20190116Comments.pdf

EDITH PACILLO
BRANDON KARPEN
DEPUTY ATTORNEYS GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
(208) 3 34-03 18t334-03s7
IDAHO BAR NO. 543017956
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702.5918
Attomeys for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIBS COMMISSION
IN THE MATTER OF EAGLE WATER
COMPANY'S APPLICATION FOR
AUTHORITY TO IMPLEMENT A CUSTOMER
SURCHARGE
CASE NO. EAG.W-15-01
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
attorney of record, Edith Pacillo, Deputy Attorney General, and in response to the Notice of
Proposed Settlement and Notice of Modified Procedure issued in Order No. 34225 on
December 28,2018, in Case No. EAG-W-I5-01, submits the following comments.
BACKGROUND
On November 10, 2015, Eagle Water Company filed an Application seeking authority to
implement an immediate and temporary surcharge of 53.82Yo on customers' water usage over
600 cubic feet per month. The Company also requested permission to access funds in an existing
surcharge account. The Company would use the new surcharge and the existing balance in the
surcharge account to pay for several large capital improvement projects, and its legal and
accounting fees associated with this proceeding. Application at3-5.
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STAFF COMMENTS JANUARY 16,2019
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On December 3, 2015, the Commission issued a Notice of Application and Notice of
Intervention Deadline. No parties intervened in the case. The Commission also suspended the
proposed effective date for 90 days, until March 10,2016. Order No. 33430. The Company
subsequently agreed to several further suspensions. See Order Nos. 33478, 33509. On
August 10,2016, the Commission approved a stipulation between the Company and Staff to stay
all proceedings in this matter for one year, or "until such a time that the parties file a joint motion
to lift the stay." Order No. 33567. In October 2017, the Commission granted an indefinite stay
of all proceedings. Order No. 3391 1.
On December 14,2018, Staff filed a motion requesting the Commission approve a Joint
Settlement Stipulation (the "Settlement") in this matter, and order a procedural schedule. Staff
also reported that the parties jointly recommend that the Commission lift the stay and process the
proposed Settlement by Modified Procedure. On December 28,2018, in Order No. 34225, the
Commission lifted the stay, provided notice of the proposed Settlement, and set a January 16,
2019 comment deadline.
STAFF REVIEW
Staff performed an extensive audit of the books and records of Eagle Water Company for
the years 2015 through20l7, as well as plant additions since 2008. The scope of the audit was
intended to determine the reasonableness of Eagle Water Company's operating results as
reported to the Idaho Public Utilities Commission and in conjunction with the Company's
request for a surcharge in this case. During the course of the audit, Staff discovered that the
Company had incorrectly expensed capital improvements, commingled funds between its
regulated and unregulated operations, and has negative rate base resulting in over-earnings
during 2015-2017. Each of these items is discussed in greater detail below and addressed in the
Settlement.
Regulated and Non-Regulated Operations
Eagle Water Company is in the business of providing domestic water service to
customers in and around the City of Eagle, Idaho. The Company also operates a non-utility
construction business that installs water, sewer, and storm drain systems in new real estate
development. The two business activities are conducted as a single corporation, and file one
consolidated income tax return. Employees of Eagle Water Company perform duties for both
2STAFF COMMENTS JANUARY 16,2OI9
the regulated utility activities and the construction activities of the Company. Currently there are
accounts set up that, if used correctly, would provide separation between regulated and non-
regulated activities. However, there is no formal separation between the two business activities.
Formal separation of the business activities would provide cleaner accounting records and would
protect the water utility operations from a liability arising from construction activities.
Improper Accounting
The Company has not properly allocated common expenses between regulated and non-
regulated activities. For example, all wages for the office employees are charged to the regulated
water company, although work is performed for both the regulated and non-regulated business
activities. Some expenses are allocated based on payroll, such as employee benefits, but Staff
notes that most employer payroll taxes have been attributed to the regulated water operations. In
addition, Staff found that some non-regulated expenses are charged entirely to the regulated
water company. These expenses included property taxes, liability insurance, and depreciation
expense.
In addition to not allocating expenses, or properly assigning expenses to the correct
business entity, the Company also improperly booked capital improvements. The Company
routinely expensed items that should be capitalized as plant-in-service, reflecting the expense on
the income statement rather than the balance sheet and depreciated over the life of the asset.
This practice, and the continuing hook-up surcharges that are a reduction to rate base, have
contributed to the negative rate base.
The Settlement Stipulation
Staff believes the proposed Settlement represents a fair resolution of the issues identified
and recommends it be approved as fair, just, reasonable, and in the public interest. Staff and the
Company have worked diligently to settle all issues regarding the Company's Application for an
immediate surcharge. Customer water rates will not change as a result of the Settlement.
In summary, the Settlement proposes to fully resolve the case as follows:
aJSTAFF COMMENTS JANUARY 16,2019
Rate Base
The Company has improperly booked capital expenditures and maintained inadequate
documentation of plant installation for many years. Since hook-up surcharges are a reduction to
rate base, the improper treatment of capital expenditures continued to compound a negative rate
base. Staff has verified the plant installations where possible. Staff also believes the cost of
some plant items were not included in plant-in-service at all due to the improper records. For
these and other reasons, Staff believes it is reasonable to make a one-time adjustment to offset
the negative rate base. This will allow for more reasonable filings in the future. This Settlement
provides a one-time elimination of negative rate base in 2008 by reducing$1,236,375 in year
2008 contributions in aid of construction. This adjustment brings the rate base in 2008 to zero.
Year 2008 is used for the purpose of the Settlement because of the construction of well number 8
during that year. Well number 8 had only been partially capitalized. This Settlement allows the
Company to capitalize all documented well number 8 costs as plant-in-service. Additional
plant-in-service referenced in the Company's Application will be capitalized, so long as the plant
has not been previously capitalized and is supported by invoices and proper documentation. The
Settlement also allows for the capitalization of certain plant-in-service items placed into service
after 2008, such as meters, wells, and repairs that were improperly expensed by the Company.
The Company will begin depreciating this newly capitalized plant as ifjust placed in service,
allowing for depreciation of the full amount.
Expenses
The Settlement corrects multiple accounting errors discovered by Staff during the audit in
which shared costs were not properly allocated between regulated and non-regulated operations.
The parties agree that Staff s adjustments to the Company's revenue requirement for a
reallocation of costs between the Company and the owners' comingled construction business are
reasonable.
The Settlement allows the Company to include in its revenue requirement office rent of
$950 per month. Staff s audit discovered that the Company had improperly booked its office
space rent in the past. The parties agree that including $950 per month in office space rent is a
reasonable market based rent for the water company share of the office space. It is also a
reasonable compromise.
4STAFF COMMENTS JANUARY 16,2019
Additionally, the Company will be allowed to include a higher increase for water testing
costs in its revenue requirement. Normalized costs over a nine-year testing cycle better reflect
the true cost of testing.
Surcharge Balances
The Company has three surcharge balances that will be used for the benefit of customers.
These balances arise from three separate surcharges: (a) a current surcharge on hook-up fees in
the amount of $100; (b) a current surcharge on hook-up fees in the amount of $500; and (c) the
remaining balance from the discontinued temporary surcharge, last authorized in Case. No.
EAG-W-09-01, Order No. 30936.
As of July 12,2018, the total balance in the three accounts was $365,580. Any additional
surcharge amounts collected between July 12,2018, and the time that the current surcharges are
discontinued will also be used for the benefit of customers.
The surcharge balances are to be used by the Company as a line-of-credit. The Company
may use the funds but the funds must be repaid. The funds from the surcharges are customer
money, and this arrangement assures that the customers will receive the benefit from the
surcharge funds. Additionally, the Company will deposit $45,288 of overearnings annually into
the surcharge line-of-credit account beginning with the year 2016. This provides an additional
$ 135,864 ($45,288 for the years 2016,2017 , and 2018). Therefore, the total in the line-of-credit
account of $501,444 should be available for the Company to use for future plant investments for
the benefit of customers.
Miscellaneous
The parties have agreed that the Company will provide Staff with quarterly reports of
costs and expenses, and that Staff will conduct routine audits to ensure proper booking of
expenditures. Additionally, the Company and Staff will work together to provide necessary
updates to the Company's tariff language.
STAFF RECOMMENDATIONS
The proposed Settlement represents a fair resolution of all issues identified by Staff
during audit. The Settlement is just, fair, and reasonable and in the public interest. Accordingly,
Staff recommends its approval.
5STAFF COMMENTS JANUARY 16,2019
Respectfully submitted this tb day ofJanuary 2019.
Deputy Attorney General
Technical Staff: Kathy Stockton
Michael Morrison
Chris Hecht
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6STAFF COMMENTS JANUARY 16,2019
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS I6TH DAY OF JANUARY 2019,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. EAG-W-15-01, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
MOLLY O'LEARY
BIZCOUNSELOR AT LAW
1775 W STATE ST #150
BOISE ID 83702
E-MAIL : molly(4).bizcounseloratlar.v.com
ROBERT V DESHAZO, JR.
PRESIDENT
EAGLE WATER COMPANY, INC.
P.O. BOX 455
EAGLE ID 83515
E-MAIL: eaglewaterco(#)gmail.com
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SECRETARY/-
CERTIFICATE OF SERVICE