20180531Comments.pdf

BRANDON KARPEN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
(208) 334-03s7
IDAHO BAR NO. 7956
RECEIVED
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Street Address for Express Mail
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BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF' NORTHWEST NATURAL WATER
COMPANY, LLC TO ACQUIRE FALLS
WATER COMPANY
CASE NO. FLS.W.18.O1
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission submits the following comments
regarding the above referenced case.
BACKGROUND
On February 21,2018, NW Natural Water Company applied to the Commission
requesting approval of its proposed acquisition of Falls Water Company. NW Natural Water is an
Oregon limited liability company and a wholly-owned subsidiary of Northwest Natural Gas
Company, a publicly traded Oregon corporation ("NW Natural") engaged in the natural gas
distribution and storage business, located in Portland, Oregon. Falls Water is a privately held
Idaho water company serving approximately 5,500 customers near Idaho Falls, Idaho. Falls
Water holds Certificate of Public Convenience and Necessity ("CPCN") No. 236, as amended and
approved by the Commission on August 13,2015. According to NW Natural, Falls Water will
continue to operate with its current management and employees (for at least two years), with
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ISTAFF COMMENTS MAY 31,2018
Brent Johnson, Falls Water's sole shareholder, retained as President (for at least one year).
Application at 3, Exhibit2 at 33. In addition, NW Natural has stated that the merger will not
cause an increase in rates. Application at 3. The Application includes a number of capital
improvements deemed necessary to maintain safe and reliable water service, including some
improvements already approved by the Commission. Application at 4.
NW Natural has also requested that the Commission approve "the subsequent change of
upstream ownership (two levels up) of Falls Water Company, associated with the formation of the
NW Natural holding company, to the extent the Commission deems such an approval necessary."
Application at 6.
The Commission issued notice of the Application and set an intervention deadline of
March 30,2018. No intervenors appeared in this case. The Commission set a May 31,2018,
comment deadline, and a June 7, 2018, reply deadline. Additionally, a public workshop was held
on May 21,2018. No customers attended the workshop, and no customer comments have been
filed.
STAFF REVIEW
Staff recommends that the Commission approve the proposed acquisition of Falls Water
by NW Natural Water. Staff s recommendation is based on its review of NW Natural Water's
Application, the direct testimony and exhibits of Justin Palfreyman, Vice President of Strategy
and Business Development for NW Natural, and NW Natural's responses to Staff s production
requests.
Idaho law does not specifically address the acquisition of water companies. As it has
done in previous water company acquisition cases, Staff relied on the standards outlined in Idaho
Code $61-328 related to the sale of electric utilities. Those standards dictate that:
(a) The transaction is consistent with the public interest;
(b) The cost of and rates for supplying service will not be increased by reason of such
transaction; and
(c) The applicant for such acquisition or transfer has the bona fide intent and financial
ability to operate and maintain said property in the public service.
Staff believes that the proposed acquisition by NW Natural Water meets all three standards.
2STAFF COMMENTS MAY 31,2018
Public Interest
Staff believes that this acquisition serves the public interest because, as discussed in more
detail below, it provides improved access to capital needed for system upgrades and opportunities
for cost savings based on economies of scale.
Cost and Rates
NW Natural Water stated that the acquisition will not cause an increase in rates.
Application at 3, Palfreyman Direct at 3. See also Response to Production Request No. 16.
While the Company has identified some future system improvements that could justify higher
rates, those improvements are independent of the acquisition and may be necessary regardless of
whether the system is acquired by NW Natural Water or continues as a stand-alone system.l Staff
believes that the acquisition will not increase the cost to operate, maintain, and expand the Falls
Water system because the system will function post-acquisition as it has pre-acquisition.
Staff believes that the acquisition will not increase costs associated with system operation.
NW Natural Water has better access to capital markets than Falls Water and is therefore more
likely to procure lower-cost financing for system upgrades, if and when needed. NW Natural
Water has the ability to access capital markets because it is a publicly traded company with strong
credit ratings from two major credit rating agencies. It has received investment-grade ratings of
"Al" from Moody's, and "AA+" from Standard and Poor's in20l6 and20l7. Lower financing
rates will help control costs that ultimately are passed on to customers.
In addition to improved access to capital markets, the acquisition may provide economies
of scale for overhead and shared services functions that can lower costs for customers. NW
Natural believes that shared services expenses per customer can be reduced by spreading the costs
across multiple utilities. Examples are certain legal and engineering costs. Response to
Production Request No. 1 1. Staff agrees there is potential to reduce costs to Falls Water
customers, although the size of these cost savings is unknown.
Operational economies of scale are created by spreading downstream labor costs (e.g.,
wages and benefits of a skilled field technician) or capital equipment costs (e.g., cost of a new
I Falls Water and NW Natural Water have identified upgrades to Well No. I I to meet fire flow, peak demand, and
pressure regulation requirements in the next I to 3 years. A 1.5 million gallon storage tank near Well No. 9 may be
needed at approximately the same time.
aJSTAFF COMMENTS MAY 31,2018
backhoe) over more systems and customers, by getting quantity discounts for material and supply
purchases, orby realizing efficiencies through jointly operating nearby systems. In this case,
Staff does not believe most of these savings will be realized. Many operational economies of
scale are only possible when the water systems are located near each other and can share
resources, and NW Natural Water does not own any such systems. The Company has stated that
it intends to make future water system acquisitions, but Staff notes that these acquisitions will
only contribute to operational economies of scale that benefit Falls Water customers if those
water utilities are located close enough to operate in conjunction with each other.
Iqlant and Ability to Operate
In his direct testimony, Mr. Palfreyman indicated that one of NW Natural's long-term
growth strategies is to "acquire, develop and manage a meaningful water utility business."
Palfreyman Direct at2-3. The acquisition of Falls Water appears to support NW Natural's stated
long-term growth strategy and shows that it intends to continue operating the Falls Water system.
In addition to its intent, Staff believes that NW Natural Water has the ability to operate the
system because it is a regulated utility with the experience, expertise, and financial resources to
operate smaller water utilities. NW Natural Water has familiarized itself with the Falls Water
system, developed a plan for operating the system, and demonstrated its intent to provide safe and
reliable water service.
Staff also believes that NW Natural Water can successfully operate the Falls Water system
because it is not making any immediate management or employment changes to existing Falls
Water staff. In its Application and exhibits, NW Natural Water stated that Falls Water's current
owner will remain with the Company as President for at least one year and that Falls Water
employees will be employed by NW Natural Water for at least two years. Application at 3,
Exhibit 2 at33. NW Natural Water has already begun working with Falls Water employees to
identifiz capital improvements that may be necessary in the future for the growing Falls Water
system. Application at 4.
Last, Staff believes that by joining alarge, publicly traded corporation, Falls Water may
also avoid issues surrounding succession planning that other small utility companies often face.
4STAFF COMMENTS MAY 31,2018
,S uest for A ofNWN
NW Natural has requested that the Commission approve upstream ownership changes
associated with the formation of the NW Natural holding company to the extent the Commission
deems such an approval necessary. Application at 6.
Staff believes that this type of ownership change should include Commission notification
but formal approval is not required. Staff believes that the only relevant consequence of NW
Natural's organizational structure is whether it imposes costs on Falls Water customers that will
result in future rate increases exceeding those that would have existed absent the acquisition.
Staff will review this issue in future proceedings to ensure that Falls Water customers are not
adversely affected.
CUSTOMER NOTICE AND PRESS RELEASE
NW Natural Water did not file a customer notice or press release with its Application.
However, the Company subsequently provided customers with notice by press release of its
request for approval of the Company's acquisition of Falls Water in the Post Register on May l6
and20,2018. The Company is not required to provide notice to customers or issue a press
release because the Company is notproposing any changes to rates. IDAPA 31.01.01.125.
Public Workshop and Csloloaq1s
On May 9,2018, the Commission issued a press release regarding the sale and purchase of
the Company and the upcoming public workshop. The Commission Staff held a workshop on
May 21,2078, in the City Hall in Ammon, Idaho. Both Falls Water Company and NW Natural
Water were represented. No customers attended the workshop.
As of May 31,2018, the Commission has not received any comments regarding this case.
STAFF RECOMMENDATION
Staff recommends that the Commission approve the proposed acquisition of Falls Water
by NW Natural Water.
5STAFF COMMENTS MAY 31,2018
Respecttully submitted this Z\'l' day of May 2018.
Attorney
Technical Staff: Bentley Erdwurm
Brad Iverson-Long
Chris Hecht
Michael Morrison
i : umisc:comments/fl swl 8. I bkbeblcwhmm comments
6STAFF COMMENTS MAY 31,2018
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 31ST DAY OF MAY 2018,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN
CASE NO. FLS-W-l8-OI, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
MICHAEL C CREAMER
PRESTON N CARTER
GIVENS PURSLEY LLP
601 W BANNOCK ST
BOISE ID 83702
E-MAIL: [e-mail]
prestoncarter@ givenspursley. com
ZACHARY D KRAVITZ
NORTHWEST NATURAL GAS CO
220 NW 2ND AVE
PORTLAND OR 97209
E-MAIL: [e-mail]
.lcz
SECRETARY T
CERTIFICATE OF SERVICE