20020308_ln.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
BILL EASTLAKE
RANDY LOBB
DON HOWELL
ALDEN HOLM
MICHAEL FUSS
DAVE SCHUNKE
TERRI CARLOCK
BOB SMITH
GENE FADNESS
TONYA CLARK
BEV BARKER
WORKING FILE

FROM: LISA NORDSTROM

DATE: MARCH 8, 2002

RE: 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. CASE NO. CAP-W-02-1

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. To improve water quality, the Commission authorized Capitol Water in 1997 to collect a surcharge of $3.27/month for unmetered residential customers and a 25.2% increase for metered commercial customers over a seven-year period ending August 1, 2004. Order No. 27022. To fund the proposed capital improvements, the Company now seeks to add a second surcharge of $3.56/month for unmetered residential customers and 21.1% for metered commercial customers.

Capitol Water serves approximately 2,800 customers in an area of approximately four square miles in the near southwest part of 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.
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 the improvements, and institutes a temporary surcharge to recover the cost from customers.
A. Declaration of Prudency
Recognizing the need to ensure customer 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 demand for this area is approximately 491 gpm. Id. at 2. Because DEQ recommends doubling this estimate for unmetered systems such as Capitol Water’s, 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, 4, 6 and 7 located in the western portion of Capitol Water’s service area currently supplement the water drawn from Well No. 1. In the winter months, water for the eastern portion of the 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, 4, 6, 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.
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. Id. 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 of PERC 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 the old Well No. 5. Id. at 4.
2. Distribution System Upgrades.
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.e., below 35 psi). Id. The limited deliverable capacity of Well Nos. 3, 4, 6, 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 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 $13,874.96 it has spent thus far on new distribution system connections in the Well No. 5 service area following abandonment of the well. Id.
3. Legal 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 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 § 61901. 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 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 rate of non-metered residential customers by $3.56. Exhibit 106 at 1. Thus the monthly rates of customers served by ¾" lines would increase from $12.62 to $16.28. Id. Residential customers served by 1" lines would see their monthly rate increase from $14.47 to $18.14. Id. Customers served by 1¼" lines would likewise experience a rate increase from $15.72 to $19.38. Id.
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 1,000 cubic feet per month would increase from $0.60 to $0.70 per 100 cubic feet. The rate for any 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 MINIMUM CHARGE PROPOSED MONTHLY MINIMUM CHARGE ¾" AND SMALLER $7.50 $8.76 1" $10.40 $12.10 1 ½" $15.00 $17.46 2" $25.65 $29.92 3" $45.75 $45.75 (no change) Exhibit 106 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 appraise the Commission of monies expended, construction progress and any testing results. Id.
Citing the limited scope of the issues presented in their 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 RECOMMENDATION
Staff recommends the Commission process this case under Modified Procedure. To keep the Company’s legal costs to a minimum, Staff recommends that the Commission schedule a public hearing only if a significant number of public commentors request one.
COMMISSION DECISION
Does the Commission wish to process this Application by Modified Procedure?

_________________________________
Lisa Nordstrom
M:CAPW0201_ln

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