27022.pdf

Office of the Secretary
Service Date
July 1 , 1997
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
CAPITOL WATER CORPORATION FOR A
TEMPORARY RATE INCREASE TO
IMPLEMENT WATER QUALITY
IMPROVEMENTS.
CASE NO. CAP-96-
ORDER NO. 27022
Original Application
On September 11 , 1996, Capitol Water Corporation (Capitol Water; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) in Case No. CAP-96-
requesting authority to implement a temporary five year 35% rate increase (approximately
$1O0 000/year) to fund certain expenses and investments associated with improving the quality of
water provided by Capitol Water to its customers. The Company is experiencing the presence of
iron and manganese in waters from several of its source wells, particularly Well No.6. The
Commission issued a Notice of Application in Case No. CAP-96-2 on October 8 , 1996.
Customer complaints regarding water quality have been received by the Company, the
Commission (reference Case No. CAP-96-1: In the Matter of the Investigation of Capitol Water
Company and its Ability to Provide Adequate Service and Water Quality) and the Idaho Division of
Environmental Quality (DEQ). The complaints describe water quality as "rusty or staining" water.
The Company states that the problem is localized depending on the season and the location of the
individual customers on the Company s system. As represented by the Company, DEQ does not
consider iron and manganese contamination to be a health hazard. DEQ, the Company states
, "
has
concluded that the current levels of iron and manganese in Capitol Water s water supply does not
constitute a health risk and does not constitute a basis for additional water treatment or the use of a
different source of supply.
Capitol Water serves approximately 2 228 unmetered residential customers and 147
metered commercial customers in an area of approximately four square miles in Boise. It is bounded
ORDER NO. 27022
roughly by Northview Street on the south, Ustick Road on the north, Maple Grove on the west, and
Curtis Road on the east. The system has six wells. There are no storage reservoirs.
Proceedings in Capitol Water s rate case were suspended by the Commission for the
purpose of completing Case No. CAP-96-, the Commission initiated investigation and
evaluation of water quality and water supply issues in the Capitol Water service area. Reference
Order No. 26629.
Following the suspension, the Company retained the consultant services of Scanlan
Engineering (Terry Scanlan, engineer/hydrogeologist). Based on his investigation and analysis
Mr. Scanlan on January 23 1997, submitted a report (Evaluation of Water Quality and Water Supply
Issues in the Capitol Water Corporation Service Area) to the Company and Staff.
Mr. Scanlan s recommendations closely parallel the recommendations included in the
Company s original Application. Mr. Scanlan recommends drilling a new well (Well No.7) to allow
the Company to access higher quality water, and to avoid, to the extent possible, the operation of
Well No.
Mr. Scanlan s report also recommends that the Company continue with a modified
program for injecting phosphates to "sequester" the iron and manganese in the water. Mr. Scanlan
recommends that the Company discontinue sequestering at Well Nos. 6 and 2, but continue
sequestering at Well Nos. 1 and 4 and all wells other than Well No.6 if customer complaints
continue.
Amended Application
On March 28, 1997, the Company filed an Amended Application in Case No. CAP-
96-2 updating the costs for funding certain expenditures associated with improving the quality of
water and including certain other expenditures that the Company has been required to make since
the original Application was filed. The Amended Application includes supporting workpapers, the
Engineering Report by Scanlan Engineering (Exh. 105, pp. 5-22), and new proposed rate schedules.
Capitol Water in its Amended Application is now proposing that the Commission approve a
temporary rate increase to amortize a loan of approximately $403 000 over seven (7) years and to
recover certain other annual operation and maintenance expenses ($13 600). The total requested
amount by the Company is itemized in Company Exhibit 3 (see Attachment 1 to this Order).
ORDER NO. 27022
Included within the Company s request are additional expenditures for water system
facilities that were not included in the original Application for a temporary rate increase. Those
expenditures are as follows:
Ada County Highway District has initiated road improvements in the Cole Road
and Ustick Road areas. The Company has major water mains in these streets.
These highway improvements have obligated Capitol Water to lower several of its
water mains. The costs oflowering these mains is estimated to be $15 000.
The line shaft, bearings and column pipe for Well No.3 failed and the pipe in Well
No.3 had to be removed and the line shaft, bearings and column shaft replaced.
Well No.3 is the Company s lead well and provides the highest quality water on
the system. The cost of this repair was $11 491.46.
Capitol Water contends that the current rate structure does not allow it to build cash reserves to cover
such large non-discretionary expenditures. As a result, it is represented that the owners of the
Company, Bob and Bonnie Price have borrowed against life insurance policies and used a portion
of funds they received when their home was taken by condemnation by the Ada County Highway
District. It is the Company s contention that these personal payments by the Prices must be
considered as short-term loans from the Prices to the Company.
Capitol Water agrees with Staff that the requested revenue increase can be funded by
means of a $3.27 (compare Amended Application-$4.03) per month surcharge added to the base
monthly rate per customer under rate Schedule No.1 (Tr. p. 67) and a 25.2% increase in the rates
for commercial customers under the Company s rate Schedule No.2 (Tr. p. 80). The $3.27 per
month surcharge for residential customers represents a 15.8% increase in the summer and a 35.4%
increase in the winter. Tr. p. 80. The Company has agreed to bill the surcharge as a separate line
item on monthly billings to its customers. Tr. p. 54.
The Company states that it has obtained a commitment from the Bank of America to loan
Capitol Water the amount it needs to drill Well No., to make the other investments required to
provide a long-term supply of higher quality water, and to repay some ofthe loans the Prices have
made to the Company. As represented by the Company, the Bank of America will accept a loan
amortization term of84 months, i., seven years. Because all of Capitol Water s assets are subject
to prior first mortgage liens, the Company states that as a condition of the loan, the Bank of America
ORDER NO. 27022
will require that the Company receive an order from the Commission increasing the Company s rates
in an amount sufficient to cover the amortization of the loan over the seven-year loan term.
A meeting between the Company, its customers and Commission Staff was held on
April 9, 1997. Reference Tr. pp. 44-46.
Public hearing in Case No. CAP-96-2 was held on May 19, 1997 in Boise, Idaho. The
following parties appeared by and through their respective legal counsel:
Capitol Water Corporation
Commission Staff
Barton L. Kline, Esq.
Scott D. Woodbury, Esq.
The testimony and record in pertinent part can be summarized as follows:
In related Case No. CAP-96-1 the Commission opened a docket to investigate and
evaluate the water quality and water supply issues in the Capitol Water service area. The
Commission directed the Company to identify and develop the costs of alternatives for mitigating
or eliminating the iron and manganese problem for its wells and water distribution system.
Company and Staff evaluation reports have been filed in that case and also in this case as Staff
Exhibit 105. Also of significance regarding what is an aesthetic water quality problem, are the EP A
National Secondary Drinking Water regulations and guidelines related to iron and manganese. See
Staff Exhibit 104; Tr. pp. 72-73.
Capitol Water is before the Commission requesting a temporary surcharge to fund certain
expenses and capital expenditures associated with improving the aesthetic quality of its water
specifically addressing the presence in its water of iron and manganese. The total requested amount
is itemized in Company Exhibit 3 (Attachment 1 to this Order).
The Scanlan Engineering Report recommends drilling a new well as the best alternative
for solving or mitigating the water quality of Capitol Water. Staff agrees. Tr. p. 74. Staff separately
addressed the individual components in the Company s itemized schedule, Exhibit 3 , objecting to
none. See Tr. pp. 75-77.
ORDER NO. 27022
Capitol Water residential customers are unmetered. Mr. Scanlan in his report states that
water use in unmetered water systems is often twice as high as the water use in metered systems, and
this is particularly true during the irrigation season. Mr. Scanlan s report states that reduced water
consumption would eliminate the need to use Well No.6 and probably would eliminate the need to
replace Well No.2. Scanlan Report p. 9, Tr. pp. 46-, 86. Metering customers as a means of
addressing the Company s water quality problem was rejected as not being cost effective. See
Scanlan Report p. 14, Tr. p. 15.
Staff recommends that the temporary surcharge be paid by all customers (not just those
experiencing water quality problems) because all customers contribute to the demand on the system
that requires the poor quality wells to be operated. Tr. p. 92. Staff notes that the proposed surcharge
is designed only to recover the payments on the bank loan, related income tax and incremental
operating expenses. Tr. p. 78.
Staff notes, without taking exception, that continuing operating expenses for heating fuel
sequestering chemicals and incremental water testing are part of what the Company is requesting
(i., $13 600 - Exhibit 3). These costs Staff notes although nominal are operating expenses that
would be recognized as known changes to the Company s operating expenses in a general rate case
and included in the Company s base rate design.
Staff recommends that a separate balancing account be created on the Company s books
with all transactions related to this Application flowing through that account on a monthly basis as
transactions occur. Tr. p. 101. Staff notes that the length of the surcharge may be affected by
unknown factors such as customer growth on the system.
COMMISSION FINDINGS
The Commission has reviewed and considered the filings of record and transcript of
proceedings in Case No. CAP- W -96-2. The presence of iron and manganese in the water supply and
distribution system of Capital Water has presented the Company with difficult decisions. On the one
hand the identified contaminants are secondary and non-health threatening. On the other hand, the
aesthetic nature of the problem is an irritant to the Company s affected customers and a persistent
public relations challenge.
ORDER NO. 27022
We cannot address a contaminant problem of this nature, a problem that becomes
increasingly manifest during periods of summer peak demand without noting that Capital Water to
a large extent is an unmetered system. The water consumption patterns of unmetered customers on
a flat rate are typically greater than metered customers who pay for volume consumed. It is not
reasonable in an integrated system to expect only affected customers to pay for measures to eliminate
or mitigate water quality contamination.
We appreciate the Company s efforts in this case. The investigation and analysis reports
filed by the Company and Commission Staff provide us with a factual basis for our findings. We
fmd good reason to conclude that the Company s proposal for improving the quality of its water is
sound. The related costs are reasonable and justify our decision to approve and authorize the
proposed investment detailed in the Company s Exhibit No.3 (see Attachment 1 to this Order).
We note the point raised by Staff that continuing operating expenses are included in the
Company s request and are not normally the type of expense recovered by way of surcharge. While
we agree with Staff s characterization of the expenses, we note that the expenses identified are
relatively nominal in dollar amount. Given the cash flow constraints of the Company as reflected
in the record, we fmd it reasonable to permit recovery of these amounts in the surcharge. For similar
reasons and to further regulatory efficiency, we also approve recovery of the requested non-water
quality related costs for lowering lines in the area of Cole and U stick Road. The method of recovery
that we authorize is the requested seven (7) year temporary surcharge identified as a separate line
item on monthly billings. The amount of surcharge that we find fair and reasonable is a $3.27 per
month surcharge for unmetered Schedule No.1 residential customers and a 25.2% surcharge for
metered Schedule No.2 commercial customers. As recommended by Staff and to facilitate any
audit, Capitol Water is required to create a separate balancing account on the Company s books with
all transactions related to this Application flowing through the account on a monthly basis as
transactions occur. We limit recovery to the authorized amounts, i., a principal loan amount of
$402 624., and an annual operation and maintenance expense figure of$13 600. We expect actual
cost figures to be substituted for these estimates.
The Commission further finds it reasonable to require quarterly written status reports
from the Company apprising the Commission of moneys expended, construction progress, testing
results, water quality-related complaints and general impressions as to the results of its efforts to
ORDER NO. 27022
eliminate or mitigate iron and mangenese contamination of its waters. We direct the Company to
utilize our investigation docket CAP-96-1 for such filings. The quarterly filing requirement will
end one calendar year after Well No.7 goes on line. 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.
CONCLUSIONS OF LAW
The Commission has jurisdiction over Capital Water Corporation, a water utility, and the
issues raised in Case No. CAP-96-2 pursuant to the provisions of Idaho Code Title 61 and the
Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described and qualified above
IT IS HEREBY ORDERED and Capital Water Corporation is authorized to incur indebtedness in
the principal amount of $402 624.71 for expenditures detailed in Attachment 1 to this Order, to
expend $13 600 in related annual operation and maintenance expense, and to assess a related
temporary seven year surcharge for Schedule 1 and Schedule 2 customers as detailed above. The
Company is directed to account for the authorized expenditures in the manner described above. The
Company is further directed to file compliance tariffs with the Commission Secretary.
IT IS FURTHER ORDERED and Capitol Water Corporation is directed to file quarterly
and annual status reports, as detailed above, in Docket No. CAP- W -96-
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 ~ 61-626.
ORDER NO. 27022
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
~1h
day of June 1997.
RALPH NELSON, COMMISSIONER
((h~
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Assistant Commission Secretary
vldlO:CAP-96-sw2
ORDER NO. 27022
CAPITOL WATER TEMPORARY RATE INCREASE
SCHEDULE OF INVESTMENT AND EXPENSES
A. Investment
1. Well No.
Capitol Water Bid Cost to Date
Pump sale and install, well test. drill test well
bore for production well , Ustick and North
Cole Road per bid Riverside , Inc.
Well Site
Option on well site -no charge
Purchase price if option exercised
((j)
$3.75 per
sq. foot times approximately 11 000 sq feet
Survey cost
Engineering/legal fees - zoning
compliance/sales cost
Other Expenses Per Scanlan Estimate
Well house (200 sq. foot ((j) $601 sq ft)
Site Improvement (driveway, landscape)
Electrical
Subtotal:
Contingencies (15
% )
TOTAL
2. Well No.
Rebuild expense
3. Well No.
Repair Expense - per Riverside Bid
4. Scanlan Consulting Report
169 049.
250.
500.
000.
12,000.
000.
000.
236 799.00.
35.519.
$272 318.
000.
491.46
830.
ATTACHMENT 1
Case No. CAP-96-
ORDER NO. 27022
Page 1 of 2
Sequestering Costs
Monies already expended for polyphosphates
chemicals
Installation of furnace in chemical storage area
Additional equipment for injecting
polyphosphates at wells (per Scanlan estimate)
Cost for Lowering Lines in Cole and Ustick
Road
Legal and Accounting Expense for Rate
Proceeding
Loan fees - expenses
B. Annual Operation and Maintenance Expenses
TOTAL TO BE BORROWED
Fuel for heating chemical storage area
Ongoing annual cost of sequestering chemicals
(per Scanlan Report)
Additional annual water quality testing
(per Scanlan Report)
Subtotal
11,483.
500.
15,000.
15,000.
000.
000.
$402,624.
600.
10,000.
000.
$ 13,600.
ATTACHMENT
Case No. CAP-96-
ORDER NO. 27022
Page 2 of 2