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DATE: |
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TO: |
Office of Commission Clerk (Cole) |
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FROM: |
Division of Economic Regulation (Hudson, Bruce, Bulecza-Banks, Fletcher, Daniel, Stallcup, Redemann) Office of the General Counsel (Klancke) |
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RE: |
Docket No. 070680-WS – Application for staff-assisted rate case in Pasco County by Orangewood Lakes Services, Inc. |
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AGENDA: |
09/29/08 – Regular Agenda – Proposed Agency Action Except for Issues 12, 14, 15, 16, and 17 – Interested Persons May Participate |
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COMMISSIONERS ASSIGNED: |
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PREHEARING OFFICER: |
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SPECIAL INSTRUCTIONS: |
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FILE NAME AND LOCATION: |
S:\PSC\ECR\WP\070680.RCM.DOC |
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Issue Description Page
1 Quality of Service (Daniel, Redemann)
2 Used and Useful (Daniel, Redemann)
5 Billing Determinants (Bruce)
13 Miscellaneous Service Charges (Hudson)
14 Four Year Rate Reduction (Hudson)
16 Show Cause for Unauthorized Rates (Klancke, Hudson)
17 Show Cause for Serving Outside Territory (Klancke)
Orangewood Lakes Services, Inc. (Orangewood or Utility) is a Class C utility serving 223 water and 190 wastewater customers in Pasco County. According to the Utility’s 2007 Annual Report, total gross revenue was $60,586 and $47,552 for water and wastewater, respectively. The Utility’s operating expenses were $58,690 for water and $102,540 for wastewater.
Orangewood was granted water and wastewater Certificate Nos. 315-W and 260-S, respectively, in 1979.[1] The Utility had been in existence since 1973 providing service to a mobile home community without compensation, and therefore, was exempt from Commission regulation. Subsequently, developers of property adjacent to the mobile home community contacted Orangewood to obtain water and wastewater service. At that time, the Utility began providing service to those developments for compensation, and therefore, was no longer exempt from Commission regulation. Orangewood requested and was granted a certificate and rates and charges for only the adjacent development areas, and failed to include the original mobile home community. This issue was not discovered by staff until the current rate proceeding. Issue 17 addresses staff’s recommendation regarding the Utility serving outside of its authorized territory.
This Utility has never had a rate proceeding before this Commission. On November 9, 2007, in the instant docket, Orangewood filed a request for a staff-assisted rate case (SARC). The Utility also requested emergency wastewater rates. By letter dated December 7, 2007, Orangewood withdrew its request for emergency wastewater rates and instead requested interim wastewater rates. By Order No. PSC-08-0063-PCO-SU, issued January 28, 2008, the Commission approved a 63.57 percent interim rate increase, subject to refund with interest. However, to date, the Utility has not implemented the interim rates.
The Commission has the authority to consider this rate case pursuant to Section 367.0814, Florida Statutes (F.S.).
Should the quality of service provided by Orangewood be considered satisfactory?
Recommendation:
Yes. The Utility’s quality of product, operational condition, and attempts to address customer complaints are satisfactory; therefore, the overall quality of service provided by Orangewood should be considered satisfactory. (Daniel, Redemann)
Staff Analysis:
Pursuant to Rule 25-30.433(1), Florida Administrative Code (F.A.C.), the Commission determines the overall quality of service provided by a utility by evaluating three separate components of water and wastewater operations, including the quality of the Utility's product, the operational condition of the Utility's plant and facilities, and the Utility’s attempts to address customer satisfaction.
Quality of Utility’s Product and Operational Condition of the Plant
The Orangewood water and wastewater facilities are regulated by the Department of Environmental Protection (DEP) and Southwest Florida Water Management District (SWFWMD). The DEP conducted a sanitary survey of the Utility’s water facilities on August 23, 2007, and the wastewater facilities were inspected on November 27, 2007. Orangewood has conformed to all testing and chemical analyses required by DEP and the test results have been satisfactory; however, DEP found minor deficiencies in the Utility’s reporting and leaks in several locations at the wastewater plant. DEP received a letter from Orangewood dated December 18, 2007, indicating that the reporting requirements had been corrected and the leaks repaired. Maintenance at the water and wastewater plant-sites appears to have been given adequate attention. Therefore, the Utility’s quality of product and operational condition should be considered satisfactory.
Utility’s Attempt to Address Customer Satisfaction
An informal customer meeting was held in Orangewood’s service area on May 7, 2008, to give customers an opportunity to address specific concerns about the quality of the Utility’s water and wastewater service, as well as ask questions about the regulatory process. Approximately 15 customers attended the meeting and six customers offered comments about Orangewood.
Most customers were very concerned about the amount of the potential rate increase and several customers expressed concerns about the safety of the water. Staff explained that the Utility has never had a rate case even though it has been in operation since 1978. In addition, staff explained that Orangewood is in compliance with environmental requirements for its water and wastewater facilities and further addressed each of the individual customer concerns.
Staff reviewed the Commission’s complaint tracking system and found that no complaints have been filed against the Utility in the past three years. Staff believes that Orangewood is putting forward a good faith effort to respond to the customer complaints that it has received. Therefore, the Utility’s attempts to resolve customer complaints should be considered satisfactory.
Quality of Service Summary
Based on all of the above information, staff recommends that Orangewood’s quality of product, operational condition, and attempts to address customer complaints are satisfactory; therefore, the overall quality of service provided by the Utility should be considered satisfactory.
What are the used and useful percentages for Orangewood’s water and wastewater systems?
Recommendation:
The Utility’s water and wastewater treatment, distribution, and collection facilities are 100 percent used and useful. (Daniel, Redemann)
Staff Analysis:
Orangewood’s water system includes one 8-inch well with a capacity of 500 gallons per minute (gpm) and an emergency interconnection with a neighboring water system for backup supply during emergencies. The raw water is treated with a liquid sodium hypochlorite solution which is injected prior to entry into the 5,000 gallon hydropneumatic tank. The treated water from the tanks is then pumped into the water distribution system which serves the Orangewood Lakes mobile home park (251 mobile homes and a clubhouse), an apartment complex (75 connections), Cypress Knolls (43 homes) and Lakewood Villas (115 homes) service areas. Pursuant to Rule 25-30.4325, F.A.C., a system with one well is considered 100 percent used and useful. In addition, the Utility’s water service area is built out with no apparent potential for development. Therefore, staff recommends that the water treatment and distribution facilities be considered 100 percent used and useful.
Orangewood’s wastewater treatment plant has the capacity to treat 75,000 gallons per day (gpd) based on three-months of average daily flow (TMADF) utilizing extended aeration. The TMADF for the test year was 43,840 gpd. All of the Utility’s water customers are also wastewater customers with the exception of the 43 homes in Cypress Knolls who receive wastewater treatment from a neighboring wastewater utility. Orangewood’s wastewater service area is built out with no apparent potential for development. Therefore, pursuant to Rule 25-30.432, F.A.C., staff recommends that the wastewater treatment and collection facilities be considered 100 percent used and useful.
What is the appropriate average test year rate base for the Utility?
Recommendation:
The appropriate average test year rate base for Orangewood is $32,751 for water and $46,546 for wastewater. (Hudson)
Staff Analysis:
The appropriate components of the Utility’s rate base include, utility plant in service (UPIS), contributions-in-aid-of-construction (CIAC), accumulated depreciation, amortization of CIAC, and a working capital allowance.
Staff selected a test year ended December 31, 2007, for this rate case. Rate base for Orangewood has never been established. Pursuant to Audit Finding No. 2, the Utility was unable to provide any original cost records to substantiate its 2006 rate base balances. Records necessary to determine the cost of original construction were not available and are considered lost. Absent these records, the auditor requested that an original cost study be performed by the staff engineer. The original cost study was derived by the use of an available map, DEP records, and a physical inspection of the facilities during the engineer’s investigation. Adjustments have been made to match rate base component balances with the engineer’s original cost study and to update rate base through December 31, 2007. A summary of each component and the adjustments follows.
Utility Plant in Service: Orangewood recorded $30,629 and $78,040 of UPIS for the test year ended December 31, 2007, for water and wastewater, respectively. Staff has made an adjustment to increase UPIS by $79,164 for water and $27,931 for wastewater to reflect the appropriate plant balances per the original cost study and the audit review. The Utility owner provided additional invoices in support of plant additions that were not available at the time of the original cost study and audit review. Staff has reviewed the invoices and determined that the additions should be included in UPIS. Thus, staff increased UPIS by $6,217 for water and $33,153 for wastewater. Staff has decreased UPIS by $1,383 and $1,107 to reflect averaging adjustments for water and wastewater, respectively.
Staff’s net adjustment to UPIS is an increase of $83,998 for water and $59,977 for wastewater. Staff’s recommended UPIS balance is $114,627 and $138,017 for water and wastewater, respectively.
Non-used and Useful Plant: As discussed in Issue No. 2, the Utility’s water treatment plant and water distribution system should be considered 100 percent used and useful. Also, Orangewood’s wastewater treatment plant and wastewater collection systems should be considered 100 percent used and useful. Therefore, a used and useful adjustment is unnecessary.
Contribution in Aid of Construction : The Utility recorded CIAC of $21,159 and $39,477 for water and wastewater, respectively, for the test year ended December 31, 2007. Pursuant to Audit Finding No. 3, Orangewood’s tariff includes a meter installation fee of $50 for the initial commencement of water service. The Utility, without prior Commission approval, increased its charge as follows: $125 in 1980; $200 in 1981; $275 in 1986; $375 in 1989; and $500 in 2007. Based on the connections provided in the audit, staff has calculated CIAC based on Orangewood’s increased charges. Staff is recommending that the Utility keep the additional CIAC on its books. Other than the charge collected in 2007, staff believes Orangewood would have a difficult time with a refund. As discussed in the show cause issue (Issue 15), the increased CIAC will benefit customers by decreasing rate base and thereby the return on investment the Utility will be allowed to earn. Therefore, staff has increased CIAC by $10,416 for water and $498 for wastewater. Staff has also decreased wastewater by $250 to reflect an averaging adjustment. Staff’s recommended CIAC is $31,575 for water and $39,725 for wastewater.
Accumulated Depreciation: Orangewood recorded a balance for accumulated depreciation of $20,335 for water and $52,867 for wastewater for the test year. Staff has calculated accumulated depreciation using the prescribed rates set forth in Rule 25-30.140, F.A.C. As a result, staff has increased this account by $61,684 for water and $56,824 for wastewater to reflect depreciation calculated per staff. Staff has decreased this account by $906 and $1,855 to reflect an averaging adjustment for water and wastewater, respectively. The aforementioned adjustments result in an average accumulated depreciation of $81,113 for water and $107,836 for wastewater.
Accumulated Amortization of CIAC: The Utility recorded $11,818 and $24,805 for amortization of CIAC for water and wastewater, respectively. Amortization of CIAC has been recalculated by staff using composite depreciation rates. In order to reflect amortization of CIAC as calculated by staff, this account has been increased by $11,009 for water and $10,631 for wastewater. Staff has decreased this account by $514 and $699 for water and wastewater, respectively, to reflect an averaging adjustment. Staff’s net adjustments to this account results in Amortization of CIAC of $22,313 for water and $34,737 for wastewater.
Working Capital Allowance: Working capital is defined as the investor-supplied funds necessary to meet operating expenses or going-concern requirements of the utility. Consistent with Rule 25-30.433(2), F.A.C., staff used the one-eighth of the operation and maintenance (O&M) expense formula approach for calculating working capital allowance. Working capital has been increased by $8,499 (based on water O&M of $67,996) and $21,353 (based on wastewater O&M of $170,828) to reflect one-eighth of staff’s recommended O&M expenses for water and wastewater, respectively.
Rate Base Summary: Based on the forgoing, staff recommends that the appropriate test year average rate base is $32,751 for water and $46,546 for wastewater. Rate base is shown on Schedule Nos. 1-A and 1-B, and staff’s adjustments are shown on Schedule No. 1-C.
What is the appropriate rate of return on equity and overall rate of return for this Utility?
Recommendation:
The appropriate return on equity is 12.01 percent with a range of 11.01 percent - 13.01 percent. The appropriate overall rate of return is 7.67 percent. (Hudson)
Staff Analysis:
The Utility recorded the following items in its capital structure for the test year: common stock of $112,482, long term debt of $225,336, and customer deposits of $13,135. The appropriate rate of return on equity is 12.01 percent using the most recent Commission-approved leverage formula.[2] The Utility’s capital structure has been reconciled with staff’s recommended rate base. Staff recommends a return on equity of 12.01 percent with a range of 11.01 percent - 13.01 percent, and an overall rate of return of 7.67 percent. The return on equity and overall rate of return are shown on Schedule No. 2.
What are the appropriate pre-repression billing determinants for ratesetting purposes for the respective water and wastewater systems?
Recommendation:
The appropriate pre-repression billing determinants for ratesetting are 4,502 equivalent residential connections (ERCs) and 27,816.3 kgals for the water system and 3,994 ERCs and 21,483 kgals for the wastewater system. (Bruce)
Staff Analysis:
The customer base is comprised of four subdivisions consisting of single-family homes and a mobile home park. Staff’s engineer discovered that the customers of the mobile home park were not individually metered and had not been billed for their water and wastewater services. Mr. Heiler is the owner of the utility and has indicated in his response to Staff Audit No. 4, dated January 16, 2008, that as provided in the lease documents, dated March 1, 1999, in exchange for services provided by Orangewood Lakes Mobile Home Community, Orangewood Lakes Mobile Home Community receives water and wastewater service from Orangewood Lakes Services.
There are approximately 224 metered residential customers for the water system and approximately 181 metered customers for the wastewater system. However, the mobile home park is unmetered and the customers will therefore be classified as general service customers with usage billed to the owner of the park. The mobile home park has a clubhouse, plus 251 small mobile homes occupied by retirees. The mobile homes are approximately 700 square feet. To calculate the appropriate number of ERCs, staff assigned one ERC per single-family home, 0.6 ERC per mobile home, and one ERC to the clubhouse. Therefore, staff recommends that the appropriate number of ERCs served by the utility for the general service class is 1,819 ERCs for both the water and wastewater systems. Furthermore, staff recommends that the appropriate number of ERCs served by the utility for the residential class is 2,683 ERCs, and 2,175 ERCs for the wastewater system. The appropriate kgals for the residential water system and wastewater system is 14,843 and 8,510, respectively. The appropriate kgals for the general service class is 12,973. This number was calculated on the total number of gallons taken from the 2007 Monthly Operating Reports multiplied by 10 percent unaccounted-for-water, minus the gallons billed for the residential class.
Based on the foregoing, the appropriate pre-repression billing determinants for ratesetting are 4,502 ERCs and 27,816.3 kgals for the water system, and 3,994 ERCs and 21,483 kgals for the wastewater system.
What are the appropriate amounts of test year revenues in this case?
Recommendation:
The appropriate amount of test year revenues for the Utility is $110,623 for water and $89,676 for wastewater. (Bruce, Hudson)
Staff Analysis:
Orangewood was not charging the Orangewood Lakes mobile home park water and wastewater rates. As discussed in Issue 5, staff is including the mobile home park in its billing determinants for ratesetting purposes. For the test year, staff is imputing the revenues associated with the mobile home park. Staff has applied the Utility’s tariffed rates to staff’s recommended billing determinants, resulting in test year revenues of $110,623 for water and $89,676 for wastewater. Test year revenues are shown on Schedule Nos. 3-A and 3-B. The related adjustments are shown on Schedule No. 3-B.
What is the appropriate amount of test year operating expenses?
Recommendation:
The appropriate amount of operating expense for the Utility is $77,815 for water and $181,865 for wastewater. (Hudson)
Staff Analysis:
Pursuant to Audit Finding No. 5, Orangewood does not separate its water expenses from its wastewater expenses. The test year O&M expenses have been reviewed, and invoices, canceled checks, and other supporting documentation have been examined. As discussed in Issue 5, the Utility does not charge the mobile home park, a related party, for water and wastewater service in exchange for the mobile home park not charging for services it provides to Orangewood. In order to appropriately establish the expenses related to the Utility operations, staff is including the expenses for services provided by the mobile home park. Staff made several adjustments to the Orangewood’s operating expenses, as summarized below:
Salaries and Wages – Employees – (601/701) – The Utility has one employee, an office manager, who works 40 hours per week. To determine the proper amount of salary expense to allocate between water and wastewater, staff evaluated the responsibilities and determined that 60 percent of time was dedicated to water service and 40 percent for wastewater. The Utility pays the employee an annual salary of $25,175, which staff believes is reasonable. Based on this salary, staff recommends salary expense for water of $15,105 and $10,070 for wastewater.
Salaries and Wages – Officers – (603/703) – Orangewood president’s salary is $10,400. Staff believes the salary is reasonable. To determine the proper amount of salary expense to allocate between water and wastewater, staff evaluated the responsibilities and determined that 60 percent of time was dedicated to water service and 40 percent for wastewater. Based on this salary, staff recommends salary expense for water of $6,240 and $4,160 for wastewater.
Purchased Water – (610) – The Utility paid $2,256 for purchased water to the City of New Port Richey. Staff believes this amount is reasonable. Staff’s recommended purchased water expense is $2,256.
Sludge Removal Expense – (711) – Orangewood provided invoices that indicated sludge removal for the test year was $33,056 for wastewater. The Utility uses Arthur Price Septic Service (Arthur Price) for sludge removal. Arthur Price disposes the sludge at Pasco County Utilities (Pasco). Arthur Price provided the Utility a letter indicating that Pasco would be increasing its sludge disposal rates. During the test year, the price per thousand gallons for sludge disposal to Pasco was $29.00. Pasco will begin charging a rate of $106.50 per thousand gallons effective October 1, 2008. Staff verified the accuracy of the rate with Pasco. As a result of the increase in the sludge disposal rate, the Utility’s sludge removal expense would increase by $34,619. Therefore, staff has increased this account by $34,619 to reflect a pro forma increase in sludge removal expense. Staff’s net adjustment to this account is $67,675 ($33,056 + $34,619). Staff’s recommended sludge removal expense is $67,675 for wastewater.
Purchased Power – (615/715) – Orangewood provided invoices that indicated the purchased power for the test year was $5,666 for water and $6,536 for wastewater. Staff believes that the purchased power amounts are reasonable and has made an adjustment to include these amounts in the test year expense.
Chemicals – (618/718) – The Utility provided invoices that indicated the chemicals for the test year were $2,742 for water and $11,035 for wastewater. Staff believes that the chemical amounts are reasonable and has made an adjustment to include these expenses.
Materials and Supplies – (620/720) – Orangewood provided invoices that indicate material and supplies for the test year was $76 for wastewater. Staff believes that the amount is reasonable and has made an adjustment to include this expense.
Contractual Services – Billing – (630/730) – The Utility provided invoices indicating its total billing expenses for the test year were $13,846 for water and wastewater. Staff believes these amounts are reasonable. To determine the proper amount of billing expense to allocate between water and wastewater, staff evaluated the billing process. Based on this evaluation, staff recommends contractual services – billing for water of $11,366 and $2,480 for wastewater.
Contractual Services - Professional – (631/731) – The Utility provided invoices indicating its accounting services for the test year were $2,100. The accounting services consisted of the year-end closing of the books and the preparation of Orangewood’s annual report and tax return. Staff believes this amount is reasonable. Staff has increased this account by $1,050 each for water and wastewater. The Utility provided an invoice indicating engineering expense of $2,800 for its wastewater permit renewal. Staff believes this amount is reasonable. Pursuant to Rule 25-30.433(8), F.A.C., staff amortized the permit renewal cost over five years resulting in a $560 increase to wastewater. Staff’s recommended contractual services – professional is $1,050 for water and $1,610 for wastewater.
Contractual Services – Testing – (635/735) – Each utility must adhere to specific testing conditions prescribed within its operating permit. These testing requirements are tailored to each utility as required by Rule Chapter 62-550, F.A.C. for water and Rule Chapter 62-600 F.A.C. for wastewater and enforced by DEP. Staff made an adjustment to increase water by $1,799 and wastewater by $1,667 to reflect all DEP required testing.
Contractual Services – Other – (636/736) – The Utility recorded $0 in this account during the test year. Orangewood provided invoices from Gator Water and Wastewater Management, Inc. (Gator) indicating it spent $9,180 or $765 monthly for operator services during the test year. For 2008, the Utility indicated the operator expense increased to $1,150 per month. Staff believes that the amount spent for operator services is reasonable. To determine the proper amount of operator expense to allocate between water and wastewater, staff evaluated the duties and determined that the expense should be allocated equally. Therefore, staff has increased this account by $6,900 each for both water and wastewater. During the test year, Orangewood paid $1,951 and $1,274 for normal contracted repairs for water and wastewater, respectively. Staff believes these amounts are reasonable and has increased this account accordingly. The Utility spent $1,450 for cleaning of the lift stations. Staff believes this amount is reasonable and increased this account accordingly. Orangewood indicated its yearly contracted engineering expense will be $500. The Utility indicated the engineer expense is due to changes in DEP rules that require periodic engineering certification of the hydro pneumatic water tank and certification as to the interior cleanliness and condition of the interior tank coating. Staff believes this amount is reasonable and increased this account accordingly. Staff has included expenses incurred by the mobile home community on behalf of Orangewood. Staff has reviewed the documentation provided by the Utility and included the expense staff believes are reasonable. Thus, staff has increased this account as follows: maintenance of the percolation pond at $16,680 annually for wastewater; the drain field piping at $22,765 annually for wastewater; and the plants at $7,020 for water and $10,920 for wastewater. Based on the above, staff’s recommended contractual services – other is $15,871 for water and $60,489 for wastewater.
Rents – (640/740) – The Utility recorded $0 in this account during the test year. Orangewood is located in a building owned by Heiler Trust, a related party. The Utility leases the office space for $3,600 which includes water, electricity, and the use of the copy room. Orangewood allocated 30 percent of the rent to water and 70 percent to wastewater. Staff believes the rent amount is reasonable. However, the allocation should be divided 60 percent for water and 40 percent for wastewater based on the allocation of employee time to each system. Therefore, the account should be increased by $2,160 for water and $1,440 for wastewater.
Rule 25-30.433(10), F.A.C., specifies that a Utility is required to own the land on which the Utility treatment facilities are located, or possess the right to continued use of the land, such as by holding a 99-year lease. The Utility has a 99-year lease agreement with the mobile home park for the use of the land at $0 annually.
Staff believes that the rental agreement for the land is a related party transaction. By Order No. PSC-00-1513-TRF-WS, issued August 21, 2000, in Docket No. 991835-WS, In Re: Application for allowance for funds prudently invested (AFPI) charge for additional water improvements and for additional lines associated with wastewater extension into George Mayo subdivision in Marion County, by Tradewinds Utilities, Inc., the Commission found the following:
Related party transactions require heightened scrutiny. Although a transaction between related parties is not per se unreasonable, it is the utility’s burden to prove that its costs are reasonable. Florida Power Corporation v. Cresse, 413 So. 2d 1187, 1191 (Fla. 1982). This burden is even greater when the transaction is between related parties. In GTE Florida, Inc. v. Deason, 642 So. 2d 545 (Fla. 1994), the Court established that when affiliate transactions occur, that does not mean that unfair or excessive profits are being generated, without more evidence to contrary. The standard is to evaluate affiliate transactions and determine whether those transactions exceed the going market rate or are otherwise unfair.
In exchange for water and wastewater services, the mobile home community is leasing the land to Orangewood at $0. As discussed previously, staff is recommending that the expenses incurred by the mobile home community on behalf of the Utility should be reflected on the Orangewood’s books. Thus, staff believes a rental amount should be included on the Utility’s books for the lease of the land. Orangewood has chosen not to purchase the land but to lease or rent it from a related party. The Commission has found that the appropriate rent amount for the land between related parties shall be the annual rate of return, based on the Utility’s current capital structure, times the original cost of the land in service.[3] In order to determine the original cost of land, staff researched the Pasco County property appraiser database and found sales of land during the time the mobile home park came into existence as well as being within the vicinity of the mobile home park. Staff determined that land was sold for approximately $8,611 an acre at that time. The water plant is located on .51 acres of the property and the wastewater plant is located on 1.58 acres. Staff has determined that the value of the land for the water plant should be $4,392 and the value of land for the wastewater plant should be $13,605. Staff’s recommended rate of return is 7.67 percent. Therefore, staff has determined rent for the land to be $337 ($4,392 x 7.67 percent) for water and $1,044 ($13,605 x 7.67 percent) for wastewater. Staff has increased this account according for the land rent.
Orangewood leases a generator from the mobile home community as a back-up for any power losses. The lease amount is $2,200 a year. Staff believes this amount is reasonable and increased this account accordingly. Staff’s recommends contractual services – rents of $4,697 for water and $2,484 for wastewater.
Insurance Expense – (655/755) – The Utility provided documentation that indicated insurance expense for the test year was $69 for water and $1,107 for wastewater. Staff believes the amounts are reasonable and has made adjustments to include these expenses.
Regulatory Commission Expense – (665/765) – Orangewood recorded $0 in this account during the test year. Pursuant to Section 367.0816, F.S., rate case expense is amortized over a 4-year period. The Utility is required by Rule 25-22.0407, F.A.C, to mail notices of the customer meeting and notices of final rates in this case to its customers. For these notices, staff has estimated $191 for postage expense, $163 printing expense, and $23 for envelopes. The above results in a total rate case expense for noticing of $377. Orangewood paid a $2,000 rate case filing fee for water and wastewater. Staff recommends that total rate case expense is $2,377 ($2,000 + $377), which amortized over four years is $594, allocating $297 each for water and wastewater.
Miscellaneous Expense – (675/775) – During the test year, the Utility spent the following on miscellaneous expenses: $348 for computer upgrades; $523 for bank charges; $150 for State of Florida Annual Report filing fee and $100 on collection fees. Staff believes these amounts are reasonable. The expenses totaled $610 and were allocated equally between water and wastewater. Orangewood paid telephone expense of $228 for water and $532 for wastewater. Staff believes this amount is reasonable and has increased this account accordingly. Staff recommends miscellaneous expense of $838 for water and $1,142 for wastewater.
Operation and Maintenance Expense (O&M Summary) – The total O&M adjustment is an increase of $67,996 for water and $170,828 for wastewater. Staff’s recommended O&M expenses are $67,996 for water and $170,828 for wastewater. O&M expenses are shown on Schedule 3-D and 3-E.
Depreciation Expense (Net of Amortization of CIAC) – Staff calculated test year depreciation of $3,335 for water and $4,855 for wastewater using the rates prescribed in Rule 25-30.140, F.A.C. Staff has calculated amortization of CIAC of $919 for water and $1,397 for wastewater based on composite rates. Staff’s recommended net depreciation expense is $2,416 for water and $3,458 for wastewater.
Taxes Other Than Income (TOTI) – The Utility recorded taxes other than income of $3,624 for water and $4,161 for wastewater. The amounts included in this account for payroll taxes are $769 for water and $2,081 for wastewater. Staff calculated that payroll taxes are $1,633 ($21,345 x .0765) for water and $1,089 ($14,230 x .0765) for wastewater. Staff has increased this account by $864 ($1,633 - $769) for water and decreased this account by $993 ($2,081 - $1,089) to reflect payroll taxes on staff’s recommended salary. As discussed in Issue 5, staff has increased test year revenues by $47,101 for water and $40,665 for wastewater. Based on staff’s recommended test year revenues, Orangewood’s regulatory assessment fees (RAFs) should be $4,978 for water and $4,035 for wastewater. The amounts included in this account for RAFs are $2,855 for water and $2,080 for wastewater. Staff has made adjustments to increase RAFs by $2,123 ($4,978 - $2,855) for water and by $1,956 ($4,035 - $2,080) for wastewater. The mobile home park paid $62,159 of property taxes for the park. In order to determine the Utility’s portion of the property taxes, staff has determined that the Orangewood’s facilities occupy 1.28 percent of the property for water and 3.95 percent for wastewater. Based on these percentages, staff has determined property taxes for the Utility to be $793 for water and $2,455 for wastewater. Staff’s net adjustment to this account is an increase of $3,780 for water and $3,418 for wastewater.
Income Tax – The Utility recorded income tax of $0 water and wastewater. The Utility is an 1120 S corporation. As such, the tax liability is passed on to the owner’s personal tax returns. Therefore, staff did not make an adjustment to this account.
Operating Expenses Summary – The application of staff’s recommended adjustments to the audited test year operating expenses results in staff’s calculated operating expenses of $77,815 for water and $181,865 for wastewater. Operating expenses are shown on Schedule Nos. 3-A and 3-B. The related adjustments are shown on Schedule 3-C.
What are the appropriate revenue requirements?
Recommendation:
The appropriate revenue requirements are $78,900 for the water system and $189,947 for the wastewater system. (Hudson, Bruce)
Staff Analysis:
Based on staff’s calculated revenue requirement below, the Utility earned more than the recommended rate of return for its water system. Orangewood is overearning on its water system and a revenue decrease is normally the appropriate action undertaken under these circumstances. According to staff’s calculations, the appropriate revenue change is a decrease of $31,723 (or 28.68 percent) for the water system and an annual increase of $100,271 (or 111.82 percent) for the wastewater system. This would allow the Utility the opportunity to recover its expenses and earn a 7.67 percent return on its investment. Staff’s recommended revenue is as follows:
|
Water |
|
Wastewater |
|
|
Adjusted Rate Base |
$32,751 |
|
$46,546 |
|
Rate of Return |
7.67% |
|
7.67% |
|
Return on Rate Base |
$2,512 |
|
$3,570 |
|
Adjusted O & M Expense |
67,996 |
|
170,828 |
|
Depreciation expense (Net) |
2,416 |
|
3,458 |
|
Taxes Other Than Income |
5,976 |
|
12,091 |
|
Income Taxes |
0 |
|
0 |
|
Revenue Requirement |
$78,900 |
|
$189,947 |
|
Less Adjusted Test Year Revenues |
110,623 |
|
89,676 |
|
Annual Increase/(Decrease) |
-$31,723 |
|
$100,271 |
|
Percent Increase/(Decrease) |
-28.68% |
|
111.82% |
The calculation above results in a 28.68 percent annual decrease of $31,723 for water and a 111.82 percent annual increase of $100,271 for wastewater.
Orangewood serves approximately 475 water customers and 432 wastewater customers. Forty-three water customers receive wastewater services from another entity. In prior cases when the customer bases were similar for water and wastewater, staff recommends that the water system overearnings be netted against the wastewater system underearnings, resulting in net utility underearnings. In this case, the customer bases are dissimilar and netting would result in the water system subsidizing the wastewater system. Therefore, staff recommends reducing the water system revenues.
Staff realizes that reducing the water rates can promote customers to use an excessive amount of water and also undercuts SWFWMD’s effort to promote conservation. However, staff’s only option was to reduce rates since the Utility’s water system is overearning. As mentioned earlier, in this case, staff could have netted the water system overearnings against the wastewater system to avoid the reduction in rates, however; the two customer bases are dissimilar. Staff has been in contact with SWFWMD, and SWFWMD’s staff has stated that Orangewood has not exceeded their capita. Furthermore, District staff also indicated that due to low per capita water use, there were no conservation requirements for this utility. Based on the above, staff believes that reducing the water rates is appropriate in this case. Revenue requirement is shown on Schedule No. 3.
What are the appropriate rate structures for the Utility’s various customer classes?
Recommendation:
The appropriate rate structure for the water and wastewater systems’ residential and non-residential class is a base facility charge (BFC)/uniform gallonage charge rate structure. The water system’s 2 kgals allotment should be removed from the BFC, and the BFC cost recovery should be set at 50 percent. The appropriate rate structure for Orangewood’s wastewater system should be changed to a BFC/gallonage charge rate structure. The residential wastewater cap monthly gallon age cap should be set at 8,000 gallons (8 kgal). The non-residential gallonage charge should be 1.2 times greater than the corresponding residential charge, and the BFC cost recovery percentage for the wastewater system should be set at 50 percent. (Bruce)
Staff Analysis:
The Utility’s current rate structure for the water system consists of a monthly BFC/gallonage charge rate structure, in which the BFC of $12.50 includes a 2 kgal allotment in the BFC, and all gallons in excess of 2 kgal used are charged $2.80 per kgal. In prior cases, it has been Commission practice to eliminate allotments in the base charge. This type of rate structure is not considered conservation-oriented because it discourages conservation.
Water Rates: Staff performed a detailed analysis of Orangewood’s billing data in order to evaluate various BFC cost recovery percentages for the residential rate class. The goal of the evaluation was to select rate design parameters that: 1) allow the Utility to recover its revenue requirement; 2) equitably distribute cost recovery among Orangewood’s customer; and 3) implement, where appropriate, water conservation rate structures consistent with the Commission’s Memorandum of Understanding with the state’s five Water Management Districts.
The Commission’s preferred rate structure had traditionally been the BFC/uniform gallonage charge rate structure. However, over the past several years, the Water Management Districts have requested whenever possible that an inclining block rate structure is implemented .
As discussed in Issue 8, staff has recommended that the water system’s revenue requirement be reduced. Orangewood earned more than the recommended rate of return for its water system. When this happens, a revenue decrease is normally the appropriate action undertaken under these circumstances. In prior cases, when a utility is overearning on its water system, if appropriate, staff recommends that the water system overearnings be netted against the wastewater system underearnings, resulting in net utility underearnings. However, in this case, there are significant dissimilarities in the water and wastewater customer bases. Of the 475 water customers, approximately ten percent (43 customers) do not receive wastewater service from the Utility. If the water system overearnings were netted against the wastewater system underearnings, these 43 customers would be subsidizing the wastewater service of the remaining 432 customers. Therefore, staff recommends that the water system overearnings not be netted against the wastewater underearnings.
Based on the foregoing, implementing an inclining block rate structure would be inappropriate. However, staff recommends that a BFC/uniform gallonage charge rate structure be implemented. This rate structure is considered a conservation-oriented rate structure because customers’ bills increase as their consumption increases. Furthermore, staff does not believe it is appropriate to continue the kgal allotment in the BFC because it is a non-conserving rate structure.
The traditional BFC/uniform gallonage charge rate structure has been the Commission’s water rate structure of choice for nonresidential classes. This is consistent with Rule 25-30.437(6), F.A.C. The uniform gallonage charge should be calculated by dividing the total revenues to be recovered through the gallonage charge by the total of gallons attributable to all rate classes. This should be the same methodology used to determine the general service gallonage charge in this case. With this methodology, nonresidential customers would continue to pay their fair share for the cost of service.
Staff’s recommended rate design for the water system is shown on Table 9-1 on the following page. Staff also presented two alternative rate structures to illustrate other recovery methodologies. The current rate structure and Alternatives 1 and 2 result in price decreases at all levels of consumption.
TABLE 9-1
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