20190814final_order_no_34416.pdf

Office of the Secretary
Service Date
August 14,2019
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.BCS-W-19-01/
OF GEM STATE WATER COMPANY FOR )DIA-W-19-01
APPROVAL OF ACQUISITIONOF THE )ASSETS AND TRANSFER OF THE CPCN'S )OF DIAMOND BAR ESTATES AND BAR )CIRCLE S WATER )ORDER NO.34416
On April 29,2019,Gem State Water Company,LLC ("Gem State Water"or
"Company")filed an Application seeking approval of the Company's acquisition of the assets of
Diamond Bar Estates,L.L.C.("Diamond Bar")and Bar Circle "S"Water,Inc.("Bar Circle")and
the transfer of each company's certificate of public convenience and necessity ("CPCN")to Gem
State Water (collectively,"Application").
On May 31,2019,the Commission issued a Notice of Application and Notice of
Modified Procedure.Order No.34347.
The Commission received comments from the Idaho Department of Environmental
Quality ("DEQ"),Commission Staff,and reply comments from Gem State Water.
Now,having reviewed the record,the Commission approves the Application of Gem
State Water.
THE APPLICATION
Gem State Water seeks approval of the asset purchase agreement ("Asset Purchase
Agreement")it signed with Diamond Bar,Bar Circle,and Bar Circle "S"Ranch,Inc.("Bar Circle
Ranch").Diamond Bar is a regulated water utility that serves approximately 46 customers under
CPCN No.413.Application at 4.Bar Circle is a regulated water utility that serves approximately
218 residential customers and one commercial customer under CPCN No.296.Id.Diamond Bar
and Bar Circle both serve customers in or near Kootenai County,Idaho.Id
As part of the transaction,Gem State Water is also purchasing the assets of Bar Circle
Ranch,an unregulated company that owns real property and easements on which some utility
assets are located.Id.Before the transaction,Diamond Bar,Bar Circle,and Bar Circle Ranch
were owned by Robert Turnipseed and Clara Turnipseed ("the Turnipseeds")through different
ownership structures.After filing its Application,Gem State Water contracted with the
Turnipseeds for one-year of use and access to what was formerly Diamond Bar's emergency
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backup well,which is privately owned by the Turnipseeds and was not included in the Asset
Purchase Agreement.Gem State Water Production Response 15.
Gem State Water is a wholly-ownedsubsidiary,by and throughits parent companies,
of Northwest Natural Holding Company.The latter company was created during a corporate
reorganization of Northwest Natural Gas Company and its affiliates.Northwest Natural Gas
Company is a 160-year old natural gas utility serving customers in the Pacific Northwest.Id at 2.
Gem State Water is not requesting any changes to rates,rate structure,or other charges in this
Application and states that any future changes will be based on prudently incurred capital
expenditures and other accepted ratemaking principles.Id at 4.
THE COMMENTS
a)DEQ Comments.
When DEQ filed its first set of comments,Gem State Water had not yet reached the
one-year agreement with the Turnipseeds for access to the backup well.DEQ stated that the
Diamond Bar system was subject to DEQ's groundwater source redundancy rule ("Redundant
Source Requirement")and therefore a backup well would be required under DEQ's rules.DEQ
also noted that the backup well must satisfy DEQ's requirement for a dedicated well lot ("Well
Lot Requirement"),if the well were to be transferred.DEQ noted that the backup well is located
approximately 430 feet from a recycled water irrigation site operated by the Hayden Area Regional
Sewer Board ("HARSB").Current DEQ guidance recommends a 1,000 foot buffer between such
activities and public-use wells.However,because of the direction of ground water flow between
the sites and monitoring data collected from the backup well,DEQ stated that the current backup
well site location was considered acceptable relative to the location of the recycled water irrigation
site.DEQ Comments at 2.
DEQ filed supplemental comments on July 18,2019 stating that the one-year
agreement reached by Gem State Water and the Turnipseeds satisfies DEQ's Redundant Source
Requirement while the one-year agreement is in effect.DEQ also clarified that the backup well
was constructed before the Well Lot Requirement was in effect,and therefore the backup well is
not subject to the Well Lot Requirement.However,DEQ stated that acquiring a redundant source
that satisfies all DEQ's current rules and guidance would be in the best interest of public health.
See DEQ Supplemental Comments at 1.
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b)Commission StaffComments.
Commission Staff filed comments recommending the Commission approve the
Application.Staff analyzed the transaction using Idaho Code §61-328 as a guide and therefore
looked at:1)whether the transaction would follow the public interest,2)whether the cost of and
rates for supplying service would be increased because of the transaction,and 3)whether the
transferee has the bona fide intent and financial ability to operate and maintain the system in the
public service.
Staff noted that small water companies are often owned by individuals without a
succession plan for when the owner can no longer fulfill the requirements of being a regulated
public utility.Staff noted that the purchase of such systems by experiencedowners and operators
of regulated public utility infrastructure can benefit the public.However,Staff raised concerns
that the Asset Purchase Agreement did not include all assets necessary to operate the system post-
transaction and,therefore,the transaction may cause additional system costs that would not
otherwise have been incurred.
Staff recommended that the Commission not allow costs incurred by Gem State Water
to construct a backup well to be included in base rates in a future rate case.Staff noted that
Diamond Bar was allowed to include operation and maintenance costs for the backup well in base
rates in Diamond Bar's last rate case,DIA-W-15-01,and stated its concern that customers may
have to pay twice for a backup well.Staff noted that the transactionprice should reflect the assets
included in the transaction,and if Gem State Water did not purchase all assets necessary to operate
the system,ratepayers should not be required to pay again for Gem State Water to acquire those
assets.Staff noted that Diamond Bar's main well has a history of malfunctioning,and therefore
access to an acceptable backup well is critical to maintain adequate service.Staff also expressed
concern that irrigation water right 95-10067 was not included in the transactionand that easements
to operate and maintain the systems were not included in the assets transferred in the Asset
Purchase Agreement.
THE REPLY COMMENTS
Gem State Water stated that despite its best efforts,it could not persuade the
Turnipseeds to sell the backup well,which is primarily used by the Turnipseeds for personal
purposes.Gem State Water Reply Comments at 2.Gem State Water also acknowledgedthe issues
with the backup well,and indicated that it contracted with the Turnipseeds for one-year of access
ORDER NO.34416 3
to the backup well to give the Company time to assess its options for a backup water source while
complying with the DEQ's Redundant Source Requirement.Id.Gem State Water requested that
the Commission not predetermine in this case whether costs to procure a redundant source were
prudentlyincurred or not,and to make that determination when the Company files a rate case.At
that time,the Commission will better understand the costs associated with procuring a backup
water source and the rationale for selecting a redundant source option.
Regarding whether sufficient assets were transferred in the Asset Purchase Agreement
to operate the system post-transaction,Gem State Water stated that it "is confident that all the
assets required to run the systems adequatelyand reliably are covered in the Agreement,including
sufficient water rights and easements."Gem State Water Reply Comments at 5.Gem State Water
notes that Section 1.1 of the Asset Purchase Agreement requires the Seller to "deliver to Buyer all
assets that relate to,or are held for use in connection with,the water supply and distribution
business."Id.at 5.However,Gem State Water also notes that certain assets,such as the backup
well,are owned personally by the Turnipseeds,and therefore are not included in the transaction.
COMMISSION FINDINGS AND DECISION
The Commission has jurisdictionover this matter and the issues in this case under Title
61 of the Idaho Code.Specifically,the Commission regulates "public utilities,"including"water
corporations"that serve the public or some portion thereof for compensation.See Idaho Code §§
61-125,-129,and -501.The Commission has an established practice of evaluating the transfer of
water systems under the criteria found in Idaho Code §61-328.Diamond Bar and Bar Circle are
privately held water companies and public utilities as defined in these laws.Having reviewed the
record,we approve the Application.
Gem State Water will provide organizational support,access to capital,and economies
of scale for the systems it purchases.It is in the public interest for an experienced owner and
operator of public utility infrastructure to purchase these systems.Gem State Water has
demonstrated the financial ability and bona fide intent to operate the system in the public service.
Northwest Natural Holdings,of which Gem State Water is a wholly-ownedsubsidiary,has a $400
million revolvingline of credit,2018 Net Income of $64.6 million,2018 cash flow of $9.2 million,
an Al credit rating from Moody's,and an AA-credit rating from Standard and Poor's.Staff
Comments at 7.The bona fide intent to operate the system in the public service is demonstrated
by Gem State Water's plans to develop a water master plan upon approval and closing of the
ORDER NO.34416 4
transaction,and the Company's strategic plan to purchase and operate multiple small water
companies in the region.
The cost of and rates for supplying service will not increase because of the transaction.
Any future rate increases will be the result of prudent expenditures to improve the respective
systems.The backup well's proximityto the HARSB site is a concern regardless of who owns
and operates Diamond Bar.As DEQ indicates,public health would be best served through a
backup well that meets the DEQ's current requirements.The one-year agreement with the
Turnipseeds to use and access the backup well while the Company develops and implements a
water master plan is a reasonable step toward finding a long term solution.The Company asserts
that all assets required to run the systems adequately and reliably are included in the transaction.
If the Company's confidence ultimatelyproves misplaced in this regard,we are confident that the
Company has the financial ability to purchase the required assets.The prudency of the costs
incurred to acquire assets to operate the system post-transaction will be determinedwhen we have
the benefit of a full record at the next rate case for these systems.
ORDER
IT IS HEREBY ORDERED that the Application of Gem State Water is approved.
IT IS FURTHER ORDERED that CPCN No.413 of Diamond Bar and CPCN No.296
of Bar Circle are transferred to Gem State Water.
THIS IS A FINAL ORDER.Any person interested in this Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order with regard to any
matter decided in this Order.Within seven (7)days after any person has petitioned for
reconsideration,any other person may cross-petition for reconsideration.See Idaho Code §61-
626.
ORDER NO.34416 5
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of August 2019.
PAUL KÌÊLLAND ,PRESIDENT
KR E RAPER,COMMISSIONER
ERIC ANDERSON,COMMISSIONER
ATTE :
Diane M.Hanian
Commission Secretary
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