28907.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

in the matter of THE APPLICATION OF FALLS WATER COMPANY, INC. FOR AUTHORITY TO INCREASE ITS RATES AND CHARGES. )
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CASE NO. FLS-W-01-1

ORDER NO. 28907

On July 9, 2001, Falls Water Company, Inc. (Falls Water; Company) filed an Application with the Idaho Public Utilities Commission (Commission) in Case No. FLS-W-01-1 requesting authorization to increase its rates and charges for water service. Falls Water states that its Application is needed because it is currently operating at a loss. Falls Water is an Idaho not-for-profit corporation and is therefore not authorized to make any distributions of return on investment to owners, but can utilize retained earnings for expansion and improvements.
Falls Water notes that it has not made application for a rate increase since May 1997. At that time, an increase of 21.64% was granted. Reference Case No. FLS-W-97-1, Order No. 27110. Falls Water attributes its filing in this case to the age of some of its system and the need for more frequent repairs. Included with the Company’s filing were balance sheets, income statements, rate base calculations, explanation of rate calculations and proposed tariffs.
On July 31, 2001, the Commission issued a Notice of Application and directed the Commission Staff (Staff) to recommend further scheduling following its audit of Company books. On September 28, 2001, the Commission preliminarily determined that the public interest might not require a hearing to consider the issues presented and that the issues raised by the Application could be processed under Modified Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of Procedure, IDAPA 31.01.01.201-204. Staff was directed to file its report and comments with the Commission by October 19, 2001. The Company was given until November 2, 2001 to file reply comments. The customer deadline for filing written comments or protests with respect to the Application and the Commission’s use of Modified Procedure in Case No. FLS-W-01-1 was November 14, 2001. No comments from customers were received.
The Commission has reviewed and considered the filings of record including Staff’s comments and Audit Report and the Company’s reply. We continue to find it appropriate to process this case pursuant to Modified Procedure. Reference IDAPA 31.01.01.204. By this Order the Commission authorizes an annual increase in revenue for Falls Water of $31,198 or 9.94%. The issues, comments and the Commission’s related findings are set forth below.

REVENUE REQUIREMENT, RETURN ON EQUITY, RATE BASE, TEST YEAR
The Company in its Application requested a revenue increase of $91,180 or 38%. The Company proposes a year 2000 test year for operation expense, revenue and return. Included in its revenue requirement is a requested 12% return on equity calculated on a rate base of $216,648.
As reflected in Staff’s Audit Report, the capital structure of Falls Water Company is composed entirely of owner’s equity. Staff calculated a rate base of $249,221 (Audit Report Sch. 3). Based on its analysis of the Company’s financial condition, Staff recommends a revenue increase in the range of $26,214 (8.35%) with a 10% return on equity to $31,198 (9.94%) with a 12% return on equity. The related respective revenue requirements are $312,301 (10% ROE) or $317,286 (12% ROE). Staff notes that Falls Water is a non-for-profit corporation and cannot and will not distribute profits. In Case No. FLS-W-97-1 (Order No. 27110), the Commission allowed the Company to earn 12% on rate base to establish a reserve for current and future needs. That reserve, Staff states, has been depleted.
Staff in its Audit Report enumerates a number of exceptions to the way Company has accounted for various expenses. Staff identified $47,220 of the Company’s reported operating expenses for year 2000 that should be capitalized and recognized in rate base (with related adjustments for depreciation). Staff also identified revenues and expenses associated with a non-contiguous, uncertificated water system (Black Hawk Estates) that Staff contends should be removed from operations.
The Company in its Application reported a loss of $19,884 for the 2000 test year. With Staff adjustments, the 2000 test year showed a net loss of $1,292 or a negative return on equity of (0.52%). Staff believes a rate increase is reasonable to allow the Company to continue to provide a reserve fund for needed upgrades and services.
Staff notes that the cost of capital has been declining over the past year due to declining economic conditions and reductions of interest rates by the Federal Reserve Board. Staff believes that a 10% return on equity is adequate to build a reserve and agrees that a reserve is appropriate given the expansion needs of the Company and the accounts payable balance to affiliates for prior system upgrades. A 12% return would build the reserve faster and could provide funds for system expansion and improvements sooner.
The Company in its reply comments agrees with Staff’s operating expense adjustments and calculation of rate base. The Company believes that Staff’s recommendation will allow Falls Water to operate viably and prepare for future needs. Noting that any return on equity will be utilized by the Company to modernize and improve the water system and to improve better service to its customers, the Company renews its request for a 12% return on equity.
We Find
The Commission based on its review of the record, finds it reasonable to approve for Falls Water a test year of 2000, a revenue requirement of $317,286, a related revenue increase of $31,198 (9.94%) and a 12% return on equity calculated on a rate base of $249,221. Reference Staff Audit Report, Sch. 3.

RATE DESIGN
The following tables are a summary of existing, Company proposed and Staff proposed rate designs:

Falls Water Company Inc. Schedule C-1 Flat Rate Commercial Minimum Charge ($) Quantity Included (Gallons) Quantity Charge ($/Gallon) Flat Rate OCT-MAR ($) Flat Rate ($) Existing $10.00 20,000 $0.30 $10.00 NA Company Proposal Eliminate Staff Proposal Eliminate Schedule C-2 Metered Commercial Minimum Charge ($) Quantity Included (Gallons) Quantity Charge ($/Gallon) Flat Rate OCT-MAR ($) Flat Rate ($) Existing $10.00 20,000 $0.30 NA NA Company Proposal $13.25 10,000 $0.37 NA NA Staff Proposal $10.00 20,000 $ 0 .32984 NA NA Schedule R-1 Metered Residential Minimum Charge ($) Quantity Included (Gallons) Quantity Charge ($/Gallon) Flat Rate OCT-MAR ($) Flat Rate ($) Existing $10.00 20,000 $0.30 $10.00 NA Company Proposal $12.65 10,000 $0.37 NA NA Staff Proposal $10.00 20,000 $ 0 .32984 NA NA Schedule R-2 Flat Rate Residential Minimum Charge ($) Quantity Included (Gallons) Quantity Charge ($/Gallon) Flat Rate OCT-MAR ($) Flat Rate ($) Existing NA NA NA NA $10.00 Company Proposal NA NA NA NA $13.90 Staff Proposal NA NA NA NA $13.73 Schedule R-3 Residential Multi-Family Minimum Charge ($) Quantity Included (Gallons) Quantity Charge ($/Gallon) Flat Rate OCT-MAR ($) Flat Rate ($) Existing $10.00 Per Dwelling Unit Vacant or Occupied Company Proposal $10.00 Per Dwelling Unit Vacant or Occupied Staff Proposal $13.73 Per Dwelling Unit Vacant or Occupied
Staff’s proposed rates at our approved 12% return on equity are based on a revenue requirement of $317,286 and a rate base of $249,221. Staff’s proposal provides only a slight increase to metered customers and a greater cost recovery from flat-rate customers including mobile home parks and Grayson Subdivision (formerly Sargent Water).
Staff agrees with the Company that flat-rate customer charges should be higher than the minimum charge for metered customers. Staff’s rate design recovers the recommended revenue requirement by allocating costs based on equivalent usage of all customer classes. Reference Staff Comments, Attachments D, E, & F.
Staff contends that Falls Water has provided no information or data to support its proposal to increase commercial customer charges more than residential customer charges. The Company, Staff notes, has installed meters for all commercial customers. Staff agrees with the Company’s Response proposal to read all commercial meters monthly and eliminate the commercial flat-rate tariff, Schedule C-1.
The Company in its proposal requests a reduction in the amount of commodity usage in the minimum charge from 20,000 gallons to 10,000 gallons. Staff’s bill frequency analysis does not support this reduction. Staff recommends retaining the current 20,000-gallon usage allowance included in both the commercial and residential customers’ minimum charges.
Falls Water in its reply comments agrees with the Staff’s rate design recommendations. The Company in its response notes its intent to read all commercial meters monthly, to charge metered customers for winter use above the minimum amount, and to eliminate the commercial flat rate tariff, Schedule C-1.
We Find
The Commission finds it reasonable to retain the existing metered residential and commercial minimum charges and commodity allowance. With the metering of all commercial customers we find it reasonable to eliminate the commercial customer flat-rate charges. We find the rate design proposed by Staff and agreed to by the Company to be fair, just and reasonable. It fairly reflects the respective usage of metered and flat rate customers and is an equitable way to recover the Company’s revenue requirement. Reference Idaho Code § 61-503.

SCHEDULE NO. R-2—RESIDENTIAL FLAT-RATE SERVICE (eligibility requirements)
The Company in its Application requests a change in tariff eligibility that would allow flat-rate service in any lot less than 6,000 square feet. The current flat-rate service is only for specific developments that include only existing customers. Staff recommends retaining the existing eligibility requirements included in tariff Schedule R-2. To allow flat-rate service to any customer on less than 6,000 square feet, Staff contends, may encourage growth in the unmetered category to the detriment of the Company’s water system.
Falls Water in its reply agrees with Staff’s recommendation to retain the existing eligibility requirements included in tariff Schedule R-2 for residential flat-rate service.
We Find
The Commission finds it reasonable to retain the existing tariff Schedule R-2 eligibility requirements. Water is a precious commodity that should be conserved and used wisely. Without meters it is difficult to convey to customers the true value of water or provide pricing signals or incentives to conserve.

SCHEDULE NO. M—HOOK-UP FEES
The Company in this case proposes to establish tiered hook-up fees based on the size of the water meter installed:
Standard ¾" meter hook-up will remain unchanged at $500.
Proposed 1" meter hook-up fee of $600.
Proposed 1½" meter hook-up fee of $825.
Proposed 2" meter hook-up fee of $900.
Staff recommends approval of the Company’s hook-up fee proposal. The Company’s analysis, Staff contends, appears to accurately reflect additional costs incurred for new service hook-ups of 1", 1½", and 2" meters.
We Find
The Commission finds the Company’ proposed schedule of hook-up fees rates for 1", 1½" and 2" meters to be reasonable.

SCHEDULE NO. M-SERVICE CHARGES
The Company in its Application requests authorization to initiate a service charge for delinquent accounts in the amount of 1.5% per month with a 50¢ minimum.
Historically, Staff notes, because no seasonal moratorium restrictions exist for water or telecommunication utilities and a basic monthly charge is often billed in advance, the Commission has denied late fees and interest. In recent years, however, the Commission approved a late payment charge and/or interest charge to non-paying customers of a few small water companies with little ability to easily discontinue water service. Falls Water, Staff notes, has the ability to disconnect water service. Staff recommends that neither a late fee nor an interest charge be allowed, but encourages the Company to continue to utilize Customer Relations Rules 302 and 313 to reduce the Company’s accounts receivable.
Falls Water in its reply comments agrees with Staff’s recommendation.
We Find
For reasons detailed in Staff’s comments and because of options available to the Company under the Customer Relations Rules, the Commission finds it reasonable to deny Falls Water request to assess a late payment or interest charge to non-paying customers.

RECONNECTION CHARGES
The Company proposes to increase non-recurring reconnection charges from $14 to $20 if reconnection occurs during office hours and from $28 to $40 if reconnection occurs after hours.
Staff supports the proposed increase. The Company has provided an analysis of costs associated with reconnection. The proposed fees, Staff contends, are similar to reconnection charges approved for other companies and provides reasonable compensation for work performed.
We Find
The Commission finds the proposed increase in reconnection charges to be fair and reasonable.

GRAYSON SUBDIVISION (formerly Sargent Water System)
In 1997 Falls Water purchased the Sargent Water System, an unmetered system that serves approximately 13 customers in the Grayson Subdivision. In approving the purchase, the Commission authorized Falls Water to serve the Sargent customers at Sargent’s flat-rate of $25 per month for an interim period of one year, during which time the Company was to install a well meter and track Sargent expenses. The Company, Staff states, only recently installed the well meter and has not kept track of Sargent costs.
Staff believes that the Sargent customers should not be treated differently from other fixed-price customers when there is no evidence that it costs more to serve them. Staff recommends that water service to the Grayson Subdivision customers be priced at the Company’s flat-rate residential tariff.
The Company in its reply comments agrees with Staff’s proposal.
We Find
We find that there is no record or evidence that supports charging Grayson Subdivision customers differently from other residential flat-rate customers. Reference Idaho Code 61-315—Discrimination and Preference Prohibited. We find it reasonable to switch the Grayson Subdivision customers to the Falls Water Schedule R-2 flat-rate residential tariff.

UTILITY CUSTOMER RELATIONS RULES
Staff notes that two changes are needed to bring the Company’s seven day and twenty-four hour disconnect notices into compliance with the Commission's Utility Customer Relations Rules. As required by UCRR 603.02, the Company needs to add a statement to its seven-day notice which indicates that “service will not be terminated prior to the resolution of a filed complaint.” Additionally, a bold print statement saying the utility is willing to make payment arrangements is needed to satisfy the UCRR 305 requirement.
Falls Water in its reply comments agrees with Staff’s recommendations. Changes to the Company’s 7-day and 24-hour disconnect notices have already been made.
We Find
The Commission acknowledges the Company’s compliance with the Utility Customer Relations Rules.

BLACK HAWK ESTATES
Black Hawk Estates is a separate, non-contiguous water system. Falls Water does not own the system, and it is not certificated. On February 1, 2000, the Company agreed to take on the responsibilities associated with managing, operating and maintaining the system from the subdivision developer until January 31, 2004. The Company agreed to take over the water system because the developer hoped to sell many more lots than are currently being occupied. Currently, there are only six to eight lots developed and occupied. The customers are being billed the same rate as other metered Falls Water customers are billed. However, because there are so few customers, there are not sufficient revenues to support the expenses associated with the system. Staff recommends removal of the revenues and expenses associated with the Black Hawk Estates water system because of the speculative nature of the agreement and the four-year term. If service is to continue, Staff recommends that the Company enter into a cost-based service agreement to manage the system.
Falls Water in its reply comments agrees with Staff’s recommendation. The Company is reviewing options for dealing with the Black Hawk Estates issue.
We Find
The Commission finds it reasonable to remove Black Hawk Estates revenue and expense from the Company's 2000 test year. The Company is expected to apprise the Commission of its plans regarding continued water service to Black Hawk Estates.

CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over this matter and Falls Water Company, Inc., a water utility, pursuant to the authority and power granted under Title 61 of the Idaho Code and the Commission’s Rules of Procedure, IDAPA 31.01.01.000 et seq.

O R D E R
In consideration of the foregoing and as more particularly described above, IT IS HEREBY ORDERED and the Commission in Case No. FLS-W-01-01 does hereby
Approve a test year of 2000.
Approve a rate base of $249,221 and a return on equity of 12%.
Approve revenue requirement of $317,286, a revenue increase of $31,198 (or 9.94%).
Approve the rates reflected in the foregoing schedule entitled “Staff Proposed Rates (12% return on equity).”
Authorize cancellation of the Company’s flat-rate commercial tariff Schedule C1.
Require retention of the eligibility criteria currently included in the Company’s tariff Schedule R-2.
Require that the customers in the Grayson Subdivision (previously Sargent Water) be charged for water service at Falls Water flat-rate residential tariff Schedule R-2.
Authorize the Company’s proposed Schedule No. M Hook-up Fees for 1", 1½" and 2" meters.
Require the Company to begin accounting for hook-up fees as outlined in the Staff’s Audit Report.
Authorize the Company’s proposed increase in reconnection charges.
Deny the Company’s proposal to assess late fees and interest charges on past-due accounts.
Require the Company to provide the Commission copies of its 7-day and 24-hour disconnect notices after the Company adds the two required statements.
Require that the Company by subsequent report apprise the Commission of its proposed resolution to service to Black Hawk Estates.
IT IS FURTHER ORDERED and the Commission does hereby direct the Company to file compliance tariffs and authorizes the foregoing changes to rates and charges for Falls Water Company, Inc. for an effective date of December 1, 2001.
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.

DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of December 2001.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

vld/O:FLS-W-01-01_sw2

ORDER NO. 28907 1

Office of the Secretary
Service Date
December 5, 2001