The Montana Public Service Commission on Tuesday began its inquiry into Mountain Water Co.'s rates, while voting to compel the utility to disclose information supporting the company's claim that it didn't violate provisions in a 2011 sale and transfer order.

The PSC placed the issues on the docket after The Carlyle Group sold Mountain Water to Liberty Utilities Co. last month without the commission's approval. The PSC aims to determine whether Mountain Water's rates are just and reasonable given lower interest rates and reduced debt.

In an effort to better understand Mountain Water's rates, PSC staff attorney Laura Farkas had asked the utility to produce certain documentation regarding interest rates on debt. She said Mountain Water's response raised her suspicions.

“I received an answer to a specific question I did not like,” Farkas told commissioners. “I attempted to ask the question again and re-solicit the information that I was asking for, and I received an answer that, in my opinion, appears to be a bit evasive.”

Farkas asked the commission Tuesday to issue an order compelling Mountain Water to provide the information as requested. She called it an “important question” that must be understood to fully determine if current water rates are just and reasonable.

“There is likely an interest rate or composite interest rate associated with this term-credit facility they reference in their answer,” Farkas said. “I want to know what that number is. I would like to compel them to provide that. A failure to do so – for what I'd consider to be the third time – would result in possible consequences from the commission.”

PSC Commissioner Travis Kavula also questioned Mountain Water's current rates, saying they reflect a time when Carlyle incurred a higher cost of debt with interest on notes running as high as 8.9 percent. The debt has since be reissued under Liberty's ownership, he said, though the reduced cost is not reflected in current water rates.

Kavula added that the company's current rates also reflect a higher percentage of equity than debt, though under new ownership, the equity to debt ratio is nearly even. Combined with lower debt costs, Kavula said, rates should be 4 percent lower than they currently are.

“There may be arguments developed by the parties that the upstream cost of capital held by Liberty or Algonquin (Power and Utilities Corp.) should somehow be imputed into the weighted cost of capital for this utility,” Kavula said. “But the rates as approved are based on a more equity-heavy capital structure and a higher cost of debt than currently exists at this time.”


Tuesday's docket also sought to explore whether certain provisions outlined in a 2011 sale and transfer order were violated when Carlyle sold Mountain Water to Liberty.

PSC staff attorney Jeremiah Langston told the commission that Mountain Water contends that it did not violate any provisions, though it was required to submit documentation supporting its position.

“In their answer, they provided some analysis on the request for documents, and they asserted that (a) consent email for waiver was not relevant to the (PSC's) proceeding,” Langston said. “Staff would highly recommend that this is, in fact, a relevant document.”

Langston said the document in question triggered the utility's sale and transfer to Liberty without the PSC's approval.

“This is a document the commission vitally needs to look at to understand the nature of how this came to be,” Langston said. “I would request the commission compel production of that document.”

The PSC voted to compel Mountain Water to produce the documents, along with evidence that it did not receive any dividends or transfers that accede 5 percent of Mountain Water's equity.

The PSC also permitted the Clark Fork Coalition and the city of Missoula to intervene in the “just and reasonable rate” docket under certain restrictions. The PSC is expected to take up the issues in early April.