VIRGINIA at the Capitol in the City of Charleston on the 17th day PROCEDURE. On June 9, 1976, West Virginia Water Company, a corporation,

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1 I "*a y &e*" PUBLIC SERVICE COMMISSION CHARLES TON At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA at the Capitol in the City of Charleston on the 17th day of June, CASE NO WEST VIRGINIA WATER COMPANY, a corporation. In the matter of increased rates and charges (Webster Springs District) PROCEDURE On June 9, 1976, West Virginia Water Company, a corporation, filed revised sheets to its Tariff P.S.C. W.Va. No. 1, stating an increase of approximately fifteen per cent in rates and charges for furnishing water service at Webster Springs and vicinity, Webster County, to become effective July 9, By order entered June 10, 1976, West Virginia Water Company was made respondent to this proceeding and the revised tariff sheets were suspended and the use of the rates and charges stated therein deferred until November 5, 1976, unless otherwise ordered by the Cornmission, to enable the Commission to examine and investigate the supporting data filed with said revised tariff sheets and to provide time for the Division of Accounts, Finance and Rates to make a study and report. Said order further provided that respondent, before placing said rates into effect, enter into a bond with surety approved by the Commission in the amount of $15,000, conditioned for the refund to the persons or parties entitled thereto of the amount of excess if such rates were subsequently determined to be higher than those finally fixed for the respondent, plus interest to be determined by the Com- mission, as required by Chapter 24, Article 2, Section 4, of the Code of West Virginia, as amended. Having been advised by the respondent that it intended to place the increased rates and charges into effect at the end of the I._ -~ ~ ~ PUBLIC SERVICE COMMISSION CHARLESTON -

2 suspension period, the Commission entered an order on October 21, 1976, setting the interest rate on said bond at 6 3/4%. A proper bond was furnished on November 18, 1976, and the increased rates and charges were placed into effect. By order entered November 3, 1976, this matter was set for hearing to be held in the Commission's Hearing Room at the Capitol in the City of Charleston on January 21, 1977, at 9:30 a.m., EST, and the respondent was directed to give notice of the filing of its revised tariff sheets and of the time and place of hearing thereon by proper posting and publication. Proper notice was given and the hearing was held as scheduled. The respondent was represented by F. Paul Chambers, Esq., and Michael A. Albert, Esq., its counsel. The Commission staff was represented by Paul L. Teare, Legal Division; Cleo McGraw and S. H. Dickson, Accounting Division; and Harry W. Pitts, Engineering Division. There were no letters of protest lodged in the file; no Protestants appeared at the hearing. At the close of the hearing the case was continued to February 16, A further hearing was held on February 16, 1977, at which the taking of testimony was concluded and the case submitted for decision, subject to counsel submitting a memorandum of authority on the matter of investment tax credit and other matters in issue. On March 4, 1977, the respondent submitted a note of argument in support of its position regarding the treatment of investment tax credit. EVIDENCE The Company seeks to increase rates for its Webster Springs District by approximately 15% in gross revenues, or $14,689 annually. Based upon the test year ending December 31, 1975, it is estimated that the increased revenues sought will produce an additional operating income of $8,126, or a pro forma operating income of $19,470. At going level the Company contends the test year rate of return is G.70%, this decline from 7.59% granted the Company in its last rate case (Case No. 7589) by Commission's order of March 17, 1975,

3 being ttributed to the f ct that respond nt h s mad gr to plant of $17,000 and has experienced increased cost of s additions labor, sup- plies and material in its compliance with Environmental Protection Agency requirements and its general operations. The Webster Springs District supplies residential, commercial, and municipal water service to the Town of Webster Springs and the immediate surrounding area. Its distribution network consists of 10.4 miles of mains, its average number of customers during the test year was 601. The source of supply for this District is the Elk River and the water is treated in a filtration plant having a capacity of 208,000 gallons per day, the average daily use of water during the test year was 127,000 gallons and the maximum daily usage during said period was 182,000 gallons. The water is treated by coagulation, filtration and the addition of alum, lime and chlorine which is administered by chemical feeders. It also has a laboratory approved by the State Department of Health where it can conduct routine chemical and bacteriological analyses. The rate of return under the proposed rates as relfected by the Company is 11.50% and the adjusted rate as calculated by the Commission staff is 13.71%. During the hearing counsel for Commission staff and counsel for respondent entered into a stipulation concerning adjustments to operating and maintenance expenses. This stipulation substantially agreed as to the proper amounts for some items in dispute, leaving for decision in this case the following major issues: (1) Treatment of investment tax credit, (2) Consolidated tax savings, (3) Depreciation expense, (4) Regulatory Commission expense, and (5) Rate of return. DISCUSSION OF ISSUES (1) Treatment of Investment Tax Credit On the issue of investment tax credit both the staff and the Company have flowed through 4% of the credit by applying the same directly as a reduction of the Company's income tax liability.

4 They differ, however, as to the proper application of the 6% of capital improvement portion of the investment tax credit. The st.aff contends that for the 1975 Act of the Internal Revenue Code, Section 4 6(f) (2), to be available to the respondent it must have made an election of that option within ninety days of the Act and that if it failed to do so it should be required to use Section 46 (f) (1), which allows the 6% of the credit to be amortized and requires re- duction of the rate base by the unamortized balance of such credit. Company takes the position that because it made a previous election under the 1972 Internal Revenue Code dealing with this same subject that no further action is required of it to make the provisions of the 1975 Internal Revenue Code, Section 46(f) (2), available to it, and that it can, therefore, amortize credit and not be required to reduce its rate base by the unamortized balance of the credit. Theevidence as to the requirement of making an election within ninety days and the authorities interpreting this Act are at the best nonconclusive. To decide this issue on this question alone of whether or not a timely election has been made, or if one is actually required, does not adequately take into consideration the rights of the parties involved and the ultimate effect the application of either one of the two statutory requirements will have upon the utility and its customers. The Commission is of the opinion that treatment of this issue which will allow the respondent to amortize the 6% portion of the tax credit and to make no reductions to rate base under Option 2 (Section 4 6(f) (2)) would in effect allow it to make an excess re- covery, i.e., a return on the rate base plus amortization of the credit. We, therefore, find that this issue should be resolved by t.he application of Section 46 (f) (1) of the 1975 Internal Revenue COG and approve staff's calculations made upon that basis. (2) Consolidated Tax Savings --~_I- ~ _ - This Commission has historically held that consolidated

5 income tax savings should be shared with the West Virginia customers and that neither the subsidiary nor the parent company should retain al.1 the benefits of the consolidated tax filing. Re: West Virginia Water Company (Kanawha Valley District), Case No (1975); Potomac Edison Company of West Virginia (19741, 6 PUR 4th 183; South Central Bell Telephone Co. vs. Tennessee Public Service Commission (1973), 100 PUR 3d 45. Regulations of the Internal Revenue Service relating to consolidated tax savings prescribe several methods by which savings may be distributed. Staff for the Public Service Commission con- tends that the tax liability on a consolidated filing should be ap- portioned among the companies contributing to the tax obligation in the amount their taxable income bears to the total income of the consolidation, after excluding the tax losses of regulated utilities and capital gains, and that tax losses of subsidiaries should be excluded from the calculation. Respondent takes the position that a portion of the savings should be allocated to the parent company and that loss companies in the consolidation should have their losses reimbursed before a distribution be made to the companies which pro- duced taxable income. In computing tax savings the Company used a savings of 12.62% while the staff used savings of %. The affiliates of the parent company have determined their taxes in conformity with the holding company system. We cannot, if we are to act in com- pliance with our statutory requirement of "reasonableness", adopt the contention of the respondent, which is based upon a hypothetical calculation of the affiliates' taxes. Therefore, we will accept the staff method of computation and reject the respondent's contention. We firmly believe that this treatment of the issue is just and equit- able and will work to the benefit of both the Company and the con- sumer. (3) Depreciation Expense In computing its depreciation expense the company uses an PUBLIC SERVICE COMMISSION CHARLESTON 5.

6 I_ average rate base and adds back to it one-half of its no r nue producing additions and all committed construction, resulting in a claim for depreciation of $5,270 at going level. Staff relies upon an average rate base plus one-half of committed construction in calculating its going level depreciation allowance of $4,975. The respondent by using average plant plus one-half of nonrevenue additions and a11 committed construction does not thereby use strictly a year-end rate base, but one that is a departure from average and one that produces a result very close to that of a yearend base. In the past this Commission has in all but a few cases, where extreme economic hardship would result from its use, relied upon an average rate base in making going level calculations. We take the position that an average rate base is more reliable than a year-end base because it matches revenues received to the plant which produced those revenues. West Virginia Water Co., Case No. 7828, 63 ARPSCWV (1975). Therefore, we will accept staff's depreciation computation calculated upon average plant, which results in a depreciation ex- pense reduction of $295 less than that of the respondent. (4) Regulatory Commission Expense -~-_----.ll -- The variance between staff and respondent on this issue is slight. Company estimates the cost of the current rate case at $4,400 and subtracts the consolidated tax savings calculated in the manner advocated by it of $1,867. To this it adds the portion of its last rate case upon which amortization has not been realized of $366, leaving a total of $2,899. It then amortizes this amount over a three-year period, arriving at an annual amortization of $966. Staff estimates the cost of the present case at $4,400. It applies a consolidated tax savings of $1,329, which has been de- termined based upon staff's contention of the appropriate application of taxsavings. To this is added the portion of the last rate case upon which amortization has not been realized in the sum of $366, PUBLIC SERVICE COMMISSION mmles+on 6.

7 nakinq a total of $3,437, Jhich vhen amortized, produces an annual lmortization of $1,146, which is $180 in excess of the amount projected by the Company. From the above it appears that the variance between staff md respondent on the matter of regulatory Commission expense evolves %round the treatment of consolidated tax savings. In view of the act that we have decided the basic issue of consolidated tax savings %t Issue 2 in this order, we will confirm the staff's position on this item which produces the taxes that give rise to the differences that have resulted herein. (5) Rate of Return Realizing the Commission should not be bound by a rigid nathematical calculation of weighted average cost of capital, based dpon total capitalization, for the purpose of setting a return on rate base, we have as a judgmental undertaking used several guide lines in reaching our decision on rate of return. The rate of return testimony of witnesses called by the Company indicates the need for a return of 11.02% to 11.50% and a return on common equity 3f 15%. Staff's witness testified that a rate of return of from 9% to 9 1/2% would be proper in this instance. The Commission has considered the rate of return testimony of both the Company and of the Commission's staff. On March 17, 1975, the Commission in Case No set rates for the Webster Springs District of West Virginia Water Company upon a 7.59% rate of return, to be applied to a 13-month average rate base for a test year ending December 31, Since the date of the Company's last rate case it has not been able to earn the rate of return of 7.59% awarded it and in fact the testimony indicates that on a going level basis its earned rate of return has been only 6.70%. The Company has expended $17,000 for additions required by Environmental Protection Agency and the cost of labor and supplies has increased since the end of the test year used in the last rate case of this Company. PUBLIC SERVICE COMMlSSION CHARLESTON ~- 7. I

8 After considering all of the evidence in this proceeding relating to the rate of return, we conclude that a fair rate of return for respondent is 9% calculated upon staff's adjusted rate base of $160,511. A cost of service study developed in accordance with the rulings and principles herein, based upon a 9% rate of return shows respondent's total revenue requirements to be $103,706 and a deficiency under present rates of $4,160. We have designed rates to cover the total cost of service. FINDINGS 1. Respondent's rates and charges last approved by the Commission are unjust and unreasonable in that they will not produce sufficient revenues to enable the respondent to pay its reasonable and necessary operating expenses and taxes, provide for depreciation, and earn a fair return on its property used and useful in its public service business. 2. Respondent's rates and charges now in effect under bond are likewise unjust and unreasonable in that they will produce more revenues than are needed or the aforesaid purposes. 3. The rates and charges hereinafter approved are just and reasonable in that they should produce revenues sufficient, but not more than sufficient, for the aforesaid purposes. ORDER 1. IT IS ORDERED that the following and they are hereby, approved for furnishing w spondent's Webster Springs District, to become rates and charges be, ter service to re- effective on all bills rendered for such service after the date of November 18, 1976: Applicable in entire territory served by the Webster Springs District. AVAILABILITY OF SERVICE Available for general domestic, commercial and industrial service. PUBLIC SEWVICE Cmmissrotv CHARLESTON 8.

9 RATE First 1,000 gallons used per month $ 5.96 per 1,000 gallons Next 4,000 gallons used per month per 1,000 gallons Next 5,000 gallons used per month per 1,000 gallons Next 20,000 gallons used per month per 1,000 gallons Next 30,000 gallons used per month per 1,000 gallons Next 40,000 gallons used per month per 1,000 gallons Next 100,000 gallons used per month per 1,000 gallons All Over 200,000 gallons used per month per 1,000 gallons MINIMUM CHARGE No bill will be rendered for less than the following amounts, according to the size of meter installed, to wit: 5/8 3/ /4 1 1/ or less $ 5.96 per month 8.60 per month per month per month per month per month per month per month per month Applicable in entire territory served by the Webster Springs District. AVAILABILITY OF SERVICE Available for private fire protection service. RATE Where connections, hydrants, sprinklers, etc., on private property are maintained by consumer: 2 inch Service Line with hydrants, sprinklers, and/or hose connections $ 3.38 per month 3 inch Service Line with hydrants, sprinklers, and/or hose connections 4.06 per month 4 inch Service Line with hydrants, sprinklers, and/or hose connections 5.42 per month 6 inch Service Line with hydrants, sprinklers, and/or hose connections per month 8 inch Service Line with hydrants, sprinklers, and/or hose connections per month 10 inch Service Line with hydrants, sprinklers, and/or hose connections per month 12 inch Service Line with hydrants, sprinklers, and/or hose connections per month Where connections and hydrants on private property are maintained by Company: Each Fire Hydrant per month These terms are payable monthly in advance. PROMPT PAYMENT DISCOUNT The above schedule is subject to a discount of five per cent (5%) if accounts are paid in full at the office of the Company on or before twenty (20) days from date of bill. 9.

10 LOCAl SALES TAX SURCHARGE The Municipality of Webster Springs having imposed an excise tax, exaction or fee based upon a percentage of the revenues from water sales by West Virginia Water Company, within the territorial limits of the municipality, such taxes, exactions or fees shall be billed as a "surcharge" to the customers receiving service within said territorial limits. This "surcharge" shall be computed at the appropriate effective tax rate levied by the municipality, giving consideration to the additional State gross sales tax resulting therefrom. Any increase, decrease, elimination or creation of any such taxes, exactions or fees by the municipality shall become effective after the Company has given thirty (30) days' notice to the Public Service Commission of the imposition of or any change in said taxes, by filing a revision of the appropriate tariff sheets. The monthly bills to such customers referred to above will reflect the aggregate amount resulting from Base Rate, Minimum Charge and this Local Sales Tax Surcharge. Customers receiving service in the Municipality of Webster Springs shall pay a surcharge based on the following effective surcharge rates: Local Tax Rate Surcharge Rate (A) _I_ Water Sales Rents All Other Business Water Sales Rents All Other Business (A) Surcharge Rate= Local -- Tax Rate -I- 1- (Local Tax Rate + W. Va. State Tax Rate) 2. The rates and charges that respondent now has in effect under bond are hereby canceled and stricken from the tariff files of the Commission. 3. Respondent shall refund to each of its customers entitled thereto, within sixty (60) days of the date of this order, the amount of excess collected under the rates placed into effect under bond and the amount which would have been collected under the rates that are herein approved, with interest thereon at the rate of 6 3/4% per annum until paid; that refunds of $5.00 or less may be made by crediting the amount to the subscriber's account, and that as to amounts in excess of $5.00 the refund shall be made by check. The Company is to have the right to apply any refund amount to a delinquent customer's account, however, it should not treat a customer's account as being delinquent before the refund credit has been applied to his account.

11 .... The respondent shall report to the Commission the amount refunded, including interest, the manner of refunding, and the amount, if any, which it has been unable to refund. 4. The respondent shall file with the Commission tariff sheets stating the rates and charges herein approved. - ~