20210125Reply Comments.pdf

K. Scott Bruce
Falls Water Company, Inc.
2180 N. Deborah Dr
Idaho Falls, ID 83401
Tel. (208) s22-1300
Fax [phone]
E-mail: scott I @fallswater.com
Representative for Falls Water Co.,Inc.
IN THE MATTER OF FALLS WATER COMPAIIY'S )
APPLICATION FOR AN ORDER AUTHORIZING )
INCREASES IN THE COMPAIIY'S RATES AND )
CHARGES FOR WATER SERVICE IN THE STATE )
OF IDAHO )
:'i..' i i. "E:+ji1+i t ur
-' ,:. -j,',;i ?5 Pl{ l+: l'+
BEFORE TIIE IDAHO PUBLIC UTILITIES COMMISSION
cAsE NO. FLS-W-20-03
COMPAT\Y'S REPLY TO
CONT'IDENTIAL COMMENTS
OF THE COMMISSION STAFF
Comes now Falls Water Co., Inc. ("Falls Water" or the "Company") and files the following Reply to the
Confidential Comments ("Comments") of the Staff of the Idaho Public Utilities Commission ("Staff'),
filed January 11,2021.
Staff made the following recommendations:
l. Staffrecommends an annual revenue requirement of $1,967,016, consisting of a rate base of
$4,928,979, a return on equity (*ROE") of 9.9Yo, and a weighted average cost of capital
("WACC") of 6.910/o.
2. Staff recommends a reduction to the Company's proposed employee salaries of 579,747,
employee benefits of $3,872, and payroll taxes of $6,143.
3. Staff recommends a reduction in training expenses of $2,983.4. Staff recommends the elimination of the $8,315 operational expense as well as the contribution
into the special plant reserve account, as ordered by the Idaho Public Utilities Commission
("Commission") in Order No. 32663. Staff also recommends that the Company continue to fund
the special plant reserve account with the depreciation expense associated with advanced meters.
5. Staffrecommends a reduction to shared services expense of $39,655.
6. Staff recommends setting the Company's property tax expense at l.16Yo of net plant in service
and making adjustments to the Company's income tax expense based on proposed adjustments to
the Company's expenses and rate base.
7. Staff recommends that the Company deplete the special plant reserve fund towards the
infrastructure projects built since the last rate case. Staffalso states that all of the existing funds
should be treated as a contribution in aid of construction ("CIAC").
8. Staff recommends the Company collect its revenue through an increase in commodity charges as
shown in Table No. 3 of the StaffComments.
9. Staff notes that due to customer complaints regarding a boil advisory from April20, 2020,the
Company will be implementing a mass communications system to alert customers of problems in a
more timely and modern method than that required by the Idaho Department of Environmental Quality
10. Staff recommends removing the Company's bank service charge fee from the calculation of the
gross up factor.
1
Falls Water Company Reply Comments January 25,2021
INTRODUCTION
Falls Water thanks Stafffor its diligence and flexibility in the face of the difficulties caused by
COVID-I9. Staffls flexibility allowed this case to carry forward in spite of the challenges faced due to
COVID-I9.
However, Falls Water respectfully disagrees with some of the assertions and conclusions contained in
the Staff Comments, as described in more detail below.
GENERAL COMMENTS
First, Staffnotes in several instances that Falls Water was acquired by NW Natural Water, and that
NW Natural Water indicated that customer rates would not increase by virtue of the acquisition. Staff
Comments atZ and7. That statement was true, and remains true: Falls Water is not seeking any increase
in rates caused by the acquisition. Falls Water and NW Natural Water have always indicated that any
increase in rates would be based on prudent investments and recognized ratemaking principles.l In this
general rate case, Falls Water seeks a rate increase resulting from its prudent investments and other
ratemaking principles. Falls Water asks that its application be reviewed in accordance with the
Commission's established ratemaking principles and procedures. The requested increases are not caused
by the acquisition, but rather from prudent investments and related expenses as described in more detail
in the specific comments below.
Second, in several instances Staffnotes increased expenditures on items such as training, acoounting,
human resources ("HR"), and other functions previously undertaken by Falls Water employees. Staff
Comments at 5 (training), 6 (accounting, corporate communications, HR"/payroll, and information
technology and services ["[T&S"]). Increased expenditures, in and of themselves, are not an indication
that the increase was unwaranted. Improving the operation of small water companies requires
investment in areas such as training and operations. The two go hand-in-hand; one cannot expect that
small water companies operate better without allowing expenditures in the companies' operations. Of
course, the expenditures must be reasonable and prudent. But it is not reasonable to view all increases in
operational expense as inherently suspect.
Third, Staffreferences seeking prudency approval before engaging in significant capital
improvements. StaffComments at2,9. Falls Water takes exception to those statements. Falls Water
has made specific efforts to improve the advanced communication regarding our capital investments, and
has been very deliberate about seeking Staff review and engagement in our capital investment decision-
making process. The Company has been transparent during meetings and discussions with Staff,
including a meeting held on October 16,2019, during which Falls Water and Staff discussed Falls
Water's Drinking Water Capital Facilities Plan. On this point, Staff acknowledges that the Company's
rate case application "include[s] several additions and replacements that were in the Company's Drinking
Water Capital Facilities Plan." Staff Comments at 8. The Company sought prudency review on the
expenditure for the new well (FLS-W-I7-01), which appears to be consistent with prudency reviews
sought by water companies in prior cases. Falls Water is happy to discuss with Staff its view on what
types of expenditures require prudency review. But the Company submits that, at this time at least, there
t FLS-W-18-01, Application, page 3, paragraph 10
Falls Water Company Reply Comments
2
January 25,2021
is no clear line (beyond seeking prudency review for new wells) between investments that require
prudency review and those that do not.2
Fourth, the Staff Comments refer to potential hardships caused by COVID-19. Staff Comments at 4(noting that wage increases in2020 and beyond o'are excessive at a time when many of the Company,s
customers may be facing financial hardship due to the ongoing COVD-19 pandemit"). The Company is
cognizant of COVID-19 and the hardships it has caused. The Company voluntarily ceased
disconnections and collections activities, and established payment arrangement options for customers
who have been unable to meet the current payment due date. In addition, the invistments and
expenditures that form the basis for the proposed increase were planned prior to COVID-I9. Those
investments and expenditures are based on regulatory principles set forth by the Commission, have
provided benefits during the COVID-I9 pandemic, and will continue to provide benefits after thepandemic is over. The Company respectfully submits that the COVID-19 pandemic should not be a
driver of the long-term ratemaking decisions at issue in this case.
In addition to these general comments, the Company provides the following comments, which are
more specific to Staff s particular recommendations listed above.
COMMENTS ON STAFF'S RECOMMENDATIONS
RESPONSE TO RECOMMENDATION NO. 1
Falls Water requested that the ROE of l0.5yo, established in its prior rate case, be maintained.
Further, Falls Water recognized that its business is financed almost entirely from equity, so it offered that
the overall rate of return be based on a hypothetical capital structure of 45o/odebt and 55% equity.
Staffagreed that the overall rate of return should be based on a hypothetical capital structure, rather
than the actual rate structure, but recommended an ROE of 9.9%o. Staff bases this iecommendation in
part on "[o]ther NW Natural Holdings utilities hav[ing] ROE's lower than Falls Water" and on the
Commission having awarded non-water utilities ROEs of 9.5Yo. StaffComments at 10. Staff also asserts
that the WACC of 6.910/o that results from lowering the ROE to 9.9o/o is "comparable to NW Natural
Holding's weighted cost of capital for its Oregon natural gas utility, which is 6.97yo." Staff Comments at
10.
Falls Water respectfully disagrees with the methodology and conclusion used by Staff to determine a
recommended ROE. First and foremost, Falls Water is a small water company in Idaho. The
Commission has consistently determined that ROEs of between llYo and l2o/o are appropriate for these
companies. See Case No. GPW-W-017-01, Order No. 33910 at 8 (Oct. 13,2Ol7) (apprwing llYoreturn
2 Staffalso makes the comment, "The Company is proposing large plant additions in this case, again without
seeking a prudency determination from the Commission prior to beginning work, aside from the new well.,, Staff
Comments at 9. However, Staff does not suggest that these expenditures are imprudent. And they are notimprudent-these are important, prudent investments that should be made to serve the system's customers. In
addition, it is Falls Water's understanding that prudency review is historically sought for investments such as a newwell, while more routine infrastructure improvements have not historically been subject to advance review. To the
extent the Commission requires or desires advance prudency review, some guidance regarding the types of projects
for which review is desired may be helpful to avoid future misunderstandings.
Falls Water Company Reply Comments Jawary 25,2021
aJ
on equity on the basis that it "reflects a fair return in line with similar utilities."); Case No. DIA-W-I5-
01, orderNo. 3357g at I I (Aug. 29,2016) ("We find the agreed l2Yorate of return to be fair and just and
consistent with that which *" hur. allowed in other small water company cases, and thus approve it.");
Case No. SpL-W-l3-01, OrderNo. 32904 at 8 (Oct. 1I,2013) ("The Commission finds thatal2%o return
on equity and 11.42%ooverall rate of return is fair, just and reasonable return for the Company. This
ruling is entirely consistent with past Commission precedent for small water companies and particularly
forwater systems comparable to Spirit Lake." (citing Case TRH-W-10-01, OrderNo. 32152; BCS-W-09-
02, OrderNo. 30970; and Case No. CCU-W-Lz-Ol,OrderNo. 32662)); Case No. TRH-W-13-01, Order
No. 32958 at4,l0 (Dec. 21, 2013) (authorizing l2o/oretumon equity for small water company, based in
part on Staff s recommendation that "the lTo/oreturn on equity (ROE) is consistent with the Commission-
authorized ROE for many small water companies"). In these cases, the Commission approved the ROEs
based on comparisons to other small wateriompanies in Idaho, and neither the Commission nor Staff
discussed or analyzed the ROEs approved in other states, ROEs of non-water utilities, ROEs for affiliated
companies, or the other factors Staffdiscusses here.
Falls Water submits that it is unreasonable-potentially discriminatory3-to deviate from the
Commission's typical practices regarding small water utilities on the basis that Falls Water's parent
company has holdings in other states. Potential discrimination aside, Staff does not explain how
.o-puriro.r to non-water utilities, utilities in other states, and other utilities held by Falls Water's parent
.o-puny', holding company is appropriate here, particularly against the longstanding background of
recommlnding ROEs baiedon ttre nOBs approved for small water companies. See, e.8., Case No. TRH-
w- I 3-0 I , Order No. 32g5 g at 4 (,.Staff says that the l2oh return on equity (RoE) is consistent with the
Commission-authorized ROE for many small water companies.").
In addition, while Staff makes a variety of comparisons to other utilities, Staff does not explain how it
settled upon a recommendation of 9.9Yo. lndeed, Stafls recommendation does not appear to be based on
any particular methodology. Staff appears to simply settle upon a percentage, a1d then discuss similar
lund not-ro-similar) p..."ntug"r forln-state and out-of-state non-water companies. Staff s analysis does
not distinguish betwien the water sector, natural gas sector, and electric sector, each of which has
different r-isk profiles; or between states, again,each of which has different risk profiles. Most strikingly,
Staff s analysis entirely omits the ROEs of companies that are most closely analogous to Falls Water:
small wateicompaniei in Idaho. Falls Water submits that Staff s comparisons do not provide a
reasonable basis for the Commission to authorize an ROE of 9.9%o.
As noted, Falls Water's actual capital structure was 15.4Yo debt and 84.6% equity as of December 31,
2019. Falls Water proposed to use a hypothetical capital structure as an accommodation to lower the
total rate of return. However, if Staff s analysis is adopted and the Commission uses an ROE of 9.9%o,
Falls Water submits that it would be appropriate to calculate the overall rate of return using its actual
capital structure, rather than a hypothetical.
3 The Commission may not discriminate against utilities based on the ownership status of their parent companies.
See In re PacifiCorp,base No. PAC-E-99-1, OrderNo. 25213 (1999) (noting that the U.S. Constitution's
Commerce Clause and treaties prohibit "discriminat[ion] against service providers who are citizens of other states or
foreign countries").
Falls Water Company Reply Comments Jarluary 25,2021
4
Accordingly, the Company requests that Staff s 9.9o/o ROE be increased to the Company's proposed
ROE of 10.5%. Given the prior Commission decisions authorizing ROEs of between llo/o and l2%o for
small water utilities, the Company would have been justified to seek a higher ROE, but it decided to not
do so. Instead, the Company's requested 10.5% ROE is the same percentage as the Commission
approved in Falls Water's last rate case, FLS-W -12-01, Order No. 32663, dated Octob er 12, 2012. T"his
ROE falls on the low side of ROEs approved for other small water companies, as discussed above. Falls
Water's position is that the 10.5%o ROE continues to be fair to both the Company's investors and its
customers and will enable the Company to successfully operate and attract capital. The Company also
notes that Suez Water filed its most recent rate case on September 30,2020, SIJZ-W-20-02, and its
expert consultant is recommending a 10.2%o ROE (Walker,p.62). Falls Water's l0.5Yo requested ROE is
within the range of reasonableness, especially given its smaller size compared with Suez Water. The
Company could have hired an expert ROE consultant for this rate case, but decided that it was more in
the public interest to not incur such rate case expense to be amortized over a period of time and recovered
from customers. A final consideration is that while Falls Water's actual capital structure as of December
31,2019 was 84.6%o equity I 15.4% debt, the Company is proposing a more balanced hypothetical capital
structure of 55o/o equity I 45% debt, and that concession merits adopting the Company's requested 10.5%
ROE.
RESPONSE TO RECOMMENDATION NO.2
Historically, Falls Water employees have been paid significantly less than employees of competitors
in the area, including both municipal and investor-owned utilities. In recent years, Eastem Idaho has
seen significant growth in economic activity and, correspondingly, an increase in wages and competition
for qualified employees. lndeed, recently Falls Water lost two employees to other employers due in part
to the Company's uncompetitive wages. To address this issue, Falls Water proposed wage increases,
phased in over a number of years. These increases are necessary to bring compensation to a level offered
by local competitors, such as the City of Idaho Falls water system.
ln Staff Comments Table No. I (annual salary increase comparisons), Stafls data for Falls Water are
based on the Company's response to Staff data request ("DR") No. 57. [n that DR, Staffrequested a list
of all Falls Water employees and their wage rates and percentage of wage increases for each year starting
in2012 and ending in2020. The Company's DR No. 57 response showed the gross wage increase
percentage for the Company's employees as requested (on a confidential basis). Not detailed in the
response (because it was not requested in the DR) were the components of the wage increases. Looking
at the non-redacted wage increase percentages for other similar companies, many of the percentages are
2o/oto 3o/o increases. These percentages are comparable to a cost-of-living increase which is customary in
most businesses. A second component to wage increases is incentive-based compensation for an
employee attaining licenses, certifications, and other training that enhances the employee's skill set to
better serve the utility and bring added benefit to the customers by increasing the employee's knowledge
to safeguard the public. A third component to wage increases is performance-based compensation. As
the employee excels in his or her position and/or is given added responsibilities, the company will award
a wage increase to recognize the employee's improved value to the company and its customers.
Importantly, all three components of compensation are embedded in the Falls Water wage rates and
percentage of wage increases disclosed confidentially in the spreadsheet accompanying the Company's
5
Falls Water Company Reply Comments January 25,2021
response to DR No. 57. It appears that the other companies' wage increase percentages shown in Staff
Comments Table No. I are only cost of living increases and do not reflect any additional wage increases
based on incentive-based or performance-based wage increases. (Falls Water cannot definitively confirm
this, because the data are confidential and have not been provided to Falls Water or the data are disclosed
without citations, but the percentage increases that can be seen appear to reflect cost-of-living increases
only.)
The Company has submitted to Staff a supplemental response to DR No. 57 that provides a more
detailed confidential spreadsheet to break outthe components of the wage increases.a While the details
of the comparison are confidential, the components of Falls Water's wage increases that reflect cost-of-
living increases fall within the increases noted in Staff s Table No. 1. The remaining components of the
increases do not appear to be reflected in Staff s Table, and the Table should not be used to disallow the
other components of Falls Water's proposed increases.
Moreover, Staff acknowledged in its comments that "the Company's salaries have historically been
lower than other water systems, both investor-owned and municipal systems." Staff Comments at 4. In
late 20 1 8 and in 2019, the Company lost one of its two Class 3 Distribution Operators to a neighboring
water system. The employee's reason for leaving was in part due to the opportunity to earn a better wage
than he received from the Company. Approximately six months later, an equipment operator for the
Company resigned because the Company was not able to match the wages offered by a local excavation
"o-pany. The Company is not losing employees to other parts of the State or to companies outside of
Idaho but to local businesses that offer higher wages. This creates a situation that is not in the best
interest of customers. Customers deserve to have well-trained, competent, and knowledgeable employees
working for the utility. If the Company struggles to hire good employees and then to retain them because
it is unable to offer a competitive wage when compared to other local water systems and businesses,
customer service is ultimately harmed.
It also is worth noting that Staff s Table No. 1 of comparisons to other employers is problematic.
First and foremost, the information regarding other utilities is redacted. After it filed its Comments, Staff
informed the Company that it cannot share the redacted information. Accordingly, the Company does
not even know what the numbers on the table actually are, and it cannot obtain and analyze the
underlying information to determine (for example) what the actual wages are, as opposed to the percent
increase, what components are included within the salary increase, or otherwise meaningfully respond.
The Company respectfully submits that viewing blacked-out boxes on a page does not provide an
appropriate basis for adjustments in a rate case. Second, the chart focuses exclusively on percentage
increases, without regard to the starting point of wages. If a company starts with historically low
4 Falls Water has submitted this information to Staff as confidential under the Commission's rules and pursuant to
the protective agreement in this proceeding. There appears to be some ambiguity as to whether this information is
formally considered as part of the record in the case. This information is highly sensitive, particularly in the small,
competitive marketplace of Idaho Falls. There does not appear to be a mechanism in the Commission's rules that
*ouid allo* in camera review by the Commission without publicly disclosing the confidential information to the
public. Falls Water would be happy to facilitate an in camera review or other procedure that would provide this
information to the Commission confidentially so that it can formally be considered part ofthe record. (Falls Water
notes that the same ambiguity would apply to Staff s redacted Table. If Staffintends to provide the Commission
with an unredacted version of its comments for lz camera review, Falls Water would consider a similar procedure
for its salary information.)
6
Falls Water Company Reply Comments January 25,2021
wages-as Falls Water does-then the company must play catch up with larger increases to maintain the
ability to compete in the environment. This comparison does not provide a basis to freeze wages; the
company will then simply fall further behind, and either fail to attract or retain talent, request greater
increases in the future, or both. Third, the chart draws a comparison between a small water company in
eastern Idaho with large, multi-state and multi-national corporations with operations in different sectors
and in different areas of the state. Drawing such a broad comparison, while focusing exclusively on the
percentage of salary growth, does not provide a basis to freeze wages. Falls Water does not compete with
an Avista employee in Sandpoint or an lntermountain Gas employee in Boise; it competes with the City
of Idaho Falls Water and similar private-sector companies in the area. It also should be noted that public-
sector employers are able to offer pensions and other benefits that can create a competitive challenge for
private companies like Falls Water.
The Company is attempting to bring its wages to a competitive level with local utilities and
businesses to prevent loss of trained employees. The strategy was implemented to do this over a three-
year period for 2020,2021, and2022. Staff instead recommends freezing recovery at2019levels, which
will exacerbate the existing wage disparity and put the Company in the position of falling further behind
or requesting larger increases to catch up at a later time. Staff s approach might work if the wage
difference were a small percentage, which is not the case for Falls Water: The wage differential between
the Company and the City of Idaho Falls is an average of 26%o lower for Falls Water.s This difference
would take much longer than a few years to correct, during which the Company expects that it would
continue to lose employees because of its lower wages. Customers may benefit temporarily with lower
rates, but at the long-term expense of the Company failing to attract and retain experienced workers for
the benefit of its customers. The recommendation from Staff to not include any of the 2020 or 2021
wage increases in rate recovery may also shorten the Company's timing between rate cases.
Northwest Natural Water is actively acquiring small water systems in the surrounding area of the
Company. Between the natural growth in the Company's service area and new acquisitions, the total
number of connections served by the Company has grown from 3,832 connections at the beginning of
2012 to 5,902 connections as of December 3 I , 2020 . The number of full-time employees in 20 I 2 was
seven and the Company has nine full-time employees as of the end of 2020. The Company needs to offer
competitive wages to attract and retain quality employees who can provide the expertise necessary to
give customers the quality of service that is expected by customers, particularly as the number of
customers continues to grow.
RESPONSE TO RECOMMENDATION NO.3
The Company takes exception to Staff s recommendation to reduce training expenses by $2,983.
Given recent vaccine developments, the COVID-I9 pandemic should not be expected to last for the next
two or three years. Business travel should resume and training expenses should return to pre-pandemic
levels during the time that these rates are in effect. Not all training can be done via teleconference
training sessions. It is not possible to network effectively with peers in the industry via teleconferencing,
and venues like conferences enhance the training experience. The Company requests the Commission
reject Staff s proposal to reduce the Company's haining expense.
5 Source information from City of Idaho Falls job descriptions and wage chart for October l, 2018 thru September30,2019.
7
Falls Water Company Reply Comments January 25,2021
RESPONSE TO RECOMMENDATION NO.4
The Company accepts Staff s recommendation to eliminate the $8,315 operational expense as well as
the annual savings contribution into the special plant reserve account, as ordered by the Commission in
Order No. 32663. The Company also agrees with Staff s recommendation that the Company continue to
fund the special plant reserve account with the depreciation expense associated with advanced meters,
consistent with that Order.
RESPONSE TO RECOMMENDATION NO.5
The Company included 979,225 in shared services allocated costs in its pro forma adjustments
for NW Natural Water expenses allocated to Falls Water. In response, Staff comments that "some of the
services provided do not directly benefit Falls Water customers" and recommends removing charges
"that don't offset other Falls Water expenses, specifically accounting, corporate communications,
HR/payroll, and information services." Staff Comments at 9. Staff states that these functions "were
provided by Falls Water employees prior to the acquisition," and that including the expenses would
"increase customer rates without providing any additionalbeneffi." Id.
First, Falls Water respectfully disagrees that these services do not benefit customers, and that
including the expenses would increase rates without providing a benefit. The services identified by
staff--accounting, corporate communications, HR"/payroll, and IT&S services{o benefit customers.
These are back-office functions that, while perhaps not as visible or customer-facing as other aspects of a
business, are critical to a business's success. lmproving these functions, while allowing local employees
to conduct the day-to-day functions, means that NW Natural Water can leverage its platform expertise to
benefit Falls Water service to all its customers under a shared services model. lndeed, these services
were offered and included in rates prior to the acquisition too, as explained in more detail below, but now
those services are shared over multiple water companies with increased expertise in a more cost-effective
manner. Falls Water respectfully submits that the value of these back-office functions, and the expertise
that NW Natural Water provides in these areas, be recognized fully in this case.
Second, while Staff is correct that theses services were provided by Falls Water before its acquisition
by NW Natural Water (specifically, by the prior owner who left the Company in 2019), the duties that the
prior owner performed were transitioned to NW Natural Water as he prepared to depart. The Company
adjusted the test year to exclude the prior owner's 2019 wages, benefits and payroll taxes. The duties of
accounting, communications, HR/Payroll, [T&S services, treasury, and other functions are now being
fulfilled by people at NW Natural. Falls Water's proposal of shared services costs represents a savings to
Falls Water customers of $69,127, or 47o/o, when compared to the costs of the eliminated position that
have been removed from our operating costs (table below). The Company requests that Staff s
recommendation to reduce the shared services expense be rejected given that the employee previously
providing those services is no longer with the Company and that NW Natural Water now is providing
these services in a more cost-effective manner than the prior owner.
8
Falls Water Company Reply Comments January 25,2021
Base Salary
PayrollTaxes (10/5%)
Benefits
Proposed Shared Services
Savings
% Savings
s
s
123,000
12,9L5
L2,437
79,225
69,L27
47%
Additionally, it should be noted that Staffhas proposed to reduce our ROE due to NW Natural's
access to capital markets and being able to borrow at better rates. StaffComments at 10. These
benefits do not mateialize without audited financial statements to provide to lending institutions.
Increased and improved back offrce support is required to achieve these customer benefits.
Assuming a benefit to customers by reducing the proposed ROE while also excluding the associated
costs that provide those benefits is inconsistent.
In today's world, maintaining cyber security of our network and systems is a real concern. Yes,
our current staff can carry out certain IT&S functions, but they do not have the high level of
expertise needed to administer our network to safeguard the water system and customer data. If the
IT&S costs within our proposed shared services allocation are removed, the Company will be forced
to consider adding third-party contact labor and discontinuing or reducing the use of NW Natural
Water, even though shared services costs are lower.
Since being acquired by NW Natural, the HR department has carried out the following tasks to
the benefit of Falls Water and its customers:l. Recruiting for open positions2. Changed payroll and benefits provider
3. Managed and processed open enrollment for health, dental, life and short-term and long-
term disability benefits4. Assisted with employee relations issues
5. Advised management on performance issues6. 40lk annual meeting7. Written job descriptions
8. Creating new policies such as paid-time-off
9. Working to create an employee handbook
We believe these to be value added to Falls Water and again would like to reference that many of
these tasks would have been carried out by the previous owner whose costs have been removed from
our operating costs to the net benefit of customers.
The costs of the "NW Natural Water new 2020 jobs" that Falls Water included in this rate case,
and which Staffshows in Table No.2 of its Comments, relate to a Finance & Accounting Manager,
a General Ledger Accountant, and an HR/Payroll Specialist. It is more cost effective to hire
specialized personnel at the parent company to perform accounting and HR tasks across the water
companies, rather than trying to piece these services together at each individual water company.
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Falls Water Company Reply Comments January 25,2021
These costs have been pooled at the water holding company and will be allocated out using the
Massachusetts Formula. Staff offers no specific reason why the Company should recover only half
of these prudently-incurred costs.
The o'Indirect Common Allocation Costs" that Falls Water included in this rate case, and which
Staff shows in Table No. 2 of its Comments, are the indirect labor of the following departments
combined with the costs related to our publicly-traded company structure (e.g., Securities and
Exchange Commission registrant and filing fees):o Corporate Governance and Complianceo Corporate Securityo Financial Planning & Budgetingo Financial Reportingo Internal Audito lnvestor Relations
These costs are allocated out across all NW Natural entities using the Massachusetts Formula. Staff
fails to explain why the Company should not be able to recover any of these prudently-incurred costs.
The "Corporate 27.5oh admin charge" that Falls Water included in this rate case, and which Staff
shows in Table No. 2 of its Comments, reflects a percentage of labor cost added to cover the cost of
rented space, office supplies, IT&S costs, utilities, furniture, fixtures and equipment and other
administrative costs. Staffdoes not explain why Falls Water should not be able to recover any of
these prudently-incurred costs.
There are many components to the shared services costs modeled to Falls Water, as there is a
large infrastructure of knowledge, expertise, and public company structure from which Falls Water
benefits. Again, the cost of these benefits is 47o/o lower than the previous owneros costs that have
been removed from the Company's rate case application.
RESPONSE TO RECOMMENDATION NO.6
The Company accepts Sta{f s proposal for a rate of l.160/o of net plant in service to calculate property
taxes. The Company also agrees that the income tax expense should be adjusted to reflect expense and
rate base adjustments to its application.
RESPONSE TO RECOMMENDATION NO.7
The Company agrees that using the special plant reserve fund is appropriate. The Company does,
however, take issue with Staff s recommendation that the entire amount of the fund be treated as CIAC.
Consistent with Commission Order No. 32663 that established the special reserve fund and Commission
Order No. 33863 that provided guidance as to the administration of the fund, the amount applicable for
CIAC treatment as of December 31, 2020 is $28,134.04.
t0
Falls Water Company Reply Comments laruxy 25,2021
The Commission issued OrderNo. 32663 in the Company's2012 rate case that initiated the special
reserve fund. Regarding the application of the funds in the special reserve account, the Order states (at
I l), "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."
The Order further states (at l1), "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." ln other words, the special reserve fund consists of two components: l) the depreciation of the
MXUs installed, and2) the meter reading labor savings of $8,315 annually. Regarding these two
components, Staffacknowledges that the Company "properly funded the special plant reserve fund since
the previous rate case." Staff Comments at 5.
Importantly, the Commission's rationale regarding the MXU investment did not support a
disallowance, but provided a pre-financing of future capital projects. The Order (at I l) states, "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." If the depreciation-
based portion of the fund is treated as CIAC, as Staffproposes here, the effect of that treatment is
actually a disallowance of the original project, in that the recovery of investment through depreciation
expense would not be returned to the investors of the project, but would rather offset the cost of a new
project. The Commission did not intend a disallowance of the project.
Contrary to Staff s assertion, its proposal is not "consistent with Commission Order No. 33863 in
Case FLS-W-17-01." StaffComments at 9. In Case No. FLS-W-17-01, Commission OrderNo. 33863
stated (at2), "With regard to accounting treatment of funds associated with the special reserve fund -annual savings of $8,315, now approximately $39,000 - Staffrecommended that such contributions be a
reduction to rate base, explaining that funds from the special reserve fund are customer- and not investor-
supplied capital." The Order sided with Staff in stating (at 5): "The contribution of $39,172 (annual
savings) from the plant reserve fund shall be recorded as a contribution in aid of construction, and will be
a reduction to rate base." The order did not address the depreciation-based component of the reserve
account in its determination of CIAC, which was appropriate.
As of December 31, 2020,the special plant reserve fund included $112,753.33 (See Exhibit I of the
Company's Reply Comments). The meter reading labor savings (CIAC) portion of the balance is
$28,134.04 and the MXU depreciation portion of the balance is $84,619.29. Consistent with the original
intent of the fund and subsequent guidance by the Commission, the Company proposes that only the labor
savings portion of $28,134.04 of the $112,753.33 in the special plant reserve fund be treated as CIAC.
RESPONSE TO RECOMMENDATION NO. 8
Staffrecommends the rate structure proposed by the Company be revised to move all of the rate
increase to the commodity charges. Staff proposes a20Yo increase to commodity charges. However, the
Company has concerns that moving the entire amount to commodity charges could result in reduced
usage by customers and result in the Company not achieving its authorized revenue requirement. Staff
ll
Falls Water Company Reply Comments January 25,2021
shares the Company's concern that amisbalanced rate design "significantly reduces the likelihood that
the Company could recover the revenue requirement approved in this case" and "could result in more
cash flow variance throughout the year." Staff Comments at 12.
The Company acknowledges that conservation is promoted raising only the commodity charge, but
believes a reduction in the usage allowance amounts (e.g., lowering the 12,000 gallons/month allowed for
customers with 5/8- or 314-inch meters) would help to compensate for potential lost revenue due to
conservation. Splitting the increase between volumetric and fixed charges, coupled with a decrease in the
usage allowance amounts, would balance the need for conservation with the revenue certainty provided
by fixed charges and, consistent with Staff s objective, would further "temper[] the level of volumetric
recovery in this case." Staff Comments at 12.
RESPONSE TO RECOMMENDATION NO.9
While the Company did meet the required customer notification deadlines resulting from the low-
pressure event on April 20, 202},many customers were unhappy that they were not notified individually-of *r. issue. Many customers stated that they do not watch local news outlets and were unaware of the
issue until it had been resolved. Because of the concerns of the customers and with the advancement in
technology that makes it possible to contact customers via devices readily available to most if not all
customers, the Company has enlisted the services of a mass communication service. The Company
expects that the mass communications system will be active by the end of February 2021. The contract
negotiated by Northwest Natural Water will provide this service for all of its water systems. The savings
acfiieved through the economies of scale will be passed along to customers. The costs for this service
will be billed to the Company based on the number of customers and will not be apart of shared services
provided by Northwest Natural Water. The cost of this service will appear in the next rate case.
RESPONSE TO RECOMMENDATION NO. 10
The Company does not agree with Staf|s recommendation to remove the Company's bank service
charge fee from the calculation of the gross up factor. Staff Comments at 10-11. Part of the gross up
factor is related to billed revenues, and nowhere else in this case is the expense of the bank service
charge fee associated with incremental revenue included in the revenue requirement.
Respectfully submitted this 25ft Day of January 2021.Kfu
Falls Water Company
K. Scott Bruce, General Manager
Cc:Eric Nelsen
Senior Regulatory Attorney
NW Natural, representing Falls Water
Falls Water Company Reply Comments
t2
Jaruary 25,2021
Exhibit l to Company's Reply Comments in FLS-W-20-03
Falls Water Co., !nc.
Allocation of Funds in Special Plant Reserve Fund
as of December 3t,2O2O
Meter Rdg
Lbr Savings lnterest
MXU
Depreciation
tol3t/2ot2
L]-/30/2OL2
L2l3L/2OL2
7l3Ll2OL3
2/28/2013
3/3L12013
4l30/2OL3
sl3L/2013
6130/20L3
7/3t/2OL3
8l3L/2OL3
sl3ol2oL3
L0/3L(2OL3
Ltl30/2OL3
L2/3L/2OL3
tl3Ll2OL4
2/28/20t4
3/3t/20L4
4/30/2014
s/3tl2ot4
6/30/20t4
7/3L/20L4
813L/20L4
s/30120L4
tol3]-l20t4
t7/3Ol2OL4
t2/3t/2OL4
Ll3LlzOLs
2l28lzots
3l3ll2OLs
4l3O/zots
s/3Ll20Ls
5130l20ts
7l3]-lzots
8l3Ll2OLs
9l30lzOLs
LOl3Llz0ts
Lu3OlzOLs
358.28
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.91
692.91
692.91
692.91
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.9L
692.9L
692.9L
592.91
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692,9t
692.91
692.91
L,754.72
0.06 4,245.88
0.75
o.76 2,257.20
26,282.28
8,315.00 4.59
5.28
5.34
11,191.28
6.65
8,315.00 8.60
9,121.00
2,592.2L
2,925.L5
9.38
9.60
9.7L
20,o33.46
L2l3LlzOLs
t/3Ll2OL6
2l2el20L6
3l3tl2OL6
4l30l2Ot6
sl3Ll2Ot6
6130120L6
7l3Ll2OL6
8l3Ll2OL6
el30l2oL6
tol3Ll2ot6
tu3ol2oL6
t2l31l2OL6
tl3Ll20L7
2/28/2OL7
3/3Ll2OL7
4l30l2OL7
sl3Ll2OL7
6l30l2Ot7
7l3Ll2OL7
813tl2OL7
el3ol2ol7
L0l3Ll20L7
LLl30l^OLT
L2l3Ll2OL7
Ll3L{2OL8
2128120L8
3l3t/2OL8
4/30/20L8
sl3L/20L8
6l30l2Ot8
7l3tl20t8
8l3Ll2OL8
9l30l2ot8
to/3tl2oL8
tLl3Ol2OLs
L2l3tl20t8
Ll3Ll2OLe
2128/2OLe
3l3Ll20L9
4l30lz0te
sl3Ll20te
6l30lzOLe
7l3Ll2o1e
8l3tl2OLs
9l30l20L9
L0l3LlzOLe
692.9L
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.9L
692.9L
692.9L
692.9L
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.91
692.91
692.9L
692.9L
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.9t
692.9L
692.9r
692.9L
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.9t
692.9L
8,315.00
8,315.00
8,315.00
8,315.00
L2,09
L3.92
14.53
15.08
17.O3
L8.L4
7.32
12.00
20,76
2L.33
1.81
3.50
5.31
Lt.32
L7.27
2L.t4
4,279.!L
2,059.47
2,059.47
2,O59.47
L0,912.83
6,474.L8
6,315.90
2,654.79
2,20L.37
2,051.91
4,544.64
2,050.02
2,924.10
2,046.24
2,190.66
2,L89.40
2,044.98
2,044.98
4,089.96
4,089.96
2,463.12
2,320.59
2,04L.83
L,082.t7
3,014.13
2,3L4.98
2,040.57
2,310.51
2,t73.65
2,038.68
2,177.76
2,770.50
2,432.88
2,L66.72
2,034.90
2,294.76
22.47
ttl30l20L9
L2131/2OL9
Ll3Ll2020
2/2e/2020
3/3L/2O2O
4l30l2O2O
s|3L/2O2O
6l30l2O2O
7l3Ll2O2O
8l3t/2020
el30/2ozo
LO/3L/2O2O
|u30/2O2O
L213u2020
Dec 2020 Depr
TotalclAc
692.91
692.9L
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.92
692.91
692.9L
692.9L
692.91
8,315.00
8,315.00
68,274.12
(129,823.96)
(40,140.08)
8.32
7.55
6.77
7.39
8.08
333.85
2,033.il
2,t62.31
2,033.01
2,O32.38
2,O32.38
2,295.31
2,O3t.75
2,031.75
2,03,-.75
2,155.38
2,O3t.12
2,03,-.L2
2,O3t.L2
2,L52.23
2,O30.49
214109.39
Labor Savings Total
Interest
Depreciation Total
Well 10 use Depr
Well 10 Use Lbr Savings
Net Total
68,274.L2
333.86
2L4,LOg.3g
(159,964.04)
LL2,753.33
Lt2,753.33Balance in Acct 127.1
Total of Labor Savings Deposits
Total Used of Labor Savings Deposits
Remaining Balance of Depreciataon
0.00
68,274.L2
(40,140.08)