Title: Order UW08-05 -Seawood - Water Tariff

IN THE MATTER of an application by the Seawood Water Utility Corporation for approval to increase its annual water rates and charges.

Maurice Rodgerson, Chair
Brian McKenna, Vice-Chair
John Broderick, Commissioner
Chester MacNeill, Commissioner

[1] On April 15, 2008, the Seawood Water Utility Corporation (the "Utility"), which operates as a privately-owned water utility in the Cavendish area, filed an application with the Commission for approval to increase water rates and charges, effective January 1, 2008.

[2] Specifically, the Utility's application requested that the water rates be increased as follows:

[3] On June 19th, 2008, the Commission mailed a Notice of Application to each of the Seawood water customers. The Notice outlined the Utility's proposal for increased water rates and invited written comments on the application. The deadline to respond to the Notice was July 11, 2008, however, an extension was provided to allow certain customers residing outside the province sufficient time to correspond.

[4] A number of written comments were received in response to the Notice of Application. As a result, the Commission established a process whereby the parties were able to communicate questions and concerns directly to one another. Key issues raised by the Respondents related to the Utility's treatment of capital assets associated with the water utility, the recovery and amount of the Utility's deficit, and the appropriateness of billing for serviced lots owned by the Seawood Corporation.

[5] Seawood Estates Water Utility Corporation is a privately-owned facility located in the Cavendish area. When the utility was first developed in the 1960s it offered both water and sewer services. Its complement of residents is made up primarily of seasonal owners, with many living off-Island. The original tariff of rates was devised in a simplified manner which combined both water and sewer services under one rate.

[6] In 2003, the Cavendish utility took over the responsibility of Seawood's sewer assets and joined the operation with their municipally-run wastewater system. Sewer customers in Seawood are overseen and billed by the Cavendish utility and charges are based on Cavendish's tariff of rates. Water customers remain the responsibility of the Seawood Water Utility Corporation and are billed under Seawood's tariff. In 2007, the Commission issued Order UW07-02 allowing the Seawood Utility to increase rates and, in 2008, Seawood filed this application requesting an additional increase.

[7] Respondents to the Notice raised concerns over the Utility's deficit and their approach to recovering the shortfall. Table 1 summarizes the Utility's income and expenses since 2003:

[8] As indicated in the table, there has been insufficient revenue generated to offset the Utility's expenditures in each of the years since 2003. While the 2007 rate increase offered some relief, it did not adequately meet the Utility's expenditures and has resulted in the Utility's request for an additional increase in 2008.

[9] A review of the Utility's financial statements shows that repair and maintenance costs have doubled since 2004, costs to meet legislated testing standards and water quality assurance represent roughly one-quarter of the Utility's total expenditures and electricity costs have almost doubled in one year — all of which contribute to the Utility's need for additional revenue.

[10] In the past, the Utility's owner has carried the shortfalls each year. The Commission's 2007 rate Order to Seawood instructed the Utility to properly account for the losses by establishing a loan repayment schedule at prevailing interest rates in order to recover the deficit over a reasonable period of time.

[11] The Utility, in this application, has proposed to recover the shortage over a 10-year period. The analysis indicates the deficit to be roughly $32,000 and the Commission considers the Utility's proposed recovery period to be reasonable at this time. Projections based on this scenario have been factored into the rate analysis.

4.2 Treatment of Capital Assets

[12] The Respondents expressed concern over the Utility's treatment of capital assets as well. Under the Commission's accounting procedures, the assets are recovered over their useful life in accordance with a straight-line depreciation schedule. Assets are reported through a depreciation entry and an interest payment amount, for accounting purposes. In this case, the assets are valued at approximately $52,000, which represents $1,678 in allowable depreciation expenses. Again, the Company that owns the Utility covered the costs and accounts were not properly set up by the Utility. In addition to the depreciation amount, starting in 2007, an interest component was added to properly record the entry and allow funds to be recouped.

4.3 Billing of Serviced Lots

[13] The matter of billing for serviced lots in the Seawood subdivision was raised by Respondents also. Specifically, concerns over whether the Utility is properly billing all lots in the subdivision, including ones owned by the Seawood Corporation, were raised.

[14] There appears to be confusion around the availability of services within the development and information presented to the Commission is inconsistent on this issue. The services were installed a number of years ago and some records are difficult for the Utility to provide. Based on research carried out by Commission staff, it appears that access to water service is available in some form in all areas of the development. Therefore, the Commission considers that all lots are subject to frontage charges. This includes properties where no curb stop presently exists, as well.

[15] It is recommended that an updated map of the serviced area be developed by the Utility. Although there is a cost to having this done, it would be a worthwhile exercise and beneficial to both the Utility and its customers.

4.4 Turning On/Off Water Service

[16] The Utility's practice of charging residents an amount related to the turning on and off of water services at the curb stop has resulted in expressions of concern as well. Some owners question the legitimacy of being charged an additional fee above their annual water charge. This issue is more prevalent in Seawood due to the high number of seasonal customers.

[17] The ultimate responsibility and liability for the curb stop lies with the Utility and, for that reason, only representatives of the Utility, including contractors employed by the Utility, should be allowed access to the curb stop at any time.

[18] At the beginning and end of each season, the onus is on the customer to notify the Utility, in advance, of the need to have the water service turned on or off at the curb stop. Anyone preparing for the transition of seasons is responsible for their own property and the related costs; however, the curb stop should never be accessed by anyone other than the Utility or their representative. The scheduling of the actual shutting on or off at the curb lies with the Utility and it is their responsibility.

[19] The $20 fee is intended to cover the Utility's cost to carry out and oversee this function each time and it is a legitimate charge related to this service.

[20] It should be noted that the cost to replace and install curb stops is accounted for through repairs and maintenance or capital budget expenses and is not part of the $20 fee for shutting on and off service at the curb stop.

4.5 Bad Debt Expense

[21] Generally, the writing off of bad debt as an expense is not an acceptable accounting practice under the Commission's guidelines and is not done without prior Commission approval. Therefore, the amount reported in the Utility's 2007 financial statement is not recognized as an acceptable expense at this time and does not form part of the analysis.

[22] In cases where chronic non-payment is an issue and steps have been taken by the Utility to pursue these accounts, such as registering a judgement or lien, then a written request to the Commission for a determination regarding the bad debt can be made.

5. Conclusion

[23] The Commission recognizes that Seawood is a somewhat unique entity operating within the province. While many of the challenges the Utility faces are similar to those faced by municipally-run systems, such as having to provide an essential service in the face of increasing costs and stricter safety standards, Seawood does not have access to available funding in the same manner as municipal utilities do. The Utility has an annual revenue requirement of approximately $43,000 and operates with limited resources. There are roughly 209 lots in the community and, of those, more than half are undeveloped. Two-thirds of the developed properties are occupied by seasonal residents. This places the burden to recover costs on a relatively small customer base.

[24] The Commission also acknowledges that the climate for utility rates to remain constant over long periods of time is changing, and rates will require more frequent review than in the past. The unpredictable nature of influencing factors combined with rising costs dictate that rates will need to be monitored more closely.

[25] The Commission has thoroughly reviewed and considered the application, including issues raised by the Respondents in this matter, and has concluded that a rate increase is warranted.

[26] Therefore, the Commission considers that:

an annual frontage charge of $135.00;

an annual frontage charge of $135.00, combined with an annual flat rate of $135.00 for water customers served 6 months of the year or less;

an annual frontage charge of $135.00, combined with an annual flat rate of $270.00 for customers served more than 6 months of the year,

effective with service provided on and after January 1, 2008, will result in necessary and equitable rates and charges.

[27] A schedule of revenues and expenditures is appended to this Order. The schedule is prepared in accordance with the Commission's Uniform System of Accounts and is consistent with the provisions outlined in this Order.

6. Disposition

[28] An Order will therefore issue implementing the findings and conclusions contained in these reasons.

UPON receiving an application by the Seawood Water Utility Corporation (the "Utility"), for approval to increase water rates and charges, effective January 1, 2008;

AND UPON thorough review and consideration of the application, including issues raised by the Respondents in this matter;

NOW THEREFORE, for the reasons given in the annexed Reasons for Order, and pursuant to the Island Regulatory and Appeals Commission Act and the Water and Sewerage Act

Parties to this proceeding seeking a review of the Commission's decision or order in this matter may do so by filing with the Commission, at the earliest date, a written Request for Review, which clearly states the reasons for the review and the nature of the relief sought.

Part 1

Application

Part 2

Interpretation

Part 3

General

Services

Part 5

Billing