20061213final_order_no_30198.pdf

Office of the Secretary
Service Date
December 13 2006
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF CAPITOL WATER CORPORATION FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO
CASE NO. CAP-06-
ORDER NO. 30198
On June 21 , 2006, Capitol Water Corporation ("Capitol Water" or "Company ) filed
a general rate case application seeking authority to increase its rates approximately 27.8%. If
approved the Company s revenues would increase by $132 449 annually. Capitol Water
provides service to approximately 2 875 customers in Boise, Idaho. The Company s Application
included proposed tariffs and requested an effective date of August 1 , 2006.
On July 7 2006, the Commission issued an Order and Notice of Application. In this
Order, the Commission suspended the proposed effective date of the Company s proposed rates
and directed the Commission Staff to conduct an audit of the Application and present its audit
findings in Staff comments. Order No. 30098. The Commission would then decide how it
wished to process the Application.
On September 6, 2006, the Commission issued a Notice of Modified Procedure and
Public Workshop. Order No. 30124. The Commission solicited comments from the public and
established a comment deadline of October 12, 2006 and a reply comment deadline of October
, 2006. Id. The Staff and two members of the public timely filed comments. The Company
timely filed reply comments. On November 20, 2006, Staff filed supplemental comments
(Supplemental Comments). public workshop was held on September 25 , 2006 at the
Commission s Hearing Room.
THE APPLICATION
Capitol Water s Application stated that since the entry of the final Order in its last
(1995) rate case, it has been necessary to implement certain capital improvements. Application
at 1 referencing Order No. 26247. The Commission has authorized two surcharges to recover
the Company s capital improvement costs, in June 1997 and July 2003.
To meet continued capital investment needs, the Company requested a revenue
requirement increase of $132,449 resulting in a percentage increase of approximately 27.8%.
The Company proposed to change the months subject to the summer rate schedule to include the
ORDER NO. 30198
month of April , which would provide approximately $27 000 in additional revenue. The
Company further proposed spreading the remainder of the requested additional revenue
requirement across its customer classes, resulting in a 22.21 % increase in base rates for all
customers.
DISCUSSION
The Commission has reviewed and considered the filings of record in Case No. CAP-
06-, including Staffs comments and recommendations, the Company s reply comments and
the comments of customers.
Public Comments
Two comments were received from the Company s customers. One commenter
voiced support of the Company s Application. The other commenter noted that it had been
reported that the Ada County Highway District (ACHD) had announced a plan to widen certain
areas of Ustick Road, which would require the Company to move and replace some of its water
lines. The commenter requested that the Company s costs for this replacement be subtracted
from the rate increase request and that these costs be borne by ACHD and not Capitol Water
customers.
We would like to reassure the Company s customers that no expenses for the
proposed ACHD improvements are included in the Company s Application or in the rates
approved by this Order. If the Company does incur such expenses in the future and seeks
reimbursement of them through rates or surcharges, it will need to file a request for such
recovery with the Commission, with appropriate notice to all customers.
Staff and Company Comments
Staff examined the books and records of the Company for the fiscal year ending
December 31 2005. The audit included examination of general ledger accounts and supporting
vouchers and invoices, verification of physical plant and property, and discussions with the
Company owners and employees. The Company does not employ an independent auditor to
audit its financial statements; however, it does employ an accounting firm to facilitate the
preparation of the annual reports required by the Commission and to prepare its federal and state
tax returns.
ORDER NO. 30198
TEST YEAR, REVENUES & EXPENSES
The Company proposed using the actual test year data for 2005. The Application
was based upon the actual recorded performance of the Company for 2005 and is comparable to
the 2005 annual report filed with the Commission. The actual 2005 data was not adjusted for
any known and measurable changes beyond the test year because the Company believes that the
2005 test year is indicative of the Company s continuing operations. Staff agreed to use of a
2005 test year as adjusted below.
Staff noted that the Company s accounting for operating revenues is consistent with
the requirements of the Uniform System of Accounts, as adopted by this Commission. In 2005
the Company s actual operating revenues totaled $475 805 , and the major sources of revenue
were the sale of water to unmetered residential customers (Schedule 1 - $375 977), metered sales
to commercial and industrial customers (Schedule 2 - $94 151), and fire protection revenue
(Schedule 3 - $4 788). The Company did not propose any adjustments to revenue in the
Application. Staff proposed that annual test year revenues be adjusted by $6 493 to reflect what
current rates should generate when applied to the number of existing year-end customers and the
commodity consumed.
Staff believes that the operating expenses for Capitol Water are, for the most part
properly recorded on the books of the Company. Operating expenses have increased since the
last general rate case in 1995. Staff proposed adjustments to the Application that fall into the
following categories:
Reclassification of expenses between accounts
Removal of below-the-line expenses , or expenses that would be
inappropriate to recover through rates
Annualization of water testing expenses, and
Inclusion of expenses currently being paid by surcharge funds.
Staff proposed 13 adjustments to operating expenses. The first six (Staff Adjustments A through
F) reclassified expenses from one account to another account and did not affect the Company
revenue requirement. The next four (Staff Adjustments G through J) removed expenses for
ratemaking purposes, as these expenses are below-the-line expenses. The following two
ORDER NO. 30198
adjustments annualized water-testing expenses, and the last adjustment included expenses that
have previously been charged to Capitol Water s surcharge fund account.
Removal 0/ Below-the-Line Expenses
1. Vehicle Expenses. Staff Adjustments G, H and I removed expenses related to
personal use of Company-owned vehicles. Through discussions with the Company s owners and
officers, Staff determined that at least 50 percent of the vehicle use is personal use and not
business related.
Staff Adjustment G ($85) removed half of the cost of licensing the Company-owned
vehicles driven by Company owners. Staff Adjustment H ($3 145) removed half of the
transportation expense for the Company-owned vehicles driven by the owners. Staff Adjustment
I ($4 085) removed the depreciation expense attributable to one of the two Company-owned
vehicles. The vehicles are depreciated over a five-year life, using the half-year convention.
Each vehicle was fully depreciated by the end of the test year. Therefore, it is reasonable to
remove all of the depreciation expense associated with them and no adjustment to rate base is
necessary .
In its audit, Staff noted that repairs and maintenance expenses are documented for
each vehicle. However, other expenses, especially car washes and gasoline purchases, are not
identified by vehicle. The monthly statement for the credit card used for the purchase lacks
clarification as to which vehicle has been washed or which gasoline tank filled.
Staff stated that the Company has neither maintained records associated with
personal use of the Company vehicles nor kept transportation expense records for each vehicle.
However, Staff believes it is unreasonable to disallow all transportation expenses, as some level
of expense is justified. In the absence of future improved recordkeeping, Staff recommended
that all gasoline and other miscellaneous purchases, such as car washes, for vehicles driven by
the owners be paid for with personal funds, and that they be reimbursed by the Company for
business miles using the standard mileage rate set by the Internal Revenue Service (IRS) as a
proxy for the actual cost. This requires that a logbook of business miles must be kept. The total
of Staff vehicle-related adjustments is $7 315.
With regards to the vehicle expenses, the Company explained that it attempted to
comply with prior Commission Orders to account for the separate expenses for each vehicle. It
had obtained separate credit cards for each from a major oil company; however, the Company
ORDER NO. 30198
began patronizing a discount gasoline provider when prices markedly rose and was unable to use
the separate cards. In addition, the Company believes that Staff s proposal for the Company to
maintain accurate log books" is "administratively burdensome and unworkable." The Company
stated that it is willing to agree with Staff s proposal of a 50/50 split of business and personal use
with regards to vehicle expenses, but it objects to the requirement to accurately track the actual
use of each vehicle.
Fin dim!We approve the adjustments made by the Staff in removing half of the
licensing, transportation and depreciation expenses. We find that an equal division of the vehicle
expenses for business and personal use may be reasonable, and approve of this division for the
current revenue requirement. However, we have not seen clear evidence that at least 50% of the
use of the owners' vehicles is business-related. Therefore, we direct the Company owners to
maintain a logbook of the miles driven for business purposes. In the Company s next rate case
it will need to provide clear evidence of the owners' use of these vehicles for business purposes.
Otherwise, we shall not be inclined to allow any request for vehicle-related expenses of
Company owners.
2. Holiday Event.Staff Adjustment J ($392) removed expenses for Company year-
end holiday events for employees. The Company concurred that this adjustment was reasonable.
FindinJ!We find that this adjustment is reasonable and approve removal of these
expenses from the Company s revenue requirement. The Commission has traditionally moved
these types of expenses below-the-line for ratemaking purposes, as they do not directly benefit
customers.
Annualization 0/ Water Testing Expenses
Staff proposed adjustments to annualize the water testing expenses. Staff
Adjustment K ($2 503) removed the actual amount of the water testing expenses included in the
test year and Staff Adjustment L ($5 313) replaced the actual expenses for water testing with an
annualized amount. The average cost per well for all required tests is $885.58 and the Company
has six wells that require water testing. The average cost per well was calculated by the
Company and is acceptable to Staff. The net Staff adjustment for water testing is $2 810.
Fin dim!We find that it is reasonable to include the annualized rates for water
testing expenses in the Company s revenue requirement. As not all water tests are performed
ORDER NO. 30198
every year, and several of the tests that are performed less frequently are quite costly, it is more
equitable to use the average yearly cost of water testing expenses when setting rates.
Inclusion 0/ Expenses Currently Being Paid by Surcharge Funds
There are several expenses that are currently being paid by surcharge funds. One
these is the Company s electric expense for the annual Power Cost Adjustment (PCA). Order
No. 28801 authorized the Company to charge incremental electric expenses resulting from Idaho
Power Company s electric PCA surcharge(s) against Capitol Water s surcharge account. This
was accomplished by applying the Idaho Power PCA surcharge rate, which at that time was
$0.013415 per kilowatt hour (kWh), to the billed kWh on each bill to determine the amount of
the electric surcharge authorized to be charged against the balance of Capitol Water s surcharge
account.
The current expenses for power included in the Company s Application did not
include the past portion of the PCA rate that was charged to the Company s surcharge account
and are reflective of current power expenses going forward. Although the current PCA rate
results in a credit (as opposed to a surcharge), Staff did not propose a reduction in the amount of
power expense included in the test year. Staff believes the Company s surcharge funds should
no longer be used for power expenses, as the 2005 test year expenses should be more than
sufficient to cover the ongoing power costs of Capitol Water.
Second, the Company was authorized to recover the cost of sequestering chemicals
through the surcharge funds. The amount spent for phosphates from the surcharge account
during 2005 is $14 796. Staff Adjustment M included this amount in the calculation of base
rates. Since the surcharge was first implemented in June 1997, the expenses related to the
sequestering chemicals have been charged to the surcharge account.
In its reply comments, the Company identified two additional expense adjustments
that are or should be paid from the surcharge revenue. First, are the charges that reflect the
ongoing cost to inspect, service and maintain the standby generator. This adjustment increases
the revenue requirement by $1 718 for an incremental increase of 0.36%. Staff agreed with the
Company s argument that this expense is similar to the PCA expense and the sequestering
chemical expenses noted above.
Another expense noted by the Company in its reply comments was a proposal to
amortize and include rate case expenses in the final revenue requirement. Staff noted that, if
ORDER NO. 30198
accepted, the total rate case expenses of $3,588 would be amortized over three years for an
expense increase of $1 195 and an incremental revenue requirement increase for rate case
amortization of $1 554 or 0.33%.
Findim!We find that it is reasonable that the above-noted expenses be recovered
through rates rather than through the surcharge. These are all recurring expenses necessary for
the operations of the business, or are otherwise appropriate for recovery through rates. This shift
in the source of funds for payment for power and chemical expenses will allow the Company to
retire the surcharge sooner. We direct the Company to use the amounts raised through the
surcharge to retire the Company s loan as soon as possible.
CAPIT AL STRUCTURE
Staff agreed with the Company s proposed capital structure and overall rate of return
including a return on equity of 12%. Staff accepted the Company s method of calculating
working capital, one-eighth of annual Operating and Maintenance expenses. Due to Staffs
adjustments to operating expenses, however, Staff suggested an adjustment of $1 844 to the
resulting working capital.
Staffs gross-up factor calculation uses the Company s actual bad debt expense to
arrive at Staffs net to gross multiplier. In discussions with the Company, Staff noted that bad
debts are not particularly large, and that the amount included in the test year is typical.
Therefore, Staff used the actual amount of bad debt expense in its calculation of the net to gross
multiplier.
FindinJ!We find that the proposed return on equity is reasonable, and approve
Staffs adjustment to the Company s working capital.
METERING
None of Capitol Water s residential customers are currently metered, and such
metering was last considered in Case No. CAP-96-2. Staff, as part of evaluating this case
again considered the possibility of metering Capitol Water s residential customers. The key
issues considered were: (1) consumption patterns including conservation and the effects
drought on the aquifer; and (2) the effect of the cost to meter on Capitol Water s customers.
Staff compared the consumption patterns, using 2005 data, of Capitol Water
residential customers with those of Falls Water, Bitterroot Water and United Water customers.
The Capitol Water residential water consumption is significantly higher on an annual basis than
ORDER NO. 30198
all of the others. However, it is nearly identical to the most similar companies, Falls Water and
Bitterroot Water, in peak consumption rates.
Staff also contacted the Idaho Department of Water Resources (DWR) for
information regarding Capitol Water s impact on the aquifer. DWR concluded that the minor
drawdown of that aquifer over the past few years is solely caused by the drought the surrounding
area has experienced. It further noted that the aquifer dropped similarly in past droughts and
recharged after the droughts.
The expected costs to meter the residential customers in Capitol Water s system
would be higher than in 1996 but would probably not exceed $1 500 000. This could result in a
35% or greater impact on customers' rates.
Findim!We find that it would not be reasonable to impose metering upon the
Company s customers. The costs involved are substantial and potentially a burden on the
Company s customers. Currently, the water consumption by Capitol Water customers has not
been deemed as adversely impacting the aquifer, and current capacity is adequate to meet
demand. If, in the future, we find evidence that the demand is negatively affecting the aquifer, or
that metering is otherwise more cost-effective, we may direct the Company to meter part or all of
its residential customer base.
RATE DESIGN
Summer Rates
The Company proposed to include the month of April in Schedule 1 summer rates.
Currently, summer rates are in effect from May through September. Staff did not recommend
changing the summer rates for Capitol Water to include April. The Company had no objection
to the Staffs analysis.
FindinJ!We find no reason to modify the current summer rate schedule to include
the month of April. The summer rate schedule will continue to include only the months of May
through September. Including April in summer rates would not be consistent with other water
companies in the area. Staff reviewed the rate schedules of United Water and Eagle Water and
neither company includes April in their summer rates. Although absolute uniformity is not
required, having similar structures among water utilities is preferred. In addition, Staff s review
and evaluation of the Company s power consumption and energy use did not demonstrate that
April's use was comparable to that from May to September. In fact, the Company s water use in
ORDER NO. 30198
April is substantially less than in the current summer months. Finally, the evapotranspiration
analysis that was performed by Staff demonstrated that April water demand for a lawn is
noticeably lower than the demand from May through September. Based on these analyses, we
are not convinced that water use in the month of April is sufficiently high to justify including
April in the summer rate schedule.
Schedule 3- Fire Hydrants
Staffs proposed rate design includes one major change, to eliminate Schedule 3
public fire hydrants, and allocate the costs to Capitol Water base rates. Currently, Schedule 3
consists of a flat rate per hydrant of $2., which is currently paid by the City of Boise. There
are two significant reasons for Staffs proposed change: (1) this proposal is consistent with other
Idaho water companies that all collect hydrant costs from their customers; and (2) Staff believes
charging the City of Boise for fire hydrants poses an inequity to Boise citizens. The Company
agreed with Staff s analysis.
Fin dim!We find that it is reasonable to remove Schedule 3 from the Company
tariff and that it is appropriate to integrate the fire hydrant charges into Capitol Water rates.
Charging the City of Boise results in a subsidy to Capitol Water customers paid for by other
Boise City water customers that pay both city taxes and hydrant costs in water rates. As this
only a change in the source of revenues and not new revenues, there is no gross-up for taxes as
the Company stated in its reply comments.
Allocation 0/ Revenue Requirement
Staff generally supported the recommendation of the Company to spread the revenue
requirement increase uniformly across all rate components. Taking into account all proposed
adjustments (including those described below), the revenue requirement for Capitol Water is
$624 713 , which is an overall revenue increase of31.3%.
Subsequent to filing its initial comments, Staff discovered an error identifying the
minimum allocation of water included in rates for its metered customers. This resulted in the
Staff adjustment to customer revenues being incorrectly calculated. This adjustment should be
removed, increasing the revenue deficiency by $6,493.
To meet the revenue requirement of $624 713 , Staff applied a weighted average
increase of rates to establish the correct allocation of revenue from overall revenue and rounded
ORDER NO. 30198
the tariff charges. The tariff proposed by Staff results in an overall increase to tariff rates of
38.75% due to the rounding of rates over the Company s prior tariff rates.
Schedule 1 consists of non-metered customers, generally residential, designed as a
flat rate that varies according to service line size. This schedule also includes an additional
monthly flat summer surcharge for all customers, which also varies according to service size. To
meet the targeted revenue, Staff proposed that the flat charge and the summer surcharge be
increased by 38.99% for Schedule 1 , as shown in Attachment A hereto. For example, the Staff
proposed change would result in a $12.1 0 flat charge for a %" line and a $15.40 summer
surcharge. See Attachment A.
Schedule 2 consists of metered customers, generally commercial and industrial.
These customers are charged a minimum monthly charge based on the service size plus a
declining block commodity charge. Staff proposed that the relationship between the base rate
and the commodity rate remain unchanged and that all rates on Schedule 2 be increased by
approximately 38.99%. See Attachment A. The only proposed change to Schedule 4, fire
protection services (such as sprinkler systems), is an average increase of 38.99% to all of the
rates. Id.
Findin1!: Idaho Code 99 61-301 and 61-307 require the Commission to establish just
and reasonable rates for each public utility. We find the proposed annual revenue requirement
for Capitol Water of $624 713 to be just and reasonable. We find the rate design proposed by the
Staff in Attachment A hereto to be a just and reasonable allocation of the Company s revenue
requirement among its customers. The proposed rate design maintains the relationship
previously established among the various users and reflects their demand on the system. In
addition, we find that it is necessary for the Company to specifically state the minimum
allocations of water for each class of customer in Schedule 1 in its tariff sheets that it files
pursuant to this Order.
CONCLUSIONS OF LAW
The Commission has jurisdiction and authority over Capitol Water Corporation, a
water utility, and the issues raised in Case No. CAP-06-, pursuant to Title 61 of the Idaho
Code and the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER NO. 30198
ORDER
IT IS HEREBY ORDERED that the Commission approves a $148 908 or 31.3%
increase in authorized annual revenues for Capitol Water Company, for a total authorized annual
revenue requirement of $624 713. Our revenue requirement calculation includes an authorized
12% rate of return on equity.
IT IS FURTHER ORDERED and the Commission does hereby establish rates and
charges for water service as set out above. The Company is required to file tariff sheets
consistent with this Order. The rates and charges we approve will be effective January 1 2007.
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. 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 1:;'1-1..
day of December 2006.
~~~
PAUL KJELLAN , PRESIDENT
MARSHA H. SMITH, COMMISSIONER
ATTEST:
O:CAP-O6-cg3
ORDER NO. 30198
Ta
b
l
e

1:
Cu
r
r
e
n
t

a
n
d

P
r
o
D
o
s
e
d

B
a
s
e

R
a
t
e

D
e
s
i
a
n
Sc
h
e
d
u
l
e
Cu
r
r
e
n
t

T
a
r
i
f
f
Co
m
p
a
n
y

P
r
o
p
o
s
e
d

T
a
r
i
f
f
Se
r
v
i
c
e

S
i
z
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
$
1
0
.
$1
2
.
$
1
4
.
3/
4
"
$
8
.
$1
0
.
4
5
$
1
1
.
Fl
a
t

R
a
t
e
1
1
/
4
"
Ad
d
i
t
i
o
n
a
l

S
u
m
m
e
r
Ch
a
r
g
e
Ma
y
-
$1
1
.
$1
3
.
Cu
r
r
e
n
t

T
a
r
i
f
f
Co
m
p
a
n
y

P
r
o
p
o
s
e
d

T
a
r
i
f
f
Sc
h
e
d
u
l
e
Se
r
v
i
c
e

S
i
z
e
Mo
n
t
h
l
y

M
i
n
i
m
u
m

C
h
a
r
g
e
Co
m
m
o
d
i
t
y
Ch
a
r
g
e
3/
4
"

a
n
d

S
m
a
l
l
e
r
$
5
.
Fi
r
s
t

1
00
0

f
t
3
:

I
$
6
.
$0
.
85

p
e
r
10
0

f
t
3
$
7
.
$
9
.
Se
c
o
n
d
Se
c
o
n
d
Me
t
e
r
e
d

C
u
s
t
o
m
e
r
s
00
0

f
t
3
:
00
0

f
t
3
:
11
/
2
"
$1
1
.
3
7
$0
.
4
8

p
e
r
$
1
3
.
$0
.
59

p
e
r
CD

10
0

f
t
3
10
0

f
t
3
C.

Z

=
CD
O
I
I
)
$1
9
.
Re
m
a
i
n
i
n
g

f
t
3
:
$
2
3
.
Re
m
a
i
n
i
n
g

f
t
3
:
..
.
.

0
Z
(
'
)
:
T
$0
.
36

p
e
r
$0
.
4
4

p
e
r
0
~

3
"'
C

C
D
1
0
0

f
t
3
10
0

f
t
3
WI

::
:
:
J
"
$3
5
.
$
4
3
.
::
e
:
.
.
.
.
,
..
.
1
0
0

I

co

0

00

e
n
...
1
0
0
Sc
h
e
d
u
l
e
Hy
d
r
a
n
t
s
Sc
h
e
d
u
l
e
Fi
r
e

P
r
o
t
e
c
t
i
o
n
Cu
r
r
e
n
t

T
a
r
i
f
f
Co
m
p
a
n
y

P
r
o
p
o
s
e
d

T
a
r
i
f
f
Se
r
v
i
c
e

S
i
z
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
Fi
r
e

H
y
d
r
a
n
t
$
2
.
34

p
e
r

H
y
d
r
a
n
t
$
2
.
86

p
e
r

H
y
d
r
a
n
t
Cu
r
r
e
n
t

T
a
r
i
f
f
Co
m
p
a
n
y

P
r
o
p
o
s
e
d

T
a
r
i
f
f
Se
r
v
i
c
e

S
i
z
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
Mo
n
t
h
l
y

F
l
a
t

C
h
a
r
g
e
10
"
$
6
.
$
8
.
$
1
9
.
4
3
$
3
1
.
$
4
8
.
7.
4
3
$1
0
.
$
2
3
.
$
3
8
.
$
5
9
.