PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON. At a session of the PUBLIC SERVICE COPllMISSION OF WEST PROCEDURE

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1 PUBLIC SERVICE COMMISSION OF WEST VIRGINIA At a session of the PUBLIC SERVICE COPllMISSION 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 (Montgomery 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 eighteen per cent in rates and charges for furnishing water service at Montgomery and vicinity, in the Counties of Fayette and Kanawha, 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 Commission, 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 $44,000, 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 Commission, 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

2 the 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. Bitts, Engineering Division. There was one letter 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 West Virginia Water Company seeks to increase rates for its Montgomery District by approximately 18% in gross revenues, or $43,697 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 $24,111 or a pro forma operating income of $69,710. Annual operating and maintenance expenses have increased substantially since the test year in its previous PUBLIC SERVICE COMMISSION OF WEST VIRGINIA 2.

3 ---_l_-l_ case (Case No. 7630). The Company has expended $38,3 0 for gross additions to its system since Decem,ber 31, 1972, and the increases in cost of wages, materials, and supplies have caused a decline in its rate of return, it presently earning 7.52% of the rate of 8% allowed it in its last rate proceeding. The Montgomery District supplies residential, commercial, and municipal water service to the City of Montgomery and the area adjacent thereto. Its source of supply is the Kanawha River and its treatment plant and pumping station have a capacity of 1,000,000 gallons per day. Its two intake pumps have a capacity of 700 gallons per minute each and a steel coagulation and settling basin with a capacity of 125,000 gallons, four steel vertical pressure filters with a combined capacity of 720 gallons per minute, a steel clearwell tank of 9,000 gallons capacity and two electrically driven 700 gallon per minute high service pumps. The treatment plant is equipped for the necessary chemical treatment and the average water usage during the test year was 459,000 gallons with a maximum day of 777,000 gallons. The system serves approximately 1,668 customers, has miles of distribution mains and distribution storage of 300,000 gallons. The rate of return under proposed rates as reflected by the Company is 11.5% and as calculated by the Commission staff is 12.9% for the calendar year. During the hearing counsel for Commission staff and counsel for the 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) Regulatory Commission expense, and (4) Rate of Return. DISCUSSION OF ISSUES I_--_I- (1) Treatment of Investment Tax Credit On the issue of investment tax credit both the staff and PUULlC SERVICE COMMISSION OF WEST VIRGINIA 3.

4 the Company have flowed through 4% of the credit by applying the same directly as a reduction of the Company's income tax liability. They differ, however, as to the proper application of the 6% of capital improvement portion of the investment tax credit. The staff contends that for the 1975 Act of the Internal Revenue Code, Section 46(f) (21, 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)(l), which allows the 6% of the credit to be amortized and requires reduction 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. The evidence 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 46(f)(2)) would in effect allow it to make an excess recovery, i.e., a return on the rate base plus amortization of the credit. We, therefore, find that this issue should be resolved by the application of Section 46(f)(l) of the 1975 Internal Revenue Code and approve staff's calculations made upon that basis.

5 (2) Consolidated Tax Savings - I_- This Commission has historically held that consolidated income tax savings should be shared with the West Virginia customers and that neither the subsidiary nor the parent company should retain all the benefits of the consolidated tax filing. RE: West Virginia Water Company (Kanawha Valley District), Case No (1975); Potomac Edison Company of West Virginia (1974), 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) Regulatory Commission I Expense The variance between staff and respondent on this issue is

6 slight. Company estimates the cost of the current rate case at $10,200 and subtracts the consolidated tax savings calculated in the manner advocated by it of $4,327. To this it adds the portion of its last rate case upon which amortization has not been realized of $1,808, leaving a total of $7,681. It then amortizes this amount over a three-year period, arriving at an annual amortization of $2,560. Staff estimates the cost of the present case at $10,200 and applies a consolidated tax savings of $3,082, which is determined upon staff's contention of the appropriate application of tax savings. The final order in the prior rate case for this District (Case No. 7630) ~7as issued July 10, 1975, and staff has taken the position that expenditures from July through December, 1975, in the sum of $1,999 should be treated as refund expense and offset against the unamortized balance of respondent. This application will produce a total rate case expense of $7,118 which when amortized over a three- year period equals $2,373. From the above it appears that the variance between staff and respondent on the matter of regulatory Commission expense evolves around the treatment of consolidated tax savings. In view of the fact that we have decided the basic issue of consolidated tax savings at 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. (4) Rate of Return -I - Realizing the Commission should not be bound by a rigid mathematical calculation of weighted average cost of capital, based upon 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 of 158. Staff's witness testified that a rate of return of from PUBLIC SERVICE COMMlSSlON OF WEST VIRGINIA 6.

7 c 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 July 10, 1975, the Commission in Case No set rates for the Montgomery District of West Virginia Water Company upon an 8% 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 8% awarded it and in fact the testimony indicates that on a going level basis its earned rate of return has been The Company has expended $38,300 for gross 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. 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 $594,880, 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 $255,590 and a deficiency under present rates of $0,765. We have designed rates to cover the total cost of service. FINDINGS _I- 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 for the aforesaid purposes. PUBLIC SERVICE COMM18510N OF WEST VIRGINIA 7.

8 -11 --_I- - ~.~ ~ m a --- _-- -I ~~ ~ ~.. -._ m._. ~.~.-....~..~ ~ ~~ 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 IT IS ORDERED that the following rates and charges be, and they are hereby, approved for furnishing water service to re- spondent's Montgomery District, to become effective on all bills rendered for such service after the date of November 18, 1976: Applicable in entire territory served by the Montgomery District. AVAILABILITY OF SERVICE ---- Available for general domestic, commercial and industrial service. RATE First 1,000 gallons used per month $4.35 per 1,000 gallons Next 4,000 gallons used per month 1.90 per 1,000 gallons Next 5,000 gallons used per month 1.78 per 1,000 gallons Next 10,000 gallons used per month 1.40 per 1,000 gallons Next 10,000 gallons used per month 1.02 per 1,000 gallons Next 20,000 gallons used per month.84 per 1,000 gallons Next 50,000 gallons used per month.78 per 1,000 gallons All Over 100,000 gallons used per month.71 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 inch meter or less $4.35 per month 3/4 inch meter 6.25 per month 1 inch meter per month 1 1/4 inch meter per month 1 1/2 inch meter per month 2 inch meter per month 3 inch meter per month 4 inch meter per month 6 inch meter per month I 1 i I Applicable in entire territory served by the Montgomery 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 $3.40 per month _I_---_- "- -- ~ -_I_.x I ~ PLJBLIC SERVICE COMMISSION OF WES7 VIRGINIA 8.

9 RATE (Continued) 3 inch Service Line with hydrants, sprinklers, and/or hose connections $4.07 per month 4 inch Service Line with hydrants, sprinklers, and/or hose connections 5.43 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. LOCAL SALES TAX SURCHARGE The Municipalities listed below, within the West Virginia Water Company's Montgomery District 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 suuh Junicipalities, 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 Rase Rate, Minimum Charge and this Local Sales Tax Surcharge. Customers receiving service within such Municipalities shall pay a surcharge based on the following effective surcharge rates: - Local Tax Rate --- Surcharge Rate (A) Water All Other Water All Other Sales Rents Business Sales Rents Business c- L- Montgomery Handley (A) Surcharge Rate = --- Local Tax Rate 1- (Local Tax Rate + W. Va. State Tax Rate)

10 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. 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. C H A I R M A N PULlLlC BERVICE COMMISSION OF WEPT VIRGINIA 10.