased
sales by approximately $9.000 to account for year end customer
levels.The Staff's second adjustment was significant. it added
$36.500 in sales revenues to account for increased revenues due to
metering the Company' s new Twin Lakes service area.Third. Staff
made a $160 reduction in expenses to correct for a depreciation
expense error.Finally. Staff increased expenses by $3.500 to
adjust for year end plant depreciation expenses.
The Company's final revised application projects a net
operating income of $72.953.The Company's calculations are--
total revenue $300.518; total expenses $227.564.These figures
were not updated by Company wi tness Ford at the hearing and repre-
sent the Company's final proposal on operating income.
We accept Staff' s calculation of net operating income
with the following adjustments:
A. Meter Installations
On rebuttal. Company wi tness Ford argued that Staff made
an error when it included as income $17.610 of revenue for meter
installations.Mr. Ford argued that hook-up fees are not revenue.
ORDER NO. 19493
they are contributions in aid of construction and should not be
included as revenue.Tr. 111.
Mr. Ford's arguments are convincing.Meter installation
fees are contributions in aid of construction. not revenue. and
should therefore not be calculated as revenue.This adjustment
resul ts in a reduction in revenues of $17.610.
Power Costs
The Company appropriately noted that Staff's calculations
of its net operating income failed to include Washington Water
Power's November 20. 1984 10% rate increase.Inclusion of this
item is appropriate and increases the Company's expenses by
approximately $5.150.
Postaqe Expense Increase
The Company also appropriately noted that the Staff'
calculation of its operating expenses failed to account for the 2~
increase for postage rates.The Company's operating expenses
should be increased by $289 to reflect this expense.
Meter Readinq Expenses
The Company argued that meter reading expenses will
increase by $1.368 due to the metering of Twin Lakes service
area.We find that this is an appropriate adjustment to make in
light of the Company's expanded service area.
Ad iustment for Pro jected Revenues from Twin Lakes Service Area
Staff witness Miller projected revenues from the metering
of the Twin Lakes service area of $70.779.The Applicant's figure
ORDER NO. 19493
of $73.646 is a more reasonable calculation of those revenues and
we therefore adopt it.
Taxes
The Company requested that we adjust Staff's calculation
of operating expenses for increased property taxes in the amount
of $2.380.This increase. according to Mr. Ford. resul ts from an
increase in tax base at the year ending 1984 over the previous
year.Tr. 115.
We decline to accept this adjustment.We cannot predict
what the Idaho Legislature will do in this area or what effect
wi II have on property taxes.The Company's projected 1985 pro-
perty taxes cannot therefore be characterized as a known and
measurable change and should not be adjusted prospectively.
The following table reflects the results of operations
and net operating income we find to be reasonable for the Hayden
pines Water Company:
RevenuesWater Sales
Hook-up & Meter ChargesMiscellaneous
Tota 1 Revenues
Expenses
Operator & Maint. ExpenseDepreciation
Income Taxes
Other Taxes
Total Revenue Deductions
Net Operating Income
ORDER NO. 19493
Actual Ad iustments
$282.137
17.610
771
$300.518
$48.379
( 17 . 610)
$172.552
38.152
092
$ 11.770
$227.566
~ 72.952
807
984
6. 803
Pro
Forma
$330.516
771
$331.287
179.359
42.136
11.895
$ 11.770
$245.160
86.127
I I I COST OF CAPITAL
The capi tal structure approved in the Company's last gen-
eral rate case is:
Percent of Tota Cost Wei hted Cost
Debt 32.21%16.84%42%
Equity 67 .79%11.00%46%
Tota I 100.00%
------
12.88%
The Company asserted in its final application in this
case that it was earning 8.92% overall on a rate base of $817.000
which equates to a net operating income of $72.900.Staff's posi-
tion is that the Company is earning 12.77% overall return on a
rate base of $879.456. which equates to a net operating income of
$112.302.
The Company proposed to earn 12.88% overall return which
results in the following imputed capital structure:
Percent of Tota Cost Wei hted Cost
Debt 29.84%12.25%66%
Equity 70.16%13.14%22%
Total 100.00%
------
12.88%
Staff divided its proposed net operating income of
$112.302 by its proposed rate base of $879.456 to arrive at an
ORDER NO. 19493
overall rate of return of 12.77%.This equates to a 12.98% return
on equi ty.Staff recommended that the Commission adopt the 12.98%
return on equi ty.
Another alternative that the Staff presented is a hypo-
thetical 50% debt and 50% equity ratio.If that ratio were used
with a "realistic return on equity" the Company's capital struc-
ture would be:
Percent Total Cost Wei hted Cost
Debt 50.00%12.25%6. 125%
Equi ty 50.00%14.75%375%
Tota I 100.00%
------
13 . 50%
Mr. Ford. on rebuttal. addressed for the first time the
issue of cost of equi ty capi tal.Tr. 116.Mr. Ford asserted that
a 17% return on common equi ty is reasonable.Had the Company pre-
sented a capi tal structure incorporating its proposed 17% return
on common equity it would be:
Debt 29.84%
Cost Wei hted Cost
12.25%66%
17 .00%11.93%
------
15.59%
Percent of Total
Equi ty 70.16%
Total 100.00%
A hypothetical capi tal structure consisting of 50% equi ty
and 50% debt is reasonable.We further find that a reasonable
estimate of the Company's cost of equity capital is 13.50%.The
ORDER NO. 19493
Company's resul ting capi tal structure produces an overall rate of
return of 12.88% identical to that requested by the Applicant.
The Companys' resul ting capi tal structure is:
Percent of Tota Cost Wei hted Cost
Debt 50.00%12.25%125%
Equi ty 50.00%13.50%750%
Total 100.00%
------
12.88%
Mul tiplying the rate base figure we adopted of $763.325
by 12.88% produces a revenue requirement of $98.316 or $12.220
more than the actual net operating income we have calculated.
RATE ALLOCATION AND RATE DESIGN
We decline to accept the Company's proposal to increase
its commodity charge from 11.5 cents to 12.5 cents for each 100
gallons used over 3.000 gallons.Such an increase produces more
revenues than are needed to meet the company's revenue defi-
ciency.An increase in the commodi ty charge to 12.40 cents wi
meet the $12.220 revenue deficiency we have previously calcu-
la ted.It is not necessary to increase the minimum billing
amounts to meet the Company's revenue deficiency.We therefore
decline to alter the Company's current rates other than to
increase its commodity charges as outlined above.
The only other change in current rates we adopt is for
the newly acquired Twin Lakes service area.Those customers are
currently charged a flat rate of $7.55 per month for unlimi ted
ORDER NO. 19493
water use.We find that these customers should be charged the
same rate as Hayden pines' other customers as soon as they are
metered.The Company is therefore authorized to begin charging
its newly authorized rates to those customers in the Twin Lakes
service area that are now metered.The Company is further
authorized to begin charging its rates to those customers in the
Twin Lakes service area as they become metered.
CUSTOMER RELATIONS. SERVICE REGULATIONS. TARIFF PROVISIONS
Commercial Hook-up Fees
The Company proposes to increase its commercial hook-up
fee from $500 an inch to $1.000 an inch.Mr. Ford testified that
the local fire district requires higher fire flow minimums for
commercial buildings than for residential buildings.He stated
that it is therefore the Company's posi tion that a higher hook-up
fee be assessed against the customers who are causing the company
to increase its storage and pump sizes.Tr. 105.Mr. Ford went
on to state that hook-up fees are contributions in aid of con-
struction that keep utility plant and rates down.Tr. 105.
Staff wi tness Dave Schunke opposed the Company's recom-
mendation to increase commercial hook-up fees to $1.000 per inch
from $500 per inch.Schunke testified that it is possible for a
residence to have a higher actual fire flow requirement than a
commercial establ ishment.Therefore. charging $1.000 an inch may
be inequi table to commercial establ ishments wi th low actual fire
ORDER NO. 19493 10-
flow requirements.Schunke recommended continued use of $500 per
inch hook-up fee for both commercial and residential customers.
Schunke proposed. as a compromise. that in addi tion to the $500
per inch hook-up fee the Company charge an addi tional $500 for
each commercial hook-up.Tr. 127.
Resolution of this dispute will not affect the Company'
income or revenue requirement as hook-up fees are contributions
in aid of construction.
The Company's posi tion that a higher hook-up fee be
assessed against its commercial class because of higher fire flow
requirements is well taken.However. it is also true. as Staff
pointed out. that charging $1.000 an inch may be inequi table
commercial establishments wi th low actual fire flow requirements.
We find that Staff's compromise proposal is a reasonable one.
therefore authorize the Company to charge. in addition to its cur-
rent $500 per inch hook-up fee. an addi tional $500 for each com-
mercial hook-up.This solution authorizes the Company to collect
additional funds from those customers imposing higher fire flow
requirements on the Company system while at the same time equit-
ably distributing the responsibility for paying those higher costs.
Meter Installation Charqes
The Company has proposed to increase its meter installa-
tion charge for meters 1 inch and smaller from $250 to $400.
Staff wi tness Schunke testified that the Company's aver-
age cost for meter installation in its Twin Lakes Service area
ORDER NO. 19493 11-
$300.Schunke therefore recommended that meter installation fees
for 1 inch and smaller meters only be increased from $250 to
$300.
The Company. on rebuttal. provided an exhibi t purporting
to demonstrate the Company's actual costs for meter installa-
tions.Exhibi t 13 shows the sum and average of 63 recent meter
installations by Hayden Pines Water Company.The average for all
meter installations was $399.88.Mr. Ford noted that the cost of
installing meters in the Twin Lakes service area was less expen-
sive than the average cost for installation of meters generally on
the Hayden pines Water System because of the economies of scale.
In the Twin Lakes service area the Company has been installing
meters in every house in the service terri tory thereby making
less expensive than installation of meters on the 'one-at-time-
basis' the Company usually does.
A meter installation fee of $400 is excessive.Howeve r .
the Company has demonstrated that its meter installation costs are
higher than the current $250 it is charging.We find that Staff'
proposal to increase the Company's meter installation charges
$300 is reasonable and we accept it.
Seasonal Disconnect Charqes
The Company does not currently have a tariff for seasonal
residential service for the months in which service is discon-
nected.Hayden Pines' Twin Lakes service area has such a charge
of $5 per month.Many of the customers in the Twin Lakes service
ORDER NO. 19493 12-
area only take service through the summer months and disconnect
for the remainder of the year.The Company has proposed to
increase the monthly rate for seasonal residential service for the
months in which service is disconnected to $7.50.
We find that the Company's recommendation is reasonable.
It is clear that the Company's fixed costs such as depreciation.
return on rate base and most maintenance expenses are incurred
regardless of whether water is consumed.This charge will go
towards covering those fixed costs just as the monthly minimum
charges do for the Company's permanent customers.
CONS UMER I S SUE S
The Water Pressure Complaint
Staff wi tness Schunke addressed the issue raised in the
complaint of alleged low water pressure in the Twin Lakes service
area.Schunke testified that the Idaho Department of Heal th and
Welfare. Division of Environment. has documented numerous
instances of low water pressure in Hayden pines' Twin Lakes ser-
vice area.The most recent incident was in August of 1984.
Mr. Schunke listed several design improvements that were
made to correct low pressure.He stated that. in his opinion. the
design improvements will improve the system pressure. but he is
not sure how much of an improvement will be realized.He there-
fore recommended that the pressure be evaluated in the summer
1985 after metering is complete and when usage reaches a maximum.
If additional improvements are warranted. according to Schunke.
they could be specified at that time.
ORDER NO. 19493 13-
Mr. Ford's testimony on this issue follows the same lines
as Mr. Schunke' Mr. Ford I isted several improvements the Com-
pany has made in the Twin Lakes service area.Improvements such
as increasing the output of its wells and booster stations. adding
additional flow valves and by-passes to double the output of its
well. adding an addi tional 5-horsepower pressure pump and addi-
tional pressure tanks to more than double the output of the pres-
sure pump. finally. a control system was added to cycle the pumps.
thereby decreasing the electrical pumping costs.
In addition. Mr. Ford testified that metering the Twin
Lakes service area will reduce water consumption by approximately
50% .The Company has also asked the customers in the Twin Lakes
service area to abide by watering hour regulations.Mr. Ford tes-
tified that the combination of all the above improvements will
cure any pressure problems in the service area.However. if such
measures prove unsuccessful. Mr. Ford testified that he could
install larger water mains at a total cost of $40.000.
It is apparent that water consumption will decrease
dramatically in the Twin Lakes service area after the system
metered.In addi tion. Mr. Ford's improvements appear to be rea-
sonable steps towards the solution of water pressure problems.
The Company is therefore ordered to evaluate water pressure in its
Twin Lakes service area this summer and report its findings to the
Commission.If at that time addi tional improvements are warranted
they can be specified at that time.
ORDER NO. 19493 14-
Line Extension Policy
It was pointed out on cross-examination that Hayden pines
does not have a line extension policy which provides for contribu-
tions from customers that come on line after the ini tial customer
has paid the line extension fee.The Company agreed to work wi
Staff and develop a line extension policy similar to the policies
that have been adopted for electric utilities by this Commission.
Mr. Ford agreed that a five-year period for paybacks would be
appropriate.Other details of the line extension policy were left
to be worked out by the Staff and Company.
No policy has yet been submitted.Staff wi tness David
Schunke is hereby ordered to work closely wi th Mr. Ford to assist
him in preparation of and in filing a proposed line extension pay-
back rule.Such rule should include a five-year period for pay-
backs in addition to other guidelines thought reasonable by Mr.
Schunke and Mr. Ford.The proposed line extension policy prepared
by these two individuals should be submitted for our review no
later than April 8. 1985.
The Sel tice Way Service Area
Staff wi tness Sherry Johnson testified on this issue.
Ms. Johnson summarized the history of Hayden pines' involvement in
the Seltice Way area:In 1982. Hayden pines applied for a Certi-
ficate of Public Convenience and Necessity to serve the Seltice
Way service area.The Commission refused to grant the requested
Certificate of Convenience.Stating in Order No. 17536 that.
ORDER NO. 19493 15-
we find that one of the causes of this utility'
high cost of service is the dispersed nature of
its service area. We find that it would be
advantageous to provide water service to the
Hunt'(Sel tice Way service terri tory) under a
management fee arrangement which can be worked
out between the parties. We therefore authorize
such service. However. we find that it would not
be in the best interest of the present ratepayers
to extend the Applicant' s certificated area toinclude the Sel tice Road si te requested by the
Appl icant.
According to Ms. Johnson the 21 customers in the Seltice
Way terri tory have experienced pressure problems and unrel iable
water service.The well that provides this area is located under-
neath the building of Wick's Concrete Company.Wick's Concrete
Company has recently gone bankrupt and had to be forced via a
court ordered injunction to allow Hayden pines to service the
we II
Ms. Johnson recommends that the Commission take another
look at granting a Certificate of Public Convenience and Necessi
to Hayden pines to provide water service in the Sel tice Way ser-
vice terri tory.We agree.We will reconsider our denial of Mr.
Ford's request for a Certificate of Public Convenience and Neces-
si ty to provide water service in this terri tory if Mr. Ford so
desires.Mr. Ford is free to file an application. with supporting
testimony and exhibi ts. requesting that this area be included in
his Company's service terri tory.Any such application should
include a specific proposal on how the Company would obtain a
secure source of water.
ORDER NO. 19493 16-
FINDINGS OF ULTIMATE FACT AND CONCLUSIONS OF LAW
Hayden Pines Water Company is a water corporation and a
public utility as those terms are defined in Chapter 1. Title 61.
Idaho Code and. as such. is under the jurisdiction and regula-
tory authority of this Commission.
I I
The present rates contained in the Company' s currently
effective tariff do not provide a fair. just and adequate rate
return and are not fair. just and reasonable.
I I I
The rates contained in the Applicant's proposed tariff
would not resul t in a fair. just or reasonable rate of return and
should not be approved.
It is fair. just and reasonable in all respects to
increase Hayden pines' commodi ty charge from 11.5 cents per 100
gallons for usage above 3.000 gallons to 12.40 cents.
The cost of capi tal computation set forth herein is in
all respects fair. just and reasonable to Applicant' s customers.
stockholders and the Company.
ORDER NO. 19493 17-
we have authorized for the rest of the Applicant's system as soon
as those customers are metered.
IT IS HEREBY ORDERED that Hayden Pines Water Company be.
and hereby is. authorized to increase its commodity rate to 12.
cents for each 100 gallons of water consumed over 3.000 gallons
per month.
IT IS HEREBY ORDERED that Hayden pines Water Company be.
and hereby is. authorized to begin charging its Twin Lakes service
area customers the same rates as are presented in its currently
effective tariffs as soon as those customers are metered.It is
further ordered that this Order shall become effective with all
billings prepared and rendered for service provided on and after
February 22. 1985.
IT IS FURTHER ORDERED that Hayden pines file tariffs and
rate schedules reflecting an increase in its commodi ty charge from
11.5 cents to 12.40 cents per 100 gallons for usage above 3.000
gallons to be effective immediately.
THIS IS A FINAL ORDER.Any person interested in this
Order (or in issues finally decided by this Order) or in interlo-
cutory Orders previously issued in this Case No. U-1121-30 may
petition for reconsideration within twenty-one (21) days of the
service date of this Order wi th regard to any matter decided
this Order or in interlocutory Orders previously issued in this
ORDER NO. 19493 19-
The test year to be used in the proceeding is the
month period ending December 31. 1984.This test year. is appro-
priate and accepted by the Commission as reflecting the current
resul ts of operations in the present economic period.
VI I
The average test year rate base set herein is the appro-
priate rate base to be used in this case.That rate base
$763.325.It does not include plant held for future use. or cus-
tomer advances for construction.
VIII
A net test year operating income of $86.127. is not just.
reasonable or appropriate.
The Hayden pines Water Company should be allowed to real-
ize a 13.50% rate of return on common equi ty and an overall rate
of return of 12.88% on its previously determined rate base.It is
fair. just and reasonable to increase Applicant's operating reve-
nues in the State of Idaho by $12.220 to allow the Company to earn
a 12.88% rate of return.An increase in the Applicant' s rates of
$12.220 is just and reasonable and is based on the evidence pre-
sented in this proceeding.
It is fair. just and reasonable that the Company's cus-
tomers in its Twin Lakes service area begin paying the same rates
ORDER NO. 19493 18-
Case No. U-1121-30.Wi thin seven (7) days after any person has
peti tioned for reconsideration. any other person may cross-
petition for reconsideration.See Idaho Code S61-626.
DONE by Order of the Idaho Public Utili ties commission at
Boise. Idaho. thi~~n~ay of February. 1985.
PRESIDENT
ATTEST:
~/lCt
SECRETARY
pr/vs/84L
ORDER NO. 19493 20-