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DONOV AN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
(208) 334-0357
IDAHO BAR NO. 5921
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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
CASE NO. KHW-O5-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through it Attorney of Record
Donovan E. Walker, Deputy Attorney General, in response to the Second Notice of Application and
Second Notice of Modified Procedure on January 27 2006, Order No. 29960, submits the following
comments.
BACKGROUND
On August 22, 2005, Kootenai Heights Water System, Inc. (Kootenai Heights; Company)
filed an Application for a Certificate of Public Convenience and Necessity (CPCN) with the Idaho
Public Utilities Commission (Commission). On September 30, 2005 , the Commission issued an
initial Notice of Application and Modified Procedure establishing a deadline for written comments
of November 10, 2005. On November 1 , 2005, the parties executed a Stipulation asking the
Commission to suspend the written comment deadline. The Commission suspended the comment
deadline and directed the parties to report the status of this matter to the Commission within 60
STAFF COMMENTS MARCH 9, 2006
days. Order No. 29909. On January 20 2006, Staff reported that the Company wishes to proceed
with its original Application. The Commission issued a Second Notice of Application and Modified
Procedure setting the comment deadline of March 9 2006.
ST AFF ANALYSIS
Kootenai Heights Water System consists of eleven (11) residential lots and one lot used for a
well site and pump house. The adjacent area is served by the City of Kootenai, Idaho , who
currently has a moratorium on allowing water users located outside its established water area
boundaries from connecting to the city s water system. There is no other domestic water supplier
close enough to financially justify providing this area s water needs. The City of Sandpoint, for
example, would have to cross part of the City of Kootenai to serve the area.
Floyd and Mickie McGee (McGees) are the developer of this property; and are the officers
and shareholders of the Applicant. The McGees were the owners of all the property included in the
proposed service area and were the grantors transferring the ownership of Lot 10 (the well Lot) to
the Applicant. Development began in 2004 and a hook-up fee of $5 000 has been received from
each of the 11 lots for a total amount of$55 000.
The system consists of one 4 inch, 5 HP well pump with an 8 inch casing pumping from a
depth of approximately 200 feet. There are three 100-gallon hydro-pneumatic tanks to maintain
pressure in the system. All equipment is located on the well lot. There is no other water storage in
this system.
The Company has indicated in the documentation filed with the Application that it incurred
cost as follows 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
Additionally, the Company is claiming the current fair market value of the well lot at $40 000.
Kootenai Heights has a Water Service Agreement it proposes as the basis for rates and
policies concerning the operation of the water company. The water service agreement provides for
STAFF COMMENTS MARCH 9, 2006
the charging of a water usage fee in the amount of forty dollars ($40.00) per month for 10 000
gallons, with the excess gallons used over 10 000 per month being at the rate of $4.00 per thousand
gallons.
The McGees own additional property adjacent to the proposed service area property, and
plan to develop this property in the future. If this property were developed, the McGees would
consider combining the water systems of the anticipated development with the water system under
consideration in this Application.
Technical Review
The well capacity determined from well records and pump data is sufficient to serve the
present customer base. The three (3) pneumatic pressure/storage tanks are also adequate. The
Company has notified both the Panhandle Health District and DEQ that it plans to expand the
system to serve an additional 48 customers. Both DEQ and the Health District have advised the
Company that the expansion will require further review and approval.
In a letter dated January 6 2005 the DEQ approved the existing system contingent upon full
compliance by the Company with five (5) items delineated in the approval letter. The responsible
engineer at DEQ has advised Staff that all but one of those requirements has been satisfied and that
the remaining requirement needs several more months of water testing before it can be resolved.
Also, the system was reviewed and inspected on February 10, 2005 by the Health District.
The Health District notified the Company s certified operator, Kirk Marine, of the results of that
inspection in a letter dated February 27 , 2005. That letter notes that the system is mostly in
compliance with IDAP A 58.01.08 with nine (9) required improvements and two (2) suggested
improvements noted.
The Company has hired a certified operator to manage the water company and appears to
have the financial ability to maintain adequate service. Therefore, Staff recommends that the
Company be granted a CPCN and work to comply with the requirements of the DEQ and the Health
District.
Financial Review
Based on a review of the financial records and the historical relationship between the
developer and the water company, Staff believes the Company would not be entitled to recognize
any rate base in the establishment of rates for two reasons. First, Commission Rule 103 for small
STAFF COMMENTS MARCH 9, 2006
water companies (IDAP A 31.36.011 03) 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
, 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. This 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 (9 130 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)
The well lot is considered contributed capital under Rule 103 no matter the cost.
Staff proposes to reflect the hook-up fees 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. It is important to set these accounts up properly now so system capital
costs can be properly reflected in future rates. To the extent the Company wants to continue
collecting a hook-up fee, Staff recommends that the Company file a request for approval to include
this charge in its tariff.
Attachment A, Section A reflects Staffs 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.
Staff will assist the Company to set these accounts up properly. Assistance to book any
future expansion will also be provided if requested by the Company.
Annual Expenses
The Company did not have any history of annual operating, maintenance, or administrative
expenses. It has entered into a contract with Mr. Kirk Marine to provide service to the Company as
the certified operator. The compensation for this service will be billed on an hourly rate of $15.
STAFF COMMENTS MARCH 9, 2006
per hour plus parts and expenses. Staff interviewed Mr. Marine and received estimates from him
concerning annual expenses for the operation and maintenance of the system. Based on Mr.
Marine 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. The total estimated annual expenses
for operating, maintenance and administrative functions total $3 820. Taxes including property,
federal and state are approximately $1 310 per year. Therefore, the total annual expenses of$5 160
are the revenue requirement.
Because there is no rate base, no annual depreciation expense is included in revenue
requirement. As discussed earlier, all water system investment is recovered through the sale of lots
and through hook-up fees.
Estimates are currently used to establish the expense amounts in Attachment B. Therefore
Staff will audit the Company s records for the two years ending December 31 , 2007. This will
allow a report to be provided to the Company and Commission showing actual expenses, revenues
and any additional investments subject to recovery through rates.
Tariff
The Company proposes a monthly rate of $40.00 per month plus $4.00 per 1000 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. When Staff
compared the Company proposed rate to those of nearby municipal and private water systems, the
proposed rates were found to be higher.
The City of Sandpoint Municipal Water Utility, which is near the Company s proposed
servIce area, established the following rates as of July 2004 for residential use with a % inch
connection:
Fixed Monthly Charge
Volume Charge for Every 1 000 Gallons
First 6 000 Gallons
001 - 50 000 Gallons
Over 50 000 Gallons
$7.
$1.45
$1.70
$1.95
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 average consumption by
Sandpoint water customers for the 12 month period ending November 1 , 2005 was approximately
STAFF COMMENTS MARCH 9, 2006
000 gallons this includes all types of residences (multi-family for example). City water utility
representatives state that this was for a very wet summer where little irrigation was required. The
most recent rate set by the PUC in the area was for Bitterroot Water, located just south of Athol
Idaho (25 miles south of Sandpoint). The average irrigation use in the Sandpoint area for the 5
summer months should be comparable to the 30 000-gallon average used by the customers of
Bitterroot water for the five summer months. However, the lots in Kootenai Heights are smaller
than at Bitterroot, so it is appropriate to use a lower usage rate. Staff assumed that the summer
months' average usage at Kootenai heights would be 24 000 gallons per month or 18 000 gallons per
month for irrigation over and above a 6 000-gallon minimum charge allowance. Staff believes that
a minimum charge allowance of 6 000 gallons per month is appropriate since the surrounding
communities of Sandpoint, Kootenai and Ponderay have tariff structures where 6 000 gallons is a
set point.
The rates approved for Bitterroot are a mInImUm charge of $21.00 per month and a
commodity charge of$1.73 for every 1 000 gallons over 15 000 in a month. After consideration of
these nearby water company tariffs and the Company s revenue requirement, Staff recommends the
following tariff:
Fixed Monthly Charge
Volume Charge for Every 1 000 Gallons
Over 6 000 in a month
$25.
$ 1.90
This tariff when applied as described above results in annual revenue of $5 181 , or $21.00 more
than the Staff proposed required revenue. The Company has installed individual meters. Staff
included expenses related to monthly meter reading and billing in the annual revenue requirement.
Monthly billing would provide a good price signal to customers with regard to usage under Staffs
proposed rate structures and Staff recommends that the Company read meters and bill on a monthly
basis.
CUSTOMER RELATIONS
Kootenai Heights did not provide evidence that it had notified its customers of its
Application to the Commission. Therefore, Staff is not sure that customers are aware of the
Company s Application. As of March 6, 2006 , no public comments had been received by the
Commission regarding this case.
STAFF COMMENTS MARCH 9, 2006
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" that includes a number of provisions regarding operation of the water company. Staff
does not know whether purchasers of the lots are the same parties who will be receiving water
service as customers of the water company.Regardless of whether "purchasers" are also
customers , if the Commission grants the Company s request to become a regulated water utility,
Paragraphs 3 , 4 and 5 of the contract will be superceded by the Commission s rules as well as
Kootenai Height's filed tariff. The Company s tariff will specify water rates, recurring and non-
recurring charges, and the terms and conditions of providing service. The Commission s Utility
Customer Relations Rules (IDAPA 31.21.01) 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 (IDAPA 31.21.02) govern the
provision of information to customers.
Paragraph 3 of the contract specifies that water shall be used "for household domestic
purposes in reasonable quantities" and that "Irrigation of yards shall be done at times of low water
usage, so, as not to interfere with household water uses." The terms "household domestic purposes
reasonable quantities , and "low water usage" are not defined, and there is no indication of how
the Company would propose to enforce these provisions. Staff assumes the provisions were put in
place to encourage customers to use water efficiently and to prioritize use inside homes over outside
water use. Although Staff does not disagree with that intention, it believes that properly designed
rates and provision of information to customers about water conversation and wise water use during
the spring and summer will be more effective.
Paragraph 4 specifies a $5 000 hook up fee. Paragraph 5 sets water rates and specifies under
what conditions rates will increase. Paragraph 5 also indicates that the Company will not bill its
customers, but customers are expected to pay by the 10th of each month. Customers will be billed
semi-annually for "excess water usage over the allowed 10 000 gallons per month"Finally,
Paragraph 5 establishes a $10 late payment fee and a $50 reconnection fee following termination for
non-payment. As stated earlier, the Commission approved tariffs will supercede the rates and
charges set forth in the contract on a going forward basis. No cost support was provided to justify
the $10 late payment fee or the $50 reconnection fee.
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
STAFF COMMENTS MARCH 9, 2006
and payment than proposed by the Company. 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. Staff recommends that the Company be required to take meter readings and
bill customers each month. This should not be an onerous task for the Company.
Staff recommends that the Commission approve a $25 reconnection fee. If approved, the
$25 fee would apply regardless of the time of day or day of week that service is reconnected.
Because the Company has so few customers, a simple fee structure makes sense. The fee is high
enough to discourage customers from not paying their bills and to compensate the Company for
costs associated with reconnection.
Staff recommends that the Company not be allowed to collect a $10 late payment fee.
Unlike regulated energy utilities, regulated water utilities are not prohibited from disconnecting
customers at certain times of the year. The Commission has allowed water utilities that are unable
to discontinue water service easily to assess a late fee for non-paying customers, as would be the
case with non-metered systems. However, that is not the case with Kootenai Heights. Finally, a
$10 flat rate fee is excessive. If the Commission chooses to allow the Company to impose a fee on
customers who pay late, Staff recommends that any late fee be set at 1 % per month on any past due
balance carried over from the prior month's bill; this would be consistent with what the
Commission has allowed other utilities to charge.
The Company 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 conduct its
day-to-day business. At a minimum, Staff recommends that the Company be directed to file for
Staff review and approval the following documents: (1) tariff; (2) sample bill, (3) disconnect
notice, and (4) annual summary of rules and rates. A model tariff for small water companies is
available, and Staff can provide examples of documents and guidance to the Company upon
request.
STAFF COMMENTS MARCH 9, 2006
RECOMMENDATIONS
Staff recommends:
That the Company be granted a Certificate of Public Convenience and Necessity to
provide water service to the proposed service area encompassing the 11 residential lots
as described in the Application;
That the Company be directed to adopt and submit a tariff containing the following
rates and charges:
Fixed Monthly Charge
Volume Charge for Every 1 000 Gallons
Over 6 000 in a month
$25.
$ 1.90
That the Company be directed to file a $25 reconnection fee;
That the Company be directed to file a hook-up fee tariffifit chooses to continue
assessing the fee;
Elimination of the Company s proposed $10 late payment fee;
A late fee is not recommended. However, if one is established, the Commission
should direct the Company to file a late fee set at one percent (1 %) of any past due
balances carried over from the prior month;
That the Company be directed to take meter readings and bill customers each month;
That the Company be directed to file for Staff review and approval the following
documents: (1) tariff; (2) sample bill, (3) disconnect notice, and (4) annually, a
summary of rules and rates.
Respectfully submitted this r+k day of March 2006.
Deputy Attorney General
Technical Staff: Joe Leckie
Carol Cooper
Harry Hall
STAFF COMMENTS MARCH 9, 2006
KOOTENAI HEIGHTS WATER SYSTEM
Plant-in-Service and Contribution in Aid of Construction
A. Annalysis of Plant-in-Service and Annual Depreciation Expense
Plant-in-Service Depreciable Plant Annual
Life Investment Depreciation
Value
Well 094 483.
Distribution System 9,483 189.
Pump 987 899.
Pump House 382 182.
Total Investment 946
Total Annual Depreciation
Expense 755.
B. Analysis of Contribution in Aid of Construction and Annual Amortization
Amortization
Term in Years
CIAC Annual
Amortization of
CIAC
Amortization of Contribution
in Aid of Construction 000.00 $755.
Attachment A
Case No. KHW-05-
Staff Comments
03/09/06
KOOTENAI HEIGHTS WATER COMPANY
Pro-Forma Revenue Requirement
Pro Forma
Annual Est.
Revenues
Metered Sales 280
Expenses
Operation Expenses
Purchased Power 600
Supplies & Expenses 100
Water Testing 350
Other
Total Operation Expense 050
Maintenance Expenses
Maintenance of Well Lot 300
Repairs of Water Plant 200
Other
Total Maintenance Expense 500
Customer Accounts Expense
Meter Reading Labor 100
Accounting and Collecting Labor 300
Other
Total Customer Accounts Expense 400
Administrative & General Expenses
Administrative & General Salaries 600
....
f--_.Office Supplies & Other Expenses 200
Outside Services Emploved
Certified Operator 600
Property Insurance 250
Requlatorv Commission Expenses 150
Miscellaneous General Expenses 100
Total Administrative & General Expenses 900
Total Operating, Maintenance and Administrative
Expenses 850
Taxes
Property Taxes 1200
Income Taxes
State of Idaho
Federal
Total Taxes 1310
Total Annual Expenses 160
NET INCOME (LOSS)120
Attachment B
Case No. KHW-05-
Staff Comments
03/09/06
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CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 9TH DAY OF MARCH 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. KHW-05-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
TO THE FOLLOWING:
FLOYD N McGREE PRESIDENT
KOOTENAI HEIGHTS WATER SYSTEM
INc.
PO BOX 1925
SANDPOINT ID 83864
GARY A FINNEY
FINNEY FINNEY & FINNEY P
120 E LAKE ST SUITE 317
SANDPOINT ID 83864
SEC 1k~
CERTIFICATE OF SERVICE