Docket UW10302
Order UW93-9IN THE MATTER of an application by the St. Eleanors Water and Pollution Control Corporation for a Water and Sewer Tariff increase.
BEFORE THE COMMISSION
on Friday, the 4th day of June, 1993.
Linda Webber, Chairman
John L. Blakney, Vice-Chairman
Order
Contents
1 Introduction
2 The Applicant
3 Applicant's Financial Position
4 Revenue Requirement
5 Rates
6 Metering
7 Disposition
Order
Reasons for Order
1 Introduction
This Order and Reasons for Order set forth the Commission's findings and conclusions in respect of an application of the St. Eleanors Water and Pollution Control Corporation (the "Applicant", "St. Eleanors" or the "Utility") for a rate increase. This Order also sets forth the Commission's reasons for Order UW93-8, which was issued by the Commission on May 28, 1993. Order UW93-8 contains the approved Tariff resulting from St. Eleanors application. That Order should therefore be read in conjunction with these Reasons.
The application in this matter was filed with the Commission in November, 1992 and was noticed in the local press in December, 1992. The notice sought public comment on the application by January 15, 1993. No comments were received.
In an effort to reduce expenditures associated with the public review process—and in view of the lack of public comment—the Commission decided against proceeding with a public hearing of the application. As a result, these findings are based on an analysis of the written material filed by the applicant and recent decisions made by the Commission in respect of other public utilities.
2 The Applicant
The application is a body corporate and a public utility within the meaning of the Water and Sewerage Act engaged in the provision of water and sanitary sewage services to customers in the Community of St. Eleanors. The Applicant provides combined water and sewage service to some 760 customers, most of whom are billed on a flat-rate basis.
The Applicant's present Tariff was last reviewed by the former Public Utilities Commission in 1985. If approved, the increase proposed in the present application would see residential flat rates increase some 30 percent.
3 Applicant's Financial Position
The Applicant's present financial position as well as its 1993 forecast is shown in Table 1. Revenues for 1993 are at proposed rates.
Table 1
St. Eleanors Water and Pollution Control Corporation
Financial Position
Actual 1992 & Forecast 1993
ACTUAL
FORECAST
1992
1993
WATER & SEWER REVENUES Water & Sewer Sales - Meted & Unmet $187,462
$221,062
Public Fire Protection 75,282
83,064
Miscellaneous 1,852
0
264,596
304,126
WATER & SEWER EXPENDITURES Operating Water & sewer purchases 24,210
26,500
Hydrant charges 11,312
11,312
Pollution control 32,415
35,600
Power 12,319
17,000
Wages 52,576
52,600
Maintenance & supplies 14,697
13,600
Rent-office space 17,018
18,100
Equipment rental 53
300
164,600
175,012
General Administration 41,347
43,080
Office & postage 8,111
8,950
Rate application 3,605
0
Insurance 614
750
Regulatory assessment 3,173
3,200
Vehicle expenses 2,271
3,000
Bank charges 268
270
Miscellaneous 89
250
59,478
59,500
Non-Operating Depreciation 22,985
27,000
Retirement of LTD 56,123
0
Interest on LTD 30,871
42,598
109,979
69,598
Total expenditures 334,057
304,110
Excess of revenue over expenditure (expenditure over revenue) (69,461)
16
Surplus(deficit),beginning of year (62,367)
(131,828)
Surplus(deficit),end of year ($131,828)
($131,812)
Although the Applicant continues to claim both principal debt payment and depreciation as capital-related expense deductions, the Commission has, in recent years, disallowed the principal debt repayment. Since depreciation is intended to recover the cost of an asset over its useful life, the allowance of both expenses has the effect of requiring customers to pay for an asset twice.
The Commission notes that this change in accounting policy is either now in effect or will, this year, be applied to each municipal utility in the Province. Since the Commission has implemented the above change for utilities that have come before us since 1991, we will require that the applicant's financial statements be adjusted accordingly.
The above change results in a decrease in St. Eleanors revenue requirement. A prior-period adjustment to 1991 has the following effect.
Table 2
Financial Position
(Adjusted)
1992 & 1993
1992
1993
WATER & SEWER REVENUES Water & Sewer Sales - Meted & Unmet $187,462
$221,062
Public Fire Protection 75,282
83,064
Miscellaneous 1,852
0
264,596
304,126
WATER & SEWER EXPENDITURES Operating Water & sewer purchases 24,210
26,500
Hydrant charges 11,312
11,312
Pollution control 32,415
35,600
Power 12,319
17,000
Wages 52,576
52,600
Maintenance & supplies 14,697
13,600
Rent-office space 17,018
18,100
Equipment rental 53
300
164,600
175,012
General Administration 41,347
43,080
Office & postage 8,111
8,950
Rate application 3,605
0
Insurance 614
750
Regulatory assessment 3,173
3,200
Vehicle expenses 2,271
3,000
Bank charges 268
270
Miscellaneous 89
250
59,478
59,500
Non-Operating Depreciation 22,985
27,000
Interest on LTD 30,871
42,598
53,856
69,598
Total expenditures 277,934
304,110
Excess of revenue over expenditure (expenditure over revenue) (13,338)
16
Surplus(deficit),beginning of year (16,230)
(29,568)
Surplus(deficit),end of year ($29,568)
($29,552)
The practical effect of this accounting adjustment is the lowering of the Applicant's accumulated deficit from approximately $130,000 to some $30,000 as well a reduction in interest charges associated with the Applicant's proposal to finance and repay the deficit over a ten-year period. We will include in rates provision for the recovery of this deficit over a three-year period.
1. The Applicant's 1991 and 1992 financial statements—and those thereafter—shall be adjusted to reflect the elimination of principal debt repayments as deductions from income.
4 Revenue Requirement
Appendix 4 of this Order contains a summary of the combined water and sewer expenditures of the Utility for the years 1992 to 1995 adjusted to reflect the accounting change discussed in Section 3 above. Appendix 4 also shows adjustments we have made to the Applicant's proposals as well as a three-year expenditure average (1993-95) that is utilized for rate-design purposes. The allowed expenditures are the same as those proposed by the Applicant save for a reduction in interest expense associated with the financing and repayment of the deficit, an adjustment in the hydrant charges to reflect the addition of two hydrants that Summerside is now charging St. Eleanors and an adjustment in power costs to reflect 1992 actuals that have been adjusted upwards at 4% per annum. In all other respects, the Applicant's proposals have been accepted.
In Commission Order UW92-4 dated April 4, 1992 Re Charlottetown Water Commission, the Commission addressed the issue of allowing utilities to recover an increment over the actual cost of service to maintain their financial integrity. In that case and in others that have followed, the Commission indicated that the financial integrity of municipal utilities is properly measured through recognition of a utility's debt interest coverage ratio. The same principle should apply in St. Eleanors. We have included in revenue requirement an interest coverage ratio of 1.3 times—which equates, in the 1993-95 average test year, to approximately $6,400—as well as an allowance of some $10,000 to recover the adjusted deficit over a three-year period.
These adjustments—shown in Appendix 5—result in a 1993-95 average revenue requirement allowance of $302,488.
2. The Commission authorizes—for rate design purposes—a 1993-95 average revenue requirement for St. Eleanors in the amount of $302,488.
5 Rates
The Applicant employs a form of the commodity-demand method of cost allocation and rate design. The method has been used by St. Eleanors in the past and is considered an acceptable approach to rate making.
Over the last three-year period, the Commission has been reviewing the broad issue of rate design with the view of modifying, over time, the methods used in allocating costs1. Until recently, an emphasis had been placed on allocating a greater portion of costs to either the demand or customer component of cost—or some combination of the two—with a lesser emphasis on flow. In the Commission's view, greater emphasis must be placed on the actual consumption of customers, which is better represented by flow.
Appendices 1 to 8 of this Order represent the cost allocation and rate design model that the Commission has used in this case. The inputs to the model and the model itself are largely the same as those used by St. Eleanors. However, they reflect a movement in the allocation of costs described above.
The use of the appended model is not in any way intended as a criticism of the model used by the Applicant. The work carried out by the Applicant's consultant is consistent with generally accepted cost allocation and rate design practices. However, for the reasons described above, we have decided to modify our approach to cost allocation.
In addition to slight modifications we have made in the allocation of costs, we have amended the Applicant's sales forecast somewhat. The amendment reflects the use of actual consumption data for comparable customers in other municipalities that have meters rather than the use of proportionate (i.e. average equivalent household) water consumption data.
Since greater emphasis should, we believe, be placed on consumption rather than demand, we will, over time, be allocating a greater portion of costs to flow. In our view, rates designed on this basis better reflect the user-pay concept.
6 Metering
The bulk of the Applicant's customers are unmetered. Indeed, only 40 or so of the close to 800 customers of the Utility are metered.
In a decision dated June 27, 19852, the former Public Utilities Commission commented on St. Eleanors metering practices:
Another matter that came to light at the hearing was the fact that the Utility meters very few customers. Indeed, evidence adduced by Mr. Baglole indicates that the Utility intends to remove meters from two apartment buildings, since other such buildings are not metered. Moreover, it would appear, based on a customer census contained in the application, that no general metering practice or policy is adhered to, since a few commercial customers are metered while others are not.
The Commission is of the opinion that a utility the size of the Applicant (or for that matter, any utility offering services to commercial and industrial, as well as residential customers) should have in place a program of metering all commercial and industrial customers. In this respect, the Commission will order that a study be carried out to determine the costs of metering all commercial and industrial customers, and that the study be submitted to the Commission within 12 months of the date of this decision.
(pp. 17-18)
The study described above was filed with the Public Utilities Commission in March of 1986. In January of 1987, the Utility advised the Public Utilities Commission that it did not wish to increase the level of metering in the Community. The matter was not, at the time, further pursued.
The Commission believes that St. Eleanors must put in place implementation plans for metering all non-residential customers. The continued use of flat rates does not, in our view, send appropriate pricing signals to consumers nor does it facilitate the concept of user-pay.
The Commission will require St. Eleanors to prepare an implementation plan for metering all non-residential customers. The plan is to include a specific proposal for the installation of water meters over a period not to exceed two years. The plan is to be filed with the Commission for its review by November 30, 1993.
3. The Applicant shall prepare and submit to the Commission for its review and approval an implementation plan for metering all non-residential customers.
4. The implementation plan shall include a specific proposal for the installation of water meters on all non-residential customers over a two-year period.
5. The implementation plan shall be filed with the Commission by November 30, 1993.
The Commission notes that similar instructions will be issued to other water utilities in the Province in the near future. Over the long term, the Commission wishes to see universal water metering in Prince Edward Island become a reality. Indeed, universal metering is now in effect in the Community of Sherwood and we are encouraging universal metering in areas where it is now economically feasible.
The installation of meters on all non-residential customers in St. Eleanors is a step in this direction.
7 Disposition
An Order implementing the above findings will therefore issue. The Commission acknowledges the delay in releasing these findings and is working on ways and means of expediting the disposition of matters before us.
The concerns that St. Eleanors has expressed in this area are understood.
Order
UPON the application of the St. Eleanors Water and Pollution Control Corporation for a water and sewer Tariff increase;
NOW THEREFORE, pursuant to the Island Regulatory and Appeals Commission Act and the Water and Sewerage Act;
IT IS ORDERED THAT
1. The Applicant's 1991 and 1992 financial statements—and those thereafter—shall be adjusted to reflect the elimination of principal debt repayments as deductions from income;
2. The Commission authorizes—for rate design purposes—a 1993-95 average revenue requirement for St. Eleanors in the amount of $302,488;
3. The Applicant shall prepare and submit to the Commission for its review and approval an implementation plan for metering all non-residential customers;
4. The implementation plan shall include a specific proposal for the installation of water meters on all non-residential customers over a two-year period; and
5. The implementation plan shall be filed with the Commission by November 30, 1993.
DATED at Charlottetown, Prince Edward Island, this 4th day of June, 1993.
BY THE COMMISSION:
Linda Webber, Chair
John L. Blakney, Vice-Chair
NOTICE
Section 12 of the Island Regulatory and Appeals Commission Act reads as follows:
12. The Commission may, in its absolute discretion, review, recind or vary any order or decision made by it or rehear any application before deciding it.
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.
Sections 13.(1) and 13(2) of the Act provide as follows:
13.(1) An appeal lies from a decision or order of the Commission to the Appeal Division of the Supreme Court upon a question of law or jurisdiction.
(2) The appeal shall be made by filing a notice of appeal in the Supreme Court within twenty days after the decision or order appealed from and the Civil Procedure Rules respecting appeals apply with the necessary changes.
1 The Commission is studying the overall issue of cost allocation and rate design with the view of adopting a new model for use throughout the province. When completed, the model will be made available to municipal utilities and should assist in reducing the costs associated with preparing rate applications.
2 Public Utilities Commission Order UW850627 in Docket W-10-3(D)
