XII. Assignment of Proceeding
Michael R. Peevey is the Assigned Commissioner and John E. Thorson is the assigned ALJ and principal hearing officer in this proceeding.
General
1. On April 8, 2002, the Commission issued D.02-04-017, finding that Keene Water System is a public water utility. Rates were not established in that decision.
2. On November 4, 2004, Union Pacific Railroad filed its rate application on behalf of the Keene Water System.
3. The application has been protested by the Stonybrook Corporation, Bridget Beard (an individual water user), and the Commission's own Water Division.
4. Keene Water System serves approximately 37 users, some of whom have multiple connections.
Ratesetting: Gross Revenues
5. For test year 2004, an estimated 7 million gallons of water each year will be sold yielding, based on the rate design adopted herein, gross operating revenues of $120,121.
Ratesetting: Expenses
6. Adjusting for the determinations made in this decision, Keene's allowable expenses total $108,109.
7. For test year 2004, the parties agree on these expenses: $1,500 for water testing, $3,900 for chlorination, and $6,100 for electricity and telephone. These expense projections are reasonable. Keene does not seek recovery for property or income taxes in this proceeding. The separation of these expenses from overall Union Pacific Railroad finances is not cost-effective.
8. For test year 2004 expense categories where the parties do not agree, the following expense projects are supported by the evidence and are reasonable:
a. $50,526 for labor costs (1,600 hours including the cost of meter-reading ordered in this decision). Fringe benefits should be calculated at 53%.
b. $9,000 for the employee's vehicle cost.
c. $4,410 for the technical advisor (Department of Health Safety requirements)
d. $1,443 for license and permit expenses. For expenses beyond this amount, Keene should use the memorandum account to track these expenses and to seek recovery through advice letters. This decision authorizes the memorandum account requested by Keene in Advice Letter No. 2.
e. $13,000 for materials and supplies.
f. $20,000 for legal fees incurred in this proceeding with this amount being amortized, without interest, at $3,000 per year until fully recovered. Any ratesetting-related legal fees in excess of $20,000 should be booked to a memorandum account, which is authorized by this decision, pending subsequent Commission review.
Ratesetting: Ratebase
9. The parties disagree about whether the 1997 distribution pipeline replacement project should be included in ratebase. The original cost of the 1997 distribution pipeline project was $602,226. Keene estimates the useful life of this improvement to be 40 years. In determining net plant of $502,611, Keene has subtracted $106,000 in depreciation from 1997 to date.
10. The 1997 distribution pipeline replacement project was a reasonable and prudent decision. The benefits to the railroad are outweighed by the benefits to the water users of an updated water distribution system, and the protestants have offered no evidence quantifying how any benefits to the railroad could be quantified.
11. For test year 2004, the water system's ratebase should be $502,611.
12. Keene's proposed rate of return of 2.39% is well below the average rate of return of 12.90% normally authorized for Class D water utilities.
Ratesetting: Rate Design
13. Keene's revenue requirement for test year 2004 is $120,121 based on the calculations herein.
14. While the Commission's Standard Practice U-7-W allows a Class D utility to recover of 100% of the utility's fixed costs through the service charge, Keene has asked only to recover 50% of its fixed costs through the service charge and the balance through commodity charges.
15. In the case of this small water utility, using commodity pricing exclusively may result in so much conservation that insufficient revenues are generated to meet the utility's revenue requirement with detrimental effects on the utility's operations (at a time when improvements are already necessary in those areas).
16. In furtherance of the public interest, and to benefit consumers, the Commission rejects the proposals for 100% commodity charges and adopts the rate design proposal made by Keene of 50% service charge and the balance through a commodity charge.
Tehachapi-Keene Pipeline
17. In 1994, if not before, Keene had impliedly dedicated the water system for public use.
18. In D.02-07-075, the Commission indicated that Keene's prudence in replacing the Tehachapi-Keene Pipeline would be examined in a subsequent ratemaking proceeding, such as this pending proceeding.
19. Keene discontinued use of the pipeline in 1994 because the conveyance was 100 years old and the Interstate Commerce Commission had ordered the enlargement of the tunnel through which the pipeline ran.
20. The cost of replacing this pipeline would have been $4 million or more. If this cost were added to the Keene ratebase, the financial impact through rates would be detrimental to ratepayers.
21. Keene has failed to prove that it engaged competent technical assistance in analyzing water supply options upon the discontinuance of the pipeline, that it systematically studied alternative well locations, or that it explored other water supply options.
22. The three wells that Keene drilled have provided unreliable water supplies of inferior quality.
23. Having taken actions as early as 1994 to hold the water system out for public use, Keene failed to apply for a certificate of public convenience and necessary so that it would have had the formal powers of eminent domain to acquire land or water necessary for reliable supplies of clean water.
Metering and Billing
24. During summer 2005, Stonybrook and Beard conducted a survey to verify who is a customer of the system. The results of this survey are set forth in Exhibit No. 6 (Aug. 5, 2005). This list of customers is the most accurate information available and should be deemed the list of "existing customers" referred to in D.02-04-017 for whom the company has a continuing service obligation. This list should also be used for rate allocation purposes.
25. All parties support Keene assuming ownership and maintenance of water distribution facilities downstream of the master meters, entering into service relationships with individual customers, and assuming responsibility for reading individual meters and submitting individual bills.
26. Keene's assumption of the ownership, maintenance, and management of water distribution facilities downstream of the master meters (including meter reading and billing) is the most practical, efficient, and fair method to perform these necessary water system functions.
General Order (GO) 103
27. Water service is frequently interrupted, with some interruptions extending for several days or weeks. The interruptions appear to result from unreliable summer well supply coupled with increased summer demand. Interruptions may be also result from problems with customer-owned facilities that are downstream of Keene's master meters. The interruptions are so common that the railroad has contracted for stand-by service to haul water by truck from Tehachapi. Several days may pass before a water shortage is detected by the company and substitute water arrives.
28. Water pressure throughout the system is frequently inadequate.
29. Water delivered through the system is frequently discolored and contains orange-brown solids.
30. In recent years, the company has failed to satisfy many DHS obligations concerning water quality and reporting, as summarized in a DHS letter dated December 8, 2004: (1) failure to submit monthly reports from November 2003 to November 2004); (2) continuous violation of the 2 mg/L Maximum Contaminant Level (MCL) for naturally occurring fluoride; (3) a history of non complying with public notification of the fluoride condition; (4) failure during part of 2004 to submit require monthly fluoride samples to DHS; (5) failure to submit the 2003 Annual Report to the drinking Water Program; (6) failure to submit the 2003 Consumer Confidence Report; (7) failure to conduct the summer 2004 Disinfection Byproduct Rule monitoring report; (8) low system pressure upon occasion; and (9) failure to submit the required response to DHS's October 2003 field inspection.
31. Keene was formally cited by DHS in December 2003 for failure to comply with the total coliform MCL during November 2003.
32. Keene was served with a notice of violation in June 2002 indicating that the company had failed to properly monitor for nitrates.
33. From February to April 2005, Keene submitted required monthly reports to DHS that contained data that was unchanged from month-to-monthly, a highly improbable event in a dynamic hydraulic system. The erroneous submissions indicate either negligence or misrepresentation.
34. Keene admits that the water system occasionally exceeds the MCL for fluoride, a primary drinking water standard, as well as the MCLs for iron and manganese and color criteria, all secondary standards.
Other Issues
35. As of the date of the hearing, there is no balance in the water hauling memorandum account to amortize.
General
1. As of 1994, if not before, the Keene Water System was operated as a public utility as defined by Public Utilities Code Section 2701.
2. Keene Water System is a Class D water company.
3. The Commission has jurisdiction to review the prudence of the 1994 pipeline project pursuant to Public Utilities Code Section 761.
Ratesetting
4. The revenue requirement of $120,121, based on the calculations herein, is just and reasonable.
5. The 1997 distribution pipeline replacement project was a reasonable and prudent decision. The net plant cost of this project should be included in ratebase.
6. For test year 2004, the water system's ratebase of $502,611 is just and reasonable.
7. Keene's proposed rate of return of 2.39% is just and reasonable.
Rate Design
8. Keene should be allowed to recover 50% of its fixed costs through the service charge and the balance through commodity charges, as calculated with reference to the Commission's Standard Practice U-7-W. The Commission determines that this is in the public interest.
Tehachapi-Keene Pipeline
9. The Commission has jurisdiction to determine the reasonableness and prudence of replacing the Tehachapi-Keene Pipeline in this proceeding.
10. Keene was reasonable and prudent in discontinuing the existing Tehachapi-Keene Pipeline.
11. Keene was unreasonable and imprudent in its selection of alternative water sources to replace water from the Tehachapi-Keene Pipeline.
12. Keene's unreasonableness and imprudence manifests itself, in part, in its violations of GO 103. In providing an appropriate remedy for Keene's unreasonableness and imprudence, Keene should be ordered to undertake remedial measures to comply with GO 103.
Metering and Billing
13. Exhibit No. 6 (Aug. 5, 2005) is an updated, accurate list of those existing customers who are entitled to continuing service by the Keene Water System, as contemplated by D.02-04-017. Exhibit No. 6 supersedes the list of customers originally set forth in Conclusion of Law 6 of D.02-04-017. Exhibit No. 6 should be used for rate allocation purposes.
14. Keene should assume the ownership, maintenance, and management of water distribution facilities downstream of the master meters (including meter reading and billing).
General Order 103
15. Keene has violated numerous provisions of GO 103, § II.
16. The remedial measures set forth in the ordering paragraphs are necessary and reasonable for bringing Keene into compliance with GO 103.
IT IS ORDERED that:
1. The summary of earnings and rates for test year 2004 are authorized in conformance with this decision and as set forth in Appendices A through D. Keene Water System is authorized to file in accordance with General Order (GO) 96-A (or its successor), and to make effective on no less than five days' advance notice, a tariff containing the test year 2004 increase as provided in this decision. The revised rates shall apply to service rendered on or after the tariff's effective date.
2. Subject to pro forma tests after the 2004 increases are effective, Keene also is authorized to file in accordance with GO 96-A (or its successor), and to make effective on not less than five days' advance notice, a tariff setting forth rates for years 2005 and 2006, calculated in conformance with this decision. The revised rates shall apply to service rendered on or after the tariff's effective date.
3. Union Pacific shall continue to provide water to all existing customers who are identified in Exhibit No. 6 (Aug. 5, 2005), Application 04-11-004, so long as the water consumed is paid for.
4. Keene shall prepare and file, as an advice letter, a service agreement in accordance with GO 103 and the Water Division's standard practice. Once the service agreement has been approved, Keene shall require existing customers to sign the agreement; and if they do not, service may be terminated in accordance with GO 103.
5. Each customer in Upper Keene and Lower Keene will have its own operable meter no later than 180 days following the end of the stay period imposed in Ordering Paragraph 16. If a customer does not have a meter by that date, Keene shall install such meter and bill the customer the cost for such meter and installation. Each customer shall have six months to pay for the meter. If a customer refuses to allow Keene to install a water meter, Keene may terminate water service to such customer. All meters in Upper Keene and Lower Keene will be installed no later than 270 days following the end of the stay period imposed in Ordering Paragraph 16.
6. No later than 270 days following the end of the stay period imposed in Ordering Paragraph 16, Keene will improve the distribution system downstream of the current master meters used to serve Upper Keene and Lower Keene. The owners of properties served by Keene shall grant Keene in timely fashion the necessary easements in a recordable form for the installation and maintenance of such facilities. If a property owner refuses to grant such easements, Keene may terminate service to such property, as provided by the applicable provisions of GO 103.
7. Keene will not be responsible for the repair and maintenance of distribution facilities downstream of the master meters used to serve Upper and Lower Keene until such time as it has improved the facilities.
8. Keene is authorized to file a ratebase offset which reflects the full cost of these capital expenditures (other than the water meters, which are chargeable to individual customers) in its ratebase. Keene is authorized to earn a rate of return of 2.39% on these facilities and to collect immediately the revenue requirement associated with these facilities via a surcharge.
9. Where applicable, GO 103 and any applicable provisions of the Water Division's standards of practice also apply to these distribution system improvements.
10. Within two years of the end of the stay period imposed in Ordering Paragraph 16, Keene shall complete those remedial measures necessary to bring the water system into compliance with GO 103 and applicable state and federal water quality standards (including those deficiencies determined in this decision).
11. The company shall retain, at its own expense and not at ratepayer expense, one or more qualified outside consultants to prepare (with community and Water Division input) a hydrologic and engineering assessment of possible measures to improve water supply reliability and quality. Using these consultants' recommendations, Keene shall prepare a plan, within 180 days of the effective date of this decision, indicating how it proposes to improve water supply reliability and quality. The plan must identify the proposed remedial measures that will bring the water system into compliance with GO 103, and applicable state and federal water quality standards, within two years of this decision. The plan will estimate costs and identify any applications Keene intends to file for certificates of public convenience and necessary or for ratemaking. Keene shall submit an informational copy of this plan to the Water Division and shall make one or more complete copies of the plan available to ratepayers and the Keene community.
12. After a 30-day opportunity for comments by the Water Division, ratepayers, and the Keene community, Keene shall modify the plan as necessary and immediately proceed to implement the plan. Keene shall report quarterly to the Water Division, ratepayers, and the Keene community on its progress. Keene shall also provide a final report to the Water Division, ratepayers, and the Keene community once the work is completed, indicating how the system, as improved, substantially complies with GO 103.
13. After an opportunity for comments by ratepayers, the Water Division will review Keene's final report. If the Water Division believes the water system still does not substantially comply with GO 103 (unless a good and sufficient reason for noncompliance is demonstrated), the Water Division may recommend the filing of an order instituting investigation or other appropriate proceeding.
14. Any work actually undertaken pursuant to the plan may be booked to a memorandum account. Keene may seek to recover these expenditures upon separate application or these expenditures will be subject to a reasonableness review during a subsequent rate proceeding. In reviewing the reasonableness of these expenditures, the Commission should at that time also consider and give deference to Findings of Fact 19-21 and Conclusions of Law 11-12 of this decision.
15. Memoranda accounts are also authorized for the booking of license and permit expenses and legal fees in excess of those approved in this decision. Advice Letter No. 2, which tracks permits and monitoring costs, is approved.
16. To allow the parties to negotiate a mutually beneficial resolution to the issues in this proceeding, the provisions set forth in all preceding ordering paragraphs (with the exception of Ordering Paragraphs 11 and 15) are stayed for 180 days after the effective date of this decision ("stay period"). During the stay period, however, Union Pacific shall continue to provide water to all existing
customers who are identified in Exhibit No. 6 (Aug. 5, 2005), Application 04-11-004. At the conclusion of this 180-day stay period, the provisions will come into full force and effect without any further action of the Commission.
17. Application 04-11-004 is closed.
This order is effective today.
Dated July 20, 2006, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
Commissioners
ATTACHMENT A
List of Appearances
Alison D.S.L. Arnold |
Seth Hilton |
APPENDICES
APPENDIX A
UNION PACIFIC'S KEENE WATER SYSTEM
SUMMARY OF EARNINGS
Test Year 2004
|
|
|
|
|
|
|
Utility Estimated |
Division Estimated |
|||
|
Present |
Proposed |
Present |
Proposed |
Adopted |
|
Rates |
Rates |
Rates |
Rates |
Rates |
Operating Revenues |
|
|
|
|
|
Metered Rate |
$28,000 |
$128,450 |
$28,000 |
$128,450 |
$120,121 |
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
Labor |
50,526 |
50,526 |
48,545 |
48,545 |
50,526 |
Vehicle |
12,000 |
12,000 |
6,580 |
6,580 |
9,000 |
Technical Advisor/ DHS related expenses |
4,410 |
4,410 |
4,410 |
4,410 |
4,410 |
Test Water Samples |
1,500 |
1,500 |
1,500 |
1,500 |
1,500 |
Chlorination |
3,900 |
3,900 |
3,900 |
3,900 |
3,900 |
Hauling |
0 |
0 |
0 |
0 |
0 |
Monitor System & Permits (DHS Fee) |
6,784 |
6,784 |
1,443 |
1,443 |
1,443 |
Materials & Supply |
13,000 |
13,000 |
13,000 |
13,000 |
13,000 |
Electricity & Telephone |
6,100 |
6,100 |
6,100 |
6,100 |
6,100 |
Legal Fees |
20,000 |
3,000 |
3,000 |
3,000 |
3,000 |
Subtotal |
118,220 |
101,220 |
88,478 |
88,478 |
92,879 |
|
|
|
|
|
|
Depreciation Expense |
15,230 |
15,230 |
0 |
0 |
15,230 |
Income Tax Expense |
0 |
0 |
800 |
9,000 |
0 |
Total Expenses |
133,450 |
116,450 |
89,278 |
97,478 |
108,109 |
|
|
|
|
|
|
Net Revenue |
(105,450) |
12,000 |
(61,278) |
30,972 |
12,012 |
Rate Base |
|
|
|
|
|
Average Plant |
609,226 |
609,226 |
0 |
0 |
609,226 |
Aver. Depr. Reserve |
106,615 |
106,615 |
0 |
0 |
106,615 |
Net Plant |
502,611 |
502,611 |
0 |
0 |
502,611 |
Less: Contributions |
0 |
0 |
0 |
0 |
0 |
Advances |
0 |
0 |
0 |
0 |
0 |
Rate Base |
502,611 |
502,611 |
0 |
0 |
502,611 |
Rate of Return |
Loss |
2.39% |
0 |
0 |
2.39% |
|
|
|
|
|
|
(END OF APPENDIX A)
APPENDIX B
UNION PACIFIC'S KEENE WATER SYSTEM
Schedule No. 1
GENERAL METERED SERVICE
Test Year 2005
APPLICABILITY
Applicable to all metered water service.
TERRITORY
The Cities of Keene and Caliente and vicinity, Kern County.
RATES
Quantity Rate:
All water, per 1,000 gallons ...............................$8.86 (I)
Per Meter
Per Month
Service Charge:
For 5/8x3/4-inch meter........................... $93.13(I)
For 3/4-inch meter........................... 139.70 |
For 1-inch meter............................ 232.83 |
For 1-1/2-inch meter............................ 465.65 |
For 2-inch meter............................ 745.04 (I)
The Service Charge is a readiness-to-serve charge, which is applicable to all metered water service and to which is added to the charge for water used at the Quantity Rate.
SPECIAL CONDITIONS
1. All bills are subject to the reimbursement fee set forth in Schedule No. UF.
(END OF APPENDIX B)
APPENDIX C
UNION PACIFIC'S KEENE WATER SYSTEM
Schedule No. 1
GENERAL METERED SERVICE
Test Year 2005
COMPARISON OF RATES
A comparison of KWS' present rates and the adopted rates is shown below:
Present Recommended
Rates Rates
QUANTITY RATE
All water, per 1,000 gallons $ 4.00 $ 8.86
SERVICE CHARGE
Per Meter Per Month
For 5/8x3/4-inch meter..........................0.00 93.13
For 3/4-inch meter...........................0.00 139.70
For 1-inch meter...........................0.00 232.83
For 1-1/2-inch meter...........................0.00 465.65
For 2-inch meter....................... ...0.00 745.04
A comparison of monthly bills for a 5/8 X ¾-inch meter at various consumption
rates is as follows:
Quantity
Used Current Adopted Amount Percent
1,000 gallons Rates Rates Increase Increase
3.0 $12.00 $119.71 $107.71 897.58%
4.0 16.00 128.57 112.57 703.56
5.0 20.00 137.43 117.43 587.15
6.0 24.00 146.29 122.29 509.54
(END OF APPENDIX C)
APPENDIX D
UNION PACIFIC'S KEENE WATER SYSTEM
ADOPTED QUANTITIES
Test Year 2005
Service Connections
5/8x3/4-inch meter........................................ 33
3/4-inch meter.............................................. 2
2-inch meter................................................. 2
Total 37
Meter Water Sales Used to Design Rates 7,000,000 gallons
(END OF APPENDIX D)
