Agenda Date: March 10, 2000 Item Number: Docket: UW-000052 Company Name: Rainier View Water Co., Inc. Staff: Danny P. Kermode, Revenue Requirements Specialist Recommendation: Approve Rainier View Water Co., Inc.'s, petition for an accounting order authorizing use of funds collected as Contributions in Aid of Construction for the purpose of a settlement payment, and approve the accounting of the payment as an Extraordinary Deduction to result in shareholders rather than ratepayers paying the cost of settlement.. Discussion: On January 14, 2000 Rainier View Water Co., Inc., (Rainier) filed a Petition under WAC 480-09-420(7) seeking an order regarding the treatment of costs incurred by the Company under a one-time settlement. The amount and details of the settlement have been filed on a confidential basis pursuant to WAC 480-09-015. Due to its confidentiality, the amount can not be cited in the body of this memo. In its Petition, the Company requests an order that: •Authorizes the Company to use funds, as stated in Rainier's Petition, that have been collected as Contributions in Aid of Construction (CIAC) for the purpose of a settlement payment, and •Approves accounting for the payment as an Extraordinary Deduction to be recorded in account 434 of the Uniform System of Accounts for Class A Water Utilities (1996). The Petition is a result of a 1998 class-action lawsuit filed by a group of customers of the former Sound Water Company. Rainier reached a confidential, out-of-court settlement with the residents in order to avoid the possible financial damage to the Company by an adverse jury award. The requested accounting order is an integral part of the court settlement. The Company's proposed accounting treatment recognizes that the portion of the settlement amount not paid by its insurer is a cost to be absorbed solely by the company and not its customers. Staff analyzed the transaction to insure that it is solely the company absorbing the loss, and that the Company does not receive a return on or return of the amount expended from CIAC. Under the requested accounting, the Company is prevented from receiving a return on the CIAC settlement funds by the expensing of the settlement liability in the year of payment. The expensing of the settlement payment reduces equity by the payment amount. Simultaneously for rate making purposes, the amount of CIAC used to reduce net plant in the determination of rate base is increased by the payment amount. The resulting total capital structure is reduced with an equal reduction in the Company's rate base. Therefore there is a reduction in the overall return on investment equal to the settlement payment times the allowed equity return. Another concern of Staff was the possibility that the Company may receive the settlement payment back in the form of depreciation. However, analysis shows that because there would be more CIAC than related utility plant, the CIAC amortized each year would be greater than the depreciation expense from related CIAC utility plant. Therefore, the total depreciation recovered by the Company would be reduced by the amount of the payment over the average CIAC amortization period versus the amount that would have been recovered had no settlement payment been necessary. Docket UW-000052 March 10, 2000 Page 2 It is Staff's opinion that it is in the customers’ best interest to allow the Company to use funds collected as CIAC for the purposed settlement payment. Also, it is Staff's opinion that the proposed accounting provides protection of the customers of Rainier from paying any portion of the Company's settlement payment either by a "return on" or a "return of" the proposed settlement payment. Therefore Staff recommends that the Commission approve Rainier View Water Co., Inc.'s, petition for an accounting order authorizing the use of funds collected as Contributions in Aid of Construction for the purpose of a settlement payment, and approve the accounting of the payment as an Extraordinary Deduction.