20051019Comments.pdf

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DONALD L. HOWELL, II
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3366
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE EAGLE WATER
COMPANY'S REQUEST FOR A TEMPORARYSURCHARGE. CASE NO. EAG-O5-
ST AFF COMMENTS
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Donald L. Howell, II, Deputy Attorney General, and submits the following
comments in response to Order No. 29870 issued on September 16 2005.
THE APPLI CA TI 0 N
On August 3, 2005, the Commission issued an emergency Order directing Eagle Water
Company to "use all deliberate speed" to increase low water pressure in the Eagle Springs
subdivision. Order No. 29840. The Order also directed the Company to prepare an engineering
report for its entire system and to file an Application for a surcharge to recover the costs of:
(1) the immediate system improvements to correct the low-pressure conditions; (2) preparing the
system engineering report; and (3) the costs to be incurred in preparing the Surcharge
Application.
On August 24, 2005, Eagle Water filed its Application for a temporary surcharge. The
Company also proposed three additional measures that it could implement to address low-
ST AFF COMMENTS OCTOBER 18 2005
pressure concerns. On September 9 2005 , the Company supplemented its Surcharge
Application with a request to immediately implement the temporary surcharge.
Eagle Water asserted in its Application that it has alleviated the low-pressure problems
affecting Eagle Springs subdivision by replacing an 8-inch mainline with a 12-inch mainline.
This mainline is connected to the booster pump serving the Eagle Springs subdivision. The
Company estimated that the cost of replacing the 8-inch mainline with the larger 12-inch
mainline was $40 027. Application at 2. Eagle Water also estimated the cost of producing the
engineering report and the legal/accounting costs to prepare the Surcharge Application. Id. at 5.
These costs are reflected below.
ITEM
Replace 8-inch line
Prepare Engineering Report
Legal & Accounting Expenses
TOT AL
COST
$ 40 027
$ 79 895
$ 5.500
$125,422
Order No. 29870 at 2.1 Eagle Water stated that it will take between three to five months to
complete the engineering report. Exh. 4, p. 5.
A. Additional Low Pressure Measures
Although the Company believes that it has adequately addressed the immediate low-
pressure problems in Eagle Springs, it is concerned that there may be occasional drops in water
pressure
, "
especially in light of the continued wasting of water that has been observed in Eagle
Springs." Surcharge Application at 2. The Company s engineer has identified three additional
measures, which may "further alleviate water pressure problems in the Eagle Springs area.
These additional measures are:
Option 1 - Increase the power of the current booster pump from 60
horsepower (HP) to 75 or 100 HP. The estimated cost of this option is
$87 075.
Option 2 - Install an additional booster pump buried under Big Springs Street
at the 2 700-foot elevation. The estimated cost of this option is $81 607.50 or
approximately $1 600 per customer for the 51 customers at the highest
elevation in Eagle Springs.
1 The Company s Application misreported the legal and accounting subtotals as $7 250. The table above shows the
correct data and total amount.
STAFF COMMENTS OCTOBER 18, 2005
Option 3 - Drill a new well under an existing permit from IDWR to serve the
entire system. The estimated cost of this option is $390 305. The Company
has an existing permit to drill this well but expires on March 1 , 2006.
Order No. 29870 at 2. The Company estimated that Option 1 and Option 2 would take
approximately six weeks to implement. Option 3 would take 60 to 180 days. Application at 4-
The Company s preference is for the Commission to authorize Option 3 (the new well).
The Company asserted that based upon DEQ criteria for estimating peak hourly demand
the peak demand for Eagle Water is approximately 2 000 gallons per minute (gpm). In addition
to this normal peak demand, the Company maintained that fire-flow requirements for public
safety are an additional 1 500 gpm. Using the DEQ standards, the Company estimated its system
peak demand could exceed 3 500 gpm. Id. at 4. The Company reported that the maximum
pumping rates of the four operational wells are: No.1 - 600 gpm; No.2 - 400 gpm; No.
000 gpm; and No.6 - 2 000 gpm.2 The total pumping rate for the four wells is 5 000 gpm-
500 gpm above the estimated peak demand. The Company stated that if either Well No.4 or
No.6 should temporarily fail, there may "not be adequate quantity or pressure for the system" to
meet DEQ standards. Id. at 4.
B. The Proposed Surcharge Alternatives
The Company estimated that a monthly billing surcharge of 16.850/0 over 3 years would
recover the anticipated costs for: (1) correcting the immediate pressure problems; (2) preparing
the engineering report; (3) recovering the legal/accounting costs; and (4) implementing either
Option 1 or Option 2. This surcharge would recover $214 147. Exh.
The Company s preferred alternative would be to recover the immediate costs (the 3
elements above) and to implement Option 3 (the new well) for a total estimated cost of
$517 477. The Company s accountant has calculated that a monthly surcharge of 40.85% would
recover this amount over three years. The Company estimates that this larger surcharge would
result in an additional $9.16 per month for the average residential customer. Even with the
proposed surcharge, the Company asserted that the average customer s annual water bill would
be lower than the annual water bills for customers of either the City of Eagle s municipal water
system or United Water. Order No. 29870 at 3.
2 In addition to the four operating wells (Nos. 1 , 2, 4, 6) the Company uses Well No.3 as a back-up supply source
(sand problems) and Well No.5 has never been developed. The proposed Option 3 (new well) would be Well No.
STAFF COMMENTS OCTOBER 18, 2005
The Company proposed that its Surcharge Application be processed under Modified
Procedure. In its supplemental Application of September 9, 2005 , the Company filed copies of
its Press Release and Customer Notice to comply with the Commission s Customer Information
Rule 102. IDAPA 31.21.02.102. In its supplement, the Company asked for an immediate
effective date for its temporary surcharge. Order No. 29870 suspended the proposed surcharges
until October 28, 2005.
EAGLE WATER COMPANY HISTORY
A. Hook-up Fees and Low Pressure
In 1992 the Commission issued Order Nos. 24319 and 24474, granting Eagle Water a
$100 engineering study hook-up fee and a $500 construction hook-up fee (hook-up fees). Case
Nos. EAG-91-1 and -92-1. These hook-up fees were intended to address customer
complaints regarding inadequate water pressure and to fund a new well that was intended to
allow the Company additional capacity to expand its system to accommodate additional
developments in Eagle Water s service territory.
The Commission revisited the hook-up fees in Order No. 24890 issued in May 1993.
During the construction of the new well, the Company applied for the authority to finance
additional debt to pay for a variable speed pump to be used at the new well. In Order No. 24890
the Commission granted the Company s request to continue the hook-up fees to provide the
necessary financing for the larger capacity pump. The Commission intended the proceeds from
the hook-up fee to be used to amortize the debt for the new well and pump. The hook-up fee
remains in the current tariff.
In July 2000, the Commission initiated a docket for investigation of Eagle Water
Company and its ability to provide adequate water service to the customers of Eagle Springs
Estates and adjacent areas. Staff reported that in July of2000, Eagle Water s Well No.4 failed
causing low pressure in the water system. Pressure was particularly low in the Eagle Springs
subdivision located east of Horseshoe Bend Road and south of Floating Feather Road. Eagle
Water repaired the well pump and also installed a new booster pump, which increased pressures
in the Eagle Spring subdivision. At that time Eagle Water indicated that it intended to drill a
new well that would further help alleviate water pressure problems. It had obtained a water
rights permit and was awaiting a well drilling permit. It expected to drill the well in the winter of
STAFF COMMENTS OCTOBER 18 2005
2000 and have it operational by the summer of 2001. The Company was also in the preliminary
planning stages for a new storage reservoir that would be located in the foothills northeast of
Eagle Springs. If the reservoir was built, the Company stated that it would help maintain and
stabilize water pressures in the system as well as provide additional fire protection. See Order
No. 28513.
In 2003 the Company filed to expand its service area. Staff pointed out in its Comments
that Eagle Water had been planning for several years to drill a new well near the southeast corner
of its service territory and to construct a storage reservoir near the northeast corner, but has yet to
make progress on either project. Staff went on to say, it believes both may be necessary in order
to maintain continuing capability to provide adequate service as additional development occurs
on the east side of the Company s system.
B. Current Customer Complaints and Comments
As of October 17 2005, the Commission had received 25 written comments from
customers. The majority of the comments were from customers who felt the pressure problems
improved when the 12-inch line was reconnected. These customers also feel that option 2 (the
Big Springs booster) is necessary to fix problems with their portion of the system. However
these customers mistakenly thought the Company wanted the 51 subdivision customers served
by the in-line booster pump to pay for it.
Three other customers are against the surcharge. Another customer was not opposed to
the surcharge, considering it necessary to attain quality water service; however, he felt Eagle
Water and the PUC should have fixed the problem earlier. One customer indicated that service
has been bad for years and another customer stressed she has had pressure problems since 1997.
Two customers felt the surcharge was a band-aid fix and would rather see a permanent rate
increase sufficient to provide Eagle Water with the funds necessary to meet the demands of a
continually growing population. Two customers objected to Eagle Water saying their
subdivision has used excessive lawn irrigation. New hookups along Horseshoe Bend Road are a
concern of almost all those who commented; because they fear those extra connections will
further deteriorate the systems current low water pressure.
On October 12 , 2005 , the Commission held a workshop and hearing at the Eagle Senior
Citizen Center in Eagle. About 20 people attended the workshop and hearing. Three Eagle
Water customers testified at the hearing. All three customers were concerned about approving
STAFF COMMENTS OCTOBER 18 , 2005
any of the three additional options without proof that these options would permanently solve the
pressure problems.
ST AFF ANALYSIS
The Commission s Order No. 29840 directed Eagle Water to file an Application for a
surcharge to recover the costs of: (1) the immediate system improvements to correct the low-
pressure conditions; (2) preparing the system engineering report; and (3) the costs to be incurred
in preparing the Surcharge Application. The Company s Surcharge Application in this case
requests a surcharge to recover the three costs mentioned above and the cost of other facilities
that it believes are necessary to correct the pressure problem, specifically a new well or one of
two booster pump projects (the 3 options).
A. The Three Low Pressure Options
The Company asserts in its Application that the low-pressure problems affecting Eagle
Springs subdivision have been alleviated by replacing an 8-inch mainline with a 12-inch
mainline. To verify that the pressure problem had been remedied, the Company monitored the
pressure in the Eagle Springs Subdivision for 14 days following the installation of the 12-inch
mainline. During that period pressures were significantly improved but still dipped to about
20psi on several occasions. Although pressures improved, the Company s engineer, Jim Reese
concluded that some additional improvements are necessary to completely correct the pressure
problems. In the Company s Application, (Exhibit No.4 pg.1), he states
, "
The 12-inch pipe
installation, however, is only a short term fix. ... As a result, we have looked at alternate
methods to ensure pressure would remain above the required DEQ minimums." Mr. Reese then
proceeds to describe the three different Company Options.
DEQ, Eagle Water and a number of customers have commented that replacement of the
inch water main with the 12-inch water main is not sufficient to fully resolve the water
pressure problems. They believe that improvements in the existing booster pump, or a new
booster pump, or a new well will be necessary to completely correct the problems. Although
Staff acknowledges that some additional facility improvements will certainly be required to
correct the pressure problems, Staff recommends that the engineering report be completed prior
to instituting any plant improvements. Staff maintains that until the comprehensive engineering
study is complete, it is not clear what specific improvements are needed, what the proper size
ST AFF COMMENTS OCTOBER 18, 2005
and location of the well is, and what other improvements may be required. Other improvements
may include mainlines, storage or booster pumps, to properly utilize a new well.
To illustrate the importance of these unknown considerations, Staff observes that there is
ample water supply in the west side of the system, and additional water supply in that area would
do little to resolve the existing pressure problems on the east side. Consequently, analyzing
location and proper interconnection are critical to effectively utilize any additional supply.
Completing the comprehensive engineering study to answer these questions prior to authorizing
large expenditures is the prudent thing to do. Staff also agrees with the sentiment expressed by
customers at the public hearing that the Company should not get the cart before the horse and
make investments that might later prove to be less than optimum.
Facility improvements designed to increase water pressure in the Eagle Springs area have
been planned by the Company since 2000. At that time the Company planned to drill a new well
and construct new storage facilities. After five years of delay the well, although not complete, is
still the preferred facility improvement but it is not clear why storage is not being considered or
how it might fit in the comprehensive solution. Before the Company proceeds with storage, a
booster or a new well, Eagle Water should complete the engineering study.
Therefore, Staff recommends that the Company be authorized to recover only those costs
identified by the Commission in Order No. 29840: (1) the immediate system improvements to
correct the low-pressure conditions; (2) preparing the system engineering report; and (3) the
costs to be incurred in preparing the Surcharge Application. This recommended cost recovery
$125 422 is comprised of $40 027 for emergency repairs (Company Exhibit 2); $79 895 for the
Commission ordered engineering study (Company Exhibit 4); $3 500 for legal fees (Company
Exhibit 5); and $2 000 for accounting fees (Company Exhibit 6).
Once the engineering study is complete, the Commission can be presented with the
resultant plan of action for water quantity and quality requirements, and that any extension of the
surcharge and change in the surcharge rate be determined in a future proceeding.
B. Financial Review
Staffs review of the Company s financial condition was utilized to determine whether a
surcharge was even necessary. Staff and the Company have been working to verify the amount
of prior hook-up fees collected, determine where the revenue has been used, and if the
expenditures were booked properly. It appears that funds collected from the hook-up fees have
STAFF COMMENTS OCTOBER 18 , 2005
been used for purposes other than engineering fees and well improvements. The Company has
not properly tracked and accounted for the hook-up fee funds once they were collected. The
hook-up fees have been booked to Contributions in Aid of Construction (CIAC), yet it is not
clear what corresponding entries were made. Eagle Water s 2004 Annual Report submitted to
the Commission shows that it received about $148 000 in hook-up fees, including the hook-up
fees authorized in Order Nos. 24319 24477 and 24890; yet plant in service only increased by
about $12 000. This incomplete booking has contributed to the Company now having a negative
rate base.
In Case No. EAG-04-3 Eagle Water acknowledged its negative rate base and
described the circumstances that led to the negative rate base. Although this case was
withdrawn, the Company s prefiled testimony stated that the primary factor leading to the
negative rate base was the failure to capitalize much of the cost of plant put into service. Instead
plant has been expensed to minimize income taxes. The Company acknowledged that an
extensive review of the prior years' accounting records was warranted to correct the problem of
the negative rate base.
While the issue in this case is not negative rate base or its effect on a general rate case
the financial status and borrowing capabilities of the Company are an important part of the
analysis required to evaluate the proposed surcharges. For the last four years the Company has
reported an average net income of about $100 000. The Company has used the surcharge
proceeds for a variety of expenses other than what the surcharge was originally intended. These
other expenses include meeting payroll requirements, meeting federal tax obligations, and in
general, meeting the cash flow needs of the Company. Staff notes that the inflow of cash from
the hook-up fees has most likely forestalled or delayed a need for a general increase in rates.
The Company has proposed three options that require additional funding beyond what
Staff is recommending in this case. Staff s recommendation does not require a loan for
completion of the project. However, the other options could require obtaining a loan to proceed.
Idaho Banking Company has been consulted to determine what is necessary for Eagle Water to
secure a loan. If the Commission allows the Company to fund expenditures under any of the
Company s three options, then the financial institution s loan requirements will need to be
provided by the Company for Staff review to determine the appropriate surcharge amount and
recovery time period.
ST AFF COMMENTS OCTOBER 18, 2005
C. Staff Surcharge recovery period and rate design
1. Recovery Period.All of the Company s surcharge options, which include additional
capital investment, are designed to recover the identified costs in a 3-year period. Staff is
proposing that cost recovery be limited to those actions previously identified by the Commission.
Consequently, Staff recommends a I-year cost recovery period to coincide with completion of
the system engineering study and construction of needed system facilities. If additional revenue
is necessary, such revenue could be obtained by continuing or slightly modifying the existing
surcharge for an extended period.
2. Gross-up.The total amount to be recovered must be grossed up for income tax
effects. The gross-up factor, as calculated by the Company s CPA, Geneva Trent, is 127.88%.
Staff finds the Company s calculation to be reasonable. After applying the gross-up factor, and
assuming recovery for one year, the total to be recovered by the Staffs proposed surcharge is
$160 389. This surcharge is an increase of approximately 26% over total operating revenues of
$616 029 in 2004.
3. Rate Design.The Company has proposed in its Application to recover the surcharge
as a uniform percent increase on all tariff rates. While this is a straightforward approach that
would create a fairly level revenue stream, Staff believes that it is more appropriate to recover
the surcharge on the commodity charge only. The improvements are required mainly to provide
added water supply for the peak periods in the summer months. Therefore a surcharge, which is
added only to the water use over the 600 cubic foot minimum, seems appropriate. Based on
Company estimates, Staff has calculated that a surcharge on use above 600cf of 42.5% (19.
cents/l00cf) would generate the necessary revenue. This would raise the commodity rate from
$.451 per 100 cubic feet to $0.643 per 100 cubic feet. Even with this increase, Eagle Water
commodity rate would still be 41 % below United Water s winter rate and 53% below its summer
rate.
In order to accelerate collection of the surcharge and to provide a conservation price
signal in the summer months, Staff suggests that the surcharge could be set higher in the summer
months. In the alternative, if the Commission chooses to apply the surcharge to all tariff rates as
proposed by the Company, all rates would increase by 26% for a I-year period. Staffwill
closely review the accounting for all surcharge revenue. Because actual sales could be more or
ST AFF COMMENTS OCTOBER 18, 2005
less than projected, surcharge costs may be recovered sooner or later than the 12-month period
proj ected.
Questions remain with the 12-inch mainline. The Company has not fully explained why
the initial 12-inch mainline was installed in a temporary easement, why it was subsequently
damaged, or why it was replaced with an 8-inch mainline.
SUMMARY
Staff believes that water pressure has been an ongoing problem that has not been
adequately addressed by the Company. The Commission will continue to receive complaints
and customers will continue to have inadequate service during periods of peak consumption if
appropriate action is not taken. Staff recommends only allowing the Company to recover those
costs authorized in Order No. 29840 over a I-year period. This is a grossed-up amount of
$160 389. A long-term solution resulting from the completed engineering study should be put in
place to ensure that adequate service is available to Eagle Water s customers.
Respectfully submitted this rg
(1-day of October 2005.
Donald L. well, II
Deputy Attorney General
Technical Staff: Kathy Stockton
Eric Johnson
Daniel Klein
Dave Schunke
i: :umisc/comments/eagwO5 .2dhdesejdkkls
STAFF COMMENTS OCTOBER 18 2005
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 18TH DAY OF OCTOBER 2005
SERVED THE FOREGOING FIRST PRODUCTION REQUEST OF THE COMMISSION
STAFF TO EAGLE WATER COMPANY, IN CASE NO. EAG-05-, BY MAILING
A COpy THEREOF POSTAGE PREPAID, TO THE FOLLOWING:
ROBERT DESHAZO
PRESIDENT
EAGLE WATER COMPANY INC
PO BOX 455
EAGLE ill 83616-0455
MOLLY O'LEARY
RICHARDSON & O'LEARY
PO BOX 7218
BOISE ill 83707
SECRETARY
CERTIFICATE OF SERVICE