Table of Contents

 

ISSUE    DESCRIPTION                                                                                                      PAGE

CASE BACKGROUND.. 4

TEST PERIOD.. 5

1 - Projected Test Year. 5

2 - Forecasts of Customer Growth and Therms. 6

QUALITY OF SERVICE.. 7

3 - Quality of Service. 7

RATE BASE.. 8

4 - Total Utility Plant 8

5 - Accumulated Depreciation. 9

6 - Working Capital Allowance. 10

7 - Rate Base. 11

COST OF CAPITAL.. 12

8 - Capital Structure. 12

9 - Cost Rate for Common Equity. 14

10 - Weighted Average Cost of Capital 15

NET OPERATING INCOME.. 16

11 - Revenues from Sale of Gas. 16

12 - Total Operating Revenues. 17

13 - Account 879, Customer Service Expense (Residential Load Retention Program) 18

14 - Account 921, Office Supplies and Expenses (Lobbying Expenses) 20

15 - Account 921, Office Supplies and Expenses (Nextel telephone/radios) 21

16 - Account 923, Outside Services Employed. 22

17 - Account 928, Regulatory Commission Expense (Rate Case Expense) 23

18 - O&M Expenses (Payroll Taxes) 25

19 - Total O&M Expense. 26

20 - Depreciation and Amortization Expense. 27

21 - Taxes Other Than Income Tax. 28

22 - Income Tax Expense. 30

23 - Total Operating Expenses. 31

24 - Net Operating Income. 32

REVENUE REQUIREMENTS. 33

25 - Revenue Expansion Factor and Net Operating Income Multiplier. 33

26 - Operating Revenue Increase. 34

COST OF SERVICE AND RATE DESIGN.. 35

27 - Cost of Service Methodology. 35

28 - Revenue Allocation Across Rate Classes. 36

29 - Customer Charges. 37

30 - Transportation Charges. 38

31 - Third Party Supplier Charges. 39

32 - New Volumetric Rate Classes. 40

33 - Annual Therm Eligibility Threshold. 41

34 - Effective Date of Revised Rates and Charges. 42

OTHER ISSUES. 43

35 - Interim Increase. 43

36 - Required Entries and Adjustments. 44

37 - Close Docket 45

ATTACHMENTS. 46

Attachment 1. 46

Attachment 1-A.. 47

Attachment 2. 48

Attachment 3. 49

Attachment 4. 51

Attachment 5. 52

Attachment 6. 53

Attachment 7. 69

 

Case Background

This proceeding commenced on June 30, 2004, with the filing of a petition for a permanent rate increase by Sebring Gas System, Inc. (Sebring or the Company).  Sebring requested an increase of $234,641 in additional annual revenues.  The Company based its request on a 13-month average rate base of $1,132,523 for the projected test year (PTY) ending December 31, 2005.  The requested overall rate of return is 8.65% based on an 11.50% return on common equity.

 

            By Order No. PSC-04-0860-PCO-GU, issued September 2, 2004, in this docket, the  Commission granted an interim rate increase of $97,211.  In that Order, the Commission found the Company’s rate base to be $782,836 for the interim test year ended December 31, 2003, and its allowed rate of return to be 6.08% using a return on equity of 10.00%.

 

            The Commission set initial rates by Order No. PSC-92-0229-FOF-GU, issued April 20, 1992, in Docket No. 910873-GU, In Re: Petition for approval of initial rates to be established by Sebring Gas System, a division of Coker Fuels, Inc.  In that order the Commission found the Company’s jurisdictional rate base to be $1,055,175 for the projected year ended December 31, 1993.  The allowed rate of return was found to be 10.86% for the test year using a 12.00% return on equity.

 

            The Commission ordered a reduction of the authorized return on equity by Order No. PSC-93-1774-FOF-GU, issued December 10, 1993, in Docket No. 931103-GU, In Re:  Investigation into the appropriate equity return for Sebring Gas System, Inc.  In that order the Commission lowered the 12.00% to an 11.00% mid-point for its authorized rate of return with a range of plus or minus 100 basis points.

 

Pursuant to Section 366.06(4), Florida Statutes (F.S.), Sebring requested that the Commission process its petition for rate relief using Proposed Agency Action (PAA) procedures.   A customer meeting was held on August 23, 2004.  No customers attended the meeting and staff has not received any customer complaints.  The Commission has jurisdiction over this request for a rate increase and an interim rate increase under Sections 366.06(2) and (4), and 366.071, F.S.

DISCUSSION OF ISSUES

TEST PERIOD

Issue 1:    Is Sebring’s projected test period for the 12 months ending December 31, 2005 appropriate?

Recommendation:  Yes. With the adjustments recommended by staff in the following issues, the 2005 test year is appropriate.  (Brinkley)

Staff Analysis:  The Company used actual data for the 2003 test year rate base, net operating income, and capital structure.  The 2005 projected test year balances were prepared using a combination of 2003 data trended for expected inflation, customer growth, and payroll growth, and specific budgeted increases.  Certain plant additions in fiscal year 2003 have been audited by Commission auditors and analyzed by staff as well.

 

            The purpose of the test year is to represent the financial operations of a company during the period in which the new rates will be in effect.  New rates for Sebring Gas will go into effect 30 days after the November 30, 2004 agenda, or on December 30, 2004.  Sebring Gas’s 2005 fiscal year begins January 1, 2005, and ends December 31, 2005; therefore, the year 2005 is an appropriate test year.

 

            In the following issues, staff is recommending that certain adjustments be made to Sebring’s projected test year.  With the inclusion of these adjustments, staff believes that the 2005 projections of Sebring’s financial operations are appropriate to use as a basis for setting rates.

 

Issue 2:  Are Sebring’s forecasts of customer growth and therms by rate class appropriate?

Recommendation:  No.  The projected number of residential bills and therms by rate class as contained in the Minimum Filing Requirements (MFR) Schedule G-2, Page 8 of 31, for the 2005 test year should be adjusted to reflect staff’s disallowance of the Company’s proposed Customer Residential Load Retention Program discussed in Issue 13.  (Hewitt)

Staff Analysis:  Staff reviewed the projected billing determinants contained in MFR Schedules G-2, Pages 6 and 8, for base year plus one and test year 2005, the historical customer count for years 1999 through year 2003, and the consistency of the projected values with the historical trends.  Staff recommends that the billing determinants contained in the MFR Schedule G-2 be approved with the exception of the TS-1 rate class which should be adjusted to reflect staff’s recommended disallowance of the Company’s proposed Residential Load Retention Program discussed in Issue 13.

 

In response to Staff’s First Data Request, Question 10, the Company stated that the base year plus one revenue forecast losses were assumed by the Company to be in the new TS-1 rate class (0-200 annual therms).  Using the Company’s estimated decline of 15 customers for 2003 to 2004, the 2005 rate class TS-1 billings should be reduced by 180 (15 customers x 12 months) and 750 therms.  This reduction is based on the Company’s projection that without the Residential Load Retention Program, the Company would continue to lose customers in the lower therm use category.

QUALITY OF SERVICE

Issue 3:  Is the quality of service provided by Sebring adequate?

Recommendation:  Yes.  Sebring’s quality of service is adequate.  (Brinkley)

Staff Analysis:  A customer meeting was held in Sebring on August 23, 2004, to gather information from customers regarding the Company’s quality of service and its request for a permanent rate increase.  No customers attended the meeting.

            Staff researched the Commission’s Division of  Regulatory Compliance and Consumer Assistance records for complaints.  There have been no complaints logged against the Company since our current complaint tracking system began in mid-1999.

            Staff noted no ongoing safety concerns.  Further, there were no customer interruptions affecting either 10% or 500 meters during the historic test year ending 2003.  Finally, the Company has tested all of its meters within 120 months of the test year.  For these reasons, staff recommends that the Commission find that Sebring’s quality of service is adequate.

RATE BASE

Issue 4:  Is Sebring’s requested Total Plant-in-Service of $2,202,495 appropriate?

Recommendation:  No.    Total Plant-in-Service should be decreased by $13,166 to $2,189,329 to reflect the effects of two prior period adjustments and the reclassification of an expense item to plant.  (Brinkley)

Staff Analysis:  The Company’s Plant-in-Service is overstated due to two prior-period adjustments and the reclassification of an expense item to plant.

            The Company retired a truck and reflected it in its December 2003 Earnings Surveillance Report, but failed to pick up that retirement in its MFRs.  Staff recommends reducing 2005 PTY Plant-in-Service by $15,144 to incorporate the Company’s 2003 retirement.

            Commission staff conducted a surveillance audit in Docket No. 010906-GU, In re:  Request for approval of depreciation study for five-year period 1996 through 2000 by Sebring Gas System, Inc. as of December 31, 2001.  In preparing its MFRs, the Company increased Plant-in-Service based on the prior audit findings.  In the current audit, staff determined that the Company overstated the adjustments by $22, net.  Staff recommends reducing 2005 PTY Plant-in-Service by $22 to correct this.

            In Issue 15, staff recommends reclassifying $2,000 for Nextel telephone/radios from Operation and Maintenance (O&M) Expense to plant, thereby increasing Plant-in-Service.  The three adjustments reduce Total Plant-in-Service by a net amount of $13,166.

Issue 5:  Is Sebring’s requested Accumulated Depreciation of $1,070,838 appropriate?

Recommendation:  No.  Accumulated Depreciation should be reduced by $5,262 to $1,065,576 to reflect the effects of two prior period adjustments and the reclassification of an expense item to plant.  (Brinkley)

Staff Analysis:  Staff recalculated Accumulated Depreciation to reflect the plant adjustments recommended in Issue 4.  Specifically, staff made a $15,144 decrease due to the truck retirement, a $9,788 increase due to prior period audit findings, and a $94 increase due to the reclassification of Nextel communication equipment  The net effect of these adjustments is a $5,262 reduction to Accumulated Depreciation.

Issue 6:  Is Sebring’s requested Working Capital Allowance of $17,122 appropriate?

Recommendation:  No.  Working Capital should be reduced by $23,853 to ($6,731).  (Brinkley)

Staff Analysis:  Staff analyzed Working Capital using the balance sheet method.  According to the Company, its cash needs during 2005 were based on the assumption that rates would not be increased.  During the development of this proceeding, staff asked the Company to consider the effect of a positive rate increase on its cash needs.  The Company revised its cash budget to reflect a reduced need for cash.  Staff recommends a reduction to cash, and hence to Working Capital, in the amount of $24,158 to reflect the Company’s reduced cash needs.

            In Issue 21, staff is recommending a reduction to Taxes Other than Income of $610 for tangible taxes.   With that adjustment, staff is recommending a commensurate reduction to Taxes Accrued – General in the amount of $305 for the average of the expense adjustment which increases Working Capital by $305.  The net reduction to Working Capital for the two adjustments is $23,853.

Issue 7:  Is Sebring’s requested Rate Base of $1,132,523 appropriate? 

Recommendation:  No.  The recommended adjusted Rate Base is $1,100,766.  (Brinkley)

Staff Analysis:  This is a calculation based upon the decisions in Issues 4, 5, and 6, as summarized below.

		Rate Base
Per Company		$1,132,523
Adjustments      Issue 4	($13,166)
Issue 5	5,262
Issue 6	(23,853)
Per Staff		$1,100,766

COST OF CAPITAL

Issue 8:  What is the appropriate capital structure?

Recommendation:  Regarding investor capital, the appropriate capital structure is 54.97% common equity and 45.03% debt.  In addition, staff recommends that the Commission cap Sebring’s equity ratio at 60% as a percent of investor capital.  (Lester)

Staff Analysis:  For the projected test year, Sebring filed a capital structure consisting of 52.5% common equity, 42.8% long-term debt and 4.7% customer deposits.  In developing this capital structure, Sebring made the following adjustments:

 

1) The Company increased retained earnings in December 2003 to reflect the recalculation of accumulated depreciation.

 

2) The Company reclassified an account payable from Coker Fuel as common equity in December 2003.

 

3) The Company included an increase of $100,000 in common equity in January 2005, which reflected an equity infusion from its owners.

 

4) The Company included an increase in long-term debt on $98,403 in June 2005 to finance capital improvements.

 

            Based on a finding from the Commission staff’s earnings surveillance audit in 2001, Sebring recalculated accumulated depreciation using the appropriate depreciation rates.  Previously, the Company had used accelerated depreciation rates.  The effect of this recalculation was a reduction to accumulated depreciation and an increase to retained earnings.  Specifically, the Company increased retained earnings in December 2003 by $361,424.  Staff agrees with this recalculation of accumulated depreciation and corresponding increase in retained earnings.  However, in Issue 5, staff corrected this recalculation of accumulated depreciation in calculating rate base.  To properly reflect the corrections to accumulated depreciation, staff reduced the test year average balance for common equity by $2,773.

 

            Sebring’s Vice-President, Jerry Melendy, noted in his testimony that Sebring and Coker Fuel are related companies in that they have the same owners but are separate corporations.  Mr. Melendy stated that, over the past three years (through 2003), Sebring’s revenues have not been sufficient to support it operations.  During this period, Coker Fuel provided $222,053 to Sebring as of December 2003, and Sebring recorded this amount as an account payable.  In May 2004, the Company decided to reclassify the account payable as paid-in capital as of December 2003.  Sebring noted that it has a low equity ratio for the industry and it has had several years of negative net income.

 

            Staff agrees with the reclassification.  The Company has not been in a position to reduce  or eliminate the account payable.  The funds are essentially a contribution from a related company, which has the same owners.  Reclassifying these funds as common equity will place the Company in a better financial position for the future.

 

            Sebring projected an equity infusion of $100,000 in January 2005 and an increase in long-term debt of $98,403 in June 2005.  The Company stated that these funds would fund capital improvements and would be needed if rates remained at current levels.  Since staff is recommending an increase in revenue in this case, and since this rate case should be completed before the 2005 projected test year, staff requested revised equity and debt projections from the Company.  Using these revisions, staff reduced the 13-month average balances for common equity and long-term debt for the projected test year by $13,388 and $10,770, respectively.

 

            Given the adjustments discussed above, staff recommends that the appropriate capital structure for Sebring consists of  52.18% common equity, 42.74% long-term debt and 5.08% customer deposits.  Regarding investor capital, this recommended capital structure consists of 54.97% common equity and 45.03% debt.

Staff notes that Sebring’s equity ratio, calculated as a percentage of investor capital (long-term debt, short-term debt, preferred stock, and common equity), is 54.97%.  Staff recommends that the Commission cap Sebring’s equity ratio at 60%.  The Commission ordered equity ratio caps of 60% in the rate cases for St. Joe Natural Gas in Order No. PSC-01-1274-PAA-GU, issued June 8, 2001, in Docket No. 001447-GU, In re:  Request for rate increase by St. Joe Natural Gas Company, Inc. and Indiantown Gas Company in Order No. PSC-04-0565-PAA-GU, issued June 2, 2004, in Docket No. 930954-GU, In Re: Petition for rate increase by Indiantown Gas Company.  Sebring’s debt cost rate is reasonable and it is in a position to maintain this low cost rate.  The Commission should ensure that the Company continues to use significant amounts of debt to finance its rate base.

Issue 9:  What is the appropriate cost rate for common equity?

Recommendation:  The appropriate cost rate for common equity is 11.50%, with a range of plus or minus 100 basis points.  (Lester)

Staff Analysis:  Sebring decided not to retain the services of a cost of capital consultant because the Company viewed the cost of such services as not warranted in this case.  The Company proposed a cost rate for common equity of 11.50% based on recent Commission decisions. 

 

            Below are the Commission’s recent rate case decisions on the appropriate cost rate for common equity for natural gas distribution companies:

 

Company	Cost of Equity	Order	Date of Order
St. Joe Natural Gas Company	11.50%	PSC-01-1274-PAA-GU	June 8, 2001
TECO Peoples Gas	11.25%	PSC-03-0415-FOF-GU	March 25, 2003
City Gas Company of Florida	11.25%	PSC-04-0128-PAA-GU	February 9, 2004
Indiantown Gas Company	11.50%	PSC-04-0565-PAA-GU	June 2, 2004
Florida Public Utilities Company	11.25%	PSC-04-1110-PAA-GU	November 8, 2004

 

            Sebring noted in its testimony that it is a small company similar to St. Joe Natural Gas and Indiantown Gas.  Further, Sebring noted that small companies generally exhibit greater investment risk due to limited ability to absorb the loss of a customer, lack of revenue diversity, exposure to economic slowdowns, and difficulty in managing supply in a post-FERC 636 environment.  The Company also stated that the lack of industrial customers increases its risk since industrial customers contribute higher returns than residential customers.  Finally, Sebring stated that its opportunities for growth are limited and that financing growth can create risk.

            Sebring is significantly smaller, both in revenues and throughput, than Peoples Gas, City Gas or Florida Public Utilities’ gas division.  Staff believes that, considering size and risk, Sebring is similar to St. Joe Natural Gas and Indiantown Gas.  For the reasons noted, staff believes that 11.50% is a reasonable cost rate for common equity for this company.  The appropriate range around the authorized return on equity is plus or minus 100 basis points.

Issue 10:  What is the appropriate weighted average cost of capital including the proper components, amounts and cost rates?

Recommendation:  The appropriate weighted average cost of capital is 8.64%.  (Lester, Kenny)

Staff Analysis:  Based on the recommended capital structure in Issue 8 and the recommended cost rate for common equity in Issue 9, the appropriate weighted average cost of capital is 8.64%.  Attachment 2 presents staffs recommended capital structure, cost of equity, and cost of capital.

NET OPERATING INCOME

Issue 11:  Are Sebring’s estimated revenues from sales of gas by rate class at present rates for the December 2005 projected test year appropriate?

Recommendation:  No.  The appropriate revenues from sales of gas should be $279,213, a reduction of $1,526.  (Draper)

Staff Analysis:  Per MFR Schedule E-2, Page 1, the Company calculated present revenues from sales of gas of $280,739 based on its projected billing determinants.  However, as discussed in Issue 2, staff is recommending a reduction in the Company's projected billing determinants of 15 customers, or 180 bills, and 750 therms.  Accordingly, present revenues from sales of gas based on projected billing determinants should be reduced by $1,526, to $279,213.

Issue 12:  Are Sebring’s Total Operating Revenues of $288,074 appropriate?

Recommendation:  No.  The appropriate amount of Total Operating Revenues is $286,548.  (Kaproth, Wheeler)

Staff Analysis:  On MFR Schedule G-22, Page 8 of 31, the Company projected revenues of $280,739 from the sale of gas and Miscellaneous Revenues of $7,335, resulting in Total Operating Revenues of $288,074.  In Issue 11, staff recommends a reduction of $1,526 in revenues.  Therefore, Total Operating Revenues must be decreased by the same amount, $1,526 from $288,074 to $286,548.

Issue 13:  Should an adjustment be made to Account 879, Customer Service Expense?

Recommendation:  Yes.  Account 879, Customer Service Expense, should be reduced by $10,000 for the 2005 projected test year.  (Kaproth, Romig)

Staff Analysis:  For 2005, Sebring projected $10,000 for its Residential Load Retention Program and included these costs in Account 879, Customer Service Expense.  As explained by Mr. Melendy, on Pages 28, 29, and 30 of his prefiled testimony, Sebring is experiencing a steady loss of its residential customers to electricity.  Many of the residential customers have only one gas appliance and when that appliance needs to be replaced, Sebring is at risk of losing that customer.  Mr. Melendy claims that since 1999, Sebring has lost 65 accounts which is over 10% of the residential customer base, at a loss of almost $36,000 in revenues over the past five years.

The Company proposes to initiate a Residential Load Retention Program to reduce the number of lost customers.  Sebring proposes to identify at-risk single appliance customers that do not have gas water heaters.  They are considering a number of incentives designed to add an appliance in the customer’s home in conjunction with local trade allies.  Generally, the program will focus on offering residential customers free water heater installations.  For 2005, Sebring proposes to target 20 water heater installations at $500 each.

            Staff believes, in general, that customers benefit by an increasing customer base.  Customers can realize savings through economies of scale and a larger customer base will help defray the cost of future plant projects.  Likewise, customer attrition could result in higher rates from the spreading of fixed costs over fewer customers.  For these reasons, staff believes that a program designed to increase customer growth (or decrease customer attrition) may benefit customers.  However, the cost of a program of this type should not exceed the benefit or revenue associated with the increased customers.

 

            In Issue 2, staff addresses projected test year therms and revenues and proposes a $1,526 decrease to revenues to recognize the attrition of fifteen lower usage residential customers, which decrease has not been taken into consideration in the utility’s projected revenues.  Staff notes that much of the benefit of the marketing program remains largely unquantified and would be expected to take place outside the projected test year.  Staff believes that expenses associated with customer retention and growth programs should not be included in rates without the corresponding effects on revenues resulting from increased customer retention and growth.  Further, staff believes that these expenses should only be included to the extent that revenues equal or exceed expenses.

 

            Although the Company’s marketing program may be successful in the long run, the $1,526 in lost revenues in the projected test year is far short of the $10,000 projected test year expenses in this issue.  Staff has two alternatives to address this situation: (1) Staff could impute revenues at least equal to the expenses and include both revenues and expenses in rates; or (2) remove both revenues and expenses.  Staff recommends removing the Residential Load Retention Program expenses and revenues as a more straightforward approach.

 

            Staff does not have an opinion on the likely success of this program and only attempts to suggest a way in which to properly set rates.  Based on the above analysis, staff believes that Account 879, Customer Service Expense, should be reduced by $10,000 to remove the cost associated with the Residential Load Retention Program.  The adjustment to reduce revenues is addressed in Issue 11.

            In Order No. PSC-04-0731-CFO-GU, issued July 29, 2004, in Docket No. 030569-GU, In re: Application for rate increase by City Gas Company of Florida, the Commission made a similar finding and disallowed the estimated cost of marketing programs that were projected to promote customer growth and decrease customer attrition.

Staff recommends that Account 879, Customer Service Expense, be reduced by $10,000 for the 2005 projected test year.

Issue 14:  Should Account 921, Office Supplies and Expenses, be reduced for the 2005 projected test year to remove lobbying expenses?

Recommendation:  Yes.  Account 921, Office Supplies and Expenses, should be reduced by $527 for the 2005 projected test year.  (Kaproth)

Staff Analysis:  Sebring included $2,950 in American Gas Association (AGA) and $400 in Florida Natural Gas Association (FNGA) dues in its 2003 O&M Expenses.  Following discussions with the Company, staff determined that approximately 15% of each association’s dues relates to lobbying activities.  Therefore, staff recommends that 2003 costs be reduced by $503.  Applying the general inflation rates of 2.3% for 2004 and 2.4% for 2005, results in a $527 reduction to its projected 2005 O&M costs.

            Based on the above, staff recommends that Account 921, Office Supplies and Expenses, should be reduced by $527 for the 2005 projected test year.

Issue 15:  Should an adjustment be made to Account 921, Office Supplies and Expenses, to remove the 2005 projected cost of four Nextel telephone/radios?

Recommendation:  Yes.  Account 921, Office Supplies and Expenses, should be reduced by $2,000 to remove the 2005 projected cost of the Nextel telephone/radios.  (Romig)

Staff Analysis:  Sebring Gas included $2,000 in its 2005 projected O&M Expenses for four Nextel telephone/radios.  Mr. Melendy states in his testimony that, “The radios would greatly improve communications with field personnel and facilitate the dispatch of crews for service and emergency response.”  Although staff is not taking exception to this expenditure, staff believes these costs should be capitalized rather than expensed and believes that they are appropriately included in Account 397, Communication Equipment.  The plant addition, related accumulated depreciation, and depreciation expense are taken up in Issues 4, 5, and 20, respectively.

            Staff recommends that the projected 2005 costs in Account 921, Office Supplies and Expenses, be reduced by $2,000 to remove the four Nextel telephone/radios.

Issue 16:  Should an adjustment be made to Account 923, Outside Services Employed?

Recommendation:  Yes.  Account 923, Outside Services Employed, should be reduced by $13,187 for the 2005 projected test year.  (Romig)

Staff Analysis:  Per Commission Staff Audit Exception No. 3, Sebring Gas recorded accounting and legal expenses of $11,950 and $5,713, respectively, in Account 923, Outside Services Employed, totaling $17,663 for the period ended December 31, 2003.  Of the accounting expenses recorded, $275 were determined to be out-of-period and $6,600 were determined to be related to work on this rate case.  Of the $5,713 in legal expenditures, $3,611 were determined to be related to work on this rate case and $2,102 were determined to be related to the Company’s transportation petition.

            Staff believes it appropriate to reduce this account by $12,588 for 2003 ($275+$6,600+$3,611+2,102).  Applying the general inflation factor of  2.3% for 2004 and 2.4% for 2005, Account 923, Outside Services Employed should be reduced by $13,187 for the 2005 projected test year.  The 2003 accounting costs of $6,600 and the 2003 legal costs of $3,611, both of which are related to work on this case, will be considered in Issue 17.  The $275 should be disallowed as an out-of-period expenditure and the $2,102 that was determined to be related to the Company’s transportation petition should also be disallowed.  As determined in Order No. PSC-04-0499-TRF-GU, issued May 14, 2004, in Docket No. 031123-GU, In re:  Petition for authority to convert and transfer all remaining sales customers to transportation service, to terminate merchant function, and for approval of certain tariff changes on experimental basis, by Sebring Gas System, Inc., a subsequent filing to address the over-recovery or under-recovery resulting from the PGA mechanism is required.  The $2,102 in legal expenditures related to the foregoing proceeding should be considered at the same time the over-recovery or under-recovery is considered and disposed of.

            Therefore, staff recommends that Account 923, Outside Services Employed, be reduced by $13,187 for the projected 2005 test year.

 

Issue 17:  Should an adjustment be made to Account 928, Regulatory Commission Expense?

Recommendation:  Yes.  Account 928, Regulatory Commission Expense, should be reduced by $12,815 for the 2005 projected test year.  (Romig)

Staff Analysis:  For 2005, Sebring projected $30,000 in rate case expense in Account 928.  According to page 39 of Mr. Melendy’s prefiled testimony, Sebring projects total rate case expenditures of $120,000, which staff believes to be an all-inclusive amount, and includes the $10,211 of 2003 rate case costs addressed in Issue 16.  Sebring proposes a four-year amortization period, resulting in the $30,000 expense in the projected 2005 test year.

Staff examined the support for services provided and expenditures through October 31, 2004.  Staff also reviewed a flat fee contract for the preparation and filing of the MFRs and testimony and consulting services for this case.  Rate case costs through October 31, 2004, including the flat fee contract, total $73,741.  The Company anticipates additional legal expenditures of $10,000 for the months of November and December 2004, bringing its updated total to $83,741, which is $36,259 less than the total included in its MFRs.  Using this amount results in rate case expense of $20,935 per year for four years.

In Order No. PSC-04-0565-PAA-GU, issued June 2, 2004, in Docket No. 030954-GU, In Re: Petition for rate increase by Indiantown Gas Company, the Commission authorized an increase for Indiantown.  In that case, the Commission found total rate case expenses of $52,500 to be prudent and amortized this amount over a four-year period.  Indiantown projected rate case expense of $100,050, which included $35,000 for consulting fees, $55,050 for legal fees, and $10,000 for miscellaneous expenses.  Its updated rate case expenses, which included actual expenses to date and projected expenses, providing there was no protest, were ultimately $52,500, and included $36,000 for consulting fees, $12,000 for legal fees and $4,500 for miscellaneous expenses.

 

Sebring and Indiantown Gas Company are extremely small gas companies.  Furthermore, staff believes the two companies and their rate cases have other similarities.  The instant petition filed by Sebring and Indiantown’s petition were filed within eight months of one another.  This is the first rate case for Sebring; the rate increase granted in Docket No. 030954-GU was Indiantown’s first rate case.  Both Indiantown and Sebring chose the proposed agency action process.  One of Sebring’s witnesses filed prefiled testimony in both cases.  The consultant in both cases negotiated a flat fee contract for his services.  However, for Sebring, the consultant prepared the MFRs and was one of two primary contacts for the proceeding, whereas the Company personnel in the Indiantown case responded to staff inquiries and fielded staff’s questions.

For Sebring, the consultant charged a $50,000 consulting fee.  Staff believes this is not justified and has reduced the fee by $10,000, which is more in line with the amount allowed in Indiantown.

 

Also, Sebring has projected that legal fees will be $10,000 for November and December, 2004.  At the attorney’s hourly billing rate, this would represent 50 hours of work.  Staff believes that 50 hours is excessive and that 25 hours would be more appropriate.  Therefore, staff believes that the projected legal expense should be reduced by $5,000.

 

Based on the above information, updated estimates, the similarities of Indiantown and Sebring and allowing for the differences between the processing of the two cases, staff believes that total rate case expense of $68,741, or $17,185 per year, if amortized over four years, is appropriate.

 

Staff believes the four-year amortization period to be reasonable and consistent with other Commission decisions.  Applying the four-year amortization to the $51,259 reduction, translates to the recommended $12,815 decrease to projected test year rate case expense.

Consequently, staff recommends that Account 928, Regulatory Commission Expense, be reduced by $12,815 for the 2005 projected test year.

Issue 18:  Should an adjustment be made to the projected 2005 O&M Expenses to remove the payroll taxes?

Recommendation:  Yes.  Projected 2005 O&M Expenses should be reduced by $12,738 to remove the payroll taxes.  (Romig)

Staff Analysis:  Sebring Gas does not administer its own payroll.  Instead, the Company contracts with an employee leasing company to provide its payroll services and administer other compensation activities.  As a result, the payroll costs included in the O&M Expenses include the employer’s portion of FICA, Medicare, State Unemployment Tax (SUTA) and Federal Unemployment Tax (FUTA), employer liability insurance, pension cost and the 2.25% administrative fee.  Consequently, O&M Expenses are overstated and Taxes Other Than Income are understated.

            To reflect the appropriate classification of costs, staff recommends removing the non-payroll costs and reclassifying them in the appropriate accounts.  Staff’s reallocation reduces O&M payroll costs by $26,405, increases other O&M costs by $13,667 and increases Taxes Other Than Income Taxes by $12,738.  Taxes Other Than Income is taken up in Issue 21.  The detail of the increases to the accounts follows.

 

            Based on the above, staff recommends that O&M Expenses be reduced by $12,738 to remove the payroll taxes.

Issue 19:  Is Sebring’s O&M Expense of $321,779 appropriate? 

Recommendation:  No.  Sebring’s O&M Expense should be reduced by $51,267 to $270,512.  (Kaproth)

Staff Analysis:  In preceding issues, staff recommends reducing O&M Expense by a total of $51,267.  If these reductions are approved, O&M expense should be reduced by the same amount.

Issue 20:  Is Sebring’s Depreciation and Amortization Expense of $64,755 appropriate?

Recommendation:  No.  The appropriate level of Depreciation and Amortization Expense for the projected test year is $64,318, to reflect staff’s analysis in Issues 4, 5, and 15. (Gardner)

Staff Analysis:  As discussed in Issue 15, it was discovered that Sebring proposed to expense radio equipment in the amount of $2,000 which should be capitalized.  As a correction to this projection, O&M Expense should be reduced by removing the radio equipment and placing it into plant Account Number 397 – Communication Equipment.  This account has a Commission-approved depreciation rate of 9.4% which was applied to the $2,000 plant investment.  This correction created an increase of $188 to Depreciation Expense and an increase of $94 to Accumulated Depreciation for the projected test year.

 

Also, as discussed in Issues 4 and 5, the resulting Depreciation Expense for the projected test year was overstated and should be reduced by $625.  The net effect of the two adjustments is a reduction of $437 to the projected $64,755 Depreciation and Amortization Expense, therefore, establishing the appropriate level for the projected test year at $64,318.

Issue 21:  Is Sebring’s Taxes Other Than Income of $7,117 appropriate?

Recommendation:    No.  The appropriate amount of Taxes Other Than Income is $19,058, an increase of $11,941.  (Winters)

Staff Analysis:  Per MFR Schedule G-2, Page 1 of 31, the Company proposed Taxes Other Than Income (TOTI) of $7,117.  In response to a data request by staff, the Company provided a breakdown of TOTI for 2005.  The Company’s and staff’s proposed TOTI for the 2005 projected test year are as follows:

 

	Per Company	Staff Adjustment	Per Staff
Payroll Taxes	0	12,738	12,738
Intangible Taxes	26	(  26)	0
RAFs	1,449	(  16)	1,433
Tangible Personal Property Tax	5,017	( 610)	4,407
Occupational License	625	( 145)	480
TOTAL	7,117	11,941	19,058

 

            The Company did not include any Payroll Taxes in TOTI.  The Company provided payroll data, including payroll taxes, for 2003.  Staff used this data to calculate the percentages to apply to the 2005 payroll amount to calculate Payroll Taxes consisting of FICA, Medicare, Federal Unemployment Tax and State Unemployment Tax.  This resulted in Payroll Taxes of $12,738, an increase of $12,738 to the Company requested amount of $0.

            The Company included state intangible taxes of $26 in its MFRs.  It was determined that the Intangible Taxes were paid by Sebring as agent for Florida stockholders.  Consistent with prior Commission practice, staff recommends that Intangible Taxes paid on behalf of stockholders be disallowed.  See Order No. PSC-01-1274-PAA-GU, issued June 8, 2001, in Docket No. 001447-GU, In re:  Request for rate increase by St. Joe Natural Gas Company, Inc. and Order No. PSC-03-0351-PAA-SU, issued March 11, 2003 in Docket No. 020344-SU, In re: Application for Rate Increase in Monroe County by Key Haven Utility Corporation.  As a result, staff recommends that TOTI be reduced by $26.

            The Company projected 2005 Regulatory Assessment Fees (RAFs) of $1,449.  To calculate this amount, the Company multiplied Total Revenues of $288,074 by .00503.  Staff recalculated the RAFs by applying the RAF rate of .005 to the Company’s Total Revenue, resulting in RAFs of $1,440.  This adjustment results in a $9 decrease to RAFs.  In addition revenue was decreased by $1,526 in Issue 11.  The impact of this adjustment to revenue is to decrease RAFs by an additional $7.  Therefore, staff recommends RAFs of $1,433, a $16 decrease to the Company requested amount of $1,449.

            The Company projected 2005 Tangible Personal Property Tax by increasing the 2003 MFR Property Tax of $4,775 by 2.5 percent for both 2004 and 2005.  Per Audit Exception No. 4, property taxes billed in 2003 were only $4,445.  In response to a staff data request, the Company provided a copy of the actual 2004 Personal Property Tax bill.  Staff’s review indicated Personal Property taxes for 2004 of $4,304, if paid during the November 4% discount period.  Staff applied the 2.4% general inflation factor to the actual 2004 property tax bill of $4,304, resulting in projected 2005 Property Taxes of $4,407.  This adjustment results in a staff recommended decrease of $610 to the Company requested amount of $5,017.

            The Company included $625 for occupational licenses in its MFRs.  In response to a staff data request, the Company indicated the licenses are for the City of Sebring for $255 and Highlands County for $225.  Neither the city nor the county has increased the fees for 2004, and there is no knowledge of any planned increase for 2005.  Therefore, staff recommends occupational license cost of $480.  This adjustment results in a decrease of $145 to the Company requested amount of $625.

            In summary, based on the above adjustments, TOTI should be increased by $12,738 for Payroll Taxes, decreased by $26 for Intangible Taxes, decreased by $16 for RAFs, decreased by $610 for Tangible Personal Property Tax, and decreased by $145 for Occupational Licenses, resulting in a net increase of $11,941, and a net amount of $19,058 in TOTI.

Issue 22:  Is Sebring’s Income Tax Expense of ($41,158) appropriate?

Recommendation:  No.   The appropriate amount of income tax expense is $0.  (Kenny)

Staff Analysis:  The Company included ($41,158) of income tax expense in its 2005 MFRs.  Since the Company started operations in 1992, it has had net operating losses (NOLs) reflected on its income tax returns.  As a result of the NOLs, the Company has never incurred a tax liability and therefore the income tax expense recorded on its books has been zero since 1992.  As of December 31, 2003, the Company has a significant amount of accumulated NOL carryforwards that are available to offset future tax expense.  A corporation may carry forward a NOL up to 20 years.   Staff anticipates that once the new rates are in effect, the Company will reflect positive net income in 2005 and the years to follow.  However, staff believes it will take several years before the Company will be able to fully utilize the NOL carryforwards.  Further, the customers have not benefited from the tax losses the Company has accumulated over the years, as evidenced by zero income tax expense reflected in prior years’ Annual Reports and Earnings Surveillance Reports.  Therefore, staff believes that the amount of income tax expense reflected in the MFRs should be zero and the federal and state income tax factors in the revenue expansion factor should be omitted.

Issue 23:  Are Sebring’s Total Operating Expenses of $352,493 appropriate? 

Recommendation:  No.  Total Operating Expenses should be increased by $1,395 to $353,888 for the 2005 projected test year.  (Kaproth)

Staff Analysis:  This is a calculation based upon the decisions in issues that precede this issue.

Issue 24:  Is Sebring’s Net Operating Income of ($64,419) appropriate? 

Recommendation:  No.  Sebring’s Net Operating Income of $(64,419) should be decreased by $2,921 to ($67,340) for the projected 2005 test year.  (Kaproth)

Staff Analysis:  This is a calculation based upon the decisions in preceding issues.

REVENUE REQUIREMENTS

Issue 25:  What is the appropriate test year revenue expansion factor and the appropriate net operating income multiplier?

Recommendation:  The appropriate revenue expansion factor is 99.50000% and the appropriate net operating income multiplier is 1.0050.  (Romig, Kenny)

Staff Analysis:  The Company’s calculation and staff’s calculation are shown on Attachment 4.  The only difference between the Company’s calculation and staff’s calculation is the income tax expense factors.  The Company used 5.5% for its State and 26.40% for its Federal Income Tax factors, whereas staff used zero in each case.  Income tax expense has not been included, as discussed in Issue 22.

Consequently, staff recommends that the revenue expansion factor be 99.50000% and the net operating income multiplier be 1.0050, as shown on Attachment 4.

Issue 26:  Is Sebring’s requested annual operating revenue increase of $234,641 appropriate? 

Recommendation:  No.  The appropriate annual operating revenue increase for the projected 2005 test year is $163,262.  (Romig)

Staff Analysis:  This is a calculation based upon the decisions in preceding issues.  The revenue requirement is shown on Attachment 5.

COST OF SERVICE AND RATE DESIGN

Issue 27:  What is the appropriate cost of service methodology to use to allocate costs to the rate classes?

Recommendation:  The appropriate methodology is contained in Attachment 6.  (Wheeler)

Staff Analysis:  The appropriate cost of service methodology to be used in allocating cost to the various rate classes is reflected in staff’s cost of service study contained in Attachment No. 6, pages 1-16.

The purpose of a cost of service study is to allocate the total costs of the utility system among the various rate classes.  The results of the cost of service study are used to determine how any revenue increase granted by the Commission will be allocated to the rate classes.  Once this determination is made, rates are designed for each rate class that recover the total revenue requirement attributable to that class.  Staff’s study reflects the recommended adjustments to rate base, expenses, net operating income, billing determinants and projected test year base rate revenues.

Issue 28:  If the Commission grants a revenue increase to Sebring, how should the increase be allocated to the rate classes?

Recommendation:  Staff’s recommended allocation of the revenue increase to the rate classes is contained in Attachment 6, page 16 of 16.  (Wheeler)

Staff Analysis:  Staff’s recommended allocation of the revenue increase is contained in Attachment 6, page 16 of 16.  Staff’s recommended allocation and the resulting per-therm charges will be adjusted subsequent to the agenda conference to reflect any change to the revenue requirement that results from the Commission’s votes on the issues.  The staff recommended allocation of the increase was designed to move each rate class towards the system rate of return (i.e., to parity), while taking into account the rate impact on each customer class.

Issue 29:  What are the appropriate Customer Charges?

Recommendation:  Staff’s recommended customer charges are as follows:

 

Rate Class	Staff Recommended Customer Charge
Transportation Service 1 (TS-1)	$9.00
Transportation Service 2 (TS-2)	$12.00
Transportation Service 3 (TS-3)	$35.00
Transportation Service 4 (TS-4)	$150.00
Transportation Service 5 (TS-5)	$500.00

(Baxter)

Staff Analysis:  The customer charge is a fixed charge that applies to each customer’s bill  no matter the quantity of gas used for the month.  The customer charge is typically designed to recover costs such as metering and billing that are incurred no matter whether any gas is consumed.

 

            Staff’s recommended customer charges are contained in the Table below.  The table also shows the existing customer charges and the Company-proposed charges.

 

Rate Class	Present Charge	Company Proposed Charge	Staff Recommended Charge
Transportation Service 1 (TS-1) 0-200 therms	$7.00 (Residential) $17.00 (Commercial)	$10.00	$9.00
Transportation Service 2 (TS-2) 201-1000 therms	$7.00 (Residential) $17.00 (Commercial)	$15.00	$12.00
Transportation Service 3 (TS-3) 1001-10K therms	$17.00	$80.00	$35.00
Transportation Service 4 (TS-4) 10,001-50K therms	$17.00	$250.00	$150.00
Transportation Service 5 (TS-5) >50,000 therms	$17.00 (< =100,000 therms) $100.00 (>100,000 therms)	$1,350.00	$500.00

            As discussed in Issue 32, Sebring is proposing to eliminate its residential and commercial customer classifications and to replace them with five volumetric-based rate classes.  The Company is also proposing substantial increases in its customer charges, as shown in the table above.  The staff recommended customer charges shown above, while higher than the current charges, are below those proposed by Sebring.  Staff believes that the recommended charges represent a reasonable increase given the low level of Sebring’s current customer charges.  Staff therefore recommends that they be approved.

Issue 30:  What are the appropriate per therm Transportation Charges?

Recommendation:  Staff’s recommended per therm Transportation Charges are contained in Attachment 7, page 1.  (Wheeler)

Staff Analysis:  Staff’s recommended per therm Transportation Charges are contained in Attachment 7, page 1.  These charges are subject to change based on the Commission’s vote in other issues.

Issue 31:  Is Sebring’s proposed new Third Party Supplier (TPS) rate schedule and associated charge appropriate?

Recommendation:  Yes.  (Draper)

Staff Analysis:  Sebring has proposed a new TPS rate schedule applicable to third party suppliers.  In addition, Sebring has proposed to increase the TPS charge from $2 per monthly transportation bill to $3 per monthly transportation bill.  The $2 TPS charge is currently included in the Terms and Conditions for Transportation Service section of Sebring’s tariff.  Sebring projects that it will render 6,631 transportation bills in the projected test year.

 

The proposed TPS charge is designed to recover $20,258 in administrative and billing service costs that Sebring provides to Third Party Suppliers.  Specifically, Sebring has proposed to allocate portions of Accounts 902 (meter reading expense) and 893 (maintenance of meters and house regulators) to the TPS rate class.  In addition, Sebring has proposed to recover a portion of the proposed incremental increase in salary expense through the TPS charge.  The salary expense is related to the addition of a part-time position to help administer Sebring’s aggregated transportation service.

Staff has reviewed the proposed charge and the costs it is designed to recover, and believes that it is reasonable.  Staff therefore recommends that the proposed new TPS rate schedule and its associated charge be approved.

Issue 32:  Is Sebring’s proposal to replace its existing Residential, General Service and General Service Large Volume rate classes with five new volumetric rate classes appropriate?

Recommendation:  Yes.  (Draper)

Staff Analysis:  Presently, Sebring defines its rate classes based upon the end uses of the customers in the class, i.e., residential, commercial, and industrial.  Sebring has proposed to restructure its rates in order to group customers based solely on the number of therms they use annually.  This restructuring will result in five new rate schedules as shown below:

 

The proposed therm usage threshold levels are designed to more accurately reflect similar patterns such as annual volume, load profile, and the assignment of fixed and variable costs of serving the various rate classes.  The Commission has recently approved similar rate restructuring for the Florida Division of Chesapeake Utilities Corporation, Indiantown Gas Company, and NUI City Gas of Florida.  For these reasons, staff believes that the proposed volumetric-based rate classes are appropriate, and recommends that they be approved.

Issue 33:  Is Sebring’s proposal to lower the annual therm eligibility threshold from 100,000 to 50,000 therms for its Alternate Fuel, Interruptible, Special Contract and Individual Transportation Service Customers appropriate?

Recommendation:  Yes.  (Draper)

Staff Analysis:  Sebring has proposed to lower the annual therm eligibility threshold for Alternate Fuel, Interruptible, Special Contract, and Individual Transportation Service Customers from 100,000 to 50,000 therms.  Currently, no customers are large enough to qualify for the above tariff provisions.

 

            The Alternate Fuel, Interruptible, Special Contract, and Individual Transportation Service tariffs are designed to allow Sebring to negotiate customer-specific rates, terms, and conditions with large-volume customers.  Specifically, Alternate Fuel customers are eligible to receive service under Sebring’s Contract Transportation Service Rider that allows Sebring to flex the cents per therm Transportation Charge based upon the customer’s alternate fuel capabilities.  Customers designated as Interruptible and Special Contract customers can enter into special contracts with Sebring for the provision of gas.  Individual Transportation Service customers may select their own gas marketer.  For all other customers, Sebring’s authorized pool manager purchases and delivers natural gas to the Company’s distribution system.

            By lowering the annual therm eligibility thresholds, Sebring’s largest customer, as well as potential future large-volume customers, would qualify for the above described tariff provisions.  Staff believes that Sebring’s proposal is reasonable and should therefore be approved.

Issue 34:  What is the appropriate effective date for Sebring’s revised rates and charges?

Recommendation:  The revised rates and charges should become effective for meter readings on or after 30 days following the date of the Commission vote approving the rates and charges.  (Wheeler)

Staff Analysis:  All new rates and charges should become effective for meter readings on or after 30 days from the date of the Commission vote approving them.  This will insure that customers are aware of the new rates before they are billed for usage under the new rates.

OTHER ISSUES

Issue 35:  Should any portion of the $97,211 interim increase granted by Order No. PSC-04-0860-PCO-GU, issued September 2, 2004, be refunded to the customers?

Recommendation:  No portion of the $97,211 interim increase should be refunded.  (Romig)

Staff Analysis:  In this docket, the requested interim test year was the twelve months ended December 31, 2003.  The Commission granted the interim increase by Order No. PSC-04-0860-PCO-GU, issued September 2, 2004.

            An interim increase is reviewed when final rates are derived to determine if any portion should be returned to the ratepayers.  In this case, interim rates went into effect September 16, 2004.  Therefore, 2004 is the appropriate year to analyze for affirmation of the interim increase.

            Staff reviewed the Company’s 2004 financial projections and made adjustments appropriate for the 2004 test year.

            Staff believes that no refund of interim is required because the revenue requirement for the 2004 test year exceeds the revenue requirement for the interim.

Issue 36:  Should Sebring be required to file, within 90 days after the date of the final order in this docket, a description of all entries or adjustments to its annual report, rate of return reports, and books and records that will be required as a result of the Commission’s findings in this rate case?

Recommendation:  Yes.  To ensure that the utility adjusts its books in accordance with the Commission’s decision, Sebring should provide proof, within 90 days of the consummating order finalizing this docket, that the adjustments for all the applicable FERC USOA primary accounts have been made to its annual report, rate of return reports, and its books and records.  (Kaproth)

Staff Analysis:  To ensure that the utility adjusts its books in accordance with the Commission’s decision, Sebring should provide proof, within 90 days of the consummating order finalizing this docket, that the adjustments for all the applicable FERC USOA primary accounts have been made to its annual report, rate of return reports, and its books and records.

Issue 37:  Should this docket be closed?

Recommendation:  Yes.  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the Order, this docket should be closed upon the issuance of a Consummating Order.  (Jaeger)

Staff Analysis:  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the Order, this docket should be closed upon the issuance of a Consummating Order.

ATTACHMENTS