20230622Comments of Commission Staff.pdf

CLAIRE SHARP
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE,IDAHO 83720-0074
[phone]
IDAHO BAR NO.8026
Street Address for Express Mail:
11331 W CHINDEN BLVD,BLDG 8,SUITE 201-A
BOISE,ID 83714
Attorneyfor the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF GEM STATE WATER )COMPANY,LLC'S APPLICATION FOR )CASE NO.GSW-W-23-01APPROVALOFTHEACQUISITIONOFTHE)ASSETS OF THE WATER BUSINESS OF )VALIANT IDAHO,LLC )COMMENTS OF THE
)COMMISSION STAFF
COMMISSION STAFF ("STAFF")OF the Idaho Public Utilities Commission,by and
through its Attorneyof record,Claire Sharp,Deputy AttorneyGeneral,submits the following
comments.
BACKGROUND
On February 6,2023,Gem State Water Company,LLC,("Gem State"or "Company")
applied for Commission approval of its acquisition of the assets of the water supply system of
Valiant Idaho,LLC ("Valiant")and TIC Utilities,LLC ("TIC")(collectivelythe "Selling
Parties").Application,1.The Company requests the Idaho Public Utilities Commission
("Commission")find this transaction consistent with the public interest and amend its Certificate
of Public Convenience and Necessity ("CPCN")No.2931 to include the service areas of the
'Gem State operates water systems under CPCN No.293 that were previously owned by Spirit Lake East Water
Company and Lynnwood Water.
STAFF COMMENTS 1 JUNE 22,2023
Selling Parties or issue a new CPCN authorizing the Company to provide water service to the
areas served by the Selling Parties.Id.at 1,6,8.
On February 27,2023,the Commission issued a Notice of Application,and Notice of
Intervention Deadline.Order No.35690.No one intervened.
Gem State is a regulated public utility providing water service to customers in northern
Idaho.Gem State is a whollyowned subsidiary of NW Natural Water of Idaho,LLC,which is
owned by NW Natural Water Company,LLC,and the Company represents there are sufficient
resources to "proactivelyaddress the infrastructure needs of the utility"and "make needed
improvements to the water system."Id.at 2,5.The Company has acquired other water utilities
in Idaho.2 Id.at 3.
The Selling Parties own a water system that is not regulated by the Commission and had
been providing water service to "approximately 148 residential customers in or near Bonner
County,Idaho"("Water Business").Id.at 3.The area served by the Selling Parties is close to
the territory that Gem State provides water service to.Id.
Gem State submitted a Water System Asset Purchase Agreement ("Agreement"),
executed by the Company and the Selling Parties on December 9,2022.Id.The Agreement is
contingent upon Commission approval.Id.at 4.
If the Commission approves the transaction ("Transaction")set forth in the Agreement
Gem State will acquire the Selling Parties'assets related to the Water Business ("Water Business
Assets")and will provide water service to the Selling Parties'customers as a regulated public
utility.Id.3-4.The Water Business Assets "include real property and personal property used to
operate the Water Business,including all water rights."Id.at 4.
Gem State requests the Commission amend CPCN No.293 to include the expanded
service area or issue a new CPCN to the Company.Id.at 6.
Gem State asserts that the transaction is in the public interest for the followingreasons.
Approval of the transaction will allow for "access to capital that is not currentlyavailable to the
Selling Parties."Id.at 4.Gem State also represents it will offer expertise in operating regulated
utilities.Id.The Company also contends it will maintain or improve the level of services
2 Gem State has the following CPCNs in Idaho:"a)CPCN No.319 (Bitterroot);(b)CPCN No.296 (Bar Circle);(c)CPCN No.293 (Spirit Lake East);(d)CPCN No.390 (Happy Valley Water Systems,Inc.);(e)CPCN No.280 (TroyHoffmanWaterCorp.,Inc.);(f)CPCN No.413 (Diamond Bar Estates);and (g)CPCN No.293."Id.at 6.
STAFF COMMENTS 2 JUNE 22,2023
currentlyprovided.Id.at 5.Further,Gem State represents that the Company will continue
operating the water system using the Selling Parties rates and charges until it requests,and the
Commission approves any rate changes in a future rate proceeding.Id.at 4.
Gem State asserts that "[i]f the Transaction is approved,Gem State Water will assess
what,if any,capital investments are needed."Id.at 6.The Company represents that "[s]uch
capital investments may include installation of meters and/or other projects."Id
STAFF ANALYSIS
Staff recommends the Commission approve the acquisition of Valiant and TIC water
supply assets by Gem State.Staff also recommends:(1)prior to issuing the Company a new
CPCN,the Company provide the Commission through written acknowledgementby the Idaho
Department of Environmental Quality ("DEQ")of the physical separation required of the VP,
Incorporated and Valiant water systems;(2)prior to issuing the Company a new CPCN,the
Company provide the Commission with a complete and comprehensive legal description of the
service area currentlyoperated by Valiant and TIC,which validates that the requested service
area does not overlap any other adjacent water utility;and (3)the Company provide the
Commission with construction documentation and installation drawings for the Valiant and TIC
system to assure the system was installed using industry standard practices,and that the installed
system complies with local ordinance.
Staff's recommendations are based on comprehensive review and analysis of the
Company's Application,a general adherence to Idaho Code §61-328,and the Company's
response to numerous Staff production requests.
Idaho Code §61-328
Although,Idaho Code does not specifically address the acquisition of a water utility,as in
previous water utility acquisition filings,Staff relied on the requirements outlined in Idaho Code
§61-328 for the sale of electric utilities as a basis for evaluating other types of utility system
acquisitions (i.e.,water,natural gas,etc.).This statute requires the Commission to determine
that:
STAFF COMMENTS 3 JUNE 22,2023
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 the system in the public service.
Having used these stated requirements within its analysis,and after thorough review of
all relevant documentation related to the sale,Staff believes the acquisition of the assets for the
water supply system by Gem State comply with the requirements of Idaho Code §61-328.
Public Interest
Gem State,in conjunctionwith its parent companies,is actively seeking to expand its
operations in Idaho.Gem State and its associated companies have shown commitment to a
growth plan in Idaho through prior acquisition of water companies.3 The continued acquisition
of water systems by Gem State will likelyprovide benefit through operational efficiencies and
economies of scale through these past acquisitions and now with Valiant and TIC.The area
currentlyserved by Valiant and TIC is stated to be in the general vicinity of other areas served by
Gem State.Because of this,the Company,for reasons of improved service and operating
efficiency,plans to use current employees in expanded roles in the areas for operating the
acquired Valiant and TIC water system.
Additionally,Valiant Water,Inc.is not currentlyoperating as a utility regulated by the
Commission.However,if this Application is approved,the system will then become a regulated
utility operating within the State of Idaho,under the jurisdiction of the Commission.
Customer Rates
The Company states it will maintain existing rates and charges followingthe acquisition,
and that it will not seek to include the transaction expenses related to the acquisition in rates.
Palfreyman Direct at 6-7.When Gem State eventuallyfiles a general rate case,Staff will ensure
3 Falls Water (FLS-W-18-01),Spirit Lake East/Lynnwood Water (SPL-W-19-01),Bar Circle S Water/Diamond Bar
Estates (BCS-W-19-01/DIA-W-19-Ol),TaylorMountain Water (FLS-W-19-Ol),Happy Valley Water and BitterrootWater(GSW-W-19-01),MorningView Water Company (FLS-W-20-04),Troy Hoffman (GSW-W-21-01).
STAFF COMMENTS 4 JUNE 22,2023
that the requested rate increase was not driven by the transaction,and that rates will not be higher
than they would have been absent the transaction.
Staff reviewed Production Request No.25 which provided the financial informationand
tax documents for Valiant,and TIC.This is a combined water and sewer system and therefore
these responses combined the revenues,expenses,and plant in service of both systems into one
document.Splitting the expenses and revenues between water and sewer systems was difficult.
Referencing presumptions for small water companies as contained in IDAPA 31.36.01.102,Staff
assumed that all the current plant in service is contributed capital and will be excluded in rate
base.Staff believes current rates are a reasonable starting point for this water system.This also
complies with the requirement of Idaho Code §61-328(b)stated above as rates will not change
due to this application.
In addition,Gem State Water has stated that any future rate increases would be related to
prudent capital investment or other increased expenses,and not due to the expenses of this
acquisition.Palfreyman Direct at 7.This also complies with the requirement of Idaho Code
§61-328(b)because all future rate increases will be due to capital investment and other expenses
and not due to the acquisition.
Company Intent and Ability
Staff believes Gem State has demonstrated its bona fide intent and financial ability to
provide continued operation of the system and reliable service.Gem State has committed to
provide safe and reliable service and to meet the infrastructure needs of Valiant.See Application
at 5.Gem State employs Leslie Rayner as its general manager.Ms.Rayner is an experienced
water operator with whom Staff has worked with in the past.In these past interactions,Ms.
Rayner has been responsive to requests for information from Staff and has consistently complied
with Commission orders.
Water systems routinelyrequire repair,replacement,and extension of infrastructure to
provide reliable and sufficient water service to customers.Financing this infrastructure at a
reasonable cost is a challenge for smaller water systems.Gem State,through its parent company,
Northwest Natural Holdings,has the necessary access to capital markets to proactively address
Valiant's infrastructure needs in a timely manner at a competitive cost.See Application at 5.
Northwest Natural Gas Company has a Baal credit rating from Moody's and an A+credit rating
STAFF COMMENTS 5 JUNE 22,2023
from Standard and Poor's.Northwest Natural Gas Company has consolidatednet income of
$86.3 million from continuing operations,cash flow from operations of $147.7 million,and a
revolvingcredit line of $400 million.4 Improved access to capital markets usuallyhelps lower
financing costs that ultimatelyare included in rates paid by customers.
CPCN
Staff believes prior to the Commission issuing the Company a new CPCN to operate the
Valiant and TIC system as a regulated water utility in Idaho,the Company must provide the
Commission with a complete and comprehensive legal description of the service area currently
operated by Valiant and TIC.This service area must also validate that the requested service area
does not overlap with any other non-Company owned water utilities operating adjacent to the
Valiant and TIC water system.Once the required informationhas been provided and validated,
Staff believes the Commission should issue a new CPCN to Gem State authorizing it to provide
service for the Valiant and TIC water system as a regulated utility within Idaho.
Staff requested a legal description of the service area attributed to the Valiant and TIC
water business.In response,the Company referenced a developmentmap for the Idaho Club.
See Response to Staff Production Request No.3.Staff believes the Company's response is
inadequate for describing the service area for the purpose of the CPCN.
Staff is also aware of legal issues related to asset ownership with VP,Incorporated,'
which is an unregulated water utility operating adjacent to the Valiant and TIC water system.
VP,Incorporated has submitted a case comment questioning ownership of the water business
serving the Idaho Club which will be served by the Valiant and TIC system.Prior to the
Commission issuing a CPCN to Gem State for the Valiant and TIC system,the Commission
must be assured there is not an overlap between the two water systems or any other systems
operating in the area.
Water System Separation
In Genesis GolfBuilders,Inc.,v.Pend Oreille Bonner Development,LLC,the court
ordered the public water systems of Valiant and VP,Incorporated ("VP")to be physically
4 Northwest Natural Gas Company's Form 10-K for 2022,pages 78,82 and 58.*See GNR-W-17-01 Investigation of VP,Incorporated,an unregulated Northern Idaho Water Company.
STAFF COMMENTS 6 JUNE 22,2023
separated.Genesis GolfBuilders,Inc.,v.Pend Oreille Bonner Development,LLC,Case No.
CV-2009-1810 (1st Dist.Bonner)(2017)(order modifying injunctionentered April 28,2017).
The Court Order states:
d.VP and Valiant shall cooperate to allow Valiant,and its agents,engineers,
contractors,and/or employees,to disconnect and separate,as efficiently andcosteffectivelyasreasonablypossible,the water system for the realpropertieswithinTheIdahoClub's PUD ("PUD Water System"),whichshallthereafterbeoperatedandmaintainedbyValiant,from the watersystemfortherealpropertiesthatarenotwithinTheIdahoClub's PUD("Hidden Lakes'Water System"),which shall thereafter be operated andmaintainedbyVP;
e.Valiant and VP shall cooperate to disconnect and separate the PUD WaterSystemfromtheHiddenLakes'Water System in such a manner that it will
cause as little disruption as is reasonably possible in water services toexistingresidents/customers,properties,and/or any other recipients.Id.
In addition to the Court Order,the DEQ requires the systems to be physicallyseparated
from each other.6 On the March 30,2023,the owner of the VP,Incorporated system asserted
that valves separate the systems.See response to Production Request No.3 in Case No.GNR-
W-17-01.Staff questioned if valves are sufficient separation in terms of DEQ requirements and
learned that valves are not considered to be adequate physical separation.Neither Company has
provided evidence that the systems have been physicallyseparated in compliance with the Court
Order and DEQ requirements.
Given that no evidence of physical system separation has been provided,Staff
recommends that issuance of a CPCN be conditioned upon the Company providing evidence and
DEQ acknowledgement of physical separation of the systems within six months of a
Commission Order.
System Design and Installation Documentation
Staff recommends the Commission direct the Company to provide complete design
documentation and installation drawings for the Valiant and TIC system to assure the system was
installed using industry standard practices,and that the installed system complies with local
ordinance.Staff requested this informationwithin several production requests,but in response
6 See IDAPA 58.1.08 542 FACILITY AND DESIGNSTANDARDS-DISTRIBUTION SYSTEM 02.D.and 543FACILITYANDDESIGNSTANDARDS:CROSS CONNECTIONCONTROL.
STAFF COMMENTS 7 JUNE 22,2023
Gem State indicated that the informationsubmitted was incomplete.Staff believes that to
understand whether the system can reasonably provide reliable service the Company must
provide complete documentation of the system's design and installation.
Tariff
The Valiant and TIC water system is not currentlyoperated as a regulated utility.
However,if the acquisition is approved by the Commission,Staff believes it would be better to
create a separate rate schedule for the Valiant and TIC water system to ensure costs related to the
acquisition are not introduced into rates.
Customer Documentationand Communication
Notification of Sale
Rule 125 of the Commission's Rules of Procedure does not require customer notification
unless the utility is requesting a rate change.IDAPA 31.01.01.125.In its Application,Gem State
stated its intention to publish a Customer Notice in the local newspaper regarding Gem State's
agreement to purchase the system.Additionally,Gem State asserted it would provide written
notice by mail to each customer and subsequently file with the Commission its verification of
when the notice was sent.See Application at 7.
The Company published a notice in the Bonner County Daily Bee on February 28,2023,
and subsequently filed a copy of the notice and the invoice for publication.In addition to the
Company notice,the Commission issued a press release on May 11,2023.
If the Commission approves the system acquisition,Staff recommends that Gem State
provide another direct notice to customers of the purchase,either through a separate mailing,a
message on bills,or as an insert sent with customer billing.Additionally,Staff recommends that
Gem State include the new contact information,includingtelephone numbers,emergency phone
numbers,mailing address,and billingand payment information.
Documentation
Gem State is required to update customer documents to reflect any changes brought about
by the sale of the Valiant and TIC water system.Staff is willing to work with Gem State to
update its billingand collection documents as well as its Explanation of Rates and Annual Rules
STAFF COMMENTS 8 JUNE 22,2023
Summary.Staff recommends Gem State work with Staff to make any necessary revisions within
three months of issuance of the final order in this case.
Customer Comment
As of June 22,2023,only one comment has been received.
STAFF RECOMMENDATION
Staff recommends the Commission:
Approve the sale of Valiant and TIC water supply and distribution assets to Gem
State in accordance with the Water System Asset Purchase Agreement dated as of
December 9,2022,in that it complies with the intent of Idaho Code §61-328;
Find that the current plant in service of the Valiant and TIC water system is
subject to the presumptions stated in IDAPA 31.36.01.102;
Order the Company to provide evidence through DEQ written acknowledgement
of the required physical separation of the VP,Incorporated and Valiant water
systems within 6 months of the Commission's final order;
Order the Company within 6 months of the Commission's final order,to submit a
full and complete legal description of the Valiant and TIC service area which
validates that its acquired service area does not overlap with any non-company
owned water business which may border the Valiant and TIC service area.Only
after this validation is complete should the Commission issue a new CPCN;
Order the Company within 6 months of the Commission's fmal order,to provide
complete design documentation and installation drawings for the Valiant and TIC
system;
Order the Company to notify customers of the purchase of Valiant and TIC
system with new contact informationeither through a separate mailing,a message
on bills,or as a bill insert within 30 days of the Commission's final order in this
case;and
Order the Company to work with Staff to make any necessary revisions to its
billingand collection documents and its Explanation of Rates and Annual Rules
Summary followingthe Commission's final order in this case.
STAFF COMMENTS 9 JUNE 22,2023
Respectfully submitted this ay of June 2023.
Claire Sharp
Deputy Attorney General
Technical Staff:Rick Keller
Laura Conilogue
Chris Hecht
Kevin Keyt
Joseph Terry
i:umisc/comments/gsww23.lcsrkjtlemschkk comments
STAFF COMMENTS 10 JUNE 22,2023
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