20031219Final Order No 29401.pdf

Office of the Secretary
Service Date
December 19 2003
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
CAPITOL WATER CORP. TO USE MONEY IN A)
SURCHARGE ACCOUNT TO RETIRE A LOAN EARLY. CASE NO. CAP- W -03-
ORDER NO. 29401
On September 30, 2003 , Capitol Water Corporation filed an Application requesting
permission to use surplus funds to retire a loan. On November 10 2003 , the Commission issued
the Notice of Application and Notice of Modified Procedure.Order No. 29376.The
Commission Staff was the only party to submit comments on the Company s Application and it
recommended that the Commission modify it slightly and approve it. In this Order we modify
and approve the Company s Application.
BACKGROUND
On July 1 , 1997, the Commission authorized Capitol Water to incur debt (Loan 1) to
fund certain water quality improvements for its system. Case No. CAP-96-, Order No.
27022. The principal loan amount was $402 624.71. Id. The Commission authorized the
Company to collect a surcharge (Surcharge 1) of $3.27 a month from its unmetered residential
customers and a surcharge increase of 25.2% for its metered customers. This surcharge was
intended to recover: Loan 1 amortization costs; annual Idaho Power Company Power Cost
Adjustment (PCA) charges; the annual purchase cost of phosphates for water treatment; and the
incremental income taxes associated with the surcharge. Order Nos. 27022 and 28801. The
surcharge would allow the Company to amortize the loan over a seven-year period, ending
August 1 , 2004. Id.
On May 22, 2002, the Commission authorized the Company to incur an additional
$507 000 in debt (Loan 2) to finance additional improvements to its water system. Case No.
CAP-02-, Order No. 29035. The Commission authorized the Company to institute a second
surcharge (Surcharge 2) of $3.10 a month for residential flat-rate customers and a 23.
surcharge increase for metered customers. Surcharge 2 recovers only loan amortization costs
and incremental income taxes associated with the surcharge. Surcharge 2 will retire Loan 2 in
2009. Id.
ORDER NO. 29401
The Company states that it has accrued surplus funds in its surcharge accounts and
requests that it be allowed to use the surplus funds to retire the approximate $63 000 balance of
Loan 1 early. This would also eliminate Surcharge 1. The Company alleges this money is
available because it has borrowed less money than anticipated on Loan 2 and the interest rate on
it was reduced from 7% to 5.65%. The Company contends this would leave a balance of more
than $40 000 to help satisfy Loan 2 amortization costs, phosphate purchases and power expenses.
By retiring Loan 1 (and Surcharge 1) early, the Company asserts it will save on interest charges
and the Company s customers will receive reductions in their bills. The Company requests the
Commission approve its Application quickly.
STAFF COMMENTS
In its written comments Staff stated that it reviewed the Company s Application
audited the surcharge accounts, and worked closely with Capitol Water over the years to insure
that both the borrowed funds and the collected surcharges have been properly applied and
accounted for.
Staff found the Company had accumulated a surplus in its accounts as represented.
However, Staff believed the Company undercharged its surcharge accounts. Staff recommended
that two adjustments be made to the Company s surcharge accounts. First, Capitol Water
surcharge accounts did not include amounts paid to Idaho Power resulting from PCA rate
charges over the past several years. Staff believed the Company s surcharge account balance
should be adjusted downward by $4 126 to recognize the changes in PCA rates. Staff also
recommended that Capitol Water adjust its charges to the surcharge account each May when
Idaho Power s PCA rate adjustment becomes effective. Second, the Company undercharged its
surcharge account balance by $11 597 for income taxes paid for the years 2001 and 2002. Staff
also recommended that Capitol Water annually calculate the effect of the surcharges on its
income tax liability and charge the incremental income tax expense to the surcharge account in a
timely manner. Based on these adjustments Staff believes the Company s surcharge account
balance should actually be $91 140 as of September 30, 2003.
Staff supported Capitol Water s request to payoff the balance of Loan 1 with the
adjusted surplus balance and commended the Company for bringing this Application to the
Commission. Staff also recommended that the Commission authorize the Company to eliminate
Surcharge 1 that is associated with Loan 1.
ORDER NO. 29401
Staff was also concerned that the remaining surcharge, Surcharge 2, would not
provide enough cash flow for the Company to service Loan 2 and pay for the phosphates and
Idaho Power s annual PCA rate charges. See Order No. 29035. Shortages in the Surcharge 2
account could cause the Company to file a general rate case to recover these costs. Thus, Staff
recommended that the Commission authorize the Company to adjust the remaining surcharge
upward by $0.45 per month for flat rate customers and raise the surcharge for metered customers
by 3.5 percentage points. Staff believed these adjustments would provide sufficient revenue to
cover the ongoing PCA and phosphate costs. The purpose of including the Idaho Power PCA
charges and phosphate costs in the calculation is to make Capitol Water whole, neither benefiting
nor penalizing the Company. Thus, Staff did not anticipate an increase in profits to the Company
as a result of the proposed increase and believed any excess funds collected should be used to
retire Loan 2 early.
Staff contended the elimination of Loan 1 and Surcharge 1 early in combination with
the small upward adjustment to Surcharge 2 would allow the Company s flat rate customers to
realize a net reduction in surcharges from $6.37 per month to $3.55 per month, or a surcharge
reduction of 44.27%. The surcharges that metered customers pay will change from 48.8% per
month to 27.1 %, or a 44.47% rate reduction. The elimination of Loan 1 at an interest rate of9%
would also benefit the Company s customers who are paying its carrying costs through
Surcharge 1. Based on the recommended modifications to Capitol Water s Application, Staff
believed the overall reductions were just and reasonable to the Company and its customers.
Finally, Staff reviewed the Company s improvement projects currently approved in
Order No. 29306. The Company plans to install a back up generator at Well No.4 at an
estimated cost of $75 000 and begin an aquifer recharge project to provide water quality
improvements at an estimated cost of $20 000. The Company has sufficient borrowing capacity
in the 2002 loan to complete these activities. The interest rate of this loan is between 5.5 and 6%
as represented by the Company. Therefore customers will see a reduction in overall bills and the
Company will be able to complete its project needs previously approved by the Commission.
COMMISSION FINDINGS AND DECISION
Capitol Water is a water utility that is engaged in the sale of and distribution of water
in the State of Idaho. See Idaho Code 99 61-125 and 61-129. In addition, the Company wishes
ORDER NO. 29401
to change its rates for the service it provides to its customers. See generally Idaho Code 9 61-
503. Accordingly, the Commission has jurisdiction over this Application.
Capitol Water alleged it has not borrowed the entire amount of Loan 2 that the
Commission authorized. See Order No. 29035. The Company also stated the interest rate on
Loan 2 has decreased from 7% to 5.65%. The Company contends these factors have allowed it
to accrue over $100 000 in its surcharge account. Staff verified these facts, but contends the
Company did not take into account the impacts Idaho Power s PCA rate charges and the
Company s annual income taxes had on its accounts. The Commission finds that surplus funds
have accrued in Capitol Water s surcharge account due to the factors above. In addition, the
Commission finds the Company s actual surcharge balance is less than asserted by it due to the
annual impacts of Idaho Power s PCA rate charges and income taxes that were not previously
included. Because of these adjustments the Commission finds it is necessary to direct Capitol
Water to take action to keep its surcharge account current. Accordingly, the Commission orders
the Company to: 1) adjust its charges to its surcharge account each May when Idaho Power
Company s PCA rate adjustment becomes effective, and 2) calculate the annual effect of the
Company s surcharges on its income tax liability and charge the incremental income tax expense
to the surcharge account in a timely manner.
The Commission finds the Company s request to retire Loan 1 early is sound.
Authorizing the Company to use the surplus funds to retire Loan 1 early will provide benefits to
the Company s customers by reducing their rates for service.
Based upon Staffs analysis, after retiring Loan 1 and eliminating Surcharge 1 the
Commission finds that Capitol Water s Surcharge 2 will not provide the cash flow requirements
for the Company to service Loan 2 and pay for phosphates and Idaho Power s annual PCA rate
charges. This is because Surcharge 2 was established to recover only the loan amortization costs
and incremental income taxes associated with the surcharge. It was not meant to provide cash
flow to pay for Idaho Power s PCA rate charges and phosphates necessary for the system as did
Surcharge 1. Accordingly, the Commission finds that it is reasonable and necessary to adjust
Surcharge 2 upward in order to ensure the Company has sufficient cash flow. The Commission
directs Capitol Water to adjust Surcharge 2 upward by $0.45 per month for flat rate customers
and by 3.5 percentage points for metered customers. The purpose of including these items in the
calculation is to make Capitol Water whole, neither benefiting nor penalizing the Company. In
ORDER NO. 29401
the event that surplus funds again accrue in the Company s surcharge account, it shall use the
funds to retire Loan 2 early.
Elimination of Loan 1 and Surcharge 1 early in combination with the adjustment to
Surcharge 2 allows the Company s flat rate customers to realize a reduction in surcharges from
$6.37 per month to $3.55 per month or a surcharge reduction of 44.27%. The surcharges that
metered customers pay will change from 48.8% per month to 27.1 % or a 44.47% reduction. The
Commission finds that it is in the public interest to approve Capitol Water Corporation
Application with the modifications suggested by Staff.
ORDER
IT IS HEREBY ORDERED that Capitol Water Corporation s Application
approved as modified above. The Commission authorizes the Company to use surplus funds in
its surcharge account to retire Loan 1 early.
FURTHER ORDERED that Surcharge shall eliminated
contemporaneously with the retirement of Loan 1.
IT IS FURTHER ORDERED that Capitol Water Corporation shall increase its
Surcharge 2 by $0.45 per month for flat-rate customers and 3.5 percentage points for metered
customers in order for the Company to cover loan amortization costs of Loan 2, incremental
income taxes, annual Idaho Power PCA rate charges and the annual purchase cost of phosphates
for water treatment.
IT IS FURTHER ORDERED that Capitol Water shall: 1) adjust the expense it
charges against the surcharge account balance each May when Idaho Power Company s PCA
rate adjustment becomes effective; and 2) calculate the annual effect of the Company
surcharges on its income tax liability and charge the incremental income tax expense to the
surcharge account in a timely manner.
IT IS FURTHER ORDERED that Capitol Water Corporation shall file conforming
tariffs within twenty-one (21) days of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. CAP- W -03-
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 or in interlocutory Orders previously issued in
ORDER NO. 29401
this Case No. CAP-03-Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 9 61-
626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this I r fI'-
day of December 2003.
MARSHA H. SMITH, COMMISSIONER
ATTEST:
~LD
D. Jewell
Commission Secretary
O:CAPWO30 1 jh2
ORDER NO. 29401