ORDER NO. 97-074

ENTERED MAR 3 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 774

DISPOSITION: Investigation Completed; Docket Closed

Salmon Valley Water Company, Inc. (SVWC), is a fully regulated investor-owned water utility located in Welches, Oregon. In September 1995, the PUC staff received a letter of complaint from a developer/customer alleging that SVWC was "breaching its franchise and PUC regulations by withholding water connections to new developments." At its October 17, 1995, public meeting, the Commission approved staff’s recommendation to open an investigation into the capacity of SVWC to serve new development.

Pursuant to the Commission’s directive, Staff conducted an investigation over a period of several months. Two public meetings were held in Welches to gather information from the SVWC, customers, and local and state government officials involved in the regulation of SVWC. Staff conducted many informal conferences with SVWC officials, customers, and public officials involved in this matter. Staff prepared a report which is attached to this order and incorporated herein as Appendix A.

FINDINGS OF FACT

SVWC is a public utility in Oregon which provides water service to or for the public. ORS 757.005.

SVWC is subject to the authority of the PUC under ORS 756.040.

SVWC serves an exclusive service territory authorized by the Portland Metropolitan Area Local Government Boundary Commission (Boundary Commission).

SVWC has consistently represented to the Boundary Commission that it had the capacity to serve the aforementioned service territory (see

ORS 199.464(7)(f) and Staff Report, pages 7-11).

In 1994 SVWC represented to the PUC that it did not have a capacity problem. See Order No. 94-984.

On July 31, 1995, the SVWC board of directors adopted a connection policy that placed a moratorium on ". . . any new developments" unless the new developments provided the incremental capacity required to serve them.

On August 10, 1995, SVWC notified PUC staff that the utility had reached the limits of its capacity to serve and could no longer serve any new development. SVWC made no formal request to the Commission for authority to place a moratorium on any new service connections.

On August 18, 1995, SVWC issued Authorization Letter No. 392, approving water service to a single-family residential dwelling.

Based upon the July 31, 1995, moratorium, SVWC refused service to Cedar Glen Sales on August 31, 1995, for "five or six" multi-family connections. The option of entering into a developer’s agreement was not disclosed to Cedar Glen Sales.

In February 1996, as a result of a loss of storage facilities caused by a storm-related earth slide, SVWC placed a second moratorium on all new water service connections.

SVWC’s 1995 well capacity coupled with its ability to pump its storage units establishes that SVWC had capacity to meet and exceed its estimated demand in July and August 1995.

On May 1, 1996, SVWC lifted the February 1996 moratorium because a contingency plan to meet demand was put in place.

In May 1996, SVWC lifted the July 1995 moratorium after staff advised the company that it believed the differing connection policies created an undue preference.

OPINION

ORS 757.020 provides:

Every public utility is required to furnish adequate and safe service, equipment and facilities, and the charges made by any public utility for any service rendered or to be rendered in connection therewith shall be reasonable and just, and every unjust or unreasonable charge for such service is prohibited.

ORS 757.325 provides:

(1) No public utility shall make or give undue or unreasonable preference or advantage to any particular person or locality, or shall subject any particular person or locality to any undue or unreasonable prejudice or disadvantage in any respect.

(2) Any public utility violating this section is guilty of unjust discrimination.

The Commission concludes that SVWC violated the above statutes. First, SVWC refused to serve prospective customers in August 1995 based on its July 31, 1995, moratorium. ORS 757.020 draws no distinction between present and future customers. The term "customer" is not in fact mentioned in the statute. Instead, the statute sets out a requirement placed upon "every public utility." A "public utility," by definition, offers its services to the general public. ORS 757.005(1). Thus, every public utility offering service to the general public must meet the requirements of ORS 757.020. Offerings to the general public include existing and future customers; thus the requirement is not limited to existing customers only. Moreover, ORS 757.020 speaks to charges for services rendered or those "to be rendered." Use of the future tense supports the conclusion that the statute is to be applied to both existing and new customers. We conclude that SVWC violated ORS 757.020 by refusing to connect new multi-unit dwelling customers.

The Commission also concludes that SVWC engaged in a discriminatory practice violating ORS 757.325 in August 1995 by allowing certain types of residential dwellings to be connected to its water system while denying others. We conclude, moreover, that this preference was unreasonable and undue. SVWC claimed to have been experiencing a water shortage when the connection policy was developed and implemented and thus that its policy was not unreasonable. However, even if that were true it would not justify differentiating between, for example, three single-unit dwellings and one three-unit dwelling, as SVWC policy did. More important, however, is the fact that the Staff’s investigation and the record in this case do not establish that a shortage was occurring.

In past orders, we have interpreted these statutes in relationship to a claim that there is a shortage of resources. In Order No. 74-156, we concluded that a utility’s refusal to provide service could be reasonable and not violative of the above statutes if by providing service the utility "might have been prevented from fulfilling this statutory obligation to all its other customers." Order No. 74-156. That conclusion was based on findings that a true shortage existed and that the company’s paramount duty was to continue to provide adequate service to its existing customers.

In this case, however, the evidence does not support a claim that an actual shortage existed when the July 31, 1995, moratorium was imposed and in August 1995 when the refusal to provide service occurred. In Order Nos. 73-312 and 74-156 we concluded that a shortage must be actual and present to justify denial of service to applicants.

The Commission concludes that the record does not establish a reasonable basis for the discrimination practiced by SVWC or for the refusal to provide service. We conclude that SVWC thus violated two statutes set out above.

SVWC has an obligation to serve all customers located in its exclusive service territory and should pursue additional capacity as necessary to meet this obligation. SVWC benefits from this exclusive service area because no other water supply system may serve within the territory authorized by the Boundary Commission (ORS 199.464 (5)(a)). To be granted this exclusive area, SVWC represented to the Boundary Commission that it had enough capacity to provide water service to the areas applied for.

SVWC’s July 1995 moratorium on new development was based on the company’s philosophy that new customers/developers should pay the cost of plant and resource requirements for expansion. The company philosophy was to reduce its capital outlay for expanded utility plant to meet new development demands by entering into "development agreements," under which the developer would agree to provide the incremental increase in water and water storage required to meet the added demand placed on the system by the development.

SVWC limited the construction and development of new multifamily dwellings by not approving multifamily dwelling applications for service, unless the developer would enter into a developer’s agreement. At the same time, SVWC continued to approve applications for water service to single family dwellings. This policy is inappropriate because it treats customer classes differently by imposing a moratorium on new multifamily dwellings without imposing a similar restriction for other customers. This moratorium resulted in SVWC engaging in an act of undue preference resulting in discrimination as defined by ORS 757.325.

The water industry is capital intensive. Historically, the companies have financed expansion and were then allowed to earn a return on their capital investment. Mainline extension fees helped defray the cost of the mainlines, but storage, pumping, and distribution costs associated with expansion were the responsibility of the company. Developer agreements have only recently been used as an alternative financing mechanism for expansion. Developer agreements are considered special contracts and are subject to approval by the Commission. These special contracts must be entered into willingly by the developer and cannot be used as a condition of service.

The Commission has the right to seek monetary or civil penalties for violation of any statute administered by the PUC (ORS 757.990). The Commission may also consider the level of service quality in setting a rate of return on equity during the ratemaking process. The Commission will not seek monetary or civil penalties in this case because any monetary penalties would not be remitted to the customers affected by the violations. Our decision, however, in no way affects the customer’s private right of action for any injuries under ORS 757.185. Moreover, the Commission will comprehensively review SVWC’s service quality in any future rate proceedings.

WATER CAPACITY

SVWC is in the process of developing a water master plan with the aid of a professional engineer. The water master plan is an evaluation of the needs of the water system for a 20-year period and is required by the Oregon Health Division (OHD) (OAR 333-061-062). The plan must include, but is not limited to, the following:

Water quality and service goals, identification of present and future water system deficiencies, recommended alternatives for achieving goals and correcting deficiencies, and a recommended implementation schedule and financing program for constructing improvements.

A description of the existing water system including service area, source of supply, status of water rights, current status of drinking water quality and compliance with regulatory standards, maps or schematics of the system showing size and location of facilities, estimates of water use, and operation and maintenance requirements.

A description of water quality and level of service goals for the water system, considering existing and future regulatory requirements, nonregulatory water quality needs of water users, flow and pressure requirements, and capacity needs related to water use and fire flow needs.

An estimate of the projected growth of the water system during the master plan period and the impacts on the service area boundaries, water supply source and availability, and customer water use.

An engineering evaluation of the ability of the existing water system facilities to meet the water quality and level of service goals, identification of any existing water system deficiencies, and deficiencies likely to develop within the master plan period. The evaluation shall include the water supply source, water treatment, storage, distribution facilities, and land operation and maintenance requirements. The evaluation shall also include a description of the water rights with a determination of additional water availability, and the impacts of present and probable future drinking water quality regulations.

Identification of alternative engineering solutions, and associated capital and operation and maintenance costs, to correct water system deficiencies and achieve system expansion to meet anticipated growth, including identification of available options for cooperative or coordinated water system improvements with other local water suppliers.

A description of alternatives to finance water system improvements including local financing (such as user rates and system development charges) and financing assistance programs.

A recommended water system improvement program including the recommended engineering alternative and associated costs, maps or schematics showing size and location of the proposed facilities, the recommended financing alternative, and a recommended schedule for water system design and construction.

The Commission concludes that SVWC shall submit its water plan to the Commission and vigorously pursue its implementation. SVWC shall also submit to the Commission an annual report on the status of the execution of the master plan, updates or revisions to that plan, existing water capacity, existing load, and number of new customers for the years 1997 through 2001.

CONCLUSIONS

1. SVWC is a public utility subject to the jurisdiction of the Commission.
2. In August 1995, SVWC failed to provide adequate service in its service territory in violation of ORS 757.020 by refusing service to potential customers.
3. In August 1995, SVWC committed unjust discrimination in violation of ORS 757.325 by giving undue preference or advantage to certain customers or potential customers and by subjecting certain potential customers to undue and unreasonable prejudice or disadvantage.

ORDER

IT IS ORDERED that:

1. SVWC shall submit its water master plan to the Commission by April 1, 1997.
2. SVWC shall submit to the Commission an annual report of the status of the implementation of its water master plan and information documenting current and future capacity and demand data including existing water capacity, existing load, and number of new customers. This report shall be submitted by April 1 of the following year for each calendar year 1997 through 2001.
3. SVWC shall file with the Commission an annual certification statement regarding the provision of nondiscriminatory service. The statement is to be submitted by April 1 of the following year for each calendar year 1996 through 2000.

Made, entered, and effective_____________________________.

A party may request rehearing or reconsideration of this order within 60 days from the date of service pursuant to ORS 756.561. A party may appeal this order pursuant to ORS 756.580.