29035.pdf

Office ofthe Secretary
Service Date
May 22 2002
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF CAPITOL WATER
CORPORATION'S APPLICATION FOR A
TEMPORARY SURCHARGE, A
DECLARATION OF PRUDENCY, AND
AUTHORITY TO INCUR DEBT TO FUND
SYSTEM IMPROVEMENTS.
ORDER NO. 29035
CASE NO. CAP-02-
On February 26 2002, Capitol Water Corporation (Capitol Water; Company) filed an
Application requesting the Commission issue an Order that declares its proposed capital
expenditures prudent, authorizes the Company to incur debt to fund the improvements, and institutes
a temporary seven-year surcharge to recover the cost from customers. The Commission authorized
Capitol Water in 1997 to collect a surcharge of $3.27 /month from unmetered residential customers
and to implement a 25.2% increase for metered commercial customers over a seven-year period
ending August 1 2004 to fund water quality improvements. Order No. 27022. To fund proposed
capital improvements, the Company now seeks to add a second surcharge of $3.56/month for
unmetered residential customers and implement a 21.1 % increase for metered commercial
customers.
In the Notice of Application and Modified Procedure issued on March 28, 2002, the
Commission solicited comments regarding Capitol Water s Application. Order No. 28980. No
written comments were received other than those submitted by Commission Staff, to which the
Company responded on April 22, 2002. In this Order the Commission grants Capitol Water
Application and authorizes collection of a $3.O/month surcharge for unmetered residential
customers and a 23.6% increase for metered commercial customers, subject to various reporting
requirements.
THE APPLICATION
Capitol Water s Application directly or indirectly requests the Commission to issue an
Order that declares the proposed capital expenditures prudent, authorizes the Company to incur debt
to fund specified improvements, and institutes a temporary surcharge to recover the cost from
customers.
ORDER NO. 29035
Capitol Water serves approximately 2 800 customers in an area of approximately four square miles
in west Boise. It is bounded roughly by Northview Street on the south, Ustick Road on the north
North Maple Grove on the west, and Curtis Road on the east. The system has seven wells, two of
which have been abandoned. Capitol Water has no storage reservoirs.
A. Declaration of Prudency
Recognizing the need to ensure customer health and safety by correcting flow and
pressure deficiencies, Capitol Water intends to focus its capital improvements on replacing Well No.
5 and upgrading its distribution system. Because the Company believes the expenses incurred to
date and the proposed expenditures would be in the public interest, Capitol Water specifically
requests a Commission Order "declaring that the incurrence of these expenses is a prudent capital
investment." Application at 5.
1. Well 5 Replacement
The eastern portion of the Company s water system includes the approximately 420
customers located east of Fry Street. This area was historically supplied by Well Nos. 1 , 2, and 5
which originally had a combined capacity of 1 700 gallons per minute (gpm). Based on Idaho
Department of Environmental Quality (DEQ) criteria for estimating system demand for metered
public water systems, the anticipated peak hour demand for this area is approximately 1 091 gpm.
Id. at 2. Because DEQ recommends doubling the estimate for unmetered systems such as Capitol
Water , peak-hour demand could exceed 2 000 gpm. Id. In addition to normal peak demands, fire
flow requirements for public safety are 1 500 gpm. Id. Thus under a worst-case scenario, peak hour
demand could exceed 3 500 gpm. Id.
Well No.2 has failed due to casing collapse and Well No.5 was abandoned in 2000 due
to perchloroethylene (PERC) contamination. Well No.1 is more than 40 years old, and has a
capacity of just 350 gpm. It is typically only used during summer months due to high levels of iron
and manganese. Company Well Nos. 3 6 and 7 located in the western portion of Capitol Water
service area currently supplement the water drawn from Well No. I. In the winter months, water for
the eastern portion ofthe Company s system is supplied entirely from the Company s Well Nos. 3
and 7. The combined capacity of Well No.1 and the deliverable capacity of Well Nos. 3 , and 7
leave a peak hour demand shortfall of 1 050 gpm, and a shortfall of approximately 2 050 gpm to
meet recommended fire safety flows during peak summer hour demand. Id. at 3.
ORDER NO. 29035
Capitol Water plans to replace Well No.5 as soon as possible to provide adequate water
supply for fire protection and peak hour demands. The replacement well will be located on the same
site and will seal off the contaminated shallow aquifer zones. !d. The replacement well will tap
aquifer zones that are believed to have good water quality with respect to iron and manganese, and
only residual levels of dissolved PERC. Id. The residual levels ofPERC are anticipated to diminish
over time as the well is pumped. Id. Based on the Company s current system capacity and customer
demand, a well sized to produce approximately 1 000 gpm is needed to replace abandoned Well No.
5. Id. The Company proposes servicing this well with a 100-horsepower, variable speed, line-shaft
turbine pump rated to produce 200 to 1 000 gpm. Id. Although the cost to replace Well No.5 is
projected to be $346 000, the Company also seeks to recover the $45 349.66 it has already expended
to date for costs associated with the abandonment of old Well No.5. Id. at 4.
2. Distribution System Upl!rades
The eastern portion of the Company s service area is connected to the western portion by
three 4-inch mains. These connections are located at the intersections of Pomona Road and Fry
Street, Newman Street and Norman Drive, and Northview Street and Fry Drive. At five feet per
second velocity, approximately one pound per square inch of pressure (psi) is lost for every 100 feet
of four-inch pipe. Based on this calculation, a maximum supply of approximately 600 gpm can be
delivered from the western portion of the system to the eastern portion. Id. at 3.
At flow rates in excess of 600 gpm, delivery pressure in the current system may decline to
unacceptable levels (i., below 35 psi). Id. The limited deliverable capacity of Well Nos. 3
and 7 from the western service area contributes to the peak hour demand shortfalls described above.
To ensure adequate distribution capacity, the Company plans to complete a system-wide hydraulic
map and model. Id. at 4. Based on current knowledge, it is estimated that the distribution capacity
upgrade will require installation of approximately 2 000 feet of eight-inch pipe. Id. Although the
distribution upgrade is projected to cost $90 000 , the Company also seeks to recover the $13 874.
it has spent thus far on new distribution system connections in the Well No.5 service area following
abandonment of the well. Id.
3. Lel!al Expenses
Because Capitol Water is a small company, the Company contends that the cost of
preparing and processing this Application will represent a significant extraordinary expense. Id. The
ORDER NO. 29035
Company estimates that the legal and accounting costs associated with this Application will be
approximately $12 500. Id. Capitol Water requests that it be allowed to recover its actual expenses
for processing this rate case out of the proceeds of the temporary rate increase.
B. Authority to Incur Debt
Under Idaho Code, a regulated water utility like Capitol Water must receive authorization
from the Commission to incur long-term debt with respect to its property situated in Idaho. Idaho
Code ~ 61-901. To make the capital investment necessary to provide adequate water supply and
distribution, Capitol Water proposes to borrow $507 000 at 7.08 percent over seven years. Id. at 4
and Exhibit 104. Under this borrowing arrangement, the Company would be required to repay
$92 061.96 each year. Id.
C. Temporary Surcharge
To recoup the costs of its capital investments, the Company requests that the Commission
approve a seven-year temporary surcharge. This surcharge is in addition to the previously approved
$3.27/month surcharge for unmetered residential customers and 25.2% surcharge for metered
commercial customers that will expire on August 1 2004.
Capitol Water proposes that a $3.56 per month charge be added to the base monthly rate
for residential customers under rate Schedule No.1. Schedule No.1 is applicable to all non-metered
customers for domestic use and lawn sprinkling. When combined with the current 3% franchise tax
this proposed temporary surcharge would increase the flat monthly base rate of non-metered
residential customers by $3.66. Exhibit 106 at 1. Thus the monthly rates of customers served by%"
lines would increase from $12.62 to $16.28 during the months of October through April. Id.
Residential customers served by 1" lines would see their monthly base rate increase from $14.47 to
$18.14 during the months of October through April. Id. Customers served by 1~" lines would
likewise experience a rate increase from $15.72 to $19.38 during the months of October through
April. Id. The additional monthly sprinkling rates of $11.40 during the months of May through
September are unchanged by this surcharge Application.
The Company also requests a 21.1 % increase in the rates for metered commercial
customers taking service under the Company s rate Schedule No.2. If approved as requested, the
first 1 000 cubic feet per month would increase from $1.06 to $1.24 per 100 cubic feet. The next
000 cubic feet per month would increase from $0.60 to $0.70 per 100 cubic feet. The rate for any
ORDER NO. 29035
additional consumption would increase from $0.45 to $0.53 per 100 cubic feet. When combined
with the current 3% franchise tax, this proposed increase would also raise the monthly minimum
charge as follows:
SERVICE LINE SIZE CURRENT MONTHLY PROPOSED MONTHLY
MINIMUM CHARGE MINIMUM CHARGE
%" AND SMALLER $7.$8.
$10.40 $12.
1 WI $15.$17.46
$25.$29.
$45.$45.75 (no change)
Exhibit 1 06 at 2.
D. Procedural Matters
The Company intends to maintain a separate balancing account on its books with all
transactions related to the Application flowing through the account on a monthly basis as
transactions occur. Id. at 5. Its Application states that none of the expenditures proposed in their
Application will be recorded to the Company s plant accounts and the Company will not seek to add
these costs to its rate base for ratemaking purposes. Id. Capitol Water also states that it will file
written quarterly status reports to apprise the Commission of monies expended, construction progress
and any testing results. Id.
Citing the limited scope of the issues presented in its Application, Capitol Water requests
that its Application be processed without a hearing under Commission Rule of Procedure 202. Id.
The Company did not propose an effective date.
STAFF COMMENTS
1. Source Replacement (Well 5)
The Company s Application proposed construction of a new well and well house at the
abandoned Well No.5 site on the eastern portion of the system. According to Staff, this location
would provide a source where the supply need is the greatest. Staff Comments at 2. The Company
consultants, Scanlan Engineering and Hydrologic, performed a preliminary system analysis and
groundwater study. The consultants analyzed the groundwater contamination and believe that the
upper aquifer contamination should not detrimentally affect a new properly constructed supply well
in this location. !d.
ORDER NO. 29035
According to Staff, the Company s consultants project a minimum additional supply
requirement of 1,050 gpm and a worst-case requirement of2 050 gpm for the system. Id. They also
estimate 1 000 gpm is reasonable to expect from a well drilled at the Well No.5 location. Id.
Because the new well will not completely provide all of the calculated extreme requirement for the
eastern portion of the system, the consultants recommend pipeline improvements with this proposal
and possible reconstruction of Well No.2 in the future. Id. at 2-
Based on its analysis, Staff found that additional water supply is needed because of the
considerable water capacity shortage in the eastern portion ofthe Company s system. Id. at 3. Staff
agreed that the next logical improvement is to increase the transmission capacity associated with
Well No.5 as the Company proposes. Id.
2. Other ReQuested Fundinl!
Staff agrees that some mainline improvement is probably necessary but cannot adequately
assess the need or cost without further information. Id. Staff recommends that the Company
conduct its network analysis and submit improvement recommendations before proceeding with any
further mainline improvements. !d.
Staff reviewed the estimated costs for abandoning old Well No., constructing a new
Well No., performing additional studies, and submitting Commission case filings. Staff believes
the Company s system improvement proposal is reasonably based on sound technical advice and
recommends that the Commission approve the plan and find the estimated costs to be reasonable
subject to several conditions. !d. at 4. Although Staff believes it is reasonable to include the portion
of mainline improvements proposed in this filing to minimize finance costs and facilitate the timely
construction of the improvements, Staff recommends that any monies for mainline improvements
other than those directly associated with Well No.5 should be held until the Commission has an
opportunity to review the network study and approve recommended mainline upgrades. Id. Staff
also recommended the Company file quarterly status reports that summarize the status of studies
proposed designs and construction schedules in addition to the Company s proposed quarterly
financing status reports. Id.
3. Surcharl!e Calculation
Staff reviewed the calculations made by the Company to develop an appropriate customer
surcharge to fund the construction activities. According to Staff, the Company s calculations were
ORDER NO. 29035
intended to duplicate the approach proposed by Staff and approved by the Commission in Case No.
CAP- W -96-2. That case was a similar request for a customer surcharge to pay for backbone system
improvements. However, Staff found that Exhibit No. 105 attached to the Application does not
recognize interest expense and depreciation expense deductions for income taxes as indicated. Id.
Staff also believes that the Company inappropriately allocated costs between flat rate residential
customers and metered commercial customers. Id.
Staff recalculated the required surcharge and determined the effect on the Company
customers. ~taff also updated the cost of borrowed funds in these calculations to reflect the 7.46%
offered by the Bank of America on April 5, 2002. In doing so, Staffs calculations produced a
surcharge of $3.07 per month for residential flat rate customers instead of the $3.56 surcharge
calculated by the Company. !d. at 5. Staffs calculations also produced a surcharge of23.6% for the
Company s metered customers as compared with the 21.1 % calculated by the Company. Id. The 3%
Boise City franchise tax would add $0.10 to the residential flat rate customer surcharge, bringing the
total effect of the surcharge to $3.17. Id. The franchise tax would also increases the commercial
metered surcharge by 0.71 %, bringing the total effect of the surcharge to 24.3%. !d.
Staff also calculated the effect on customers' bills of both the 1996 surcharge and the
proposed surcharge in this case. The majority of residential customers use % inch service lines and
would see an increase in their basic rates (without 1996 surcharge) of 13.33% in the six summer
months and an increase of 25.72% during the six winter months. Id. Staff noted that on an annual
basis the increase for these customers would be 19.53%. Id. Since commercial metered customers
are not on seasonal rates, their uniform annual increase is 23.60%. Id.
4. Accountinl! Issues
Staff stated that the Commission, in Order No. 27022 in Case No. CAP- W -96-, directed
Capitol Water to establish a balancing account on its books and flow all transactions related to the
1996 surcharge through the balancing account. Id. Instead, Staff asserted that the Company opened
a separate bank account, into which all surcharges collected and bank loan proceeds from the 1996
surcharge have been deposited. !d. at 6. When payments were required to pay for improvements or
make loan payments, the Company transferred funds from the special bank account to its regular
checking account from which checks have been written to make the payments. Payments made for
system improvements have been recorded to the Company s regular plant accounts. Consequently,
ORDER NO. 29035 - 7-
Staff found it very difficult to identify the special project investments that are not to be included in
the Company s rate base. Id.
Upon discussing this problem with the Company, Staff and Capitol Water agreed that the
Company must perform an analysis of its past activities to determine the amounts incorrectly
recorded to each of its plant accounts. Id. Staff proposed that the Commission reiterate its
instructions to the Company in this case to establish a balancing account on its books for all future
surcharge activities. Id. Staff also recommended that the Company be instructed to complete its
analysis of its plant accounts and furnish to the Commission, for its approval, correcting entries to
remove the investments recorded in error from the prior surcharge authorized in Case No. CAP - W -
96-1. Id.
COMPANY REPLY COMMENTS
In a response Fax to Staff s counsel on April 22, 2002, Capitol Water indicated that it is
in agreement with all of Staffs recommendations. However, in regard to the odd amount of the
increase, the Company asked that the amount ofthe $3.07 surcharge be changed to $3.10 for easier
recordkeeping.
PUBLIC COMMENT
Although the Commission did not receive any written comment from the public, Staff
received one phone call from a Capitol Water customer. This customer did not complain about the
costs and still believed that Capitol's rates are reasonable. However, the customer noted that the
Company s bill stuffer was silent regarding the percentage increase represented by the proposed flat
$3.56 surcharge to residential customers but indicated a 21 % increase to metered residential
customers.
COMMISSION FINDINGS
The Commission has reviewed the filings of record in this case and makes the following
findings:
1. Declaration ofPrudency The Company seeks an order declaring certain expenses
for water system improvements to be prudent capital investments that can be duly recovered from
ratepayers. The Commission has reviewed the expenses (proposed and thus far incurred) to replace
Well No., upgrade the distribution system and prepare an interim surcharge request. We find the
engineering reports and analyses filed by the Company and Commission Staff provide us with a
ORDER NO. 29035
factual basis to conclude that the Company s proposal for improving its water system is sound.
Capitol Water and Scanlan Engineering have identified water capacity deficiencies in the eastern
portion of the system that limit the Company s ability to meet fire safety flows and peak hour
demand. The record also indicates that delivery pressure in the current system may decline to an
unacceptable level without upgrading the system s distribution capacity. As the only other party in
this case, Commission Staff did not object to recovery of expenses to replace Well No., upgrade
the distribution system or recover legal expenses, and also found them to be appropriate. Id. at 2-
Based on the evidence before us, we find recovery ofthe proposed costs to remedy these
water capacity issues to be reasonable. To this end, we approve the proposed investment detailed in
Company s Exhibit Nos. 101-103. Likewise, the Commission authorizes Capitol Water to recover
its reasonable legal and accounting expenses associated with this filing in an amount approximating
$12 500. A separate schedule showing the final amount associated with the legal and accounting
expenses shall accompany the Company s first quarterly filing with the Commission.
As proposed in its Application, the Company shall submit written quarterly status reports
to appraise the Commission of monies expended, construction progress and any testing results.
Capitol Water shall also submit the proposed network analysis and any further improvement
recommendations prior to proceeding beyond the improvements directly associated with the
proposed new Well No.5 installation. We also direct the Company to include in its Annual Report
filing with the Commission a schedule depicting the status of the loan balancing account from
inception to date and the remaining loan balance.
2. Authority to Incur Debt To facilitate the financing ofthese improvements, Capitol
Water requests authority to incur approximately $507 000 in debt to cover the capital investment
expenditures until the costs are recovered from ratepayers. The Company proposes to borrow these
funds from Bank of America and repay the amount over seven years with revenue collected from a
customer surcharge. For this loan, the Bank of America quoted Capitol Water an interest rate of
08% on February 6 2002 and 7.46% on April 5 , 2002.
The Commission finds that it is necessary and appropriate for Capitol Water to borrow
$507 000 to fund capital improvements. The general purposes to which the proceeds will be put are
lawful under the Public Utility Law of the State ofIdaho and are compatible with the public interest.
ORDER NO. 29035
Therefore, the proposed seven-year loan from Bank of America is approved. Capitol Water shall file
the final loan documents with the Commission when completed.
3. Temporarv Surcharl!e: The Company has requested that the cost of the proposed
improvements be recovered by a seven (7) year temporary surcharge identified as a separate line item
on monthly billings. Capitol Water proposes that a $3.46 per month surcharge be added to the base
monthly rate for non-metered residential customers and a 21.1 % rate increase for metered
commercial customers. This new surcharge would be in addition to the previously approved $3.
per months surcharge for unmetered residential customers and 25.2% surcharge for metered
commercial customers that will expire on August 1 2004. Order No. 27022.
Staff did not agree with the calculations used by the Company to formulate an appropriate
surcharge. Staff found that Capitol Water 1) did not recognize interest expense and depreciation
expense deductions for income taxes and 2) inappropriately allocated costs between flat rate
residential customers and metered commercial customers. Staff Comments at 4. Thus, Staff
recalculated the required surcharge and updated the cost of borrowed funds in these calculations to
reflect the 7.46% offered by the Bank of America on April 5, 2002. Id. Staff s calculations resulted
in a surcharge of$3.07 per month for residential flat rate customers and a surcharge of23 .6% for the
Company s metered customers. Id. at 5.
Since Capitol Water s Reply indicated that it was in agreement with all of Staff s
recommendations, the Commission presumes that the Company does not oppose Staffs
recalculations. However, the Company asked that the amount ofthe $3.07 surcharge be changed to
$3.10 for easier recordkeeping. The Commission agrees that a round surcharge number is preferable
in this instance. Given our review of the record and the apparent agreement of the parties, we find
that a $3.10 per month surcharge for unmetered Schedule No.1 residential customers and a 23.
surcharge for metered Schedule No.2 commercial customers to be fair and reasonable.
As recommended by Staff and to facilitate any audit, Capitol Water shall create a separate
balancing account on the Company s books with all transactions related to this surcharge flowing
through the account on a monthly basis as transactions occur. We limit recovery to the authorized
amounts, i., a principal loan amount of $507 000.
4. Accountinl! Issues : The Commission, by Order No. 27022 in Case No. CAP- W -96-
directed Capitol Water to establish a balancing account on its books and flow all transactions related
ORDER NO. 29035 10-
to the 1996 surcharge through the balancing account. As noted above, Staff comments stated that the
Company did not follow the Commission s instructions and instead opened a separate bank account.
Id. at 6. The result was that expenditures for capital improvements were commingled with regular
plant expenditures that are recovered in a rate case rather than through a temporary surcharge.
The Commission finds it is imperative that Capitol Water account for its system
improvements separately from its regular plant expenditures that are to be included in rate base. To
correct its bookkeeping, the Company shall complete its analysis of its plant accounts and file
corrected entries that remove the investments recorded in error from the prior surcharge authorized in
Case No. CAP- W -96-1. The Company shall file its analysis and proposed correcting entries with the
Commission no later than December 31 , 2002.
CONCLUSIONS OF LAW
The Commission has jurisdiction over Capitol Water Corporation, a water utility, and the
issues raised in Case No. CAP-96-2 pursuant to the provisions ofIdaho Code Title 61 and the
Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER
IT IS HEREBY ORDERED and Capitol Water Corporation is authorized to incur
indebtedness in the principal amount of $507 000 for the purposes described in its Application and
implement a $3.10 residential flat rate surcharge and a metered commercial surcharge of23.60%.
The Company is directed to account for the authorized expenditures in the manner described above.
The Company is further directed to file the final loan documents and compliance tariffs with the
Commission Secretary.
IT IS FURTHER ORDERED that Capitol Water Corporation shall submit written
quarterly status reports to appraise the Commission of monies expended, construction progress and
any testing results. The first quarterly report shall also include a separate schedule detailing the final
legal and accounting expenses associated with this filing. We also direct the Company to include in
its Annual Report filing with the Commission a schedule depicting the status of the loan balancing
account from inception to date and the remaining loan balance.
IT IS FURTHER ORDERED that Capitol Water file with the Commission the proposed
network analysis and any further improvement recommendations prior to proceeding beyond the
improvements directly associated with the proposed new Well No.5 installation.
ORDER NO. 29035 11-
IT IS FUTHER ORDERED that Capitol Water establish a balancing account on its books
to track all financial activity associated with its surcharge.
IT IS FURTHER ORDERED that the Company shall complete its analysis of its plant
accounts and file corrected entries that remove the investments recorded in error from the prior
surcharge authorized in Case No. CAP- W -96-1. The Company shall file its analysis and proposed
correcting entries with the Commission no later than December 31 , 2002.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days ofthe service date ofthis Order. Within seven (7) days
after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code 961-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho, this ;2."-
day of May 2002.
(')1~
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Commission Secretary
O:CAPW020 1 In2
ORDER NO. 29035 12-