PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON

Transcription

1 9. I E CHARLESTON CASE NO W-MA CITY OF WHEELING, a municipal corporation, Ohio County. Investigation and suspension of increase in water rates and charges as a result of petitions filed in accordance with West Virginia Code Section b. ADMINISTRATIVE LAW JUDGE'S DECISION PROCEDURE On December 1, 1987, the City of Wheeling, a municipal corporation, Ohio County, adopted an ordinance increasing rates and charges for provid- ing municipal water service within and without the City of Wheeling's corporate limits. The rates promulgated by the ordinance, which would be c effective no sooner than January 15, 1988, or 45 days after the ordinance was passed, would increase the rates and charges by 48%. Under the provisions of West Virginia Code b, as enacted on March 10, 1979, and amended on July 1, 1981, the Commission does not have the jurisdiction and authority to review, modify or approve changes in municipal rates which are promulgated by ordinance unless the Commission receives one of the following petitions within thirty (30) days of the adoption of the municipal ordinance: (a) A petition from a customer aggrieved by the changed rates or charges who presents to the Commission a petition signed by not less than twenty-five percent of the customers served by such municipally operated public utility; or P i (b) A petition from any customer who is served by a municipally operated public utility and who resides outside the corporate limits and who is affected by the change in said rates or charges and who presents to the Commission a petition alleging discrimination between customers within and without

2 (c) A petition from any customer or group of customers who are affected by the change in rates who reside within the municipal boundaries and who present a petition to the Commission alleging discrimination between the customers or group of customers and other customers of the municipal utility, if the petition is accompanied by evidence of discrimination. On December 28, 1987, the Commission received a petition from the Citizens Committee, Inc., George Efthemes, Executive Director, alleging that the municipal rates and charges adopted by the City of Wheeling's ordinance were discriminatory. On December 31, 1987, the Commission received a petition from the City of Benwood, Village of Bethlehem, Village of Clearview, Village of Valley Grove, Ohio County Public Service District, Town of Triadelphia, and West Alexander Borough Municipal Authority (collectively referred to herein as "wholesale customers" or "resale customer"), which alleged that the City of Wheeling's rates were discriminatory between customers who resided inside and outside the municipal boundaries. By order entered on January 8, 1988, the City of Wheeling was made a Respondent to a proceeding to review the water rates and charges pro- mulgated by the municipal ordinance, in accordance with the requirements of West Virginia Code $24-2-4b and the Commission's General Order No. // 200.3, which was adopted on September 9, Accordingly, the water rates and charges adopted by the ordinance were suspended and deferred for use until 12:Ol a.m., May 15, 1988, which was 120 days from the effective date of the ordinance. Hearings in the matter were scheduled to be conducted on Thursday, March 17, 1988, to begin at 1O:OO a.m., EST, in the Court Room, West Virginia Independence Hall, 1528 Market Street, Wheeling, West Virginia. As noted by that order, interested parties were permitted -2-11

3 - Virginia Code $24-2-4b. - Once the Commission's jurisdiction was so -3- cw

4 triggered, the City's outside customers, George Efthemes and other interested persons had the ability to appear as Protestants in opposition to any and all the rates contained in the City's ordinance and could seek to intervene in the proceedings as appropriate under Rule 12.6 of the Commission's Rules of Practice and Procedure. Since Mr. Efthemes had not yet sought intervenor status, the ALJ determined it premature to address his legal standing to participate as a party. Finally, the ALJ denied the City's motions to place all rates but its resale customers' rates into effect prior to the end of the suspension period because the City did not establish a financial hardship due to its increased cost of purchased water, as provided by West Virginia Code b(g). The hearing commenced as scheduled on March 17, Appearances were made by John L. Allen, Esquire, on behalf of the City of Wheeling; John Preston Bailey, Esquire, on behalf of the resale customers; and Mary C. Wright, Esquire, on behalf of the Commission Staff. In response to a motion, Mr. George H. Efthemes was granted status as an intervenor, although it was unclear whether he was technically intervening on behalf of himself or the Citizens Committee, Inc., a corporation he formed and whose office is also his residence. Since Mr. Efthemes was not represented by counsel, Mr. Efthemes was provided the opportunity to submit questions for witnesses through Staff counsel. At the conclusion of the March 17, 1988 hearings, the ALJ established a procedural schedule for filing certain requested post-hearing exhibits and for submitting statements of positions or briefs. This procedural schedule was subsequently revised by order entered on March 28, 1988, in response to a Staff motion for an extension of time. -4-

5 In accordance with that procedural schedule, on March 31, 1988, Staff of the Public Service Comnission submitted a revised class cost of service study and rates which reflected modified cost allocation factors to more accurately reflect the effect of resale customers' storage capacity on the City of Wheeling's system demand. According to the schedule established by the March 28, 1988 order, the parties were permitted to make appropriate motions on or before Wednesday, April 6, 1988, for further hearings to examine or challenge Staff's revised exhibits. By order entered April 4, 1988, the Administrative Law Judge scheduled additional hearings on his own motion to receive additional testimony to explain Staff's methodology which was applied to account for the impact of resale customers' storage on system demand. In particular, the ALJ wished to examine the calculations, methodologies and assumptions applied by Staff to derive the 132% maximum day demand factor and the 174% maximum hour demand factor for resale customers with independent storage capacity. Therefore, additional hearings were scheduled to commence on Wednesday, April 6, 1988, in the Commission's Main Hearing Room, 201 Brooks Street, Charleston, West Virginia, beginning at 1:OO p.m. The additional hearings were held as scheduled. At the conclusion of the April 6, 1988 hearing, the briefing schedule was modified to permit all parties of record to submit initial briefs or statements of positions on or before April 13, 1988, and reply statements or briefs on or before April 18, 1988., EVIDENCE The first public witness in the proceeding was Woodrow Miller, 1 President of Ohio County Property Owners Association, who was speaking on I1-5-

6 his own behalf. In his statement, Mr. Miller stated that he wants the City's water and sewer public works to be consolidated to make operations more efficient and less costly. Mr. Miller also questioned the need for some of the City's proposed improvements. (Tr , pp ). Mr. Leo Robb, who is an ex-city Councilman, objected to the magnitude of the City's proposed rate increase, and desired a gradual increase to reduce the rate impact on the City's affected customers. (Tr , p. 19). Robert Harding, Chairman of the Board for the Wheeling Area Chamber of Commerce, spoke on behalf of its Board, officers and members. Mr. Harding's statements were in favor of the proposed rate increase. He testified that after repeated meetings with City officials, the Chamber of Commerce is convinced that the City's proposed rate increase and associated upgrades, improvements and maintenance programs to be supported by those rates are necessary to provide reliable, safe and adequate water service and provide for expansion and improved quality of life in the community. Mr. Harding stated that although the percentage of increase is substantial, he believed that the resulting rates to the City's average customer would still be among the lowest in the State. (Tr , pp ). Don Berakis, maintenance employee for the City of Wheeling Water Department, testified that the City has endeavored to improve its plant and facilities, and perform necessary maintenance and repairs to keep its system in good operating condition over the years. However, in recent years, he testified that a lack of funds has made it increasingly difficult to do the repairs as needed. Therefore, Mr. Berakis had observed a 11 PUBLIC SE RVlCE COM M ISSlON -6-

7 definite decrease in the City Water Department's repair and maintenance activities. (Tr , pp ). Mark James, an Economic Consultant with the Wheeling Power Company, spoke as an individual who is familiar with the economic development needs of the community. Mr. James spoke in favor of the City's requested increase on the basis that a sound, reliable water system is needed to improve the City's business climate and attract new industry. (Tr , pp ). Jack Lipphardt, a Methodist Minister who is also a member of the Wheeling City Council, spoke in favor of the increase on the basis that it was needed to properly maintain the current water system and do the capital improvements on the water system to sustain the City's future water needs. Although Mr. Lipphardt works with the Carpenter House, a local social service agency which works with low income families, Mr. Lipphardt did not believe the proposed rates would produce an undue burden on the City's low income customers. (Tr , pp ). George H. Efthemes, an Intervenor to the proceeding, is a retired government professional engineer. Mr. Efthemes testified that the City of Wheeling officials have failed to properly maintain the utility's water tanks, reservoir and the overall water system over the past 10 years. Mr. Efthemes was opposed to increasing the City's rates to upgrade and improve items which would have been unnecessary if the City had implemented an acceptable preventive maintenance program. Therefore, Mr. Efthemes was opposed to the City's bond issue to finance capital improvements on the system, and he objected to paying for that borrowing through the City water rates. (Tr , pp )

8 Mr. Efthemes also observed that the City was serving customers beyond the City limits in a manner which was not contemplated by the system's original designers. While Mr. Efthemes is not opposed to the City serving these outside customers as wholesale customers or resale customers, he is opposed to rates which require the citizens of Wheeling to effectively subsidize the cost of providing water service to those outlying areas. (Tr , pp ). As a final observation, Mr. Efthemes also objected to expenses that the City of Wheeling incurred for outside legal services when it had its own City solicitor. (Tr , pp ). The City of Wheeling introduced three exhibits for consideration. City Exhibit No. 1 included a copy of the City's ordinance, proposed rate schedule and all financial information illustrating the basis of the water utility's requested rates and changes which were adopted by the City Council. City Exhibit No. 2 was a Rule 42 Exhibit which set forth the City's anticipated revenue requirements and expenses, debt service requirements, and a bill analysis for the respective customers. City Exhibit No. 3 comprised the City's response to various data requests and requests for information submitted by the Staff of the Public Service Commission of West Virginia. Lloyd Adams, City Engineer and Director of Public Works of the City of Wheeling, testified that approximately $359,000 of the City's requested 48% rate increase was to be earmarked for operation and maintenance expenses. Approximately $34,000 of this money was to make up for a perceived revenue shortfall in the water utility's prior budget, and the remaining $325,000 was to meet increased operation and maintenance expenses for the City Water Company's projected budget. A specific I -8-

9 breakdown of the $325,000 of increased expenses is set forth in Schedule I, "Anticipated Expenses", found on page 4 of City Exhibit No. 1. Mr. Adams proceeded to describe each anticipated expense. (Tr , pp ). Mr. Adams further testified that approximately $542,355 of the City's requested 48% increase, was to be used by the City to finance approximately $6, 000, 000 worth of capital improvements which have been proposed by the City. An extensive engineering study of the City of Wheeling system was undertaken in 1986 by outside consultants. This report, which was identified as the Stilson Report, lists approximately $20,000,000 worth of projects for improvements and capital additions to the City's water system. Mr. Adams testified that the City officials reviewed the conclusions of the Stilson Report, and selected projects which would provide the most beneficial results to the City's water customers. Accordingly, the City determined that approximately $5,662,000 worth of projects recommended by the Stilson Report should be undertaken by the City. (Tr , pp ). The capital improvement projects selected by the City were set forth on Schedule 2, Water Division Capital Improvement Projects, which is found on page 9 of City Exhibit No. 1. Mr. Adams proceeded to describe each project listed on Schedule 2 and explain how the need and estimates were derived from the Stilson Report. (Tr , pp ). The City intended to finance these capital improvement projects by seeking a $6,000,000 bond issue from the Water Development Authority (WDA), at an interest rate of approximately 8%. Based on information received from the WDA, a $6,000,000 borrowing from the WDA would require. -9-

10 an annual debt service of $542,355 to be included in the City's rates. (City Exhibit No. 1, page 8 and Tr , p. 81). On cross-examination, counsel for the City and the City's witness recognized that the Staff of the Public Service Commission contended that many of the City's proposed capital improvement projects would require a certificate of convenience and necessity from the Commission before it could proceed with the construction of the projects. Therefore, the City agreed and stipulated that it would not include funding of capital improvements which would require a certificate of convenience and necessity from the Commission and would not expect to recoup the cost of funding such projects through rates until the projects have been designed and approved. (Tr , pp ). However, Staff testified that the City should proceed with some of these projects which would not require Commission certificate approval by funding specific projects through the City's remaining surplus provided by Staff's proposed rates. Thomas Beatty, Finance Director for the City of Wheeling, sponsored the City's Accounting Exhibit, City Exhibit No. 2, which itemized the various expenses anticipated by the City. He gave additional testimony on the various expenses incorporated in the City's requested rate increase. (Tr , pp ). Mr. Beatty also testified that the City's recommended rate structure was based on a two-step block structure which was developed in the City of Wheeling's prior rate case. Essentially, the City of Wheeling spread its proposed 48% rate increase evenly among all customer classes and rate blocks. (Tr , pp ). In response to cross-examination by Staff, Mr. Beatty testified that he had reviewed the Staff Rule 42 Exhibit which was prepared by Thomas Sprinkle, and he accepted the per books figures and going-level ='II" m 1n -LU-

11 adjustments noted by Mr. Sprinkle with a few exceptions. (Tr , pp ). With those stated reservations, Mr. Beatty accepted Staff's characterization of the City of Wheeling's per books expenses and going-level adjustments, and abandoned the City's proforma adjustments. (Tr , pp ). Mr. Beatty's specific reservations will be discussed in further detail in conjunction with Mr. Sprinkle's testimony. Thomas D. Sprinkle, Senior Utilities Analyst with the Public Service Commission, prepared Staff's Rule 42 Exhibit, identified as Staff Exhibit No. 1, after conducting an audit and investigation of the City's books and records. In performing Staff's audit, Mr. Sprinkle reviewed the operating records of the City of Wheeling for the year ended June 30, 1987, to determine the Company's per books revenues, expenses and shortfalls. Mr. Sprinkle then made going-level adjustments for major expense categories based on an analysis and measurement of demonstrated price level changes, and applied an inflation factor to all remaining items and expenses which are not readily subject to a detailed analysis. The Staff applied an inflation factor of 6.4% to expense items for which known and measurable changes could not be determined by a detailed analysis. Staff's inflation factor assumes that the new rates would become effective May 15, (See Transmittal Letter, dated March 14, 1988, at the beginning of Staff Exhibit No. 1). Mr. Sprinkle's going-level adjustments included pay increases which were given to City employees during the test year and increased benefits which were included in the City's 1988 through 1989 budget. (Staff Exhibit No. 1, Transmittal Letter, Statement G, Adjustment No. 4). Among other adjustments, Staff disallowed $38,431 which was expensed during the test year for a comprehensive water system evaluation which was -11-

12 previously identified as the Stilson Report. Staff also disallowed $2,025 in outside legal fees which were incurred above the $425 monthly retainer of John L. Allen as the Water Department's attorney. Further, Staff adjusted the City Administrative fee paid by the Water Department to the City from $60,299 to $15,184. Staff was of the opinion that the $60,299 charge was not cost justified so Staff reduced the level of these outside services to the level approved in the last municipal appeal rate case (Case No W-MA1, with adjustments to reflect the overall percentage increase of the City's general fund expenditures between 1983 and Further, upon the recommendation of Staff Engineer C. E. Windham, Jr., Staff's audit report included annual expenses for meter testing and tank painting, which were needed to be done on a regular basis. Finally, Staff made other adjustments to reflect revenues and costs which fairly allocated the greater portion of the customer accounting and collection expense allocations and accounting and bookkeeping functions that are performed on behalf of, or jointly with, the Water Pollution Control and Sanitary Board of the City of Wheeling. (See Staff Exhibit No. 1, Transmittal Letter and Statement G). After reviewing Staff's Rule 42 Exhibit, Thomas Beatty only objected to certain Staff adjustments to the City of Wheeling's purchased power expenses and chemical expenses, Staff's elimination of costs paid to consulting engineers for the Stilson Report and Staff's adjustment to the Water Department's share of the City's administrative expenses. Mr. Beatty testified that the City bills its overall administrative expenses to the City's Enterprise Fund. The costs and expenses included in this billing would include the cost of operating and maintaining administrative departments which allegedly perform outside services on

13 behalf of the City Water Department, including the City Council, the City Manager Office, the City Engineer, Data Processing Department, Financing Department, the City Solicitor, and other types of administrative offices. Once the total cost of the City administrative expenses are determined and included in the City's general fund, these expenses are allocated to each City department, based on the number of employees within each department. In this manner, the City determined that approximately 11% or 12% of the administrative expenses provided by the City's general fund should be allocated to the Water Department, resulting in the $60,299 fee. (Tr , pp ). Mr. Sprinkle disagreed with the way the City allocated administrative fees to the Water Department. He did not believe that the administrative expenses would be more accurately allocated based upon the time study or some other methodology which more reliably matches the expenditures with functions performed by the City officials on behalf of the Water Department. Since Mr. Sprinkle did not believe that the level of administrative services provided on behalf of a department bore a reasonable relationship to the number of employees in that department, he believed that Staff should refer to the last accepted methodology for allocating the City's general administrative fees as applied in the City of Wheeling's last rate case. (Tr , pp , 178, ). Mr. Beatty noted that $38,431 was expensed toward the Stilson Report during the test year to pay for the engineering services, since no funding sources were available to proceed with the project. Mr. Sprinkle testified that the cost of the Stilson Report should be carried as a deferred account for ratemaking purposes, and those costs should eventually be incorporated in project costs and paid when the project is constructed and I -13-

14 capitalized. Mr. Sprinkle also noted that this expense would be a nonrecurring expense, and one-time capital expense items should not be reflected in rates as an operation and maintenance item. Such treatment would improperly reflect that one-time expense as a continuing source of revenue for the system. (Tr., , pp , 184). Mr. Beatty agrees that it should have been booked to a deferred account for ratemaking purposes and recouped at a point in time when the projects were funded. Therefore, Mr. Beatty admitted that those expenses should have been recouped through future project costs instead of recovered through rates at this time. (Tr , pp ). The City objected to Mr. Sprinkle's reflection of an $8,000 savings in purchased power as a result of the installation of a new Capacitor because that new capacitor had not yet been installed (Tr , pp ), and the City had similar objection to cost savings flowing from the installation of a new coagulant feed system. Mr. Sprinkle testified that both of these cost savings were based on the recommendation of Staff Engineer Windham that the City proceed to install the capacitor, fluoride feed system and coagulant feed system as soon as possible, since those capital improvement items would not require a certificate in Mr. Windham's opinion and they would provide an immediate benefit to the system. (Tr , pp ). Staff Engineer C. E. Windham gave testimony regarding three major areas. First, Mr. Windham reviewed the City's proposed projects to determine whether they should be appropriately included in the City's rates. Second, he reviewed the City's operations and engineering requirements to develop engineering allocation factors to be applied in a Staff cost of service study to fairly design rates which recovered revenues from -14- I1

15 the various customer classes according to the City's cost of providing service to those customers. Finally, Mr. Windham recommended approval of appropriate capital improvements and determined a reasonable amount of cash surplus to be incorporated in the City's rates to properly fund the necessary plant additions. In the course of his investigation, Mr. Windham examined the Stilson Report and the City's proposed capital improvement projects. Based upon his review, he submitted an analysis and recommendations regarding the proper treatment and consideration of the various capital improvement projects and the impact of these projects on the City's operation and maintenance expenses. (Staff Exhibit No. 2.). After reviewing the City's proposed capital improvement projects, Mr. Windham was of the opinion that a number of these proposed capital additions would require certificates of public convenience and necessity from the Public Service Commission, in accordance with West Virginia Code These particular projects included construction and replacement of storage capacity on the City of Wheeling's system, certain improvements to the City's raw water intake and main pump station, and the replacement or improvement of the City's transmission and distribution lines. Based upon the Stilson Report, Mr. Windham was of the opinion the total cost of the proposed projects requiring a PSC certificate was $4,092,575. (See list, page 1 of Staff Exhibit No. 2). However, Mr. Windham also maintained that a number of the proposed capital improvements did not require a certificate of convenience and necessity, and such projects could be performed as capital improvements to the City's system and financed by the City's remaining surplus generated through rates after the utility's normal operation and maintenance expenses and debt service requirements have been met. These items -15-

16 consisted of 11 items listed in the Stilson Report, including $763,000 in main replacements and $385,000 of other items of construction, and $234,600 in additional capital improvements which were not reflected as capital improvements in the Stilson Report. Mr. Windham testified that in determining whether the various capital improvements would require Commission approval in the form of a certificate, he determined whether or not the capital addition or improvement could normally be done in the ordinary course of business, whether the capital improvements were going to require additional or substantial financing other than what would ordinarily be funded through the utility's rates, whether the capital addition constituted a new item or expansion of the system as opposed to the replacement of the existing system, and whether the nature of the individual project would require extensive engineering design which would need to be reviewed by the Department of Health Engineers as well as Commission Engineers in order to adequately protect the public interest. (Tr , pp , ). Mr. Windham recommended that the improvements which could properly be performed without certificate approval be done over a period of years. He further recommended that the $763,000 in main replacements included in the Stilson Report be accomplished over a 10-year period. He recommended that the $385,000 in capital improvements and the $234,600 in capital improvements which were listed on page 2 of Staff Exhibit No. 2 be performed over a five-year period. Although Staff's recommended capital additions would be performed over time, Mr. Windham recommended that the 300 KVAR capacitor, the fluoride feed system and the coagulant feed system be installed as soon as possible. According to the Stilson Report, although the capacitor was estimated to cost $5,000 to install, it would produce PUBLIC SERVICE commission -16- m I1

17 approximately $8,000 in additional energy savings each year. Therefore, the benefits of installing this capacitor would be flowed through immediately to the City of Wheeling, and these annual expense savings were reflected in Staff's recommended rates. Mr. Windham also recommended that the coagulant feed system and fluoride feed system be installed as soon as possible to improve the City's chemical treatment of the water, and the Stilson Report indicate these systems could be installed at a total cost of $45,000. Once installed, the fluoride feed system would increase Wheeling's chemical expenses by approximately $1,250, but the installation of the coagulant feed system was estimated to save the City of Wheeling approximately $4,450 per year in chemical expenses. Since these improvements were considered to be a high priority, Staff reflected the impact of installing these feed systems in the City of Wheeling's going-level operating expenses. (See Tr , p. 210; Staff Exhibit No. 1, Statement G, Adjustments No. 3 and 7). Mr. Windham also reviewed the City of Wheeling's anticipated expenses which were engineering related, and calculated the utility's cost of testing and replacing its water meters, replacing and maintaining its vehicles and painting its tanks based upon accepted preventative maintenance programs and operating practices. (See, Staff Exhibit No. 2; Tr., , pp ). The costs of these maintenance programs were amortized and reflected in the City of Wheeling's operating expenses as recurring annual expense. Finally, after reviewing the City's unaccounted-for water levels for the test year, Staff determined that the City of Wheeling needed to do a leak detection survey to identify the location of leaks on its system and to prioritize the schedule of line replacement. From his observations, I1-17-

18 the unaccounted-for water level has increased from 1.2 million gallons per day to 1.5 million gallons per day, based on test year data. This increase in unaccounted-for water represents a slight increase from the last case, and the City's current unaccounted-for water levels are 19.4%, which exceeds the 15% which is considered to be a maximum acceptable level for water utilities. (Tr , pp ). Mr. Windham also sponsored the engineering allocation factors which were used in Staff's cost of service study to design Staff's recommended rates in this proceeding. As noted by Mr. Windham's testimony, Staff performed the cost of service allocation study in an attempt to match the water system's revenues to the various expenses of serving a number of different classes of customers who have different water use patterns and place various demands and service conditions on the City of Wheeling's system. In short, the City of Wheeling must build and maintain adequately sized facilities to meet normal loads imposed on its system, as well as the fluctuating demands or peak loads imposed on its water system to provide adequate water service to residential customers, commercial customers, industrial customers, resale customers, and to provide fire service. Since some customers use water generally uniformly during the day, while others consume most of their water during a short interval of time, the Staff cost of service study attempts to functionalize the City of Wheeling's overall cost of providing service according to commodity-based expenses, customer-based expenses, maximum demand expenses and maximum hour expenses. At the same time, Mr. Windham developed engineering factors which scrutinizes the various customer class usage patterns to determine how those functionalized costs should be fairly allocated between the customer classes I1

19 The method of cost allocation which was applied by the Staff in this case is primarily based upon a methodology developed by a water rate committee of the American Water Works Association in It is considered by Staff to be the most modern and up-to-date method of cost allocation for water utilities because of the manner in which it treats costs associated with peak demands, or the cost of providing water service at usage rates which exceed the average requirements imposed on the water system. However, the Staff is continually refining the methodology in an effort to more accurately assign costs. The cost allocation methodology applied by the Staff in this case is the same basic methodology as was applied in the City of Wheeling's last rate case, Case No W-MA, with one modification. In the last case, the Staff's class cost of service study did not reflect any impact of wholesale customers' storage on the peak demand imposed by those customers on the City of Wheeling's system. In recognition of the fact that the existence of storage capacity on a resale customer's system should buffer or reduce the resale customer peaks and fluctuating usage patterns which must be satisfied by the City of Wheeling's system, Staff has modified its cost of service study to reflect reduced peak demands when resale customers have independent storage capacity. (See Staff Exhibit No. 3; Tr , pp , ). Mr. Windham described his methodology for calculating the maximum day and maximum hour demand factors for resale customers with independent storage in great detail. As noted by Mr. Windham, the American Water Works Association has established maximum day and maximum hour demand factors for residential, commercial and industrial customers. These factors, which are based on field studies and investigations of existing 1-19-

20 systems, have been adopted as industry standards which reflect the rela- tive impact of those customer classes on overall system demand. The Staff determined the number of residential, commercial and industrial customers of each of the seven resale customers served by the City of Wheeling. For those resale customers who did not have storage capacity, the Staff applied the AWA factors to the respective customers served by the resale customer, and determined a weighted average demand factor for that resale customer. For resale customers who had their own storage, Staff calculat- ed a theoretical demand factor with the use of actual monthly consumption data, as follows: 1. First, Staff determined the month of maximum usage from actual data in the test year and compared the average day in the maximum month to the average day throughout the year. (Based upon Mr. Windham's work papers, which were submitted as ALJ Request Exhibit No. 1, the ratio between the maximum monthly usage for customers with independent storage capacity was approximately 115% of their average daily use). 2. For purposes of analysis, Staff assumed that the maximum day usage for those customers would occur during the maximum month, and the maximum hour usage for those customers would occur during the maximum day. 3. To determine the maximum day consumption for the resale customers with independent storage, Staff assumed that the ratio between the resale customers' maximum day consumption and their average day consumption during the maximum month would be the same as the ratio between the customers' average day consumption during the maximum month to the customers' average day throughout the year. Once this assumption is made, the ratio between the maximum day and the average day would be the square of the average day in the maximum month to the average day, as follows: - Avg. day max. mo. - Avg. Day Max. day Avg. day max. mo. 2 Max. day ratio = = (Avg. day m+x. mo.) (Avg. day)" 4. Similarly, Mr. Windham assumed that the ratio between the maximum hour and the average hour in the maximum day would be the same as the ratio between the maximum day and the average day. Once that is assumed, the ratio between the maximum hour and the average hour would be equal to the square of the maximum day -20-

21 ratio, which is in turn equal to the fourth root of the ratio between average day in the maximum month and the average day, as follows: Max. hr. - Max. day Avg. hr. max. day Avg. day Max. hr. - Avg. Hr. max. day x Max. day Avg. hr. Avg. hr. Avg. day Since Max. Day = 24 x Avg. hr. max. day and Avg. Day = 24 x Avg. hr. Then Max. hr. (Max. day) 2 = (Avg. day max.,mo.i 4 - Avg. hr. (Avg. day) (Avg. Day) ' 5. Once these respective factors are derived, these theoretical averages were applied by Staff in the same manner as AWA factors to determine the respective demands the resale customers with storage placed on the City of Wheeling's system, except the maximum hour demand for a pump storage tank was determined according to size of the pump. In essence, Staff's method provides that maximum month ratios are the square root of maximum day ratios which are in turn the square root of maximum hour ratios. Since the maximum month ratio for resale customers with their own storage was 1.15 in the past year, the maximum daily demand factor for resale storage customers was calculated by Staff to be 1.32 and the maximum hourly demand factor was calculated to be After all these factors were collectively weighed, Staff concluded that the comprehensive maximum day demand factor for resale customers, both with and without storage, was %, and the maximum hour demand factor for those same customers was 223%. (See ALJ Request Exhibit No. 1, ALJ Request Exhibit No. 2, Staff Exhibit No. April 6, pp , 41-53). 5, pages 6A and 6B and Tr., As noted by AWA factors stated on page 6A of Staff Exhibit No. 5, the resulting AWA factors for all resale customers, whether or not they have storage capacity, is slightly higher than the

22 AWA factors for industrial customers, which have a fairly level demand, but the theoretical demand factors for resale customers with storage is significantly below the accepted AWA demand factor for industrial customers. Upon receipt of certain post-hearing information, the Staff redetermined its weighted average demand factors through the best available information regarding ownership, location and functioning of the various resale storage tanks. Based upon information made available to Staff, Staff concluded that the peak demands for the various resale customers were met as follows: 1) Benwood has its own tank with an altitude valve which meets approximately 10% of Benwood's peak demands; 2) Bethlehem is supplied through a storage tank and booster pump with a maximum capacity of 235 gallons per minute; 3) Clearview has its own storage tank and booster pump with a maximum capacity of 84 gallons per minute; 4) the systems of Valley Grove and Triadelphia are served through a Triadelphia storage tank. (The Triadelphia storage tank is located so that it meets about 30% of the peak demands for Triadelphia, but the Valley Grove system is served exclusively through the Triadelphia storage tank); 5) Ohio County PSD has four basic points of connections: Ohio County PSD No. 6 and No. 10 demands are met directly by the City of Wheeling's tanks, Ohio County PSD No. 7 is served by its own storage tank and pump with a maximum capacity of 175 gallons per minute, and Ohio County PSD Nos. 8 and 11 are served through their own storage tank and booster pump with a maximum capacity of 650 gallons per minute; and, 6) West Alexander is served through the Ohio County Public Service District. (See Staff Exhibit No. 5, pp. 2-4). =mn m qq -LL-

23 Diane Davis Trump compiled the Staff class cost of service study which incorporated the engineering allocation factors derived by Mr. Windham and designed a tariff which recaptured revenues from the respective customer classes in the manner which fairly represented the cost of providing service to those classes. Ms. Trump also sponsored the revenue requirements which Staff recommended for the City and recommended rate and tariff modifications on behalf of the Staff. Staff Exhibit No. 4 repre- sents the computation of Ms. Trump's class cost of service study and revenue requirement recommendations in this case. Based upon Staff's Rule 42 Exhibit, the City had operating revenues of $2,162,829 at going level, operation and maintenance expenses of $1,902,092, depreciation and amortization expenses of $341,894, other income of $85,414, other income deductions of $88,748 and an existing debt service of $219,134. Based upon Staff's analysis, at going level, the Company had a net income deficit of $84,491 and a debt service coverage of On a cash flow basis, after operating and maintenance expenses and debt service requirements have been paid, the City's cash flow demonstrated that the City had $127,017 as a surplus to meet capital additions at going level. Staff determined that this going-level surplus was inade- quate to meet the utility's five-year average of plant additions, adjusted for inflation, which was determined to be $202,998, and Staff's recommended level of plant additions. (See Statements A and H of Staff Exhibit No. 1). Based upon the operating expenses and debt service requirements determined by the Staff audit report and the level of capital additions represented by Mr. Windham's recomendations, Staff determined that the City's rates should be designed to produce an annual revenue of -23-

24 approximately $2,212,030. After the Water Department and other operating revenues and income were added to the revenues generated by the rates, and subtracting the City's operating and maintenance expenses, taxes and debt service requirements, the Staff recommended rates produced a surplus of $345,000. (See Staff Exhibit No. 4, Schedule No. 4). This level of surplus was adequate to fund Staff's recommended plant additions to be accomplished over the next few years according to Mr. Windham's recommen- dations. In total, the Staff recommendations and completion schedules for plant additions would require an annual expense of $343,031 additions. (See Staff Exhibit No. 4, Schedule 5 ). for plant Schedules 1 and 2 of Staff Exhibit No. 4 illustrate how the various operating expenses of the Company were functionalized according to maximum day expenses, maximum hour expenses, commodity expenses, customer expenses and direct fire expenses. Schedule 1 shows how those various functionalized expenses were allocated to each customer class according to the engineering cost allocation factors developed in Mr. Windham's study. The first page of Staff Exhibit No. 4 summarizes the total allocated cost according to customer class and illustrated how the City's going-level rates would recover revenues from each class. With the aid of a computer? Staff blocked and designed rates to recover the revenues from the customer classes in a manner which approxi- mates the cost of providing service to those same customer classes. Based upon the computer analysis, Staff recommended a rate schedule which had a three-tiered structure. charges : Staff recommended rates provide the following First 1,000 gallons per month $3.00 per 1,000 gallons Next 499,000 gallons per month $.96 per 1,000 gallons Over 500,000 gallons per month $.54 per 1,000 gallons =mn -24-

25 (See Staff Exhibit No. 5, Revised Schedule 6, attached to Staff Exhibit No. 5). On a total sales revenue basis, Staff's recommended annual revenue level of $2,212,038 represents approximately a 10.86% increase in rates, which is substantially lower than the Company's requested increase of 46.2%. However, the figure for the percentage increases for each class of customer varies as a result of Staff's class cost of service study. Based upon the results of the study and Staff's recommended rates, the residential class would see an effective rate increase of 17.3%, the City's commercial class would see an increase of approximately 16.2%, the City's industrial and public classes would experience an increase of approximately 4%, the resale customer class would experience a decrease of 10.7%, and the City's fire service would increase by approximately 10.86%. (See summary of Staff's revised class cost of service study, Staff Exhibit No. 5). After reviewing the City's proposed tariff provisions, the Commission Staff rejected a $10 charge for returned checks because bad check charges are against Commission policy. Accordingly, the costs of bad checks should be recovered through the Company's general rate structure. Ms. Davis also noted that the City's recommended connection fees varied according to the size and types of meters. Staff has recommended a single connection fee which is increased from the City's existing level of $200 per tap to $250 per tap. Ms. Davis noted that the connection fee is established as a contribution in aid of construction and is not designed to recover all the costs of providing the tap. The Staff recommended tariff also approved the City's proposed increase in its reconnection charge from $10 to $15. (Tr , pp ). I1-25-

26 Finally, Staff recommended an increase to the City's public and private fire service tariff which reflected an increase equal to Staff's overall recommended revenue increase of 10.86%. The City had not proposed to increase this tariff. This modification accurately recovered the cost of the City making such fire service available. (Tr , p. 220). DISCUSSION The resale customers in this case fully support the Staff's positions in this case. In their opinion, Staff's cost of service study has confirmed what they have maintained for a period of time; namely, that the existence of resale customer storage capacity reduces the effective peak demands placed on the City of Wheeling system by resale customers and the City's associated cost of serving those customers. The resale customers had made a similar argument in Wheeling's last rate case which was rejected, and they welcomed the Staff refinement in Staff's cost of service methodology. The resale customers also believed that Staff's adjustments to the City's various operating expenses reflected known, measurable and reliable estimates of the City of Wheeling's going-level expenses. (See Initial and Reply Resale Customers' Statements of Positions filed respectively on April 14 and April 18, 1988). The City basically agreed with the Staff's assessment of its needed level of revenue. As long as it is determined that certain projects require certificate approval, the City agrees that the cost of funding such projects should not be reflected in rates until they are approved. (Tr , pp ). The City's only objections made on the record were the Staff's treatment of the payment made by the City for the Stilson Report, the Staff's reduction of City administrative expenses which are -26-

27 shown as outside services, and the Staff's reflection of cost savings from the anticipated installation of a 300 KVAR capacitor and the fluoride and coagulant feed systems by the City. (Tr , pp ). Finally, the City disagreed with Staff's modified rate structure because it was based on a cost of service study which reflected invalid assumptions and misinformation concerning the impact of resale customer storage on the City of Wheeling's system demand. The City believes that the cost of service format applied by Staff in Case No W-MA would more accurately reflect the City's cost of serving the respective customer classes, and the City observes that its proposed rate structure is based upon Staff's prior cost of service study. (See City of Wheeling Statement of Position, filed on April 13, 1988). Staff's positions were further supported by Staff's Initial and Reply Briefs, respectively filed on April 13, 1988 and April 18, ALJ After review of the various arguments and positions in this case, the accepts Staff's assessment of the City's per books and proforma revenue requirements and the Staff recommended revenue levels. As correctly noted by Staff, many of the capital improvements which the City intended to finance through its proposed rates require a certifi- cate of convenience and necessity from the Commission before they can be constructed. West Virginia Code provides, in part: No public utility, person or corporation shall begin the construction of any plant, equipment, property or facility..., except ordinary extensions of existing systems in the usual course of business, unless it shall obtain from the public service commission a certificate of public convenience and necessity requiring such construction... The Commission certificate process provides a forum in which the need, engineering feasibility and financial feasibility of construction projects are scrutinized, and the affected customers are given public notice and an II 1-27-

28 opportunity to protest the project as a part of that review process. By statute, the only exempted construction projects are ordinary extensions of the utility's facilities which are accomplished in the usual course of business. The Administrative Law Judge admits that the statutory characterization of "ordinary extensions of existing systems in the usual course of business" is somewhat nebulous, but it has been more clearly defined by a case-by-case analysis of contemplated projects. In summary, the established Commission policy provides that the following construction projects need to be certificated: Projects which require substantial engineering design; projects which require long-term financing to be accepted by the utility in the form of grant monies or loans, as opposed to being funded as an ordinary extension of the utility's system under Rule 5.05 of the Commission's Rules and Regulations for the Government of Water Utilities or funded through a utility's normal surplus; or projects which initiate a service obligation or territory which should be supported by public need. All such projects would require that the interest of existing or prospective customers be protected by the Commission's certificate review process, which is the primary focus and obligation under Code $ It is clear that the utility's contemplated $6,000,000 borrowing to collectively finance the varied projects is a comprehensive project which requires a certificate to adequately protect the public interest. Further, many of the individual projects, if viewed in isolation, present engineering and technical concerns which require Commission scrutiny to adequately protect the public interest. The ALJ also agrees with Staff that the specific projects listed on page 2 of Staff Exhibit No. 2, which is also attached to this order as -28-

29 Appendix By can properly be installed or constructed without further Commission approval to the extent that they are funded by the utility's revenue surplus produced by rates, after the utility's operating expenses and debt service requirements have been satisfied. Mr. Windham has testified that the identified projects would constitute standardized improvement, replacement or extension of the utility's existing system which do not require extensive engineering, and their construction or installation in this manner would not increase the utility's debt service, rely on public fundings, or impact future rates, all of which would require further Commission or public scrutiny. Therefore, the City shall be required to obtain a certificate of public convenience and necessity with respect to the construction projects listed on page 1 of Staff Exhibit No. 2, which is attached to this order as Appendix A. No provisions shall be made in the City's approved rates to fund these projects, and such funding should not be recouped through rates until an appropriate certificate has been approved. The approved rates shall be designed to produce a surplus which is adequate to fund the capital additions listed in Appendix B according to the recommended amortization schedule established by Mr. Windham's testimony. The City should note, however, that the funding of these projects could also be included as part of a subsequent certificate project which encompasses all or part of the projects listed in Appendix B. The Staff's treatment of the various projects is consistent with prior Commission determinations that a certificate of convenience and necessity for the major upgrading of existing facilities, and the financing of such construction, cannot be approved in advance of the certificate case filing. See Union Public Service District, Case No S-42TY I1-29-