20060901notice_of_proposed_order.pdf

Office of the Secretary
Service Date
September 1 2006
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF KOOTENAI HEIGHTS WATER
SYSTEM, INC. FOR A CERTIFICATE OF
PUBLIC CONVENIENCE AND NECESSITY NOTICE OF
PROPOSED ORDER
CASE NO. KHW-O5-
On August 22, 2005 , Kootenai Heights Water System, Inc. (Kootenai Heights
Company) filed an Application for a Certificate of Public Convenience and Necessity with the
Idaho Public Utilities Commission (Commission). The Commission ordered that the Application
be processed by Modified Procedure. Order Nos. 29877 and 29960. Commission Staff was the
only party to file comments. On August 31 , 2006, the Commission issued Kootenai Heights a
Certificate of Public Convenience and Necessity. Order No. 30122. The Commission also
ordered that a Proposed Order regarding just and reasonable rates, charges, rules, and regulations
be issued for comment. Id.
NOTICE OF PROPOSED ORDER
YOU ARE HEREBY NOTIFIED that Procedural Rule 312 allows the Commission
to issue a Proposed Order in any proceeding. IDAPA 31.01.01.312. Pursuant to Rule 312, the
Commission is issuing the attached Proposed Order for comment. The parties may file
comments or exceptions to the Proposed Order within 21 days of the service date of this Notice.
In addition, the parties may file replies to the other parties' comments or exceptions no later than
seven days after service of the initial comments or exceptions.
YOU ARE FURTHER NOTIFIED that the Commission may adopt or revise a
Proposed Order in response to the filed comments and issue a Final Order accordingly. The
Proposed Order is not an Order of the Commission unless it is later adopted by an Order.
NOTICE OF PROPOSED ORDER
Dated at Boise, Idaho this
ATTEST:
J rap D. Jewell '
Commission Secretary
O:KHW-O5-01 dw5 notice
NOTICE OF PROPOSED ORDER
31 s-r day of August 2006.
!2t r:u-PAUL KJELL NDER, PRESIDENT
f\RSHA H. SMITH, COMMISSIONER
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF KOOTENAI HEIGHTS WATER
SYSTEM, INc. FOR A CERTIFICATE OF
PUBLIC CONVENIENCE AND NECESSITY PROPOSED ORDER
CASE NO. KHW-O5-
On August 22, 2005, Kootenai Heights Water System, Inc. (Kootenai Heights
Company) filed an Application for a Certificate of Public Convenience and Necessity with the
Idaho Public Utilities Commission (Commission). The Commission ordered that the Application
be processed by Modified Procedure. Order Nos. 29877 and 29960. Commission Staff was the
only party to file comments. On August 31 , 2006, the Commission issued Kootenai Heights a
Certificate of Public Convenience and Necessity. Order No. 30122.
With this Order the Commission establishes just and reasonable rates, charges, rules
and regulations for the Company. Idaho Code 99 61-301 , 61-302, 61-303, 61-502, 61-503, and
61-623.
THE COMPANY'S APPLICATION
The Company submitted various supplemental documents with its Application
including: a map of the proposed service area, a Water Service Agreement and Easement form
documents evidencing the incorporation of the Company, a copy of the contract with its Certified
Operator, a copy of a Clarification-Modification of the Plat for Kootenai Heights, and a letter
from the Department of Environmental Quality (DEQ) evidencing conditional approval of the as-
built plans.
At the time of the Application the water system was in service with six residential
customers connected to the system. Application at 2. The Company states that the system will
ultimately serve 11 residential customers. Id. The requested service area for the water system
consists of Lots 7-18 of Kootenai Heights, with the well located on Lot 10. Application at
The Company states that the cost to construct the system was $83 500 including the value of Lot
10. Application at 2. The average monthly consumption for the entire system was reported as
000 gallons, and the Company states that billing was to start on October 2005. Id. The
Application states that proposed rates and charges, rules and forms are all contained within the
Water Service Agreement submitted with the Application. Id.
PROPOSED ORDER
The Water Service Agreement and Easement (WSA) states that the system was
developed to provide water "to certain Lots in Kootenai Heights and for further development of
additional land and lots in the sole discretion of the Water Provider." WSA at 1. The WSA
further provides that each lot shall pay a hook-up fee of $5 000, and that rates will be $40 per
month up to 10 000 gallons, and $4.00 per 1 000 gallons used over 10 000 gallons per month.
WSA at 2. Each customer will be metered, with the cost of the meter and its installation paid by
the Company. Id. The Agreement states that monthly rates will not be increased for the first five
years. WSA at 2-3. Additionally, the Agreement states that monthly bills will not be sent, and
the lot owner shall pay the monthly fee on the I st day of each month. WSA at 3. Billings will be
sent to customers twice a year, on or about May I and October 1 , for the purpose of computing
and billing any excess water usage over the allowed 10 000 gallons per month. WSA at 3-
FINDINGS OF FACT
I. Rate Base
Based upon our reVIew of the financial records and the historical relationship
between the developer and the water company, we find that the Company is not entitled to
recognize any rate base in the establishment of rates for two reasons. First, Commission Rule
103 for small water companies (IDAPA 31.36.01.103) establishes a presumption that capital
invested in the water system by the developer is considered contributed capital and is excluded
from rate base. Rule 103 states:
In issuing certificates for a small water company or in setting rates for a small
water company, it will be presumed that the capital investment in plant
associated with the system is contributed capital, i., that this capital
investment will be excluded from rate base.
Second, the Company has received contributions in the nature of hook-up charges in
the amount of $55 000. The Company has indicated in the documentation filed with the
Application that it incurred the following costs to develop the water system:
Well Installation
Distribution Lines
Well House
Pump, Pressure, Electrical
Engineering
Attorney Fees
Total
$ 11 370
$ 8 915
$ 6 000
$16 910
$ 1 800
$ 3,500
$ 48,495
PROPOSED ORDER
Additionally, the Company is claiming the current fair market value of the well lot at $40 000.
We find that the $55 000 hook-up fee contribution is an offset to the cost of the system. ($48,495
plus any allocation of original cost for the well lot.) The well lot is approximately 1/5 of an acre
130 sq. ft.), and it is very unlikely that the original cost of this parcel is more than the
difference between the contributed hook-up fees and the cost of the water system ($55 000 less
$48 495 or $6 505). Regardless of the cost, we find that the well lot is considered contributed
capital under Rule 103.
We find that the hook-up fees should be reflected as an offset to the plant-in-service
account. Until new plant is added subsequent to and independent of owner development, plant-
in-service and hook-up fees will continue to offset each other such that there will be no rate base
or depreciation expense to increase rates. We caution the Company that it is important to
correctly set these accounts up now so system capital costs can be properly reflected in future
rates. We direct Staff to assist the Company to set these accounts up properly, and to properly
book any future expansion if requested by the Company. To the extent the Company wants to
continue collecting a hook-up fee, it should include this charge in its tariff.
Attachment A, Section A to Staff Comments reflects proposed plant-in-service
accounts, reasonable depreciable lives and the annual depreciation. These items are offset by the
hook-up fees recorded as Contributions in Aid of Construction and the presumption that water
system capital is contributed by the owner/developer through the sale of lots. The amortization
of these contributions is shown in Section B. We hereby adopt Attachment A, Sections A and B
to Staff Comments.
Commission Findin2s We find that the Company is not entitled to recognize any
rate base in the establishment of rates. The capital investment in plant associated with the water
system is contributed capital, and this capital investment will be excluded from rate base.
IDAPA 31.36.01103. Additionally, we find that the $55 000 hook-up fee contribution is an
offset to the cost of the system, and should be reflected as an offset to the plant-in-service
account.
II. Annual Expenses/Revenue Requirement
Because there is no rate base, we find that a just and reasonable rate should be based
upon the Company s annual operating expenses. There is no history in the record of actual
annual operating, maintenance, or administrative expenses, therefore we find it prudent and
PROPOSED ORDER
reasonable to rely upon the estimates of the Company s certified operator regarding the annual
expenses for the operation and maintenance of the system.
Based on the certified operator s estimates, Staff prepared a pro forma schedule of
annual expenses that the Company could reasonably incur in the operation of the water company.
Those estimates are included in the Schedule of Annual Expenses and attached as Attachment B
to Staff Comments. We hereby adopt Attachment B to Staff Comments, attached as Appendix A
to this Order. Staff proposes to audit the Company s records for the two years ending December
, 2007, in order to update the estimated annual operating, maintenance, or administrative
expenses based on actual expenses, revenues, and any additional investments subject to recovery
through rates. Because there is no rate base, no annual depreciation expense is included in the
revenue requirement.
Commission Findin2s We find the calculation of the Company s annual expenses
and revenue requirement prepared by Commission Staff to be reasonable. We find it reasonable
to rely on estimates from the Company s certified operator for annual expenses. As discussed
earlier, all water system investment is recovered through the sale of lots and through hook-up
fees. We find the total estimated annual expenses for operation, maintenance, and administrative
functions to total $3 820. We find taxes including property, federal, and state to be
approximately $1 310 per year. Therefore, we find that the total annual expense of $5 160
should be set as the Company s annual revenue requirement.
III. Rates
The Company proposes in its Application a monthly rate of $40 per month plus $4.
per 1 000 gallons for usage over 10 000 gallons. If every customer used no more than the
allowed 10 000 gallons each month, the annual revenue generated by the Company at this rate
would be $5 280, which exceeds the annual revenue requirement.
When the Company s proposed rates are compared to those of nearby municipal and
private water systems, the proposed rates seem somewhat high. The most recent rate set by the
Commission in the area was for Bitterroot Water, located just south of Athol, Idaho (25 miles
south of Sandpoint). The rates approved for Bitterroot are a minimum charge of $21 per month
and a commodity charge of $1.73 for every 1 000 gallons over 15 000 in a month. The size of
the lots in Kootenai Heights is smaller than those in Bitterroot, and thus average usage
assumed to be lower for Kootenai. The City of Sandpoint Municipal Water Utility, which is near
PROPOSED ORDER
the Company s proposed serVIce area, established the following rates as of July 2004 for
residential use with a 3/4 inch connection: fixed monthly charge of $7.00; volume charge for
every 1 000 gallons, with the first 6 000 gallons at $1.45; 6 001-000 gallons at $1.70; and
over 50 000 gallons at $1.95 per gallon. The Sandpoint tariff structure is much more progressive
and has higher commodity charges than have been set for other regulated water utilities in north
Idaho. The communities of Sandpoint, Ponderay, and Kootenai have tariff structures where
000 gallons is a minimum usage billing point. We find that a minimum charge allowance of
000 gallons per month, rather than the 10 000 proposed by the Company, is appropriate.
After consideration of the nearby water company rates and the Company s revenue
requirement, we find the following rates to be just and reasonable:
Fixed Monthly Charge
Volume Charge for every 1 000 gallons
Over 6 000 in a month
$25.
$ 1.90
These rates when applied as described in Staff Comments result in annual revenue of $5 181 , or
$21 more than the proposed required revenue. The Company has installed individual meters.
The annual revenue requirement includes expenses related to monthly meter reading. Monthly
billing provides a good price signal to customers with regard to usage as well as monthly cash
flow for the Company.
Commission Findin2s We find that given the particular characteristics ofthis water
system, including the geographic location, the number of customers and size of lots, the
installation of individual meters, as well as the rate structures of several surrounding water
systems that a just and reasonable initial rate structure for Kootenai Heights Water System, Inc.
is a fixed monthly charge of $25 per month, with a volume charge of $1. 90 for every 1 000
gallons over 6 000 gallons in a month. We find that the Company shall read meters and bill
customers on a monthly basis. This will provide a price and usage signal to customers as well as
a monthly cash flow for the Company.
Iv. Customer Relations/Tariff Issues
According to the Company s Application, purchasers of lots served by Kootenai
Heights Water System signed a contract entitled "Kootenai Heights Water Service Agreement
and Easement" (WSA) that includes a number of provisions regarding operation of the water
company that are covered by or are in conflict with the Commission s Utility Customer Relations
PROPOSED ORDER
Rules and Utility Customer Information Rules. Provisions in the Company s tariff, which is
filed with the Commission, must comply with our rules, the WSA notwithstanding. The
Company and its customers cannot contract away the regulatory requirements of the
Commission.
Kootenai Heights did not file a proposed tariff with its Application, nor has it
submitted copies of its proposed bill statements, disconnection notices, or other documents
necessary to eonduct its day-to-day business. The Company did not provide evidence that it had
notified its customers of its Application to the Commission. The Commission has received no
public comments.
The Company s tariff should specify water rates, recurrIng and non-recurring
charges, and the terms and conditions of providing service. Paragraphs 3 , 4, and 5 of the
Company s WSA conflict with the Commission s Utility Customer Relations Rules and/or
address issues that are required to be in the Company s filed tariff. The Commission s Utility
Customer Relations Rules (IDAPA 31.21.01.000 et seq.govern the collection of deposits,
billing, disconnection of service, payment arrangements, and dispute resolution. Both the Utility
Customer Relations Rules and the Utility Customer Information Rules (IDAP A 31.21.02.000
seq.govern the provision of information to customers.
Rule 201 of the Commission s Utility Customer Relations Rules (UCRR) requires
that customers be billed at regular intervals. Rule 202, UCRR, requires a longer interval between
billing and payment than proposed by the Company before late fees/charges are assessed. The
minimum specified period is 15 days, or 12 days after bills are mailed or delivered, if bills are
mailed or delivered more than 3 days after the billing date. Monthly billing of customers is the
predominate billing interval used by regulated utilities in Idaho. It is also the best way to give
customers immediate feedback on how much water they used and how much it cost.
We find the $50 reconnection fee proposed by the Company to be unsupported by
any cost data, and to be excessive. We approve a $25 reconnection fee that will apply regardless
of the time of day or day of week that service is reconnected. This fee is high enough to
discourage customers from not paying their bills and to compensate the Company for costs
associated with reconnection.
We find the $10 late payment fee proposed by the Company to be arbitrary and
unsupported by any cost data in the record. Additionally, unlike regulated energy utilities
PROPOSED ORDER
regulated water utilities are not prohibited from disconnecting customers at certain times of the
year for non-payment. We note that the Company, with an individually metered system, small
service area, and small number of customers, has readily available access to disconnect non-
paying customers, as long as disconnections are conducted according to the Commission s Rules.
We find a late fee of 1 % per month on any past due balance carried over from the prior month'
bill to be just and reasonable.
Commission Findin2s We find that certain portions of the Company s Water
Service Agreement that it has executed with its customers either conflict with or address issues
governed by the Commission s Utility Customer Relations Rules and Customer Information
Rules. IDAPA 31.21.01.000 et seq., IDAPA 31.21.02.000 et seq. It is reasonable to require the
Company to adopt and implement the Commission s Utility Customer Relations and Customer
Information Rules, as well as an accounting system consistent with the information required by
the Commission s annual report for small water companies. A model tariff for small water
companies is available, and Staff is directed to provide examples of documents and guidance to
the Company upon request.
ULTIMATE FINDINGS OF FACT AND CONCLUSIONS OF LAW
Kootenai Heights Water System, Inc. is a water corporation providing water service
to the public within the State of Idaho Idaho Code 99 61-124, 61-125, and is operating as a
public utility. Idaho Code 9 61-129.
The Commission has jurisdiction over this matter as authorized by Title 61 of the
Idaho Code, and more particularly Idaho Code 99 61-501 61-502 61-503 61-520, and 61-523.
The Commission has the power and authority to establish initial rates, charges
classifications, practices, rules, and regulations that it finds to be just and reasonable. Idaho
Code 9 61-623.
ORDER
IT IS HEREBY ORDERED that Kootenai Heights Water System, Inc. is not entitled
to recognize any rate base in the establishment of rates. The capital investment in plant
associated with the water system is contributed capital, and this capital investment will be
excluded from rate base. IDAPA 31.36.01.103. The $55 000 hook-up fee contribution is an
offset to the cost of the system, and shall be reflected as an offset to the plant-in-service account.
PROPOSED ORDER
IT IS FURTHER ORDERED that the Company s total annual expense of $5 160 be
set as the Company s annual revenue requirement.
IT IS FURTHER ORDERED that the Company shall read meters and bill customers
on a monthly basis.
IT IS FURTHER ORDERED that the Company is directed to adopt and submit a
tariff containing the following rates and charges: a fixed monthly charge of $25 and a volume
charge of $1.90 for every 1 000 gallons over 6 000 gallons per month; a $25 reconnection fee; a
late payment charge of 1 % per month on any past due balance; and a $5 000 hook-up fee, should
the Company wish to continue assessing that hook-up fee for any additions to the system.
IT IS FURTHER ORDERED that the Company is required to adopt and implement
the Commission s Utility Customer Relations Rules (IDAPA 31.21.01.000 et seq.
),
the
Commission s Customer Information Rules (IDAPA 31.21.02.000 et seq.
),
and an accounting
system consistent with the information required by the Commission s annual report for small
water companies. Idaho Code 9 61-405.
IT IS FURTHER ORDERED that the Company shall submit tariffs conforming to
this Order, as well as a sample bill and disconnection notice, no later than 30 days after the
service date of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) may petition for reconsideration within twenty-one (21) days of the
service date of this Order with regard to any matter decided in this Order. Within seven (7) days
after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code 9 61-626.
PROPOSED ORDER
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of September 2006.
PAUL KJELLANDER, PRESIDENT
MARSHA H. SMITH , COMMISSIONER
DENNIS S. HANSEN, COMMISSIONER
ATTEST:
Jean D. Jewell
Commission Secretary
0: KHW - W-O5-O l dw6 _proposed
PROPOSED ORDER
I KOOTENAI HEIGHTS WATER COMPANY
Pro-Forma Revenue Requirement
Pro Forma
Annual Est.
IRevenues
Metered Sales 280
I Expenses
Operation Expenses
Purchased Power 600
Supplies & Expenses 100
Water Testina 350
Other
Total Operation Expense 050
IMaintenance Expenses
I Maintenance of Well lot 300
I Repairs of Water Plant 200
Other
Total Maintenance Expense 500
Customer Accounts Expense
Meter Readina labor 100
Accountinq and Collecting labor 300
Other
Total Customer Accounts Expense 400
Administrative & General Expenses
Administrative & General Salaries 600
Office Supplies & Other Expenses 200
Outside Services Emploved
Certified Operator 600
Property Insurance 250
Reaulatorv Commission Expenses 150
Miscellaneous General Expenses 100
Total Administrative & General Expenses 900
Total Operating, Maintenance and Administrative
Expenses 850
ITaxes
Propertv Taxes 1200
Income Taxes
State of Idaho
Federal
Total Taxes 1310
Total Annual Expenses 160
INET INCOME (LOSS)120
Appendix A
Case No. KHW-O5-
Proposed Order