The Ministry of Forests, Lands, Natural Resource Operations and Rural Development is pressing Hemlock Utility Services on some of the rationale for its recent application to increase water utility rates by up to 600 per cent.
On Tuesday, Sept. 3, Hemlock Utility Services responded to a number of questions posed by the ministry about a proposed increase to the water utility fees, including many about the $850,000 loan needed to pay for the plant upgrades, the utility services’ management expenses and the rationale for a 600 per cent increase for residential properties.
The proposed fee increase was brought forward to residents in June, and would see residential rates would go from $49.82 a quarter to $348.74 a quarter.
The proposed increases are intended to help pay for upgrades to the Hemlock water system, which were completed 2015. The upgrades were ordered by the Fraser Health in 2013 because of a boil advisory that prevented the Sasquatch Mountain Resort — owned by Ralph Berezan, the same person who owns Hemlock Utilities Services — from proceeding with its Master Development Plan.
According to the utility service, it took more than a year to get a quote and another year to complete the upgrades, at a cost of $850,000. The boil advisory was rescinded in 2016, although four other boil advisories have been put in place since then, largely due to heavy rainfalls.
Although the $850,000 upgrade was a large, planned expenditure, the utility service chose not to apply for a rate increase sooner — even though it was knowingly operating at a deficit — because it wanted to wait until the boil advisory had been lifted.
“The utility company did not want to raise rates until the system was fully functioning and the boil advisory could be rescinded,” the company’s answer to the province reads. “The utility company felt it would not have had the support from the customers until the boil advisory was lifted.”
The answer does not explain the three year gap between the boil advisory being lifted and the 2019 application for a rate increase.
The $850K loan
Most of the questions asked by the province centered around the $850,000 “loan” from Berezan Juniper Enterprises, which is being repaid with a five per cent annual interest rate over 12 years.
So far nothing has been repaid to Berezan Juniper Enterprises, and there was no original amount borrowed, the utility’s response reads. The loan is not spread out over the useful life of the plant, which is expected to be 20 years.
The only terms are the repayment of the five per cent interest; the utility company is estimating this to be $28,212 in 2020 and $40,050 in 2021.
By 2021, about one-fifth of the utility service’s expenses will be interest payments. Expenses are also estimated to be more than double what they were in 2018, with the vast majority of the increase going to interest payments, “management fees,” wages, and repairs and maintenance.
The province questioned the rationale for the 12-year loan, asking if any other options were explored and what made the 12-year amortization and five per cent interest rate so appealing.
“Based on experience, Mr. Berezan felt that these terms were better than what he could get from a financial institution for this size and type of loan,” the response reads.
“The utility followed the guidelines for acceptable terms when determining the length of loan repayment (terms must be more favourable than when sourcing from a financial institution).”
In addition, the province also requested a detailed explanation for the utility’s cost breakdown for “management duties,” which included $150 an hour for “executive management duties” and “budgeting and year-end-review” (92 hours a year and 48 hours a year respectively).
When asked how the rates of pay were calculated, the utility company said the cost is “based on an estimate of hours spent on each activity” and that in prior years it was based on 15 per cent of revenue. With the rate increases, that percentage would be “too high in comparison to actual costs” so the number was reduced to eight per cent.
Increasing the rate
In addition to questions about expenses, the province also asked a number of questions on how the proposed increase was calculated for homeowners. In particular, it asked by residential homeowners would be seeing a 600 per cent increase, while commercial properties would see less.
According to the utility service, the proposed increases were based on a “work back model,” starting with the service’s largest customer: the day lodge.
As the day lodge is not metered, Hemlock Utility Services determined the day lodge’s new rate by looking a two year-round casino and restaurant businesses. One has a water bill of approximately $6,000 and sees 240,000 guests annually, while the other has a bill of $15,000 and sees 313,000 guests annually.
“The utility company used the above comparisons and noted that the municipal rates would be approximately $5,000 a year for the 60,000 guest visits” to the Hemlock day lodge, the response reads. “Therefore an appropriate premium was added, resulting in a rate of $20,932 per annum for service.”
Working back from that number gave the subsequent increases for residential customers, and other commercial users.
The company also noted that it doesn’t have data to say whether condos or cabins would use more water; for simplicity, it said, the rates were kept the same for both residential property types.
In Hemlock Utility Services’ application for the rate increase, the company noted that it would be looking at upgrading the water system in the future, in order to keep up with demand from projected development projects in Sasquatch Mountain Resort.
A potable water reservoir would be required to satisfy peak demands with the addition of a hotel or housing development — a project that’s expected to cost $350,000 — while a gradual replacement of the entire system would take between 10 and 15 years, and cost around $3 million.
The province asked how many new customers the company is expecting in the next 10 years; the utility service said there would be approximately 76 new residential units, for a total of 310 units, although it wasn’t clear how many commercial customers would be added. If a hotel was included, that would add an additional 100-120 rooms with water hookup to the system.
The province also asked several pointed questions about how Hemlock Utility Services expected to pay for those projects, including: how will it pay for the projects, and does it expect them to be financed by the customers?
Hemlock Utility Services answer?
“The utility company has not formulated a comprehensive plan for these projects,” the response reads. Although the proposed rate increase includes $82,000 a year for reserve funds, it does not expect those funds will be able to cover the cost of the upgrades.
“The plan will be to do sections at a time, and spread over years,” the response reads. “The original application states 10 to 15 years, however, in order to avoid rate shock, this project will most likely need to be spread out over 20 to 30 years.”
These questions, and their subsequent answers, are the first part of the process for Hemlock Utility Services’ proposed rate increase.
Current customers of the utility company have until Sept. 17 to provide their final comments to the secretary of the comptroller of water rights either by email (email@example.com), fax (250-953-5124) or mail (Secretary to the Deputy Comptroller of Water Rights, PO Box 9340 STN PROV GOVT, Victoria, BC V8W 9M1).
Hemlock Utility Service will have until Sept. 24 to provide its final comments to the comptroller; after that, a decision on the proposed increase will be made.