20071207Reply comments.pdf

FALLS WATER
-~~-COMPANY
Tel.: [phone]!1 DEC -1
Fax: [phone]
1770 Sabin Dr, Idaho Falls, Idaho 83406-6747
Website: www.fallswater.com
Pr'; 2: l 2
December 6, 2007
Idaho Public Utilties Commission
ATTN: Commission Secretary
472 W. Washington
Boise, Idaho 83702-5983
Subject: Company Reply to Staff Comments
Dear Commission Secretar:
Enclosed are an original and seven copies of the Company Reply to Staff Comments together with supporting
exhibits. Please call if you have questions.
Sincerely,k~~
K. Scott Bruce
Manager
K. Scott Bruce
Falls Water Company, Inc.
1770 Sabin Dr
Idaho Falls, ID 83406
TeL. [phone]
Fax [phone]
E-mail: scottl(ifallswater.com
Representative for Falls Water Co., Inc.
r::~.-
i". I/""L: ¿
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
FALLS WATER COMPANY FORAN ORDER
AUTHORIZING INCREASES IN THE COMPANY'S
RATES AND CHARGES FOR WATER SERVICE
)
)
)
)
)
)
)
)
COMPANY'S REPLY TO
COMMENTS OF THE
COMMISSION STAFF
CASE NO. FLS-W-07-1
Comes now Falls Water Company and fies the following reply to comments of the Commission
Staff dated November 21, 2007.
OPERATING EXPENSES
Wage and Salary Staff Adjustment No.1 (Staff Attachment 1 lines 11, 13, 14 and 16).
Staff in its comments eliminated the wage and salary pay increases the Company approved on
September 15,2007 to be effective December 18,2007. The Staff on Page 4 of its comments in the first
full paragraph states "The test year is a 2006 test year, and pay increases to be paid in 2008 stretches the
bound of 'known and measurable.''' Falls Water Company takes exception to the Staffs
characterization of stretching ..."the bound of known and measurable." The wage and salary increases
were approved in September 2007 to be effective December 18,2007. The approval was well in
advance of the date Staff fied its comments on November 21,2007 and Staff in its comments
acknowledges it is aware of the increases and the effective date. (Staff comments at Page 3) The
Commission by its Order No. 30457 dated October 24, 2007 established a scheduled final order date in
this case of January 2,2008 several weeks after the effective date of the wage and salary increases.
Staff did not express any opinion regarding the reasonableness of the wage and salar increase but rather
simply eliminated the effect because of the feeling that the effective date was too long after the end of
the test year period. Falls Water notes that the effective date is within 12 months of the end ofthe test
period, is known and is measurable prior to the effective date of the Commissions order in this case.
Regarding the new employee that Staff discusses on Page 4 of its comments, the Applicant accepts
Staffs substitution of the actual starting salary for this employee rather than what was estimated by the
Company. The new employee's anual pay is $40,000 rather than the 47,250 estimated by the
Company. This would reduce the Company's request by $7,250. As a strictly office employee the
payroll overhead loading for taxes and insurance would be at 13.8% rather than the 18.92% as fied in
1
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007
the Company's application. This change would reduce the Company's costs by $3,419.50 (47,250 x
18.92 less 40,000 x 13.8%).
The company must have a certified operator in charge and a certified backup operator to meet state
requirements. The company's system is a Class II system and the operator in charge and the backup
operator must hold at least a Class II certification. Curently, the operations manager, who is a Class II
operator, is our certified operator in charge. To meet the certified backup operator, the company must
curently use a Class II certified operator who is not a company employee. Curently, that individual is
the former owner of Falls Water Co., Inc., Kelly Howell. The fee he charges through RDI West
includes this service to the company. Field personnel are to become certified operators and as they
receive their certification, they receive a pay increase to recognize their level of training and the
contribution to the company made by having the certification. The employees must first have their
Class I certification before they can take their test for Class II certification. One of the field employees
passed the certification test taken on November 7,2007. He received his Class I certification. The
employee received a wage increase of$I.50 per hour effective November 19,2007. The anualized
increase in company field labor expenses associated with this increase is $3,905.09 (($1.50 x 105.25%
(December 18,2007 wage increase)) x 2080 hours/year x 118.92% (Payroll taxes and Workers
Compensation Insurance percentage)). The annualized employer's match for the 401k associated with
the wage increase will increase expenses by $98.51 (($1.50 x 105.25% (December 18,2007 wage
increase)) x 2080 hours/year x 103% (Employer 401k match percentage)).
To Summarize, the Applicant believes the PUC Staffs payroll adjustments are unjust and uneasonable.
The increased costs to the Company are known and measurable. The Company is or will be
experiencing these costs before the Commission issues its order. To deny these costs makes it
impossible for the Company to recover its operating costs. Denial of these costs places a burden on the
Company owners to either subsidize the water company operation or cut back on service to the
detriment of the water customers.
The Commission should reject Staffs downward adjustments to wage and salar costs in the amount of
$28,365.93 and substitute the net downward adjustments discussed above regarding the payroll cost of a
new employee and operator certification in the amount of $6,665.90.
Rental Expense, Staff Adjustment No.2 (Staff Attachment No. 1 line 36.
Staff eliminated $24,650.50 for expected increases in rental costs for the Company to move into new
quarters that will consolidate office, maintenance and storage fuctions at one location. Although the
new building has not yet been constructed, the permitting process has begu, land has been acquired by
the building owner and lease agreements are in place. Constrction has been delayed due to delays in
the permitting process and now freezing weather has delayed commencement of construction.
Construction wil begin in the early spring of 2008 and we expect to occupy the facilties by June of
2008 (within 6 months of the Commissions order in this case. Staffhas stated in its comments (page 5)
"The new office space is not yet 'used and useful' to the utilty." The used and useful test is normally
associated with utility investments in utility plant in service rather than operating costs. The used and
useful test is usually associated with a new investment that will either increase revenues due to increased
commodity sales or reduce expenses due to the elimination of an expense the new asset wil make
avoidable. That is not the case here. Were the Company constructing its own building, it would
2
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007
experience a decrease in its rental expenses at the time the investment in the new asset was placed in
service and added to the Company's rate base. This Company proposed proforma adjustment
recognizes that the Company has grown beyond the physical limitations of its existing rented space and
must move into a larger, consolidated more efficient location.
Contract Services, Staff Adjustment No.3 (Staff Attachment No. 1 line 35)
Staffhas eliminated $24,000 of Contract services for payments made to RDI West. Staff is correct that
RDI West is a subsidiary of Frontier Property Group the previous owner of Falls Water Company. Mr.
Kelly Howell is an offcer of Frontier Property Group and a director of Falls Water Company. Falls
Water Company wants to point out that there are no salares paid to the officers and directors of the
Company due primarly to cash flow restraints. The services of Mr. Howell through his membership on
the board and his experience owning and operating the Company in the past provide a valuable resource
to the management of the Company. The $24,000 paid to RDIWest for "consulting services" are in lieu
of director fees.
Accounting, Staff Adjustment A (should be No.4). (Staff Attachment No. 1 line 28)
Company concurs with the Staffs adjustment.
Attorney Fees, Staff Adjustment No.5 (Staff Attachment No. 1 line 29)
Company concurs with the Staffs adjustment.
RATE BASE
Staffhas made two adjustments to the Company's rate base. The two adjustments are related and
intertwined. They are discussed here simultaneously.
Falls Water Company is unique among regulated water companies in Idaho. Falls Water is unaware of
any other regulated water company that collects a contribution in aid of constrction from developers to
pay for future source of supply and storage assets required to meet growth on the system resulting from
the development activities. Most water companies accept the contribution of a completed asset (well
and / or reservoir) from a developer who has constructed such facilities as a part of the property
development project. United Water Company in Boise collects no contribution for these facilities but
rather uses its retained earnngs, debt or additional investor fuds to construct these facilties thus
increasing its investment in plant in service (rate base). All companies accept or wil accept
contributions of transmission and distribution piping, customer services, meters and fire hydrants. All
such contributions are simultaneous with the addition of a new asset (plant in service, or rate base)
Falls Water Company is one of the larger regulated water companies in the state and is in an area that is
growing rapidly. Unlike United water in Boise, Falls Water Company is a small independent company
with few owners. Falls Water Company does not have access to the capital markets of United Water
and other very large utility companies. Hence the contribution in aid of construction the Company is
3
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007
authorized to collect for futue source of supply and storage needs resulting from new development in
the area.
Staff has eliminated from rate base the Companies investment of $272,500.00 in its new well #9 that
will be in service in mid 2008. Simultaneously, Staffhas included the fuds invested in this futue asset
in the "Contributions in Aid of Construction" Account that is a rate base deduction. In effect, the Staff
here has "double dipped" the Company's rate base investments. The asset is not recognized in rate base
while the contributed fuds invested in the asset are used to reduce the company's investment in other
assets. This is an inappropriate taking of the Company's investments.
Staff has also used additional developer contributions for source of supply and storage to reduce the
Company's rate base by $166,100.87. These contributions are intended to be used for future
development of source of supply and storage facilties. The Company treats these contributed fuds as
dedicated fuds for futue construction of source of supply and storage facilities. They are considered
contributions held for future use, an offset to propert held for future use. They are not used to meet
curent cash flow needs for operating expenses or constrct other asset improvements. The purose of
these developer contributions is to avoid rate shock in the future when large investments in wells and
reservoirs are placed in service to meet new demands on the water system caused by growth. Staff s
approach artificially suppresses curent rates to existing customers and insures futue rate shock to all
customers when a new water source or storage asset is placed in service without the benefit of an
additional contribution in aid of construction offset. In the meantime, Falls Water Company is
precluded from earning a fair, just and reasonable retu on investor fuds used to construct facilties
that are currently used and useful to provide service to our customers.
The Commission should reject the Staffs proposed rate base adjustments in their entirety.
RATE DESIGN
The Company's rate design is based on the Company adjusted anual revenue requirement of
$1,009,179.32. The Company proposes a single commodity rate for all customer classes of
$0.727/1,000 gallons and a monthly minimum charge of$16.l5, which includes 12,000 gallons of water.
A comparison of the curent rates, Staff proposed rates and the Company proposed rates are shown in
the summar Table 1.
4
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007
Table 1
STAFF PROPOSED COMPANY
SCHEDULE CURRNT TARIFF TARIFF PROPOSED TARIFF
Minimum Commodity Minimum Commodity Minimum Commodity
Charge Charge Charge Charge Charge Charge
R-l 11.53 $0.48 per $14.00 $0.626 per $16.15 $0.727 per
1,000 1,000 1,000
gallons over gallons over gallons over
12,000 12,000 12,000
gallons gallons gallons
R-2 20.17 N/A 20.17 N/A 20.17 N/A
R-3 11.53 $0.48 per $14.00 $0.626 per $16.15 $0.727 per
1,000 1,000 1,000
gallons over gallons over gallons over
12,000 12,000 12,000
gallons gallons gallons
R-4 11.53 $0.48 per $14.00 $0.626 per $16.15 $0.727 per
1,000 1,000 1,000
gallons over gallons over gallons over
12,000 12,000 12,000
gallons gallons gallons
Attached to these reply comments are Company Exhibit Numbers 9, 10 and 11 that show
the effect of these comments on the recommendations of the Commission Staff. The
Company's reply recommendation would result in an increase of 44.22% as shown on
Exhibit No. 11 line 13.
Respectfully Submitted,
k.;n~1l~
Falls Water Company
K. Scott Bruce, Manager
5
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007
FALLS WATER COMPANY
REVENUES & EXPENSES
TEST YEAR ENDED 12/31/2006
Exhibit 9
1 Ordinary Income/Expense
2 Income
3 400 . Operating Revenue
4 460 . Unmetered Revenue
6 461.1' Metered Residential
6 461.2' Commercial Revenue
7 474, Other Utilty Revenue
8 Total 400 . Operating Revenue
9 Total Income
10 Expense11 601.6' Labor Field
12 601.7' Labor Meter Reading13 601.8' Labor Office
14 601.9' Admin. Labor
16 603. Salary Officers & Directors
16 604. Employee Benefits
17 610 . Purchased Water
18 616. Electrical Power
19 618. Chemicals
20 620.2 . Source M&S
21 620.6 . Distribution M&S
22 620.7' Postage23 620.8 . Office
24 620.81 . Telephone Expense
26 620.82 . Bank service charges
26 620.83 . Office Utiltes Expense27 631.1' Engineering
28 631.2' Accounting29 631.3' Attorney30 636 . Testing
31 636.2 . Source Contract Repairs32 636.3 . Trash
33 636.6 . Distribution Contract Repairs34 636.7 . Data Processing
36 636.8 . Contract Service - Consulting36 641 . Rental of Propert37 642 . Rental of Equipment
38 660 . Transporttion Expense
39 666. Insurance Expense
40 660 . Advertising Expense
41 666 . Regulatory Commission Expenses
42 670 . Bad Debt Expense
43 676.1 . Training Expenses
44 676.2 . Dues & Publications
46 676.4 . DEQ Fee Expense
46 676.9 . Uncategorized Expenses
47 Total Expense
48 Net Ordinary Income
49 Other Expen.e
60 403 . Depreciation Expense
61 408 . Taxes62 408.11 . Propert Taxes
63 409.10 . Fed Income Tax
64 409.11 . State Income Tax66 Total 408 . Taxes
66 408.10 . Regulatory Fee
67 Total Other Expense
68 Net Other Income69 Net Income
COMPANY REPLY TO STAFF COMMENTS
A
Staff
Proposed
693,756.06
21,592.19
835.00
716,183.25
716,183.25
172,240.88
56,617.62
112,635.10
52,859.60
1,112.00
109,773.11
4,816.21
10,719.97
37,105.71
14,293.89
24,290.04
12,824.06
1,731.00
4,636.15
1,282.50
2,168.17
2,948.75
8,099.69
1,400.00
1,017.36
30,420.00
3,716.00
11,868.00
20,108.20
35,013.23
12,097.00
2,081.45
4,879.55
8,688.20
2,515.27
1,275.00
10,988.00
125.00
776,346.71
(60,163.46)
73,222.22
12,121.77
30.00
12,151.77
1,780.43
87,154.42
(87,154.42)
(147,317.88)
6
B
Company
Adjustments
12,928.39
2,675.18
4,696.46
2,167.18
24,000.00
24,643.50
71,110.71
(71,110.71)
(71,110.71)
C
Company
Proposed
716,183.25
185,169.27
59,292.80
117,331.56
55,026.78
1,112.00
109,773.11
4,816.21
10,719.97
37,105.71
14,293.89
24,290.04
12,824.06
1,731.00
4,636.15
1,282.50
2,168.17
2,948.75
8,099.69
1,400.00
1,017.36
30,420.00
3,716.00
24,000.00
36,511.50
20,108.20
35,013.23
12,097.00
2,081.45
4,879.55
8,688.20
2,515.27
1,275.00
10,988.00
125.00
847,457.42
(131,274.17)
73,222.22
12,121.77
30.00
12,151.77
1,780.43
87,154.42
(87,154.42)
(218,428.59)
DECEMBER 6, 2007
Falls Water Company, Inc.
Calculation of Rate Base
Exhibit 10
Rate Base 2006
Net Assets
1 Utility Plant in Service
2 Net Correcting Entry to Utilty Plant in Service
3 Corrected Total of Utility Plant in Service
4 Less: Contributions in Aid of Construction
5 Correcting Entry to Contributions in Aid of Construction
6 Corrected Total of Contributions in Aid of Construction
7 Subtotal of Investor Owned Assets for Rate Base
8 Less: Accumulated Depreciation
9 Correcting Entry to Accumùlated Depreciation
10 Corrected Total of Accumulated Depreciation
11 Less: Accum Amort of Contribution in Aid of Construction
12 Correcting Entry to Accum Amort of CIAC
13 Corrected Accum Amort of CIAC
14 Total Accum Depr net of Accum Amort of CIAC
15 Corrected Net Utilty Plant ~ 12/31/2006
16 Proforma additions to Plant (2007 & 2008 Meter Conversions
17 Proforma Additions to Plant (Line Loop Extensions)
18 Working Capital (1/8 of Operation and Maintenance Expenses)
19 Rate Base
7
COMPANY REPLY TO STAFF COMMENTS
w (~ ~)
2,573,701.87
99,794.37
1,512,893.13
158,680.44
491,076.85
18,889.34
43,633.91
33,333.95
2,673,496.24
1,671,573.57
509,966.19
76,967.86
1,001,922.67
432,998.33
568,924.34
181,522.80
152,800.00
105,932.18
$ 1,009,179.32
DECEMBER 6, 2007
....
FALLS WATER COMPANY
COMPANY CALCULATION OF REVENUE REQUIREMENT
Exhibit 11
A B C A B C
Staff Staff Staff Company Company Company
1 Rate Base $289,189.61 $1,009,179.32
2 Required Rate of Return 7.20%7.20%
3 Net Operating Income Requirement $20,829.79 $72,689.31
4 Net Operating Income Realized $ (147,317.89)$ (218,428.59)
5 Net Operating Income Deficiency $168,147.68 $291,117.90
Non-Tax Taxable Non-Tax Taxable
6 Revenue Increase necessary to overcome loss $ 147,317.89 $ 218,428.59
I
7 Revenue Increase necessary for Income Requirement $20,829.79 $72,689.31
8 Gross-up Factor 1.02 1.30 1.02 1.30
9 Revenue Increase Requirement $ 149,849.36 $27,094.28 $222,181.9 $94,550.62
10 Total Revenue Increase Required $ 176,943.63 $316,731.81
11 Adjusted Test Year Revenue $ 716,183.24 $716,183.24
12 Total Revenue Requirement $ 893,126.87 $1,032,915.05
13 Percent Increase Required 24.71%44.22%
8
COMPANY REPLY TO STAFF COMMENTS DECEMBER 6, 2007