A complicated rate case that includes missing business records and a letter sent to more than 270 Helena Valley homeowners initially proposing a sewer and water rate increase from $70 to nearly $500 per month is now in the hands of the Montana Public Service Commission.
The PSC held a two-day hearing last week to consider a request from North Star Water & Sewer to increase rates on 272 homes in the North Star Subdivision located in the north Helena Valley. While it has backed off the initial ask of nearly $500 and says it would cap rates at $95 per month, the company still seeks a recognized rate from the PSC of about $270 per month to officially confirm the value of the infrastructure.
“That number ($95) would enable us to operate the system and set money aside for any failures or any repairs because it’s a big system and a lot of repairs will have to be done at a certain point, and the maintenance is pretty crucial,” North Star co-owner Doug Peterson told the commission.
Jonathan Motl, the attorney representing North Star, told the commission that the $95 also reflected the “human factor” that the company took under consideration and what residents could likely afford.
The $270 recognized rate is important to North Star, he said, to prove publicly the investment made by the company as it requests a higher rate of return and potential future costs.
The case has grown increasingly complex and at times contentious as homeowners have spoken out against the proposed rate hikes. During public comment at the commission meeting several homeowners expressed concerns that such higher rates would decrease home values for resale.
“We ask you guys to consider that water is a basic need,” homeowner Kelly Byron told the commission. “… Please consider that these rates are outrageous and unreasonable.”
At the center of the case is a dispute over the cost of the water and sewer facilities and lines and what amount North Star should be able to charge customers to collect on the investment or turn a profit. Because the homeowners are considered “captive” consumers as they must get their water and sewer service from North Star, the PSC regulates the company as a small utility and authorizes rates.
According to attorneys for North Star, one of the managing partners who was repeatedly identified as Dan Chovanak during the hearing, essentially disappeared following personal issues and took with him several years of business records. According to testimony, Chovanak controlled the company’s bookkeeping and other financial and reporting duties.
Chovanak has not been charged with any crimes related to North Star and Peterson told the commission an attempt to serve him civilly for the records was unsuccessful.
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Peterson says he has since taken on the bulk of the financial duties in addition to the rate case. Those include reconciling multiple years of delinquent taxes and annual reports, but he says he does expect to bring the company’s finances up to par, including any penalties, and the company has been paying its other bills.
Due to the missing records, in preparation for the rate case the remaining partners paid the engineering firm that built the project to estimate the construction value based on costs at the time – a value of more than $5 million. Based on that figure the company says it has drastically undercharged homeowners for a decade.
But that $5 million is disputed by the Montana Consumer Council, a state agency that advocates on behalf of utility customers before the PSC, and Derek Oestricher, a North Star homeowner and attorney who has intervened in the case. Both Oestricher and Jason Brown, attorney for the council, grilled witnesses and challenged the rates as unreasonable, particularly in light of the missing records.
The council performed its own rate assessment which includes a value estimate of only $1.2 million found in one of North Star's reports. Restrictive covenants also say that the water and sewer infrastructure could be purchased by the homeowners association at the price of $1.2 million.
Based on that figure, the council recommends dropping the rates to about $50 per month.
“A reasonable rate is somewhere in the neighborhood of $50 per month, so right now we’re being overcharged,” Oestricher said.
That $1.2 million figure is being misapplied by the council, Motl said. The figure is cited as a depreciation value for tax purposes, according to testimony from CPA Cindy Utterback, and then was mistakenly cited as the value for the infrastructure.
Whatever the PSC decides, the relationship between some North Star residents and the company appears to have deteriorated over the ordeal. Both Commission Chairman Brad Johnson and Oestricher questioned Peterson on whether the initial higher proposed rates were meant to shock residents into later accepting a more modest rate increase.
“When each neighbor received a letter threatening nearly $500 per month water and sewer rate we took that as a threat to our investments,” Oestricher told the commission.
Peterson denied that the initial rates were made as a negotiating tactic, saying the letters to homeowners were a requirement and reiterating that the company is attempting to set rates based on actual costs.
The PSC is expected to render a decision on the case in March or April, according to commission spokesman Drew Zinecker.
Reporter Tom Kuglin can be reached at 447-4076 @IR_TomKuglin