Case Background
Suwannee Valley Estates (Suwannee Valley) is a Class C water utility located in Columbia
County serving approximately 16 water customers. Suwannee Valley was issued
Water Certificate No. 421-W pursuant to Order No. 12762, issued December 9, 1983,
in Docket No. 820346-W, In Re: Application of Suwannee Valley Estates for a Certificate
to Operate a Water Utility Pursuant to Section 367.171, Florida Statutes.
The utility’s service area is in the Suwannee River Water Management District;
however, it is not in a water use caution area. Wastewater service is provide
by septic tanks. The utility’s 2003 annual report reflects operating revenues
of $2,326 and an operating loss of ($3,568).
On October 20, 2003, Consolidated Water Works, Inc. (CWW or Buyer) filed an application for transfer of the utility’s facilities and certificate from Suwannee Valley to CWW.
According to the application, on October 9, 2003, CWW entered into an agreement
to purchase the utility and the land upon which the facilities were located for
a purchase price of $15,000. The application was found to be deficient. The
deficiencies were corrected on May 10, 2004.
This recommendation addresses the transfer of the
water facilities from Suwannee Valley to CWW, cancellation of certificate 421-W
and the amendment of certificate No. 393-W held by CWW. The Commission has
jurisdiction to consider this matter pursuant to the provisions of Section
367.071 Florida Statutes, and Rule 25-30.037, Florida Administrative Code.
Discussion of Issues
Issue
1: Should the Commission approve the transfer of the water facilities from Suwannee
Valley Estates to CWW, the cancellation of Certificate No. 421-W and the amendment
of Certificate No. 393-W?
Recommendation: Yes, the transfer of the water facilities from Suwannee Valley to CWW should be
approved. Suwannee Valley’s Certificate No. 421-W should be canceled and CWW’s
Certificate No. 393-W should be amended to include the territory of Suwannee
Valley. The transfer should be effective the day of the Commission vote. In addition, CWW should be ordered to submit a warranty deed within 60 days of the
date the order resulting from action taken at this agenda conference becomes
final, reflecting that ownership of the land upon which the Suwannee Valley facilities
are located has been properly conveyed to CWW. CWW is responsible for
remitting the 2004 and all future regulatory assessment fees (RAFs) and annual
reports. A description of the territory to be transferred is appended to this
recommendation as Attachment A. (Johnson, Walden, Kaproth)
Staff Analysis: On May 10, 2004, CWW completed all of the filing requirements for its application for
transfer of Certificate No. 421-W from Suwannee Valley to CWW. The application
is in compliance with the governing statute, Section 367.071, Florida Statutes,
and other pertinent statutes and rules concerning an application for transfer.
Commission Approval. Section 367.071, Florida
Statutes, requires that no utility shall sell, assign, or transfer its
certificate of authorization, facilities or any portion thereof, or majority
organizational control, without prior approval of the Commission unless such
sale, assignment, or transfer is made contingent upon Commission approval. The
contract is contingent upon the Commission’s approval. The closing is
scheduled to take place thirty days after the Commission approves the transfer.
Noticing. The application contains proof of
compliance with the noticing provisions set forth in Rule 25-30.030, Florida
Administrative Code, including notice to the customers of the utility to be
transferred. No objections to the notice of application have been received and
the time for filing such has expired.
Sales Contract and Financing. The application
contains documentation to comply with Rule 25-30.037(2)(g), (h), (i), and (k),
Florida Administrative Code, regarding terms of the sale and financing of the
purchase, including a copy of the purchase agreement. The purchase price for
the utility and land is $15,000. The buyer obtained a five year loan to
purchase Suwannee Valley. The customer deposits were transferred to the buyer.
Proof of Ownership. Rule 25-30.037(2)(q), Florida
Administrative Code, requires proof that the utility owns or has provided for
the continued use of the land upon which the utility facilities are located. The
application included an unexecuted sample of the warranty deed to be recorded
after closing on the sale. The applicant has requested that they be allowed to
provide proof that the utility owns the land upon which its facilities are
located after the closing. According to the applicant, upon the issuance of
the Commission’s order approving the transfer application, the ownership of all
utility land will be transferred to CWW. CWW should be required to provide a
warranty deed or proof that the utility owns or has continued use of the land
upon which its facilities are located within 60 days of the order becoming
final.
Public Interest. The application also contains
a statement, pursuant to Rule 25-30.037(2)(j), Florida Administrative Code,
regarding how the transfer is in the public interest. According to the
application, the transfer is in the public interest because the buyer has the
expertise and finances to operate the utility to better serve the customers. CWW
is a corporation owned by a father and son, which consists of several small
utility systems. It should be noted that CWW has a history of providing poor
management and questionable service which was documented in Order No.
PSC-01-1988-PAA-WU, issued October 8, 2001, in Docket No. 001682-WU, In Re:
Application for staff-assisted rate case in Columbia County by Consolidated
Water Works, Inc. However, the current owners of Suwannee Valley no longer
want to be in the utility business and the plant has deteriorated under their
management. CWW does not have any outstanding consent orders from Florida
Department of Environmental Protection (FDEP) and has complied with the
directives of the Commission. It appears at this time that CWW is making an
effort to maintain and improve the utility systems that it owns. Therefore,
staff believes that CWW can increase the quality of customer service and
efficiencies of the utility through economies of scale.
CWW has shown sufficient technical and financial ability to
operate the system. With regard to the financial ability of CWW, the
application included the financial statements of one of the owners of CWW, which
indicates sufficient net worth. While most of the assets are in real estate,
the statement also reflect liquid assets, as well as the ability to attract
financing. According to the application, the utility’s investment capital will
be provided by Mr. Jeffrey Espenship. We find these assets are sufficient to
ensure continued financial stability. With regard to technical ability, we
recognize that CWW has been a certificated utility since 1983. In addition, CWW's
owner, Mr. Jack Espenship, has been in the water utility business since 1972,
and he has shown improvement in maintaining the CWW systems. Therefore, we
find that the requisite technical ability has been demonstrated. Additionally,
the application contains a statement that the buyer will fulfill the
commitments, obligations, and representations of the sellers with regard to
utility matters.
The application states that the buyer has performed a
reasonable investigation of the Suwannee Valley system as required by Rule
25-30.037(2)(p), Florida Administrative Code. The buyer included a statement
that the system appears to be in satisfactory condition and in compliance with
all applicable standards set by the FDEP. Staff has contacted the FDEP and
verified that there are no outstanding notices of violation.
The water treatment plant is composed of one 4-inch well.
Liquid chlorination is used as the primary form of treatment. The average
daily flow for the calendar year 2003 was approximately 10,247 gallons per day
(gpd). Given the age of the system, the new owners of Suwannee Valley have
initiated replacement of approximately 16 residential meters, back flow valves,
meter boxes, curb stops, locks, and electrical repairs after completing a
preliminary investigation of the subdivision. The cost for these repairs is
estimated to be $5,804.
Annual Reports & Regulatory Assessment Fees. Rule
25-30.037(2)(r), Florida Administrative Code, requires that the application
contain a statement regarding the disposition of any outstanding RAFs, fines,
or refunds owed. The application states that all RAFs, fines, and refunds have
been paid by the applicant. We have verified that the RAFs and annual reports
have been filed through December 31, 2003 and that there are no outstanding
penalties, refunds or interest as of December 31, 2003 for RAFs or Annual
Reports. CWW will be responsible for remitting the 2004 and all future RAFs
and annual reports.
Based on the above,
staff recommends that the transfer of the Suwannee Valley facilities to CWW is
in the public interest and should be approved. Suwannee Valley’s Certificate No. 421-W should be canceled and CWW’s Certificate No. 393-W amended to include the additional
territory. In addition, CWW should be ordered to submit a warranty deed within
60 days of the issuance date of the order resulting from action taken at this
agenda conference, reflecting that ownership of the land upon which the Suwannee
Valley facilities are located has been properly conveyed to CWW. The transfer
should be effective the day of the Commission vote. A description of the
territory being transferred is appended to this recommendation as Attachment A.
Issue
2: What is the rate base of Suwannee Valley at the time of transfer?
Recommendation: The rate base could not be calculated at this time. Therefore rate base has been set
at $0 for transfer purposes as of December 30, 2002. The utility should be
required to provide proof within 60 days of the order becoming final, that it
has set up the books and records for all of CWW, including the Suwannee Valley
system, using the National Association of Regulatory Utility Commissioners (NARUC)
Uniform System of Accounts (USOA) and that the beginning plant balances for the
Suwannee Valley system reflect the balances establish pursuant to this order.
(Johnson)
Staff Analysis: Rate base for Suwannee Valley has never been established by the Commission. Suwannee Valley
entered into a contract on October 9, 2003, to sell its water facilities to CWW.
It is Commission practice to establish rate base as of the date of transfer.
Staff conducted an audit of the books and records of the utility to determine
rate base. The audit report contained several audit exceptions, but could not
determine rate base from the information provided by the utility.
Audit Exception No. 1. This exception was the
audit opinion that the utility was not maintaining its books pursuant to Rule
25-30.115(1), Florida Administrative Code, which requires all water and
wastewater utilities to maintain their accounts and records in conformance with
the NARUC Uniform System of Accounts. According to the
sellers of Suwannee Valley, the original owners of the utility never released
the books and records. Therefore, the sellers’ failure to maintain the
utility’s books and records in accordance with 1996 NARUC USOA was perpetuated by
the owners before they obtained ownership.
Staff has received a verbal commitment from
CWW of its intention to bring the utility’s books and records into compliance
with the 1996 NARUC USOA. In addition, staff recommends that the utility
should be required to provide proof, within 60 days of the Commission’s order
becoming final that it has set up the books and records for all of CWW,
including the Suwannee Valley system, using the NARUC USOA and that the
beginning plant balances for the Suwannee Valley system reflect the balances
establish pursuant to this order.
Audit Exception No. 2. This exception was the audit opinion that without an official starting point, a per audit balance could
not be established for land. As mentioned earlier, there is no general ledger
and there is no land recorded in the annual report for Suwannee Valley. The
company provided a deed that listed the well and the utility on the same lot.
In addition, the deed indicates that the land and the utility is owned by Mr. Bud
Espenship and Mr. Dave Mangrum. The application for transfer does not mention
Mr. Dave Mangrum. Mr. Mangrum informed the staff auditor that he was not
aware of the application for transfer or the sale of the utility. Subsequent
to the audit report Mr. Mangrum signed over his interest in the land and the
utility to Mr. Bud Espenship, the owner of Suwannee Valley.
Audit Exception No. 3. The utility collected
deposits from its customers at the rate of two times the monthly flat charge of
$12. The utility has a total of sixteen customers and a deposit of $24 from
each customers which results in $384 in customer deposits.
Rule 25-30.311(4)(a), Florida Administrative
Code, requires each utility that requires deposits from its customers to pay a
minimum interest on such deposits of 6 percent per annum. Subsequent to the
purchase agreement, the deposits of $384 were transferred to the purchaser of
the utility. The new owner has stated that the customers deposits will be
refunded with interest as required by Rule 25-30.311(4)(a), Florida Administrative
Code.
Audit Exception No. 4. The utility could not
provide original source documents for plant in service, due to the lack of
books and records. The utility’s tax return and the annual report to the
Commission listed no plant.
Staff found five invoices for plant
replacement items. The five plant items have a combined plant total of $2,359.
The corresponding accumulated depreciation is $918 for a net plant balance of $1,441.
The rate base for this system could be set at $1,441, based on the records
that are available. However, that amount would not include the cost of land,
lines and CIAC. Due to the lack of books and records and assistance from the applicants,
staff could not determine the value of these items.
Staff notified the buyer that, in order to
establish rate base in this proceeding, an original cost study needed to be
prepared. The buyer filed a letter on May 10, 2004, stating that it would not
be doing an original cost study, but it would file for a rate proceeding at a
later date. According to the buyer, the plant is practically fully depreciated
and it would not be prudent to incur the expense for a cost study. Therefore,
without an original cost study and books and records, the buyer is expecting a
rate base of zero. In addition the new owners have hired an accountant to
handle its books and records and agreed to use the NARUC USOA.
RATE BASE
Based on the absence of books and records and the utility’s
decision not to prepare an original cost study, staff recommends that rate base
be set at $0 for the water system as of December 30, 2002.
Issue
3: Should an acquisition adjustment be included in the calculation of rate base?
Recommendation: No. Pursuant to Rule 25-30.0371(2), Florida Administrative Code, an acquisition
adjustment should not be included in rate base. (Johnson, Brown)
Staff Analysis: An acquisition adjustment results when the purchase price differs from the rate base
at the time of the acquisition. The acquisition adjustment resulting from the
transfer of Suwannee Valley to CWW would be calculated as follows:
Purchase Price $15,000
Less Staff Calculated
Rate Base $ 0
Positive
Acquisition
Adjustment $15,000
======
Pursuant to Rule 25-30.0371(2) Florida
Administrative Code, a positive acquisition adjustment shall not be included in
rate base absent proof of extraordinary circumstances. The buyer has neither
requested an acquisition adjustment nor identified any extraordinary
circumstances. Therefore, staff recommends that a positive acquisition
adjustment should not be included in the calculation of rate base for transfer
purposes.
Issue
4: Should the rates and charges approved for Suwannee Valley be continued?
Recommendation: Yes, CWW should continue charging the rates and charges approved for Suwannee Valley
until authorized to change by the Commission in a subsequent proceeding. The
tariff reflecting the change in ownership should be effective for services
provided or connections made on or after the stamped approval date on the
tariff sheets. (Johnson)
Staff Analysis: Suwannee Valley's rates and charges were established by the Commission, pursuant to Order No. 12762,
issued December 9, 1983, in Docket No. 820346-W, In Re: Application of Suwannee
Valley Estates for a Certificate to Operate a Water Utility Pursuant to Section
367.171, Florida Statutes. The utility’s approved rates and charges are as
follows:
|
Monthly Water
Service Rates
|
|
Residential
|
|
Flat Rate per month
|
|
$12.00
|
|
|
|
|
|
Miscellaneous
Service Charges
|
|
Initial Connection Fee
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$ 15.00
|
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Normal Reconnection Fee
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$ 15.00
|
|
Violation Reconnection Fee:
|
$ 15.00
|
|
Premises Visit Fee (in lieu of
disconnection)
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$ 10.00
|
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Service Availability
Charges
|
|
|
|
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Meter Installation Charge
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$200.00
|
Rule 25-9.044(1), Florida Administrative Code,
provides that in case of change of ownership or control of a utility that places
the operation under a different or new utility the company which will
thereafter operate the utility business must adopt and use the rates,
classification and regulations of the former operating company (unless
authorized to change by the Commission).
Based on the above, staff recommends that the
utility continue operations under the existing tariff and apply the approved
rates and charges until authorized to change by the Commission in a subsequent
proceeding. As noted in Issue 2, CWW intends to file a rate proceeding at a
later date. CWW has filed a revised tariff reflecting the transfer to CWW. If
the Commission approves staff’s recommendation, the tariff filing should be
effective for services rendered or connections made on or after the stamped
approval date.
Issue
5: Should this docket be closed?
Recommendation: No.
This docket shall remain open pending receipt of evidence that CWW owns or has
continued use of the land upon which its facilities are located, and pending
receipt of proof that it has set up its books and records using the NARUC
Uniform System of Accounts. Once the recorded deed and proof of appropriate
accounting procedures have been received, and staff has verified that the
submissions satisfy the requirements of Rule 25-30.037(2)(q), Florida
Administrative Code, this docket may be closed administratively if no timely
protest to the Commission’s proposed agency action order has been filed by a
substantially affected person, and a consummating order has been issued. (Brown)
Staff Analysis: This
docket shall remain open pending receipt of evidence that CWW owns or has
continued use of the land upon which its facilities are located, and pending
receipt of proof that it has set up its books and records using the NARUC
Uniform System of Accounts. Once the recorded deed and proof of appropriate
accounting procedures have been received, and staff has verified that the
submissions satisfy the requirements of Rule 25-30.037(2)(q), Florida
Administrative Code, this docket may be closed administratively if no timely
protest to the Commission’s proposed agency action order has been filed by a
substantially affected person, and a consummating order has been issued..
ATTACHMENT A
SUWANNEE
VALLEY ESTATES
COLUMBIA
COUNTY
WATER TERRITORY
DESCRIPTION
UTILITY SERVICE
AREA
TOWNSHIP 2 SOUTH, RANGE 16 EAST
SECTION 22
That part of the SW ¼ of the SW ¼ of said Section 22 lying
West of the Eastern R-O-W of U. S. Highway 41 (also known as State Highway
100.)