DATE:	January 6, 2005
TO:	Director, Division of the Commission Clerk & Administrative Services (Bayó)
FROM:	Division of Economic Regulation (Johnson, Kaproth, Rieger) Office of the General Counsel (Jaeger)
RE:	Docket No. 030123-WS – Application for transfer of majority organizational control of Sports Shinko Utility, Inc. d/b/a Grenelefe Utilities in Polk County and for name change on Certificate Nos. 589-W and 507-S to Grenelefe Resort Utility, Inc.
AGENDA:	01/18/05 – Regular Agenda – Is Proposed Agency Action for Issues 3 - Interested Persons May Participate
CRITICAL DATES:		None
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\030123.RCM.DOC

 

 Case Background

Sports Shinko Utility, Inc. d/b/a Grenelefe Utilities (Sports Shinko or utility) is a Class B utility located in Polk County serving approximately 1,716 water and 1,280 wastewater customers.  The utility was issued Certificate Nos. 589-W and 507-S pursuant to Order No. PSC-97-1546-FOF-WS, issued December 9, 1997, in Docket No. 961006-WS, In re:  Application for certificates under grandfather rights to provide water and wastewater service by Sports Shinko Utility, Inc. d/b/a Grenelefe Utilities in Polk County, subsequent to Polk County turning over jurisdiction to the Public Service Commission.  The utility is located in a portion of the Southwest Florida Water Management District (SWFWMD) which is considered a water use caution area.  In 2003, the utility had annual operating revenues of $322,228 for water and $195,460 for wastewater, with a net operating income of $37,133 for water and a net operating loss of $34,717 for wastewater.

On February 4, 2003, Grenelefe Resort L.L.C. (Grenelefe Resort or buyer), filed an application for transfer of majority organizational control of Sports Shinko and a name change to Grenelefe Resort Utility, Inc. which was deficient.  The utility filed an original cost study and completed the filing requirements on October 12, 2004.  Grenelefe Resort was formed on June 27, 2002.  The sole member and manager of Grenelefe Resort is Central Florida Investments, Inc. (CFI), a Florida corporation.  Sports Shinko’s name was changed to Grenelefe Resort Utility, Inc. effective January 13, 2003, with the Florida Department of State, Division of Corporations.

This recommendation addresses the transfer of majority organizational control to Grenelefe Resort, the name change from Sports Shinko to Grenelefe Resort Utility Inc., rate base for transfer purposes, rates and charges and the apparent violation of Section 367.071(1), and 367.1214 Florida Statutes.  The Commission has jurisdiction to consider this matter pursuant to Section 367.071, Florida Statutes.

 

Discussion of Issues

Issue 1:  Should Sports Shinko be ordered to show cause, in writing within twenty days, why it should not be fined for its apparent violation of Sections 367.071 and 367.1214, Florida Statutes?

Recommendation:  No.  Show cause proceedings should not be initiated.  (Jaeger)

Staff Analysis:  Sports Shinko is in apparent violation of Section 367.071(1), Florida Statutes, which states, in part, "No utility shall sell, assign, or transfer its certificate of authorization, facilities or any portion thereof, or majority organizational control without determination and approval of the commission that the proposed sale, assignment, or transfer is in the public interest . . . .”  At the time of certification, the stock of Sports Shinko was owned by Sports Shinko (Florida) Co., Ltd.  The utility and non-utility property was purchased out of a bankruptcy proceeding.  The purchase and sale agreement, dated June 18, 2002, was approved by the United States Bankruptcy Court, Middle District of Florida, Tampa Division, on June 27, 2002.  The closing on the sale of the stock for this utility from the court appointed Trustee occurred on July 1, 2002.  At that time, ownership of the land upon which the facilities are located was transferred to Grenelefe Resort.  The transfer of control of the utilities and ownership of the land occurred prior to Commission approval, which is an apparent violation of Section 367.071, Florida Statutes.

            Utilities are charged with the knowledge of the Commission’s rules and statutes.  Additionally, “[i]t is a common maxim, familiar to all minds that ignorance of the law’ will not excuse and person, either civilly or criminally.”  Barlow v. United States, 32 U.S. 404, 411 (1833).  Section 367.161, Florida Statutes, authorizes the Commission to assess a penalty of not more than $5,000 for each offense, if a utility is found to have knowingly refused to comply with, or to have willfully violated any provision of Chapter 367, Florida Statutes.  By failing to comply with the provisions of Sections 367.071(1) and 367.1214, Florida Statutes, the utility’s acts were “willful” in the sense intended by Section 367.161, Florida Statutes.  In Order No. 24306, issued April 1, 1991, in Docket No. 890216-TL, In Re:  Investigation Into The Proper Application of Rule 25-14.003, F.A.C., Relating To Tax Savings Refund For 1988 and 1989 For GTE Florida, Inc., the Commission, having found that the company had not intended to violate the rule, nevertheless found it appropriate to order it to show cause why it should not be fined, stating that "[i]n our view, 'willful' implies an intent to do an act, and this is distinct from an intent to violate a statute or rule." Id. at 6.  Also, the utility’s name was changed from Sports Shinko to Grenelefe Resort Utility, Inc., on January 13, 2003, without Commission approval.  This would appear to be in violation of Section 367.1214, Florida Statutes.

            However, under the circumstances of this case, staff believes that show cause proceedings should not be initiated against Sports Shinko for failure to obtain Commission approval prior to the transfer or name change.  Transfer of ownership occurred due to the bankruptcy.

            Although the transfer and name change occurred prior to Commission approval, staff does not believe that the apparent violations of Sections 367.071, and 367.1214, Florida Statutes, rises in these circumstances to the level of warranting the initiation of show cause proceedings.  Therefore, staff recommends that the Commission not order Sports Shinko, to show cause for failing to obtain Commission approval prior to the transfer and name change.  This is consistent with the Commission’s decision in Order No.  PSC-03-0578-FOF-WS, issued April 18, 2003, in Docket No.  020382-WS, In Re:  Application for transfer of facilities and Certificate Nos. 603-W and 519-S in Polk County from New River Ranch, L.C. d/b/a River Ranch to River Ranch Water Management,  LLC.

Issue 2:  Should the transfer of majority organization Control of  Sports Shinko Utility, Inc. in Polk County to Grenelefe Resort L.L.C. be approved and should the request to change the name of the utility to Grenelefe Resort Utility, Inc., be approved?

Recommendation:  Yes, the transfer of majority organizational control of Sports Shinko Utility, Inc. in Polk County to Grenelefe Resort L.L.C., is in the public interest and should be approved.  Also, the request to change the name of the utility to Grenelefe Resort Utility, Inc. should be approved.  A description of the territory granted by Certificate Nos. 589-W and 507-S is appended to this recommendation as Attachment A.  (Johnson, Rieger, Kaproth)

Staff Analysis:  On February 4, 2003, an application was filed for approval of the transfer of majority organizational control of Sports Shinko to the Grenelefe Resort and a name change to Grenelefe Resort Utility, Inc.  The utility’s initial application was found to be deficient.  The utility corrected and completed the application on October 12, 2004.  Grenelefe Resort acquired the utility through a stock purchase and the nonutility property at a bankruptcy auction.  The buyer submitted the Stock Purchase Agreement (Agreement) which sets forth the terms and conditions by which the buyer acquired all of the outstanding stock of the utility.  The actual closing for the sale took place on July 1, 2002.

            The application is in compliance with the governing statute, Section 367.071, Florida Statutes, pertaining to an application for transfer of majority organizational control.  A description of the territory granted by Certificate Nos. 589-W and 507-S is appended to this recommendation as Attachment A.  Notice of the application was given as required by Rule 25-30.030, Florida Administrative Code.  No objections were received and the time for filing such has expired.

 

            Pursuant to Rule 25-30.037(3)(e) and (g), Florida Administrative Code, the application contained a statement describing the financing of the purchase, the entities providing funding to the buyer, and an explanation of the manner and amount of such funding.  According to the application, the $12,750,000 purchase price for the development and utility assets was financed with a $7,000,000 loan and the remainder in equity from the managing company CFI.

Proof of Ownership.  Pursuant to Rule 25-30.037(3)(i), Florida Administrative Code, the application contained a copy of the Trustee quit claim deed and general warranty deed for the land on which a second water treatment plant and wastewater plant are located and an easement for the land on which another water treatment plant is located, as evidence that the utility owns the land upon which the utility facilities are located.

Annual Reports and Regulatory Assessment Fees (RAFs).  Staff has verified that the utility is current with respect to annual reports through 2003 and RAFs through June 31, 2004.  In addition, the utility is owed a net refund of $2,080.17 for an underpayment for the last six months in 2002 and overpayments in 2003 and 2004.  Staff will review the refund for approval once the necessary paper work is completed.  The fines for the late filing of the 2002 and 2003 annual reports have been paid.  Grenelefe will be responsible for filing the  2004 annual report and the payment of  RAFs for July 1, 2004 through December 31, 2004 and for the subsequent years.

 

Environmental Compliance.            According to the utility’s annual report, the water treatment plant is composed of two interconnected treatment facilities with activated carbon filtration, anti-corrosion and chlorination used as the primary forms of treatment at this facility.  The utility also employs five wells to provide non-potable irrigation water used throughout the utility’s service area.  According to the utility’s annual report, the current permitted wastewater treatment plant capacity is 680,000 gallons per day (gpd), with the treated effluent sent to percolation ponds.   Water consumption in the area is controlled by the Southwest Florida Water Management District.  The utility’s territory is in two overlapping water use caution areas. Staff has confirmed with the Florida Department of Environmental Protection (DEP)  that the utility’s water and wastewater systems are currently in environmental compliance with respect to DEP standards.

Public Interest.          Pursuant to Rule 25-30.037(3)(f), Florida Administrative Code, the application contained a statement of how the transfer is in the public interest including a summary of the buyer’s experience in water and wastewater operations and a showing of the buyer’s financial ability to provide service.  The buyer, CFI, also owns River Ranch Water Management, LLC, another Commission regulated utility.  The buyer provided the consolidated financial statements of its parent company which appear to indicate sufficient liquid assets to maintain normal utility operations as well as address any utility emergencies.  To insure consistent compliance and the continued operations of the utility, the buyer has retained licensed operators, regulatory accountants, operations and billing services.  In addition, the buyer provided a statement of intent to fulfill the commitments, obligations and representations of the seller with regard to utility matters.  According to the applicant, the transfer is in the public interest because the customers will continue to receive the same quality service to which they are accustomed.

            Based on all of the above, staff recommends that the transfer of majority organizational control of Sports Shinko Utility, Inc., from Sports Shinko (Florida) Co., Ltd., to Grenelefe Resort L.L.C. is in the public interest and should be approved.  Also, the request to change the name of the utility to Grenelefe Resort Utility, Inc. should be approved.  A description of the territory granted by Certificate Nos. 589-W and 507-S is appended to this recommendation as Attachment A.
Issue 3:  What is the rate base of Sports Shinko at the time of transfer?

Recommendation:  The rate base is $506,627 for water and $129,272 for wastewater as of July 1, 2002.  (Johnson)

Staff Analysis:  Rate base has never been established for the utility.  The books and records of the prior owner and the original source documents were not available.  Subsequent to filing its application for transfer of majority organizational control the buyer hired a consultant to prepare an original cost study for the systems.  The original cost study was filed on October 12, 2004. Staff reviewed the original cost study report, the methodology used, and the resulting proposed original cost for the water and wastewater systems.

 

            Utility Plant In Service (UPIS).  The utility’s original cost study indicates UPIS balances of $3,410,084 for the water system and $2,866,595 for the wastewater system as of July l, 2002.  Staff is in agreement with the utility’s UPIS balances as determined in the original cost study.

 

            Land.  The utility’s original cost study indicates land balances of $7,000 for the water system and $49,400 for the wastewater system as of July l, 2002.  The utility operates two water treatment plants and one wastewater treatment plant.  One water plant is located on property which is covered by a perpetual utility easement from the condominium association which is valued at $4,000, according to the cost study.  The second water treatment plant is located on land that is owned by the utility and valued at $3,000.  The applicant submitted a copy of a general warranty deed for the second water treatment plant site which is located on a .25 acre parcel and the wastewater treatment plant site is located on a 4.25 acres parcel.  Since the utility does not own the land for which it has a perpetual easement, the cost for the land as reflected in the original cost study should not be included in rate base.  The utility is in agreement that the cost of the land for the perpetual easement should not be included in rate base.  Therefore, staff has reduced the water land account by $4,000.  Staff recommends that the utility land balance for the water system is $3,000 and the wastewater land balance is $49,400.

 

            Accumulated Depreciation.  The utility’s original cost study indicates accumulated depreciation balances of $1,578,581 for the water system and $2,218,473 for the wastewater system as of July l, 2002 based on the guideline depreciation rates prescribed by Rule 25-30.140, Florida Administrative Code.  Therefore, staff is in agreement with utility’s accumulated depreciation balances as determined in the original cost study.

 

            Contributions in Aid of Construction (CIAC) and amortization of CIAC.  The CIAC and amortization of CIAC recorded on the utility’s books could not be traced to original source documentation.  It appears that the prior owner did not collect the appropriate service availability charges, and did not record CIAC properly.  The utility is authorize to collect a $65 meter installation charge (5/8” x 3/4”) and a service line extension and tap charge at actual cost.

 

            Pursuant to Rule 25-30.570, Florida Administrative Code:

 

                       If the amount of CIAC has not been recorded on the utility’s books and the utility does not submit competent substantial evidence as to the amount of CIAC, the amount of CIAC shall be imputed to be the amount of the plant costs charged to the cost of land sales for tax purposes if available, or the proportion of the cost of the facilities and plant attributable to the water transmission and distribution system and the sewage collection system.

 

            Since the utility did not have adequate books to provide CIAC balances, staff recommends that CIAC of ($2,300,861) for water and ($1,048,895) for wastewater should be imputed based on the cost of the water transmission and distribution system and the wastewater collection system, pursuant to Rule 25-30.570, Florida Administrative Code.  The utility did not include CIAC in the original cost study.  In addition, staff recommends that amortization of CIAC of $972,985 for water and $480,645 for wastewater be included in rate base as of July 1, 2002.

            Based upon all the above, staff recommends that rate base for transfer purposes be established as of July 1, 2002, at $506,627 for water and $129,272 for wastewater.  Staff notes that rate base for transfer purposes does not include ratemaking adjustments for working capital and used and useful.

Issue 4:  Should the rates and charges approved for this utility be continued?

Recommendation:  Yes, the buyer should continue charging the rates and charges approved for Sports Shinko until authorized to change by the Commission in a subsequent proceeding.  The tariff pages reflecting the transfer should be effective for services provided or connections made on or after the stamped approval date on the tariff sheets.  (Johnson)

Staff Analysis:  Sports Shinko’s current rates for water and wastewater service were approved by the Commission in an administrative price index and pass-thru proceeding effective January 6, 2001.  The utility's approved miscellaneous service charges, meter testing, and service availability policy and charges were effective August 14, 1998, pursuant to Order No. PSC-97-1546-FOF-WS, issued December 9, 1997, in Docket No. 961006-WS.  The utility’s approved rates and charges are listed on Attachment B.

 

            Rule 25-9.044(1), Florida Administrative Code, provides that:

 

                        In case of change of ownership or control of a utility which 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).

 

            Grenelefe Resort Utility, Inc. has not requested a change in the rates and charges of the utility. Accordingly, staff recommends that, pursuant to Rule 25-9.044(1), Florida Administrative Code, 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.  The utility has filed a revised tariff reflecting the change in issuing officer and the requested utility name change as part of the transfer of majority organizational control.  The tariff filing should be approved and effective for services provided or connections made after the stamped approval date.

 

Issue 5:  Should this docket be closed

Recommendation:   No.  This docket should remain open pending receipt of evidence that Grenelefe Resort Utility, Inc. has provided proof that the adjustments for all the applicable NARUC USOA primary accounts have been made and has set up its books and records using the NARUC Uniform System of Accounts.  Once the proof has been provided that the adjustments for all the applicable NARUC USOA primary accounts have been made and the books and records are set up using NARUC Uniform System of Accounts, this docket may be closed administratively if no person whose substantial interest are affected by the Commission’s proposed agency action timely files a protest to that action and a consummating order has been issued.  (Jaeger)

Staff Analysis:   This docket shall remain open pending receipt of evidence that Grenelefe Resort Resort Utility, Inc. has provided proof that the adjustments for all the applicable NARUC USOA primary accounts have been made and has set up its books and records using the NARUC Uniform System of Accounts.  Once the proof has been provided that the adjustments for all applicable NARUC USOA primary accounts have been made and the books and records are set up using NARUC Uniform System of Accounts, this docket may be closed administratively if no person whose substantial interest are affected by the Commission’s proposed agency action timely files a protest to that action and a consummating order has been issued.

ATTACHMENT A

 

GRENELEFE RESORT UTILITY INC.

WATER AND WASTEWATER SERVICE AREA

 

DESCRIPTION OF TERRITORY SERVED

 

The following areas in Range 28 East, Township 28 South, Sections 5, 6, 7 and 8, Polk County, Florida;

 

The South ½ of Section 6;

The North ½ of Section 7; and

 

In Sections 7 and 8 described as follows:

The Point of Beginning (POB) identified as the center of Section 7; from the POB run N 89°42'32" E a distance of 2,599.05 feet; to the NW corner of Section 8; thence N 89°50'22" E a distance of 1,320.00 feet; thence South a distance of 1,317.85 feet more or less; thence S 03°59'01" E a distance of 827.42 feet; thence N 89°54'04" W a distance of 1,378.88 feet; to the East line of Section 7; thence S 89°26'13" W a distance of 2,574.02 feet; thence N 00°37'09" W a distance of 2,152.99 feet; to the POB; and

 

In Section 5 described as follows:

Begin at the SW corner of Section 5, Range 28 E, Township 28 S; run N 00°13'39" E a distance of 2,641.87 feet to the POB; from the POB run N 00°05'32" W a distance of 660.00 feet; thence N 89°49'05" E a distance of 1,600 feet more or less; thence Southerly along the waters edge of Lake Polk a distance of 688 feet more or less; thence S 89°50'03" W a distance of 1,407 feet more or less to the POB; and

 

In Section 5 described as follows:

From the SW corner of Section 5, Range 28 E, Township 28 S, also the POB; run N 00˚13'39" E a distance of 2,641.87 feet; thence N 89˚49'05" W a distance of 971.87 feet; thence S 00˚43'25" E a distance of 2,642.27 feet; thence S 89˚50'03" W a distance of 994.74 feet to the POB; and

 

In Section 8 described as follows:

From the NW corner of Section 8, Range 28 E, Township 28 S, also the POB; run N 89°50'03" E a distance a 994.74 feet; thence S 00°02'32"W a distance of 2,634.51 feet; thence S 89°50'22" W a distance of 1,000.27 feet; thence N 00°09'45" E a distance of 2,634.45 feet to the POB.

Attachment B

Monthly Water Service Rates
Residential Service Meter Size:
5/8" x 3/4"		$   5.81
1"		$ 14.53
1 1/2"		$ 29.06
Charge Per 1,000 Gallons
10,000 Gallons		$   0.76
10,001 - 35,000 Gallons		$   1.52
35,000 +  Gallons		$   2.28

 

 

General Service Meter Size:
5/8" x 3/4"		$    5.81
1"		$  14.53
1 1/2"		$  29.06
2"		$  46.49
3"		$  92.98
4"		$145.28
6"		$290.57
Charge Per 1,000 Gallons		$   0 .76

 

IRRIGATION SERVICE

Non-Potable Water

 

Meter Size	Base Rate	Usage $/Kgals	Inverted Rate
5/8” x 3/4”	$ 2.99	$0.64 to 50K	$2.28>50K
1”	$7.47	$0.64 to 125K	$2.28>125K
1 ½”	$14.95	$0.64 to 250K	$2.28>250K
2”	$23.92	$0.64 to 400K	$2.28>400K

 

 

IRRIGATION SERVICE

Potable Water

 

Residential Service All Meter Sizes:
		$   5.81
Charge Per 1,000 Gallons
(0-25,000 Gallons) (25,000 + Gallons)		$ 1.52 $ 2.28

 

 

 

 

Monthly Wastewater Service Rates
Residential Service All Meter Sizes:
		$   8.10
Charge Per 1,000 Gallons  (maximum 10,000 gallons)		$   1.09

 

 

General Service Meter Size:
5/8" x 3/4"		$      8.10
1"		$    20.25
1 ½"		$    40.51
2"		$    64.82
3"		$  129.63
4"		$  202.55
6"		$  405.10
Charge Per 1,000 Gallons		$      1.09

 

 

 

Service Availability Charges
Service Line Extension and Tap		Actual Cost
Meter Installation Charge 5/8" x 3/4"		$ 65.00
over 5/8" x 3/4"		Actual Cost

 

 

SCHEDULE NO. 1
GRENELEFE RESORT UTILITY, INC. SCHEDULE OF WATER RATE BASE AS OF JULY 1, 2002
DESCRIPTION	BALANCE PER UTILITY	STAFF’S ADJUSTMENTS		BALANCE PER STAFF

Utility Plant in Service	$3,410,084	0		$3,410,084
Land	7,000	(4,000)		3,000
Accumulated Depreciation	(1,578,581)	(0)		(1,578,581)

Contributions in Aid of    Construction (CIAC)

(0)

(2,300,861)

(2,300,861)

Amortization of CIAC

0

972,985

972,985

WATER RATE BASE

$ 1,838,503

($1,331,876)

$   506,627

 

 

SCHEDULE NO. 2

GRENELEFE RESORT UTILITY, INC. SCHEDULE OF WASTEWATER RATE BASE AS OF JULY 1, 2002

DESCRIPTION

BALANCE PER UTILITY

STAFF’S ADJUSTMENTS

BALANCE PER STAFF

Utility Plant in Service	$2,866,595	0		$2,866,595
Land	49,400	0			49,400
Accumulated Depreciation	(2,218,473)	0			(2,218,473)
Contributions in Aid of    Construction (CIAC)	(0)	(1,048,895)			(1,048,895)
Amortization of CIAC	0	480,645			480,645
WASTEWATER RATE BASE	$   697,522	($568,250)			$   129,272

 

 

 

 

GRENELEFE RESORT UTILITY, INC.

SCHEDULE OF ADJUSTMENT TO RATE BASE

AS OF JULY 1, 2002

 

 

            EXPLANATION                                                              ADJUSTMENTS

                                                                                                                                                                                                                                   Water                                                                                              Wastewater

A) Land

1.  To remove the cost of the easement                     $(4,000)

 

 

B) CIAC

1.  To reflect Imputed CIAC                              $ (2,300,861)             $  (1,048,895)

 

 

C) Accumulated Amortization of CIAC 

1.  Correspond adjust. to imputed CIAC                 $ 972,985              $  480,645