Order 15665 - Prov. Water Supply Board: Reconsideration of IFR Program

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

ORDER

WHEREAS, On March 31, 1995, the Providence Water Supply Board ("PWSB") filed an application with the Rhode Island Public Utilities Commission ("Commission") seeking a general increase in its then existing rate schedules. The PWSB's rate filing was offered for an April 30, 1995 effective date and was designed to generate total revenue in the amount of $33,514,890. This request, if granted, would have increased the PWSB's then present revenue collections by $11,111,008 or approximately 49.6 percent.

WHEREAS, The Commission conducted a thorough examination of the PWSB's rate filing, and also the subsequent response filings of the Division of Public Utilities and Carriers ("Division") and a number of intervenors who participated in this rate filing docket. After several public hearings and open meetings, the Commission issued a final report and order on December 26, 1995 (Order No. 14881). In that report and order, the Commission rejected the PWSB's rate increase of $11,111,008, and instead authorized the PWSB to file new tariffs designed to recover additional annual revenues of $8,093,883 (Id.). This rate increase became effective with consumption on and after December 26, 1995.

WHEREAS, In its rate filing, the PWSB had requested, inter alia, $4,401,400 to fund an infrastructure replacement ("IFR") program in the rate year. The PWSB also identified the need for future rate filings in order to fund necessary IFR projects over the next five years.

WHEREAS, The Commission considered the PWSB's IFR proposal, as well as the comments and arguments of the other parties.

WHEREAS, After considering the complete record relative to the PWSB's proposed IFR plan and its concomitant costs, the Commission authorized the PWSB to collect $4 million "to expense its proposed rate year IFR plan..." (Order No. 14881, p. 118). The Commission also made the following finding regarding future IFR funding:

This Commission is very much committed to the goal of keeping the PWSB's IFR plan viable. Keeping this water system whole and in top running condition directly benefits the majority of people living in this state. The Commission notes that approximately 600,000 Rhode islanders utilize water which originates from the PWSB water system.

After a thorough examination of the PWSB's 5-year IFR plan, we have decided to provide additional subsequent IFR funding so that the PWSB will know that future funding will be available. Our future commitment to this IFR plan, noted and quantified now, should significantly assist the PWSB in keeping its IFR plan on schedule. This additional funding should also help to minimize the frequency of rate increase filings which appear inevitable under the PWSB's IFR aspirations.

Specifically, the Commission will authorize an additional $2 million for the PWSB's IFR plan, for effect beginning with consumption on and after January 1, 1997. An additional $2 million is hereby authorized for effect beginning with consumption on and after January 1, 1998. The PWSB is directed to file appropriate tariffs with the Commission, on or before December 1, 1996 and 1997. We shall reserve the option of conducting a compliance hearing on the filing of the aforementioned tariffs. Moreover, if the PWSB, at the time of these special IFR tariff filings, has either a general or abbreviated rate filing pending before the Commission, we reserve the option to incorporate and consolidate the IFR funding issue into the pending rate case docket. This incorporation/consolidation may result in implementation delays beyond January 1, and/or a modification of the future IFR funding approved herein.

As a final note, the commission, upon the filing of the two special IFR tariff filings, will examine the PWSB's de facto effectuation of its proposed IFR plan. If thereupon the Commission determines that the PWSB is not carrying out its IFR plan as designed and proposed, we reserve the option to modify the future IFR funding approved herein. (Order No. 14881, pp. 119-120).

WHEREAS, The PWSB filed its first supplemental IFR tariff reflecting an additional $2 million for the PWSB's IFR plan, for effect beginning with consumption on and after January 1, 1997, supra, on November 27, 1996. The Division reviewed that tariff filing and supported its approval and implementation. After a thorough examination, the Commission determined that the PWSB's November 27, 1996 tariff filing was in compliance with Order No. 14881 and approved the tariff for effect beginning with consumption on and after January 1, 1997 (Order No. 15167), issued on December 23, 1996.

WHEREAS, The PWSB filed its second supplemental IFR tariff reflecting an additional $2 million for the PWSB's IFR plan, for effect beginning with consumption on and after January 1, 1998, supra, on December 1, 1997.

WHEREAS, The Commission conducted a duly noticed public hearing on December 18, 1997 at the Commission's hearing room located at 100 Orange Street, in Providence, for the purpose of fully investigating whether the instant filing comports with the spirit and letter of Commission Order No. 14881.

The following counsel entered appearances:

FOR THE PWSB:                    Michael R. McElroy, Esq.

FOR THE DIVISION OF

PUBLIC UTILITIES AND

CARRIERS ("DIVISION"):     Elizabeth A. Kelleher, Esq.

Special Assistant Attorney General

FOR THE COMMISSION:     John Spirito, Jr., Esq.

December 18, 1997 Hearing

During the December 18, 1997 hearing the PWSB offered three witnesses in support of its filing. The witnesses were identified as: Jeanne B. Bondarevskis, the PWSB's Regulatory Manager; Mr. Paul Gardoury, the PWSB's Director of Engineering; and Mr. Paul A. Titzmann, the PWSB's Finance Director.

Ms. Bondarevskis was the only witness to proffer prefiled direct testimony (PWSB Exh. 97-1). Ms. Bondarevskis presented a number of cost allocation schedules which had been adjusted to reflect the additional IFR funding amount of $2 million. New tariff schedules were also included which would effectuate the proposed January 1, 1998 rate increase (PWSB Exh. 97-1).

Mr. Gadoury was offered by the PWSB to answer any engineering related questions. In preliminary comments, Mr. Gadoury testified that the PWSB has been spending its IFR funding as planned (12/18/97, Tr. 33-36). Mr. Gadoury maintained that the PWSB "absolutely" needs the requested $2 million in IFR funding in order to continue with its planned IFR projects (Id., Tr. 37-38).

Mr. Titzmann was offered by the PWSB to answer any remaining questions. During the questioning of Mr. Titzmann, he indicated that the PWSB had spent approximately $843,000 of restricted IFR funds to pay for meter replacement related costs (Id., Tr. 90). According to this witness, the PWSB spent the $843,000 to replace about 5100 meters over the last two years (Id., Tr. 89). Mr. Titzmann related that the PWSB made "a conscious decision" to begin using the IFR funds for meter replacement costs in the latter half of 1995 (Id., Tr. 91-92).

The Division did not offer any witnesses during the December 18, 1997 hearing. By way of a statement, the Division represented that its review of the record reflects that the PWSB "has carried out their IFR Plan as designed and proposed" (Id., Tr. 130). The Division did however, express "pause" over learning that the PWSB has been using IFR funds for meter replacements (Id.). The Division opined that this use of IFR funds is "not...in accordance with the Commission's order" (Id.).

February 16, 1998 Hearing

A number of oral and written data requests were propounded by the Commission during and after the December 18, 1997 hearing. These data requests were designed to primarily further explore the matter of the PWSB using IFR funds to finance meter replacements, an action which violates two previous Commission orders, infra. Upon receipt of the data responses, the Commission scheduled and conducted another hearing in this docket on February 16, 1998.

At the February 16, 1998 hearing the PWSB again offered Mr. Paul Titzmann to answer any remaining questions. The PWSB also offered its Supervisor of Metering, Mr. Richard Caruolo, in response to a Commission directive that meter installation personnel be present at the hearing.

During the February 16, 1998 hearing the Commission included all of the PWSB's data responses in the record (Commission Exhs. 98-1, 98-2 and 98-3). A PWSB response to a Division data request was also included in the record (Division Exh. 98-1).

Predicated on the aforementioned data responses, as supplemented by PWSB witness testimony, the following information was evidenced:

- That in addition to the reported $843,032 of IFR funds expedited for meter-related costs through June 30, 1997, the PWSB reported that it expended an additional amount of $88,622 of IFR funds for meter costs between July 1, 1997 and December 31, 1997 (Comm. Exh. 98-1, Response 5).

- That the PWSB purchased 5262 meters with IFR funds (Comm. Exh. 98-2, Response 10).

- That in response to subsequent Commission propounded written data requests, the PWSB admitted that its heretofore representation that it had expended $931,654 of IFR funds on meter replacement costs ($843,032 & 88,622) was "wrong or unclear" (Comm. Exh. 98-2, Response 10).

- That as a consequence of the Commission's scrutiny, the PWSB discovered that it had improperly double counted a $141,562 payment to its meter vendor, which was charged to the PWSB's IFR fund; that it improperly charged $4,370 of general overhead to its IFR account in FY 95-96; that it improperly charged $25,269 of general overhead to its IFR account in FY 96-97; and that it improperly charged $2,616 for couplings and encoder guns (Comm. Exhs. 98-2, Response 7; and 98-3, Response 5). These mistakes represent an aggregate admitted error of $173,817.

- That out of the remaining $757,837 ($931,654 - 173,817), the PWSB now represents that only $315,195 was actually spent on meters (Comm. Exhs. 98-2, Response 7; and 98-3, Response 7). The PWSB now asserts that the balance, $442,642, was not charged to IFR expense (2/16/98, Tr. 20-21, 24-30, 49-50).

At the conclusion of the February 16, 1998 hearing, the PWSB offered a proposal in response to the Commission's concerns over the PWSB's use of $315,195 of IFR funds for meter requirements. The PWSB proposed to repay the $315,195, taken from the PWSB's IFR fund, with a similar amount from the PWSB's restricted debt service meter replacement fund. The PWSB testified that this debt service meter replacement account now has over $800,000 in it. The PWSB also noted that this debt service fund was originally designed and created for the very purpose of replacing meters. The PWSB also stated that if this proposal was acceptable to the Commission, the PWSB would discontinue its current use of IFR for meter replacements. The PWSB further urged the Commission to approve its instant request for additional IFR funding (Id., Tr. 170-172).

The Division's final position reflected a much different resolution to the issue of PWSB's inappropriate use of IFR funds. The Division asserted that "Providence Water should abide by this Commission's orders" (Id., Tr. 172). The Division maintained that the PWSB's request for additional IFR funding should only be approved under three conditions. Specifically, the Division would require:

...that all expenditures related to meters are backed out of the IFR funding and that that money is replaced with funds from other sources. Second, that Providence Water properly account for all IFR expenditures. And third, that they agree on a going forward basis that IFR funds will not be used for meters (Id., Tr. 173).

FINDINGS

The PWSB's application, now before this Commission, seeks tariff implementation approval for the purpose of increasing rates by $2,000,000. This $2,000,000 rate increase was, in a sense, pre-approved by the Commission in a prior order in this docket (Order No. 14881, supra). These funds are earmarked for PWSB infrastructure replacement projects exclusively (See Order No. 14881, pp. 119-120).

In the PWSB's initial general rate filing in this docket, the PWSB filed an IFR plan that identified 59 infrastructure replacement projects which had to be funded within a five year period (PWSB Exh. 8). Under State law, the Commission is required to only approve funding for these projects if they are determined by the Commission to be "just and reasonable" (R.I.G.L. Section 46.15,66(5)). The Commission carefully considered the projects identified and found them to be just and reasonable, and in the best interest of ratepayers.

Predicated upon this finding, the Commission authorized the PWSB to gradually collect $18 million from ratepayers between 1996 and 1998 in order to fully fund the PWSB's IFR plan. The Commission opted for this ramping-up method of IFR revenue increases so that any rate shock associated with raising these necessary capital improvement funds could be mitigated. If this third and final $2 million IFR increase is approved, the PWSB will be financially able to expense $80 million over the next ten years improving and replacing its aged water system infrastructure.

In this proceeding, the Commission was greatly troubled to learn that the PWSB had ignored a Commission directive to not use its approved IFR funds for meter replacement costs (See Order No. 14881, p. 118). The Commission was also frustrated by the PWSB's failure to issue the bonds which the Commission authorized specifically for meter replacement costs. As of the date of this order, over $1,000,000 of ratepayer funds sits languishing in a restricted debt service account.

The Commission acknowledges that the PWSB appealed the Commission's order in this docket denying its motion for reconsideration relative to the issue of whether the PWSB could use IFR funds for meter replacement costs. However, that previous Commission order was never stayed pending the appeal. Consequently, the PWSB was compelled to abide by the order's findings and prohibitions (See Order No. 15126).

It was for these several reasons that the Commission first rejected the PWSB's instant request for an additional $2 million in IFR funds when it first discussed this filing at open meeting in March (See open meeting minutes from March 9, 1998). However, since that open meeting, the Rhode Island Supreme Court issued its decision in the PWSB appeal, and held, inter alia, that the PWSB could properly use IFR funds for meter replacement costs (See Providence Water Board v. Public Utilities Commission, No. 96-600-M.P., issued on March 11, 1998). [1 The Commission has issued a remand order in response to the Supreme Court's decision (See Order No. 15644, decided April 26, 1998).]

Predicated on the Court's decision the Commission has revisited the PWSB's instant request for $2 million in IFR funding. The Commission finds that the record reflects that the PWSB is in substantial compliance with its proposed and designed IFR Plan. Accordingly, the Commission will approve the PWSB's proposed IFR tariff increase. However, due to the fact that the PWSB's IFR-related recordkeeping appears to have been significantly less than stellar, as evidenced by the admitted errors noted above, and because the PWSB has not abided by Commission decisions, the Commission has decided to attach certain reporting requirements and conditions on the IFR funds being approved herein. These requirements and conditions are as follows:

The replacement of aging infrastructure is a common problem for water utilities across the country. Aging pipes, pumps, valves and treatment plants is a major issue confronted by utilities, regulatory bodies and ratepayers. In many cases, these purification and delivery systems were built as much as 50 to 100 years ago. The PWSB has described this as a "critical need". This Commission has explored this situation in detail over a number of dockets. The replacement costs are high and the funding options are limited. Due to the inability of the PWSB to obtain long-term financing for these capital improvements, the Commission, after careful analysis and deliberation, has provided significant dollars in rates to pay for the needed and necessary system improvements. With approval of this request for an additional $2 million, the PWSB will have a full 35.6% of the funds collected from ratepayers allocated toward capital improvements. This is a major initiative and the Commission considers it to be a cooperative effort among ratepayers, the Commission and the PWSB. However, with this allocation of dollars comes certain responsibilities. In the past, the Commission conditioned the increase in rates for infrastructure on the PWSB's continued success in completing work and spending the dollars on intended projects. This responsibility and condition will, of course, continue to exist. However, due to the many problems and difficulties that came to light during this proceeding (and described above), the Commission will impose additional criteria for continued receipt of these dollars. First of all, the PWSB must clearly and fully obey all orders and requirements of the Commission. This has not been the case over the past few years. Secondly, the PWSB must provide timely and accurate information to the Commission and Division. The performance of the PWSB in this docket relative to delays and errors is unacceptable. It should not be a difficult matter to answer questions (whether in written or oral form) in an immediate and accurate manner.

The PWSB is now on notice that a deficiency in any of the areas listed above may result in the Commission eliminating some or all of the funding the utility receives for capital improvements. This effort to improve and replace the physical plant of the PWSB requires a positive relationship with ratepayers and regulators.

To further strengthen the Commission position on this point, the $2 million increase approved herein will be a temporary one. It will have effect through December 31, 1999. At that point, the PWSB can petition for a continuation of these dollars but only after a showing that it has complied with the three criteria listed above. The Commission will also fully review the effectiveness of the PWSB's IFR program at that time.

Furthermore, the Commission finds that an inordinate amount of time was needed to extract necessary and relevant information and data from the PWSB. The Commission believes that the PWSB could have been more forthright in the production of this information and data. As the Commission has concluded that the delays experienced in this case were caused by the PWSB, the Commission shall approve this filing for effect on May 1, 1998, rather than the proposed effective date of January 1, 1998.

Accordingly, it is

(15665) ORDERED:

(1) That the supplemental IFR tariff filing of the Providence Water Supply Board, filed with the Commission on December 1, 1997, pursuant to a previous order in this docket (Order No. 14881), is hereby approved.

(2) That the new rates shall go into effect beginning with consumption on and after May 1, 1998.

(3) That the new rates approved herein shall be effective through December 31, 1999. The PWSB shall thereupon petition the Commission to extend this rate increase beyond that date.

(4) That the Commission's previous decision to deny this filing, as reflected in the minutes from a March 9, 1998 open meeting, is hereby vacated.

Effective at Providence, Rhode Island on April 28, 1998, pursuant to an open meeting decision. Written order issued on July 31, 1998.

PUBLIC UTILITIES COMMISSION