Edmonton, Alberta

Decision U98041

File 3202-1

CU WATER LIMITED APPLICATION FOR APPROVAL OF A CHANGE IN RATES FOR 1997, 1998 AND 1999

1. INTRODUCTION

CU Water Limited (CU Water or the Company) filed with the Alberta Energy and Utilities Board (the Board) an application (the Application) dated 10 March 1997 for approval to change existing rates for 1997, 1998 and 1999. In the Application, CU Water stated that the changes to customer rates were proposed in accordance with a negotiated settlement involving the Company, the Highway 14 Regional Water Services Commission (the Commission) and the County of Strathcona (the County). In the Application, CU Water indicated that, early in 1996, recognizing a potential shortfall in future revenues, the Company identified the need to revise customer rates. CU Water considered that some alternative to a rate hearing would be preferable given the size and nature of the service area. CU Water approached the Commission and the County to discuss alternative processes available to determine the appropriate revision to customer rates. The Commission agreed that a negotiation process was preferable to a hearing and considered that such a process could result in a mutually agreeable determination of appropriate rates. In the Application, CU Water also requested that the Board approve as final, the existing rates approved on an interim basis in Decision E95071 dated 22 June 1995. In accordance with the instructions of the Board, the prescribed Notice of the Application was published by 23 April 1997 in each of the daily newspapers having general circulation in the service area of CU Water. Notice was also served by 18 April 1997 on all parties registered in CU Water's most recent General Rate Application. The Notice specified that objections to the Application be submitted by 2 May 1997. A written submission was received from Mr. J. Cheladyn in the County of Strathcona.

2. BACKGROUND

CU Water, a wholly-owned subsidiary of Canadian Utilities Limited commenced operations in August 1992. CU Water has an exclusive franchise agreement to construct, operate and maintain a water distribution system in a defined area of the County. The franchise agreement also gives CU Water the exclusive right to construct, operate and maintain truck fill facilities within a defined area of the County. Under the CU Water and County of Strathcona No. 20 "Water Transportation Agreement", CU Water transports water owned by the County for delivery to County customers and sale to the Commission. The "Ardrossan Water Transportation Agreement" sets out the terms of a contribution by the County to the capital cost of construction of a portion of CU Water's pipeline. The Agreement also includes a method for calculating the amount of water flowing through the Company pipeline and sets the terms of payment by the County for transmission of County water. The "Expanded Service Agreement" amends certain terms of each of the above mentioned Agreements and provides for the potential expansion of water services provided by CU Water to the County. CU Water has exclusive franchise agreements for the supply of water to the Village of Ryley and to the County of Beaver. The Company has an agreement with the Town of Tofield for the bulk supply of water. CU Water purchases its water from the Commission, which in turn purchases its water from the County which purchases the water from the City of Edmonton. On 9 November 1993, CU Water made an application (the 1994/95 Application) for approval of revised rates effective 1 January 1994 and 1 January 1995. Prior to a public hearing, scheduled by the Board on 20 October 1994 to deal with the 1994/95 Application, the County filed a submission proposing that the Board declare CU Water not to be a public utility for purposes of the Public Utilities Board Act. The County proposed that CU Water be regulated on a "complaints basis". At the hearing on 20 October 1994, the Board considered that a Decision on the merits of the County's proposal should precede the hearing of the 1994/95 Application. However, before issuance by the Board of a decision on the merits of the County's proposal, CU Water filed an application (the 1995/96 Application) on 18 May 1995 "amending" the 1994/95 Application. In the 1995/96 Application, CU Water requested approval of revised rates effective 1 June 1995 and 1 January 1996, and indicated that these rates had been agreed through negotiation with its customers. On 22 June 1995, the Board issued Decision E95071 approving revised rates, as requested by CU Water in the 1995/96 Application on an interim refundable basis effective 1 June 1995.

3. PARTICULARS OF THE APPLICATION

In the Application filed on 10 March 1997, CU Water requested that the Board approve the rates proposed for 1997, 1998 and 1999. The rates proposed in the Application are the rates agreed to by CU Water, the Commission and the County in the negotiated settlement process.

The negotiated settlement was the result of numerous meetings, involving all parties, during 1996 which led to CU Water filing the proposed rates with the Board on 19 December 1996. The following is the sequence of action steps and meetings which took place during the negotiation process:

8 May 1996 CU Water proposes to negotiate rates with the Commission.

6 June 1996 ad hoc Commission meeting agrees to "special meeting" to discuss CU Water proposal.

24 June 1996 Commission holds conference call and agrees to enter into negotiations with CU Water.

23 July 1996 Negotiating meeting between CU Water and Commission.

16 September Second negotiating meeting between CU Water and 1996 Commission. Agreement reached on rates.

24 September Commission formally approves rate agreement. 1996

29 October CU Water formally outlines rate schedules to Commission. 1996

13 December Commission formally informs CU Water of agreement to rate 1996 schedules.

19 December CU Water files rate schedules with the Board. 1996

CU Water indicated that the Commission includes representation from the County of Beaver, the County of Strathcona, the Town of Tofield, and the Village of Ryley, which are all of the communities served by the Company. The Company submitted that those communities were well represented during the settlement process. CU Water stated that, in the negotiation process, the Commission had been provided with financial information setting out the need for an adjustment to existing rates which have been approved by the Board on an interim basis. CU Water stated that, the Company, the Commission and the County have agreed in the negotiated settlement, that the rates proposed for 1997, 1998 and 1999 are reasonable rates for water provided to CU Water's customers. In the Application, CU Water also requested that the Board approve as final, the existing rates in effect on an interim basis since 1995. The existing and proposed rates were set out in the Application as follows:

Rate Description of Existing Proposed Proposed Proposed Charge ($) 1 Jan 1 Jan 1 Jan 1997 1998 1999 ($) ($) ($)

Urban Fixed 16.24 16.24 16.24 16.24 Commodity 2.13 2.29 2.46 2.64

Rural Fixed 40.80 40.80 40.80 40.80 Commodity 2.13 2.29 2.46 2.65 Connection Contribution 2,780 2,780 2,780 2,780

Bulk Commodity 2.13 2.29 2.46 2.64

Truck Fill Commodity 1.11 1.00 1.00 1.00

Strathcona Transportation 0.20 0.30 0.30 0.30 Transportation Charge per cubic metre

Ardrossan Commodity 1.21 1.32 1.42 1.53 Coin Op

Ryley Truck Commodity 2.20 2.37 2.55 2.74 Fill

• The Urban Rate applies to customers located within the boundaries of the Village of Ryley.

• The Rural Rate applies to all customers located within the rural areas of the County of Strathcona and the County of Beaver.

• The Bulk Rate applies to water purchased by the Town of Tofield.

• The Truck Fill Rate applies to water purchased through the card lock system at the Ardrossan Truck Fill Station.

• The Strathcona Transportation Rate applies to water transported for the County in accordance with existing agreements between CU Water and the County.

• The Ardrossan Coin Operated Rate applies to water purchased through the coin operated system at the Ardrossan Truck Fill Station.

• The Ryley Truck Fill Rate applies to water purchased at the Ryley Truck Fill.

The Application included copies of all relevant correspondence between CU Water, the Commission and the County, together with minutes of meetings involving the parties during the settlement process. The background to the rate proposals is outlined in the following documentation included in the Application:

• Letter dated 6 August 1996 to CU Water from the law firm of Reynolds, Mirth, Richards & Farmer (Reynolds Mirth) on behalf of the Commission.

• Letter dated 11 September 1996 from CU Water to Reynolds Mirth.

• Letter, with proposed rate schedules, dated 29 October 1996 from CU Water to the Commission.

• Minutes of Commission meeting dated 6 November 1996.

The following paragraphs summarize the background to the negotiated settlement, indicating the positions of the parties during the process, as set out in the above documentation:

Position of the Commission

The letter from Reynolds Mirth dated 6 August 1996 referred to a presentation made by CU Water to the Commission earlier in the year in which the Company appeared to propose an increase in rates of 20% per year for three years. The Commission expressed concern that information provided to date by CU Water was not sufficient to enable the Commission to assess the justification for a rate increase. In particular, the Commission was concerned that rate increases of the magnitude proposed by CU Water might threaten the viability of the Company. Accordingly, the Commission considered it important that CU Water should identify the steps being taken to increase the number of customers and sales volumes. The Commission acknowledged that the supply of water by CU Water to the residents of areas represented by Commission members appeared to be in a formulative stage. Nevertheless, the Commission expressed concern that the absence of information on CU Water's business and marketing plans made it difficult for the Commission to assess the merits of a rate increase. The Commission considered that CU Water should submit, for review by the Commission, the level of information normally required by the Board in a general rate application, to enable the Commission to determine its position regarding any potential rate increase.

Position of CU Water

In its letter dated 11 September 1996, CU Water referred to its presentation made on 4 March 1996, at the request of the Commission, where the Company explained that, in order to achieve a fair rate of return, a revenue increase of 20% per year, for three years, would be required. CU Water stated in the letter, that this had not, in any way, represented a proposal for an increase in rates, but submitted that the information presented formed the basis for the Company's proposal to negotiate an increase in rates with the Commission. CU Water indicated in the letter that the Company had offered to negotiate a rate increase with the Commission in order to avoid the cost to the customer of a rate application and hearing. CU Water also referred to a meeting held on 23 July 1996, involving representatives of the Company and the Commission. CU Water indicated that the Company and the Commission subsequently confirmed their understanding of the rate proposals made by each party at that meeting. With respect to the Commission's request for information similar to that normally required by the Board in a general rate application, CU Water stated that the Company's 1995/1996 General Rate Application contained enough information to enable the Commission to consider the proposed increase. The letter from CU Water to the Commission dated 29 October 1996 included revised rate schedules reflecting an increase of 7.5% in the commodity charge in each of the years 1997, 1998 and 1999. In the letter, CU Water sought confirmation from the Commission of the rates agreed to by the parties in the negotiation process as set out in the rate schedules attached to the letter.

Confirmation of Agreement

On 13 December 1996, the Commission forwarded to CU Water, minutes of a meeting of the Commission held on 6 November 1996 during which the Commission confirmed the negotiated rates as set out in CU Water's letter dated 29 October 1996.

4. SUMMARY OF WRITTEN SUBMISSION

Mr. J. Cheladyn

In his letter dated 2 May 1997, Mr. Cheladyn submitted:

• the applicant is supported by revenue from a very small customer base; • the operations of the Company are governed by a rather convoluted set of agreements to buy, sell and transport water; • the Company's distribution system is highly subsidized by the Alberta taxpayer and County ratepayers through fiscal investment in CU Water's pipeline; • the applicant, as a utility and by legislation, is not required to be responsible to the community or individual rate payers with respect to rate increases; • there is no requirement for the Company to demonstrate, through public scrutiny, that the operations are efficiently or prudently managed; • losses experienced by the applicant may accrue from: o poor marketing; o buyer resistance (as in the case of the abandoned Baseline Road proposal); o costs incurred from failures of proposals (such as the loss to Aqualta of the water supply for Cochrane); o little or no response for franchise proposals in Parkland or Spruce Grove; • the direct costs of such endeavors are passed on to existing rate payers in a rate increase application; • there should be clear evidence of the need for the rate increase, and that the increase is due exclusively to higher direct product and services costs.

Mr. Cheladyn submitted that the rate application process should be public and at the applicant's cost, so that it can be demonstrated that the rate payer is not being subjected to rate increases due to any lack of corporate performance on the part of the applicant. Mr. Cheladyn considered that the Board should deny the Application if the basis for the increase cannot be clearly substantiated by the applicant.

CU Water

CU Water provided the following response to Mr. Cheladyn's comments:

• CU Water is supported by customers in Tofield, Ryley, Strathcona County and Beaver County. The Highway 14 Waterline was constructed with the co- operation and support of the local and provincial governments in an effort to find a more cost-effective method of providing water service to rural Alberta.

The agreements that CU Water has in place with Strathcona County, Beaver County, Tofield, Ryley and the Commission, while complex, have been reached through a negotiating process that recognizes the differing needs of the customers and the municipalities involved.

The distribution system is not subsidized by the Alberta taxpayer or the County rate payers. Alberta Transportation and Utilities provided an original grant of $4.9 million to the Commission. This money was then applied by the Commission to the capital cost of constructing the transmission line. This amount is equivalent to the amount that would have been provided to Tofield and Ryley if they had not gone ahead and constructed their own traditional water treatment plants, or if the Commission had built the waterline itself. This grant of $4.9 million has been used to reduce the net rate base of CU Water, thereby providing full benefit to CU Water's customers.

• As a regulated utility, CU Water must abide by the orders of the Board in regard to all rate increases. All of the communities in the CU Water franchise area are represented on the water commission and participated in the negotiating process that led to an agreement on the proposed rate increases.

In regard to individual rate payers, CU Water has received no complaints from any of its customers in regard to the recently advertised rate proposals.

• Due to the co-operation of the Commission and the process of negotiation that took place, costs were kept to a minimum and are in fact, almost negligible. CU Water will absorb these costs. However, should a full general rate application be required, the costs would be significant. CU Water would expect to recover those costs through rates charged to customers.

• CU Water has incurred losses in past years. Steps have been taken to improve its marketing effort which include providing service line pipe as a convenience to new customers, and beginning in 1997, financing of the rural customer contribution. CU Water has worked in partnership with Strathcona County in bringing water service to Antler Lake and Collingwood Cove resulting in an additional 45 customers receiving water service.

CU Water has incurred no losses due to other business proposals. These business development costs have been paid for by a sister company, ATCO Gas Services Ltd., and have been borne by the shareholder, not the customer. • The proposed rate increases were not arrived at by any formula and are not reflective of a return on equity. They were negotiated with the Commission and reflect the recognition by the Commission that CU Water suffers a severe revenue shortfall, while at the same time, the recognition by CU Water that it must seek rates that are deemed fair and reasonable by its customers.

5. BOARD FINDINGS

The Board recognizes that there has been a trend in utility regulation, in recent years, towards settlement of rates by negotiation. The Board views this trend positively, and considers it a useful and appropriate process for water utilities to utilize. While settlement by negotiation is an evolving process, the Board considers that the process should embody certain principles, which include the following:

• all parties having an interest in the tariffs of the utility have a fair opportunity to participate in the settlement process;

• adequate information is produced from the settlement process to enable the Board to understand the basis for the agreement and assess its reasonableness;

• the results of the process satisfy the Board's statutory obligations and any public interest considerations which may extend beyond the immediate concerns of the negotiating parties.

The Board has reviewed the Application and considers that there was a fair opportunity for participation in the negotiated settlement process by all interested parties, and is satisfied with the manner in which the Company and the interested parties have resolved the issues. Further, the Board is satisfied that the information in the settlement agreement is adequate to enable the Board to understand the basis for the agreement. The Board notes that the Company has incurred losses in past years, and identified the need, early in 1996 to revise customer rates, recognizing a potential shortfall in future revenues. The Board recognizes that, while the proposed increase will not allow the Company to earn an optimal rate of return, it will contribute to the achievement of a break-even position. The Board also recognizes the Company's submission that it will improve its marketing efforts and attempt to increase its customer base. Further, in adopting a negotiation process, costs were kept to a minimum. The Board considers that the Company's response to Mr. Cheladyn's submission has adequately addressed the specific concerns raised. The Board notes that no concerns were raised by individual customers of CU Water with respect to the rate proposals as advertised in the Board prescribed public notice. Having reviewed all of the evidence filed, the Board accepts the conclusions reached by the parties with respect to the proposed rates. Accordingly, the Board accepts the terms of the Application, and the proposed rates for 1997, 1998 and 1999, as set out in Schedule "A" of this Decision. These rates replace the rates approved on an interim basis in Order E95071 dated 22 June 1995. The rates, tolls and charges approved on an interim basis in Order E95071 are hereby fixed and approved as final for the period during which they were in effect. The Board notes that there does not appear to be any need to revise the Company's Terms and Conditions of Service at this time. The Board notes the matters raised by the County, in its submission filed prior to the 1994/95 Application, challenging CU Water's status as a public utility for the purposes of the Public Utilities Board Act. After consideration of the matters raised by the County and of the nature of CU Water's operations, the Board considers that the Company meets the description of a public utility as defined in section 1(i)(iii) of the Public Utilities Board Act. The Board concurs with CU Water's use of a negotiated settlement process to revise customer rates and terms and conditions of service. As noted elsewhere in this Decision, the Board considers that utilization of a negotiated settlement process is an effective and beneficial procedure for a regulated utility to employ. The process provides affected parties the opportunity to voice their concerns and ultimately reach an agreement with the utility for submission to the Board with respect to changes in rates and terms and conditions of service without incurring the costs associated with the formal hearing process.

6. ORDER

IT IS HEREBY ORDERED THAT:

1. The rates, tolls and charges of CU Water Limited, set out in Schedule "A" attached to and forming part of this Decision, are hereby fixed and approved as the rates applicable to all metered and estimated consumption on and after 1 January 1997.

2. The rates, tolls and charges approved on an interim basis in Order E95071 are hereby fixed and approved as final for the period during which they were in effect.

3. The rates, tolls and charges of CU Water Limited, set out in Schedule "A" of this Decision, replace the rates, tolls and charges previously approved on an interim basis in Schedule "A" of Order E95071 dated 22 June 1995.

Dated in Edmonton, Alberta on 23 February 1998. ALBERTA ENERGY AND UTILITIES BOARD (signed by) A. Calista Barfett Presiding Member Gordon J. Miller Member Céline Bélanger Member

Decision U98041 Schedule "A" Page 1 of 17 Effective by On Consumption January 1, 1997 This Replaces Urban Rate Previously Effective July 1, 1996

CU WATER LIMITED URBAN RATE

Applicable to all customers that are located within the boundaries of the Village of Ryley. CHARGES: Fixed Charge: $16.24 per month Commodity Charge: $2.29 per Cubic Metre Minimum Monthly Charge: Fixed Charge

Decision U98041 Schedule "A" Page 2 of 17 Effective by On Consumption January 1, 1997 This Replaces Rural Rate Previously Effective July 1, 1996

CU WATER LIMITED RURAL RATE

Applicable to all customers that are located within the rural areas of the County of Strathcona and the County of Beaver. CHARGES: Fixed Charge: $40.80 per month Commodity Charge: $2.29 per Cubic Metre Minimum Monthly Charge: Fixed Charge Minimum Rural Connection Contribution: $2780

Decision U98041 Schedule "A" Page 3 of 17 Effective by On Consumption January 1, 1997 This Replaces Bulk Rate Previously Effective July 1, 1996

CU WATER LIMITED BULK RATE

Applicable to water purchased by the Town of Tofield. CHARGES: Commodity Charge: $2.29 per Cubic Metre Minimum Consumption: 108,000 Cubic Metres per year

Decision U98041 Schedule "A" Page 4 of 17 Effective by On Consumption April 1, 1997 This Replaces Ardrossan Truck Fill Rate Previously Effective April 1, 1996

CU WATER LIMITED ARDROSSAN TRUCK FILL RATE

Applicable to water purchased through the card lock system at the Ardrossan Truck Fill Station. CHARGES: Commodity Charge: $1.00 Cubic Metre

Decision U98041 Schedule "A" Page 5 of 17 Effective by On Consumption January 1, 1997 This Replaces Ardrossan Coin Operated Rate Previously Effective August 15, 1992

CU WATER LIMITED ARDROSSAN COIN OPERATED RATE

Applicable to water purchased through the coin operated system at the Ardrossan Truck Fill Station. CHARGES: Commodity Charge: $1.32 per Cubic Metre

Decision U98041 Schedule "A" Page 6 of 17 Effective by On Consumption January 1, 1997 This Replaces Ryley Truck Fill Rate Previously Effective August 15, 1992

CU WATER LIMITED RYLEY TRUCK FILL RATE

Applicable to water purchased at the Ryley Truck Fill. CHARGES: Commodity Charge: $2.37 per Cubic Metre

Decision U98041 Schedule "A" Page 7 of 17 Effective by On Transportation April 1, 1997 This Replaces Strathcona Transportation Rate Previously Effective April 1, 1996

CU WATER LIMITED STRATHCONA TRANSPORTATION RATE

Applicable to water transported for the County of Strathcona in accordance with the "CU Water and The County of Strathcona No. 20 Water Transportation Agreement", the "Ardrossan Water Transportation Agreement", and the "Expanded Services Agreement", including Ardrossan water consumption CHARGES: Transportation Charge: $0.30 per Cubic Metre

Decision U98041 Schedule "A" Page 8 of 17 Effective by On Consumption January 1, 1998 This Replaces Urban Rate Previously Effective January 1, 1997

CU WATER LIMITED URBAN RATE

Applicable to all customers that are located within the boundaries of the Village of Ryley. CHARGES: Fixed Charge: $16.24 per month Commodity Charge: $2.46 per Cubic Metre Minimum Monthly Charge: Fixed Charge

Decision U98041 Schedule "A" Page 9 of 17 Effective by On Consumption January 1, 1998 This Replaces Rural Rate Previously Effective January 1, 1997

CU WATER LIMITED RURAL RATE

Applicable to all customers that are located within the rural areas of the county of Strathcona and the County of Beaver. CHARGES: Fixed Charge: $40.80 per month Commodity Charge: $2.46 per Cubic Metre Minimum Monthly Charge: Fixed Charge Minimum Rural Connection Contribution: $2780

Decision U98041 Schedule "A" Page 10 of 17 Effective by On Consumption January 1, 1998 This Replaces Bulk Rate Previously Effective January 1, 1997

CU WATER LIMITED BULK RATE

Applicable to water purchased by the Town of Tofield. CHARGES: Commodity Charge: $2.46 per Cubic Metre Minimum Consumption: 108,000 Cubic Metres per year

Decision U98041 Schedule "A" Page 11 of 17 Effective by On Consumption January 1, 1998 This Replaces Ardrossan Coin Operated Rate Previously Effective January 1, 1997

CU WATER LIMITED ARDROSSAN COIN OPERATED RATE

Applicable to water purchased through the coin operated system at the Ardrossan Truck Fill Station. CHARGES: Commodity Charge: $1.42 per Cubic Metre

Decision U98041 Schedule "A" Page 12 of 17 Effective by On Consumption January 1, 1998 This Replaces Ryley Truck Fill Rate Previously Effective January 1, 1997

CU WATER LIMITED RYLEY TRUCK FILL RATE

Applicable to water purchased at the Ryley Truck Fill. CHARGES: Commodity Charge: $2.55 per Cubic Metre

Decision U98041 Schedule "A" Page 13 of 17 Effective by On Consumption January 1, 1999 This Replaces Urban Rate Previously Effective January 1, 1998

CU WATER LIMITED URBAN RATE

Applicable to all customers that are located within the boundaries of the Village of Ryley. CHARGES: Fixed Charge: $16.24 per month Commodity Charge: $2.64 per Cubic Metre Minimum Monthly Charge: Fixed Charge

Decision U98041 Schedule "A" Page 14 of 17 Effective by On Consumption January 1, 1999 This Replaces Rural Rate Previously Effective January 1, 1998

CU WATER LIMITED RURAL RATE

Applicable to all customers that are located within the rural areas of the County of Strathcona and the County of Beaver. CHARGES: Fixed Charge: $40.80 per month Commodity Charge: $2.64 per Cubic Metre Minimum Monthly Charge: Fixed Charge Minimum Rural Connection Contribution: $2780

Decision U98041 Schedule "A" Page 15 of 17 Effective by On Consumption January 1, 1999 This Replaces Bulk Rate Previously Effective January 1, 1998

CU WATER LIMITED BULK RATE

Applicable to water purchased by the Town of Tofield. CHARGES: Commodity Charge: $2.64 per Cubic Metre Minimum Consumption: 108,000 Cubic Metres per year

Decision U98041 Schedule "A" Page 16 of 17 Effective by On Consumption January 1, 1999 This Replaces Ardrossan Coin Operated Rate Previously Effective January 1, 1998

CU WATER LIMITED ARDROSSAN COIN OPERATED RATE

Applicable to water purchased through the coin operated system at the Ardrossan Truck Fill Station. CHARGES: Commodity Charge: $1.53 per Cubic Metre

Decision U98041 Schedule "A" Page 17 of 17 Effective by On Consumption January 1, 1999 This Replaces Ryley Truck Fill Rate Previously Effective January 1, 1998

CU WATER LIMITED RYLEY TRUCK FILL RATE

Applicable to water purchased at the Ryley Truck Fill. CHARGES: Commodity Charge: $2.74 per Cubic Metre