Order 15566 - Kent County Water Authority: Motion for Relief from Compliance Order

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

ORDER

WHEREAS, On October 2, 1997, the Rhode Island Public Utilities Commission ("Commission") issued Report and Order No. 15418 in this docket instructing the Kent County Water Authority ("KCWA" or "Authority") to file new rates and charges designed to generate additional revenues in the amount of $2,200,000. The Commission also directed the KCWA to continue refunding to ratepayers the $600,000 previously ordered in Docket No. 2440 (See Order No. 15166).

WHEREAS, The KCWA filed compliance tariffs on October 17, 1997. These tariffs were approved by the Commission in a compliance order issued on November 24, 1997 (See Order No. 15457).

WHEREAS, In its compliance order the Commission also addressed the KCWA's restricted accounts. We noted as follows:

In Report and Order No. 15418 the Commission identified six expense categories which the commission directed the KCWA to restrict in specific accounts (p. 50). With the exception of the infrastructure replacement account addition in this docket, the same accounts were restricted in the KCWA's last rate case in Docket No. 2098. In Docket No. 2098 the Commission's final report and order directed the KCWA to keep any funds not expended from these restricted accounts in "interest-bearing accounts" to be carried over to subsequent years for their designated purposes" (Order No. 14364, p. 94).

However, during the instant rate proceeding the Commission discovered that the KCWA has failed to retain the interest income in some of the Authority's restricted accounts. Instead, the Authority has been withdrawing some of the interest income and depositing it in the Authority's operations and maintenance general account. As the Commission has never removed this interest retention requirement, we expect the KCWA to abide by our prior decision in Docket No. 2098, and immediately correct this deficiency (See Order No. 15457, pp. 2-3).

WHEREAS, In response to this observation and directive, the KCWA filed a Motion for Relief from Compliance Order on December 4, 1997. The Authority seeks relief from the Commission's order requiring it to retain the interest income in the aforementioned accounts. The KCWA proffered the following argument:

The Authority does not interpret Report and Order 14364 in Docket No. 2098 as requiring the retention of interest earnings in the restricted accounts. Rather, the Authority has consistently interpreted the term "designated purposes" to mean purposes which are consistent with the bond resolution which were part of the evidence and record in Docket 2098. Under Section 514 of the Bond Resolution, it is stated that "All income earned on investment of the Operation and Maintenance Reserve Fund, the Renewal and Replacement Reserve Fund, and Insurance Reserve Fund, and the Capitalized Interest Account shall be credited to and deposited in the Revenue Fund." The Authority has done just that and it is the Reserve Fund which fuels the operation and maintenance expenses of the Authority.

The Bond Resolution further states in Section 506 that any excess revenues in the Debt Service Fund remaining after payment of the bonds may be deposited in the Stabilization Account or the redemption fund, or, if consistent with the rate order, into the Reserve Fund. Those interest revenues have not been placed in the Revenue Fund. In other words, the Authority has not retained the interest in the Debt Service Fund, but the interest earnings from the operation and maintenance repair and replacement reserves were deposited into the Reserve Fund consistent with the bond resolution.

The use of the interest income from the reserve accounts was referred to and part of the Authority's cost of service analysis prior to the filing of Docket 2555. As such, there was a reduced revenue requirement through rates paid by rate payers. Had that interest income not been available to the Authority, the revenue request would have been three percent higher and conversely, if the compliance order is interpreted consistently with Chairman Malachowski's letter of November 20, 1997, the Authority will be three percent short of its revenue requirements.

The Authority further avers that since its receipt of the Report and Order in Docket 2098 in December of 1993, that it has provided reports to the Commission every four months, describing activity in the restricted accounts and that those reports have shown a monthly disbursement of interest earnings from the restricted accounts to the revenue fund.

The Authority further avers that both page 18 and Appendix 2 of the Report and Order for Docket 2555 clearly indicate that interest will be utilized as revenues.

WHEREAS, On December 15, 1997, the Division of Public Utilities and Carriers ("Division") filed a response to the Authority's motion. The Division did not object to the Authority's request for relief. The Division offered the following rationale for its position:

The Division has reviewed the matter and determined that the Commission's Order in Docket No. 2555 clearly required that interest on all restricted accounts, including the bond reserve accounts, be maintained within the same restricted accounts. However, it appears that the Authority used the interest earned on the debt service reserve accounts to reduce its overall revenue requirements in Docket No. 2555. The accounts presumably include the Debt Service Fund, the Debt Service Reserve, the Renewal & Replacement Reserve, the Operation & Maintenance Reserve, and the Stabilization Account. As a result, ratepayers are receiving the benefits of the Authority's practice of transferring the interest from the reserve accounts to the revenue fund through lower rates. In this context, the Division believes that it would create financial hardship to the Authority to enforce the literal language of the Commission's Order as it relates to the accounting of interest income on the bond related reserve accounts.

WHEREAS, The Commission has considered the Authority's contentions relative to the issue of retaining the interest income in all of its restricted accounts. The Commission has also considered the position being espoused by the Division. Predicated thereon we make the following findings:

1. That the Commission's final report and orders in Docket Nos. 2098 and 2555 clearly required the KCWA to retain and carry over both the principal and interest income in its various restricted accounts.  [1 Contained in the text of the Authority's motion is reference to a number of accounts whose names are derived through the Authority's Bond Resolution. Although these accounts parallel the restricted accounts established in the Commission's final report and order in Docket No. 2555, the Commission's decision herein only relates to the six specifically named restricted accounts germane to this docket. The Commission must remind the Authority to identify its restricted accounts consistently with the names established and utilized in this docket.]  The Commission is not persuaded by the Authority's arguments to the contrary.

2. That the KCWA has violated that directive insofar as it has been using the interest income generated in several of its restricted accounts to pay for general operations and maintenance expenses.

3. The Authority's general rate filing in this docket included the use of restricted interest income for general operations and maintenance expenses. This use of restricted interest income was a violation of both the spirit and letter of our final report and order in Docket No. 2098. Unfortunately, we did not discover the violation until after our final report and order in the instant docket was issued. The Authority's current operations and maintenance revenue allowance reflects the restricted interest income, and because an adjustment would be unnecessarily costly for ratepayers at this time, we will grant temporary relief from that directive in Order No. 15457 which reasserts the requirement that all interest income be retained in restricted accounts. In short, the Commission will allow the Authority to continue with its current practice of utilizing the interest income associated with the Authority's restricted Operation and Maintenance Reserve Fund, the Renewal and Replacement Fund, the Debt Service Reserve Fund, and the General Debt Service Fund to pay for general operations and maintenance expenses. The Commission has decided to address and cure this violation in the Authority's next general rate case.

4. That the Authority shall be directed to continue to retain and carry over the interest income generated in its Renewal and Replacement and Infrastructure Replacement restricted accounts.

Accordingly, it is

(15566) ORDERED:

1. That the Kent County Water Authority's December 4, 1997 Motion for Relief from Compliance Order, is hereby granted.

2. That the Kent County Water Authority shall continue to restrict and carry over the interest income generated in its Renewal and Replacement and Infrastructure Replacement restricted accounts.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND, ON JANUARY 6, 1998, PURSUANT TO AN OPEN MEETING DECISION. WRITTEN ORDER ISSUED ON MARCH 20, 1998.

PUBLIC UTILITIES COMMISSION