20121012final_order_no_32663.pdf

Office of the Secretary
Service Date
October 12, 2012
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF FALLS WATER COMPANY FOR AN ) CASE NO. FLS-W-12-01
ORDER AUTHORIZING INCREASES IN )
THE COMPANY'S RATES AND CHARGES )
FOR WATER SERVICE ) ORDER NO. 32663
On January 30, 2012, Falls Water Company applied to the Commission for authority
to increase its rates and charges. Falls Water provides water service to more than 3,900
residential and commercial customers north of the City of Ammon and northeast of the City of
Idaho Falls in Bonneville County. The Company last increased its basic rates and charges in
March 2010. Order No. 31022. With this Application, the Company asks to increase the
revenues it receives from rates by $295,059.75 (about 26.5%), for a new total revenue
requirement of $1,407,671.
We have thoroughly reviewed the record in this case, including written comments and
analysis from the Company, Commission Staff, and the Company's customers, and testimony
from customers given in a public hearing. Based on that review, we approve a new, total
revenue requirement for the Company of $1,257,158. The Company's new rates and charges
will take effect on October 16, 2012.
PROCEDURAL BACKGOUND
On February 22, 2012, the Commission suspended the proposed effective date for the
schedule of rates and charges to August 28, 2012. Order No. 32467, Idaho Code § 61-622. On
March 16, 2012, the Commission issued a Notice of Public Workshop, Notice of Modified
Procedure, and Notice of Public Hearing setting comment and reply deadlines, a public
workshop, and a customer hearing. See Order No. 32487 and corresponding Errata. The
workshop and customer hearing occurred, Staff and members of the public filed written
comments, and the Company filed a written reply. The Staff then filed an issue-narrowing
surreply per Commission Order, and the Commission suspended the * Company's schedule of
rates and charges until October 16, 2012. See Order Nos. 32626 and 32642.
ORDER NO. 32663 1
THE APPLICATION
In its Application, the Company said that after its last rate case it: (1) replaced
manually-read meters with new touch-read meters and installed radio transmitter units (MXLJs)
on all meters not already so equipped; (2) doubled its rented office and warehouse space; and (3)
added an on-line billing option (Xpress Bill Pay) for customers. Application at 2. These and
other expenditures have led the Company to apply to raise rates and increase revenues. Id. at 1,
4. The Company proposed to increase customer rates and decrease the corresponding volume of
water allowed as follows:
Customer Monthly Charges (Base Rate Chares
Meter Size
(inches)
Present
Rate
($/month)
Present
Volume
Allowance
(gallons)
Proposed
Rate
($/month)
Proposed
Volume
Allowance
(gallons)
Percent
Increase
(%)
3/4- inch or smaller $16.10 12,000 $19.18 5,000 19.1%
1-inch $22.54 17,000 $26.85 7,000 19.1%
1 V2 - inches $28.98 22,000 $34.52 9,000 19.1%
2—inches $37.03 28,000 $44.11 12,000 19.1%
4 - inches $66.01 49,000 $78.64 20,000 19.1%
Commodity Charges
Current Proposed
Customer Rate Rate Percent
Class ($/1,000 gallons) ($/1,000 gallons) Increase (%)
All Customer Classes L $0.611 $0.670 9.7%
See Id.
The Company says, this rate design will yield $1,407,749.70 in revenues, which is
within $78.59 of the requested, $1,407,671.11 revenue requirement. Id. The Company estimates
that the average, 3/4" metered-customer's bill will increase 26.8%; the average 1" metered-
customer's bill will increase 24.3%; the average 1 1/2" metered-customer's bill will increase
26.1%; the average 2" metered-customer's bill will increase 27.8%; and the average 4" metered-
customer's bill will increase 28.1%. Id. at 4-5.
Apart from the rate increase, the Company also proposes to read meters year-round.
Id at 5. The Company historically has read residential meters from April through October but
not during the winter due to difficult meter access. However, the Company now can read meters
year-round because it has installed radio-read meter units throughout its system. Id. The
ORDER NO. 32663 2
Company notes that year-round reading would enable it to detect leaks sooner, thereby benefiting
customers and conserving water. The Company also notes that customers would be able to pay
for excess water used during the winter as the overages are incurred instead of having to wait for
the Company to assess them for such use when it bills them in the spring. Id.
PUBLIC COMMENTS AND TESTIMONY
Numerous customers submitted written comments or testified in this case. Customers
opposed the magnitude of the Company's proposed rate increase and the water allowance
decrease. Customers noted that the Company should have gradually updated infrastructure so as
not to inflict a sudden, extreme rate hike on customers, and that the Company should not have
spent so much on meters without obtaining prior input from the Commission and customers.
Customers also urged the Commission to scrutinize the Company's spending habits and
operating costs, especially the Company's decision to increase building space and improve meter
technology during a poor economy. Customers said the Company paid excessive rent, and that it
incurred unnecessary mailing costs by distributing the customer notice separately from monthly
bills.' Customers also said that the Company's customer notice soft-pedaled the proposed rate
increase by omitting that the Company also was proposing a water-allowance decrease. In one
public comment, and at the customer hearing, a few customers complained about low water
pressure.2
Commission Decision: We appreciate the time that the Company's customers took to
comment and testify in this case. We recognize that for some customers any rate increase will
result in economic hardship. We also note that the Commission has an obligation to Falls Water
and its customers to set rates at a level sufficient to allow the Company to recover its reasonable
expenses and receive a reasonable return on its investments. Such rates enable the Company to
remain financially sound and capable of providing adequate, safe water to its customers. That
said, we note that Commission Staff raised many, similar issues in its comments and we will
address those issues later in the Order.
l Commission Rule 125 says that customer notices "may be mailed to customers as bill stuffers over the course of a
billing cycle or may be contained in additional comment pages to the customer's bill." The rule contemplates that a
company will mail customer notices with monthly bills.
2 One customer commented that his water pressure was "really low." See Public Comment filed July 10, 2012. And
at the customer hearing that night, three customers said pressure frequently was low; two customers said pressure
was fine or low depending on whether use occurred during peak irrigation times; one customer said pressure was
"pretty good" and that he had no complaints about pressure. See Tr. at 9-15, 17, 23-25, 28-30, 33.
ORDER NO. 32663 3
With regard to the low-pressure issue, we note that customer views were mixed. On
the day of the customer hearing, five customers said they had experienced low pressure in
varying degrees at some point. It is unclear from the record why these pressure issues occurred
and whether they Wé widespread or isolated incidents. We note that Commission Staff was
present at the hearing and addressed the pressure issue with the Company. We expect the
Company to diligently work to resolve any water pressure issues, and we encourage customers to
contact the Company or Staff if they continue to experience low pressure. We also suggest the
Company consider implementing a residential irrigation schedule if doing so would mitigate low
pressure issues that might arise at peak-use times.
STAFF COMMENTS, COMPANY REPLY, AND SURREPLY
The parties' positions on (1) revenue requirement, (2) rate design, and (3) other issues
are discussed below.
I. REVENUE REQUIREMENT
In this section we address revenue requirement issues including the appropriate test
year and the expenses, rate base, and rate of return to be allowed.
A. Test Year
The Company proposed a 2011 test year, adjusted and normalized for known and
measurable changes. Application at 2. Staff agreed with the Company's proposal. Comments at
25.
Commission Decision: Based on our review of the record and the parties' agreement
on this issue, we find that a 2011 test year is reasonable and appropriate.
B. Expenses, Rate Base, and Rate of Return
1. Expenses. In its Application, the Company reported $933,351 in annual ordinary
expenses, and $215,195 in net other expenses. Application Exhibit 2. Staff proposed
disallowing certain of the Company's reported expenses related to depreciation expense, source
of supply expense (costs for electric power and water testing and treatment), rental property
expense, and rental equipment expense. These individual expense adjustments are discussed
below.
a. Depreciation Expense. The Company's Application said the meter project
increased depreciation costs by $84,210. Application at 3-4; Exh. 2, p. 2 1 52. The meter project
that was completed in January 2012, has two parts: (1) the Company's investment to replace 604
ORDER NO. 32663 4
old, manually read meters with new touch-read meters, as contemplated by prior Commission
Orders; and (2) the Company's investment to install MXU radio transmitters on all meters not
already so equipped.
In its comments, Staff said the Company miscalculated meter project depreciation
and that, using the Company's methodology, the depreciation expense should have been
$83,988. Staff said, however, that even this corrected figure is wrong because it relies on the
Company's assumption that the meters have no salvage value and a 10-year depreciable life.
Staff said the Commission should use the NARUC 3 standard—a 10% salvage value and at least a
35-year depreciable life—until the Company presents "reasonable, auditable, evidence
demonstrating a basis" for using a shorter useful life. Staff then applied the NARUC standard to
recommend that the Commission allow a $3,249 depreciation expense for the $126,336 in touch-
read meter investment that Staff said should be included in rate base. Because Staff said the
other portion of the meter project—the MXU investment—should not be included in rate base,
Staff also recommended that the Commission disallow the remaining, $80,739 in MXU-related
depreciation. Comments at 10 and 25 and Atch. B.
In its reply, the Company maintained that the Commission should let it recover
depreciation for the entire meter project (i.e., on both the $126,336 investment in touch-read
meters allowed by Staff, and on the $674,024 in MXU investment opposed by Staff), for a total
meter project asset value of $800,360.4 The Company then proposed adjusting depreciation by
$28,766 based on a 25-year depreciable life and no salvage value, which the Company said were
more realistic assumptions given its experience and the meter components. Reply at 5-6, Atchs.
8 and 9.
In its surreply, Staff accepted the Company's new proposal to assume a zero salvage
value and a 25-year depreciable life, but only for the $126,336 in touch-read meter investment.
Surreply at 2. Staff thus increased its originally recommended depreciation expense for the
touch-read meter investment by $1,805, from $3,249 to $5,054. Surreply at 2. Staff noted,
National Association of Regulatory Utility Commissioners.
"Staff recommended disallowing the Company's claimed $713,542 in investment related to buying and installing
3,300 MXUs, consisting of $674,024 for the MXU units plus $39,518 for financing charges and temporary office
labor. The Company's proposal accepts the recommended disallowance for financing charges and temporary office
labor.
Staff observed that the revised depreciation adjustment requires Staff to revise its recommended rate base and
revenue requirement, and that the new revenue requirement would lead Staff to change its rate design.
ORDER NO. 32663 5
however, that the actual useful life of the new metering technology is unknown. Staff thus
recommended that the Company "keep maintenance and replacement records for each composite
construction meter, to establish a reliable record to determine the useful life for this new
enhanced type of meter." Id.
Commission Decision: Based on our review of the record and the parties' agreement
on salvage value and useful life, we find that it is reasonable and appropriate for the Commission
to use the parties' assumption of a zero salvage value and 25-year depreciable life when
calculating meter project depreciation. We find it reasonable to require the Company to track
meter maintenance and replacement as suggested by Staff so the Company can better document
useful life for the meters.
b.Source of Supply Expense. In its Application, the Company reported increased
electric power costs, water sample testing costs, and water chemical treatment costs. Application
at 3, Exh. 2 Col. B. Staff accepted the Company's $2,725 adjustment to the test year water
sample testing cost, but Staff recommended decreasing the Company's pro forma electric power
cost by $18,535, and the pro forma water chemical treatment cost by $427. Comments at 11-12,
25. The Company concurred with Staffs recommendations. Reply at 8.
Commission Decision: Based on our review of the record and the parties' agreement
on these issues, we find that the Company's $2,725 adjustment to the water sample testing cost,
and the Staffs $18,535 adjustment to the Company's pro forma electric power cost and $427
adjustment to the pro forma water chemical treatment cost are reasonable and appropriate.
c.Rental Property Expense. In its Application, the Company asked to recover
$4,255.30 in additional rental property expenses to reflect that it had increased its rented office
and warehouse space. The Company claimed a total, adjusted property rental expense of
$53,952. Application at 3, Exh. 2.
In its comments, Staff expressed concern that the Company had leased the additional
space from its owner. Staff highlighted that the same issue arose in the Company's last rate case.
There, the Company leased 4,000 square feet of the same building space from its owner. The
Commission warned the Company about engaging in such related-party transactions, and
directed the Company to prove that its lease was the product of arms-length bargaining.
Comments at 12, citing Order No. 31022. In the instant case, Staff said the Company again
seeks to recover expenses arising from a related-party lease. This time, the Company has again
ORDER NO. 32663 6
leased the original 4,000 square feet of building space from the owner, along with an extra 5,000
square feet. Staff said the Company has not demonstrated any savings or other economic
benefits that might justify the new lease. Rather, the Company simply says it needs the extra
space to conduct routine vehicle maintenance, to store inventory and a backhoe and dump truck
that the Company also rents from the Company's owner, and to capture the benefits of
consolidating its building sites together. Id. at 13. Staff recommended that the Commission
allow only one-fifth of the expense related to the newly leased, 5,000 square feet of building
space. This proposal decreases the Company's claimed office and warehouse rental expense by
$11,957, from $53,952 to $41,995. Id. at 13-14, 25, Atch. G.
In its reply, the Company disagreed with Staff's recommendation. The Company said
the Commission should allow it to claim one-half of the expense related to the newly leased,
5,000 square feet of building space.6 The Company recommended the Commission decrease
Staff's $11,957 adjustment to the claimed, $53,952 in annual rent by $8,992 to $2,965, for a total
adjusted, annual property rental expense of $50,987 (i.e., $53,952 - $2,965). Reply at 9, Atch.
16.
Commission Decision: In the Company's last rate case, FLS-W-09-01, we advised
the Company that it must prove that a related-party lease is reasonable and the product of arms-
length bargaining before the lease costs can be included in rates:
Staff notes that affiliate transactions are subject to close scrutiny and the
regulated utility has an increased burden to prove the reasonableness of its
affiliate transactions. For expenses to be justified there needs to be evidence
of arm's length bargaining between the Company and the source of the
expense. The burden of proof is on the Company to show that the costs
incurred in the affiliate transaction are reasonable and beneficial to
customers.
The Commission is genuinely concerned by the number of affiliate
transactions that Falls Water engages in without apparent regard to providing
evidence of arm's length bargaining. The Company has an increased burden
of proving the reasonableness of the costs incurred in an affiliate
transaction....
Order No. 31022 at 5.
6 The Company said that only one-half of the additional lease expense should be allowed because the Company does
not effectively use one-half of the newly rented, 5,000 square feet of space.
ORDER NO. 32663 7
Here, the Company has again failed to carry its burden of proving that its lease with
its owner is reasonable and the product of arms-length bargaining. Even if the Company's
proffered reasons for needing the extra space are true (i.e., the Company needs the space for
storage, maintenance, and convenience), those reasons do not establish that the lease terms are
reasonable. The Company has not, for example, demonstrated what a comparable empty building
would rent for in this poor economic climate. We find that Company's proposed, $53,952 in
rental property expense is excessive, that Staff's recommended $11,957 adjustment to the rental
property expense is reasonable, and that the Company will be allowed to recover through rates a
total annual rental property cost of $41,995.
d. Rental Equipment Expense. In its Application, the Company reported a
$31,474.28 rental equipment expense. Application Exh. 2, Col. H 134.
In its comments, Staff noted that the Company rented the equipment (backhoe and
dump truck) from the Company's owner. Staff said the Company provided little evidence to
support the Company's claim that it has ongoing need for this equipment. Staff recommended
that the Commission decrease the reported equipment rental expense by $11,474, from $31,474
to $20,000, to match the Company's documented, as opposed to claimed, annual rental expense.
Comments at 25, Atch. H.
In its reply, the Company said it has rented heavy equipment for years and routinely
repairs service line leaks, repairs and replaces fire hydrants, and upgrades meter barrels. Reply
at 9. The Company disputed Staff's claim that the Company only documented $20,000 in 2011
rental equipment expense; the Company said it provided Staff with invoices for the entire
$31,474 in 2011 rental equipment expense. Id The Company also said that Staff's
recommendation assumes the Company only rented the equipment for 10 months rather than 12.
The Company thus asked the Commission to allow an increase of $4,000 ($2,000 per month in
rent times two months) for a total equipment rental expense of $24,000 annually. Id. at 10.
Commission Decision: Based on our review of the record, we find that the
Company's lease of rental equipment from its owner is another related-party transaction.
Annualization of the monthly lease yields a reasonable level of rental expense at this time. We
find it reasonable to allow the Company to recover $24,000 in equipment rental expense.
Allowance of a greater rental dollar amount must be established by need and comparable third-
party market analysis. The Company has not adequately supported a higher amount.
ORDER NO. 32663 8
2. Rate Base. A water company's "rate base" is its investment in utility plant and the
working capital necessary to purify and distribute water, upon which the Company is allowed to
earn a fair rate of return. With its Application, Falls Water proposed a $2,545,288.78 rate base.
Application at 2, Exh. 1 and 2. The Company and Staff concurred that working capital should be
calculated as 1/8 of the allowed operating expense, which we find to be reasonable. See
Application at 2; Comments at 14. But Staff recommended the Commission adjust rate base
components including plant in service (land and land rights, and meters) and accumulated
depreciation. The parties' positions on these adjustments are discussed below.
a. Plant in Service (Land and Land Ri,hts, and Meters). The Company reported
plant in service (PIS) with an adjusted total of $6,606,671.74 as of December 31, 2011.
Application Exh. 1. The amount includes, among other items, a $2,213,824.33 balance in PIS
account 303-Land & Land Rights. The amount also includes a $1,825,131.62 balance in PIS
account 334-Meters. Id. Staff recommended decreasing the overall PIS account balance. The
parties' positions on land and land rights and meters are as follows.
i.Land and Land Rights. Staff recommended that the Commission decrease the land
and land rights balance by $92,518 to reflect a Commission-approved adjustment for plant held
for future use from Order No. 31022. Comments at 3, 25. The Company ultimately concurred
with Staff's recommendation. Reply at 3.
ii.Meters. In its Application, the Company asked to increase its rate base by
$839,878.35 to recognize the Company's costs to (a) replace 604 manually read meters with new
touch-read meters and (b) install MXU radio transmitters on all meters not already so equipped.
Application at 2, Exh. 1. If granted, the Company's request would increase the 334-Meter
account balance to $1,825,132. Id.
In its comments, Staff noted that the Company's $839,878 in meter project costs
includes: (a) $126,336 for 604 new touch-read meters and the labor to remove 604 manually read
meters; and (b) $713,542 related to buying and installing 3,300 MXUs (in sum, $674,024 for the
MXUs, plus $39,518 for financing charges and temporary office labor). Staff Comments, Atch.
C. Staff said the $126,336 in touch-read meter investment belongs in rate base because the
Commission approved such an investment during the 2009 rate case. Comments at 5. But Staff
said the $713,542 in MXU-related investment should be removed from rate base because that
investment is not economically justified. Staff Comments at 3, 5, and 25, Atch. A. Staff said the
ORDER NO. 32663 9
Company estimates the MXUs will save $8,315 per year in reduced fuel and labor expenses, but
that even if the estimated savings are correct it would take the Company 86 years to recover its
MXU investment. Id. at 6. Staff said the Company's MXU investment is "extremely large"
compared to the Company's approved rate base, and that "the Company should have sought
Commission approval for the investment before launching the project. Having failed to do so,
the Company proceeded at its own peril." Id at 8.
In its reply, the Company said disallowing $713,542 in (about 85% of) meter project
costs is confiscatory and prohibits the Company from earning a fair rate of return. The Company
said it can accept Staff's recommended, $39,518 disallowance for financing charges and
temporary office labor, but that the remaining $674,024 for MXUs should be allowed. The
Company reiterated that the MXUs are beneficial because they will reduce labor and fuel
expense by allowing the Company to read meters year-round and will help the Company more
quickly discover and respond to leaks, thereby saving customers money. The Company notes
that other utilities are converting to automated meter reading systems. Reply at 3-6.
b. Accumulated Depreciation. In its comments, Staff recommended decreasing
accumulated depreciation by $80,739 to account for Staff's recommended, $80,739 adjustment
to the Company's claimed, annual depreciation expenses for the meter project. Comments at 3,
25, Atchs. E and I.
In its reply, the Company said that Staff should not have removed $80,739 from
accumulated depreciation. The Company pointed out that it did not book depreciation for the
meter project during 2011 because that project was still construction work in progress until it
was completed in January 2012. The Company's rate base calculation thus restored $80,739 to
accumulated depreciation. Id at 6.
Commission Decision on Rate Base: Based on our review of the record and the
parties concurrence on land and land rights, the touch-read meter investment, and NM-related
financing charges and temporary office labor, we find that it is reasonable and appropriate to
adjust the rate base by disallowing $92,518 of the Company's reported investment in land and
land rights, allowing the Company's $126,336 investment in touch-read meters, and disallowing
$39,518 of the Company's MXU-related financing charges and temporary office labor.
How to treat the Company's remaining, $674,024 in MXLJ investment is more
problematic. We are deeply troubled that the Company abruptly invested so much money in
ORDER NO. 32663 10
MXU transmitters without obtaining prior input from customers, Staff, or the Commission. Had
the Company sought such input, it likely would have received direction to prioritize other
projects—trunk line improvements, storage and booster tank stations, and replacing old water
lines—over the MXUs. While a regulated public utility must spend enough on its system to
ensure that its customers receive safe and reliable service, it may not engage in gold-plating at
ratepayer expense. We would wholly disallow the Company's MXU investment if the Company
were a larger utility.
But the Company is a small water utility, and we are concerned that wholly
disallowing the MXU investment could jeopardize the Company's financial integrity and ability
to provide safe and reliable service to customers. And while the Company spent far too much
too quickly to install its MXUs, we believe the Company's MXUs ultimately will benefit its
customers. We thus find it reasonable and appropriate to allow the Company to also include in
rate base its $674,024 in MXU investment. That said, we also find it reasonable and appropriate
for the Company to reinvest the MXU-related depreciation and the annual savings of $8,315 over
25 years into a special plant reserve fund that the Company may use only to finance
infrastructure projects like trunk line improvements, storage tank and booster stations, and
replacing old water lines, as referenced in the Company's reply at page 2. The Company must
maintain the special plant reserve fund in a separate account, and Staff will routinely audit the
deposits and plant investment expenditures to assure compliance with this Commission directive.
A final word of caution to the Company about its upcoming projects: With this Order, we are
not passing on the prudency of any of the Company's potential infrastructure projects, and we
strongly encourage the Company to consult with Commission Staff before it begins any such
projects. To the extent any investments from this special plant reserve account are approved by
the Commission, they will be allowed in rate base and depreciated like any other prudent plant
investment.
Lastly, based on our review of the record, we find that the Company did not book
depreciation on the new meters in 2011. For ratemaking purposes, the revenue requirement
includes the meters in rate base and a full year of depreciation expense. We thus find that
accumulated depreciation is now consistent with the inclusion of depreciation expense in rates.
Based on the above discussion, we approve a total rate base of $2,414,927.
ORDER NO. 32663 11
3. Rate of Return. The Company's proposed capital structure and overall rate of
return/weighted cost of capital is set forth in Application Exhibit 3. In sum, the Company
proposed a 3.25% cost of debt, a 12% return on equity (ROE), and a 7.75% overall rate of
return/weighted cost of capital. Application at 4, Exh. 3.
In its comments, Staff concurred with the Company's proposed capital structure and
cost of debt at 3.25%. Comments at 2. But Staff recommended the Commission decrease the
ROE to 11.00% and the overall rate of return to 7.23% to reflect that market achieved and
allowable returns are lower now than when the last rate case occurred. Id. at 2, 14-15, and 26.
Staff also considered a lesser, 10% ROE because the Company's equity ratio exceeds 50% and it
lacks a significant required capital budget for the near future; but Staff ultimately determined that
11% was appropriate due to the increased regulatory risk arising from Staffs large,
recommended MM adjustment. Id
In its reply, the Company disagreed with the Staffs recommendation to decrease the
ROE and overall rate of return. The Company said it needs a higher ROE to attract capital for
future projects and because it is more susceptible to the adverse impact of risks and market
forces than is a larger company. Reply at 2. Notwithstanding these arguments, the Company
ultimately said it could accept Staffs recommended lower ROE if the Commission would allow
the Company to recover its MXU investment and associated depreciation expenses. Id.
Commission Decision: Based on the record and the parties' agreement, we find that
the Company's proposed capital structure and 3.25% cost of debt is reasonable and appropriate.
With respect to the ROE and overall rate of return, we note that the record references potential
ROE's of 12% (Company), 11% (Staff, to recognize risk associated with disallowing MXUs),
and 10% (Staff, based on the Company's 50%+ equity ratio and no significant future capital
budget). After carefully reviewing the record and the parties' arguments, we find an ROE of
10.5% and an overall rate of return of 6.97% is fair to both the Company's investors and its
When discussing its risks, the Company said it is regulated by "agencies whose policies tend to swing with current
political and economic conditions." The Commission reassures the Company that the Commission has consistently
designed procedures to help small company's remain viable while providing safe and reliable service. The
Company also observed that its investors make a long-term commitment and expect an average return over many
economic and political cycles. The Company then blithely asked: "When the economy was doing very well and the
stock market was producing 25% to 30% returns did the PUC raise the ROE to compete with the economic
conditions?" Id. The Company misunderstands the Commission's role and the Company's responsibilities. Simply
put, if the Company believed it was entitled to a higher ROE, then it should have asked the Commission to approve
a higher ROE. The Commission expects a public utility to understand its financial needs. If the Company believed
it had such needs, then it should have asked the Commission to address them through a rate proceeding.
ORDER NO. 32663 12
customers and will enable the Company to successfully operate and attract capital. In making
this finding, we note that while we are not allowing the Company the full ROE it requested, we
are allowing a return on the Company's MXU investment and are accepting the Company's
arguments about depreciable life and salvage value.
C. Revenue Requirement
In its Application, the Company proposed increasing its revenue requirement by
$295,059.75 (26.52%), from $1,112,611.36 (2011 adjusted revenue) to $1,407,671 (requested
revenue requirement). See Application at 4, Exh. 4. The Company calculated the increase using
a $2,545,288 rate base, a 12% return on equity and an overall 7.75% rate of return, $933,351 in
ordinary expenses, plus $215,195 in net other expenses.
In light of the adjustments proposed in its comments, Staff recommended a lesser,
overall revenue requirement of $1,169,054, which represents a $15,832 (1.4%) revenue increase.
Staff Comments at 14-15, 25.
The Company's reply then provided information that ultimately led Staff to re-adjust
depreciation expenses in the Company's favor. Staffs re-adjustment increased Staffs original
recommended revenue requirement from $1,169,054 to $1,171,179. Surreply at 2.
Commission Decision: Based on our review of the record and our above findings, we
establish a new revenue requirement of $1,257,158 and find it is fair, just, reasonable and
sufficient to enable the Company to recover its operating expenses and the rate of return on rate
base as allowed in this Order.
H. RATE DESIGN
In its Application, the Company proposed to achieve its requested revenue
requirement by increasing its metered rates and decreasing the included maximum gallons
allowed as summarized on page 2 of this Order.
In its comments, Staff recommended the gallons allowed to customers and the
commodity charge remain unchanged, and any increase in rates be uniformly spread on the
customer charge. Comments at 16. Staff said it normally supports decreasing the volume
allowance for a customer charge to the average customer's monthly winter usage, but it does not
do so here because: (a) the Staff-recommended revenue increase is small compared to the
volume allowance reduction, and the Company's proposal to decrease the volume allowance but
not the customer charge would increase customer bills above Staff's proposed revenue
ORDER NO. 32663 13
requirement percentage increase; and (b) Staff cannot analyze the actual revenue impact of the
proposed volume allowance change without the Company's water consumption data. Id at IT
Staff thus said the Commission should keep the Company's current volume allowance for
various meter sizes. Id Staff concurred with the Company's proposal to base rate design on
customer distribution by meter class as follows:
Meter Class No. of Customers % Distribution
5/8 and 3/4-inch 3,679 95.8%
1-inch 109 2.8%
1 Y2-inch 17 0.4%
2-inch 33 0.9%
4-inch 2 0.1%
Total 3,840 100.0%
Id at 18.
Staff said the Company estimated its variable (commodity) revenue using 2011
monthly excess-water usage data, and that the Company proposed to apply a commodity rate of
$0.67/1,000 gallons to the monthly excess-water usage for various customer classes. Id The
Company estimated 734,085,000 gallons in total annual excess water usage for all customer
classes (having already subtracted the volume allowance for each customer class). Id. However,
Staff said the Company's estimated excess usage no longer applies to the extent the Commission
accepts Staffs recommendation to maintain current volume allowances. Id. Staff said
commodity sale revenue depends on commodity rate and the quantity of water billed at that rate.
Staffs rate calculations assumed an excess usage volume based on: (1) the estimated excess
usage volume rate per customer from the Company's last rate case (Case No. FLS-W-09-01,
Order No. 31022); and (2) a 3,840 total customers. Staff said the Commission should calculate
commodity revenue based on an annual excess usage of 639,602,000 gallons.8 Id To maintain
Company revenue stability, Staff recommended increasing the customer charge and leaving the
commodity rate at its current level. Id. at 20. Staff proposed the following rate design:
8 Adjusted total annual excess volume = 605,955 (Order No. 31022)/3,638 x 3,840 = 639,602,000 gallons.
ORDER NO. 32663 14
BASIC CUSTOMER CHARGES
Service Meter
Size
Vol. Allowance
in Gallons
Minimum
Charge
5/8and%-inch 12,000 $16.44
1-inch 17,000 $23.02
11/2 inch 22,000 $29.59
2 inch 28,000 $37.81
4-inch 49,000 $67.40
COMMODITY CHARGES
Commodity Charges for all Meter Sizes ($71,000
gallons) 1 $0.611
Staff's proposed rate design leaves the commodity charge as is while increasing the customer
charge from the current, $16.10/month rate to $16.44/month (a 2.1% increase for a typical
customer with a 3/4-inch meter). Id. Staff's proposal would increase the average, residential
customer's monthly bill to $21.10/month (a $0.34 or 1.6% increase over current rates). Id.
In its reply, the Company disagreed with Staff's recommended rate design and
commodity rate charge, but agreed to keep the volume allowance at 12,000 gallons for 3h-inch
and smaller meters. Reply at 6. The Company also disagreed with Staffs recommended annual
excess usage volume. The Company proposed an excess usage volume of 573,038,000 gallons
based on 2011 data and the number of new customers in the Company's service territory. Reply
at 6-9.
In its surreply, Staff said the Company had not provided the 2011 customer-usage
data to Staff when Staff was preparing its comments. Based on the new data, Staff conditionally
accepted the Company's proposed, excess usage volume. Surreply at 2. Staff then normalized
water usage over several years as follows:
Customer
Type or
Class
Company-Prop.
Excess Usage
(2011 datagals)*
Percent of
Total
Excess
Usage
Ratio of
Average
Annual Usage
to 2011
Normalized
Total Annual
Excess Usage
Residential 522,959,000 91.26% 1.05245 550,387,746
Multi-Family 19,296,000 5.37% 0.95724 18,470,918
Commercial 30,406,000 3.37% 1.14916 35,374,471
Total 573,038,000 100.0% 1.05444 604,233,135
*Calculated excess usage over present volume allowance for all meter sizes.
ORDER NO. 32663 15
Surreply at 3. In sum, Staff said the Commission should leave the commodity rates unchanged
and recalculate the customer charges for various meter sizes based on the final, Commission-
approved revenue requirement and the excess volume amounts discussed above. Surreply at 4•9
Commission Decision: Based on our review of the record, we find that customer
charges should be increased uniformly by the percentage increase in revenue requirement of
11.09% and rounded to the nearest $0.25. The commodity rate should be increased to achieve
the remainder of the new revenue requirement based on a normalized, total annual excess
volume of 604,233 gallons. We find the rate design set forth in the Attachments to this Order to
be a fair, just, reasonable and sufficient way for the Company to recover its new revenue
requirement.
III. OTHER ISSUES
A. Amending Company's CPCN
In its comments, Staff recommended the Company apply to amend its CPCN No. 236
after this rate case concludes to reflect that the Company is servicing subdivisions outside its
currently certificated area. Staff Comments at 21, 25. The Company concurred with Staff's
recommendation. Reply at 10.
Commission Decision: Based on our review of the record and the party's agreement
on this issue, we find it reasonable to require the Company to amend its CPCN as set forth
above.
B. Year-Round Meter Reading
In its Application, the Company proposed to read meters year-round. Application at
5. The Company presently reads single-family residential meters from April through October
but not during the winter due to difficult meter access. But the newly installed meter project
meters will enable the Company to read meters year-round. Id. The Company said year-round
meter reading benefits customers and conserves water because plumbing leaks will be detected
sooner. Further, customers will be able to pay for water use above the minimum as overages are
Another rate design issue involves the Company's proposal to include a new Schedule No. 3 for Private Fire
Sprinkler and Service. Application at 6. The Company, however, did not provide the proposed Schedule No. 3, and
the Company subsequently withdrew its proposal. Comments at 21. Staff did not oppose the Company's decision
to withdraw the proposal, but it recommended the Company conduct further investigation into how many customers
have private sprinklers or firefighting lines and then submit a revised proposal to the Commission in the Company's
next rate case. Id. The Company agreed to investigate the issue and to propose a separate tariff for this service.
Reply at 11.
ORDER NO. 32663 16
incurred; customers presently do not pay for excess water use that occurred from November
through March until the Company bills them in April. Id.
In its comments, Staff said the Company is now fully converted to an automated
meter reading (AMR) system, is ready to read meters year-round, and has explained how year-
round reading benefits customers. Staff thus recommended the Commission approve the
monthly meter-reading request. Comments at 22, 25.
The Company's reply initially said the Company "does not wish to read meters year-
round if it must bear the costs of the [AMR] equipment on its own." Reply at 6. That said, the
Company acknowledged that year-round meter reading benefits water resource management,
conservation planning, and water right planning. Reply at 10. The Company thus concluded:
"while disagreeing with the Staff assessment of the benefit of our project for our customers, [the
Company] is in agreement that year-round meter reading is a positive step towards meeting water
resource management goals." Id.
Commission Decision: Based on our review of the record and the party's agreement
on this issue, we find it reasonable to authorize and direct the Company to begin reading meters
year-round.
C. Unauthorized Charges to Customers
In its comments, Staff said that the Company has been making the following four
types of unauthorized charges relating to building new facilities to serve new customers: (1) a
charge for improvement to physical plant which varies depending upon whether the water
provided will be used for irrigation; (2) two different charges for the cost of water rights
depending upon whether the water provided will be for in-house use and/or irrigation; (3) a
miscellaneous development fee to cover engineering costs, and (4) a charge to install a service
line underneath a street to the customer's property. Comments at 22. Staff said the first three
charges contradict the Uniform Main Extension Rule within the Company's approved tariff, and
that the Commission has not approved such charges for any other small water company. Id at
22-23. But Staff also noted the Commission has previously approved the fourth charge for other
companies and allowed those companies to charge customers for installing a service line under a
roadway to provide a customer connection. Id. at 23, citing Case Nos. DIA-W-07-01, BCS-W -
09-02, and MUR-W- 10-01. Staff thus recommended the Commission authorize the Company to
modify its tariff to include the following Commission-approved language:
ORDER NO. 32663 17
When the installation of a new service line requires the Company to bore a
line under a road, all additional costs will be charged to the customer on a
time and materials basis. The new customer may, at their option, hire a Falls
Water Company approved independent contractor to perform the road bore
and connection. The Company will require such contractor to show proof of
bonding, licensing and insurance and have at least five (5) years of experience
at hot tapping water lines. Falls Water Company will inspect and approve all
the work being performed to insure compliance with the Company's
installation requirements.
Staff also recommended the Company refund to customers any unauthorized charges
collected from them over the past three years. Id. The Company agreed with the Staff's
recommendations. Reply at 11.
Commission Decision: Based on our review of the record and the party's agreement
on this issue, we find it reasonable to authorize the Company to modify its tariff to include the
Commission-approved language referenced above. We also find that the Company's
unauthorized charges were excessive. The Company must, therefore, refund to its customers the
four types of unauthorized charges referenced above, to the extent collected within the past three
years, with interest from the date of collection. See Idaho Code §§ 61-641 and 61-642; and
Rules 203-204 of the Utility Customer Relations Rules (UCRR). We find interest at 1% per
annum to be reasonable and appropriate in this situation. Reference UCRR 106. Within the next
60 days, the Company shall prepare a corrected billing indicating the refund due to each
customer who was charged and issue a credit on the customer's next bill. The Company shall
credit any remaining credit balance against future bills unless the customer, after notice from the
utility, requests a refund. See UCRR 204.
D. Customer Notice and Press Releases
In its comments, Staff said the Company's customer notice and press release detailed
the Company's proposed percentage increase for various connection sizes but did not explain
how the Company determined the percentage increase for each customer class. Staff said the
Company later explained its methods to customers during the workshop. But Staff
recommended the Company's future customer notices comply with Rule 25 of the Commission's
Rules of Procedure, (IDAPA 31.01.01), which states: "the notice shall give the proposed overall
percentage change from current rates as well as the proposed percentage increase in revenue for
ORDER NO. 32663 18
each major customer class." Comments at 24, 26. The Company agreed with Staff
recommendation. Reply at 11.
Commission Decision: Based on our review of the record and the party's agreement
on this issue, we find it reasonable to direct the Company to ensure that its future customer
notices comply with the Commission's Rules, as set forth above.
E. Xpress Bill Pay
In response to customer requests, the Company contracted with Xpress Bill Pay to let
customers pay their bills online. The Company said that when other utilities provide such a
service, their vendors typically charge the customer a convenience fee. The Company opted to
pay for the cost of the program. The Company said the on-line bill pay program costs are less
than the Company's prior merchant pay system, and that numerous customers have signed up.
Staff believes that the volume of customer participation to date indicates the appropriateness of
the program, and Staff supports the Company's decision. Comments at 25.
Commission Decision: Based on our review of the record, we believe it is
appropriate to approve the Company's implementation of Xpress Bill Pay. We commend the
Company for utilizing its on-line bill pay option to save costs while increasing customer
convenience.
ULTIMATE FINDINGS OF FACT AND CONCLUSIONS OF LAW
Falls Water is a water corporation. The Commission has jurisdiction and authority
over Falls Water and the issues raised in this case, pursuant to Title 61 of the Idaho Code and the
Commission's Rules of Procedure, IDAPA 31.01.01.000, et seq. Based on our review of the
record, we find that Falls Water's existing rates, charges, and practices are unreasonable to the
extent described in the body of this Order, and that the rates do not afford sufficient revenue to
the Company. See Idaho Code §§ 61-501 and 502. We also find it fair, just, and reasonable for
the Company to changes its rates, charges, and practices as described in this Order. Accordingly,
we approve a 10.5% ROE and an overall rate of return of 6.97% on a total rate base of
$2,414,927, and we authorize the Company to increase its annual revenues by $125,546 to
satisfy a total revenue requirement of $1,257,158. See the Attachments 1 and 2 to this Order,
further detailing this decision.
ORDER NO. 32663 19
ORDER
IT IS HEREBY ORDERED that Falls Water shall have an annual revenue
requirement of $1,257,158, with expenses, rate base, rate of return, capital structure, and rate
design as detailed in the body of this Order and its Attachments. The Company shall submit
tariffs in compliance with the rates and charges identified in this Order no later than fourteen
(14) days from the service date of this Order. The rates and charges authorized by this Order
shall become effective for service rendered on and after October 16, 2012.
IT IS FURTHER ORDERED the Company shall maintain repair and replacement
logs for its meters to better enable the Company and Commission to assess the meters' useful
lives;
IT IS FURTHER ORDERED that the Company shall apply to amend its CPCN as
described in this Order;
IT IS FURTHER ORDERED that the Company shall read its customer meters year-
round;
IT IS FURTHER ORDERED that the Company shall refund the unauthorized
charges collected from customers as set forth in the body of this Order. The Company may file a
modified tariff with the language quoted in this Order that will enable the Company to charge
customers when it must install a service line under a roadway to provide a customer connection;
IT IS FURTHER ORDERED that the Company shall ensure that its future customer
notices comply with RP 25, with such notices giving "the proposed overall percentage change
from current rates as well as the proposed percentage increase in revenue for each major
customer class."
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.
ORDER NO. 32663 20
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of October 2012.
PAUL KJELLA D R, PRESIDENT---`
MACK A. REDFORD, COMMISSIONER
MARSHA H. SMITH, COMMISSIONER
ATTEST:
D. JewellJ
â'ommission Secretary
O:FLS-W- 12-0 l_kk5
ORDER NO. 32663 21
Falls Water Company
Summary of Commission Decision
Plant In Service $ 6,474,635
Accumulated Depreciation (1,589,467)
CIAC (2,588,586)
Working Capital 1/8*
118,345
Total Rate Base $ 2,414,927
Expenses Commission Decision
Electrical Power
Chemicals
Rental of Property
Rental of Equipment
Depreciation
Total Expenses
131,871
6,625
41,995
24,000
103,919
$ 1,058,179
Capital Structure and Return
Long-Term Debt
Equity
Total
Percent Cost Weighted

48.63% 3.25% 1.58%

51.37% 10.50% 5.39%

100.00% 6.97%
Revenue Requirement
Rate Base
Required Rate of Return
Return
Gross-up
Total Expenses
2,414,927
6.97%
168,320
30,659
1,058,179
Total Revenue Requirement
$ 1,257,158
ATTACHMENT
CASE NO. FLS-W-12-01
ORDER NO. 32663
Falls Water Company Case No. FLS-W-12-01
Commission-Approved Rate Design (By Service Meter Size)
Commission-Approved Revenue Req. $1,257,158
Total Number of Customers 3,840
MINIMUM CUSTOMER (BASE) CHARGES
Service
Meter Size
Number
of
Meters
Minimum
Volume-Gals
Minimum
Charge
Total An. Rev.
from Mm.
Charge
5/8 and 3/4 - inch 3,679 12,000 $17.75 $783,627
1-inch 109 17,000 $25.00 $32,700
11/2-inch 17 22,000 $32.25 $6,579
2-inch 33 28,000 $41.00 $16,236
4 - inch 2 49,000 $73.25 $1,758
Total 3,840 $840,900
COMMODITY CHARGES
Total Annual Excess Volume for all meter sizes (x 1,000 gals) 604,233
Commodity charges for all meter sizes ($/1,000 gals) $0.689
Total Commodity Revenue $416,317
Total Revenue (base and commodity charges)
Revenue collected over (under) Revenue Requirement
Various Charges as a % of Gross Revenue
Minimum Charge
Commodity Charge
$1,257,217
$59
67%
33%
*Normalized annual volume of excess usage.
ATTACHMENT 2
CASE NO. FLS-W-12-01
ORDER NO. 32663