For an official paper copy, contact the Florida Public ServiceCommission at contact@psc.state.fl.us or call (850) 413-6770. There may be a charge for the copy.
State of Florida
Public Service
Commission
Capital Circle Office Center 2540 Shumard
Oak Boulevard
Tallahassee, Florida 32399-0850
-M-E-M-O-R-A-N-D-U-M-
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DATE: |
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TO: |
Director, Division of the Commission Clerk & Administrative Services (Bayó) |
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FROM: |
Division of Economic Regulation (Brady, Kaproth, Redemann) Office of the General Counsel (Vining) |
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RE: |
County: Charlotte |
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AGENDA: |
01/18/05 – Proposed Agency Action for Issues 2 and 3--Regular Agenda – Interested Persons May Participate |
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SPECIAL INSTRUCTIONS: |
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FILE NAME AND LOCATION: |
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On November 12, 2003, an application was filed for the transfer of the assets and certificates of Hunter Creek Utilities, LLC (Hunter Creek or utility) to Rivers Edge Utilities, LLC (Rivers Edge). On September 23, 2004, the application was amended to transfer the utility to MSM Utilities, LLC (MSM).
Hunter Creek is a Class C water and wastewater utility currently providing service to approximately 50 lots in The Oaks at Rivers Edge (formerly known as Hunter Creek Village). The development is located in an unincorporated portion of Charlotte County north of Punta Gorda and contains 100 acres adjacent to a tributary of the Peace River. The total number of developed lots at the end of Phase III will be 284, or 227 equivalent residential connections (ERCs). The service area is in the Southern Water Use Caution Area of the Southwest Florida Water Management District (SWFWMD). The utility’s 2003 annual report indicated combined annual revenues of $16,569, with a combined net operating loss of $46,660.
The utility’s water and wastewater facilities have been in existence and providing service since 1982; however, Charlotte County did not come under Commission jurisdiction until September 27, 1994. The utility owner, Mr. John Leonette, originally filed for a non-profit exemption from Commission regulation pursuant to Section 367.022(7), Florida Statutes. After failing to meet the requirements for that exemption, Mr. Leonette withdrew his request for an exemption and filed, instead, for original water and wastewater certificates on June 10, 1998.
The Commission granted the utility Certificate Nos. 611-W and 527-S on April 19, 1999, in Docket No. 980731-WS.[1] The docket was held open and any extension of service was withheld pending verification by September 30, 1999, of the utility’s sustained compliance with the Florida Department of Environmental Protection’s (FDEP’s) maximum standards for radioactive contamination. When Mr. Leonette failed to meet the deadline, the Commission initiated proceedings for possible deletion of unserved territory.[2] Shortly thereafter, Mr. Leonette began construction on plant improvements and, upon FDEP verification of sustained compliance, the Commission canceled territory deletion proceedings and closed the docket on April 25, 2000.[3]
In August of 2000, when the previous utility and development owner, Mr. Ernest MacLachlan died, the Trustees of Ernest E. MacLachlan Revocable Trust and the Zola M. MacLachlan Revocable Trust (MacLachlan Trusts), began foreclosure proceedings against Mr. Leonette for property which included the utility facilities. Staff monitored the progress of the proceedings during which Mr. Leonette retained control of the utility. A Final Judgment of Foreclosure was issued by the Circuit Court on July 26, 2002, which ultimately resulted in a Certificate of Title being issued to the MacLachlan Trusts on December 10, 2002.[4] Since the transfer was pursuant to a court-ordered foreclosure sale, there were no provisions for the sale to be contingent upon Commission approval pursuant to Section 367.071(1), Florida Statutes. The Commission has previously recognized that, due to the exigencies of this type of situation, show cause proceedings are not warranted.[5]
Since the MacLachlan Trusts were in negotiations to sell the utility to a third party developer, they requested an extension of time in which to file an application for transfer of certificates. When negotiations failed, the MacLachlan Trusts established a utility corporation and filed an application for transfer on November 12, 2003, to Rivers Edge Utilities, LLC. On September 23, 2004, the application was amended to request the transfer of Hunter Creek’s facilities and certificates to MSM. The closing occurred on December 15, 2004, contingent upon Commission approval.
The purpose of this memorandum is to address the transfer of facilities and certificates from Hunter Creek to MSM, rate base for transfer purposes, an acquisition adjustment, and the rates and charges. The Commission has jurisdiction pursuant to Section 367.071, Florida Statutes.
Noticing. Pursuant to Rule 25-30.030, Florida Administrative Code, the application contained the requisite proof of noticing. No objections to the application were received by the Commission and the time for filing such has expired.
Buyer Organization Structure. The application indicates that the buyer is a Florida Limited Liability Company established in Florida on August 23, 2004. It is 100% owned by five partners all of which are Trustees for Trusts in their names (Buyer Trustees).[6]
Sale Contract and Financing. As noted in the Case Background, at the time of the transfer to MSM, the utility was owned by the MacLachlan Trusts based on a Certificate of Title issued on December 10, 2002, pursuant to a foreclosure action. The MacLachlan Trusts subsequently entered into a Vacant Land Purchase Contract (contract) with MSM Land Investments, L.L.C. An addendum to the contract clarified that the buyer and seller consider $229,000 of the total purchase price of $4,500,000 to be apportioned to the purchase of the utility. The transfer of certificates occurred on December 15, 2004, subject to approval by the Commission.
The application stated that all necessary financing to complete the sale of the utility assets has been provided as equity capital contributions by the Buyer Trustees. The total amount of funding provided specifically to the utility was $300,000. The utility had no customer deposits, guaranteed revenue contracts, developer agreements, leases, or customer advances at the time of the closing.
Proof of Ownership. Rule 25-30.037(2)(q), Florida Administrative Code, requires evidence that the utility owns the land upon which the utility treatment facilities are located, or a copy of an agreement which provides for the continued use of the land, such as a 99-year lease. The application included a copy of an executed 99-Year Lease Agreement between Waterfront Homes of Charlotte, LLC (Waterfront) and MSM. Waterfront is a corporation established by MSM Land Investments L.L.C. at the time of the closing to receive the land assets of the development. Staff recommends that the term of the lease meets the requirements of the rule with respect to continued use of the land. However, staff recommends that the Commission take no position on the prudence of the costs of lease until reviewed in a future rate proceeding.
Annual Report and Regulatory Assessment Fees (RAFs). Staff has verified that, in accordance with Rule 25-30.110, Florida Administrative Code, annual reports for the utility have been filed for 2003 and all prior years. The prior owner, Mr. Leonette, late-paid the utility’s 1998 RAFs on September 18, 1999, but failed to pay RAFs from 1999 through November 25, 2002, when he lost ownership in the foreclosure. The Commission decided in Order No. PSC-03-0962-FOF-WS [7] not to initiate show cause proceedings and, instead, requested permission from the Florida Department of Financial Services to write off amounts for 1999 through November 25, 2002 as uncollectible. Staff has confirmed that RAFs from November 25, 2002 through 2003 have been paid by the MacLachlan Trusts. The penalties and interest on the late payment of 1998 RAFs was paid on December 3, 2004. Therefore, there are no penalties or interest outstanding for annual report or RAF payments. A statement was provided with the application that the MacLachlan Trusts will be responsible for filing the utility’s 2004 annual report and paying 2004 RAFs by March 31, 2005. MSM will be responsible for filing the utility’s annual reports and paying RAFs for all subsequent years.
Books and Records. As described in more detail in Issue 2, all books and records for the utility were lost in the foreclosure. In order to calculate rate base for transfer purposes, the MacLachlan Trusts hired an outside accountant to perform an original cost study. The Managing Partner of the Buyer Trusts also provided a statement affirming his intent to maintain continuous property records for the utility in accordance with Rule 25-30.110, Florida Administrative Code. Furthermore, the Managing Partner attested that he understands the requirement to keep the books and records of the utility in conformity with the NARUC uniform system of accounts as required by Rule 25-30.115, Florida Administrative Code, and intends to hire an outside expert to ensure compliance with all Commission rules.
Environmental Compliance. Pursuant to Rule 25-30.037(2)(p), Florida Administrative Code, the application contained a statement from the Managing Partner of the Buyer Trustees that the utility facilities appear to be in satisfactory condition and, to the best of his knowledge, are in compliance with all applicable standards set by the FDEP. Staff has confirmed with the FDEP that there are no outstanding notices of violation issued for the utility systems. In addition, staff has confirmed with the SWFWMD that, although the utility is in a Water Use Caution Area, there are no current restrictions on Hunter Creek’s wells.
Technical and Financial Ability. Pursuant to Rule 25-30.037(2), Florida Administrative Code, the application contained a statement indicating how the transfer is in the public interest, including a summary of the buyer’s experience and financial ability. The Managing Partner of the Buyer Trustees also provided a statement of his willingness to fulfill the obligations, commitments, and representations of the seller with regard to utility matters.
The application indicates that the Buyer Trustees purchased ownership of the development known as The Oaks at Rivers Edge as well as the water and wastewater system that serve its residents. As such, the Buyer Trustees have a substantial investment in the Community and are committed to providing quality service to the customers of the utility, including operating the systems in accordance with the utility’s FDEP permits. While the Buyer Trustees have not previously owned or operated any water and wastewater utilities, the statement indicates that they intend to continue to employ personnel familiar with the administrative and regulatory affairs, and operation and maintenance of the water and wastewater facilities.
Staff reviewed the personal financial statements for the Buyer Trustees, which reflected significant financial resources. According to the application, the Buyer Trustees have provided initial capitalization for MSM in the amount of $300,000.
Conclusion. Based upon all the above, staff recommends that the transfer of the assets and Certificate Nos. 611-W and 527-S from Hunter Creek Utilities, LLC, to MSM Utilities, LLC, is in the public interest and should be approved. The territory being transferred is described in Attachment A. The effective date of the transfer should be the date of the Commission vote on January 18, 2005. The MacLachlan Trusts should be responsible for filing the utility’s 2004 annual report and paying 2004 RAFs by March 31, 2005, and MSM Utilities, LLC, should be responsible for filing annual reports and paying RAFs for all subsequent years.
Utility Plant in Service (UPIS) and Land Easement. As noted earlier, since all books and records for the utility were lost in the foreclosure proceedings, the MacLachlan Trusts hired an outside regulatory consultant to conduct an original cost study. The consultant used documentation such as FDEP sanitary survey reports, construction permits, and contracts to identify Hunter Creek’s UPIS. For a majority of the water plant items, and for all of the wastewater plant items, the consultant was able to obtain copies of actual 1982 construction invoices for Hunter Creek. For the remainder of the water plant items, the consultant used invoices for utility facilities similar to Hunter Creek that were constructed nearby and at approximately the same time.
The utility facilities consist of one 30,000 gallon per day (gpd) water treatment plant with two wells and one 15,000 gpd wastewater treatment plant. In addition, the utility has constructed water distribution and wastewater collection lines throughout Phase I and a portion of Phase II of the development. As noted in Issue 1, the utility is leasing the land under the utility facilities from its land-owner affiliate, Waterfront Homes of Charlotte, LLC. Therefore no cost for land under the utility’s treatment plants is included in rate base. However, the utility was required by FDEP to purchase a sovereign submerged land easement in 1992 for a reject water discharge pipe. Since the easement was required by FDEP, staff recommends that the one-time easement payment and site preparation costs of $12,698 be included in rate base as land easement.
Staff has reviewed the invoices and methodology used in the utility’s original cost study and made a net adjustment of $225 to water plant based on a scrivener’s error and additional meter invoices. Otherwise staff believes the invoices and methodology are reasonable and recommends that the utility’s proposed UPIS balances as of December 31, 2004, of $371,011 for water, as adjusted, and $188,366 for wastewater be approved.
Accumulated Depreciation. The utility’s original cost study used a 40 year depreciation rate for all water and wastewater plant items. The reason given for not using the guideline rates required by Rule 25-30.140, Florida Administrative Code, was that the existing rates and charges were based on a 40-year depreciation rate. As previously noted, rate base has never been established for this utility. In addition, the utility’s tax statements were lost in the foreclosure proceeding. Therefore, there is no means for staff to verify whether or not the prior owners used a 40-year depreciation rate for tax purposes. Therefore, staff recommends that accumulated depreciation as of December 31, 2004, should be $251,503 for water and $128,230 for wastewater based on the guidelines rates in Rule 25-30.140, Florida Administrative Code.
Contributions-in-aid-of-Construction (CIAC) and Amortization of CIAC. The utility’s service availability policy is for the developer to install the water distribution and wastewater collection lines to the boundary of each new lot and for the lot owner, or the developer, to pay all approved service availability fees. 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 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.
Due to its size, Hunter Creek is composed of distribution and collection lines without transmission mains. Therefore, the utility’s original cost study proposed that the costs of the utility’s distribution and collections lines, along with the costs of meters and meter installation, be imputed as CIAC. In addition, as noted in the Case Background, in 2000 the utility had to purchase and install radon abatement equipment. The portion of the total cost for this abatement equipment which was funded by a FDEP grant was also included in CIAC. Staff believes that the utility’s proposed CIAC as of December 31, 2004, of $89,840 for water and $96,166 for wastewater is reasonable and should be approved. The associated December 31, 2004 amortization of CIAC, using guideline depreciation rates instead of the 40 year rates proposed by the utility, is $36,566 for water and $60,030 for wastewater.
Conclusion. Based upon all of the above, staff recommends that rate base for transfer purposes as of December 31, 2004, of $78,932 for the utility’s water system and $24,000 for the utility’s wastewater system be approved. Schedules 1 and 2 show the calculation for water and wastewater rate base, respectively. Schedule 3 shows staff recommended adjustments to the utility’s proposed water and wastewater rate bases. Schedules 4 and 5 show staff’s recommended water and wastewater account balances, respectively, for UPIS and accumulated depreciation as of December 31, 2004. Staff notes that rate base for transfer purposes does not include the normal rate making adjustments for used and useful or working capital. Within 30 days of the date of the order approving rate base, the utility should be required to provide a statement from its accountant indicating that the utility’s books have been adjusted to reflect the Commission approved rate base adjustments and balances.
Issue 3: Should an acquisition adjustment be approved?
Purchase Price $229,000
Combined Rate Base $102,932
Positive Acquisition Adjustment $126,068
Pursuant to Rule 25-30.0371, 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 an acquisition adjustment should not be included in the calculation of rate base for transfer purposes.
Issue 4: Should the utility’s existing rates and charges be continued?
Hunter Creek’s current service rates and charges were approved by Order No. PSC-99-0756-FOF-WS[8], as shown below. The utility does not have any approved service availability charges or customer deposits. It does have the Commission’s standard miscellaneous service charges and meter test deposits.
Monthly Residential Water Service
Minimum Charge $10.50
Gallonage Charge
0-5,000 gallons $ 3.25
5,001 – 8,000 gallons $ 4.88
Over 8,000 gallons $ 7.32
Monthly Residential Wastewater Service
Minimum Charge $ 6.50
Gallonage Charge
0 – 10,000 gallons $ 2.50
Maximum monthly charge $31.50
Staff recommends that the existing rates and charges for Hunter Creek be continued until authorized to change by the Commission in a subsequent proceeding. The tariff sheets reflecting the existing rates and charges should be effective for services rendered or connections made on or after the stamped approval date.
Attachment A
WATER AND WASTEWATER SERVICE TERRITORY
HUNTER CREEK UTILITIES, LLC
CHARLOTTE COUNTY
RIVERS EDGE COMMUNITY
Township 40 South, Range 23 East
Section 12
The NE 1/4 of the NW 1/4 of the SW 1/4 of the SW 1/4, of Section 12, Township 40 South, Range 23 East.
And
The SE 1/4 of the NW 1/4 of the SW 1/4 of the SW 1/4, of Section 12, Township 40 South, Range 23 East.
And
The NW 1/4 of the SW 1/4 of Section 12, Township 40 South, Range 23 East.
And
That portion of Government Lot 2, Section 12, Township 40 South, Range 23 East, lying South of Lee Branch Creek.
And
The Westerly 30 feet of the SW 1/4 of the SW 1/4 of Section 12, Township 40 South, Range 23 East.
Township 40 South, Range 23 East
Section 11
All of Government Lot 5, lying South of Lee Branch Creek in Section 11, Township 40, South, Range 23 East.
And
HUNTER CREEK UTILITIES, LLC
Water Rate Base
As of December 31, 2004
Recommended
Description Utility Balance Staff Adjustments Balance
Utility Plant in Service $ 370,786 $ 225 A $ 371,011
Land Easement $ 12,698 $ - 0 - $ 12,698
Accumulated Depreciation $(140,181) $(111,322) B $(251,503)
Contributions in Aid
of Construction $( 89,840) $ - 0 - $( 89,840)
Accumulated Amortization
of CIAC $ 32,976 $ 3,590 C $ 36,566
Total Water Rate Base $ 186,439 $(107,507) $ 78,932
HUNTER CREEK UTILITIES, LLC
Wastewater Rate Base
As of December 31, 2004
Recommended
Description Utility Balance Staff Adjustments Balance
Utility Plant in Service $ 188,366 $ - 0 - $ 188,366
Land $ - 0 - $ - 0 - $ - 0 –
Accumulated Depreciation $(105,955) $( 22,275) B $(128,230)
Contributions in Aid
of Construction $( 96,166) $ - 0 - $( 96,166)
Accumulated Amortization
of CIAC $ 54,092 $ 5,938 C $ 60,030
Total Wastewater Rate Base $ 40,337 $( 16,337) $ 24,000
Schedule 3
HUNTER CREEK UTILITIES, LLC
Schedule of Water and Wastewater Rate Base Adjustments
As of December 31, 2004
Recommended Rate Base Adjustments
Explanation Water Wastewater
A. Utility Plant In Service
To made a correcting adjustment and to
add additional meter installation invoices $ 255
B. Accumulated Depreciation
To reflect guideline depreciation rates. $(111,322) $( 22,275)
C. Amortization of CIAC
To reflect guideline depreciation rates $ 3,590 $ 5,938
Total Adjustments $(107,507) $( 16,337)
Schedule 4
HUNTER CREEK UTILITIES, INC.
Staff Recommended Water Account Balances
As of December 31, 2004
Accumulated
Plant Depreciation
Acct. No. Account Name Balance Balance
304 Structures & Improvements (Buildings) $105,120 $ 87,593
304 Structures & Improvements (Electrical) $ 26,600 $ 22,163
307 Wells $ 13,070 $ 10,890
309 Supply Mains (Piping) $ 10,025 $ 7,043
334 Flow Meters for Supply Mains $ 1,550 $ 1,550
311 High Service Pumping Equipment $ 4,000 $ 4,000
320 Water Treatment Equipment (Original) $ 46,518 $ 46,518
320 Water Treatment Equipment (Replaced) $ 85,683 $ 22,680
330 Distribution Reservoirs $ 23,500 $ 16,020
331 Distribution Lines $ 35,107 $ 20,790
333 Services $ 11,425 $ 7,335
334 Meter& Meter Installation $ 4,613 $ 2,609
335 Hydrants $ 2,800 $ 1,575
339 Miscellaneous Equipment $ 1,000 $ 737
$371,011 $251,503
Schedule 5
HUNTER CREEK UTILITIES, INC.
Staff Recommended Wastewater Account Balances
As of December 31, 2004
Accumulated
Plant Depreciation
Acct. No. Account Name Balance Balance
361 Collection Sewers (Gravity) $ 62,241 $ 35,010
361 Collection Sewers (Manholes) $ 16,915 $ 14,085
363 Collection Sewers (Service) $ 17,010 $ 10,935
370 Receiving Wells $ 25,000 $ 1,000
380 Treatment & Disposal (Equipment) $ 30,000 $ 30,000
380 Treatment & Disposal (Ponds) $ 37,200 $ 37,200
$188,366 $128,230
[1] Order No. PSC-99-0756-FOF-WS, issued April 19, 1999, in Docket No. 980731-WS, In Re: Application for certificate to provide water and wastewater service in Charlotte County by Hunter Creek Utilities, LLC.
[2] Order No. PSC-99-2380-PCO-WS, issued December 6, 1999, in Docket No. 980731-WS.
[3] Order No. PSC-00-0818-FOF-WS, issued April 25, 2000, in Docket No. 980731-WS.
[4] Case No. 01-746-CA, in the Circuit Court of the Twentieth Judicial Circuit in and for Charlotte County, Florida.
[5] Order No. PSC-00-0758-PAA-SU, issued April 17, 2000, in Docket No. 991056-SU, In Re: Application for transfer of Certificate No. 456-S from Del Vera Limited Partnership to Coolidge-Ft. Myers Realty Limited Partnership d/b/a Heron’s Glen Utilities in Lee County and Order No. PSC-03-0518-FOF-WS, issued April 18, 2003, in Docket No. 020382-WS.
[6] Ben J. Maltese, Trustee of the Ben J. Maltese Revocable Trust dated 09/09/97, 30% owner; Gerald G. Mansour Trustee of the Gerald G. Mansour Revocable Trust dated 11/18/91, 15% owner; Gerald J. Mansour Trustee of the Gerald J. Mansour Revocable Trust dated 10/06/83, 15% owner; Ghassan M. Saab, Trustee of the Ghassan M. Saab Trust dated 02/16/87, 15% owner; and Khalil Saab, Trustee of the Khalil Saab Revocable Trust dated 10/10/94, 25% owner.
[7] Order No. PSC-03-0962-FOF-WS, issued August 25, 2003, in Docket No. 030449-WS, In Re: Disposition of delinquent regulatory assessment fees for Hunter Creek Utilities, LLC in Charlotte County.
[8] Order No. PSC-99-0756-FOF-WS, issued April 19, 1999, in Docket No. 980731-WS, In Re: Application for certificate to provide water and wastewater service in Charlotte County by Hunter Creek Utilities, LLC.