flsw01.1swahresmfussmjm.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

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 APPLICATION OF FALLS WATER COMPANY, INC. FOR AUTHORITY TO INCREASE ITS RATES AND CHARGES.
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CASE NO. FLS-W-01-1

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on September 28, 2001, submits the following comments.
On July 9, 2001, Falls Water Company, Inc. (Falls Water) 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 requests authorization of a 38.0% increase in water rates as follows:
( Increase flat rate residential customer monthly charges from $10.00 to $13.90.
( Increase the residential metered rate from $10.00 for the first 20,000 gallons and $.37 per 1,000 gallons in excess of 20,000 gallons to $12.65 for the first 10,000 gallons and $.37 per 1,000 gallons in excess of 10,000 gallons.
( Increase the commercial metered rate from $10.00 for the first 20,000 gallons and $.37 per 1,000 gallons in excess of 20,000 gallons to $13.25 for the first 10,000 gallons and $.37 per 1,000 gallons in excess of 10,000 gallons.

Falls Water also proposes to:
( Eliminate the Metered Commercial Service Seasonally Read rate.
( Establish tiered hook-up fees based on the size of the water meter installed.
Standard ¾” meter hook-up fee 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
( Increase the reconnection fees from $14.00 during office hours to $20.00 during office hours and from $28.00 for after hours to $40.00 for after hours.
( Institute a service charge for delinquent accounts in the amount of 1.5% per month with a $.50 minimum.
( Except for these charges, the tariffs on file with the Commission will remain the same.

Staff’s comments on the Company’s Application are as follows:

REVENUE REQUIREMENT
Staff has reviewed the Company’s Application in this case and has conducted a field audit of the Company’s financial records. Staff cannot support the revenue increase requested in the Company’s Application for $91,180.09 (38.0%) with a 12% return on equity. Based on its analysis of the Company’s financial condition, Staff recommends an increase in the Company’s revenues in the range of $26,214.02 (8.35%) with a 10% return on equity to $31,198.45 (9.94%) with a 12% return on equity. Attachment A consists of a copy of Staff’s Audit Report.
Attachment A, Schedule No. 1 enumerates a number of exceptions to the way the Company has accounted for various expenses. First, Staff has identified $47,220.35 of the Company’s reported operating expenses that should be capitalized and recognized in the Company’s rate base. Second, adjustments to the Company’s Application to recognize these exceptions requires adjustments to the Company’s reported depreciation expense and accumulated depreciation accounts. Finally, Staff has identified revenues and expenses associated with a non-contiguous, uncertificated water system (Black Hawk Estates) that should be removed from operations. For more detail on these two adjustments, refer to the body of the Staff Audit Report, Attachment A.
Attachment A, Schedule No. 2 presents the Company’s Result of Operations as filed by the Company and as adjusted by the Staff for the items detailed in Schedule No. 2 and explained in the Audit Report. The Company reported a loss of $19,883.89 for the 2000 test year. After making the adjustments proposed by Staff, the 2000 test year showed a net loss of $1,291.90 or a negative return on equity of 0.52%. This amount is substantially less than the previously authorized rate of return on assets of 12%. Staff therefore believes a rate increase is reasonable to allow the Company to continue to provide a reserve fund for needed upgrades and services.
Attachment A, Schedule No. 3 develops Staff’s alternative revenue increase amounts of $26,214.02 and $31,198.45. These revenue increases represent increases of 8.35% and 9.94% of the revenues billed to customers in the 2000 test year based on providing a return on equity in the range of 10% to 12%. The capital structure of the Company for all practical purposes is composed entirely of owner’s equity and therefore is synonymous with rate base. The Commission has for several years been using 12% as a reasonable return on equity for small water companies in recognition of the increased risk associated with a small customer base. Falls Water’s Application included a return on rate base of 12%. However, the cost of capital has been declining over the past year due to the declining economic conditions and reductions of interest rates by the Federal Reserve Board.
As a not-for-profit corporation, Falls Water is not permitted to distribute earnings of the corporation to its shareholders. Any profit realized from the operation must be used to either improve the water system or be held to meet unexpected repair and maintenance costs.
Staff believes that a 10% return is adequate to build a reserve and agrees that a reserve is appropriate given the expansion needs of the Company and the accounts payable to affiliates for prior system upgrades that needs to be paid down. A reserve fund is also useful to smooth out the cash flow concerns that the Company has. The 12% benchmark return used by the Commission for water companies would build the reserve faster and could provide funds for system expansion and improvements sooner. Even with the 12% return, the revenue per customer required would still be among the lowest rates of any regulated water utility in Idaho (See Attachment B).

RATE DESIGN
The following tables and Attachment C are a summary of existing, Company proposed and Staff Proposed rate designs.

Falls Water Company Inc. Summary of Existing Rates Schedule Description Minimum Charge Quantity Included Quantity Charge Flat Rate OCT-MAR
Flat Rate C-1 Flat Rate Commercial $ 10.00 20,000 Gal. $ 0.30 $ 10.00 NA C-2 Comm. Read Yr. Round $ 10.00 20,000 Gal. $ 0.30 NA NA R-1 Metered Residential $ 10.00 20,000 Gal. $ 0.30 $ 10.00 NA R-2 Flat Rate Residential NA NA NA NA $ 10.00 R-3 Residential Multi-Family $ 10.00 Per Dwelling Unit Vacant or Occupied

Falls Water Company Inc. Company Proposed Rates Schedule Description Minimum Charge Quantity Included Quantity Charge Flat Rate OCT-MAR
Flat Rate C-1 Flat Rate Commercial Eliminate C-2 Comm. Read Yr. Round $ 13.25 10,000 Gal. $ 0.37 NA NA R-1 Metered Residential $ 12.65 10,000 Gal. $ 0.37 $ 12.65 NA R-2 Flat Rate Residential NA NA NA NA $ 13.90 R-3 Residential Multi-Family $ 10.00 Per Dwelling Unit Vacant or Occupied

Falls Water Company Inc. Staff Proposed Rates (10% Return on Equity) Schedule Description Minimum Charge Quantity Included Quantity Charge Flat Rate OCT-MAR Flat Rate C-1 Flat Rate Commercial Eliminate C-2 Comm. Read Yr. Round $ 10.00 20,000 Gal. $ 0 .31097 NA NA R-1 Metered Residential $ 10.00 20,000 Gal. $ 0 .31097 $ 10.00 NA R-2 Flat Rate Residential NA NA NA NA $ 13.51 R-3 Residential Multi-Family $ 13.51 Per Dwelling Unit Vacant or Occupied
Falls Water Company Inc. Staff Proposed Rates (12% Return on Equity) Schedule Description Minimum Charge Quantity Included Quantity Charge Flat Rate OCT-MAR Flat Rate C-1 Flat Rate Commercial Eliminate C-2 Comm. Read Yr. Round $ 10.00 20,000 Gal. $ 0 .32984 NA NA R-1 Metered Residential $ 10.00 20,000 Gal. $ 0 .32984 $ 10.00 NA R-2 Flat Rate Residential NA NA NA NA $ 13.73 R-3 Residential Multi-Family $ 13.73 Per Dwelling Unit Vacant or Occupied
While there are an infinite number of possible rate designs “…the basic objective of a rate study should be the development of a rate structure that will attain the maximum degree of equitability among customers, will be consistent with local practice and conditions, and will be in the best interest of both the community and the utility.”
Staff therefore used the existing rates as a basis for Staff’s proposed rate design. The primary differences between the rate proposal of the Company and Staff are Staff adjustments to the 2000 test year. Staff’s recommended reduction in the revenue requirement proposed by the Company, significantly reduced the necessary rate increase.
Staff’s proposed rates are based on a revenue requirement of $312,301 or $317,286 for a 10% or 12% respective return on equity on 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). While, the Company’s rate proposal spreads the increase over all customer classes except multi-family, it significantly over recovers Staff’s recommended revenue requirement.
Staff agrees with the Company that flat rate customer charges should be higher than metered customers’ minimum charge. Staff, however, disagrees with the Company’s methodology used to establish that charge. Staff’s rate methodology recovers the recommended revenue requirement by properly allocating costs based on the equivalent usage of all customer classes. Staff’s rate methodology first adjusts the existing flat rate (average usage of 31,304 gallons see Attachment D) to an equivalent metered customer charge. Adjustment #1 adds $3.39 to flat rate customer charges. Adjustment #1 is insufficient to recover all of Staff’s recommended revenue requirement therefore additional adjustments were necessary. Staff’s second adjustment increases commodity rates to recover the balance of the revenue requirement. Staff’s final adjustment increases the flat rate charges for the additional incremental increase in commodity charges (See Attachment E and F).
Staff disagrees with the Company’s proposal to increase commercial customer charges more than residential customer charges. Staff does not believe the Company has provided sufficient data to justify the difference. Based on the information provided by the Company, Staff has no way of determining that a higher minimum charge for commercial customers is warranted.
Staff agrees with the Company’s proposal to read commercial meters throughout the year. Reading commercial customers’ meters every month will eliminate the current inconsistent billing practices. Currently there are a number of commercial customers such as churches and schools that are billed multiple minimum charges and no commodity charge. The Company has indicated that it has installed meters for all commercial customers. Staff recommends approval of the Company’s proposal to read all commercial customers’ meters monthly and eliminate the commercial flat rate tariff, Schedule C-1.
Staff also reviewed the Company’s request to reduce the amount of the commodity usage in the minimum charge from 20,000 gallons to 10,000 gallons. Staff’s bill frequency analysis does not indicate a need to reduce the quantity included in the minimum as proposed by the Company. Therefore, Staff recommends retaining the current 20,000 gallon usage included in both the commercial and residential metered customers’ minimum charges.
In summary, Staff recommends retaining existing metered residential and commercial minimum charges, slightly increasing metered customers commodity charges, eliminating the commercial customer flat rate charges, and increasing flat rate charges to residential and multi-family customers. The following represents an average summer month’s bill for the various residential customer classes.

OTHER TARIFF CHANGES
Schedule No. R-2 – Residential Flat Rate Service
Staff recommends retaining the existing eligibility included in Tariff Schedule R-2. The Company requested change would allow flat rate service in any lot less than 6000 square feet. The current flat rate service is only for specific developments that include only existing customers. To allow flat rate service to any customer on less than 6000 square feet may encourage growth in the unmetered category and that would be detrimental to the system.
Schedule No. M – Hook-Up Fees
Staff has no objection to the Company’s proposal to include new rates for larger meters as an option to its current hook-up fees. The Company’s analysis appears to accurately reflect additional costs incurred for new service hookups. Staff did not review the original base charges in the hook-up fee calculation and further analysis may be necessary should an increase to base rates be requested. Proper accounting for the hook-up fees is addressed in Attachment A, Staff Audit Report.

Schedule No. M – Service Charges
Falls Water requests authorization to institute a service charge for delinquent accounts in the amount 1.5% per month with a $.50 minimum. Historically, the Commission has allowed gas and electric utilities to assess interest charges because of severe restrictions which curtail those utilities' ability to disconnect service during the months of December, January, and February. Because no such restrictions exist for water or telecommunications utilities and because a basic monthly charge is often billed in advance (as is the case with Falls Water), the Commission has denied late fees and interest.
In recent years the Commission approved a late payment charge and/or interest charged to non-paying customers of a few small water companies with little ability to easily discontinue water service, i.e., no shut-off valves or non-metered service. Falls Water Company 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. The Company reduced its accounts receivable from $37,887 in May 1999 to $16, 778 in July 2001 after it implemented disconnect procedures as allowed in the Customer Relations Rules. This demonstrates the effectiveness of service disconnection as a collection tool.
The Company requests that non-recurring reconnect charges be increased from $14.00 to $20.00 if reconnection occurs during office hours, and increased from $28.00 to $40.00 if reconnection occurs after office hours. The Company provided an analysis of costs associated with reconnection. Staff supports these increases. The proposed fees are similar to reconnection charges approved for other companies and provide reasonable compensation for work performed.

SARGENT WATER SYSTEM
In 1997, Falls Water Company purchased a water system called Sargent Water that served customers in the Grayson Subdivision located near the existing Falls Water system. The Sargent Water system consisted of 12-13 customers on a well with a two-inch line running to each house. There are no meters. Falls Water applied to the Commission to serve the area in Case No.
FLS-W-98-01. Order No. 27616 authorized the Company to serve the Sargent customers at Sargent’s flat-rate of $25 per month for an interim period of one year.
Falls Water was also ordered to do some specific things including filing an amended certificate. One of the items the Company was to accomplish was the installation of a well meter to track the water used by the customers. The Company was also ordered to track the expenses so that in one year’s time the Commission could set the rates for these customers. The Company made no filing and did not keep track of costs separately. The Company has only recently installed the meter and has not kept track of the Sargent costs separately. Staff believes that the Sargent customers should not be treated differently from the 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. Staff has reviewed this option with the Company and they agree that it would be appropriate to charge all the fixed-rate customers the same.

CONSUMER STAFF COMMENTS
Falls Water provided customers with a notice of the proposed rate increase as required by Utility Customer Information Rules [UCIR] 102. The Company gave the percentage increase it requested, but did not mention the dollar amount as required by the rule. The notice also does not specifically state this is a “proposal” subject to public review and Commission decision. It does say the Application is on file at Falls Water Company office for examination. Although the Company’s notice is deficient in several respects, Staff does not recommend that the Application be returned for incompleteness as could be required under UCIR 102.05. Sufficient customer notification has been provided in this particular instance. However, Staff recommends that the Commission encourage the Company to review notice requirements and fully comply with the rules in its next application.
Falls Water Company's Information Pipeline pamphlet gives customers good over-all information on several subjects. It includes water rates and a summary of termination rules as required by IPUC Utility Customer Relations Rules [UCRR] 701.
Its billing statements meet UCRR Rule 201 requirements and gives customers several ways, including a web address, to reach the Company.
Consumer Staff notes that two changes are needed to bring the Company’s 7-day and 24-hour disconnect notices into compliance with PUC rules. As required by UCRR 603.02 the Company needs to add a statement to its 7-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.
Only two Falls Water customers have contacted the Commission since 1998. The 1998 contact was not a complaint, but rather an inquiry regarding a statement found on the Company’s rules summary. The recent contact was an objection to the 38% proposed rate increase request with the customer saying that inflation isn't at that level and salaries have not increased 38% in the past three years.

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 the 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. Staff recommends that the customers be billed according to the cost of service of the system after those costs can be determined or that the Company enter into a cost-based service agreement to manage the system.

STAFF RECOMMENDATIONS
Staff recommends the following:
A revenue increase in the range of $26,214.02 (8.35%) to $31,198.45 (9.94%) based on a 10% to 12% return on equity.
Implementation of Staff’s rate design.
Cancellation of the Company’s flat rate commercial tariff Schedule C-1.
Retention of the eligibility criteria currently included in the Company’s tariff Schedule R-2.
The customers in the Grayson subdivision (previously Sargent Water) be charged for water service at Falls Water’s residential fixed-rate customer tariff Schedule R-2.
Adopt the Company’s proposed hook-up fees.
Adopt the Company’s proposal to increase the reconnection charges.
Deny the assessment of late fees and the interest charges on past due accounts.
That the Company provide the Commission copies of its 7-day and 24-hour disconnect notices after the Company adds the two required statements.
That for future rate increase applications, the Company needs to fully meet Utility Customer Information Rule requirements as found in UCIR 102.
Require the Company to begin accounting for the hook-up fees as outlined in the Staff Audit Report.

Respectfully submitted this day of October 2001.

__________________________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Alden Holm
Michael Fuss
Marge Maxwell

SW:AH:RES:MJM:MFUSSmisc\comments\flsw01.1swahresmfussmjm
In Case No. FLS-W-97-01, Order No. 27110 was issued that allowed the Company, a non-profit corporation, the opportunity to earn 12% on rate base to establish a reserve for current and future needs. That reserve has been depleted.
Manual of Water Supply Practices-Water Rates, AWWA M1, American Water Works Association, 1991, page 33.

STAFF COMMENTS 11 OCTOBER 19, 2001

Sheet3
Sheet2
data
Ave bil cht
Falls Water Company Inc.
Summary of Existing Rates
Schedule
Description
Minimum Charge
Quantity Included
Flat Rate OCT-MAR
C-1
Commercial Service
NA
C-2
Comm. Read Yr round
Quantity Charge
R-1
Metered Residential
R-2
Flat Rate Residential
R-3
Residential Multi-Family
Per Dwelling Unit Vacant or Occupied
20,000 Gal.
Company Proposed Rates
Staff Proposed Rates
10,000 Gal.
Eliminate
Existing Rates
Average Summer Monthly Bill
Flat Rate
Staff Prop (10%)
Staff Prop (12%)
Company Prop
$10.00
$0.30
$10.00
$16.23
10.00
0.30
20.76
$24.03
30.76
$16.46
10.00
0.31
20.76
$16.85
10.00
0.33
20.76
$10.00
$0.30
$10.00
$13.90
$13.51
$13.73
$10.00
$0.30
$10.00
$10.00
$10.00
$13.51
$13.73
$10.00
$10.00
$13.25
$0.37
$12.65
$0.37
$12.65
$13.90
$10.00
$10.00
$0.30
$10.00
$0.30
$10.00
$13.75
$13.75
Existing Rates
Company Prop
Staff Prop (10%)
Staff Prop (12%)
Falls Water Company Inc.
Average Summer Monthly Bill
Metered Residential
Metered Residential
Metered Residential
Metered Residential
Flat Rate Residential
Flat Rate Residential
Flat Rate Residential
Flat Rate Residential
Residential Multi-Family
Residential Multi-Family
Residential Multi-Family
Residential Multi-Family
16.23
24.03
16.46
16.85
10.00
13.90
13.51
13.73
10.00
10.00
13.51
13.73