Recommendation (Regular)

Public Service Commission
Capital Circle Office Center 2540 Shumard Oak Boulevard
Tallahassee, Florida 32399-0850

Case Background

Indiantown Company, Inc. (Indiantown or utility) is a Class B utility providing water and wastewater service to approximately 1,806 water and 1,686 wastewater customers in Martin County. In addition to the regulated water and wastewater operations, the utility also has unregulated refuse and roll-off operations. Also, Indiantown Telephone System, Inc. (ITS), a sister company, performs administrative functions for the utility. Indiantown is a wholly-owned subsidiary of Postco, Inc. (Postco). Further, several employees, including Mr. Robert Post (President of Postco, ITS, and Indiantown), Mr. Jeff Leslie (Vice-President of Postco, ITS, and Indiantown), and Mr. William Hannah (Special Projects Manager for ITS and Indiantown), spend time on regulated and non-regulated activities and their time must be allocated accordingly.

Water and wastewater rates were last established for this utility by Order No. PSC-00-2054-PAA-WS, issued October 27, 2000, in Docket No. 990939-WS, In re: Application for rate increase in Martin County by Indiantown Company, Inc.

On August 18, 2004, Indiantown filed its Application for Rate Increase in the instant docket. Staff found several deficiencies in the Minimum Filing Requirements (MFRs). However, the utility corrected those deficiencies, and the official filing date was established as November 2, 2004. The utility requested that the application be processed using the Proposed Agency Action (PAA) procedure set forth in Section 367.081(8) Florida Statutes (F.S.). Pursuant to that section, at the expiration of five months following the official filing date, if the Commission has not taken action or, if the Commission's action is protested by a party other than the utility, the utility may place its requested rates into effect under bond, escrow, or corporate undertaking subject to refund, upon notice to the Commission and upon filing the appropriate tariffs. Indiantown also requested interim rates pursuant to Section 367.082, F.S. The test year established for interim and final rates is the historical twelve-month period ended December 31, 2003.

By Order No. PSC-04-1265-PCO-WS, issued December 21, 2004, in this docket, the Commission approved an interim revenue increase of $56,022 (or 9.17%) for water and $93,702 (or 10.76%) for wastewater.

The utility requested final rates designed to generate annual water revenues of $801,014 and wastewater revenues of $1,209,823. This represents a revenue increase of $189,765 (31.05%) for water and $338,771 (38.89%) for wastewater.

By letter dated February 14, 2005, Indiantown initially extended the five-month statutory deadline for the consideration of its requested final rates to April 19, 2005. On April 13, 2005, the utility requested a deferral of staff’s original recommendation filed on April 7, 2005, in order to provide additional information on the recommended sludge removal expense adjustment. Indiantown extended the statutory deadline to June 14, 2005. Upon further review, staff does not take issue with the MFR amount of sludge removal expense. As a result, the following issues have been revised: working capital, rate base, parent debt adjustment, operating income, revenue requirement, wastewater rates, and interim refund. The revised recommendation addresses Indiantown’s requested final rates. The Commission has jurisdication pursuant to Sections 367.081 and 367.082, F.S.

Discussion of Issues

Quality of Service

Issue 1: Should the quality of service provided by Indiantown Company, Inc. be considered satisfactory?

Recommendation:

Staff recommends that the utility’s overall quality of service is marginal. Indiantown should be required to make all repairs or corrections mandated by Department of Environmental Protection. (Edwards)

Staff Analysis:

Pursuant to Rule 25-30.433(1), Florida Administrative Code (F.A.C.), in every water and wastewater rate case, the Commission shall determine the overall quality of service provided by the utility by evaluating (1) the quality of the product, (2) the operating conditions of the plant and facilities, and (3) the utility’s attempt to address customer satisfaction.

Quality of the Product

Staff has reviewed both the utility and the Department of Environmental Protection’s (DEP) records and has communicated with DEP staff. It appears that the finished product of the wastewater treatment plant complies with regulatory standards. However, according to DEP, the utility’s lab results indicate that the Total Trihalomethanes (TTHM) levels for the finished water product exceeded the maximum contaminant levels (MCL). Trihalomethanes are the result of chlorine interacting with organics in water. On February 23, 2005, the utility, in a response to a staff data request, indicated that it would be converting from its existing chlorine disinfection system to a chloramine system. Chloramines consist of two chemicals (chlorine and ammonia). The utility believes that the change in the disinfection method will reduce its TTHM level to meet DEP regulatory standards.

Based on the above, staff believes that the quality of the finished product for wastewater is satisfactory. Although the quality of the finished product for water exceeds the MCL for TTHM, it appears that the utility has begun to take the necessary steps toward resolving its TTHM issue. Thus, staff recommends that the quality of the finished product for both water and wastewater treatment plants should be considered satisfactory.

Operating Condition of the Water and Wastewater Facilities

Based on the DEP inspection, staff’s field inspection, and other investigations, the wastewater utility plant does not comply with DEP environmental regulatory standards. The DEP wastewater inspector stated that he visited the plant on February 23, 2005, and the facility is out of compliance. He stated that, “[a]ll of the pits that were formerly the sludge drying beds contained solids which must be removed and disposed of properly. This deficiency was noted during the last inspection.” The utility has not yet removed the solids, resulting in pits with direct discharge to groundwater. In addition, the inspector stated that, “[o]ne of the sludge drying beds has been receiving effluent discharges during the flushing of the chlorine contact chamber.”

Since the February 23, 2005 inspection, DEP has issued a “NOTICE OF NONCOMPLIANCE” to the utility. Indiantown has 15 days to respond with documentation that the deficiencies have been corrected or with a plan for achieving compliance.

In addition, staff believes that the test-year plant flow records of both plants (water and wastewater) have erroneous data. For example, the water treatment plant’s records indicated that in ten out of the twelve months of the test year, the gallons of water sold were greater than the finished water pumped. The wastewater plant’s records indicated that in five out of the twelve months of the test year, the gallons of wastewater treated were greater than the gallons of water sold. This erroneous data was a clear indication that the utility was not monitoring its plants’ flow meters or analyzing the data, which could result in lost revenue and possible excessive expenses, which could be passed onto its customers.

According to the utility, it has addressed the problem by purchasing new water plant flow meters and calibrating all of the other plant meters. In addition, the utility stated that in the past no individual was assigned the task of monitoring and analyzing the flow data; however, Indiantown’s assistant superintendent will be charged with these responsibilities.

Based on the above, staff recommends that the operating condition of both water and wastewater facilities should be considered unsatisfactory.

The Utility’s Attempt to Address Customer Satisfaction

Staff reviewed the customer complaint logs of the utility, DEP, and the Commission. In its MFRs, the utility listed 101 customer complaints that were received by the utility during the test year. Those complaints related to “high water use-check meter for leaks.” Staff reviewed the utility’s records, and it appears that all of the customer complaints were handled properly. Staff also reviewed the DEP records and found no customer complaints on file.

The Commission’s records indicate that six complaints were received from the utility’s customers during the last five years (October 2000 to January 2005). These complaints concerned high bills, improper bills, and quality of service. Staff reviewed the utility’s records and it appears that the complaints were handled in a proper and timely manner.

On January 12, 2005, staff conducted a customer meeting in the utility’s service territory in Indiantown, Florida. Of the nine persons that attended the meeting, five people spoke. The customers’ primary concerns were low water pressure, the gallonage cap on wastewater rates, possible water contamination, and meter readers not reading their meters. Staff requested a written response from the utility regarding the concerns expressed by the residents at the customer meeting. The utility’s response is as follows:

1) Pressure - A representative from the utility visited Ms. Laura Groomes, Mrs. Deninger, and Mr. Matson. The water pressure readings were 70, 65, and 65, pounds per square inch, respectively. In addition, a utility representative visited Ms. Eckels home and was unable to determine why she had a problem with the toilet and no problems with any of her other appliances. Further, in its response, the utility stated that it would respond promptly to any allegations of low water pressure and would investigate each complaint. Indiantown stated that if development occurs close to the Indianwood community in the future it would, if necessary, loop the system.

2) Gallonage Cap on sewer – The utility’s response was that it would leave the issue of rate structure to the Commission.

3) Contamination - The utility stated that it would continue to provide DEP required notices to customers. In addition, it would take timely water samples and file all reports due to DEP. If, after the third quarter of sampling, the changes in methodology and flushing have not achieved the desired results, it would take further corrective action, as appropriate.

4) Meter reading – According to Indiantown, Mr. Hewitt, the plant superintendent, showed Ms. Eckel how the meter readers scrape off any dirt or debris in order to read the meters. In addition, he explained that the meters are below ground, and there is usually some dirt or debris on top, but this does not interfere with obtaining an accurate reading.

Based on the above, it appears that the utility promptly handles its customer’s complaints, and staff recommends that the utility’s response to customer complaints should be considered satisfactory.

Summary

Based on staff’s review, the quality of the finished water exceeds the MCL for TTHM. However, staff believes that the utility is actively attempting to address the water product problem regarding its TTHM exceeding the MCL. The wastewater treatment facility’s finished product does comply with DEP’s standards; however, its plant’s operating conditions do not comply due to its failure to remove solids in the sludge drying beds. Also, the test-year plant flow records of both the water and wastewater plants have erroneous data, which demonstrated that the utility was not monitoring its plants’ flow meters or analyzing the data. Based on these deficiencies, staff recommends that the operating conditions of both the water and wastewater facilities should be considered unsatisfactory. It appears that the utility did not attempt to comply with the DEP mandate regarding the removal of the sludge drying beds. Therefore, staff recommends that the utility’s overall quality of service should be considered marginal. Staff also recommends that the utility be required to make all DEP required corrections to its water and wastewater treatment facilities.

Rate Base

Issue 2: Should stipulated rate base adjustments be made?

Recommendation:

Yes. Based on uncontested audit adjustments, plant should be decreased by ($39,851) for water and ($448) for wastewater, and accumulated depreciation should be decreased by $42,938 for water and $11,925 for wastewater. In addition, wastewater accumulated amortization of CIAC should be increased by $3,030. (Fletcher)

Staff Analysis:

Staff auditors recommended the following rate base adjustments.

Audit Adjustments	Water	Wastewater
1. Remove unused wireless equipment– Exception No. 1
Decrease Plant (Account No. 340)	($3,120)	0
Decrease Accumulated Depreciation	$260	0
2. Computer Retirements and Reclassifications – Exception No. 3
Decrease Plant (Accounts Nos. 340 and 390)	($9,830)	($2,819)
Decrease Accumulated Depreciation	$6,563	$6,086
3. Vehicle Retirements – Exception No. 4
Decrease Plant (Accounts Nos. 341 and 391)	($38,059)	($7,533)
Decrease Accumulated Depreciation	$36,859	$6,608
4. Correct Amortization of CIAC – Exception No. 5
Increase Accumulated Amortization of CIAC		$3,030
5. Pro Forma Vehicle Purchased in 2004 – Exception No. 9
Increase Plant (Accounts Nos. 341 and 391)	$1,875	$5,625
Increase Accumulated Depreciation	($156)	($469)
6. Correcting Depreciation Rate for Account 304 – Disclosure No. 4
Increase Accumulated Depreciation	($478)
7. Capitalizing Items Expensed – Disclosure No. 11
Increase Plant – Account No. 330	$1,233
Increase Plant – Account No. 331	$8,050
Increase Plant – Account No. 364		$1,934
Increase Plant – Account No. 371		$1,611
Increase Plant – Account No. 394		$733
Increase Accumulated Depreciation	($110)	($299)

The utility agrees with all of the above audit adjustments. Therefore, staff recommends that plant be decreased by ($39,851) for water and ($448) for wastewater and that accumulated depreciation be decreased by $42,938 for water and $11,925 for wastewater. In addition, staff recommends that wastewater accumulated amortization of CIAC be increased by $3,030.

Issue 3: Should any plant items placed into service prior to 1975 be retired?

Recommendation:

Yes. Because the utility has no detail regarding what types of plant are included in Accounts Nos. 348 and 398, Other Tangible Plant for water and wastewater, respectively, and because the plant in these accounts will be fully depreciated before the recommended rates go into effect in 2005, the following adjustments should be made to retire this plant. (Fletcher)

	Water	Wastewater
Plant	($706,235)	($709,350)
Accumulated Depr.	$706,235	$709,350
Depreciation Expense	($17,656)	($9,817)

Staff Analysis:

According to Audit Disclosure No. 3, staff auditors stated that the balances in Accounts Nos. 348 and 398, Other Tangible Plant for water and wastewater, respectively, include plant that was placed into service prior to 1975. Staff auditors also stated that there is no support available detailing what types of plant are in those accounts and that the depreciation period should be 10 years, pursuant to Rule 25-30.140, F.A.C. In its audit response, the utility stated that the Commission has utilized a 2.5% depreciation rate in its last two rate cases because there is no detailed breakdown available for assets in these accounts. Based on the utility’s group depreciation adjustment in its MFRs, staff notes that the plant in these accounts will be fully depreciated before staff’s recommended rates go into effect in 2005. Based on the above, staff recommends that the following adjustments should be made to retire this plant.

	Water	Wastewater
Plant	($706,235)	($709,350)
Accumulated Depr.	$706,235	$709,350
Depreciation Expense	($17,656)	($9,817)

Issue 4: Should adjustments be made to reflect additional retirements?

Recommendation:

Yes. Plant and accumulated depreciation should each be reduced by $51,910 for water and $94,634 for wastewater. Correspondingly, depreciation expense should be reduced by $1,367 for water and $3,934 for wastewater. (Revell, Fletcher)

Staff Analysis:

According to Audit Exception No. 2, staff auditors stated that the utility failed to make several plant retirements from 1999 to 2003. Based on the information provided by the utility, our auditors could not determine the original cost. Staff auditors stated that the original cost of the retired plant would have to be determined before any retirements could be booked.

According to staff’s discussion with Indiantown, the utility did not have a retirement policy. Based on the utility’s audit response and its response to Staff’s Third Data Request, Indiantown estimated the in-service dates of retired plant based on the utility water and wastewater superintendent’s recollection since he has been with Indiantown for 30 years. The utility estimated the original cost of the retired plant by deflating the replacement cost of each asset using the Consumer Price Index.

On numerous occasions, the Commission has approved Utilities, Inc.’s retirement policy, which is to retire 75% of the replacement cost, if the original cost of the plant retired or the year that the retired plant was placed into service is not known. Otherwise, if the year that the retired plant was placed into service is known, the Handy Whitman Index (HWI) is used to determine the appropriate retirement percentage to apply to the cost of the replaced plant. See Order No. PSC-04-0363-PAA-SU, issued April 5, 2004, in Docket No. 020408-SU, In re: Application for rate increase in Seminole County by Alafaya Utilities, Inc., at p. 11; and Order No. PSC-00-1528-PAA-WU, issued August 23, 2000, in Docket No. 991437-WU, In re: Application for increase in water rates in Orange County by Wedgefield Utilities, Inc., at p. 9. Since Indiantown cannot provide any support documentation verifying its estimated in-service dates and does not have a retirement policy, staff recommends using past Commission practice thereby reducing plant and accumulated depreciation by 75% of the replacement value of the new plant. See also Order No. PSC-04-0356-PAA-WU, issued April 5, 2004, in Docket No. 030423-WU, In re: Investigation into 2002 earnings of Residential Water Systems, Inc. in Marion County, at p. 16;Order No. PSC-03-1250-PAA-WU, issued November 6, 2003, in Docket No. 030250-WU-, In re: Application for staff-assisted rate case in Pasco County, by Floralino Properties, Inc., at p. 10; and Order No. PSC-01-1574-PAA-WS, issued July 30, 2001, in Docket No. 000584-WS, In re: Application for approval of staff-assisted rate case in Martin County by Laniger Enterprises of America, Inc., at p. 10.

Therefore, staff recommends that plant and accumulated depreciation each be reduced by $51,910 for water and $94,634 for wastewater. Correspondingly, depreciation expense should be reduced by $1,367 for water and $3,934 for wastewater.

Issue 5: Should an adjustment be made to the utility’s pro forma plant and expense items?

Recommendation:

Yes. Plant should be increased by $4,131 for water and decreased by ($48,723) for wastewater. Corresponding adjustments should be made to increase water accumulated depreciation by ($112) and decrease wastewater accumulated depreciation by $66,887. Corresponding adjustments should also be made to increase depreciation expense by $226 for water and $1,160 for wastewater. Further, operation and maintenance (O&M) expenses for wastewater should be increased by $2,788. (Fletcher, Edwards)

Staff Analysis:

In its MFRs, the utility included eight pro forma plant additions totaling $42,953 for water and $185,131 for wastewater. Indiantown also included a pro forma expense of $14,000, which is an annual amortization amount of the total tank painting cost over five years. The utility has completed five of the pro forma plant additions. The outstanding pro forma projects are as follows:

Description	System	Plant	Expense
Security Camera	Water	$6,000	$0
Generator for Sewer Plant	Wastewater	69,093	0
Relocate Jefferson St. LS	Wastewater	75,000	0
Painting Sewer Tanks	Wastewater	0	14,000
Total		$150,093	$14,000

In Staff’s First Data Request, Indiantown was asked to provide a detailed description of each pro forma plant item, including: its purpose; a statement as to why it should be included in this rate case; copies of all signed contracts directly related to the addition of each plant project; and the projected in-service date for each project. In its response, the utility included a description, projected cost, and expected completion date for each project. However, Indiantown provided unexecuted cost proposals for all the above items, which date back to 2003.

Subsequently, staff requested that the utility provide executed contracts for all of the outstanding pro forma projects. On March 3, 2005, the utility provided the executed contracts for all of these projects. The following is a breakdown of the utility’s revised costs for its outstanding projects.

Description	System	Plant	Expense
Security Camera	Water	$10,131	$0
Generator for Sewer Plant	Wastewater	72,500	0
Relocate Jefferson St. LS	Wastewater	91,480	0
Painting Sewer Tanks	Wastewater	0	16,788
Total		$174,111	$16,788

Section 367.081(2)(a)2., F.S., states:

. . . . the commission shall consider utility property, including land acquired or facilities constructed or to be constructed within a reasonable time in the future, not to exceed 24 months after the end of the historic base year used to set final rates . . . . (Emphasis added.)

Staff notes that all of the outstanding pro forma projects are scheduled to be completed before year-end 2005. Thus, all of these requested pro forma projects are with the 24-month time frame mentioned above. Further, staff believes that all the pro forma projects requested in the utility’s filing are needed to serve its current customers.

In Audit Disclosure No. 2, the auditors stated that the utility did not include a pro forma retirement adjustment for the Jefferson Street lift station. In its audit response, the utility stated the Jefferson Street lift station was built in 1960 and that the estimated original cost was $3,000. Based on discussion with Indiantown, the 1960 in-service date was estimated based on the utility water and wastewater superintendent’s recollection since he has been with Indiantown for 30 years. The utility cannot provide any support documentation verifying this estimated in-service date. As discussed in an earlier issue, when there is a lack of support documentation for the in-service dates, staff has recommended using a retirement policy that reduces plant and accumulated depreciation by 75% of the replacement value of the new plant. For consistency, staff recommends that the Jefferson Street lift station should also be retired at 75% of the replacement cost.

Based on the above, staff recommends that plant be increased by $4,131 for water and decreased by ($48,723) for wastewater. Corresponding adjustments should be made to increase water accumulated depreciation by ($112) and decrease wastewater accumulated depreciation by $66,887. Corresponding adjustments should also be made to increase depreciation expense by $226 for water and $1,160 for wastewater. Further, O&M expenses for wastewater should be increased by $2,788.

Issue 6: Does the utility have any excessive unaccounted for water and infiltration and inflow, and, if so, are adjustments necessary?

Recommendation:

Yes. Indiantown has 5.0% excessive unaccounted for water and 6.67% excessive infiltration and inflow for wastewater. Therefore, purchased power and chemicals should be reduced by $2,231 for water and $4,920 for wastewater. (Edwards)

Staff Analysis:

It is Commission practice to allow 10% of total water treated as an acceptable level of unaccounted for water. See Orders Nos. PSC-98-1269-FOF-WS, issued September 24, 1998, in Docket No. 971401-WS, In re: Application for a staff-assisted rate case in Bay County by Bayside Utilities, Inc.; and PSC-96-1466-FOF-WU, issued December 3, 1996, in Docket No. 960133-WU, In re: Application for staff-assisted rate case in Lee County by MHC-DeAnza Financing Limited Partnership, d/b/a Buccaneer Water Services. In most instances, the Commission has reduced the chemical and electrical costs associated with unaccounted for water in excess of 10% so that ratepayers do not bear those excessive costs.

Unaccounted for Water

In its original MFRs, the utility indicated that the test year unaccounted for water was a negative (8.62%) and its filing showed no other gallons of water usage. In addition, the utility does not believe that it has excessive unaccounted for water. Further, MFR Schedule F-1 indicated that the utility sold 16,984,000 more gallons of water than it pumped. Indiantown stated that gallons pumped are based on flow meter readings at the end of each month, while gallons billed are based on the flow meter reading taken on the 19^th of each month; therefore, gallons sold are greater than gallons pumped. In addition, the utility stated that the flow meters are old and needed to be repaired or replaced. Regarding accountability of unaccounted for water, the utility stated that it considers water not sold to be other water usage and it does not record the other water usage.

After two requests from staff for a more detailed analysis regarding unaccounted for water, the utility responded stating that it had replaced the water flow meters in October 2004, and the meters were now registering properly. Since the new water meters were installed, staff requested current water flow data. The utility provided copies of its current flow recording (from October 2004 to January 2005). These records show that the total unaccounted for water is 15%. Based on the above-noted orders, staff believes that 10% is acceptable and the remaining 5% is excessive. However, the utility still believes there is no excessive unaccounted for water.

Staff reviewed the applicants original MFRs and the filing showed two months (March and June 2003) that the gallons of water sold was less than the wastewater treated. In addition, the records indicated that for ten out of twelve months of the test year, the gallons of water sold were greater than the finished water pumped. Staff concluded the utility’s data was flawed and unreliable. Therefore, staff could not use this data to calculate U&U or unaccounted for water. After receiving the utility’s response to staff’s data request, staff analyzed the data and it appears that the records are now reflecting normal flow patterns. Staff noted that in the utility’s revised analysis, Indiantown’s records indicated 5% excessive unaccounted for water. However, it made no reduction to chemicals or purchased power expenses, and staff believes that adjustments should be made. In addition, staff believes that since the new meters were installed, the utility will be able to better address variances in water pumped compared to water sold and produce reliable data. Further, staff used the water flow data (from October 2004 to January 2005) in its U&U calculation.

Staff believes that the utility should strive to reduce it’s unaccounted for water by aggressively seeking a goal of 10% or less. Water conservation is becoming increasingly important and staff believes that utilities should make extra effort to track water sales, record water losses, and be vigilant to reduce excessive amounts of unaccounted water. See Order No. PSC-03-1440-FOF-WS, issued December 22, 2003, in Docket No. 020071-WS, In re: Application for rate increase in Marion, Orange, Pasco, Pinellas, and Seminole Counties by Utilities, Inc. of Florida, at p. 110. Based on the above, staff recommends that the adjusted expenses for purchased power and chemicals should be reduced by 5.0%, or $2,231.

Infiltration and Inflow (I&I)

The industry standard that the Commission relies upon is based on the assumption that 80% of the water purchased by residential customers is returned as wastewater. In its filing, the utility indicated that there was no excessive I&I. In its revised MFRs, Indiantown also stated:

During August 2003, the Company’s service area received approximately 14 inches of rain. Among other things, a demolition site in the service area was flooded and 30 4 inch sewer lines that were left uncapped by the contractor drew in the water from the pond that was created by the flooding. All of the water was processed by the sewer plant, and FDEP gave approval to overflow into the St. Lucie Canal. Subsequent smoke testing revealed the uncapped lines, which were then capped. The Company believes this was a one-time act of God and was beyond the immediate control of the Utility.

Indiantown believes that this resulted in a very large amount of inflow, which should explain why the amount of wastewater treated was greater than the amount of water sold during August 2003.

Later, the utility provided an I&I calculation showing that there was 6.67% (14.1 million gallons) of excessive I&I. The method used by the utility to calculate I&I is as follows:

a) First, to determine the allowance for infiltration, the utility multiplied 500 gallons per day (gpd) times the diameter of each main (wastewater), times the mileage equivalent, times 365 days that resulted in 20,016,235 gallons per year.

b) Second, Indiantown used the customer’s billing records to determine the allowance for inflow; a total of 94,701,000 gallons, which is 10% of the allowable inflow of 19,470,100 gallons.

c) Third, the utility combined the infiltration and the inflow, for an allowable I&I of 39,484,128 gallons.

d) Fourth, Indiantown subtracted the actual wastewater treated (211,200,000) from the estimated water flows returned to the wastewater system (157,630,000), which resulted in an estimated I&I of 53,570,000 gallons.

e) Fifth, the utility subtracted the allowable I&I from the total estimated I&I, which resulted in an excessive I&I of (14,085,872 or 14.1 million gallons).

Staff agrees with the utility’s methodology and conclusion. Based on the above, staff recommends that the adjusted expenses for purchased power and chemicals should be reduced by 6.67%, or $4,920.

Conclusion

Based on the above staff believes that Indiantown has 5.0% excessive unaccounted for water and 6.67% excessive I&I for wastewater. Therefore, purchased power and chemicals should be reduced by $2,231 for water and $4,920 for wastewater.

Issue 7:

What are the used and useful percentages for the utility’s water treatment plant, wastewater treatment plant, water distribution system, and wastewater collection system?

Recommendation:

Indiantown’s used and useful percentages should be as follows:

Water Treatment Plant	100%
Wastewater Treatment Plant	73.86%
Water Distribution and Wastewater Collection Systems	100%

Wastewater rate base should be reduced by $249,687 to reflect that 26.14% of treatment and disposal equipment should be considered non-used and useful. Corresponding adjustments should also be made to reduce wastewater depreciation expense and property tax expense by $24,319 and $5,597, respectively. (Edwards, Lingo, Fletcher)

Staff Analysis:

In its filing, the utility stated that its water and wastewater treatment plants, distribution and collection systems are 100% percent used and useful (U&U). Staff has analyzed the utility’s request and its analysis and recommendations are discussed below.

Water Treatment Plant

In its MFRs, the utility did not provide a water treatment plant U&U percentage calculation because it was 100% U&U in the last rate case. Indiantown believes the water treatment facility is 100% U&U, pursuant to Order No. PSC-00-2054-PAA-WS, at p. 8. For the reasons discussed below, staff recommends that this percentage continue to remain in place.

Staff reviewed the utility’s MFRs and could not calculate the water treatment plant’s U&U percentage because the flow data was unreliable. In addition, staff reviewed the following: 1) the utility’s records to determine the amount of residential growth since the last rate case; 2) the utility’s facility to see if there was an increase in its plant capacity; and, 3) the utility’s Monthly Operation Reports to analyze the data. Staff discovered that the records show a growth rate of 18.4 customers per year, which is not a substantial amount of growth and there were no new components added to the plant, which would increase its capacity. Further, staff analyzed the utility’s water flow data, which was discussed earlier, and discovered that the data was flawed.

Staff calculated the U&U percentage by taking the peak demand, plus a growth allowance, fire flow, and subtracted excessive unaccounted for water, divided by the capacity of the system. This calculation shows that the water treatment plant is 86.96% U&U. Given the numerous problems with the utility’s water flow data, staff used the utility’s current flow data (from October 2004 to January 2005) to calculate the U&U percentage. Staff determined the peak demand of 832,000 gpd (in the peak month of January 2005) to be reasonable. According to the utility’s MFRs, the required fire flow allowance is 2000 gallons per minute, which is to be maintained for two hours, or 240,000 gpd. Since the utility’s last rate case there has been no additions to plant; therefore, staff believes that the plant’s capacity is 1.231 million gallons per day (mgd), as in the last rate case. The growth allowance is based on linear regression, which shows an annual growth of 15.5 equivalent residential connections (ERCs) per year; the annual growth rate (15.5) should be multiplied by 5 years to obtain the statutory five-year growth allowance of 77.5 ECRs at 412.5 gpd per ERC, or 31,968 gpd, pursuant to Section 367.081(2)(a)2.b., F.S. As discussed earlier in Issue No. 6, the utility’s current records indicated that the total unaccounted for water is 15%, of which 5% is excessive. As stated above, the result is 86.96% U&U. (See attachment A)

In Order No. PSC-96-1320-FOF-WS, issued October 30, 1996, in Docket No. 950495-WS, In re: Application for rate increase and increase in service availability charges by Southern States Utilities, Inc. for Orange-Osceola Utilities, Inc. in Osceola County, and in Bradford, Brevard, Charlotte, Citrus, Clay, Collier, Duval, Highlands, Lake, Lee, Marion, Martin, Nassau, Orange, Pasco, Putnam, Seminole, St. Johns, St. Lucie, Volusia, and Washington Counties, at p. 77, the Commission determined that the level of used and useful treatment plant determined in an earlier proceeding shall not be decreased due to a decline in demand. Furthermore, the Commission determined that it would be appropriate to authorize a decreased level of used and useful plant if there were (1) the addition of new plant, or (2) mistakes in calculations in earlier proceedings to correct. This Order was appealed and reversed on other grounds.

Specifically for Indiantown, staff has determined that there has been a decline in demand. Further, there has not been any additional plant added that would increase capacity or any mistakes in calculations made in the last case. Therefore, staff recommends that the used and useful for water treatment plant be considered 100% used and useful in this proceeding.

Wastewater Treatment Plant

Pursuant to Rule 25-30.432, Florida Administrative Code, used and useful percentages for a wastewater treatment plant shall be calculated by comparing test year flows to the DEP permitted capacity, using the same method of measuring flows. The rule further states that the Commission will consider other factors including growth, infiltration and inflow, whether the service area is built-out, whether the permitted capacity differs from the design capacity, differences between components, and whether the flows have decreased.

In this case, the utility has twice revised its calculation of the wastewater treatment plant U&U percentage. The utility’s three calculations are as follows:

Original Calculation

In its original MFRs, the utility provided a used and useful calculation of 97% for the wastewater treatment plant. It divided the three-maximum-month average daily flow (TMADF) of 724,000 gpd by the DEP permitted capacity 750,000 gpd. Notwithstanding this calculation, the utility believes that the plant should be considered 100% used and useful.

The utility stated that the wastewater treatment plant should be considered 100% U&U because the plant’s permitted capacity was exceeded on numerous occasions during the test year and the calculation was based on the requirements of Rule 25-30.432, F.A.C., to match the numerator with the denominator. However, the utility did not include growth or infiltration and inflow, in its calculation. In addition, the utility states that the plant should be considered 100% U&U because it has exceeded 0.8 mgd on 27 occasions during the year and on 14 of those occasions, flow met or exceeded 1.0 mgd.

First Revision

On January 14, 2005, Indiantown submitted a supplemental response to staff’s data request. This supplemental response contained revised calculations of its wastewater treatment plant used and useful. These calculations were provided by an engineering consultant and were based on historical growth and future growth. Staff will briefly describe each revised proposal separately.

U&U Based on Historical Growth

According to this response, the utility’s consultant first restated the historical wastewater flows by eliminating 14.1 million gallons of excess inflow and infiltration. These excessive flows were assumed to be based on lines broken during demolition of county owned homes and 2003 rainfall amounts in excess of average year flows. This reduces the three-maximum-month average daily flow (TMADF) from 724, 000 gpd reported in the MFRs to 634,000 gpd. Then the utility’s consultant used total wastewater billed to residential customers from the MFRs divided by 365 days to calculate its average gallon per day. This was then divided by the total residential customers to calculate the annual gallon per day per customer. Then a multiplier was applied to this amount to estimate the three-maximum-month average daily flow (TMADF) per ERC. It is not clear how the multiplier was calculated.

To calculate “historical growth,” the consultant then used the Upper East Coast (UEC) Water Supply Plan. Based on the UEC, population for Indiantown Water Company is estimated to grow from 5,252 people in 2002 to 6,193 people in 2025, or an average of 37.64 per year. This equates to approximately 10.75 ERCs per year, assuming 3.5 people per household. However, this growth was applied to the statutory period of five years then multiplied times the TMADF per ERC. This calculation results in a used and useful percentage of 86.84%.

U&U Based on Future Growth

In the second calculation, the consultant began with the same methodology described above to calculate the TMADF per ERC. However, to estimate growth, a speculative annual growth rate was used based on a newspaper article published in the TCPalm local news. The article addresses potential development in Indiantown by several local developers. In its response, Indiantown stated that it realizes that these proposals by local developers are speculative and are not supported by historical trends. Based on this news article, the consultant calculated future growth by using the 10.75 customers per year described above and adding speculative growth of 224 customers per year for a total of 480.25 customers for the statutory five year growth period. The result is a proposed used and useful percentage of 105.11%.

Second Revision

On January 21, 2005, the consultant submitted a second revision to Indiantown’s U&U calculation. In this supplemental response, Indiantown used the same methodology described above, however it changed its TMADF to 665,000 gpd. This results in U&U percentages of 90.97% and 109.25% for historical and future growth respectively.

The burden of proof in a Commission proceeding is always on a utility seeking a rate change. Florida Power Corporation v. Cresse, 413 So. 2d 1187, 1191 (Fla. 1982). Given the numerous problems with the flow data and inconsistencies with the utility’s U&U calculations, staff used the same U&U percentage in the last case of 64.6% for interim purpose. However, staff has reviewed the utility’s numerous calculations and takes the following positions:

1) Staff agrees with the utility regarding the conclusion of its I&I calculation.

2) Staff reviewed the adjustments that were made to the wastewater flow data (Schedule F-2) and believes the utility’s adjustments are not warranted since the level of rainfall was not abnormal. Therefore, staff disagrees with the adjustments that were used to modify the flow data. (Staff’s rainfall analysis is discussed in Attachment C.)

3) Staff reviewed the utility’s reason for using the UEC Plan and speculative growth, and believes the utility failed to show why its methodology is better than the Commission’s practice of using actual flow data and linear regression as set out in Rule 25-30.431, F.A.C. Therefore, staff disagrees with the method used by the utility.

4) To calculate growth and the appropriate growth allowance, a regression analysis was performed. Based on actual customer growth data, staff calculated a growth of 14 ERCs per year, which results in a projection of 25,200 gpd for the statutory 5-year growth period defined in Section 367.081(2)(a)2.b., F.S.

5) Staff reviewed the TMADF used by the utility. According to the utility, these are the three months that received the highest levels of I&I. In addition, the utility indicated that the service area received 14 inches of rain during the month of August 2003, which was “a one-time act of God.” Staff disagrees with the utility’s choice of these months. Staff believes months that receive abnormal rainfall should not be considered. As such, staff used the months of May, June and July, 2003. In addition, staff believes months that receive high levels of I&I do not reflect months of high customer usage. As stated earlier, staff did not used the corrected flows subsequently provided by the utility’s consultant.

Staff calculated the plant’s U&U percentage by taking the TMADF (May, June, and July 2003) of 567,333 gpd and 25,200 gpd allowance for growth, subtracted 38,591 gpd for excessive I&I (which is discussed in a later issue), and dividing that by the plant’s DEP permitted capacity of 750,000 gpd based on TMADF. The result is 73.86% used and useful and 26.14% non-used and useful percentage. (See Attachment B)

Based on the above, staff recommends that the wastewater treatment plant should be considered 73.86% U&U. This results in a net non-used and useful amount of $249,687. Corresponding adjustments for non-used and useful plant should also be made to reduce depreciation expense by $24,319 and property taxes by $5,597.

Water Distribution and Wastewater Collection Systems

In its MFRs, the utility did not provide a U&U calculation for the water distribution and the wastewater collection systems because it was 100% U&U in the last rate case. The utility stated that the water distribution and the wastewater collection systems are 100% U&U, pursuant to Order No. PSC-00-2054-PAA-WS, at p. 13.

Staff reviewed Indiantown’s records and there have been no substantial changes to the utility’s distribution or collection system, which would increase its residential connections, since the last rate case. Staff calculated the used and useful percentage for the distribution and collection systems by adding the average number of the test year ERCs of 1,617 and the 77.5 ERCs for growth, discussed above. Staff then divided the sum by the total number of ERCs of 1,695, by the capacity of the system (1,745 ERCs). The result is 97.11% used and useful. Consistent with Commission practice, any percentage above 95% should be considered 100%. See Order No. PSC-96-1320-FOF-WS, issued October 30, 1996, in Docket No. 950495-WS, In re: Application for rate increase and increase in service availability charges by Southern States Utilities, Inc. for Orange-Osceola Utilities, Inc. in Osceola County, and in Bradford, Brevard, Charlotte, Citrus, Clay, Collier, Duval, Highlands, Lake, Lee, Marion, Martin, Nassau, Orange, Pasco, Putnam, Seminole, St. Johns, St. Lucie, Volusia, and Washington Counties, at p. 77. Based on the above, staff recommends that the used and useful percentage for the water distribution and wastewater collection systems should be 100%.

Summary

Staff recommends that Indiantown’s used and useful percentages should be as follows:

Water Treatment Plant	100%
Wastewater Treatment Plant	73.86%
Water Distribution and Wastewater Collection Systems	100%

Wastewater rate base should be reduced by $249,687 to reflect that 26.14% of treatment and disposal equipment is not used and useful. Corresponding adjustments should also be made to reduce wastewater depreciation expense and property tax expense by $24,319 and $5,597, respectively.

Issue 8: What is the appropriate working capital allowance?

Recommendation:

The appropriate amount of working capital is $68,841 for water and $91,232 ~~$88,714~~ for wastewater. (Fletcher)

Staff Analysis:

Rule 25-30.433(2), F.A.C., requires that Class B utilities use the formula method, or one-eighth of O&M expenses, to calculate the working capital allowance. The utility has properly filed its allowance for working capital using the formula method. Staff has recommended several adjustments to the utility’s O&M expenses. Due to the adjustments recommended in other issues, staff recommends that working capital of $68,841 and $91,232 ~~$88,714~~ should be approved for water and wastewater, respectively. This reflects a decrease of ($9,112) to the utility’s requested working capital allowance of $77,953 for water and a decrease of ($12,336) ~~($14,854)~~ from the utility’s requested allowance of $103,568 for wastewater.

Issue 9: What is the appropriate rate base?

Recommendation:

Staff Analysis:

Consistent with other recommended adjustments, the appropriate average rate base for the test year ending December 31, 2003 is $387,964 for water and $1,045,123 ~~$1,042,605~~ for wastewater. Staff recommended water and wastewater rate bases are shown on Schedules Nos. 1-A and 1-B, respectively. The adjustments are shown on Schedule No. 1-C.

Cost of Capital

Issue 10: What is the appropriate return on common equity?

Recommendation:

The appropriate return on common equity is 10.13% based on the Commission leverage formula currently in effect. Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes. (Maurey)

Staff Analysis:

The return on equity (ROE) included in the Company’s filing is 9.39%. This return is based on the application of the Commission’s current leverage formula approved in Order No. PSC-04-0587-PAA-WS, issued June 10, 2004, in Docket No. 040006-WS, In Re: Water and Wastewater Industry Annual Reestablishment of Authorized Range of Return on Common Equity for Water and Wastewater Utilities Pursuant to Section 367.081(4)(f), F.S., and an equity ratio of 84.0%.

As discussed in Issue 11, staff recommends the Commission cap Indiantown’s ratio of common equity as a percentage of investor sources of capital at 60% for ratemaking purposes. Based on the leverage formula approved in Order No. PSC-04-0587-PAA-WS and an equity ratio of 60%, the appropriate ROE is 10.13%. In addition, staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.

Issue 11: What is the appropriate weighted average cost of capital including the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2003?

Recommendation:

The appropriate weighted average cost of capital for the test year ended December 31, 2003 is 8.98%. (Maurey)

Staff Analysis:

Based upon the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2003, staff recommends a weighted average cost of capital of 8.98%. The weighted average cost of capital included in the Company’s filing is 8.97%. Schedule No. 2 details staff’s recommendation.

The test year per book amounts were taken directly from Indiantown’s MFR filing, Schedule D-2. Staff agrees with the specific adjustments proposed by the Company with one exception. Per Audit Disclosure No. 6, the Company’s proposed adjustment to reduce short-term debt overstated the amount associated with non-utility liability insurance debt. Per its response to the Audit Report, the Company is in agreement with the auditor’s opinion. Based on the finding in the Audit Report, staff reduced the adjustment to short-term debt. The impact of staff’s recommended adjustment is a net increase in the balance of short-term debt compared to the Company’s filing.

Indiantown’s test year per book amounts produce an equity ratio as a percentage of investor sources of capital of 93.4%. After making the adjustment to remove the investment in non-utility operations from common equity, the ratio is 89.5%. The Company used its equity ratio as a percentage of total capital of 84.0% to determine its proposed ROE of 9.39%. Staff believes the level of equity capitalization proposed by Indiantown is excessive and unreasonable relative to the level of risk faced by the Company. Since common equity is generally the most expensive form of capital available to a company, staff believes Indiantown should employ a more balanced mix of debt and equity in an effort to minimize its overall cost of capital. To this end, staff recommends the Commission cap Indiantown’s ratio of common equity as a percentage of investor sources of capital at 60% for ratemaking purposes.

Based on a review of Indiantown’s annual reports and the financial statements of its parent company, Postco, Inc., Indiantown has access to debt capital under reasonable terms. Capping Indiantown’s equity ratio for ratemaking purposes will give the Company the incentive to pursue a more cost effective mix of capital. Capping a company’s equity ratio at 60% for ratemaking purposes is consistent with past Commission decisions. See Order Nos. 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.; PSC-04-0565-PAA-GU, issued June 2, 2004, in Docket No. 030954-GU, In Re: Petition for Rate Increase by Indiantown Gas Company; and PSC-04-1260-PAA-GU, issued December 20, 2004, in Docket No. 040270-GU, In Re: Application for Rate Increase by Sebring Gas System, Inc. The impact of staff’s recommended adjustment is a net increase in the balance of long-term debt and a net decrease in the balance of common equity compared to the Company’s filing.

Staff used the respective cost rates proposed by the Company with one exception. Staff used a cost rate for common equity of 10.13% rather than the 9.39% return included in the Company’s filing. Because of the recommended adjustment to the relative level of equity capitalization discussed above, it was necessary to recalculate the return on equity (ROE). The determination of the appropriate ROE is discussed in Issue 10. Staff did not take issue with the proposed cost rates for long-term debt of 9.50%, short-term debt of 4.82%, and customer deposits of 6.00%.

Finally, the Company made a pro rata adjustment over all sources of capital except customer deposits when it reconciled the capital structure to rate base. However, when the balance of deferred income taxes has been specifically identified, as was done in this case, including deferred incomes taxes in the pro rata adjustment is not appropriate. Staff’s recommended adjustment to reconcile the capital structure to rate base was made pro rata over the investor sources of capital. The impact of staff’s recommended adjustment is a net decrease in the balances of common equity, long-term debt, and short-term debt, and a net increase in the balance of deferred income taxes compared to the Company’s filing.

Net Operating Income

Issue 12: Should an adjustment be made to water revenues?

Recommendation:

Yes. To reflect the appropriate receipt of base facility charges for the Indiantown Marina, water revenues should be increased by $2,107. (Fletcher)

Staff Analysis:

In its filing, the utility made a ($6,876) water revenue adjustment relating to a billing error for the Indiantown Marina. According to the utility’s response to a staff data request, this customer is a water only customer who was also billed for usage from 18 meters at the docks, and the meters at the docks are 5/8” x 3/4” meters. As such, the utility should receive 18 base facility charges monthly, not one base facility charge (BFC). Therefore, staff recommends that water revenues should be increased by $2,107 (17 meters times $10.33 BFC times 12 months) to reflect the appropriate receipt of base facility charges for the Indiantown Marina.

Issue 13: Should stipulated net operating income adjustments be made?

Recommendation:

Yes. Based on uncontested audit adjustments, revenues should be reduced by ($1,382) for water and increased by $1,382 for wastewater, and O&M expenses should be reduced by ($18,198) for water and ($35,028) for wastewater. Further, depreciation expense should be reduced by ($7,209) for water and ($3,403) for wastewater, and payroll taxes should be increased by $2,720 for water and decreased by ($1,599) for wastewater. (Fletcher)

Staff Analysis:

Staff auditors recommended the following adjustments.

Audit Adjustments	Water	Wastewater
1. Remove unused wireless equipment– Exception No. 1
Decrease Depreciation Expense	($260)
2. Computer Retirements and Reclassifications – Exception No. 3
Decrease Depreciation Expense	($1,238)	($654)
3. Vehicle Retirements – Exception No. 4
Decrease Depreciation Expense	($6,344)	($1,256)
4. Correct Amortization of CIAC – Exception No. 5
Increase CIAC Amortization Expense		($3,030)
5. Correct health, dental, and disability insurance– Exception No. 6
Decrease Pension and Benefits	($14,492)	($22,828)
6. Correct liability insurance – Exception No. 7
Decrease Insurance – General Liability	($1,381)	($2,429)
7. Correct workman’s compensation insurance– Exception No. 8
Increase Insurance – Workman’s Compensation	$395
Decrease Insurance – Workman’s Compensation		($2,866)
8. Correct vehicle insurance and Pro Forma Vehicle – Exception No. 9
Decrease Insurance – Vehicle	($100)	($6,836)
Increase Depreciation Expense	$313	$938
9. Reflect actual purchased power – Exception No. 10
Decrease Purchased Power	($207)	($219)
10. Non-utility inter-company telephone charges – Exception No. 11
Decrease Purchased Power	($172)	($172)
11. Inventory adjustment to materials & supplies – Exception No. 12
Decrease Materials & Supplies	($6,527)

Audit Adjustments	Water	Wastewater
12. Amortize cost of wastewater permit renewal – Exception No. 14
Decrease Materials and Supplies		($2,400)
Decrease Contractual Services – Engineering		($505)
Decrease Contractual Services – Other		($7,493)
13. Remove cost for test well – Exception No. 15
Decrease Contractual Services – Other	($5,261)
14. Remove out-of-period testing expense – Exception No. 16
Decrease Contractual Services – Other		($870)
15. Reflect actual affiliate billing charges – Exception No. 18
Increase Materials and Supplies	$631	$631
16. Reflect actual payroll taxes – Exception No. 19
Increase/(Decrease) Payroll Taxes	$1,689	($1,702)
17. Reclassify mowing expenses – Exception No. 20
Increase/(Decrease) Contractual Services – Management Fees	($1,360)	$1,360
18. Correct depreciation for Account 304 – Disclosure No. 4
Increase Depreciation Expense	$101
19. Include omitted salary of one employee – Disclosure No. 7
Increase Salaries & Wages	$13,475	$1,358
Increase Payroll Taxes	$1,031	$104
20. Increase omitted benefits of one employee – Disclosure No. 8
Increase Pensions and Benefits	$8,122	$11,171
21. Capitalizing Items Expensed – Disclosure No. 11
Decrease Materials & Supplies	($8,217)	($2,344)
Decrease Contractual Services – Management Fees	($3,000)
Increase Depreciation Expense	$221	$599
22. Correct bad debt expense - Disclosure No. 15
Decrease Bad Debt Expense	($103)	($585)
23. 50/50 allocation of late fee – Disclosure No. 17
Increase/(Decrease) Forfeited Discounts Revenue	($1,382)	$1,382

The utility agrees with all of the above audit adjustments. Therefore, staff recommends that revenues should be reduced by ($1,382) for water and increased by $1,382 for wastewater, and O&M expenses should be reduced by ($18,198) for water and ($35,028) for wastewater. Further, staff recommends that depreciation expense should be reduced by ($7,209) for water and ($3,403) for wastewater, and payroll taxes should be increased by $2,720 for water and decreased by ($1,599) for wastewater.

Issue 14: Should any further adjustments be made to employee salaries?

Recommendation:

Water salaries and benefits should be reduced by $28,519 and $4,818, respectively. Wastewater salaries and benefits should be reduced by $25,561 and $4,818, respectively. Corresponding reductions for water and wastewater taxes other than income of $2,236 and $1,957, respectively, should also be made. (Revell, Fletcher)

Staff Analysis:

In its filing, Indiantown reflected total adjusted employee salaries of $182,070 for water and $212,338 for wastewater. Additionally, the filing reflected total adjusted pensions and benefits of $115,747 and $114,083, for water and wastewater, respectively. Included in MFR B-3, pages 2 and 3 of 4, were pro forma adjustments to salaries, benefits and taxes other than income. These calculations contained errors noted by the auditors and adjusted for in an earlier issue.

Staff believes that additional adjustments are necessary. In response to a staff data request, the utility provided salary history from 1999 through 2004 for Indiantown’s employees, which covers the period since the last rate case, and includes employees hired since 1999. The data showed that in most years, for most employees, raises were limited to 3%. For some years, certain employees did not receive a raise, or received 2% raises. In only one year did an employee receive a salary increase in excess of 3%; that raise was for 5% for one employee. Staff believes the utility’s actual past 3% wage increases are reasonable because those increases are above inflation. Since the utility’s information indicated raises were generally no more than 3%, and in some cases less, staff recalculated all salaries using 3% increases per year for all employees, even for those who did not receive any increase for a given year. This results in reductions to water and wastewater expense of $17,733 and $14,775, respectively. Corresponding reductions to taxes other than income of $2,236 and $1,957 for water and wastewater, respectively, should also be made. Staff notes that had staff made adjustments based on the utility-specific percentage increases granted, or not granted, to each employee, the adjustment would have been greater.

Additionally, the salary, benefits expense, and associated taxes other than income for Mr. William Hannah should be disallowed for the purpose of calculating rates in this docket. The utility did not provide any support for Mr. Hannah’s time in 2003; additionally, staff finds these expenses to be duplicative to duties being performed by other employees. Also, as noted previously, in Florida Power Corporation v. Cresse, the Florida Supreme Court stated that the burden of proof in a Commission proceeding is always on a utility seeking a rate change.

In a data request, staff requested that the utility provide the original source documentation supporting how many hours each employee spent on Indiantown, Postco, Inc. or other affiliates whose time was charged to the utility for the 2003 or 2004 calendar years. Staff requested that this documentation be in the form of time sheets, work orders, management reviews, or other documents that indicated at least weekly how a person’s time was spent.

The utility did not provide the requested information to staff; the only response to the staff data request was a copy of an internal e-mail that the requested information had been provided to the auditors. In that e-mail, Indiantown stated that the comptrollers of each company reviewed employee allocations annually and were representative of the present time spent. Further, the utility stated that the allocations were found to have remained constant since the last rate case.

A review of the audit work papers showed that Indiantown had provided the auditors part of the requested documentation for Mr. Jeff Leslie, Mr. Robert Post, and Mr. William Hannah. The documentation provided for Mr. Leslie, for the 2003 calendar year only, was incomplete. The information provided for Mr. Robert Post consisted of an untotaled one-page sheet in outline form listing time spent for calendar year 2003.

The documentation provided for Mr. Hannah in the work papers was a two-page e-mail from Mr. Hannah to the Controller which was forwarded without comment or confirmation to staff. The e-mail listed the hours for a number of activities, with a one or two-line explanation of the duties performed. Mr. Hannah presently is working 24 hours a week, and approximately 52% of his hours were for the regulated utility. A comparison of Mr. Hannah’s activities for 2003 indicate that he largely performed functions that were duplicative of the activities performed by other employees.

Mr. Hannah reflected 611 hours for regulated activities, which is an approximate average of 12 hours per week. Of the total regulated hours, 100 hours were for responding to customer complaints and explaining procedures to the general public. Indiantown has a full time water and wastewater customer service representative to handle customer complaints; therefore, Mr. Hannah’s activities appear to be duplicative. The e-mail also indicated that Mr. Hannah spent approximately 150 hours attending Martin County Commission (County Commission) meetings, for which 75 hours were on behalf of FPSC regulated Indiantown systems. The calculations provided for these hours appear to indicate that 150 hours was the total estimated hours the County Commission was in session for calendar year 2003. Staff reviewed the proposed agendas and minutes of all County Commission meetings for 2003. There were a number of items which dealt with generalized area growth issues; however, staff did not find any agenda item which dealt directly with the regulated water or wastewater system. While there may be items specifically related to Indiantown in future years, staff does not believe it is necessary to attend all sessions from start to finish, particularly when all items are available for review on the internet prior to the actual agenda. Mr. Post’s estimated hours indicates that he also spent 50 hours attending County Commission meetings. Staff believes that it is duplicative for two individuals to attend the meetings when there is not an item specifically related to Indiantown. As such, staff recommends that Mr. Post’s hours for his attendance at County Commission meetings be allowed, but Mr. Hannah’s hours for this function be disallowed.

Mr. Hannah also lists 240 hours for items related to planning water service to Martin Correctional, a planned industrial park, and another planned project which was cancelled. Also, the project to supply water to the Martin Correctional has been abandoned. Mr. Post and Mr. Leslie list a total of 440 hours for these same projects. Again, staff finds these hours to be duplicative. As mentioned above, and also in a later issue, the utility has not provided sufficient documentation of time spent by Postco, Inc. or Indiantown Telephone System, Inc. employees. Further, the documentation for Mr. Hannah indicates that he is performing duties that are also being performed by other employees. For these reasons, staff recommends that the full salary

~~utility believes that it would need to haul approximately 200,000 gallons per month of sludge, at an annual cost of $96,000.~~

Staff has requested a copy of the utility’s sludge removal contract and copies of all sludge related invoices for 2004. The utility did not provide a copy of its current sludge removal contract. The contract it submitted was an extension of the previous contract for one year, which had expired ~~July 15, 2004~~. Staff noted that although the contract indicated that the price per gallon of $0.040 would increase to $0.042 because of tipping fees, in July 2004, the cost per gallon in its 2004 invoices did not reflect an increase in the price per gallons.

Staff agreed with the auditor’s opinion that the test year expense should be reduced. However, staff considered the difference in the MFR expense, and the 2004 invoice price and the 2004 annual sludge removal as a reasonable adjustment on a going-forward basis. The utility began using the new mobile dewatering method in 2004, and its invoices show that the utility is paying a total cost of 0.04 per gallon, which include the cake hauling and all landfill expenses. This amount is less than the cost per gallon the utility paid under the regular method of sludge hauling in 2003. In addition, the added cost of lime stabilization and maintaining sludge beds are no longer required. Based on an actual cost of approximately $44,537 (1,113,405 x $0.04), staff recommends that the sludge removal expense be reduced by $20,145.

Issue 16: Should any portion of purchased power for the utility’s water system be removed as non-utility expense?

Recommendation:

Yes. Purchased power for the water system should be reduced by ($356) as non-utility expense. (Fletcher)

Staff Analysis:

In its MFRs, the utility reflected an adjusted purchased power test year amount of $35,949 for the utility’s water system. Staff previously recommended an uncontested audit adjustment to reduce purchased power for water by ($207). In Audit Exception No. 10, staff auditors stated that the utility allocates its electric bill for its water plant as follows: 20% for water supply; 10% for water treatment; 50% for water transmission and distribution; 10% for water administration; and 10% for wastewater administration. However, the auditors further stated that four employees, who occupy a fourth of the office, spent between 10 to 20% of their time on the refuse and roll-off operations. Based on the above, staff recommends that purchased power for the water system should be reduced by ($356) as non-utility expense.

Issue 17: Should any adjustments be made to amortize certain expenses?

Recommendation:

Yes. O&M expenses should be reduced by ($4,743) for water and ($2,900) for wastewater, in order to amortize non-recurring expenses over five years. (Fletcher)

Staff Analysis:

The following analysis is to determine whether certain expenses should be amortized. Rule 25-30.433, F.A.C., states that “[n]on-recurring expenses shall be amortized over a 5-year period unless a shorter or longer period of time can be justified.”

Lightning Damage

In Audit Disclosure No. 10, staff auditors stated that the utility incurred $26,428 related to lightning damage for which Indiantown received $7,639 in insurance reimbursement. Staff auditors stated that, of the amount not covered by insurance, the utility had capitalized $12,860 and expensed $5,929 for testing and other contractual services. In addition, the auditors stated that the utility included $1,941 in wastewater materials and supplies that related to lightning damage.

In its response to the audit, the utility stated that it operates in a severe lightning prone area and has received several strikes and damage to equipment through the years. Indiantown also stated that some of the expenses in the $1,941 amount are individually less than the $400 expense threshold for capitalization, pursuant to the National Association of Regulatory Utility Commissioners (NARUC) Uniform System of Accounts (USOA). Indiantown does not believe any adjustment is required under this disclosure.

In Staff’s Third Data Request, the utility was asked to provide a schedule reflecting the dates its plant was damaged due to lightning strikes in 2002 and 2004, including the amount of damages incurred for each event and any insurance proceeds received for each occurrence. In its response, the utility failed to include any damages for the year 2002 and 2004. Because the utility failed to provide this information, staff is unable to determine whether a portion or all of the test year expenses associated with lightning damage is non-recurring in nature. Based on the above, staff recommends that these amounts be amortized over 5 years.

Grove Road Repairs

In Audit Disclosure No. 11, staff auditors noted several expenses that might be non-recurring in nature, which included $1,685 for repairs to Grove Road leading to the utility’s off-site ponds. In its response to the audit, Indiantown stated that these repairs were normal recurring types of expenses. In Staff's Third Data Request, the utility was asked to provide the amount of any repairs to the Grove Road. In its response, the utility stated that no repairs were made to the road in 2000, 2001, 2002, and 2004. As such, staff believes these repairs are non-recurring in nature and recommends the expense should be amortized over 5 years.

Based on the above, staff recommends that O&M expenses should be reduced by ($4,743) for water and ($2,900) for wastewater, in order to amortize non-recurring expenses over five years.

Issue 18: Should any further adjustment be made to Materials and Supplies for wastewater?

Recommendation:

Yes. To normalize the test year expense level, Material and Supplies (M&S) expense should be reduced by $13,770 for wastewater. (Revell, Fletcher)

Staff Analysis: In its MFRs, the utility reflected a M&S test year amount of $73,767 for the utility’s wastewater system, which represents an increase of 181.07% over the Commission approved amount in Indiantown’s last rate case. The utility stated that the reason for the increase in M&S was due to an increase in maintenance requirements. Indiantown calculated a wastewater O&M expense benchmark index of 14.17%.

The O&M benchmark analysis is a comparison of the O&M expenses approved in the last rate proceeding escalated for growth and inflation for the same time period to the level requested in the current case. Staff uses the benchmark analysis as a tool to measure the utility’s growth and to highlight areas of concern. The Commission practice has been that all expense increases above the benchmark are not per se unreasonable or imprudent, nor are expenses below the benchmark automatically reasonable and prudent. Rather, the current benchmark, when applied to the respective O&M expenses, may signal the need for further justification by utilities for the increased cost levels being requested. See Order No. 17304, issued March 19, 1987, In Docket No. 850062-WS, In re: Application of Meadowbrook Utility Systems, Inc., for increased rates to its customers in Palm Beach County, Florida; and an Investigation into Overearnings, at p. 17.

Staff previously recommended an uncontested audit adjustment to reduce M&S for wastewater by ($5,666). Based on staff’s review, M&S expense has fluctuated greatly since Indiantown’s last rate case. To test the reasonableness of the test year level, staff compared M&S expenses for the two years prior to the 2003 test year. According to its annual reports from 2001-2003, the utility incurred average M&S expense of $53,256 for wastewater, after the uncontested audit adjustment above. To normalize the test year M&S expense, staff believes the appropriate expense level for rate setting purposes is a three-year average from 2001 to 2003, while also indexing the 2001 and 2002 expenses by the Commission-approved price indices. With the indexing adjustments, the three-year average is $54,332 for wastewater.

Staff notes that expenses for lift stations and manholes repairs, which flow through this account, fell by $12,855 from 2003 to 2004. This might partly explain the difference between the test year amount and the three-year average. Based on the above, staff recommends that M&S expense for wastewater should be reduced by $13,770, to reduce the test year amount to the three-year indexed average amount of $54,332.

Issue 19: Should any adjustments be made to management fees?

Recommendation:

Yes, management fees should be reduced by $15,924 for both water and wastewater. Because it is the utility’s burden to prove that its requested costs are reasonable, the utility should begin keeping time logs of the Postco, Inc. and Indiantown Telephone System, Inc. employees who spend time on Indiantown’s water and wastewater operations, in order to reflect the actual time spent. (Fletcher)

Staff Analysis:

In its MFRs, Indiantown reflected management fees of $109,641 for both water and wastewater, which included pro forma 2004 adjustments. The utility’s amount represents a 103% increase over the management fees approved in Indiantown’s last rate case. The utility explained that the reason for the increase was due to increases in health insurance and to reflect employee wage increases of 3% annually.

According to its filing, the management fee consists of salaries, benefits, payroll taxes, and other expenses associated with the president and vice-president of Postco, Inc. (Postco) and four employees of Indiantown Telephone System, Inc. (ITS), the utility’s sister company. As a result of the Audit Exception No. 17, staff has adjusted Postco’s health insurance, and depreciation expense to reflect the actual amounts, and adjusted ITS’s benefits to reflect the actual amounts.

In response to Staff’s First Data Request, Indiantown stated that Postco’s president (Mr. Post) received a $25,000 bonus in 2004 and its vice-president (Mr. Leslie) received a $50,000 salary increase in April, 2004 and a $15,000 bonus in the end of 2004. According to the MFRs, Mr. Post’s and Mr. Leslie’s salaries are $207,488 and $244,108, respectively. By Order No. 19161, issued April 18, 1988, in Docket No. 861564-WS, In re: Application of Century Utilities, Inc., for an increase in water and sewer rates in Palm Beach County, Florida, at p. 11, the Commission has previously found that bonuses should be allowed if they do not cause the salaries to be unreasonably high. Taking into account the bonuses received by Mr. Post and Mr. Leslie, and Mr. Leslie’s 2004 salary increase, staff believes the salary level of these officers are excessive.

Staff does take exception with the utility’s 3% annual employee wage increases. For all employees or positions that were approved in the last rate case, staff calculated Postco and ITS salaries based on an annual 3% increase. The MFR amounts were $61,490 greater for Postco and $28,517 greater for ITS over staff’s calculated salary amounts. Consistent with Indiantown’s stated 3% wage increases for Postco and ITS, staff recommends capping Mr. Post’s, Mr. Leslie’s, ITS’s computer system analyst, and Mr. Post’s administrative assistant salaries at 3% per year through 2004 over the amount approved in the last rate case.

With regard to the other expenses of Mr. Post and Mr. Leslie, staff has reviewed these expenses and believes adjustments are necessary. First, staff believes Mr. Post’s telephone expense should be reduced by four-elevenths, in order to remove two home lines and two cell phones of his 11 phones as non-utility and excessive. Second, staff recommends that Mr. Leslie’s auto insurance be reduced for out-of-period cost and his dues expense be reduced for contributions to charities and political action committees. Third, since the utility’s provided no support (i.e. time sheets) for the time spent by ITS employees on Indiantown, staff recommends that Ms. Holt, Mr. Leslie’s assistant, should have the same allocation percentage as Mr. Leslie.

Last, in response to a staff data request, Indiantown failed to provide an itemized list of entertainment expenses of Mr. Post and Mr. Leslie which totaled $4,118 and statement of the purposes of each itemized cost. It is the utility’s burden to prove that its requested costs are reasonable. See Florida Power Corp. v. Cresse. Without an itemized list and statement of purposes of each itemized cost, staff believes these expenses should be removed because the information is not available to determine whether these expenses are non-utility related, reasonable, or prudent.

Based on the above, staff recommends that management fees be reduced by $15,924 each for water and wastewater.

Further, in the last rate case, the Commission found that the utility had failed to justify its requested allocations used for management fees because there was no documentation to support the time spent on Indiantown. However, the Commission believed that some level of management fees was appropriate. The Commission considered various allocations using different percentages and comparisons with other utilities of the same size. The Commission also considered the personal involvement of the officers during the rate case. The Commission found that it was appropriate to consider both the total salary costs of officers that should be charged to Indiantown and the functions that these officers perform. Ultimately, the Commission found that Mr. Post’s, his secretary’s, and the computer system analyst’s time should be allocated 10% each to water and wastewater and 5% to refuse and roll-off operations. The Commission also found that Mr. Leslie’s time should be allocated 15% to water and wastewater each and 3% to refuse and roll-off operations. With the exception of Ms. Holt’s time, staff is not recommending any other changes to the utility’s allocation percentages of the management fees for this rate case.

Staff notes that there is still no documentation to support the time spent on Indiantown by Postco and ITS employees. Indiantown provided staff auditors the estimated hours spent by Mr. Post and Mr. Leslie on each of Postco’s subsidiary companies and only provided the 2003 calendar of Mr. Leslie. Based on staff’s review, Mr. Leslie’s calendar only reflects total business hours of 343 hours, which represents only about 16% of the 2,200 total estimated hours Mr. Leslie stated he worked during the test year. Staff believes that it would be improbable to expect a person to reflect on a daily calendar all actual time spent on Indiantown water and wastewater business. Because it is the utility’s burden to prove that its requested costs are reasonable, staff recommends that the utility should begin keeping time logs of Postco and ITS employees who spend time on Indiantown’s water and wastewater operations, in order to reflect the actual time spent. Based on the above, staff believes that the utility should be put on notice that the Commission will require support documentation for the actual time spent by Postco and ITS employees in Indiantown’s next rate case.

Issue 20: Should water and wastewater expenses be adjusted due to repression?

Recommendation:

Yes. It is Commission practice to reduce chemicals and purchased power for repression of water and wastewater gallons. Thus, chemicals and purchased power should be reduced by ($830) for water and ($1,198) for wastewater. (Fletcher)

Staff Analysis:

Based on previously recommended adjustments, staff’s adjusted purchased power and chemicals are $48,061 for water and $68,846 for wastewater. As discussed in Issue 26, staff has recommended residential water consumption and wastewater usage gallons will decrease by 2.3%. With these decreases, there will be a decrease in purchased power expense due to having to pump less water & wastewater and a decrease in chemical expense due to having to chemically treat less water and wastewater.

It is Commission practice to reduce chemicals and purchased power due to repression of water and wastewater gallons. See Order No. PSC-03-0647-PAA-WS, issued May 28, 2003, in Docket No. 020407-WS, In re: Application for rate increase in Polk County by Cypress Lakes Utilities, Inc., at p. 58; Order No. PSC-01-1162-PAA-WU, issued May 22, 2001, in Docket No. 001118-WU, In re: Application for staff-assisted rate case in Polk County by Keen Sales, Rentals and Utilities, Inc. (Sunrise Water Company), at p. 29. Thus, chemicals and purchased power should be reduced by ($830) for water and ($1,198) for wastewater.

Issue 21: What is the appropriate amount of rate case expense?

Recommendation:

The appropriate rate case expense for this docket is $115,442. This expense should be recovered over four years for an annual expense of $28,861. (Revell)

Staff Analysis:

The utility included a $94,000 estimate in the MFRs for current rate case expense. Staff requested an update of the actual rate case expense incurred, with supporting documentation, as well as the estimated amount to complete the case. The utility submitted a revised estimated rate case expense through completion of the PAA process of $121,468. The components of the utility’s estimated rate case expense are as follows:

	MFR Estimated	Actual	Additional Estimated	Total
Filing Fee	$7,000	$7,000	$0	$7,000
Legal Fees (Dave Erwin)	20,000	8,740	9,260	18,000
Accounting Fees (CJNW)	60,000	73,568	7,210	80,778
Consultant Fees	0	4,221	2,600	6,821
Indiantown in-house expense	5,000	4,179	450	4,629
Notices/Misc	2,000	2,495	1,745	4,240
Total R/C Expense	$94,000	$100,203	$21,265	$121,468

Pursuant to Section 367.081(7), F. S., the Commission shall determine the reasonableness of rate case expenses and shall disallow all rate case expenses determined to be unreasonable. Staff has examined the requested actual expenses, supporting documentation, and estimated expenses as listed above for the current rate case. Staff believes that the revised estimate is reasonable with the exceptions discussed below.

Staff made adjustments to reduce legal expenses by $2,700 for an “if-needed” meeting with utility personnel in Indiantown, $446 for 3.3 hours billed to correct MFR deficiencies, and $370 to revise the estimated total to complete. Staff recommends that legal expenses be reduced by a total of $3,516. Staff also recommends reducing accounting fees by $360 for two hours of accounting, since the utility failed to properly provide information to two staff data requests involving incorrect billings for the Indiantown Marina.

The Commission has previously disallowed rate case expense associated with correcting MFR deficiencies because of duplicate filing costs. See Order No. PSC-01-0326-FOF-SU, issued February 21, 2001, in Docket No. 991643-SU, In re: Application for increase in wastewater rates in Seven Springs System in Pasco County by Aloha Utilities, Inc., at pp. 73-75. Accordingly, staff recommends that a total of $3,876 be removed as duplicative and unreasonable rate case expense.

Additionally, staff recommends that consultant fees be reduced by $2,150. This expense is for 21 estimated hours, and $50 in expenses, to evaluate and prepare responses to the staff recommendation, and to participate in the Agenda conference for the present docket. Mr. Seidman’s role in the present docket is limited to the evaluation of used & useful wastewater plant and assistance with responses to related PSC data requests. In a recent docket that Mr. Seidman participated in, Docket No. 030446-SU, the Mid-County Services, Inc. (Mid-County) rate case, Mr. Seidman estimated that it would require only four additional hours to prepare for and attend the Agenda Conference in which final rates would be set for Mid-County. In that docket, he had complete responsibility for the preparation of all MFR schedules and any staff data requests concerning these schedules, as well as the responsibility to prepare the utility’s response to the entire staff recommendation. Since Mr. Seidman has a smaller degree of responsibility in this case, it is reasonable to reduce the allowed rate case expense to a level no greater than that allowed in the Mid-County docket. Staff recommends that the consultant’s fees in this docket be reduced a total of $2,150.

	MFR Estimated	Utility Revised Actual & Estimated	Staff Adjustments	Total
Filing Fee	$7,000	$7,000	0	$7,000
Legal Fees (Dave Erwin)	20,000	18,000	(3,516)	14,484
Accounting Fees (CJNW)	60,000	80,778	(360)	80,418
Consultant Fees	0	6,821	(2,150)	4,671
Indiantown in-house expense	5,000	5,379	0	5,379
Notices/Misc	2,000	3,490	0	3,490
Total R/C Expense	$94,000	$121,468	($6,026)	$115,442
Total Annual Expense	$23,500		$5,361	$28,861

Pursuant to Section 367.0816, F.S., rate case expense should be amortized over four years. Staff’s recommended annual rate case expense should be $28,861.

Indiantown Company, Inc.			Schedule No. 4-B
Wastewater Monthly Service Rates			Docket No. 040450-WS
Test Year Ended 12/31/03
	Rates	Commission	Utility		Staff	Four-year
	Prior to	Approved	Requested		Recomm.	Rate
	Filing	Interim	Final		Final	Reduction
Residential
Base Facility Charge All Meter Sizes:	$16.93	$18.75	$24.22		$19.79 ~~$19.77~~	$0.28 ~~$0.29~~

Gallonage Charge - Per 1,000 gallons
Gallonage Cap 6,000 gallons	$3.66	$4.05	$5.03
Gallonage Cap 10,000 gallons					$3.70 ~~$3.57~~	$0.05

General Service
Base Facility Charge by Meter Size:
5/8" x 3/4"	$16.93	$18.75	$24.22		$19.79 ~~$19.77~~	$0.28 ~~$0.29~~
1"	$42.34	$46.90	$60.55		$49.48 ~~$49.43~~	$0.71 ~~$0.72~~
1-1/2"	$84.68	$93.79	$121.10		$98.95 ~~$98.85~~	$1.41 ~~$1.44~~
2"	$135.49	$150.07	$193.76		$158.32 ~~$158.16~~	$2.26 ~~$2.31~~
3"	$254.04	$281.37	$363.30		$316.64 ~~$316.32~~	$4.53 ~~$4.62~~
4"	$423.40	$468.96	$605.50		$494.75 ~~$494.25~~	$7.08 ~~$7.22~~
6"	$846.81	$937.92	$1,211.00		$989.50 ~~$988.50~~	$14.14 ~~$14.43~~
8"	$1,353.84	$1,499.51	$1,937.60		$1,583.20 ~~$1,581.78~~	$22.64 ~~$23.10~~
8" Turbo	$1,524.25	$1,688.25	$2,179.80		$1,781.10 ~~$1,779.50~~	$25.47 ~~$25.98~~

Gallonage Charge, per 1,000 Gallons	$4.39	$4.86	$5.91		$4.45 ~~$4.29~~	$0.06

	Typical Residential Bills 5/8" x 3/4" Meter
5,000 Gallons	$35.23	$39.00		$49.37	$38.29 ~~$37.62~~
8,000 Gallons	$38.89	$43.05		$54.40	$49.39 ~~$48.33~~
10,000 Gallons	$38.89	$43.05		$54.40	$56.79 ~~$55.47~~
(Wastewater Gallonage Cap - Recommended Increase to 10,000 Gallons)

Attachment A

WATER TREATMENT PLANT - USED AND USEFUL DATA

Docket No. 040450-WS - Indiantown Company, Inc.

1) Firm Reliable Capacity of Plant

1,231,000

gallons per day

2) 5 Maximum Day Average From Maximum Month (January 05)

832,000

gallons per day

3) Average Daily Flow

667,000

gallons per day

4) Fire Flow Capacity

240,000

gallons per day

5) Growth (5B x 5C x [3 / 5A]

31,968

ERCs

A) Test Year Customers in ERCs

1,617

Begin

B) Customer Growth in ERCs

15.5

C) Statutory Growth Period

Years

6) Excessive Unaccounted Water

33,500

gallons per day

A) Total Unaccounted for Water

100,050

gallons per day

B) Reasonable Amount (10% x 3)

66,700

gallons per day

USED AND USEFUL FORMULA

[(2)+(4)+(5)-(6)]/(1) = 86.97%

Attachment B
WASTEWATER TREATMENT PLANT – USED AND USEFUL DATA
Docket No. 040450-WS – Indiantown Company, Inc.
1)	Permitted Capacity of Plant (3-Maximum Monthly Average Daily Flow)		750,000			Gallons per day
2)	3-Month Average Daily Flow for Maximum Month May, June & July 2003		567,333			Gallons per day
3)	Growth (3b x 3c) x 2/3a		25,200			Gallons per day
	a)	Test Year Average ERCs			1,576			ERCs
	b)	Customer Growth in ERCs using Regression Analysis for most recent 5 years including Test Year			14			ERCs
	c)	Statutory Growth Period			5			Years
		(b) x (c) x [2/(a)] =			25,200

4)	Excessive Infiltration or Inflow (I&I)			38,591			Gallons per day
	a) Allowable I&I			108,176			Gallons per day
	b) Est. I&I treated (less return)			146,795			Gallons per day
	c) Percentage of excess of wastewater treated			6.67			Percent

USED AND USEFUL FORMULA

[(2) + (3)-(4)]/ (1) = 73.86% Used and Useful

INDIANTOWN COMPANY, INC. ATTACHMENT C

TEST YEAR ENDED DECEMBER 31, 2003 Page 1 of 3


ANALYSIS OF UTILITY’S RAINFALL DATA


Background:	(1)	As contained in the utility’s January 21, 2005 supplemental response to staff’s first data request, the utility proposed an adjustment to its wastewater used and useful calculation based on greater than average rainfall during the 2003 test year. The rainfall data, totaling 67.5 inches, was collected on a monthly basis from the wastewater treatment plant during 2003. (However, the utility excluded the rainfall months of January and February from its proposed used and useful adjustment.)

	(2)	The utility compared its 2003 rainfall data to a historical annual average rainfall figure for Indiantown of 55.2 inches, obtained from a website located at www.worldclimate.com (World Climate).

	(3)	Since the utility’s 2003 rainfall data was not supplied by an independent, third-party source, staff analyzed the utility’s rainfall data to determine its reasonableness and credibility.

Problems With World Climate:	(4)	World Climate’s average annual rainfall listing for Indiantown of 55.2 inches is based on a compilation of 6 years’ of data, from 1962-1968, in order to prepare a 4 year average.

	(5)	Average annual rainfall calculations are generally based on 30 years or more of data. Compiling data that is spread throughout 6 years in order to prepare an average that is only 4 years in duration is not a reliable indicator of average rainfall at that location.

	(6)	Upon staff’s investigation of the World Climate website, we discovered that the website “is the part-time creation of one person” and that the website “only gets a small share of his time.” The website’s disclaimer states “DO NOT RELY ON THIS DATA FOR ANY PROFESSIONAL OR IMPORTANT PURPOSE.” Furthermore, the disclaimer states that the entire risk as to the quality and performance of the website and data is borne by the user.

	(7)	Based on the foregoing, staff does not believe that any information obtained from the World Climate website should be relied upon by us in this case.

Staff’s Analysis of Rainfall Data:	(8)	The utility relied on a comparison of World Climate’s average annual rainfall for Indiantown, plus the reported rainfall at the utility’s wastewater treatment plant, in order to propose an adjustment to its wastewater used and useful calculation. Based on a comparison of these rainfall figures, Indiantown was approximately 22% wetter than normal in 2003.

	(9)	Since the utility’s proposed adjustment is based on a wetter than normal test year, staff believes it is reasonable to expect surrounding cities or weather reporting stations to have also have experienced a wetter than normal year in 2003.

INDIANTOWN COMPANY, INC. ATTACHMENT C

TEST YEAR ENDED DECEMBER 31, 2003 Page 2 of 3


ANALYSIS OF UTILITY’S RAINFALL DATA (cont.)


Staff’s Analysis of Rainfall Data (cont.)	(10)	Staff obtained the latitude and longitude coordinates of all cities and South Florida Water Management District (SFWMD or District) rain measurement stations within a 0.5 degree square area around Indiantown’s coordinates. To address the utility’s concern that sites be near Indiantown, staff narrowed its search to all locations to within a 0.2 degree square area around Indiantown. This resulted in the selection of four locations. Two locations (Stuart and Okeechobee HRCN Gate 6) represent cities selected from the Southeastern Regional Climate Center’s CIRRUS database. Staff also selected two SFWMD rain measurement sites (S 135 and S 80) from the District’s DBHYDRO database.

	(11)	For each of the four sites examined, staff compared the 2003 historical rainfall to each location’s corresponding 30-year average annual rainfall. The results of this analysis are shown in Table A below.

TABLE A

[A]	ANALYSIS OF RAINFALL DATA: SELECTED REPORTING STATIONS CLOSE TO INDIANTOWN
		RAINFALL DATA
		Inches of Rainfall		2003 Rainfall Deviation From 30-Year Average
	City or Reporting Station	Recent 30-Year Average	2003	Amount	Percent
	Indiantown WWTP (A)	55.2	67.5	12.3	22.3%
	S 135 (SFWMD)	43.9	38.0	(5.9)	-13.5%
	S 80 (SFWMD)	59.5	53.4	(6.1)	-10.3%
	Stuart	57.2	56.8	(0.4)	-0.7%
	Okeechobee HRCN Gate 6	45.7	46.1	0.4	0.9%

(A)	As reported by the utility. Indiantown’s average represents a compilation of six years’ of data from 1962-1968 into a four-year average. The Indiantown weather reporting station has been inactive for a number of years.

Source:	Southeastern Regional Climate Center, CIRRUS database; South Florida Water Management District, DBHYDRO database.

INDIANTOWN COMPANY, INC. ATTACHMENT C

TEST YEAR ENDED DECEMBER 31, 2003 Page 3 of 3


ANALYSIS OF UTILITY’S RAINFALL DATA (cont.)

Staff’s Analysis of Rainfall Data (cont.)	(12)	As shown in Table A, although the utility in 2003 reported rainfall 22% above normal, none of the sites located within a 0.2 degree square area around Indiantown’s latitude and longitude coordinates experienced greater than average rainfall. To the contrary, the sites were either: a) greater than 10% below normal; or b) were within 1% of normal.

	(13)	Staff also selected two SFWMD regions – the Martin/St. Lucie region and the Lake Okeechobee region -- in order to compare each region’s 2003 rainfall to its overall average rainfall. Indiantown is located in the Martin/St. Lucie region, while the Lake Okeechobee region is adjacent to Indiantown. The results of this analysis indicate that the Martin/St. Lucie region reported its 2003 rainfall was 88% of normal (or 12% below normal). The corresponding figures reported by the Lake Okeechobee region are 95% of normal (or 5% below normal).


Staff’s Recommendation Regarding the Utility’s Rainfall Data:		In 2003, the utility reported that rainfall was 22% above normal. However, as shown in Table A on the previous page and discussed in (13) above, none of the sites examined (other than Indiantown) experienced a wetter than average rainfall year during 2003. Therefore, staff does not believe the utility’s reported rainfall of 67.5 inches during 2003 is a credible or reliable figure. Based on the foregoing, Indiantown’s 2003 rainfall data should be neither used nor relied upon in its proposed adjustment to its wastewater used and useful calculation.

INDIANTOWN COMPANY, INC. Attachment D

HISTORICAL TEST YEAR ENDED 12/31/03 Page 1 of 4

DETERMINATION OF APPROPRIATE RATE STRUCTURES

CURRENT RATES:	(1)	The utility’s current water rate structure consists of a monthly base facility charge (BFC) / uniform gallonage charge rate structure. The BFC is $10.33, and the gallonage charge is $1.53 for each 1,000 gallons (kgal) used. The corresponding wastewater rate structure also consists of a BFC / gallonage charge rate structure. The BFC is $16.93. The general service gallonage charge is $ $4.39 per kgal for all kgals used, while the residential service gallonage charge is $3.66 per kgal, capped at 6 kgal of use per month.

		DETERMINATION OF WATER RATE STRUCTURE:

PRIOR ORDERS AND PRACTICES WITH WATER MANAGEMENT DISTRICTS:	(2)	The Commission has a Memorandum of Understanding (MOU) with the five Water Management Districts (WMDs or Districts). A guideline of the five Districts, which has been adopted as a practice of the Commission, is to set the BFC charges such that they recover no more than 40% of the revenues to be generated from monthly service rates.

	(3)	The Commission’s preferred rate structure had traditionally been the BFC / uniform gallonage charge rate structure. However, over the past several years, based in large part on requests made by the Water Management Districts, the Commission has been implementing the inclining-block rate structure as the rate structure of choice. (See Order No. PSC-03-0647-PAA-WS, issued May 28, 2003 in Docket No. 020407-WS, In Re: Application for rate increase in Polk County by Cypress Lakes Utilities, Inc., pp. 31-32; Order No. PSC-00-0248-PAA-WU, issued February 7, 2000 in Docket No. 990535-WU, In Re: Request for approval of increase in water rates in Nassau County by Florida Public Utilities Company (Fernandina Beach System), p. 37; Order No. PSC-01-0327-PAA-WU, issued February 6, 2001 in Docket No. 000295-WU, In Re: Application for increase in water rates in Highlands County by Placid Lakes Utilities, Inc., p. 25; Order No. PSC-02-1733-PAA-WU, issued December 9, 2002 in Docket No. 011677-WU, In Re: Application for staff-assisted rate case in Polk County by Tevalo, Inc. d/b/a McLeod Gardens Water Company, p. 19.)

	(4)	The utility is located in the South Florida Water Management District (SFWMD or District). Per Limiting Condition No. 22 of the utility’s Water Use Permit, plus Section 2.6.1 of the District’s Basis of Review of the utility’s Water Use Permit, the utility is required to implement a conservation-oriented rate structure. The rate structure, as outlined by the District, “should include at least one of the following alternative components: increasing block rates, seasonal rates, quantity-based surcharges and/or time of day pricing as a means of reducing demands.”

	(5)	The utility’s residential customers consume approximately 8.3 kgal of water per month. It is Commission practice to implement an inclining block rate structure when average monthly consumption is at this level. (See. Order No. PSC-01-1162-PAA-WU, issued May 22, 2001 in Docket No. 001118-WU, In Re: Application for staff-assisted rate case in Polk County by Keen Sales, Rentals and Utilities, Inc. (Sunrise Water Company), p. 37; Order No. PSC 01-0323-PAA-WU, issued February 5, 2001 in Docket No. 000580-WU, In Re: Application for staff-assisted rate case in Polk County by Keen Sales, Rentals and Utilities, Inc. (Alturas Water Works) p. 24.)

INDIANTOWN COMPANY, INC. Attachment D

HISTORICAL TEST YEAR ENDED 12/31/03 Page 2 of 4

DETERMINATION OF APPROPRIATE RATE STRUCTURES (cont.)

THEORY BEHIND INCLINING BLOCK RATE STRUCTURES:	(6)	The goal of the inclining block rate structure is to reduce average demand. Under this rate structure, it is anticipated that demand in the higher usage blocks will be more elastic (responsive to price) than demand in the first usage block.

	(7)	There are several factors to consider when designing inclining block rates, including, but not limited to, the selection of the appropriate: a) conservation adjustment; b) usage blocks; and c) usage block rate factors.

PRE-REPRESSION BFC COST RECOVERY, USAGE BLOCKS AND RATE FACTORS:	(8)	Approximately 45% of the utility’s bills and 49% of the corresponding kgals are captured at 5 kgal or less. The majority of consumption at or below 5 kgal is considered highly nondiscretionary, essential consumption. Therefore, an important rate design goal is to minimize, to the extent possible, the price increases at 5 kgal or less.

	(9)	Based upon staff’s site evaluation of the utility’s service area, there are, on average, a greater number of persons per household in this case than typically found in other cases. This indicates a greater percentage of nondiscretionary water (and wastewater) usage per household. This explains, in large part, the average monthly consumption of 8.3 kgal in relation to the sizes of the housing units in the service area.

	(10)	As shown in column (B) of Table 1 on the following page, without a conservation adjustment to move more cost recovery revenues to the gallonage charge, the BFC allocation is 48%. The resulting percentage price increases, which steadily decrease at increasing levels of consumption, are contrary to the goal of conservation pricing. Furthermore, the percentage price increases at 5 kgal or less are maximized, rather than minimized.

	(11)	Based on the proportionally greater level of nondiscretionary water usage per household and the average monthly consumption per customer, staff does not believe aggressive rate factors are warranted. Therefore, the rate factors selected for this analysis are 1/1.25/1.5.

	(12)	In addition, the first usage block should be set below average monthly consumption. Therefore, staff selected two combinations of monthly usage blocks to examine: a) 0-5 kgals, 5-10 kgals and in excess of 10 kgals; and b) 0-8 kgals, 8-15 kgals and in excess of 15 kgals. Combinations of conservation adjustments, usage blocks and rate factors were analyzed. The results are shown in Table 1 on the following page.

INDIANTOWN COMPANY, INC. Attachment D

HISTORICAL TEST YEAR ENDED 12/31/03 Page 3 of 4

DETERMINATION OF APPROPRIATE RATE STRUCTURES (cont.)

TABLE 1

PRE-REPRESSION PRICE INCREASES AT VARIOUS
CONSERVATION ADJUSTMENTS (CA), USAGE BLOCKS (UB) AND USAGE BLOCK RATE FACTORS (RF)
	Conservation Adjustment Percentages and Resulting BFC Allocations Plus Varying Usage Blocks and Usage Block Rate Factors
(A)	(B) (C) (D) (E) (F)
Monthly		CA 0% BFC 48%	CA 18%, BFC 40%	CA 18%, BFC 40%	CA 28%, BFC 35%	CA 28%, BFC 35%
Consumption		UB 0, RF 0	UB 5 / 10 / 10+ RF 1 / 1.25 / 1.5	UB 8 / 15 / 15+ RF 1 / 1.25 / 1.5	UB 5 / 10 / 10+ RF 1 / 1.25 / 1.5	UB 8 / 15 / 15+ RF 1 / 1.25 / 1.5
0 kgal		24.1%	1.8%	1.8%	-9.4%	-9.4%
1 kgal		21.6%	1.9%	2.8%	-6.8%	-6.0%
3 kgal		18.1%	2.1%	4.1%	-3.3%	-1.3%
5 kgal		15.8%	2.2%	4.9%	-0.9%	1.8%
10 kgal		12.4%	10.0%	9.5%	10.7%	9.9%
20 kgal		9.5%	26.4%	24.6%	31.3%	28.9%
30 kgal		8.2%	33.9%	35.3%	40.6%	41.6%

PRE-REPRESSION BFC COST RECOVERY, USAGE BLOCKS AND RATE FACTORS (cont):	(13)	As shown in Table 1, the BFC cost recovery of 35% results in price decreases at nondiscretionary levels of consumption. It is a goal to minimize the price increases at these levels; however, as discussed in number (8) on the previous page, the utility has almost one-half of its bills and kgals at 5 kgal or less. Therefore, for revenue sufficiency and revenue stability purposes, staff does not believe that it is appropriate to have price decreases below 5 kgal. This eliminates BFC cost recovery percentages of less than 40% (e.g., columns (E) and (F)) from consideration. The 40% BFC cost recovery is within the rate structure guideline of the WMDs and is consistent with Commission practice.

	(14)	A comparison of columns (C) and (D) in Table 1 indicate similar pre-repression price increases. However, staff believes the combination in column (D) provides the best pattern of price increases, because at 5 kgal or less, they are slightly greater in column (D). This better addresses the revenue sufficiency concern than the rate design combination in column (C) above.

INDIANTOWN COMPANY, INC. Attachment D

HISTORICAL TEST YEAR ENDED 12/31/03 Page 4 of 4

DETERMINATION OF APPROPRIATE RATE STRUCTURES (cont.)

RECOMMENDATION:

Therefore, a continuation of the utility’s current rate structure is not appropriate. The rate structure should be changed to a three-tier inclining block rate structure. The usage blocks should be set for consumption at: a) 0 – 8 kgal; b) 8.001 – 15 kgal; and c) for usage in excess of 15 kgal. The appropriate usage block rate factors are 1.0, 1.25 and 1.5, respectively, with the base facility charge (BFC) cost recovery set at 40%.

		DETERMINATION OF WASTEWATER RATE STRUCTURE:

COMMISSION PRACTICE:	(15)	It is Commission practice to set the residential wastewater gallonage cap such that approximately 80% of the kgals are captured at or below the cap.

	(16)	The utility’s current residential wastewater gallonage cap of 6 kgal captures approximately 55% of billed usage, which is well below Commission-practice level. Setting a cap at this level would be typical for a service area comprised entirely of manufactured housing units, or in situations in which there are very few people per household. These circumstances do not exist for Indiantown.

	(17)	Based on the utility’s wastewater billing analysis, 80% of residential kgals is captured at 12 kgal. Since the maximum residential wastewater gallonage cap set by the Commission is 10 kgal, staff believes it is appropriate to increase the residential wastewater cap to that level. Increasing the residential wastewater gallonage cap to 10 kgal would capture approximately 74% of billed usage.

	(18)	By increasing the residential wastewater gallonage cap to 10 kgal, approximately 53% of residential bills would be less than the corresponding bills at the current 6 kgal cap.


RECOMMENDATION:		Staff recommends that the residential wastewater gallonage cap be increased to 10 kgal. This would recognize the greater number of people per household in the service area, and, correspondingly, the greater percentage of nondiscretionary water usage that is returned to the wastewater system.

INDIANTOWN COMPANY, INC. Attachment E

TEST YEAR ENDED DECEMBER 31, 2003 Page 1 of 2

ANALYSIS OF APPROPRIATE REPRESSION ADJUSTMENT

[A]

PRICE ELASTICITY CALCULATION FOR INDIANTOWN SYSTEM

Avg Consumption (kgal) – Prior Rate Case:

9.595

Long-Run Avg Consumption (kgal) 2001 – 2002:

8.502

Chg Amt:

-1.093

Chg Pct:

-11.4%

Previous

Approved

BFC

$7.54

$9.81

Gal Chg

$1.08

$1.45

Avg Price (PRIOR Consump, Previous Rates)

$17.90

Avg Price (PRIOR Consump, Approv Rates)

$23.72

Chg Amt

$5.82

Chg Pct

32.5%

PE =

% Chg Q Demanded

-11.4%

= -35.0%

% Chg P

32.5%

PE =

-35.0%

= PRICE ELASTICITY FOR INDIANTOWN

[B]

ANTICIPATED CHANGE IN QUANTITY DEMANDED – CURRENT CASE

Previous

Rec – Before Repr

Avg Consumption (kgal)

BFC

$10.33

$10.52

Current

8.344

Gal Chg

$1.53

$1.67

0-8 kgal

$2.09

8-15 kgal

$2.51

15+ kgal

Avg Price (CURR Consump, CURR Rates)

$23.10

Avg Price (CURR Consump, Recom Rates)

$24.60

Chg Amt

$1.50

Chg Pct

6.5%

Indiantown PE =

-35.0% =

% Chg Q Demanded

6.5%

% Chg Q Demanded =

-35.0%

x 6.5%

-2.3%

INDIANTOWN COMPANY, INC. Attachment E

TEST YEAR ENDED DECEMBER 31, 2003 Page 2 of 2

ANALYSIS OF APPROPRIATE REPRESSION ADJUSTMENT (cont.)

[C]

WATER REPRESSION

WASTEWATER REPRESSION

Curr RS Consump

160,975

Curr RS Consump (1)

116,326

% Chg Q Demand

-2.3%

% Chg Q Demand

-2.3%

Ratesetting Kgals

157,309

Ratesetting Kgals

113,676

Kgals Repressed

3,666

Kgals Repressed

2,650

(1) (reflects recommended cap at 10 kgal)

DATE:	May 5, 2005
TO:	Director, Division of the Commission Clerk & Administrative Services (Bayó)
FROM:	Division of Economic Regulation (Fletcher, Revell, Edwards, Rendell, Lingo, Stallcup, Maurey, Willis) Office of the General Counsel (Jaeger)
RE:	Docket No. 040450-WS – Application for rate increase in Martin County by Indiantown Company, Inc.
AGENDA:	05/17/05 – Regular Agenda – Proposed Agency Action Except for Issues 29 and 30 - Interested Persons May Participate
CRITICAL DATES:		06/14/05 (5-Month Effective Date (PAA Rate Case))
SPECIAL INSTRUCTIONS:		Deferred from the April 19, 2005 Agenda
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\040450.RCM.DOC

	Indiantown Company, Inc.				Schedule No. 1-A
	Schedule of Water Rate Base				Docket No. 040450-WS
	Test Year Ended 12/31/03
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year

1	Plant in Service	$2,955,679	$37,603	$2,993,282	($793,865)	$2,199,417

2	Land and Land Rights	5,319	0	5,319	0	5,319

3	Non-used and Useful Components	0	0	0	0	0

4	Accumulated Depreciation	(1,513,279)	(34,997)	(1,548,276)	800,970	(747,306)

5	CIAC	(1,825,903)	0	(1,825,903)	0	(1,825,903)

6	Amortization of CIAC	730,676	(43,080)	687,596	0	687,596

7	Net Debit Deferred Income Taxes	0	0	0	0	0

8	Advances for Construction	0	0	0	0	0

9	Working Capital Allowance	75,984	1,969	77,953	(9,112)	68,841

10	Rate Base	$428,476	($38,505)	$389,971	($2,007)	$387,964

	Indiantown Company, Inc.				Schedule No. 1-B
	Schedule of Wastewater Rate Base				Docket No. 040450-WS
	Test Year Ended 12/31/03
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year

1	Plant in Service	$4,532,950	$179,781	$4,712,731	($853,155)	$3,859,576

2	Land and Land Rights	383	0	383	0	383

3	Non-used and Useful Components	0	0	0	(249,687)	(249,687)

4	Accumulated Depreciation	(2,306,374)	(60,128)	(2,366,502)	882,797	(1,483,705)

5	CIAC	(2,055,280)	0	(2,055,280)	0	(2,055,280)

6	Amortization of CIAC	954,488	(74,913)	879,575	3,030	882,605

7	CWIP	0	0	0	0	0

8	Advances for Construction	0	0	0	0	0

9	Working Capital Allowance	104,166	(598)	103,568	(12,336) ~~(14,854)~~	91,232 ~~88,714~~

10	Rate Base	$1,230,333	$44,142	$1,274,475	($229,352) ~~($231,870)~~	$1,045,123 ~~$1,042,605~~

	Indiantown Company, Inc.	Schedule No. 1-C
	Adjustments to Rate Base	Docket No. 040450-WS
	Test Year Ended 12/31/03

	Explanation	Water	Wastewater


	Plant In Service
1	Stipulated Audit Adjustments. (Issue 2)	($39,851)	($448)
2	Retire Plant In-Service Prior to 1975. (Issue 3)	(706,235)	(709,350)
3	Additional Plant Retirements. (Issue 4)	(51,910)	(94,634)
4	Reflect appropriate pro forma plant. (Issue 5)	4,131	(48,723)
	Total	($793,865)	($853,155)

	Non-used and Useful
	To reflect net non-used and useful adjustment. (Issue 7)	$0	($249,687)

	Accumulated Depreciation
1	Stipulated Audit Adjustments. (Issue 2)	$42,938	$11,925
2	Retire Plant In-Service Prior to 1975. (Issue 3)	706,235	709,350
3	Additional Plant Retirements. (Issue 4)	51,910	94,634
4	Reflect appropriate pro forma plant. (Issue 5)	(112)	66,887
	Total	$800,970	$882,797

	Accumulated Amortization of CIAC
	Stipulated Audit Adjustments. (Issue 2)	$0	$3,030

	Working Capital
	Reflect appropriate working capital. (Issue 8)	($9,112)	($12,336) (~~$14,854)~~

	Indiantown Company, Inc.						Schedule No. 2
	Capital Structure-Simple Average						Docket No. 040450-WS
	Test Year Ended 12/31/03
			Specific	Subtotal	Prorata	Capital
		Total	Adjust-	Adjusted	Adjust-	Reconciled		Cost	Weighted
	Description	Capital	ments	Capital	ments	to Rate Base	Ratio	Rate	Cost
Per Utility
1	Long-term Debt	$308,216	($5,002)	$303,214	($147,111)	$156,103	9.38%	9.50%	0.89%
2	Short-term Debt	30,367	(15,732)	14,635	(7,032)	7,603	0.46%	4.82%	0.02%
3	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
4	Common Equity	4,813,931	(2,099,432)	2,714,499	(1,316,201)	1,398,298	84.01%	9.39%	7.89%
5	Customer Deposits	46,795	0	46,795	0	46,795	2.81%	6.00%	0.17%
6	Deferred Income Taxes	15,135	93,020	108,155	(52,508)	55,647	3.34%	0.00%	0.00%
7	Total Capital	$5,214,444	($2,027,146)	$3,187,298	($1,522,852)	$1,664,446	100.00%		8.97%

Per Staff
8	Long-term Debt	$303,214	$894,800	$1,198,014	($693,164) ~~($694,159~~)	$504,850 ~~$503,855~~	35.23% ~~35.22%~~	9.50%	3.35%
9	Short-term Debt	14,635	684	15,319	(8,864) ~~(8,876~~)	6,456 ~~6,443~~	0.45%	4.82%	0.02%
10	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
11	Common Equity	2,714,499	(894,800)	1,819,699	(1,052,867) ~~(1,054,378~~)	766,832 ~~765,321~~	53.51% ~~53.50%~~	10.13%	5.42%
12	Customer Deposits	46,795	0	46,795	0	46,795	3.27%	6.00%	0.20%
13	Deferred Income Taxes	108,155	0	108,155	0	108,155	7.55% ~~7.56%~~	0.00%	0.00%
14	Total Capital	$3,187,298	$684	$3,187,982	($1,754,895)	$1,433,087	100.00%		8.98%
					~~($1,757,413)~~	~~$1,430,569~~
							LOW	HIGH
					RETURN ON EQUITY		9.13%	11.13%
					OVERALL RATE OF RETURN		8.45%	9.52%

	Revenue Requirement	Revenue Increase	Percentage Increase
Water	$667,271	$56,022	9.17%
Wastewater	$964,754	$93,702	10.76%

	Indiantown Company, Inc.						Schedule No. 3-A
	Statement of Water Operations						Docket No. 040450-WS
	Test Year Ended 12/31/03
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement

1	Operating Revenues:	$618,125	$182,889	$801,014	($189,039)	$611,975	$78,334 ~~$78,325~~	$690,309 ~~$690,300~~
							12.80%
	Operating Expenses
2	Operation & Maintenance	607,870	15,750	623,620	(72,895)	550,725		550,725

3	Depreciation	31,006	8,871	39,877	(26,006)	13,871		13,871

4	Amortization	0	0	0	0	0		0

5	Taxes Other Than Income	76,969	7,308	84,277	(8,023)	76,254	3,525	79,779 ~~79,778~~

6	Income Taxes	18,223	37	18,260	(35,323)	(17,064) ~~(17,063)~~	28,151 ~~28,148~~	11,087 ~~11,085~~

7	Total Operating Expense	$734,068	$31,966	$766,034	($142,247)	$623,786 ~~$623,787~~	$31,676 ~~$31,672~~	$655,462 ~~$655,~~459

8	Operating Income	($115,943)	$150,923	$34,980	($46,792)	($11,811) ~~($11,812~~)	$46,658 ~~$46,653~~	$34,847 ~~$34,841~~

9	Rate Base	$428,476		$389,971		$387,964		$387,964

10	Rate of Return	-27.06%		8.97%		-3.04%		8.98%

	Indiantown Company, Inc.						Schedule No. 3-B
	Statement of Wastewater Operations						Docket No. 040450-WS
	Test Year Ended 12/31/03
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement

1	Operating Revenues:	$885,706	$324,117	$1,209,823	($337,390)	$872,434	$165,384 ~~$143,954~~	$1,037,818 ~~$1,016,388~~
							18.96~~16.50~~%
	Operating Expenses
2	Operation & Maintenance	$833,329	($4,782)	$828,547	($98,692) ~~($118,838)~~	$729,855 ~~$709,709~~		$729,855 ~~$709,709~~

3	Depreciation	91,263	30,786	122,049	(40,314)	81,735		81,735

4	Amortization	0	0	0	0	0		0

5	Taxes Other Than Income	103,570	15,809	119,379	(24,335)	95,044	7,442 ~~6,478~~	102,486 ~~101,522~~

6	Income Taxes	4,276	21,252	25,528	(55,094) ~~(47,471)~~	(29,566) ~~(21,943)~~	59,434 ~~51,732~~	29,867 ~~29,789~~

7	Total Operating Expense	$1,032,438	$63,065	$1,095,503	($218,435) ~~($230,957)~~	$877,068 ~~$864,546~~	$66,876 ~~$58,210~~	$943,944 ~~$922,756~~

8	Operating Income	($146,732)	$261,052	$114,320	($118,954) ~~($106,432)~~	($4,634) ~~$7,888~~	$98,508 ~~$85,744~~	$93,874 ~~$93,632~~

9	Rate Base	$1,230,333		$1,274,475		$1,045,123 ~~$1,042,605~~		$1,045,123 ~~$1,042,605~~

10	Rate of Return	-11.93%		8.97%		-0.44 ~~0.76~~%		8.98%

	Indiantown Company, Inc.	Schedule 3-C
	Adjustment to Operating Income	Docket No. 040450-WS
	Test Year Ended 12/31/03
	Explanation	Water	Wastewater
	Operating Revenues
1	Remove requested final revenue increase.	($189,765)	($338,771)
2	To reflect the appropriate amount of annualized revenues. (Issue 12)	2,107	0
3	Stipulated Audit Adjustments (Issue 13)	(1,382)	1,382
	Total	($189,039)	($337,390)

	Operation and Maintenance Expense
1	Reflect appropriate pro forma expense. (Issue 5)	$0	$2,788
2	Excessive unaccounted for water and I&I adjustments. (Issue 6)	(2,231)	(4,920)
3	Stipulated Audit Adjustments (Issue 13)	(18,198)	(35,028)
4	Employee Salaries and Benefits (Issue 14)	(33,337)	(30,379)
5	Issue Dropped. ~~Reflect appropriate sludge removal expense. (Issue 15)~~	0	0 ~~(20,145~~)
6	Remove non-utility purchased power expense. (Issue 16)	(356)	0
7	Amortize certain non-recurring items over five years. (Issue 17)	(4,743)	(2,900)
8	Reflect appropriate materials and supplies. (Issue 18)	0	(13,770)
9	Reflect appropriate management fees. (Issue 19)	(15,924)	(15,924)
10	To reflect the repression adjustment to O&M expenses. (Issue 20)	(830)	(1,198)
11	Reflect appropriate rate case expense. (Issue 21)	2,723	2,638
	Total	($72,895)	($98,692) ~~($118,838)~~

	Depreciation Expense - Net of CIAC Amortization Expense
1	Retire Plant In-Service Prior to 1975. (Issue 3)	($17,656)	($9,817)
2	Additional Plant Retirements. (Issue 4)	(1,367)	(3,934)
3	Reflect appropriate pro forma plant. (Issue 5)	226	1,160
4	To remove net depreciation on non-U&U adjustment above. (Issue 7)	0	(24,319)
5	Stipulated Audit Adjustments (Issue 13)	(7,209)	(3,403)
	Total	($26,006)	($40,314)

	Taxes Other Than Income
1	RAFs on revenue adjustments above	($8,507)	($15,183)
2	To remove property taxes on non-U&U adjustment above. (Issue 7)	0	(5,597)
3	Stipulated Audit Adjustments (Issue 13)	2,720	(1,599)
4	Employee Salaries (Issue 14)	(2,236)	(1,957)
	Total	($8,023)	($24,335)

	Income Taxes
1	To adjust to test year income tax expense.	($34,330) ~~($34,329)~~	($52, 415) ~~($44,799)~~
2	To reflect the appropriate parent debt adjustment. (Issue 22)	(994)	(2,679 2)
	Total	($35,324)	($55,094)
		~~($35,323)~~	~~($47,471)~~

Indiantown Company, Inc.				Schedule No. 4-A
Water Monthly Service Rates			Docket No. 040450-WS
Test Year Ended 12/31/03
	Rates	Commission	Utility	Staff	4-year
	Prior to	Approved	Requested	Recomm.	Rate
	Filing	Interim	Final	Final	Reduction
Residential and General Service
Base Facility Charge by Meter Size:
5/8" x 3/4"	$10.33	$11.32	$14.88	$10.52	$0.23
1"	$25.82	$28.29	$37.20	$26.30	$0.58
1-1/2"	$51.65	$56.60	$74.40	$52.60	$1.17
2"	$82.63	$90.55	$119.04	$84.16	$1.87
3"	$154.94	$169.79	$223.20	$168.32	$3.74
4"	$258.23	$282.98	$372.00	$263.00	$5.84
6"	$516.45	$565.95	$744.00	$526.00	$11.67
8"	$826.32	$905.52	$1,190.40	$841.60	$18.68
8" Turbo	$929.61	$1,018.70	$1,339.20	$946.80	$21.01

Residential Service Gallonage
Charge, Per 1,000 Gallons
0 to 8,000 Gallons	$1.53	$1.68	$1.89	$1.71	$0.04
8,000 to 15,000 Gallons	$1.53	$1.68	$1.89	$2.14	$0.05
Over 15,000 Gallons	$1.53	$1.68	$1.89	$2.57	$0.06

General Service Gallonage
Charge for all Gallons	$1.53	$1.68	$1.89	$1.90	$0.04

Private Fire Protection
Base Facility Charge by Meter Size:
2"	$6.90	$7.56	$9.92	$7.01	$0.16
3"	$12.91	$14.15	$18.60	$14.03	$0.31
4"	$21.52	$23.58	$31.00	$21.92	$0.49
6"	$43.03	$47.15	$62.00	$43.83	$0.97
8"	$68.86	$75.46	$99.20	$70.13	$1.56

	Typical Residential Bills 5/8" x 3/4" Meter
5,000 Gallons	$17.92	$19.72	$24.33	$19.07
8,000 Gallons	$22.57	$24.76	$30.00	$24.20
10,000 Gallons	$25.63	$28.12	$33.78	$28.48

Audit Adjustments

Water

Wastewater

1. Remove unused wireless equipment– Exception No. 1

Decrease Plant (Account No. 340)

($3,120)

0

Decrease Accumulated Depreciation

$260

0

2. Computer Retirements and Reclassifications – Exception No. 3

Decrease Plant (Accounts Nos. 340 and 390)

($9,830)

($2,819)

Decrease Accumulated Depreciation

$6,563

$6,086

3. Vehicle Retirements – Exception No. 4

Decrease Plant (Accounts Nos. 341 and 391)

($38,059)

($7,533)

Decrease Accumulated Depreciation

$36,859

$6,608

4. Correct Amortization of CIAC – Exception No. 5

Increase Accumulated Amortization of CIAC

$3,030

5. Pro Forma Vehicle Purchased in 2004 – Exception No. 9

Increase Plant (Accounts Nos. 341 and 391)

$1,875

$5,625

Increase Accumulated Depreciation

($156)

($469)

6. Correcting Depreciation Rate for Account 304 – Disclosure No. 4

Increase Accumulated Depreciation

($478)

7. Capitalizing Items Expensed – Disclosure No. 11

Increase Plant – Account No. 330

$1,233

Increase Plant – Account No. 331

$8,050

Increase Plant – Account No. 364

$1,934

Increase Plant – Account No. 371

$1,611

Increase Plant – Account No. 394

$733

Increase Accumulated Depreciation

($110)

($299)

Wastewater Treatment Plant

Audit Adjustments

Water

Wastewater

1. Remove unused wireless equipment– Exception No. 1

Decrease Depreciation Expense

($260)

2. Computer Retirements and Reclassifications – Exception No. 3

Decrease Depreciation Expense

($1,238)

($654)

3. Vehicle Retirements – Exception No. 4

Decrease Depreciation Expense

($6,344)

($1,256)

4. Correct Amortization of CIAC – Exception No. 5

Increase CIAC Amortization Expense

($3,030)

5. Correct health, dental, and disability insurance– Exception No. 6

Decrease Pension and Benefits

($14,492)

($22,828)

6. Correct liability insurance – Exception No. 7

Decrease Insurance – General Liability

($1,381)

($2,429)

7. Correct workman’s compensation insurance– Exception No. 8

Increase Insurance – Workman’s Compensation

$395