20031212Final Order No 29397.pdf

Office of the Secretary
Service Date
December 12, 2003
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.ORDER NO. 29397
CASE NO. FLS-O3-
On July 25 2003, Falls Water Company (Falls Water; Company) filed an Application
with the Idaho Public Utilities Commission (Commission) requesting authority to increase its
revenue requirement by $129 564.25 (38%). The Company also submitted proposed changes in
base rates and commodity charges. By this Order the Commission authorizes an annual increase
in revenue for Falls Water of $82 241 or 24% and approves related changes in tariff rates. Falls
Water is an Idaho not- for-profit corporation and holder of Certificate of Public Convenience and
Necessity No. 236. Falls Water provides water service in the Idaho Falls area to approximately
507 metered residential customers 11 multi-family residential customers, 30 metered
commercial customers, and 574 flat rate residential customers.
The issues, comments and the Commission s related findings are set forth below.
The Commission has reviewed and considered the filings of record in Case No. FLS-03-
including the analysis, comments and recommendations of Commission Staff and the Company
Reply. We have also reviewed our prior rate Orders in Case Nos. FLS-97-1 (Order No.
27110) and FLS-Ol-l (Order No. 28907). We continue to find it appropriate to process this
Application without a technical hearing and based on the written filings of record. Reference
IDAPA 31.01.01.204.
APPLICATION
Falls Water maintains that an increase in rates is needed to keep up with the
increased costs of maintenance and replacement of aging infrastructure and to improve its
customer service response.
Falls Water in its Application states as follows:
That the need for filing its Application has come about due to the fact that the
Company is currently operating at a loss. The requested increase in charges, it
states, will result in revenues sufficient to pay for the current operating
ORDER NO. 29397
expenses and provide a small return, which will be held by the corporation for
system improvements and replacement.
The aging of many of the infrastructure assets of the Company is requiring
more repair and replacement. Currently, about 900 of the 1500 meters in the
system are in need of replacement over the next ten years. The annual
replacement cost for 93 1/4" meters is $13 050. Routine maintenance, the
Company states, is not being done with the frequency that it should be done.
Maintenance on fire hydrants is not being completed as promptly as needed
due to lack of funds and manpower. For the same reason, Falls Water states
that approximately 50 street valves are in disrepair and an additional 25 new
valves have yet to be installed to correct deficiencies of needed street valves in
older portions of the water system. The Company states that a new field
employee was hired in 2003 and that another employee is needed. A study by
its engineer compared the Falls Water Company employee total to the number
of employees in other comparably sized water systems and found that Falls
Water was 1.5 employees short of the average number of employees at the
other water systems.
Included with the Company s filing were balance sheets, income statements, rate base
calculations, explanation of rate calculations and proposed tariffs.
On August 21, 2003, the Commission issued a Notice of Application in Case
No. FLS-03-1 and in Order No. 29317 suspended the Company s proposed October 15, 2003
effective date.
On September 22, 2003 , the Commission issued a Notice of Modified Procedure in
Case No. FLS-03-Reference IDAPA 31.01.01.201-204.public workshop and
opportunity for Falls Water customers to present oral testimony was held in Idaho Falls on
October 8, 2003. No customers attended the workshop. No oral testimony was presented. The
deadline for filing written comments was November 14, 2003. The Commission Staff and one
customer were the only parties to file comments. On November 20, 2003 , the Company filed
Reply Comments.
Reply Comments
In Reply Comments filed by Falls Water on November 20 2003 , the Company states
that it has reviewed Staff s Comments, finds Staff s recommendations acceptable and urges the
Commission to accept Staffs recommendations. The Company requests a December 15 , 2003
effective date.
ORDER NO. 29397
Staff Comments/Recommendations
Staff comments and recommendations in Case No. FLS-03-1 can be summarized
as follows:
Test Year, Rate Base, Return on Equity and Revenue Requirement
Staff reviewed Falls Water s Application and performed a field audit of the
Company s financial books and records. Staff recommends changes to both the rate base
amounts and the revenues and expenses proposed by Falls Water. Staff proposes a total rate base
for Falls Water of $232 116 instead of the $341 553 in Company Application.The Staff
recommended return on equity of 12% equates to annual return on rate base of $27 854. The
Commission, Staff notes, 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. Staff pointed out that in the Company s last rate case, Falls Water was allowed to calculate
rates with an authorized return on investment even though the utility is incorporated as a non-
profit company. Retained earnings for Falls Water by prior Commission direction are to be used
only for capital improvements, repair and replacement. Reference Order No. 28907, Case No.
FLS-Ol-l; Order No. 27110, Case No. FLS-97-
Based on its analysis and use of a Company proposed 2002 test year for operating
expenses with adjustments for known and measurable changes, Staff recommends that the annual
revenue requirement for Falls Water be set at $422 698. This translates to an overall revenue
increase of $82 241 or 24% and compares to the Company s requested increase of $132 745 or
39%. Because the Company has a non-profit status, Staff states that there is no need to gross up
the revenue for income taxes.
We find
In reviewing the filed comments, we find that the Company has agreed with the
analysis and recommendations of the Commission Staff. We find that Staff s recommendations
are based on its audit of Company records and operations. We find that the Staff identified
exceptions and related adjustments to the Company s financial records as reflected in the
Attachment to this Order are proper and in conformance with observed accounting standards.
We find that the resulting schedules accurately reflect the Company s financial profile, rate base
and operations for test year 2002. See Attachment to Order No. 29397.
ORDER NO. 29397
We continue to find a 12% return on equity to be reasonable for Falls Water. In
doing so we acknowledge that small water companies have greater risks than other utilities.
also recognize the operational and economic challenges facing small water companies in their
continuing efforts to provide their customers with safe, potable water. We note that Falls Water
is incorporated as a non-profit entity. In lieu of a return on investment for shareholders, we
continue to direct that the Company s retained earnings be used as a reserve for capital
improvements, repair and replacement as we did in Order No. 27110.
The labor expense adjustments we approve in the calculation of revenue requirement
reflect an increase in customers and the level of additional service required. We find at this time
that a mix of full and part-time employees enables the Company to keep its labor costs
reasonable and commensurate with the manpower level required to furnish, provide and maintain
adequate service. The Company is to be commended for providing a reasonable health insurance
program for its employees as a part oftheir wagelbenefit package.
In the context of the record established in Case No. FLS-03-1 and the results of
Staff audit and adjustments, which the Company has agreed to and which we accept as fact, we
approve and find just and reasonable for Falls Water Company the following: use of a 2002 test
year, a rate base of $232 116, a return on equity of 12%, an authorized revenue requirement of
$422 698 , and a resultant authorized revenue increase of$82 241 or 24%.
Rate Design
In developing a rate design proposal for Falls Water, Staff makes adjustments for
known and measurable changes in customers and water usage:
Customers
The Company s Application indicates that there are 1 352 residential metered
customers. As of September 2003, the Company reported that the actual number of metered
residential customers on the system was 1 507. Staff uses the known and measurable number of
metered residential customers on the system for rate design purposes.
Actual Water Usage
Falls Water uses 2002 water consumption data for its rate design calculations. Staff
has reviewed the water consumption for both 2002 and 2001 and found that significantly more
water was used in 2001 than in 2002. Staff has not ascertained the reason for this significant
ORDER NO. 29397
change. Whatever the reason, Staff believes that it is more appropriate to use both 2001 and
2002 usage in rate design calculations. Therefore, Staff in its rate design averages customer
usage over the years of 2001 and 2002. Staff also normalized the electricity expense to reflect
the additional water consumption used in the rate design calculations.
We find
The Commission finds that it is reasonable to adjust test year data for known and
measurable changes if the changes are shown to be reliable and certain. To such end we agree
that it is reasonable to use the actual number of metered residential customers and best estimates
of water usage in rate design.
Multi-Family Residential Rates
In the past, the owners of multi-family apartment complexes were charged the same
as individual flat rate customers and all apartments were charged the flat rate whether they were
occupied or not. The Company indicates that all apartment buildings are now metered and
proposes that the owners of apartment buildings be charged a metered rate. The Company
indicates that there are only four apartment buildings. In fact, however, there are 11 apartment
buildings.The Company was proposing to bill an apartment complex composed of eight
buildings as one customer. Staff believes that each metered building in an apartment complex
should be billed as a separate customer and that each metered building should be charged a
monthly customer charge. This adjustment, Staff contends, treats all apartment building owners
equally, whether the apartments are built as stand alone or in a complex. It also provides
additional winter revenue to the Company because of additional base charges.
We find
The Commission directs the Company to treat all individually metered buildings as a
separate customer for billing purposes. As such they should each be charged a monthly customer
charge. Customer bills for complexes can be aggregated to minimize mailings.
Volume Included in Base Rate
Falls Water has requested that the monthly usage allowance or volume included in
base rates be reduced from 20 000 gallons to 17 000 gallons. Staff performed a bill frequency
analysis and found no noticeable changes in customer usage at 17 000 gallons that would justify
ORDER NO. 29397
a reduction. Furthermore, Staff believes a reduction in the base commodity appears to unfairly
penalize metered customers over flat rate customers.Based on flat rate customer usage
considered in the Company s 200 I rate case and on the actual 2002 usage data provided in this
case, the average flat rate customer uses 34 460 gallons per month. This compares to the average
metered residential customer usage of 25 010 gallons per month. Therefore, Staff recommends
that the volume included in base rates remain unchanged at 20 000 gallons.
We find
Based on the data presented, the Commission finds no justification for reducing the
monthly usage allowance for metered customers.
Staff believes that it is appropriate to have similar charges for similar usage and has
developed a rate design based on both metered residential and flat rate residential consumption
averaging 34 460 gallons per month. This amount is equivalent to the actual 2002 average flat
rate customers' usage. For ease of billing, Staffs metered rate design is the same for metered
residential, multi-family residential and commercial metered service.
Staff s preferred rate design option for metered customers makes adjustments to both
the base charge and the commodity charge. The first rate adjustment is a 15% increase in base
charges or $1.50 for a base charge of $11.50. The second adjustment is an increase in the
commodity charge to collect the balance of the Staff recommended revenue requirement. Flat
rate charges for unmetered customers are based on the adjusted commodity rate for their average
460 gallons of consumption. The resulting rate design is the following:
Staff Rate Design Option 2 . Base & Commodity (H2O) Adjustment
Vol.Rate per Annual Percent
Flat or Included 1000 gal Usage In Change Ave
No.Base in Base Over Excess of Total From Annual
Customer Class Cust.Rate Rate Base Base Vol.Revenue Existing Bill
Flat Rate Residential (R-574 17.unlimited -$ 120 540 27%$ 210.
Multi-Family Residential (R-11.000 0.41 359 075 78%$ 188.
Metered Commercial (C-11.20,000 0.41 938 135 21%$ 437.
Metered Residential (R-1507 11.000 0.41 191 529 $ 286,493 17%$ 190.
Totals 2122 214 826 $ 422 243 18%
ORDER NO. 29397
Staff represents that its rate design minimizes the summer peak bill impact for customers and
only slightly increases the average bills. It also provides the Company with 15% additional
winter revenue.
We find
The Commission finds 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 g 61-503.
Customer Comments
Only one Falls Water customer submitted comments. That customer objects to the
timing of the Company s request, contending that "the time to raise rates is when the economy is
good, not when it is sliding. . . . Taxes have gone up, other utilities have gone up, gasoline has
gone up, while income is going down. . . . Us little guys have had a hard time making ends meet
as it is without additional expenses and increased rates at every turn.
We find
In authorizing this rate increase today we recognize that for some customers this will
result in economic hardship. The Commission is unaware of any assistance programs or aid
available to water utility customers. While not insensitive to the economic circumstances of
customers, we note that we also have an obligation to Falls Water to set rates at a level sufficient
to recover its costs of production and service.We encourage customers who are having
difficulty in paying their water bills to contact the Company to discuss payment arrangements.
Other Issues
Water Conservation Flat Rate Customers
Staff notes that the Company has no active conservation program and that its 574 flat
rate customers have little incentive to conserve water. Staff recommends that the Company use a
bill message or some other method of its choosing to give flat-rate customers suggestions on
water conservation and the wise use of water. Water conservation by customers, Staff notes
would minimize upward pressure on rates by reducing pumping costs.
ORDER NO. 29397
We find
The Commission has previously noted in Falls Water Orders that 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. Reference
Order No. 28907. The Company is directed to provide water conservation/wise use of water
information to customers.
Flat Rate Customers in Metered Service Territory (Henderson Trailer Park)
In discussions with the Company, Staff discovered that there are approximately 50
customers in the metered service territory that do not have meters (Henderson Trailer Park).
Staff further discovered that these customers had meters prior to the 2001 rate case but the
meters were removed in anticipation of Commission approval of a flat rate tariff change in that
case. In Order No. 28907 the Commission required the retention of the Tariff Schedule R-2 (Flat
Rate) eligibility requirement. The Commission s decision effectively eliminated any additional
flat rate customers outside of the original flat rate customer area. It also prohibited flat rate
service for the approximately 50 customers in the area where the Company had removed the
meters. Staff recommends that the meters that were removed be replaced in compliance with
Commission Orders and so as to provide an appropriate price signal and equity among all users.
We find
In this case Staff reports that the Company has failed to replace the 50 customer
meters in the Henderson Trailer Park area that were removed prior to the Company s 2001 rate
application. Reference Case No. FLS-Ol-1. This area is outside the unmetered flat-rate area.
The Company is directed to replace the meters in the Henderson Trailer Park area on or prior to
June 15 , 2004. Six months, we find is a reasonable period to accomplish the task and we were
informed by Staff that the Company has agreed to install the meters within that time period.
Contributions in Aid of Construction
In the last rate case, Order No. 28907, the Company was directed to start booking
hookup fees to the Contributions in Aid of Construction (CIAC) account instead of to the
revenue accounts. These hookup fees were to be used only for the addition of capacity or the
expansion of major water transmission lines. In 2002, the Company began booking these fees
ORDER NO. 29397
separately. However, Staff believes that the contributions should be further separated from
revenues and tracked to assure the Commission and Staff that they are used for the intended
purposes. Staff recommends that the funds be placed into a separate bank account and used only
for documented upgrades for wells and major transmission lines. This will allow the Company
to have some funds available when it is time for new wells or major lines to serve new
customers.
We find
The Commission finds Staff s recommendation to be reasonable and directs the
Company to book Contributions in Aid of Construction into a separate account and to use the
funds only for new sources of supply or major pipeline expansion.
Collection Practices
During 2002, Falls Water changed the way it billed its non-metered customers. All
the non-metered customers are located in two large mobile home parks. The majority of the lots
in the two parks are owned by an affiliate of Falls Water. Until 2002, the owner of the lot, not
the individual who lived there, paid these accounts. During 2002, the Company began billing
individual renters instead of the owner of the lot. The Company s uncollectibles went up
dramatically. Based on Staff discussions with the Company, it appears that the Company does
not actively pursue customer collections after a customer has moved. Staff recommends that the
Company turn over uncollected amounts to a collection agency. This would require little effort
on the part of the Company and may result in additional revenue. Use of the Commission
Rules regarding water shut-offs would also allow the Company to proactively reduce bad debt
expense.
We find
The Commission directs the Company to implement a more aggressive collection
practice to reduce its bad debt expense. It appears that the utility has not exhausted all collection
remedies available to it. At a minimum we expect the Company to more closely monitor its
delinquent accounts and to exercise non-payment rights available to it under the Utility Customer
Relations Rules, IDAPA 31.21.01.000 et seq. We also encourage the Company to utilize
collection agencies and in appropriate instances the State s civil courts.
ORDER NO. 29397
Engineering Expense
During the year 2002, Falls Water hired an engineer to perform a significant study
regarding the Company s impact area and future upgrade needs. The Company has been able to
secure a grant ITom the Idaho Department of Environmental Quality to help expand the study to
other water systems in the area. This study will help Falls Water map out its needs (long-term
projects and upgrades) and service boundaries for the next 20 years. Staff recommends that the
Company capitalize its engineering costs associated with the long-term study.
Staffs audit revealed that the Company was expensing some plant-related projects
and was capitalizing others. Staff recommends that the Company capitalize all plant-related
projects. By capitalizing the amounts instead of expensing them in the year they occur, both the
Company and its customers will benefit. The Company will be able to capture the benefits of the
projects over their useful life through a return on its investment in the projects and receive a
related increase in depreciation expense. Customers will benefit by not having to pay for it all at
once. By capitalizing rather than expensing its engineering projects, the Company s revenue
requirements are reduced. Staff calculated a $12 716 difference between capitalizing and
expensing the $14 210 cost associated with the Company s planned engineering projects. Staff
recommends that the Company begin immediately to capitalize these items for its own benefit
and for the benefit of its customers.
We find
Engineering studies and costs generally relate to long-term projects and upgrades.
The Commission finds it reasonable to require the Company to capitalize rather than expense its
long-term engineering study costs and all plant-related projects. Such an accounting practice, we
find, comports with standard utility practice to match investment return with a plant's useful life
and provides benefit to customers by keeping rates consistent and less volatile.
CONCLUSIONS OF LAW
The Commission has jurisdiction and authority over Falls Water Company, Inc., a
water utility and the issues raised in Case No. FLS-O3-, pursuant to Title 61 of the Idaho
Code and the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission in Case No. FLS-03-1 does hereby approve as
ORDER NO. 29397
just and reasonable the detailed changes in revenue requirement, return on equity, rate design and
Schedule R-, R-, R-, and C-2 tariff revisions.
IT IS FURTHER ORDERED and the Company is directed in compliance with the
foregoing to file amended tariffs to reflect the authorized charges on or prior to the effective date
that we hereby authorize, i., December 15 2003.
IT IS FURTHER ORDERED and the Company is directed as more particularly
described above to comply with the Commission s directions regarding water conservation
information, installation of meters, Contributions in Aid of Construction, collection practices and
capitalization of engineering study and project expense.
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 g 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this /:J..""'"
day of December 2003.
~Ch- J6iu.~
MARSHA H. SMITH, COMMISSIONER
~~~~;IONER
ATTEST:
E!ifJ Co ISSlOn Secretary
bls/O:FLSW030 1- sw2
ORDER NO. 29397
Total
2002 Actual Accepted Commission
Results Adjustments Ordered
Ordinary Income/Expense
Income
400 . Operating Revenue
460 . Unmetered Revenue 104 171 104 171
461.1 . Metered Residential 227 542 227 542
461.2 . Commercial Revenue 284 284
474, Other Utility Revenue 1,460 1 ,460
Total 400 . Operating Revenue 340,457 340,457
Total Income 340,457 340,457
-- r
9 I Expense
601.5 . Labor Field 784 755 539
601.7 . Labor Meter Reading 280 348 628
601.8 . Labor Office 000 (26 700)300
601.9 . Admin - Labor 000 168 168
603 - Salary Officers & Directors 704 704
604 - Employee Benefits 100 100
610 . Purchased Water 112 112
615 . Electrical Power 858 424 282
620.2 . Source M&S 924 924
620.6 . Distribution M&S 216 216
20 620.7' Postage 372 628 000
620.8 . Office 539 233)306
620.81 . Telephone Expense 380 380
620.82 . Bank Service charges 743 (743)
631.1 . Engineering 210 (33 716)2,494
631.2' Accounting 000 000
1261
631.3 . Attorney 367 367
635 . Testing 808 527 335
636.2 . Source Contract Repairs 311 311
636.3 . Trash 169 190
636.6 . Distribution Contract Repairs 299 299
636.7' Data Processing 800 800)000
641 . Rental of Property 300 050 350
642 . Rental of Equipment 112 112
650 . Transportation Expense 029 029
656 . Insurance Expense 918 980 898
660 . Advertising Expense 081 081
670 . Bad Debt Expense 619 (656)964
675.1 . Training Expenses 290 290
675.2 . Dues & Publications 860 860
675.4 . IDHW Fee Expense 860 320 180
Total Expense 342 242 176 361,418
Net Ordinary Income 785)(19,176)(20,961)
Other Income/Expense
Other Incomel
421 . Non-Utility Income 125 (17 174)951
\:/),7 Total Other Income 125 (17 174)951
!'~f8'Other Expense
403 . Depreciation Expense 031 031
408 . Taxes
1408.11 . Property Taxes 647 972 619
1409.11 . State Income Tax
Total 408 . Taxes 677 972 649
408.10 . Regulatory Fee 848 848
426 . Misc. Nonutility Expenses 513 (13 180)334
427.3' Interest Expense 023 493 515
615.1 . Electrical Power - Black Hawk 927 927)
615.2' Andco Well - Electricity 657 (657)
620.21 . Source M&S - Black Hawk Estates 495 (495)
620.61 . Black Hawk Distr M&S 844 (844)
620.62 . Andco Distr M&S
620.811 . Telephone - Black Hawk Estates 320 (320)
635.2 . Testing - Andco System (15)
Total Other Expense 350 (19 973)377
Net Other Income (36 225)799 (33,426)
Total Net Income (38,010)(16,377)(54 387)
I:-~~
1118,)9 Additional Return Allowed by the Commission 854
;';0 Total Revenue Allowed by the Commission 422 698
Increase Allowed by the Commission 24%
ATTACHMENT
ORDER NO. 29397
CASE NO. FLS-O3-