20190723Comments.pdf

EDWARD JEWELL
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 10446
Street Address for Express Mail
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
N[CEIVED
til!3 JUL 23 PH 2: lr I
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IN THE MATTER OF THE APPLICATION OF
GEM STATE WATER COMPANY FOR
APPROVAL OF ACQUISITION OF THE
ASSETS AND TRANSFER OF THE CPCN'S OF
DIAMOND BAR ESTATES AND BAR CIRCLE S
WATER
CASE NO. BCS-W-19-01
DrA-W-19-01
COMMENTS OF THE
COMMISSION STAFF
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STAFF OF the Idaho Public Utilities Commission, by and through its Attorney of
record, Edward Jewell, Deputy Attorney General, submits the following comments.
BACKGROUND
On April 29,2019, Gem State Water Company, LLC ("Gem State Water" or
"Company") filed an Application seeking approval of the Company's acquisition of the assets of
Diamond Bar Estates,LLC ("Diamond Bar") and Bar Circle "S" 'Water, Inc. ("Bar Circle S")
and the transfer of each Company's respective Certificate of Public Convenience and Necessity
("CPCN") to Gem State Water.
Northwest Natural Gas Company is a 160-year old natural gas utility that serves
customers in the Pacific Northwest. As part of a recent reorganization, Northwest Natural Gas
Company formed the Northwest Natural Holding Company, which holds companies including
NW Natural Water Company, LLC and its subsidiary, NW Natural Water of Idaho, LLC
STAFF COMMENTS JULY 23,2019I
Gem State Water is a wholly owned subsidiary of NW Natural Water of Idaho, LLC.
Gem State Water has applied to the Commission for authority to acquire the assets and CPCN's
of two additional regulated Idaho water utilities, Diamond Bar and Bar Circle S. Diamond
Bar serves about 46 customers under CPCN No. 413 in or near Kootenai County, Idaho. Bar
Circle S serves about 218 residential customers and one commercial customer under CPCN
No. 296 in or near Kootenai County, Idaho.
Gem State Water is not requesting any changes to rates, rate structure or other charges in
this Application and states that any future changes will be based on prudently incurred capital
expenditures and other accepted ratemaking principles.
STAFF ANALYSIS
As it has done in previous water company acquisition cases, Staff relied on the standards
outlined in ldaho Code $ 61-328 related to the sale of electric utilities. Those standards require
the Commission to determine that:
a) The transaction is consistent with the public interest;
b) The cost of and rates for supplying service will not be increased by reason of such
transaction; and
c) The applicant for such acquisition or transfer has the bona fide intent and financial
ability to operate and maintain the system in the public service.
Staff considered these requirements in its analysis, as well as applicable Idaho Department of
Environmental Quality (DEQ) water system requirements that impact the above criteria. Staff
recommends approval of the acquisition of Bar Circle S and Diamond Bar by Gem State Water
and approval of the transfer of CPCN No. 413 for Diamond Bar and CPCN No. 296 for Bar
Circle S to Gem State Water, with the caveat that costs incurred to obtain a secondary source of
water for Diamond Bar not be included in customer rates.
Through its review, Staff uncovered two primary areas of concern: (1) the adequacy of
the emergency water supply for Diamond Bar, and (2) the lack of specificity in the Agreement
about which assets are included in the transaction. In particular, Staff was concerned that the
Agreement did not transfer easements for both utilities and the water rights for Bar Circle S, but
concluded those easements are included in the broad language of the Agreement. Staff s
comments will address Diamond Bar and Bar Circle S separately.
2STAFF COMMENTS JULY 23,2019
I. Diamond Bar
For its investigation, Staff relied on DEQ Surveys, plans and design drawings prepared
for Diamond Bar during the years 1994,2004, and2005, annual reports submitted by Diamond
Bar, and information provided in the Application and in response to production requests. Staff s
concerns with Diamond Bar are: 1) whether sufficient assets were transferred as part of the
Agreement to satisfy the standards set forth in ldaho Code $ 61-328, and2) whether the system
can operate adequately and reliably post-transaction given the short term nature of the agreement
between the current owner of the system, Mr. Turnipseed, and Gem State Water for access to the
backup well.
According to Diamond Bar's 2018 Annual Report, the system serves 57 residential
customers. This differs from the 46 customers reported in the Company's Application. See
Application at 4. According to information developed during Diamond Bar's last rate case
(DIA-W-l5-01), the system includes a373 foot deep well, a 60 HP submersible well pump, a
55,000 gallon cistern, two 5 HP booster pumps, and a20 HP fire pump that can be used as a
booster pump during periods of abnormally high consumption. The 5 HP booster pumps and20
HP fire pump are located inside a pump house. The 55,000 gallon cistem is located beneath the
pump house floor. The well and 60 HP well pump are located outside the pump house. The
system obtains water via two water rights. Municipal water is obtained via water right No.
95-10068, and irrigation water is obtained via water right No. 95-10067.
A. The Transaction is Consistent with the Public Interest.
Staff notes that Gem State Water, in conjunction with its parent companies, is actively
seeking to expand its operations in Idaho. Gem State Water and associated companies have
shown commitment to their growth plan through the acquisition of Falls Water (FLS-W-l8-01),
Spirit Lake East/Lynnwood Water (SPL-W-19-01), and the submission of this Application. The
acquisition by Gem State Water may provide benefits through operational efficiencies and
economies of scale as it acquires more water systems. In the case of Bar Circle S and Diamond
Bar, Staff expects any efficiency or overhead savings to remain relatively small unless or until
Gem State Water can acquire more water systems sufficiently close in proximity to operate in
conjunction with each other.
aJSTAFF COMMENTS JULY 23,2019
B. T . Cost of and Rates for Supplying Service will Not Increase Due to the
Transaction.
Gem State Water states it will maintain the existing rates and charges post-acquisition,
and that it will not seek to include the transaction expenses related to the acquisition in rates. See
Palfreyman Direct at 6. Despite these assurances from the Company, Staff still has concerns that
the transaction may create greater costs for the system and ultimately customers than would
otherwise occur if the current backup well were transferred to Gem State Water.
i. Diamond Bar's Backup Well is not Inqluded in the Transaction.
Staff is concerned that the acquisition of Diamond Bar may cause a cost increase for
customers because Diamond Bar's backup well is located on Mr. Turnipseed's private property
and is not included in the transaction. Although the backup well is not included in the
transaction, Mr. Turnipseed and Gem State Water reached an agreement granting Gem State
Water a one-year easement to use the backup well as necessary to operate the system.
Staff notes that between20ll and 2015, Diamond Bar's main well failed no fewer
than five times, thus indicating there is a clear need for a backup well. For example, in
DIA-W-15-01, Staff commented that the system's primary source had gone out and the
secondary supply source was required to keep the system operational. In that case, the
Commission included in rates the operation and maintenance expense for the second supply
source so that the ratepayers would have an emergency source of water.
In addition to Staff s system reliability concerns, DEQ requires a redundant source of
ground water. DEQ's Ground Water Source Redundancy Rule states:
New community water systems served by ground water shall have
a minimum of two (2) sources if they are intended to serve more
than twenty-five (25) connections or equivalent dwelling units
(EDUs). Under normal operating conditions, with any source out
of service, the remaining source(s) shall be capable of providing
either the peak hour demand of the system or a minimum of the
maximum day demand plus equalization storage. See Subsection
501.18 for general design and redundancy requirements concerning
fire flow capacity. (5-8-09) IDAPA 58.01.08.501.17.
In this case, DEQ indicated that the one-year easement between Gem State Water and Mr.
Turnipseed satisfies DEQ requirements for a redundant source of water while the easement
agreement is in effect. See DEQ Supplemental Comments. While the one-year agreement for
STAFF COMMENTS 4 JULY 23,2019
access to the secondary supply source gives Gem State Water time to provide a second source of
supply, that source will necessitate additional capital projects, and therefore an increase in rate
base, which would subsequently increase costs to the customers. DEQ gives no indication in its
letter to the Commission whether an additional agreement for a longer term would satisfy DEQ's
redundant source rule.
DEQ also requires redundant water sources to have a dedicated well lot if the system is
intended to serve more than 25 customers. IDAPA 58.01.08.501.17. However, the backup well
was constructed prior to the dedicated well lot rule, and therefore, under DEQ's interpretation of
its own rules, there is no current requirement for the backup well to be on a dedicated well lot.
See DEQ Supplemental Comments. However, if contamination is detected in the redundant
emergency source, and it is determined that contamination is attributable to activities within the
well setback distances, an alternative redundant source may be required by DEQ. 1d DEQ notes
that the Hayden Area Regional Sewer Board ("HARSB") operates a recycled water irrigation site
within the required 1,000 foot setback distance for a well lot. DEQ Comments at 2. DEQ also
notes that the well is not down gradient from the HARSB, and has consistently been in
compliance with DEQ monitoring requirements and contaminant requirements. See id. at2-3,6.
Because of the known concerns related to the backup well at the time the parties made the
Agreement, Staff recommends the Commission not allow the Company to collect costs related to
securing a second supply source, because the emergency well should have been transferred, or
the purchase price should reflect the exclusion of the backup well from the Agreement (which
had already been included in customer rates), and the Company should have been aware of the
redundant source rule and the well lot requirement.
ii. The Application Does Nat Xxp}eilly lisi All Assets Necessary to Oleratalhe Sy!!er[.
Staff is concerned that the Agreement may not include all the assets necessary to operate
the system reliably. For example, the Agreement explicitly includes the transfer of the municipal
water right, 95-10068, from Diamond Bar to Gem State Water, but the Agreement does not list
inigation water right 95-10067. Current records on file with the Idaho Department of Water
Resources indicate that those rights still belong to Robert Turnipseed. Given the large number of
Diamond Bar customers who irrigate their property during summer months, Staff would be
concerned if this water right was not included in the transaction.
5STAFF COMMENTS JULY 23,2019
Staff is also concerned that not all easements necessary to operate the system are included
in the transaction. Staff notes that the Agreement's Diamond Bar asset list includes easements
that were recorded in the official records of Kootenai County on August 17,1994. However, the
agreement does not mention easements that may have been obtained after that date, such as those
that would be necessary to serve Boeckel Estates, which was incorporated into the system in
2004.
While the identified assets were not explicitly included in the Agreement, the Agreement
contains a catch-all provision. Provision No. 1.1 of the Agreement states,
Seller will sell and deliver to Buyer, and Buyer will purchase from
each Seller, free and clear of any Encumbrances, all of each
Seller's right, title and interest in all of the assets, properties and
rights of every kind and nature, whether real, personal or mixed,
tangible or intangible (including goodwill), wherever located and
whether now existing or later acquired (other than the Excluded
Assets) that relate to, or are used or held for use in connection
with, its Business (together, the "Purchased Assets"), including
those set forth on Schedule 1.1(a).
The above provision addresses Staff s concerns with respect to easements and water
rights. Staff notes that the fact that the backup well is not included in the transaction, which in
Staff s interpretation would fall within the definition of Provision No. 1.1 of the Agreement,
provides an additional layer of uncertainty as to what is and is not included in the transaction.
Staff has discussed the incomplete asset list-including missing easements and water rights and
exclusion of the backup well-with Gem State Water and Robert Turnipseed, and received
assurances from the parties that they believe all assets needed to operate the system adequately
and reliably are included in the transaction.
C. Gem State Water has the Bona Fide Intent and Financial Abilitv to Operate and
UlaintaintheSyste@
Staff believes the Company has clearly demonstrated its bona fide intent and financial
ability to provide continued operation of the system and reliable service. Staff has noticed a
recurring problem in Idaho where small water companies are often owned by individuals who
have no clear plan for succession of ownership. Water systems routinely require repair,
replacement and extension of infrastructure to provide reliable and ample water service to
6STAFF COMMENTS JULY 23,2019
customers. Financing this infrastructure at a reasonable cost is a challenge for smaller water
systems.
Gem State Water, through its parent company, Northwest Natural Holdings, has more
than adequate financial ability to fund Diamond Bar capital requirements in a timely manner at a
competitive cost. Staff notes that while Mr. Turnipseed successfully met his obligation to
finance past system improvements, the purchase of these systems by Gem State Water will
increase the access to capital beyond what Mr. Turnipseed can now provide. Northwest Natural
Holdings has a $400 million revolving line of credit, 2018 Net Income of $64.6 million, 2018
cash flow of $9.2 million, A1 credit rating from Moody's, and AA- credit rating from Standard
and Poor's. Lower financing rates help control costs that ultimately are passed on to customers.
Gem State Water has committed in its Application to serve existing and future customers
of Diamond Bar and Bar Circle S and to maintain or improve the existing level of services
without any disruption to customers. See Application at 3. The Company noted in response to a
production request that potential capital expenditures may be needed, and the Company has
stated its intent to commission an engineering study to better estimate specific capital needs. The
potential needs stated in the response do not include the secondary source of supply mentioned
above.
II. Bar Circle S
According to the Bar Circle S 2018 Annual Report, the system serves 218 residential
customers. See Application at 4. According to the 2016 Survey, the system includes a342 foot
well (Well 1) equipped with a 60 HP pump and a 360 foot deep well (Well 2) equipped with a 5
HP pump. Water from the two wells is pumped into a 185,000 gallon reservoir, and then
pumped into the distribution system using a system of four l0 HP booster pumps and a I l0 HP
fire pump. A third well (Well 3), drilled in March 2016, is equipped with a 60 HP submersible
pump; however, at the time of the 2016 Survey, it had not been connected to the Bar Circle S
distribution system. Mr. Turnipseed stated during Staff s investigation in this case that all three
wells are currently connected and operational.
Staff used the same legal framework to evaluate the proposed transaction between Bar
Circle S and Gem State Water as it used to evaluate the Diamond Bar transaction. Staff was
concerned whether sufficient assets were transferred as part of the Agreement.
STAFF COMMENTS JULY 23,20197
A. The Transaction is Consistent with the Public Interest.
StafPs comments for Bar Circle S are the same as Staff s comments for Diamond Bar in
this regard.
B. The Cost of and Rates for Supplvine Service will Not Increase Due to the
Transaction.
Gem State Water states it will maintain the existing rates and charges for Bar Circle S
customers. The Company also states the transaction expenses related to the acquisition will be
paid by Gem State Water's parent company and will not be recovered from ratepayers. See
Palfreyman Direct at 6.
Similar to StafPs concern regarding Diamond Bar, Staff is concerned that the asset list in
the Agreement does not include all easements necessary to serve existing Bar Circle S
customers. Staff requested the Company provide agreements and system maps identifying any
easements and equipment that are not Company owned. The maps provided by the Company are
incomplete and barely legible. They appear to identify only a few of the easements that would
be necessary to run the water system. Staff is particularly concerned that the easements required
to operate in Double-T Estates were not included in the asset list. Staff questions the ability of
the system to provide service to the current system as well as the recently approved development,
Garwood Corner. The Agreement also mentions the possibility of further expansion of the
system outside the current certificated territory.
Staff has discussed the incomplete asset list, including missing easements and water
rights, with both parties to the Agreement. The parties stated understanding, which appears to be
in alignment, in conjunction with Provision No. 1.1 of the Agreement, allow Staff to recommend
approval of the transaction despite the uncertainty.
C. Gem State Water has the Bona Fide I and Financial Abilitv to Onerate and
Maintain the Svstem in the Publie Sqryree.
StafPs comments for Bar Circle S are the same as Staff s comments for Diamond Bar in
this regard.
STAFF COMMENTS JULY 23,20198
CUSTOMER NOTIFICATION AND PRESS RELEASE
Rule 125 of the Commission's Rules of Procedure does not require customer notification
unless the Company is requesting a rate change. IDAPA 31.01.01 .125. In its Application, the
Company stated its intention to publish a Customer Notice in the Coeur d'Alene Press regarding
Gem State Water's agreement to purchase Bar Circle S and Diamond Bar. It is unclear whether
the Company has already published this notice. Regardless of whether the Company published
this notice, if the Commission approves the sale of Bar Circle S and Diamond Bar to Gem State
Water, Staff recommends that Gem State Water provide direct notice to customers of the
purchase, either through a separate mailing, a message on bills, or as an insert sent with bills.
COMPANY TARIFF
Currently, Bar Circle S and Diamond Bar have separate Commission-approved Tariffs,
each with different rates, charges, and rules and regulations. If the sale is approved and Gem
State Water wishes to create a single, combined Tariff that lists all the separate rates and charges
for the water systems owned and operated by Gem State Water, Staff recommends the Company
work with Staff to combine the separate Tariffs following issuance of the final order in this case.
STAFF RECOMMENDATION
Staff recommends the Commission:
. Approve the sale of Bar Circle S to Gem State Water.
. Approve the transfer of Bar Circle S CPCN No. 296 to Gem State Water.
. Approve the sale of Diamond Bar to Gem State Water with the condition that the lack
ofa redundant source not affect future rates.
. Approve the transfer of Diamond Bar's CPCN No. 413 to Gem State Water.
9STAFF COMMENTS JULY 23,2019
COMPANY DOCUMENTS
The Company will need to update customer documents to reflect any changes brought
about by the sale of the Companies. Staffis willing to work with Gem State Water to update its
billing and collection documents as well as its Explanation of Rates and Annual Rules Summary.
Staff recommends the Company work with Staff to make any necessary revisions within three
months of issuance of the final order in this case.
o Direct Gem State Water to notify customers directly of the sale of Bar Circle S and
Diamond Bar to Gem State Water, either through a separate mailing, a message on
bills, or as a bill insert.
Direct Gem State Water to work with Staff to file conforming Tariffs following
issuance of the final order in this case.
Direct Gem State Water to work with Staff to make any necessary revisions to its
billing and collection documents and its Explanation of Rates and Annual Rules
Summary within three months of issuance of the Commission's final order in this
a
o
case.
Respectfully submitted this L j,)day of July 2019.
Edward
Deputy General
Technical Staff: Chris Hecht
Bentley Erdwurm
Michael Morrison
Joseph Terry
i :umisc/comments/bcsw19. 1_diaw I 9. 1 ejjtbecwhmm comments
STAFF COMMENTS 10 JULY 23,2019
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 23RD DAY oF JULY 2019,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NOS. BCS-W-19-0l/DIA-W-I9-OI, BY MAILING A COPY THEREOF, POSTAGE
PREPAID, TO THE FOLLOWING:
PRESTON CARTER
GIVENS PURSLEY LLP
601 W BANNOCK ST
BOISE TD 83702
E -mai I : p re st o nc arte r (4:) g i v e n s p u r s I e.v-. c o m
kendrahr.g). given spr"rrsley. com
ERIC W NELSEN
SR REGULATORY ATTORNEY
NW NATURAL
220 NW 2ND AVE
PORTLAND OR 97209
E-mail : Ilric.Nel sen(a).nrvnatural.com
SECRET
CERTIFICATE OF SERVICE