ORDER NO. 97-432

ENTERED NOV 07 1997

This is an electronic copy. Appendices may not be included.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UW 54/UM 857 (PHASE II)

DISPOSITION: REFUND PROCEDURES ADOPTED;

INTERIM OPERATORS APPOINTED

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 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 that investigation.

On October 17, 1996, a prehearing conference was held in this matter in Bend, Oregon, before Ruth Crowley, Administrative Law Judge (ALJ). Paul Graham, Assistant Attorney General, appeared for Commission Staff (Staff); and Vicki 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 in this docket. Staff proposed a schedule, which was adopted. The schedule was eventually modified because Staff was unable to obtain documents from First Hill. Finally, Staff proceeded to build its case based on the documents it had 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 an investigation into those matters. By Order No. 97-077, entered March 3, 1997, the Commission consolidated the investigation and the rate case. The docket number for the investigation is UM 857.

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

A public comment hearing was held on these matters on May 21, 1997, in Bend, Oregon. An evidentiary hearing was held on May 22, 1997, also in Bend. Notice of the hearings was published in the Bend Bulletin on May 11, 1997. Both hearings were before Ruth Crowley, Administrative Law Judge (ALJ). At the evidentiary hearing, Staff was represented by Paul Graham, Assistant Attorney General. No one appeared for First Hill.

The rate portion of the case was dealt with in Phase I of these consolidated dockets. The investigation portion is the subject matter of this order.

FINDINGS OF FACT

Staff witness Marion Anderson was charged with evaluating the appropriateness of company charges, fees, and practices in establishing and maintaining water provision, pursuant to the Commission’s November 5, 1996, decision to investigate First Hill. To gain information, Mr. Anderson conducted a mail survey of current customers. The survey asked the customers to provide information and documentation regarding:

• payments made for hookup to the system;
• a 1994 repair assessment;
• main line extension; and
• any other company requested payment that customers considered questionable.

Over 40 percent of the approximately 40 current customers responded to the survey.

The survey revealed that 12 households paid hookup fees ranging from $3,000 to $11,900. Each household was assessed $300 for repairs in 1994. Two households reported that they had made main line extension payments.

The survey also showed that the company made other repair assessments in 1988, 1992, 1993, and 1994. One household reported a selective overcharge for monthly service. Another household listed a "tap charge." The total reported payments exceed $70,000.

Several households surveyed indicated that the actual service connection costs and responsibilities were left to the customers, even after payment of the hook-up fees. They submitted bills or receipts showing that they had been forced to hire their own contractors to do the work. At the public comment hearings in this docket, at least one customer also stated that the company did not bring water to the customer property line. At the evidentiary hearing, a customer testified that a number of customers had paid for hook-up but were receiving no water.

On October 14, 1996, Commission Staff contacted First Hill and requested an analysis supporting the connection charges represented by the hookup and extension charges in Appendix A. The company refused Staff’s request.

Section 1 of the company’s standard contract for water service states:

[First Hill] will install at its expense a water well, pump, reservoir, pressure storage tanks, and a four inch water main to Consumer’s property, all at its own expense.

Section 4 of the company’s standard contract for water service states:

[First Hill] shall be responsible for making proper allocation of the funds received as hookup fees and service fees so as to be financially able to expand service and reliability as necessary, keep the system in operation, provide water properly and in adequate amounts, and repair and replace any parts of the water system as necessary.

Section 7 of the company’s standard contract states:

The cost of the hookup shall be a one time expense which runs with the land and is transferable from owner to owner of said land. The cost of said hookup shall be to provide water for one residence for domestic household use only.

APPLICABLE LAW

Commission Jurisdiction

The Public Utility Commission has jurisdiction over the rates of public utilities. ORS 757.005(1) defines "public utility" in part as any "corporation . . . that owns, operates, manages or controls all or a part of any plant . . . in this state for the production, transmission, delivery or furnishing of . . . water . . . directly or indirectly to or for the public . . . ." Under ORS 757.005(1)(b)(E), water companies serving fewer than 300 customers at an average annual residential rate of $18 per month or less, which provide adequate and nondiscriminatory service, are not included in the definition of public utility. First Hill’s rates exceeded the average residential rate threshold of $18 per month and hence came under the definition of "public utility."

However, even water companies that meet the definition of "public utility" are not necessarily subject to full regulation. ORS 757.061 provides:

(1) ORS 757.105 to 757.110, 757.135, 757.140, 757.205 to 757.220 [requiring rate schedule filing and approval], 757.400 to 757.460 and 757.480 to 757.495 do not apply to a water utility serving fewer than 500 customers unless:

(a) Twenty percent or more of the customers of the water utility file a petition with the commission requesting that the water utility not be exempt from regulation under the statutes set forth in this subsection; and

(b) a rate charged by the water utility for water service exceeds maximum rates established by the commission under subsection (2) of this section.

(2) The commission shall adopt rules establishing maximum rates for water utilities serving fewer than 500 customers for the purpose of determining whether such utilities are subject to regulation under the statutes set forth in subsection (1) of this section.

The Commission adopted OAR 860-022-0028, which established the average residential rate threshold at $18 per month. First Hill came under full rate regulation because the company was charging an average residential rate of over $18 per month, and 20 percent of the customers petitioned the Commission for rate regulation pursuant to ORS 757.061.

Furnishing Service

ORS 757.020 states:

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.

OAR 860-021-0050(5) provides:

Each water utility shall furnish a water service connection from the distribution main to the customer’s property. The customer, however, may be required to pay a reasonable service connection charge. Such a charge shall not include the cost of the meter nor exceed an amount equal approximately to the average cost of making service connections for the past three years.

Commission Powers

ORS 756.040(1) and (2) provide:

(1) In addition to the powers and duties now or hereafter transferred to or vested in the Public Utility Commission, the commission shall represent the customers of any public utility or telecommunications utility and the public generally in all controversies respecting rates, valuations, service and all matters of which the commission has jurisdiction. In respect thereof the commission shall make use of the jurisdiction and powers of the office to protect such customers, and the public generally, from unjust and unreasonable exactions and practices and to obtain for them adequate service at fair and reasonable rates.

(2) The commission is vested with power and jurisdiction to supervise and regulate every public utility and telecommunications utility in this state, and to do all things necessary and convenient in the exercise of such power and jurisdiction.

OPINION

Commission Jurisdiction

Because First Hill was a public utility even before it became subject to full rate regulation by virtue of its customers’ petition, we have jurisdiction to oversee its service. ORS 757.020.

Hook-Up Fees and Other Charges

As a public utility, First Hill is required to furnish service to its customers. ORS 757.020. This requirement applies to public utilities whether or not they are fully rate regulated under ORS 757.061. As discussed below, First Hill has assessed charges in this case for which no service was delivered, or levied additional charges for services that it is obligated to provide in any case. A utility may not charge for the simple right to receive service.

The record shows that the charges designated as hook-up fees are not actually fees charged to hook to the system. Customers paid a variety of sums designated as hook-up fees (see Appendix A, column a), but First Hill did not hook them up. Instead, customers had to hire someone else to hook them up, at additional charge, or remain without water service. When we look to Section 7 of First Hill’s standard contract, it becomes clear that what First Hill designated as a hook-up fee was something else altogether: a licensing fee that First Hill charges to give users the privilege of receiving water service. A true connection charge does not "run with the land."

Appendix A, column b, lists a service repairs surcharge. Column d lists additional repair assessments. The charge for repair assessments violates the company’s standard contract. The contract provides that First Hill will allocate hook-up and service fees so as to pay for repairs to the system. See Section 4, set out above. In charging repair assessments, First Hill billed its customers for something they were entitled to receive as part of their rates and the hook-up fees. The "tap charge" in column d appears also to fall into the category of services for which customers paid in their rates and were billed again. The extension charges listed in column c also violated First Hill’s contract. Section 1 of the company’s standard contract precludes extension charges to customers’ property.

This case is highly unusual. First Hill has been imposing charges on its utility customers that are separate and distinct from utility service. In fact, the record shows that First Hill repeatedly imposed charges on its customers for the right to receive service, not for the actual provision of service. The record contains no evidence showing that First Hill delivered any of the hook-up, line extension, or repair services that it promised to provide. As a public utility, First Hill is obliged to provide adequate service at just and reasonable rates. ORS 757.020. It may not impose charges on its customers for the right to receive a service.

Moreover, First Hill’s charges appear to be fraudulent and at a minimum are unreasonable. ORS 756.040 gives us the responsibility of protecting customers from "unjust and unreasonable exactions and practices." That same statute gives us the power and jurisdiction to supervise and regulate all public utilities in the state and do "all things necessary and convenient in the exercise of such power and jurisdiction." The fact that some water utilities are exempt from full rate regulation under ORS 757.061 does not exempt them from this more general supervision by the Commission. We conclude that we are authorized to order refunds of the First Hill charges at issue in the present case. Our conclusion in this case is limited to the facts before us. We reach no conclusion about other situations in which we may have authority to order refunds.

We direct Commission Staff to create a formal refund claim form and to distribute that form to past and present (as of the date of this order) customers of First Hill. Customers will fill out the form and submit it, notarized and accompanied by photocopies of supporting canceled checks (unless these were already submitted in response to the survey). The Commission will then order the utility to make customer refunds as appropriate.

System Administration

As we noted in the Phase I order in this case (Order No. 97-240), the owners of the system have essentially abandoned it. At its August 5, 1997, public meeting, Staff recommended that the Commission appoint agents to act on behalf of First Hill to operate and maintain the water system and perform the billing, collection, and record keeping functions associated with the water system for a period of one year or until a long-term solution for the provision of water service can be secured, whichever is sooner.

Staff recommended that Butch Rogers of Bend, Oregon, be appointed as the certified system operator. Mr. Rogers owns Pine Ridge Pump in Bend and currently provides similar service for six other water systems in the Bend vicinity. He is familiar with the system and has performed repairs on the system in the past. Mr. Rogers will oversee all operations and maintenance of the system. He has requested that Tom Oblizalo, a customer of First Hill, assist him and be responsible for water quality testing at a rate of $18 per month.

Mr. Rogers will not charge the system to be its certified operator; however, he will charge for any repairs that become necessary at a rate of $40 per hour for labor plus materials. If he has to use a pump truck, he will charge $60 per hour for labor plus materials. Mr. Rogers does not anticipate any major repairs in the near future. He sees a need for minor repair work on the pumping panel, which will cost approximately $250.

Mr. Rogers also asserts that First Hill owes him approximately $500 for past work on the system. He will provide an estimate for repairs to the pumping panel and a billing for his previous repairs to the system. He has agreed to take payments for these expenses over the next 12 months.

Staff also recommended that Karen Gilbride, a customer, be appointed to collect customer payments, pay the bills, and keep an accounting of all moneys associated with First Hill. Ms. Gilbride estimates that it will take eight to ten hours per month to perform these tasks; her rate is $10 per hour. Pacificorp should provide copies of bills and notices concerning First Hill to Ms. Gilbride, 19451 Kemple Drive, Bend, Oregon, 97702.

In Order No. 97-240, the Commission ordered a flat rate of $18 per month for 40 customers. At this rate, Staff noted that monthly revenues will be $720. Staff budgeted $351 per month for salaries and wages. Mr. Oblizalo’s wage plus Ms. Gilbride’s wage total approximately $118 per month. Mr. Rogers’ payment for past repairs and the power panel repair will be approximately $62.50 per month. From time to time there will be additional expenses, such as power, postage, paper, and water tests. At this point, Staff recommends retaining the $18 per month flat rate. However, Staff will monitor the system’s expenses closely and recommend rate adjustments if they become necessary.

The Commission adopted Staff’s recommendations with respect to First Hill in their entirety. We also request that a member of Commission Staff be a signator on the trust account we ordered established for First Hill revenues in Order No. 97-240 at 9 ("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."). The Commission will then be able to monitor the account.

At the August 5 public meeting, the Commission raised the issue of whether the appointees who will administer and operate the system should be bonded. Staff explored the reasonableness of bonding the appointees and on September 23, 1997, submitted a memorandum to the Commission, with a copy to First Hill’s owners, containing its recommendations. Staff discovered that each appointee can be bonded up to $10,000 at a cost of $111 per person, through Capitol Insurance Center, Inc., in Salem.

Staff’s testimony did not include any expenditure for bonding. We conclude that bonding is prudent and reasonable, however, and approve the expenditure by this order. The company has not accumulated enough revenue to cover the expenditure. As soon as enough revenue has been set aside for this transaction, Staff has committed itself to seeing that the appointees make application to be bonded and authorizing the necessary payment. Staff estimates that, barring unforeseen consequences, there will be sufficient revenue within sixty days to fund the bonding.

First Hill customers should note that the Commission’s involvement in administration of the company will be of short duration. It is highly unusual for the Commission to involve itself in the everyday affairs of the companies it regulates, and in this instance the Commission has taken on an oversight role because the situation is extraordinary. First Hill customers must eventually take action to ensure their water supply, however. We encourage customers to pursue the options for receiving water service that have been raised at meetings between Commission Staff and customers and to select one in the near future.

ORDER

IT IS ORDERED that:

1. Refund procedures:

a. Commission Staff shall create a formal refund claim form and distribute that form to past and present customers of First Hill.

b. Customers will fill out the form and submit it, notarized and accompanied by photocopies of supporting canceled checks (unless these were already submitted in response to the survey).

c. The Commission will then order the utility to make customer refunds as appropriate.

2. For the period of one year from the Commission decision at its August 5, 1997 public meeting, or until a permanent solution is found to the provision of water service to First Hill customers, whichever comes first:

a. Butch Rogers is appointed as the certified operator of First Hill Water, Inc., with Tom Oblizalo as his assistant, under the conditions recommended by Staff and approved at the Commission’s public meeting of August 5, 1997.

b. Karen Gilbride is appointed to perform administrative functions for First Hill under the conditions recommended by Staff and approved at the Commission’s public meeting of August 5, 1997.

A member of Commission Staff shall be added to the First Hill trust account to allow the Commission to monitor the account.

As soon as enough revenue has accumulated to cover the expenditure for bonding, Staff shall see that the appointees mentioned in subparagraphs a. and b. above make application to be bonded, and shall authorize the payment necessary for bonding.

3. The interim flat rate of $18, made effective in Order No. 97-240, shall remain in effect subject to monitoring by Commission Staff. If Staff determines that the $18 rate is not sufficient to meet system expenses, Staff shall recommend a rate adjustment.

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.