20231027Final_Order_No_35971.pdf

ORDER NO. 35971 1

Office of the Secretary
Service Date
October 27, 2023
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

On February 6, 2023, Gem State Water Company, LLC, (“Company” or “Gem State”)
applied to the Idaho Public Utilities Commission (“Commission”) for approval to acquire the
assets of the water supply system of Valiant Idaho, LLC (“Valiant”) and TIC Utilities, LLC
(“TIC”) (collectively the “Selling Parties”).
On February 27, 2023, the Commission issued a Notice of Application and Notice of
Intervention Deadline. Order No. 35690. No one intervened.
On May 11, 2023, the Commission issued a Notice of Modified Procedure establishing
deadlines for public comments and the Company’s reply. Order No. 35779. Staff filed comments
to which the Company replied. Four public comments were also filed.
On July 10, 2023, the Company filed supplemental documents.
Having reviewed the record, we approve the acquisition of the Selling Parties’ water
system assets by Gem State and conditionally approve the request to amend Certificate of Public
Convenience and Necessity (“CPCN”) No. 293 to include the area currently served by the Selling
Parties as set forth below.
THE APPLICATION
Gem State operates as a regulated public utility providing water service to customers
in northern Idaho. Gem State seeks to purchase a water system from the Selling Parties that is not
Commission-regulated. Application at 1. The Selling Parties’ water system serves approximately
150 residential customers in Bonner County, Idaho, and is adjacent to Gem State’s certified service
territory. Id. at 3.
On December 9, 2022, Gem State and the Selling Parties executed a water system asset
purchase agreement that is contingent upon Commission approval (“Agreement”). Under the
Agreement, Gem State will acquire the Selling Parties’ water supply and distribution assets,
including all water rights (“Transaction”). If the Commission approves the Transaction, Gem State
proposes to serve the Selling Parties’ customers as a regulated public utility. Id. at 3–4.
IN THE MATTER OF GEM STATE WATER
COMPANY’S APPLICATION FOR
APPROVAL OF ACQUISITION OF THE
ASSETS OF THE WATER BUSINESS OF
VALIANT IDAHO, LLC
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CASE NO. GSW-W-23-01

ORDER NO. 35971
ORDER NO. 35971 2

According to the Company, the Transaction is in the public interest because the water
system would be operated as a regulated public utility by a Company with expertise operating
water systems with expanded access to capital for maintenance and improvements. Id. Gem State
represented that its employees will assume the responsibilities currently fulfilled by the Selling
Parties’ owner and independent contractors and that it does not seek to change rates, rate structure,
or other charges in this case. Id. Gem State also requested amendment of CPCN No. 293, to include
the area currently served by the Selling Parties’ water system, or alternatively the issuance of a
new CPCN authorizing Gem State to provide water service to the service area. Id. at 8.
STAFF COMMENTS
1. Idaho Code § 61-328
Staff recommended the Commission approve the Transaction. In making this
recommendation, Staff noted that Idaho law does not specifically address the acquisition of water
companies, but that it relied on the statute governing sales of electric utilities—Idaho Code § 61-
328—to analyze the Transaction. Staff Comments at 3–4. Before approving asset acquisitions by
electric utilities, Idaho Code section 61-328(3) requires the Commission to find: a) the transaction
is consistent with the public interest, b) the cost of the 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 the system in the public interest.
Staff believed the Transaction is consistent with the public interest. Id. at 4. Staff
observed that Gem State and its parent companies have a demonstrated commitment to expanding
operations in Idaho through prior water company acquisitions and that continuing this expansion
through the acquisition of the Selling Parties’ water system may provide benefits through
operational efficiencies and economies of scale. Additionally, Staff noted that Valiant is not
operating as a Commission-regulated utility. If the Transaction is approved, however, the Selling
Parties’ water system would subsequently be operated by a regulated public utility within Idaho.
Id.
Staff noted Gem State’s assertion that it will maintain existing rates and charges
following the Transaction, and that it will not seek to include expenses associated with the
Transaction in rates. Id. Rather, Gem State indicated that any future rate increases would arise
from prudent capital investment or other cost increases. Palfreyman Direct Testimony at 7. Staff
indicated that when “Gem State Water eventually files a general rate case, Staff will ensure that
the requested rate increase was not driven by the transaction, and that rates will not be higher than
ORDER NO. 35971 3

they would have been absent the transaction.” Id. at 4. To facilitate this, Staff recommended that,
if the Application is approved, Gem State create a separate rate schedule for the Selling Parties’
water system so that costs related to the Transaction are not incorporated in rates. Id. at 8. Staff
also believed that existing rates are a reasonable starting point for the water system, satisfying the
requirement under Idaho Code § 61-328(3)(b) that rates not increase due to the transaction. In
making this recommendation, Staff assumed that all current plant-in-service is contributed capital
and excluded from rate base.
Concluding its analysis under Idaho Code § 61-328(3), Staff believed that Gem State
Water has the bona fide intent and financial ability to continue reliably operating the water system.
Staff noted that if the Transaction is approved, Gem State employs a licensed water system
operator who will run the Selling Parties’ water system and that Gem State committed “to provide
safe and reliable service and to meet the infrastructure needs of Valiant [customers].” Id. at 5. Staff
also observed that Gem State, through its parent companies, has access to capital that will likely
lower financing costs for system repairs and upgrades. Id. at 5–6.
2. CPCN
Staff indicated that, prior to issuance of a CPCN authorizing Gem State to operate the
Selling Parties’ water system, the Commission should require Gem State to submit a
comprehensive legal description of the service area managed by the Selling Parties. In particular,
the description show that the service area Gem State proposes for a new CPCN does not overlap
with the service territory of any other water utilities.1
In addition to leaving the proposed service territory unclear, Staff indicated that Gem
State’s responses to Staff’s Production Requests were insufficient to establish that the water system
was complied with local ordinances using standard industry practices. To determine whether the
water system can provide reliable service to customers, Staff recommended that the Commission
order Gem State to provide complete documentation of the system’s design and installation.
3. Water System Separation
Staff noted that, in Genesis Golf Builders, Inc., v. Pend Oreille Bonner Development,
LLC, Case No. CV-2009-1810 (1st Dist. Bonner) (2017), Valiant and VP, Inc.2 (“VP”) were

1 In response Staff’s Production Request #3, seeking a legal description of the Selling Parties’ service area, Gem State
referenced a development map. Staff opined that the response was inadequate for describing a service area in a CPCN.
Staff Comments at 6.
2 VP is a private water and sewer company located near Sandpoint, Idaho.
ORDER NO. 35971 4

ordered to physically separate their water systems. Staff Comments at 6-7. According to Staff, the
written order directing this separation provides, in pertinent part:

d. VP and Valiant shall cooperate to allow Valiant, and its agents, engineers,
contractors, and/or employees, to disconnect and separate, as efficiently and cost
effectively as reasonably possible, the water system for the real properties within
The Idaho Club’s PUD (“PUD Water System”), which shall thereafter be operated
and maintained by Valiant, from the water system for the real properties that are
not within The Idaho Club’s PUD (“Hidden Lakes’ Water System”), which shall
thereafter be operated and maintained by VP;

e. Valiant and VP shall cooperate to disconnect and separate the PUD Water System
from the Hidden Lakes’ Water System in such a manner that it will cause as little
disruption as is reasonably possible in water services to existing
residents/customers, properties, and/or any other recipients.

Id.
Staff further observed that the Idaho Department of Environmental Quality (“DEQ”)
requires physical separation of water systems.3 After the owner of VP represented that valves
separate the VP water system from that of Valiant, Staff investigated further and learned that DEQ
does not consider valves an adequate physical separation. See Staff Comments at 4 in Case No.
GNR-W-17-01. Because neither VP nor Valiant have provided evidence demonstrating adequate
physical separation of their systems, Staff recommended issuance of a new or amended CPCN be
contingent on the provision of such evidence and DEQ acknowledgement of the separation. Staff
Comments at 7.
4. Customer Notice and Documentation
Staff noted that Gem State published notice of Agreement to purchase the Selling
Parties’ water system in the Bonner County Daily Bee on February 28, 2023, and subsequently
submitted a copy of the notice and invoice for publication. Id. at 8. Staff recommended that Gem
State provide another direct notice to customers, with updated contact, billing, and payment
information, if the Commission approves the Transaction. Id. Staff also expressed willingness to
work with Gem State to update its billing and collection documents along with its Explanation of
Rates and Annual Rules Summary, which it recommended directing Gem State to file within three
months of the issuance of a final order in this case.

3 IDAPA 58.1.08.542(2)(d)-.543.
ORDER NO. 35971 5

PUBLIC COMMENTS
Four public comments were filed. One customer stated the Selling Parties lack authority
to sell the water system. Other customers objected to increases in monthly charges.
COMPANY REPLY COMMENTS
Gem State replied indicating that most of Staff’s recommendations were feasible and
expressing that it would address existing information gaps. Reply Comments at 1. Specifically,
Gem State did not disagree with Staff’s recommendation that issuance of a new or amended CPCN
be contingent upon submission of the following materials within six months of a final order
approving the Transaction: (1) written acknowledgement from DEQ that its system meets DEQ’s
physical-separation requirements; (2) a legal description of the proposed service area
demonstrating that it does not overlap with adjacent water systems; and (3) complete design
documentation and installation drawings for the Selling Parties water system. Id.
Likewise, Gem State agreed with the recommendations that it create a separate tariff
and provide another direct notice to customers. However, Gem State disagreed with Staff’s
recommendation that a new CPCN be issued, opining that amending CPCN No. 293 to include the
new proposed service area for the Selling Parties’ system would be more efficient.
Despite recognizing the presumption that plant-in-service for small water companies
constitutes contributed capital, Gem State disagreed with Staff’s recommendation for exclusion of
all plant-in-service from rate base. To the contrary, Gem State contends the presumption set forth
in IDAPA 31.36.01.102 has been rebutted and requests the Commission include $1,160,869 for
plant-in-service. Id. at 4. Despite acknowledging that the Selling Parties’ system has “less than
ideal” recordkeeping and operating practices, Gem State provided supplemental invoices showing
expenses related to the water system are not contributed capital. See Supplemental Invoices
Included with Company Reply Comments. The Company argues that recognizing this amount for
plant-in-service within rate base benefits customers over the long-term, particularly considering
the condition of the Selling Parties’ water system, the circumstances facing the system, its small
size, “the regulatory issues it faces”, expenditures required in diligence, and other factors.
Company’s Reply at 4. The Company contends that its acquisition supports long-term viability of
the water system for customers, but acknowledges that the terms need to be economically viable.
Id. Alternatively, the Company requests a determination that it has rebutted the presumption
regarding contributed capital under IDAPA 31.36.01.102 and that the amounts detailed in
ORDER NO. 35971 6

supplemental invoices it provided be included within rate base during the next rate case for the
system. Id. at 4–5.
COMMISSION FINDINGS AND DECISION
The Commission has jurisdiction over this matter and the issues in this case under Title
61 of Idaho Code. Specifically, the Commission regulates “public utilities,” including “water
corporations” that serve the public or some portion thereof for compensation. See Idaho Code §§
61-125, -129, and -501. The Commission has an established practice of evaluating the transfer of
water systems under the criteria found in Idaho Code § 61-328(3). Gem State is a privately held
water corporation and public utility as defined in these laws that seeks to acquire a water system
it intends to operate for compensation. Having reviewed the record, we find the Transaction fair,
just, reasonable, and in the public interest. Consequently, we approve Gem State’s Application for
approval of its acquisition of the assets of the Selling Parties’ water system.
Gem State Water will provide organizational support, access to capital, and economies
of scale for the Selling Parties’ water system. It is in the public interest for an experienced owner
and operator of public utility infrastructure in Idaho to acquire this system. Gem State has
demonstrated the financial ability and bona fide intent to operate the system in the public service
according to this Commission’s standards. Gem State is a member of a family of companies that
arose from the reorganization of Northwest Natural Gas Company and its affiliates (“Northwest
Natural”). Northwest Natural has a $400 million revolving line of credit, a net income of $86.3
million from continuing operations in 2022, cash flow from operations of $147.7 million, an Baa1
credit rating from Moody’s, and an A+ credit rating from Standard and Poor’s. See Staff Comments
at 5–6.
The bona fide intent to operate the system in the public interest is demonstrated by Gem
State’s commendable operation of its existing systems, and the Company’s strategic plan to
purchase and operate multiple small water companies in the region. Finally, customer rates will
not increase because of the transaction. Any future rate increases will be the result of prudent
expenditures to improve the respective systems.
However, based upon the information provided, we find that Gem State has failed to
overcome the presumption of contributed capital under IDAPA 31.36.01.102. For example, the
evidence in the record does not show that the Selling Parties or any other entity involved in the
construction of the water system have not recovered the cost of this endeavor through the sale of
lots in the area that it serves. Consequently, all current plant-in-service of the Selling Parties’ water
ORDER NO. 35971 7

system shall be excluded from rate base. Accordingly, Gem State may use the Selling Parties’
current rates, which can be adjusted via a future general rate case which addresses the issue of
contributed capital.
Additionally, Gem State’s request to amend CPCN No. 293 to include the area served
by the Selling Parties’ water system is conditionally granted. This grant is contingent upon Gem
State submitting the following materials within 180 days of the issuance of this Order. First, Gem
State must submit written documentation of the water system’s compliance with DEQ’s
requirements on physical separation. Second, Gem State shall provide a complete and
comprehensive legal description of the Selling Parties’ service area, validating that the requested
service does not intrude upon any other adjacent water utility. Finally, Gem State shall submit
construction documentation and installation drawings for the Selling Parties’ water system
demonstrating that the system was installed using industry standard practices in compliance with
local ordinances. Following the submission of these materials, CPCN No. 293 will be amended in
accordance with the legal description provided by Gem State.
We also direct Gem State to notify the Selling Parties’ customers directly of the
acquisition after the Transaction closes. This notice may be a separate mailing, a message on bills,
or a bill insert. Likewise, we find it reasonable to require Gem State to establish a separate tariff
for the Selling Parties’ water system once the Transaction closes, rather than combining a rate
schedule with Gem State’s other systems. This will help ensure that acquisition costs for the water
system are not incorporated into rates. We further direct Gem State to work with Staff to make any
necessary revisions to its customer documents within three months of the service date of this Order.
O R D E R
IT IS HEREBY ORDERED that Gem State’s Application is approved.
IT IS FURTHER ORDERED that Gem State’s request to amend CPCN No. 293 to
include the area served by the Selling Parties’ water system is conditionally granted, contingent
upon Gem State submitting within 180 days of the issuance of this Order: (1) written
documentation of the water system’s compliance with DEQ’s requirements on physical separation;
(2) a complete and comprehensive legal description of the Selling Parties’ service area, validating
that the requested service does not intrude upon any other adjacent water utility; and (3)
construction documentation and installation drawings for the Selling Parties’ water system
demonstrating that the system was installed using industry standard practices in compliance with
ORDER NO. 35971 8

local ordinances. Following the submission of this information, CPCN No. 293 will be amended
in accordance with the legal description provided by Gem State.
IT IS FURTHER ORDERED that Gem State notify the Selling Parties’ customers of
the acquisition—either through a separate mailing, a message on bills, or as a bill insert after the
Transaction closes.
IT IS FURTHER ORDERED that Gem State establish a separate tariff for the Selling
Parties’ water system within 90 days after the Transaction closes.
IT IS FURTHER ORDERED that Gem State work with Staff to make any necessary
revisions to its customer documents within 90 days after the Transaction closes.
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.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this 27th day
of October 2023.

__________________________________________
ERIC ANDERSON, PRESIDENT

__________________________________________
JOHN R. HAMMOND JR., COMMISSIONER

__________________________________________
EDWARD LODGE, COMMISSIONER

ATTEST:

________________________________
Jan Noriyuki
Commission Secretary

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