ORDER NO. 97-240

ENTERED JUN 25 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UW 54/UM 857 (PHASE I)

DISPOSITION: STAFF’S PROPOSED RATES APPROVED

Introduction

On August 19, 1996, First Hill Water, Inc., filed rate schedules to be effective September 19, 1996. At its September 10, 1996, public meeting, the Public Utility Commission of Oregon (Commission) found that good and sufficient cause exists to investigate the propriety and reasonableness of the rates pursuant to ORS 757.210 and 757.215. The Commission ordered suspension of the rate schedules pending the docket UW 54 investigation.

On October 17, 1996, a prehearing conference was held in Bend, Oregon, before Ruth Crowley, Administrative Law Judge (ALJ). Paul Graham, Assistant Attorney General, appeared for Commission Staff, and Vickie Lee, Secretary and Treasurer, appeared for the company. Eleven members of the public also attended. The purpose of the prehearing conference was to inform the public about the Commission’s role in ratemaking proceedings, to take public comment on the proposed rate increase, and to set a schedule for further proceedings. Staff proposed a schedule, which the ALJ adopted. The schedule was eventually modified because Staff was unable to obtain documents from First Hill. Without the requested document, Staff proceeded to build its case based on previously collected information and on characteristics of similar water systems.

At the November 5, 1996, public meeting, Staff presented the Commission a report on First Hill’s billing and assessment practices. Based on Staff’s report and recommendation, the Commission opened a separate investigation into those matters. By Order No. 97-077, the Commission docketed the investigation as UM 857 and consolidated it with UW 54.

By Order No. 97-106, entered on March 18, 1997, the Commission extended the suspension period for the rate schedules filed by the company an additional three months, to June 19, 1997.

On May 21 and 22, 1997, the ALJ held a public comment and an evidentiary hearing in Bend, Oregon. Notice of the hearings was published in the Bend Bulletin on May 11, 1997. At the evidentiary hearing, Paul Graham, Assistant Attorney General represented Staff. No one appeared for First Hill.

Procedural Issue

Because the ALJ failed to make timely findings of fact, the Commission did not issue an order in UW 54 before the suspension period expired. As matter of law, the suspended rate schedules went into effect on June 20, 1997. See ORS 757.215(1). Consequently, the Commission no longer has jurisdiction to adjudicate the rate case docketed as UW 54.

The Commission, however, has independent authority to investigate a utility’s rates on its own motion pursuant to ORS 756.515. That statute provides, in part:

Whenever the Public Utility Commission believes that any rate may be unreasonable or unjustly discriminatory, or that service is unsafe or inadequate * * * the commission may on motion summarily investigate such matter, with or without notice.

* * * * *

(4) The commission may, after making an investigation on the commission’s motion, but without notice or hearing, make such findings and orders as the commission deems justified or required by the results of such investigation. Except as provided in subsections (5) and (6) of this section such findings and orders have the same legal force and effect as any other finding or order of the commission.

(5) In addition to any other remedy provided by law, any party aggrieved by an order entered pursuant to subsection (4) of this section may request the commission to hold a hearing to determine whether the order should continue in effect. Any such request for hearing shall be submitted to the commission not later than 15 days after the date of service of the order, and the commission shall hold the hearing not later than 60 days after receipt of such a request for hearing.

If the commission receives a request for hearing pursuant to subsection (5) of this section, the order is suspended pending the outcome of the hearing unless the commission finds that the order is necessary for the public health or safety or to prevent the dissipation of assets of a business or activity subject to the commission’s regulatory jurisdiction.

For the reasons that follow, the Commission believes that the rates charged by First Hill may be unreasonable and unjustly discriminatory. Moreover, the Commission believes that the service provided by First Hill is inadequate. Accordingly, pursuant to ORS 756.515, the Commission, on its own motion, elects to expand the investigation docketed as UM 857 to include an investigation into First Hill’s rates. The Commission also takes official notice of the record and file in docket UW 54, pursuant to OAR 860-014-0050.

On the basis of the record and file in docket UW 54, the Commission enters the following:

FINDINGS OF FACT

First Hill is a water utility providing service to residential customers near Bend, Oregon. On November 20, 1997, the Commission learned that the company raised its rates above $18 per month without giving customers notice and an opportunity to petition the Commission for rate regulation. Staff wrote the company on February 22, 1996, informing it that it must give its customers 60 days written notice and an opportunity to petition the Commission to review the rates charged before raising rates above the threshold. Staff Exhibit 2/Miller 5-6. After the company continued to fail to give its customers notice, Staff sent First Hill customers a letter informing them of their right to petition under ORS 757.061. Staff Exhibit 2/Miller 7-8. Over 20 percent of customers petitioned the Commission for review of First Hill’s rates.

On June 14, 1996, Staff informed the company of its change in regulatory status from an exempt public utility to a rate regulated public utility. Staff Exhibit 2/Miller 1-2. Staff informed the company that its current rate was unauthorized and requested it to lower its monthly rate to the $18 threshold. Staff also requested the company to file tariffs by July 14, 1996.

On August 19, 1996, the company filed its application for a general rate increase of $18,192. The company represented that its filing constituted a 153 percent increase in revenues, or total annual revenues of $30,092. Staff corrected the company’s calculations and determined that the filing actually amounted to an increase of 227.97 percent, increasing the average monthly residential rate to $64.05. The company claimed no utility plant, debt, or equity, nor did it request a rate of return in its application. The company merely stated that the "present rate does not pay expenses, nor provide a fund for repairs." The company provided no documentation to support its claim.

The company provided insufficient data for Staff to analyze its filing and determine appropriate rates. Staff sent First Hill two detailed data requests in an effort to obtain information on which to base its analysis. The first set of queries was dated September 6, 1996. The post office notified the company of the letter on September 9 and 12, and then returned it undelivered to Staff on September 22, 1996. Staff then faxed the letter to First Hill and initiated a procedure under which all future correspondence was mailed and faxed to the company and a copy also sent to the company’s registered agent. Staff received a faxed response on October 14, 1996. The data provided were not complete and the transaction report entries supplied were not properly documented.

Data request No. 2 was faxed and mailed to the company on November 26, 1996, with a response due date of December 9, 1996. Staff received a one-page letter from the company dated November 29, 1996, requesting an interim rate for the purpose of:

hiring an administrative assistant to collect data and respond to Staff’s data requests;

retaining an attorney familiar with laws regarding public utilities;

providing travel expenses to allow the company to attend meetings; and

providing funds for insurance and improvements.

The company did not specify an interim rate in its letter and provided no documentation to support its request.

Staff responded to the interim rate request by letter dated December 4, 1996, explaining that the request for interim rates did not contain sufficient information to be considered a legitimate application. Staff again requested data in support of the company’s filing and informed the company that it could ask the ALJ assigned to the case for relief if it considered the data requests overly burdensome. The company made no response to the second data request.

On December 26, 1996, First Hill sent its customers a letter urging them to take over the system. That letter provided, in part:

As you know, we are experiencing some problems with the supply and delivery of water to you, some problems with the management and finance of First Hill Water, Inc. (FHW), and problems with compliance with Oregon Public Utility Commission rules and regulations.

The float that trips the pump at the well house when the water in the reservoir gets too low is sticking and in need of repair. Until the repairs are made, the reservoir will continue to occasionally run out of water without turning on the pump. Also, one of the pumps in the pump house which provides the pressure from the reservoir to your house does not work. If the reserve pump goes out the system will be without water for a long time.

Repairs of these two items will cost in excess of $1,000. FHW does not have $1,000. Enclosed are your individual water bills up to the end of 1996. Once this money is received the repairs will be paid for[.]

[R]emember that we are 180 miles from Bend. Don’t call us when the water stops. There is nothing we can do about it. FHW has no money to [repair] your system in the event of a costly break down. We strongly urge you to protect against a very unpleasant future surprise—take over your system now!

Staff Exhibit 2, Miller 39-40

The parties pursued that option on a conference call on February 6, 1997, during which the company offered to give the management and operation of the system to the customers but wanted to retain all or part of the future hook-up fees. The parties agreed that Staff would convene an informational meeting of parties, customers, and lot owners to discuss options for water service to the customers.

The informational meeting took place on March 12, 1997. The water service options presented to First Hill customers included:

customers take over the system;

customers obtain water service from the City of Bend;

maintain the status quo (First Hill ownership under Commission regulation);

appoint one or more people to administer and operate the system as an interim solution until a long term solution can be resolved.

To date, none of these courses of action has been elected. Staff therefore recommended proceeding with the rate case and establishing rates for First Hill.

In the absence of documentation from the company, Staff developed two revenue requirements for First Hill. The first revenue requirement is based on documented expenses for the company that Staff obtained from sources other than the company. The second revenue requirement was developed by comparing documented expenses in other rate cases and using Staff’s knowledge and experience regarding the cost of operating such a system.

Revenue Requirement 1 indicates that a 62.28 percent decrease in revenues is appropriate (amounting to $5,838). Such a decrease would bring total annual revenues down to $3,536 and would produce a monthly flat rate of $7.37. Staff developed this revenue requirement based on two verified and documented expenses, for water testing and purchased power expenses. Staff contracted with a consultant, WATERLAB Corp., to research First Hill’s water quality testing requirements for the years 1996 to 1999 and provide a report of the associated expenses. Staff calculated a $701 per annum ratable amortization of testing expense by averaging the costs over the four year period. Staff also requested copies of First Hill’s power bills from PacifiCorp, its power provider, to verify actual purchased power expenses of $2,703 for the most recent 12 month period.

Staff does not, however, recommend a 62.28 percent rate decrease. Taking into consideration the age and condition of the system and Staff’s ratemaking experience and knowledge of the costs associated with water service operation, Staff concluded that the company would not be able to adequately operate and maintain the system at this rate. Staff therefore developed Revenue Requirement 2, using the documented water testing and power expenses from Revenue Requirement 1, along with other expenses from comparable water companies to develop an approximate revenue requirement for a water system the size of First Hill. Revenue Requirement 2 results in an annual revenue requirement of $8,584, which yields decrease in annual revenues of $790, or 8.43 percent and a monthly flat residential rate of $17.88. Because Staff could determine no rate base and the company did not request any return, the revenue requirement is based on recovery of expenses. Staff concludes that this rate will provide the company enough revenues to cover routine maintenance, repairs, billing and administration, water testing, office expenses, and purchased power.

Staff’s recommendation concerning rates is that the Commission not deviate from the monthly residential threshold rate established in OAR 860-022-0028 and approve a flat residential rate of $18 per month for First Hill. Staff reasons that a water utility exempt from rate regulation may raise its average monthly residential rate above that threshold if it meets one of the following criteria:

1. The water utility provides proper notification of the proposed rate increase. If sufficient customers do not petition the Commission for rate regulation, then the utility’s proposed rates above the threshold go into effect as lawful rates.

2. The water utility provides proper notification of the proposed rate increase. Sufficient customers do petition the Commission for rate regulation. Then the utility must justify its proposed rates to the commission to establish lawful rates.

Staff argues that First Hill failed to provide proper notification to its customers when it raised its rates above the threshold. The lawful average residential rate per customer cannot, therefore, legally exceed the maximum threshold of $18 per month. Staff also argues that the company has failed to justify its request for higher rates. Absent this justification, the Commission has established the maximum reasonable average monthly rate as $18. OAR 860-022-0028. Staff’s revenue requirement 2 generated a flat monthly rate of $17.88, so Staff reasons that an $18 per month flat rate should generate sufficient revenue to cover routine operating expenses.

As to operation and management of the system, Staff contends that First Hill’s ownership has essentially washed its hands of the system, citing the December 26, 1996, letter from First Hill to its customers, quoted above, as well as numerous contacts with First Hill in which the owners appeared indifferent to their obligations to provide adequate service at reasonable rates. Staff therefore recommends that the Commission use its general authority under ORS 756.040 "to do all things necessary and convenient in the exercise of such power and jurisdiction" and appoint one or more persons to administer and operate the system. Staff asks the Commission to authorize an appointee or appointees to act in the best interest of the utility and its customers. Staff also recommends that when such an appointment is made, rates be adjusted to recover any incremental expenses, which would be the difference between Staff’s proposed expenses and the actual contract labor expenses associated with operation of the system by an appointee or appointees acting on behalf of First Hill.

Staff also recommends that the appointee or appointees serve for a period of one year; that PacifiCorp be granted authority to bill the appointee or appointees for power expense; and that charges collected for water service be placed in a trust account for the operation and repair of the system. Staff notes that, at the end of the one year period, there are several possible outcomes. First, if the company continues to show no interest in the system and there is a willing buyer, the Commission could order the system taken from the current owners and sold to a new owner or owners. ORS 756.040 authorizes the Commission to "make use of the jurisdiction and powers of the office to protect such customers[.]" The new owner or owners would be required to compensate the previous owners for the system. The sale of the system requires Commission approval pursuant to ORS 757.480. Second, the customers could form a homeowners’ association or cooperative and purchase the system. Third, the customers could choose to receive water service from the City of Bend. Depending on the time of year, the City may be able to provide water service in as little as five months. Finally, the Commission could grant an extension of the appointee or appointees to administer and operate the system.

Staff did not recommend that the Commission appoint someone to administer and operate the system at the time it filed its testimony, because First Hill was then delivering water to its customers and the customers were in the process of pursuing a long term solution regarding their water service provision. If such a solution were reached, an appointee or appointees would not be needed. In the meantime, however, we note that no solution has been reached. The customers telephoned the ALJ on June 11, 1997, and informed her that they were unwilling to take over the billing functions of the system.

OPINION

First Hill is a "public utility" as defined in ORS 757.005(1). Although it serves fewer than 300 customers, the company’s rates exceed the average residential rate threshold of $18 per month and, therefore, is not exempt under ORS 757.005(1)(b)(E). First Hill also is subject to full rate regulation by the Commission, as 20 percent of its customers petitioned for Commission review and the company charges an average residential rate of over $18 per month. See ORS 757.061 and OAR 860-022-0028.

Because jurisdiction expired in the rate case, docket UW 54, the utility no longer has the burden of proof. That burden passes on to Staff in the UM 857 investigation. The Commission concludes that Staff has more than met its burden of showing that its proposed rates are reasonable. The company has provided little information, most of it unresponsive to Staff’s data requests. Staff has proceeded on the basis of information it had and its experience with similar companies, and has created a record sufficient for us to conclude that its proposed rates are just and reasonable. Therefore, we adopt Staff’s proposed flat monthly residential rate of $18 as an interim rate until an administrator is appointed to operate the system.

The Commission also adopts Staff’s recommendation to appoint one or more persons to administer the system. As noted above, the customers have been unable to date to generate a plan for running the system themselves and have not reached agreement with First Hill on purchasing or assuming management of the company. They have indicated that they are unwilling to serve as billing and collection agents as well. Therefore, the Commission directs Staff take all steps necessary to locate a suitable administrator to perform those duties. The duties of the administrator will include an accounting of expenditures, billing, collection, and deposit of revenue from the water system in a trust account for operation, expenses, and maintenance of the system. PacifiCorp will be authorized to bill the administrator for water system power expense. When an eventual new owner is identified, rates will be adjusted to recover any of the actual contract labor expenses incurred to perform the duties listed above. A final accounting will also be conducted for determination of any monies to be returned to First Hill.

The suspension period in UW 54 expired on June 19, leaving a period of six days (June 20 through June 25, 1997) in which the rates proposed by First Hill were in effect by operation of law. However, the system has no meter and billing practices are irregular. Therefore, we conclude that the Commission, on behalf of First Hill, will not bill pro rata for the six days when its rates were in effect. The Commission will bill First Hill’s customers at the $18 per month rate on a going forward basis starting with the date of this order.

This investigation includes an examination of First Hill’s connection charges, repair assessment fees, and line extension and service connection practices. Staff presented evidence on those issues at the May 22, 1997, evidentiary hearing. An order dealing with those issues is forthcoming (UM 857 Phase II).

ORDER

IT IS ORDERED that:

1. The average monthly residential rate proposed by Staff shall go into effect as of the date of this order as an interim rate.

2. As an interim solution, the Commission Staff will locate an administrator to operate the company until a new owner is found.

a. The duties of the administrator will include an accounting of expenditures, billing, collection, and deposit of revenue from the water system in a trust account for operation, expenses, and maintenance of the system.

b. After an administrator is appointed, PacifiCorp will be authorized to bill the Administrator for water system power expense.

c. When a new owner is identified, rates will be adjusted to recover actual contract labor expenses incurred to perform the duties listed under subparagraph a above.

d. When a new owner is identified, the account identified in subsection (a) above shall be closed, and a final accounting be held for determination of any monies to be returned to First Hill.

3. The issues originally the subject of this investigation, including connection charges, repair assessment fees, and line extension and service connection practices, will be dealt with in a separate order (UM 857 Phase II).

Made, entered, and effective ________________________. 

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to ORS 756.580.