29024_mod.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE INVESTIGATION INTO WHETHER PONDEROSA TERRACE ESTATES WATER SYSTEM, INC. IS A PUBLIC UTILITY SUBJECT TO REGULATION BY THE IDAHO PUBLIC UTILITIES COMMISSION
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CASE NO. GNR-W-01-1

NOTICE OF PROPOSED
INCREASE IN RATES

NOTICE OF
MODIFIED PROCEDURE

NOTICE OF
COMMENT/PROTEST DEADLINE

ORDER NO. 29024

BACKGROUND
On September 13, 2001, the Idaho Public Utilities Commission (Commission) issued Order No. 28845 in Case No. GNR-W-01-1. In this Order the Commission found that Ponderosa Terrace Estates Water System, Inc. (Ponderosa; Company) was operating in such manner as to fall within the Commission’s jurisdiction. Reference Idaho Code §§ 61-124 – Water Systems; 61-125 – Water Corporation; and 61-129 – Public Utility. Of significance, the Commission found that the Company’s customers have no say regarding the operation and management of the Company or the prices it charges for water and related services.
Ponderosa operates a water system located south of Sandpoint and southeast of the community of Sagle in Bonner County, Idaho. There are approximately 20 full time residences connected to the system and a total of approximately 87 lots within the area served by the water system. The system has been in place since approximately 1969. The current owner is Robaer Cobott. Ponderosa is an Idaho for-profit corporation located at 2626 Wrenco Loop Road, Sandpoint, Idaho 83864.
On November 28, 2001, the Commission issued Order No. 28903 establishing a $20 per month interim rate based upon the statewide average rate for small flat-rate water systems. On December 6, 2001, the Commission issued Order No. 28911 establishing a Show Cause hearing for Monday, December 17, 2001 in Sandpoint, Idaho. The purpose of the hearing was to permit Mr. Cobott to show cause (if any) why the $20 per month flat month rate established by Order No. 28903 was not reasonable and to take public comment from customers regarding the water service. The Commission vacated the Show Cause hearing on December 14, 2001 by Order No. 28917 based upon information that Mr. Cobott most likely was out of town and would be unable to attend the hearing. In its Order vacating the hearing the Commission assigned Certificate of Convenience and Necessity No. 393 to the Company and reiterated the findings and directives of its prior Orders.
On January 4, 2002, following receipt of information that Mr. Cobott was attempting to restructure the water company, Staff counsel sent Mr. Cobott a letter informing him that Orders of the Commission are law until changed by the Commission and reminding him that the Company must “. . . make written petition or application to the Commission prior to any proposed change in ownership of the Ponderosa Terrace Estates Water System, Inc.” Reference Order No. 28845.
Subsequently, the Staff has met personally with the owners of the water system on February 11 and again on March 30, 2002. At the March 30 meeting, Mr. Cobott brought numerous financial documents with him for Staff’s review. A final piece of information, a depreciation schedule, was supplied to Staff on April 10, 2002. Staff notes that the most recent entries in the depreciation schedule are for the year 1997.
CURRENT DEVELOPMENTS
Staff has advised the Commission that numerous phone calls and faxes were received over the weekend of May 4 and 5, 2002 and the morning of Monday May 6, 2002 from customers and from Bonner County Commissioner Brian Orr. These contacts address a letter sent to customers dated Saturday, May 4, 2002 informing them that the Ponderosa Terrace Water System Inc. “. . .will discontinue doing business as a public water system on May 5, 2002,” and further “This public water system will be shut down on [Sunday] May 5, 2002.” Customers have informed Staff that this language meant that the on-site water system operator, Larry Fairfax, had been given instructions to physically shut the system pumps off. Apparently, this did not occur.
The May 4 letter goes on to state that Mr. Cobott is “. . .going to start a privately owned water system on May 10, 2002, called ‘Ponderosa Terrace Estates Privately-Owned Water System Inc.’” Property owners in the subdivision must subscribe and be a shareowner in order to receive water service.
The Commission is also in receipt of a letter from Mr. Cobott dated May 6, 2002. In this letter, Mr. Cobott states that the Ponderosa Terrace Estates Water Company is going to have to go out of business because of the rates set by this Commission. He states that revenues are down 90 to 95%. Several customers have contacted the Commission Staff concerned that the Company was not billing them. They have indicated that they will not make payments unless they receive a bill. Staff has verified by telephone conversation with Mr. Cobott that this is the case. He has not and will not mail bills to customers with the $20 per month charge approved by the Commission. He does not agree with that rate and will not send a bill that makes it appear he accepts the Commission’s authorized rates.
FINANCIAL POSITION
Staff has completed a cursory review of the financial position of the Company based upon the material submitted by Mr. Cobott and provided the information to the Commission in a Decision Memorandum dated May 8, 2002. Attachment No. 1 to this Order is a one-page schedule that calculates the revenue requirement for this system. Staff refers to its analysis as cursory due to the large amount of data that appears to Staff to be somewhat arbitrary. Staff has adjusted some of the data for what appear to be unreasonable costs charged to the water system. Staff eliminated a one time non-recurring charge of $1,417.20 for refinancing costs on the owners’ home. Staff eliminated $271.70 as a non-recurring charge for computer memory upgrade. Staff reduced the Company’s proposed $3,600 home office rent allowance to $1,200 based upon commercial office rental in the Sandpoint area as posted on the web site of “Sandpoint Property Management.” These rental prices include utilities; therefore Staff has eliminated the Company’s proposed office heat allowance of $340.55 and Office electricity of $402. Staff notes that the Company assigned $5,520 as the water company’s share of payments on the owners’ home mortgage. Staff eliminated this item. The water company’s share of this cost, Staff states, is covered by Staff’s allowed return at 12%, assuming 100% equity, on the cost of the new well placed in service with proceeds from the refinance. Staff further reduced the Company’s proposed $9,000 allowance for Mr. Cobott’s management fee to $4,160. The proposed Staff allowance is based upon an average of 4 hours per week at a rate of $20 per hour. Staff contends that this allowance is quite generous based upon its experience in trying to contact Mr. Cobott and similar experiences reported to Staff by customers. Staff also eliminated a line item entitled “Monthly Profit” proposed by the Company in the amount of $3,600. This item, Staff contends, appears to be completely arbitrary. Profit is covered by Staff’s allowed return at 12% on the cost of the new well placed in service. Staff has added a depreciation expense of $963.87 for the new well that was not included in the data the Company provided. Staff advanced the Company provided depreciation schedule for the missing years 1998 through 2001 and determined that all investments other than the new well have been fully depreciated. Staff recommends acceptance of the Company’s proposed $200 per month maintenance reserve fee. Staff cautions the Company that this needs to be a funded reserve placed in a bank account and not drawn for a purpose other than maintenance of the water system.
Staff’s calculations, after review of the Company data, produce a total annual revenue requirement for this Company of $25,282.41.
RATE DESIGN
Staff notes the challenge the Company is faced with in attempting to distribute the total revenue requirement equitably among its customers. Traditional ratemaking procedures and policies, Staff contends, assume that an individual (household) should not pay for a commodity they do not receive. When electric service, gas service and telephone service is disconnected, billing stops. The same also holds true for water companies. However, Staff notes the difficulty of applying this policy to small water systems like Ponderosa Terrace Estates that were constructed to serve a vacation home development. Designing rates for such a regulated stand-alone water system to recover the cost of operating and maintaining the system, Staff contends, involves what appear to be two diametrically opposing inequities.
The traditional approach, where a customer does not pay for a commodity during a period of disconnection, shifts the burden of supporting the entire system onto those customers who are connected to the system. This is not a problem on a large system with a diverse customer base. When this occurs on a small customer base system, Staff contends that the cost shift can be significant and burdensome. Staff reports that Ponderosa Terrace Estates was constructed in the late 1960’s to serve 87 properties. Now, more than 30 years later, only 20 properties are developed and utilized full time. Some properties are used for a week or a month a year and are not occupied the remainder of the year. Ponderosa Terrace Estates Water Company is somewhat unique because each lot in the subdivision is equipped with a customer service line and most (if not all) also have a frost-free water hydrant installed on the property. Any property owner has the ability to connect a recreational vehicle to the water hydrant and begin consuming water in a matter of minutes without contacting the Company. Several of the property owners have reported owning one or more lots purchased years ago either on speculation or for future use as a retirement property. Staff presented three possible rate design scenarios. See Attachment 2 to this Order.
Staff Option 3 addresses the water system’s inability to provide sufficient water supply to serve all 87 properties on a full-time basis. Staff states that it has reviewed the Tucker Engineering Water Disinfection System Report and the supply well logs for the development. These documents, it states, indicate that current system supply capacity is approximately 25 gallons per minute. Staff calculates that the maximum number of full-time customers that could be served by the existing system is 37 customers. Staff Option 3 provides rates reflective of the limited water supply.
Option 3 rates are determined in three steps. First the variable costs associated with water consumption are distributed to the full-time customers. Second the fixed costs are allocated to the maximum number of full-time customers (37) that could be connected to the existing water supplies. Because the existing 20 full-time customers are in this category, steps one and two establish rates for the full-time customer class of $61.50/month. Staff states that it is unaware if any of the remaining properties will convert to full-time customers in the near future. Therefore, the third step equally allocates the revenue requirement not collected by the full-time customers to the remaining 67 properties, which amounts to $13.00/month. Staff believes the Option 3 rate design appropriately allocates system cost to customers based upon the impact the class of customer has on the system. Since the system will not be able to serve the remaining 67 customers on a full-time basis, they are not fully allocated the fixed costs. This option, Staff contends, also provides a price signal regarding the system capacity limitations and further emphasizes the current Commission restriction on new full-time hookups.
Commission Findings
The Commission has reviewed the filings of record in Case No. GNR-W-01-1. The Commission apprises Mr. Cobott that as a regulated utility he is bound to comply with Idaho statutes, Commission Orders and Commission Rules and Regulations. It appears as reflected above, that Mr. Cobott has not mailed bills to customers at the $20 per month charge approved by the Commission. Reference Order No. 28903. He purportedly does not agree with that rate and will not send a bill that makes it appear he accepts the Commission’s authorized rates. The Company would be well advised to reconsider its position in this regard. The customers should not be expected to voluntarily send money to the Company without some form of billing from the Company. Rendering a bill to customers at the authorized rate does not constitute agreement with the rate but acknowledges it is the Commission ordered rate and the only rate that legally can be charged.
Staff identifies an annual revenue requirement for the Company of $25,282.41 based on information provided by Mr. Cobott and recommends Rate Design Option 3 as the Staff preferred rate design. That option allocates all costs based on the impact the customer has on the system. Property owners of undeveloped lots will be assessed a charge of $13.00 per month. Property owners of developed lots will be assessed a charge of $61.50 per month. The Commission finds it reasonable to adopt these rates for a proposed effective date of June 1, 2002, subject to prior adjustment based upon customer comment and further Staff and Commission analysis.
YOU ARE HEREBY NOTIFIED that the Commission has reviewed the filings of record in Case No. GNR-W-01-1. The Commission has preliminarily determined that the public interest regarding the Commission’s intention to increase rates to water customers in the manner set forth above (Rate Option 3) may not require a hearing to consider the issues presented and that the issues raised by the proposed increase in rates may be processed under Modified Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of Procedure IDAPA 31.01.01.201-204.
YOU ARE FURTHER NOTIFIED that the Commission may not hold a hearing in this proceeding unless it receives written protests or comments opposing the use of Modified Procedure and stating why Modified Procedure should not be used. Reference IDAPA 31.01.01.203.
YOU ARE FURTHER NOTIFIED that the deadline for filing written comments or protests with respect to the proposed increase in rates in Case No. GNR-W-01-1 is Thursday, May 23, 2002. Persons desiring a hearing must specifically request a hearing in their written protests or comments.
YOU ARE FURTHER NOTIFIED that if no written comments or protests are received within the deadline, the Commission will consider the matter on its merits and enter its Order without a formal hearing. If comments or protests are filed within the deadline, the Commission will consider them and in its discretion may set the matter for hearing or may decide the matter and issue its Order based on the written positions before it. Reference IDAPA 31.01.01.204.
YOU ARE FURTHER NOTIFIED that written comments concerning Case No. GNR-W-01-1 should be mailed to the Commission and to Ponderosa Terrace Estates Water Company at the addresses reflected below:
Commission Secretary
Idaho Public Utilities Commission
PO Box 83720
Boise, ID 83720-0074

Street Address for Express Mail:

472 W. Washington Street
Boise, ID 83702-5983 Robaer Cobott
2626 Wrenco Loop Road
Sandpoint, ID 83864

All comments should contain the case caption and case number shown on the first page of this document. Persons desiring to submit comments via e-mail may do so by accessing the Commission's home page located at www.puc.state.id.us under the “File Room” icon. Once at the “File Room” page, select “File a Comment,” fill in the case number as it appears on the front of this document, and enter your comments.
YOU ARE FURTHER NOTIFIED that the filings in Case No. GNR-W-01-1 can be reviewed during regular business hours at the Idaho Public Utilities Commission, 472 W. Washington Street, Boise, Idaho. In addition, relevant filings may be viewed by accessing the Commission’s website at www.puc.state.id.us under the “File Room” icon and selecting the appropriate topic heading.

DATED at Boise, Idaho this day of May 2002.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

bls/O:GNRW0101_sw6

NOTICE OF PROPOSED INCREASE IN RATES
NOTICE OF MODIFIED PROCEDURE
NOTICE OF COMMENT/PROTEST DEADLINE
ORDER NO. 29024 1

Office of the Secretary
Service Date
May 14, 2002