DATE:	January 10, 2007
TO:	Director, Division of the Commission Clerk & Administrative Services (Bayó)
FROM:	Division of Economic Regulation (Fletcher, Kyle, Redemann, Rendell, Springer) Office of the General Counsel (Jaeger)
RE:	Docket No. 060256-SU – Application for increase in wastewater rates in Seminole County by Alafaya Utilities, Inc.
AGENDA:	01/23/07 – Regular Agenda –Proposed Agency Action Except for Issues 26, 28, 29 and 30 – Interested Persons May Participate
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		Arriaga
CRITICAL DATES:		01/23/07 (5-Month Effective Date (PAA Rate Case))
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\060256.RCM.DOC

 

Table of Contents

Issue      Description                                                                                                             Page

              Case Background. 4

              QUALITY OF SERVICE. 5

1            Quality of Service (Redemann, Rendell) 5

              RATE BASE. 12

2            Audit Adjustments for Rate Base, NOI and Capital Structure (Fletcher) 12

3            Allocation of WSC and UIF Rate Base (Fletcher) 14

4            Pro Forma Plant Additions (Fletcher, Redemann) 16

5            Used and Useful (Redemann, Fletcher) 21

6            Working Capital Allowance (Fletcher) 24

7            Rate Base (Fletcher) 25

              COST OF CAPITAL. 26

8            Return on Equity (Springer) 26

9            Deferred Taxes (Kyle) 27

10          Weighted Average Cost of Capital (Springer, Kyle) 28

              NET OPERATING INCOME. 29

11          Pro forma Miscellaneous Service Charge Revenues (Fletcher) 29

12          Pro Forma Reuse Revenues (Fletcher) 30

13          Allocation of WSC and UIF Expenses (Fletcher) 31

14          Pro Forma Salaries and Pensions (Fletcher) 32

15          Sludge Removal Expense (Flecther) 34

16          Other O&M Expense Adjustments (Fletcher) 35

17          Other Pro Forma Expense Adjustments (Fletcher) 37

18          Rate Case Expense (Fletcher) 38

19          Property Taxes (Fletcher) 46

20          Operating Income Before Any Increase (Fletcher) 47

              REVENUE REQUIREMENT. 48

21          Revenue Requirement (Fletcher) 48

              RATES AND CHARGES. 49

22          Wastewater Rates (Fletcher) 49

23          Reuse Rates (Fletcher) 50

24          Miscellaneous Service Charges (Fletcher) 53

25          Interim Refund (Fletcher) 56

26          Four-Year Rate Reduction (Fletcher) 57

              OTHER ISSUES. 58

27          Service Availablity Charges (Fletcher) 58

28          Show Cause for Apparent Violation of an Order (Jaeger, Fletcher) 60

29          Show Cause for Assessing Unauthorized Charges  (Jaeger, Fletcher) 63

30          Proof of Adjustments (Fletcher) 65

31          Docket Closure (Jaeger, Fletcher) 66

Attachment

or Schedule   Description                                                                                                     Page

 

       A            Used and Useful Attachment.............................................................................. 67

     1-A           Wastewater Rate Base....................................................................................... 68

     1-B           Adjustments to Rate Base.................................................................................. 69

       2             Capital Structure................................................................................................ 70

     3-A           Wastewater Operating Income........................................................................... 71

     3-B           Adjustments to Operating Income...................................................................... 72

       4             Wastewater Rates and Four Year Rate Reduction............................................. 73

       5            Service Availability Charges............................................................................ 74

 Case Background

Utilities, Inc. (UI or parent) is an Illinois corporation which owns approximately 80 utility subsidiaries throughout 16 states including 16 water and wastewater utilities within the State of Florida.  Currently, UI has ten separate rate case dockets pending before the Florida Public Service Commission (Commission).  These dockets are as follows:

Docket No.                                          UI Subsidiary

060253-WS                                         Utilities Inc. of Florida

060254-SU                                          Mid-County Services, Inc.

060255-SU                                          Tierra Verde Utilities, Inc.

060256-SU                                          Alafaya Utilities, Inc.

060257-WS                                         Cypress Lakes Utilities, Inc.

060258-WS                                         Sanlando Utilities, Inc.

060260-WS                                         Lake Placid Utilities, Inc.

060261-WS                                         Utilities Inc. of Pennbrooke

060262-WS                                         Labrador Utilities, Inc.

060285-SU                                          Utilities Inc. of Sandalhaven

This recommendation addresses Docket No. 060256-SU.

Alafaya Utilities, Inc. (Alafaya or utility) is a Class A utility providing wastewater service to approximately 7,100 wastewater customers and 1,200 reuse customers in Seminole County.  Water service is provided in the area by the City of Oviedo.  Wastewater rates were last established for this utility in its 2002 rate proceeding.[1]  

 On May 15, 2006, Alafaya filed the Application for Rate Increase at issue in the instant docket.  The utility had deficiencies in the Minimum Filing Requirements (MFRs).  Those deficiencies were subsequently corrected, and the official filing date was established as August 22, 2006, pursuant to Section 367.083, Florida Statutes (F.S.).  The utility requested that the application be processed using the Proposed Agency Action (PAA) procedure and requested interim rates.  The test year established for interim and final rates is the 13-month average period ending December 31, 2005.  Alafaya requested interim rates designed to generate annual revenues of $3,475,879.  This represents a revenue increase on an annual basis of $617,794 (21.62%) for wastewater.  The utility requested final rates designed to generate annual revenues of $4,142,462.  This represents a revenue increase of $1,284,377 (44.93%).

The intervention of the Office of Public Counsel was acknowledged by Order No. PSC-06-0548-PCO-WS, issued June 27, 2006, in this docket.  By Order No. PSC-06-0664-FOF-SU, issued August 7, 2006, the Commission approved an interim revenue requirement of $3,397,156, which represents an increase of $539,070 or 18.86%.  This recommendation addresses the utility’s final requested revenue increase.  The Commission has jurisdiction pursuant to Section 367.081, F.S.

Discussion of Issues

QUALITY OF SERVICE

Issue 1: 

 Is the quality of service provided by Alafaya Utilities, Inc. satisfactory?

Recommendation: 

   Yes.  The utility’s overall quality of wastewater service is satisfactory.  The reuse service is marginal; although, significant improvements are underway.  The utility should be required to meter all existing and new reuse customers by December 31, 2007.  The utility should be required to provide quarterly reports beginning March 31, 2007, and ending December 31, 2007, on the reuse improvements, including the progress on metering, the ground storage system, the augmentation wells, and any steps taken to obtain additional reuse from the City of Oviedo. (Redemann, Rendell)

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 a utility by evaluating: 1) the quality of the utility’s product; 2) the operational conditions of the utility’s plant and facilities; and, 3) the utility’s attempt to address customer satisfaction.  The rule further states that sanitary surveys, outstanding citations, violations, and consent orders on file with the Department of Environmental Protection (DEP) and the county health department over the preceding 3-year period shall be considered, along with input from the DEP and health department officials and consideration of customer comments and complaints.

 Staff’s analysis of the overall quality of service provided by the utility is derived from the quality of the utility’s wastewater effluent, the operational condition of the utility’s plant and facilities, and customer satisfaction.  Comments and complaints received by the Commission from customers were reviewed.  Staff has also considered the utility’s current compliance with the DEP’s regulations.

Quality of the Product

In Seminole County, the wastewater operations and facilities are regulated by the Orlando District office of the DEP.  According to the DEP, the utility is up-to-date with all chemical analyses and has met all chemical standards.  Therefore, staff believes that the wastewater effluent quality is satisfactory.

Condition of Plant

On December 27, 2002, the utility was sent a warning letter by the DEP due to an unauthorized spill from a broken force main.  Alafaya hired a consultant and 700 feet of the PVC pipe was replaced with ductile iron pipe.  On January 25, 2006, the utility was sent a notice by the Occupational Safety and Health Administration because there was an alleged hazard from rusty steps, lack of mid-rail on the hand rails, and a rusty cat walk on the digester.  The utility is retiring this digester and building two new digesters.  The new digesters were scheduled to go on line by December 31, 2006, but the utility now projects that they will go on-line at the end of January 2007.  A field investigation for Alafaya was conducted September 25-27, 2006.  The wastewater treatment plants were in good working order.  The main percolation or evaporation ponds were in good working order and were almost dry.  Ten lift stations were checked on September 26, 2006, during the system inspection and all were working satisfactorily.  Mr. Don Taylor, Field Supervisor, explained that the lift stations are checked on Monday, Wednesday and Friday, and the alarms are tested on Wednesday.  The wastewater system did not appear to have any deficiencies during the inspections.  The utility has a current wastewater operating permit. 

In the spring of 2006, the DEP notified Commission staff of the lack of reuse water.  The utility has implemented several steps to address this issue.  Permitting is complete and the bidding should be completed by the middle of January 2007 for a 1.5 million gallon (MG) ground storage tank with high service pumping.   The utility estimates the construction of the storage system will be complete before June 1, 2007.  The ground storage tank and high service pumping will help store additional reuse and provide additional pressure.  On October 9, 2006, a 20-inch reuse main from the wastewater treatment plant to the Lockwood Boulevard-site went into service.  The additional reuse main should improve the pressure.  The utility met with the St. Johns River Water Management District (SJRWMD) on November 11, 2006, to clarify permitting issues related to a Consumptive Use Permit.  The utility may now apply for a permit to drill wells that can withdraw 500,000 gallon per day (gpd) on an annual average basis, adding to the amount of reuse available.  Staff believes these actions will improve reuse service for the customers, except under extreme dry conditions.  Staff recommends Alafaya provide quarterly reports on the progress of the construction of the ground storage system and augmentation wells beginning March 31, 2007, and ending December 31, 2007. 

While the effluent disposal issue is being addressed by the utility, customers in the Live Oak community may also be overwatering, since the curb near some homes appears to have standing water.  The grass growing season is year round in central Florida, and irrigation is needed more in the spring and early fall.  Although the reuse usage of the golf course was estimated to be .448 million gallon per day (mgd) on an annual average daily flow (AADF) basis, it is only using .079 mgd AADF, which is significantly less than expected.  However, during the inspection staff noticed that the golf course’s greens, fairways, and rough were green.     

While there is no requirement for the utility to provide unlimited reuse, the utility is addressing the lack of reuse water.  Staff believes that the 20-inch reuse main will help with the pressure issue.  The new 1.5 MG storage tank will allow the utility to store additional reuse water and the augmentation wells will add capacity.  However, all reuse improvements will not be in service during the next spring dry period.  Staff believes that the quality of service for the condition of the plant is satisfactory.

Customer Satisfaction

The utility provided a copy of its customer complaints during the test year.  Not all the customer concerns relate to wastewater service.  Many customer concerns were related to billing.  Since customers are billed for wastewater based on their water usage, for those complaints, the water meter was reread.  The utility had a few electrical and mechanical problems at the lift stations.  Some wastewater complaints were due to blocked sewer lines.  If the blocked lines were determined to be the utility’s responsibility, the utility used one or more methods to fix the blockage including using a video camera to view the sewer line to find the problem and cleaning or replacing the line.  The utility also advised the customer that a plumber should be contacted if the problem was determined to be the customer’s responsibility.

The Public Service Commission Complaint Tracking System was reviewed.  The customer complaints were related to the lack of reuse.  Staff received numerous letters from customers in the Live Oak subdivision regarding the utility’s lack of reuse service. 

A customer meeting was held on November 15, 2006, at 6:00 p.m. at the City Hall in Oviedo, Florida.  At the customer meeting, staff provided an informational sheet that detailed the utility’s proposed improvements to the reuse system.  A pre-meeting was held with three customers from the Live Oak subdivision.  One customer explained the main concern was the lack of professionalism by the utility.  He explained the utility had promised to extend the reuse main along County Road 419 to loop the Live Oak reuse system, but the project was not started.  The customers further explained that they were having reuse pressure problems, the letter from the utility requesting rotational watering was not helpful, and the utility was not providing information to the customers on reuse improvements.  Another customer restated that at times there is no reuse water pressure.  The third customer stated that Alafaya should stop adding reuse customers, but did not object to a rate increase if they get good service.  He also stated that he wants the utility to extend the reuse line along County Road 419 and wants Alafaya to purchase reuse water from the City of Oviedo (City).  The City will be receiving reuse from the City of Orlando’s Iron Bridge Wastewater Plant, and it is estimated that the reuse will become available in May, 2007. 

Approximately ten customers attended the customer meeting.  The Honorable Mayor of the City of Oviedo presented staff with Resolution No. 1463-06 dated November 13, 2006, opposing the 45% rate increase.  The resolution also indicates that the City Council had received numerous complaints regarding the poor quality of reclaimed water service provided to customers.  The resolution further indicates that the City of Oviedo is also a customer of Alafaya at many of its municipal facilities.  Two of the three customers staff had met at the pre-meeting restated their concerns, and one customer pointed out that the proposed rotational watering plan would work if the customers received water on their appointed watering days.  It was stated that most customers now leave the reuse water system on “24/7” in hopes of receiving some reuse water.  The Waverly Woods Homeowners President explained they also have problems with the reuse system.  Two others customers who live in Live Oak Phase III explained that the reuse problem is more severe there than in Phase II. 

Utility Response

According to the utility, the extension of the loop along County Road 419 was delayed due to the delay of the construction of Phases 4 and 5 for Live Oak.  The utility now anticipates starting the construction of the County Road 419 extension by February 1, 2007, and the construction is estimated to be completed by June 30, 2007.

With respect to the customer request to the utility to stop adding customers to its reuse system, the utility did not agree to discontinue connection, and does not want to suspend connections to the reuse system.  Adding reuse customers will result in the maximum beneficial use of reuse as well as provide adequate disposal capacity as the utility grows.  Customers who elect to use potable water for irrigation often do not convert to reuse at a later date resulting in a permanent demand placed on the City’s water system.

With respect to reuse service from the City, the utility explained that the City does not have the ability to provide reuse service now and construction will not be completed until the end of the second quarter of 2007.  The City agreed to consider providing reuse to the utility if there was capacity available.  The City has not developed a wholesale rate, at this time.

Analysis

On November 16, 2006, staff again visited the wastewater plant after the customer meeting.  Even though it rained heavily the night before, the reuse system had to be turned off at 7 a.m. because the reuse tank was dry.  Since the customers were watering even though it rained, it appears they have either removed their rain sensors or their rain sensors are not working.  The rain sensor is a requirement of the Florida Uniform Building Code.  Seminole County is responsible for code violations, according to the SJRWMD.  Most of the irrigation systems are less than three years old and should have been installed with rain sensors.  It appears that the customers are compounding the problem by watering when it rains. 

Insufficient reuse pressure is the result of a lack of reuse and/or a deficiency in the distribution system.  During the 2005 test year, it is estimated that each residential customer used about 21,000 gallons of reuse water per month.  This amount of reuse should be sufficient for the customers’ watering needs.  Typically, it takes four wastewater customers to supply one reuse customer.  The ratio for Alafaya is six wastewater customers to one reuse customer.  In September and November, 2006, during the service area tours through Live Oak, it was obvious many landscapes were green and lush and were receiving adequate reuse.  Some customers may be receiving more reuse than others.

Metering of Reuse Service

Currently, the residential reuse customers are billed a flat rate.  Originally, a flat rate was used to encourage reuse due to limited disposal, but the supply is now overstressed.  Alafaya’s reuse project was approved by Order No. PSC-98-0391-FOF-SU.[2]  Alafaya filed its request for approval of its proposed reuse plan on March 6, 1996.  At that time, Alafaya’s method of disposal consisted of two separate disposal sites.  The first site consisted of nine percolation ponds, and the second site consisted of spray irrigation on an 18-hole golf course.  The DEP had limited the capacity of the treatment plant due to inadequate disposal capacity.  DEP encourages wastewater utilities to, when possible, discontinue the use of percolation ponds as the primary means of effluent disposal in favor of reuse.  The primary objective at the time of the initial request to approve the reuse plan was to encourage future use of reuse by potential customers.  In Order No. PSC-98-0391-FOF-SU, the Commission approved a flat monthly rate.  In doing so, the Commission recognized the need to promote reuse and assure adequate effluent disposal.  However, the order stated that in the future, should it become necessary to meter reuse to lessen the per customer usage, the Commission believed the utility should reserve the right to meter reuse service with the customer bearing the cost, as would be the case if meters were initially installed.  Staff estimated usage by future reuse customers as 500 gpd at the time of the reuse project approval.  The Commission acknowledged that in the future, the utility may not be able to provide sufficient reuse to all customers desiring irrigation service if the participation rate or usage was understated.

In Alafaya’s last rate case, the utility was experiencing effluent disposal problems.  At that time, there were not enough reuse customers using the reuse service.   Commission staff, the utility, DEP and SJRWMD had several discussions concerning possible solutions to the utility’s disposal problems.  In Order No. PSC-04-0363-PAA-SU, the Commission addressed the effluent disposal problems.  Specifically, the order states:

 

As previously discussed, the utility has had difficulty in disposing of its treated effluent.  One of the options available to the utility is to increase its disposal through increased reuse consumption.  This method of disposal is encouraged by both the Water Management District and the DEP.  Currently, only 23% of customers who have reuse available to their home have elected to connect to the reuse system.

 

p. 38.

 

            Further, on the issue of consumption-based reuse rates, the Commission stated the following in the last rate case order.

 

In Order No. PSC-98-0391-FOF-SU, issued March 16, 1998, in Docket No. 960288-SU, we contemplated eventually moving Alafaya’s reuse rate to a consumption-based rate for residential service.  It was anticipated that this would be the next step in a maturing reuse system to curb excessive use.  At this time, excessive use is not a problem; in fact, the opposite is true.  We believe that continuing a flat rate is appropriate in this case to encourage consumption.

Order No. PSC-98-0391-FOF-SU also required that the utility specify in its customer application for reuse that if, in the future, service is provided under a metered rate structure, the customer will be responsible for the cost of the meter.  We believe that adding a potential meter installation fee to the cost barriers already existing may discourage future connections.  As such, we find that this language shall no longer be required on the application for reuse.  Currently, the rationale for implementing a consumption-based rate is to encourage conservation.  We believe that at the time a consumption-based rate is implemented, the concern will have shifted from barriers to entry to conserving a resource.  At that time, we can take up the issue of a meter installation charge for future customers.  The cost of meters for existing customers can be considered as a utility investment and recovered through reuse and wastewater rates pursuant to Section 367.0817(3), Florida Statutes.[3]

 

As previously indicated, the opposite is now occurring.  The utility does not have enough reuse product to meet the demand.  The utility now has 1,200 existing residential reuse customers.  Those customers are now using an estimated 21,000 gallons per month.  This is significantly higher than staff’s estimated demand in 1996.  In order to effectively coordinate the state’s reuse program, the DEP, the Commission, and the five water management districts formed the Reuse Coordinating Committee in 1992.  Today, the Department of Health (DOH), the Department of Community Affairs (DCA), and the Florida Department of Agriculture & Consumer Services (DACS) also sit on the committee.  The committee meets regularly to coordinate reuse related activities and to promote communication between the member agencies.  In June, 2003, the Reuse Coordinating Committee issued its report entitled “Water Reuse for Florida: Strategies for Effective Use of Reclaimed Water.”  This report identifies strategies for increasing the efficiency and effectiveness of the use of reclaimed water in Florida, and details 16 major, interrelated strategies.  The report indicates that, “Metering of reclaimed water use and implementation of volume-based rates for reclaimed water service are critical to ensuring efficient use of reclaimed water.”  In fact, the first of the sixteen strategies is to, “Encourage metering and volume-based rate structures.”  Further, on August 27, 2001, the Chairman of the Commission signed a “Statement of Support for Water Reuse.”  This statement was further signed by the heads of the agencies participating in the Reuse Coordinating Committee.

 

Therefore, in order to correct the allocation inequities, staff recommends metering all existing and new reuse customers by December 31, 2007.  A metered rate will better allocate the reuse water supply.   The cost for metering the existing customers, approximately $180,000, should be funded by the utility and the amount should be capitalized.  New customers should be required to pay for meters for new reuse connections.

 

As mentioned earlier, the utility plans to install augmentation wells, and Alafaya may be able to purchase reuse water from the City beginning in May, 2007.  The City will receive 3.0 mgd of reuse, through Seminole County, which is a member of the Iron Bridge system.  Seminole County will also receive 3.0 mgd.  The cost of the reuse from Iron Bridge to Seminole County is $.44/1,000 gallons, and the cost the City must pay to Seminole County is still not determined.  When the City’s system is activated, 1,300 metered customers will begin requiring reuse service be provided to them.  During the dry season these customers are expected to use 1.4-1.8 mgd.  Initially, it appears that there would be reuse available; however, the City would serve its customers first, then Seminole County’s needs would be met, and Alafaya could have the remaining reuse, if there is any available.   The City has a 16-inch force main that is approximately 100 to 200 feet away from Alafaya’s Waverly Woods system.  Alafaya would have to pay for the extension to receive reuse service.  However, due to the limited capacity of Alafaya’s reuse main in that area, the City of Oviedo did not believe the City’s reuse would be that helpful.  The City is interested in working with Alafaya because the customers are all residents of the City.  Staff recommends that Alafaya provide quarterly updates beginning March 31, 2007 and ending December 31, 2007 on the progress of the augmentation wells and any discussion on obtaining additional reuse from the City.

The Live Oak subdivision’s distribution system consists of 2, 4 and 6-inch distribution lines and currently only has one 6-inch main supplying all the reuse.  As mentioned earlier, the utility has plans to extend the main on County Road 419 to loop the Live Oak distribution system, and the developer has increased the main in the last two phases from 6-inch to 8-inch mains.  According to the DEP, Alafaya analyzed its distribution system to evaluate deficiencies in the system.  Rule 62-610.469, F.A.C., requires that the distribution system be designed to supply 1.5 times the annual average daily capacity.  DEP believes the addition of the storage tank will be more effective, and the Alafaya system analysis indicated that it does not have any distribution problems at this time. 

There are no unresolved complaints which were made directly to the utility.  After reviewing the complaint files, it appears the utility is providing prompt responses to customers’ wastewater concerns.  However, based on the customers response, the reuse issue needs more attention by Alafaya.  Staff recommends that the quality of customers’ wastewater service is satisfactory, but the quality of customers’ reuse service is marginal.  The utility has cooperated with staff in providing information and has plans for improvements to the reuse system. 

Based on all of the above, staff recommends that the utility’s overall quality of wastewater service is satisfactory.  The reuse service is marginal; although, significant improvements are underway.  The utility should be required to meter all existing and new reuse customers by December 31, 2007.  The utility should be required to provide quarterly reports beginning March 31, 2007, and ending December 31, 2007, on the reuse improvements, including the progress on metering, the ground storage system, the augmentation wells, and any steps taken to obtain additional reuse from the City of Oviedo.

 

RATE BASE

Issue 2: 

 Should the audit rate base, net operating income and capital structure adjustments, to which the utility agrees, be made?

Recommendation: 

 Yes.  Based on audit adjustments agreed to by the utility and staff, plant should be decreased by $76,749; accumulated depreciation should be increased by $7,495; net depreciation expense should be decreased by $694; accumulated amortization of contributions in aid of construction (CIAC) should be increased by $29,621; working capital be increased by $85,228; operation and maintenance (O&M) expenses should be decreased by $49,104; taxes other than income taxes (TOTI) should be increased by $10,778; short-term debt should be decreased by $119,308; common equity should be increased by $3,093,004; long-term debt cost rate should be decreased by 0.07%; and short-term debt cost rate should be decreased by 1.48%.  (Fletcher)

Staff Analysis: 

 In its response to staff’s audit report, Alafaya agreed to the audit findings and audit adjustment amounts listed below.  Staff recommends the following adjustments to rate base, net operating income and capital structure.

 

Audit Adjustments to Which Alafaya Agrees
Audit Finding	Plant	Accumulated Depreciation	Depreciation Expense *	Accumulated Amortization CIAC	CIAC Amortization Expense *
Finding No. 1 Reflect Prior Order Balance	($6,909)		$6,909
Finding No. 2 Plant Retirements	($13,219)	$14,221	($683)
Finding No. 3 Transportation Equip. Allocation	($52,098)	$13,027	($8,695)
Finding No.4 Correct Depr. & Amort. Expense Per		($31,396)	$31,396	$29,621	($29,621)
Finding No. 5 Correct 13-Month Avg. Balances	($4,523)	($3,347)
Total Adjustments	($76,749)	($7,495)	$28,927	$29,621	($29,621)
*Net Depreciation Expense is the sum of Depreciation Expense and  CIAC Amortization Expense Adjustments:   $28,927 + ($29,621) = ($694)

 

 

 

 

 

Audit Adjustments to Which Alafaya Agrees
Audit Finding	Working Capital	O & M  Expense	Regulatory Assessment Fees	Capital Structure
Finding No. 6 Rate Case Expense Uncollectibles Accrued Taxes	$66,130 ($1,414) $75,165
Finding No. 9 Remove Litigation Costs		($27,252)
Finding No. 10 Attorney Fees:   Deferred Charges   Amortization   Adj. Misc. Exp.	($218,545) $163,892	($21,852)
Finding No. 12 Adj. Taxes Other Than Income			$10,778
Finding No. 15 Decrease ST Debt Increase Equity   LT Debt Rate Decr. ST Debt Rate  Decr.				($119,308) $3,093,004   (.07%) (1.48%)
Total Adjustments	$85,228	($49,104)	$10,778	As Noted Above

 

Based on the above audit adjustments, staff recommends that plant be decreased by $76,749; accumulated depreciation be increased by $7,495; net depreciation expense be decreased by $694; accumulated amortization of contributions in aid of construction (CIAC) be increased by $29,621; working capital be increased by $85,228; operation and maintenance (O&M) expenses be decreased by $49,104; taxes other than income taxes (TOTI) be increased by $10,778; short-term debt be decreased by $119,308; common equity be increased by $3,093,004; long-term debt cost rate be decreased by 0.07%; and short-term debt cost rate be decreased by 1.48%. 

Issue 3: 

 What are the appropriate Water Service Corporation (WSC) and Utilities, Inc. of Florida (UIF) rate base allocations for Alafaya?

Recommendation: 

 The appropriate WSC net rate base allocation for Alafaya is $56,853, which  represents an increase of $56,853.  WSC depreciation expense should also be increased by $9,213.  Further, the appropriate UIF rate base allocation for Alafaya is $70,910. This represents plant and accumulated depreciation increases of $81,966 and $25,629, respectively.  In addition, depreciation expense should be decreased by $5,430.  (Fletcher)

Staff Analysis: 

 Alafaya did not reflect a WSC rate base allocation in its MFRs but did reflect $19,602 of its UIF rate base allocation.  Staff performed an affiliate transactions (AT) audit of Utilities, Inc., the parent company of Alafaya and its sister companies.  WSC is a subsidiary service company of UI that supplies most of accounting, billing, and other services required by UI’s other subsidiaries.  UIF is a subsidiary of UI that provides administrative support to its sister companies in Florida.  As discussed below, staff believes several adjustments are necessary to the WSC and UIF rate bases before they are allocated to the utility.  These adjustments include recommended audit adjustments and the use of an ERC-only methodology for several WSC allocation codes.

 

Audit Adjustments

 

            In Audit Finding No. 1 of the AT audit, the staff auditor recommended adjustments to WSC’s rate base consistent with Order No. PSC-03-1440-FOF-WS.[4]  First, deferred income taxes were removed because it should be a component of the capital structure.  Second, the net computer balances were set to zero because WSC was unable to provide sufficient supporting evidence for inter-company transfers of computers and was unable to locate several missing invoices requested.  Third, the office structure and furniture balances were adjusted because WSC was unable to locate several missing invoices requested.  In its response to the AT audit, UI agreed with the above recommended audit adjustments.  Based on the above, staff recommends that the appropriate simple average WSC rate base before any allocation is $2,122,628.  Further, there was no audit finding in the AT audit regarding UIF’s rate base.  Thus, staff recommends that the appropriate simple average UIF rate base before any allocation is $1,113,433, as reflected in UIF’s general ledger.

 

ERC Methodology

 

            WSC utilizes 11 different allocation factors to allocate its rate base and expenses.  Prior to January 1, 2004, WSC’s allocation codes one, two, three, and five were based on customer equivalents (CEs).  By Order No. PSC-03-1440-FOF-WS, pp. 23-30, the Commission found that that WSC’s method of allocating its common costs based on CEs is unsupported and unreasonable.  Further, the Commission found that UI shall use ERCs, measured at the end of the applicable test year, as the primary factor in allocating affiliate costs in Florida as of January 1, 2004.

            In Audit Finding No. 4 of the AT Audit, staff auditors stated that WSC allocates its common plant and expenses quarterly as of June 30, 2005.  In addition, WSC utilizes the following: “(1) If the operating system has both water and wastewater, the wastewater customer is counted as one and one-half; (2) If the customer is an availability customer only, the customer is counted as one-half; (3) If the water company is a distribution company only, the customer is counted as one-half; and (4) If the wastewater company is a collection company only, the customer is counted as one-half.”  Staff believes that these additional four factors unnecessarily complicate the allocation process, versus the use of an ERC-only methodology.  With this additional methodology, staff notes that WSC’s ERC count will not conform to the ERC count in each Florida subsidiaries’ annual report filed with the Commission.  Further, the use of an ERC-only methodology is consistent with the methodology used by the Commission to set rates for water and wastewater utilities.  Accordingly, staff recommends that UI should use the ERC-only methodology for its allocation codes one, two, three, and five.

 

Conclusion

 

            Based on the above,  staff recommends that the appropriate WSC net rate base allocation for Alafaya is $56,853, which represents an increase of $56,853.   WSC depreciation expense should also be increased by $9,213.  Further, staff recommends that the appropriate UIF rate base allocation for Alafaya is $70,910. This represents plant and accumulated depreciation increases of $81,966 and $25,629, respectively.  In addition, depreciation expense should be decreased by $5,430.

 

 

Issue 4: 

 Should adjustments be made to the utility’s pro forma plant additions?

Recommendation: 

 Yes.  Plant should be decreased by $892,520, and accumulated depreciation should be increased by $355,866.  In addition, CIAC and accumulated amortization of CIAC should be increased by $128,582 and $2,990, respectively.  Further, net depreciation expense should be decreased by $43,466.  (Fletcher, Redemann)

 

Staff Analysis: 

 According to its MFRs, Alafaya reflected pro forma additions of $2,267,717.  The utility reflected two types of pro forma plant additions which are Work Orders and General Ledger Additions.  According to data request responses, the 1.5 MG Reuse Ground Storage Tank and the Digester for Wastewater Treatment Plant (WWTP) are scheduled to be completed on June 1, 2007, and December 31, 2006, respectively.  The utility now projects the digester will go on-line at the end of January 2007.  All the other pro forma plant additions have been completed and placed in service in 2006.  Staff has reviewed the supporting documentation and the prudence of these pro forma plant additions and believes several adjustments are necessary as discussed below.  Further, staff will address the inclusion of reuse meter installation costs in rate base.

 

Work Orders Additions

 

            The Work Orders plant additions include: (1) 1.5 MG Reuse Ground Storage Tank; (2) Force Main Improvements; (3) 20” Reuse Main from the WWTP to Lockwood; (4) Digester for the WWTP; and (5) Retirement of Digester for the WWTP.  In its response to Staff’s First Data Request, the utility asserted that the reuse storage tank would provide additional reuse supply to meet customer demand during peak flow periods and for customer growth.  Alafaya also stated that the Force Main Improvements addition was necessary to prevent pipe failures within the existing force main between the Pine Brook lift station and the connection point to a force main manifold at Lockwood Boulevard.  Further, the utility asserted that the 20” Reuse Main from the WWTP to the Lockwood addition would allow the transmission of reuse water to the residential and commercial customers to be received more efficiently.  Last, Alafaya stated that the Digester for the WWTP addition would replace the old digester constructed of steel with a new fiberglass coated steel which would be sized to treat residuals to class B standards and reduce residual hauling costs. 

 

            Section 367.081(2)(a)2., F.S., states that “ . . . 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 . . . .”  All of the Work Orders plant additions have been or will be completed within the 24-month timeframe mentioned above.  However, as discussed below, staff has several adjustments to the Work Orders Additions.

 

            First, the MFR amount for the 1.5 MG Reuse Ground Storage Tank relates to only the design, engineering, and permitting for the proposed reuse tank.  Initially, in support of this project, Alafaya provided an unsigned cost proposal dated August 1, 2005, in the amount of $65,750 for engineering and permitting, and in the amount of $1,250,000 for probable construction costs.  The utility later provided two invoices totaling $66,250 for the engineering and permitting costs.  Subsequently, staff requested an executed contract or other support documentation for the reuse storage tank construction costs, but the utility did not provide any such support documentation.

 

               Pursuant to Rule 25-30.115, F.A.C., water and wastewater utilities are required to follow the National Association of Regulatory Utility Commissioners’ (NARUC) Uniform System of Accounts (USOA).  The NARUC USOA requires that any expenditures which are identified exclusively with plant not yet in service shall be included in the Account No. 105, Construction Work in Progress (CWIP).  As such, the MFR amount for the 1.5 MG Reuse Ground Storage Tank represents CWIP and is accruing AFUDC.  By Order No. PSC-04-0262-PAA-WS[5], Alafaya was granted a 9.03% Allowance for Funds Used During Construction (AFUDC) rate.  It is the Commission practice to disallow the inclusion of CWIP in rate base if the plant project is accruing AFUDC.[6]  Staff believes that this project should be recorded as CWIP until the reuse ground storage tank is placed into service.  Thus, staff recommends that the 1.5 MG Reuse Ground Storage Tank addition be removed from rate base for this rate proceeding.  However, in determining the appropriate service availability charges for Alafaya as discussed in Issue 27, staff has utilized the $66,250 actual costs plus accrued AFUDC for engineering and permitting of the reuse tank, and the estimated $1,250,000 for the reuse tank construction costs.

 

            Second, based on support documentation provided by the utility, staff calculated a total cost of $85,760 for the Force Main Improvements addition.  As such, staff recommends that plant should be reduced by $71,260 ($157,020 MFR amount less $85,760).  Correspondingly, accumulated depreciation and depreciation expense both should be decreased by $2,370.

 

            Third, Section 367.0817(3), F.S., states: “All prudent costs of a reuse project shall be recovered in rates.”  Based on documentation by Alafaya, the utility has supported a total cost of $642,913 for the 20” Reuse Main from WWTP to the Lockwood addition.  Thus, staff recommends that plant should be reduced by $181,966 ($824,878 MFR amount less $642,913).  Correspondingly, accumulated depreciation and depreciation expense both should be decreased by $4,269.  Further, according to project notes on the utility’s approved “Capital Project Request” for the project, Alafaya stated the following: “4/20/06 – We are in receipt of an agreement from SJRWMD stating that the District will fund 20% of the overall project cost in 2006.  This equals $140,000.”  Based on the SJRWMD’s website and a discussion with the SJRWMD project manager for this 20” Reuse Main project, the utility will receive between $100,000 to $140,000.  Using Alafaya 20% match funding statement, SJRWMD should fund approximately $128,582 for this project.  The utility’s MFRs do not include any pro forma CIAC adjustment for this project.  Thus, staff recommends that CIAC should be increased by $128,582.  Correspondingly, accumulated amortization of CIAC and CIAC amortization expense both should be increased by $2,990.

 

            Fourth, in its MFRs, Alafaya reflected $1,827,123 for the Digester for the WWTP project and $663,243 for the Retirement of Digester for the WWTP.  Netting the retirement, the utility is requesting a pro forma plant increase of $1,163,880.  Based on support documentation provided by the utility, staff calculated a total direct construction cost of $662,737 for the Digester for the WWTP addition.  In its support documentation, staff also calculated AFUDC and capitalized time of $47,343 for the Digester for the WWTP addition.  The utility’s retirement policy is to utilize the Handy-Whitman Index Factor when only the original date in-service is known.  With a 1980 in-service date and a Handy-Whitman Index Factor of 36.75%, Alafaya estimated the retirement cost to be $663,243.  Staff notes that the Commission approved this retirement policy in the utility’s last rate case.  See Order No. 04-0363-PAA-SU, p. 11.  Using the 36.75% retirement factor and staff’s revised direct construction cost for the new digester, staff recommends that the appropriate retirement is $243,556.  Netting the retirement, staff has calculated a pro forma plant increase of $466,524 ($662,737 plus $47,343 less $243,556).  Therefore, staff recommends that plant should be decreased by $697,356 ($1,163,880 less $466,524).  Correspondingly, accumulated depreciation should be increased by $357,548 and  depreciation expense should be decreased by $38,794.

 

General Ledger Additions

 

            The General Ledger Additions totaled $56,939 and include the following accounts:

 

 

Based on the MFR dollar amounts and the documentation provided by the utility, staff believes these additions are normal recurring plant additions.  If normal recurring plant additions were allowed, a strong argument could be made that CIAC and accumulated amortization of CIAC should also be projected forward another year due to the expected growth, as well as billing determinants and expenses.  This would have the effect of changing the approved 2005 historical test year to projected test year.  Because of the utility’s assertion in its test year request letter that the 2005 historical test period is representative of a full year of operation and the expected growth for the utility, staff recommends that these normal recurring plant additions be removed from plant.

 

Reuse Meters

 

            As discussed in the quality of service and service availability charges issues (Issues 1 and 27, respectively), staff has recommended the metering of all existing and new reuse customers in order to correct usage inequities among the customers.  Based on information provided by the utility, there currently is approximately 1,200 customers that would need to be retrofitted with meters at a cost of $150 per meter installation.  Section 367.0817(3), F.S., states: “All prudent costs of a reuse project shall be recovered in rates.”  As discussed in Issue 27, staff is recommending that the Commission approve a meter installation charge of $150 for future reuse connections.  Thus, staff recommends that plant should be increased by $180,000 (1,200 meter installations multiplied by $150).  Corresponding adjustments should be made to increase both accumulated depreciation and depreciation expense by $9,000.

 

Summary of Pro Forma Additions

 

            The following tables illustrates staff pro forma adjustments.

 

 

            Based on the above, staff recommends that plant be decreased by $892,520, and accumulated depreciation be increased by $355,866.  In addition, CIAC and accumulated amortization of CIAC should be increased by $128,582 and $2,990, respectively.  Further, net depreciation expense should be decreased by $43,466 ($40,476 plus $2,990).

Issue 5: 

 What are the used and useful percentages of the utility's reuse and wastewater systems?

Recommendation: 

 Alafaya’s wastewater treatment plant should be considered to be 94% used and useful (U&U), the collection system to be 100% U&U, and the reuse system to be 100% U&U.  The appropriate non-U&U rate base component, depreciation expense, and property taxes should be $170,298, $7,702, and $4,407, respectively.  Accordingly, rate base and property taxes should be decreased by $94,730 and $4,407, respectively, and depreciation expense should be increased by $8,467.  (Redemann, Fletcher)

Staff Analysis: 

 In its MFRs, the utility reflected a non-used and useful rate base component of $75,568, non-U&U depreciation expense of $16,169, and no adjustments for property taxes.  Rule 25-30.432, F.A.C., provides the criteria to be used in calculating used and useful for a wastewater treatment plant.  In addition, Section 367.0817(3), F.S., provides that all prudent costs of a reuse project shall be recovered in rates. 

On September 19, 2005, Alafaya’s wastewater operating permit was revised by DEP to increase the capacity of the facility to 1.535 million gallons per day (mgd) average annual daily flow (AADF).  The permitted public access reclaimed water permit was increased to .75 mgd AADF.  The wastewater treatment plant consists of two 1.2 mgd AADF extended aeration treatment plants (total design capacity 2.4 mgd) operating in parallel with three common influent surge tanks with manual screening and grit removal, aeration, secondary clarification, chemical feed facilities, filtration and chlorination.  The effluent either goes to the 1.0 mgd cloth filter and chlorination system for public reuse or the effluent is chlorinated and sent to the percolation/evaporation ponds.  Facilities also include turbidity/chlorine residual sensors and electronic diversion valves, chemical feed facilities, a 1.5 million gallon ground storage tank with high service pumping, pump back capability to the head of the plant for retreatment, and aerobic digestion of residuals. 

In its application, the utility asserts the wastewater treatment plant (accounts 371.0 Pumping Equipment, 355.0 Power Generation Equipment, 380.4 Treatment and Disposal, and 382.4 Outfall Sewer Lines) is 94% used and useful.  The utility based its used and useful determination on its DEP permitted capacity of 1.535 mgd.  The utility asserts that the wastewater collection system in each development is constructed and contributed by the developer; therefore, a used and useful analysis is not necessary and the collection system should be considered 100% U&U.  All reuse, intangible, and general plant is considered 100% U&U. 

Rule 25-30.432, F.A.C., provides that the used and useful determination for a wastewater treatment plant should be based on, among other things, the DEP permitted capacity, the wastewater flows (using the same basis as the permitted capacity), an allowance for growth, infiltration and inflow, and whether the permitted capacity differs from the design capacity. 

Although the design capacity of the utility’s wastewater treatment plant is 2.4 mgd AADF, the DEP permitted capacity is 1.535 mgd AADF due to concerns of disposal, and as a result of DEP’s redundancy requirement, pursuant to DEP Rule 62-610, F.A.C., and the Environmental Protection Agency (EPA) Reliability Class I requirements for a utility that disposes of its effluent through public access irrigation.  In addition, there is limited space at the plant site and adding capacity in smaller steps would have required modifications to the existing system, such as modifying piping and relocating the surge tanks and digesters.  Therefore, because of the DEP redundancy requirement and the limited disposal capacity, the permitted capacity of 1.535 mgd should be the basis for determining the portion of the wastewater treatment plant that is used and useful, which is consistent with the utility’s last rate case.[7]

According to the utility, approximately 58% of the water sold to its residential and general service customers was returned to the wastewater system.  This information is based on the billing analysis and assumes 56% of the water purchased by the residential customers (406,111,700 gallons) was returned as wastewater and 96% of the water purchased by the commercial customers (31,680,000 gallons) was returned as wastewater.  The total estimated water returned as wastewater (437,791,700 gallons) was then compared to the treated wastewater (443,941,000 gallons).  Based on this analysis, infiltration/inflow does not appear to be a problem in the Alafaya wastewater collection system, and, therefore, an infiltration/inflow adjustment is not recommended.

Staff recommends that based on the AADF of 1,216,277 gpd, a growth allowance of 232,602 gpd, compared to the capacity of the system of 1,535,000 gpd, used and useful for the wastewater treatment plant should be 94%.  (See Attachment A)  Consistent with the utility’s last proceeding, the U&U adjustment should be made to Accounts Nos. 371.3 Pumping Equipment, 355.0 Power Generation Equipment, 380.4 Treatment and Disposal, and 382.4 Outfall Sewer Lines.  Further, as explained below, staff also believes that a U&U adjustment should be made to Account No. 354.7, Structures and Improvements under General Plant.

Pursuant to Order No. PSC-04-0363-PAA-SU, p. 51, the utility had $4,899,161 in Account No. 380, Treatment and Disposal Equipment, excluding any pro forma plant adjustments.  According to Order No. PSC-04-0363-PAA-SU, p. 24, Alafaya had $1,526,628 of reuse plant investment recorded in Account No. 380 which was considered 100% used and useful.  However, the remaining amount of $3,372,533 ($4,899,161 less $1,526,628) was considered 75.60% used & useful.  In Alafaya’s 2005 Annual Report, the utility made numerous plant reclassifications which included a $4,916,358 reduction to Account No. 380, which left a balance of $815,896.  According to the Annual Report Schedules S-4 (a) & (b), it appears most of the $4,916,358 amount was reclassified to Account No. 354.2, Structures and Improvements under Collection Plant.  However, on MFR Schedule A-6, it appears that all of the $4,916,358 amount was reclassified to Account No. 354.7, Structures and Improvements under General Plant. 

This transfer has the effect of decreasing the 13-month average balance in Account No. 380, while increasing the 13-month average balance in Account No. 354.7.  In some situations, a transfer of this type would have no effect on rate base.  However, because no U&U adjustment was made to Account No. 354.7, the transfer from Account 380 to Account 354 in December 2005 had the effect of increasing rate base and the revenue requirement.

In a data request, staff asked Alafaya to provide a breakdown, by primary account, of all plant reclassifications in 2005 that were associated with the $4,916,358 reduction to Account No. 380, and provide a detailed explanation for why each reclassification was needed.  In its response, the utility stated that the reclassification was made in December 2005, based on a good faith estimate of UI’s Regional Director of its Florida Operations interpretation of what these accounts should include.  Based on the information provided by the utility, staff does not believe Alafaya has justified this transfer.  Therefore, staff has applied the same 6% non-U&U percentage recommended by staff to Account No. 354.7, excluding all reuse plant and allocated UIF plant.  Moreover, because this entry was made in December 2005, staff believes there should be no material impacts on accumulated depreciation and depreciation expense.

The reuse system should be 100% U&U pursuant to Section 367.0817(3), F.S.  Because the collection system is virtually all donated property, a used and useful analysis is not necessary for the collection system.  Staff recommends that the wastewater collection system be considered 100% U&U. 

Based on the analysis above, Alafaya’s wastewater treatment plant is 94% U&U, the collection system is 100% U&U, and the reuse system is 100% U&U.  Accordingly, staff recommends that the appropriate non-U&U rate base component, depreciation expense, and property taxes should be $170,298, $7,702, and $4,407, respectively.  Accordingly, rate base and property taxes should be decreased by $94,730 and $4,407, respectively, and depreciation expense should be increased by $8,467.

 

Issue 6: 

 What is the appropriate working capital allowance?

Recommendation: 

 The appropriate working capital allowance is $517,906.  As such, working capital should be increased by $207,944.  (Fletcher)

Staff Analysis: 

 Rule 25-30.433(2), F.A.C., requires Class A utilities to use the balance sheet approach to calculate the working capital allowance.  According to its filing, Alafaya utilized the balance sheet approach and calculated a working capital allowance of $309,962.  However, as discussed below, staff believes that several adjustments to the utility’s working capital balance are necessary.

 

            As discussed in Issue 2, working capital was increased by $139,881 to reflect the correct 13-month average balances for the accumulated provision – uncollectible, deferred rate case expense, and accrued taxes and decreased by $54,653 to remove past costs for litigation with the City of Oviedo.

 

            As discussed in Issue 17, staff is recommending the appropriate annual amortization for tank and equipment painting is $5,500 ($27,500 divided by 5 years).  The 13-month average unamortized balance is $24,750.  The utility did not include any unamortized balance for this project.  As such, staff recommends that working capital should be increased by $24,750. 

 

            As addressed in Issue 18, staff is recommending total rate case expense of $111,961.  It is Commission practice to include the average unamortized balance of the total allowed rate case expense.[8]  In its MFRs, Alafaya did not reflect any unamortized rate case expense balance for this docket.  Thus, staff recommends that working capital be increased by $97,966.

 

            Based on the above, staff recommends the appropriate working capital allowance is $517,906 ($309,962 plus $139,881 less $54,653 plus $24,750 plus $97,966).  As such, working capital should be increased by $207,944 ($517,906 less $309,962).

 

Issue 7: 

 What is the appropriate rate base for the December 31, 2005, test year?

Recommendation: 

 Consistent with other previously recommended adjustments and the accumulated deferred income taxes adjustment to include $116,251 in rate base as discussed in Issue 9, the appropriate 13-month average rate base for the test year ending December 31, 2005, is $7,953,473.  Staff’s rate base recommended is shown on Schedules 1-A, with the adjustments shown on Schedule 1-B.   (Fletcher)

Staff Analysis:  Consistent with other previously recommended adjustments and the accumulated deferred income taxes adjustment to include $116,251 in rate base as discussed in Issue 9, the appropriate 13-month average rate base for the test year ending December 31, 2005, is $7,953,473.  Staff’s calculated rate base is shown on Schedules 1-A, with the adjustments shown on Schedule 1-B.

 

COST OF CAPITAL

Issue 8: 

 What is the appropriate return on common equity?

Recommendation: 

 The appropriate return on common equity is 11.46% 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.  (Springer)

Staff Analysis: 

 The return on equity (ROE) included in the utility’s filing is 11.78%.  This return is based on the application of the Commission’s leverage formula approved in Order No. PSC-05-0680-PAA-WS and an equity ratio of 39.95%.[9] 

 

            As noted in Audit Finding No. 15, Utilities, Inc.’s average common equity balance of $91,510,699 should be adjusted upward by $3,093,004 to $94,603,703.  Per its response to the Audit Report, the utility is in agreement with the audit finding.  This adjustment increased the equity ratio as a percentage of investor-supplied capital from 39.95% to 40.77%.

 

Based on the current leverage formula approved in Order No. PSC-06-0476-PAA-WS and an equity ratio of 40.77%, the appropriate ROE is 11.46%.[10]  Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.

Issue 9: 

 What is the appropriate treatment of deferred taxes for Alafaya?

Recommendation: 

 Deferred taxes should be adjusted by a debit of $137,084, and the resulting deferred tax asset of $116,251 should be removed from the capital structure and included as a line item in the calculation of rate base.  (Kyle)

Staff Analysis: 

 In Audit Finding No. 16, staff auditors noted that the utility did not record its deferred income taxes on a monthly basis, as required by Instruction No. 4, NARUC Uniform System of Accounts.  The auditors further noted that the average balance for deferred tax presented on Schedule D-1 of the MFRs was a credit of $20,833, while the year-end balance was a debit of $143,632.  Staff notes that the latter balance is reflected as a debit balance in MFR Schedule A-19, and in the utility’s 2005 Annual Report.  The auditors recalculated the utility’s average deferred tax balance before other adjustments as a debit of $77,016, requiring a debit adjustment of $97,949.  The auditors also believe that the utility overstated its calculation of deferred taxes for accelerated depreciation for state income tax purposes by $12,524.  Finally, the auditors believe that deferred taxes for intangible plant were overstated by $1,926 for state tax purposes and understated by $53,585 for federal tax purposes.  The net of these adjustments would result in a debit deferred tax balance of $116,251.

 

In its response to the audit report, Alafaya agrees with these findings with the exception of the recalculation of average deferred tax before other adjustments.  The utility states that it was not able to follow the calculations (debits and credits) performed by the auditors, and presented its own proposed adjustment, resulting in a credit balance of $116,251.  The utility did not provide any rationale for its proposed adjustment.  Staff believes that the auditors’ analysis, which is based on amounts that can be tied to Alafaya’s annual report and general ledger, is reasonable.  Accordingly, staff recommends that deferred taxes be adjusted by a debit of $137,084, the net of the auditors’ recommended adjustments.  If staff’s recommended adjustments to deferred taxes are approved, the resulting debit balance of $116,251 should be removed from the utility’s capital structure calculation and be included as a line item in the calculation of rate base, pursuant to Rule 25-30.433(3), F.A.C.

Issue 10: 

 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, 2005?

Recommendation: 

 The appropriate weighted average cost of capital for the test year ended December 31, 2005, is 8.50%.  (Springer, Kyle)

Staff Analysis: 

 Based upon the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2005, staff recommends a weighted average cost of capital of 8.50%.  The weighted average cost of capital included in the utility’s filing is 8.64%.  Schedule No. 2 details staff’s recommendation.

 

            The test year per book amounts were taken directly from Alafaya’s MFR filing Schedule D-2.  Staff made specific adjustments to three components in the utility’s proposed capital structure.  As noted in Audit Finding No. 15, Utilities, Inc.’s average common equity balance should be adjusted upward by $3,093,004.  In addition, staff auditors recommended an adjustment of $119,308 to decrease the balance of short-term debt.  Finally, staff made an adjustment of $20,833 to remove deferred taxes from the capital structure.  The appropriate treatment of deferred taxes for Alafaya is discussed in Issue 9. 

 

            Staff revised the respective cost rates proposed by the utility.  The appropriate cost rate for common equity of 11.46% is discussed in Issue 8.   In addition, the auditors in staff Audit Finding No. 15 recommended an adjustment to the cost rates for long-term debt and short-term debt.   The long-term debt cost rate was reduced from the utility proposed rate of 6.65% to 6.58%.   The short-term cost rate was reduced from the utility proposed rate of 6.62% to 5.14%.  Per its response to the Audit Report, the utility is in agreement with the audit opinion regarding these adjustments. 

 

            Based on the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2005, staff recommends a weighted average cost of capital of 8.50%.  Schedule No. 2 details staff’s recommendation.

 

NET OPERATING INCOME

Issue 11: 

 Should a pro forma miscellaneous service charge revenue adjustment be made to test year revenues?

Recommendation: 

 Yes. Using the incremental increase from the recommended charges and the historical connections, reconnections, and premise visits, miscellaneous service revenues of $2,118 should be imputed.  Accordingly, regulatory assessment fees (RAFs) should be increased by $95.  (Fletcher)

Staff Analysis: 

 In its filing, Alafaya reflected miscellaneous service revenue charges of $8,963.  As discussed in Issue 24, staff is recommending $21 for initial connections, normal reconnections, and premises visits during normal hours, which represents an increase of $6 for the initial connections and normal reconnections and an increase of $11 for the premises visits.  In its response to Staff’s Fourth Data Request, the utility stated that, during normal hours throughout the 2005 test year, it had 261 initial connections, 59 normal reconnections, and 18 premise visits.  Using the incremental increase from the recommended charges and the historical connections, reconnections, and premise visits, staff recommends that miscellaneous service revenues of $2,118 should be imputed.  Accordingly, RAFs should be increased by $95.

Issue 12: 

 Should a pro forma reuse revenue adjustment be made to test year revenues?

Recommendation: 

 Yes.  Consistent with staff’s recommended reuse charges, the test year reuse revenues should be increased by $22,638.  Accordingly, RAFs should be increased by $1,019.   (Fletcher)

Staff Analysis: 

 On MFR Schedule E-2, Alafaya reflected annualized revenues of $67,664 from its reuse flat fee, $52,812 from its reuse availability fee, and $7,766 from its general service reuse gallonage charge.  There were approximately 814 reuse customers in the 2005 historical test year.  As stated in Issue 1, there are currently 1,200 reuse customers that need to be retrofitted with meters.  As discussed in Issue 23, staff is recommending that the flat fee be replaced with a base facility charge (BFC) and gallonage charge rate structure and that the general service gallonage charge be increased from $0.29 to $0.60 per 1,000 gallons.  Using the historical annual usage of 210,904,000, the current 1,200 reuse customers, and the recommended BFC and gallonage charge, staff recommends that reuse revenues should be increased by $67,148.  Using the 26,782,000 historical general service reuse usage and the recommended $0.60 per 1,000 gallons, staff recommends that reuse revenues should be increased by $8,302.  Further, as discussed in Issue 23, staff is recommending the extinguishment of the utility’s current reuse availability fee.  As  such, staff recommends that the test year reuse availability fee revenues of $52,812 be removed.  Based on the above, staff recommends that the test year reuse revenues be increased by $22,638 ($67,148 plus $8,302 less $52,812).  Accordingly, RAFs should be increased by $1,019.

Issue 13: 

 What is the appropriate amount of allocated WSC and UIF expenses for Alafaya?

Recommendation: 

 Based on the audit adjustments and the ERC-only methodology, the appropriate WSC O&M expenses and taxes other than income for Alafaya are $153,841 and $7,297, respectively.  As such, O&M expenses and taxes other than income should be decreased by $37,053 and $2,461, respectively.  Further, the appropriate UIF O&M expenses for Alafaya is $12,885, which results in an O&M expense reduction of $3,950.  (Fletcher)

Staff Analysis: 

 In its MFRs, the utility reflected total WSC allocated O&M expenses of $190,894 and taxes other than income of $9,758.  Alafaya also recorded total UIF allocated O&M expenses of $16,835.  As discussed below, staff believes adjustments are necessary to the WSC and UIF expenses before they are allocated to the utility.  These adjustments include recommended audit adjustments and the use of an ERC-only methodology for several WSC allocation codes.

 

            In Audit Finding No. 2 of the AT audit, the staff auditor recommended adjustments to WSC’s expenses consistent with Order No. PSC-03-1440-FOF-WS.[11]  The auditor recommended removal of:  (1) insurance premiums for former employee directors’ life insurance policies; (2) fiduciary policies protecting directors, officers; and, (3) pension funds.  The auditor believes these items should be eliminated because they were for the benefit of UI’s shareholders.  Second, the auditor recommended the removal of interest expense and interest income because they are included as components of UI’s capital structure.  In its response to the AT audit, UI agreed with the above recommended audit adjustments.  Based on the above, staff recommends that the appropriate WSC expenses, before any allocation, are $7,458,207.  Further, there was no audit finding in the AT audit regarding UIF’s expenses.  Thus, staff recommends that the appropriate UIF O&M expenses before any allocation are $266,650.

 

            As recommended in Issue 3, UI should use the ERC-only methodology for its allocation codes one, two, three, and five.  Based on the above audit adjustments and the ERC-only methodology, staff recommends that the appropriate WSC O&M expenses and taxes other than income for Alafaya are $153,841 and $7,297, respectively.  As such, O&M expenses and taxes other than income should be decreased by $37,053 and $2,461, respectively.  Further, staff recommends the appropriate UIF O&M expenses for Alafaya is $12,885, which results in an O&M expense reduction of $3,950.

 

Issue 14: 

 Should an adjustment be made to the utility's pro forma salaries and wages, pensions and benefits, and payroll taxes?

Recommendation: 

 Yes.  Alafaya’s salaries and wages should be decreased by $12,344.  Accordingly, pensions and benefits should be reduced by $6,332, and payroll taxes should be reduced by $4,389.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-6, Alafaya reflected historical salaries and wages and pensions and benefits of $422,610 and $97,117, respectively.  On MFR Schedule B-15, Alafaya reflected historical payroll taxes of $35,657.  On MFR Schedule B-3, the utility requested pro forma increases in salaries and wages, pensions and benefits, and payroll taxes of $31,400, $10,711, and $5,997, respectively.  The pro forma salaries and wages represent an increase of 7.43%, and the pro forma pensions and benefits represent an increase of 11.03%.

            In Staff’s First Data Request in this docket, the utility was asked to explain why its pro forma salaries & wages increases were significantly greater than the Commission’s 2006 price index of 2.74%.  In its response, the utility explained that its increases include all new employees’ salaries, payroll taxes, and benefits for office employees and operators.  The utility also stated that the salaries were annualized to reflect a full year of costs and a cost of living increase was applied across the board to all Florida office employees and operators.

 

            In Staff’s Fifth Data Request in this docket, UI was asked to provide the total number of full-time and part-time employees for its Florida subsidiaries, their average salary, and average salary percentage increases for all Florida managerial and non-managerial employees.  According to the information provided, the historical average salary increases for all Florida Employees from 2001 to 2005 has been 4.51%.  UI realized a net reduction of eight total Florida employees from 2005 to 2006, while the total average salaries from 2005 to 2006 increased $74,616.  Staff notes, however, the total requested pro forma salary increases in UI’s current docketed rate cases in Florida is $332,883.  If the salary increases for all Florida employees were limited to an across the board increase of the 4.51% historical five-year average, the pro forma salary increases for all of UI’s current docketed cases would be $105,776.

 

            From the information provided by UI, staff is unable to attribute the respective pro forma salary increases in the UI docketed cases to the 2006 employee changes, since there was a net decrease.  The utility has the burden of proving that its costs are reasonable.  See Florida Power Corp. v. Cresse, 413 So. 2d 1187, 1191 (Fla. 1982).  Staff believes that UI has not met its burden of proof of showing how the employee changes from 2005 to 2006 affect the respective rate cases. 

 

            With the exception of Sandalhaven (a negative pro forma salary adjustment of $573)[12], staff believes the requested pro forma salary increases in UI’s other respective rate cases are excessive.  Staff notes the historical 5-year average salary increase of 4.51% is 177 basis points above the Commission's 2006 Price Index of 2.74%.  With the exception of Sandalhaven, staff recommends that pro forma salary increases in all of UI’s respective cases should be limited to the 4.51% above the 2005 historical salary amounts.  The Commission has previously limited pro forma salaries adjustments to a utility’s historical average salary increases.[13]  Thus, staff recommends that Alafaya’s salaries & wages should be decreased by $12,344.  Accordingly, pensions & benefits should be reduced by $6,332, and payroll taxes should be reduced by $4,389.

Issue 15: 

 Should an adjustment be made to the test year sludge removal expense?

Recommendation: 

 Yes.  Due to a unit disposal cost reduction and a reduction of the annual sludge hauling volume due to the installation of the new digester, sludge removal expense should be decreased by $300,000.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-6, Alafaya reflects an historical sludge removal expense amount of $535,834.  In response to Staff’s Fifth Data Request, the utility stated that the sludge removal expense should decrease by $300,000 because of the unit disposal cost decreasing from $0.12 to $0.065 and the installation of the new digester will result in a higher concentration sludge which in turn reduces the annual sludge hauling volume.  Based on the above, staff recommends that sludge removal expense be decreased by $300,000.

Issue 16: 

 Should any further adjustments be made to the test year O&M expenses?

Recommendation: 

 Yes.  O&M expenses should be decreased by $20,396 to reflect the appropriate Rental of Building/Real Property expense based on the lease escalation provisions and to remove settlement damage costs from Insurance – Other expense resulting from the utility’s failure to timely reopen an elder valve.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-6, Alafaya reflects $127,284 for Rental of Building/Real Property.  The utility also reflects $50,744 for Insurance – Other.  As discussed below, staff believes these expenses should be decreased.

 

            First, in the audit workpapers, the staff auditors provided a copy of the land lease related to the $127,284 amount for Rental of Building/Real Property.  The lease, dated May 1, 1985,  is for the rental of 65 acres.  Initially, the utility was required to pay $16,250 per quarter, which totaled $65,000 on an annual basis.  Beginning November 1, 1988 and for every successive five-year period, the lease called for an inflation adjustment to annual payment amount.  Specifically, the inflation provision calls for the utilization of the Consumer Price Index – All Urban Consumers for U.S. city average, all items, and the base period 1967 = 100.  The inflation factor equals the CPI in the month prior to the expiration of each five-year period divided by the CPI on the month of the lease’s commencement date.  The follow table illustrates staff’s calculation of the annual successive five-year period amounts since November 1, 1988.

 

 

            Since the annual lease payment will not be adjusted until November 1, 2008, staff believes the appropriate 2005 test year Rental of Building/Real Property expense should be $112,137, as calculated above.  Thus, based on the lease escalation provisions, staff recommends that Rental of Building/Real Property expense should be decreased by $15,147 ($127,284 less $112,137).

 

            Second, in Audit Finding No. 8, the staff auditors stated that the utility’s filing includes $5,249 in Account No. 759, Insurance – Other, which represents a settlement with a customer because raw sewage had backed up into the customer’s residence.  The utility had closed the elder valve at the residence because of non-payment by the prior resident.  When the current resident moved in, the water service was turned on by the City of Oviedo.  However, Alafaya failed to issue a customer service order to open the elder valve when the current customer requested service.  The staff auditors believe the settlement should be considered non-recurring and amortized over a five-year period pursuant to Rule 25-30.433(8), F.A.C.  In its response to the audit, the utility agreed with the auditors’ recommendation.  Staff believes that the ratepayers should not have to bear the cost of the utility’s failure to issue a customer service order to open the elder valve when the current customer requested service.  Therefore, staff recommends that Insurance – Other expense should be decreased by $5,249.

 

            Based on the above, staff recommends that O&M expenses be decreased by $20,396 ($15,147 plus $5,249) to reflect the appropriate Rental of Building/Real Property expense based on the lease escalation provisions and to remove settlement damage costs from Insurance – Other expense resulting from the utility’s failure to timely open an elder valve.

 

Issue 17: 

 Should an adjustment be made to the utility's pro forma expense adjustments?

Recommendation: 

  Yes.  O&M expenses should be decreased by $32,336 in order to reflect the removal of the utility’s CPI adjustments and to reflect the appropriate amortization amount for tank and equipment painting. (Fletcher)

Staff Analysis: 

 In its filing, Alafaya reflected several pro forma expense adjustments for inflation totaling $27,836, and included a $10,000 annual amortization for a deferred maintenance project relating to tank and equipment painting.  As discussed below, staff believes the inflation adjustments should be removed and the annual amortization for the tank and equipment painting should be reduced.

 

            First, in the utility’s test year approval letter dated March 20, 2006, Alafaya stated that its historic test year ending December 31, 2005, is representative of a normal full year operation.  However, on Schedule B-3, the utility made adjustments to increase its Purchased Sewage Treatment, Sludge Removal Expense, Chemicals, Materials & Supplies, Contractual Services – Engineering, Contractual Services – Accounting, Contractual Services – Legal, Contractual Services – Other, Transportation Expenses, Insurance – Other, and Miscellaneous Expense by applying the Commission’s current index of 2.74%.   In a data request, staff asked the utility to provide an explanation as to why it made a pro forma adjustment to the O&M expenses except for bad debt expense.  The utility responded that bad debt expense should have been included as well.  The utility failed to address why any of the O&M expenses should be increased by the index.  Staff does not believe the utility has adequately supported its CPI adjustments to the O&M expenses.  Staff notes that increases in purchase sewage treatment is a pass-through item pursuant to Section 367.081(4)(b), F.S., and is not subject to the Commission’s current index.  Thus, staff recommends that Alafaya’s O&M expenses should be decreased by $27,836 to reflect the removal of the utility’s CPI adjustments.

 

            Second, in its response to Staff’s Third Data Request, the utility stated that its tank and equipment surfaces exhibit signs of corrosion.  As such, Alafaya asserted there was a need to clean and paint the tank and equipment in order to prevent further deterioration and to protect the steel components of these facilities.  The utility also stated that the project was 55% complete and would be completed by early November 2006.  With a $10,000 annual amortization, the utility’s estimated total cost is $50,000.  However, in a data request response, Alafaya only provided one invoice totaling $27,500.  Pursuant to Rule 25-30.433(8), F.A.C., non-recurring expenses should be amortized over a 5-year period.  Thus, the invoice provided by Alafaya supports an annual amortization of $5,500 ($27,500 divided by five years).  Staff believes this project is reasonable and prudent, but the annual amortization should be decreased due to lack of support documentation.  Thus, staff recommends that O&M expenses be reduced by $4,500 ($10,000 less $5,500).

 

            In summary, staff recommends that O&M expenses be decreased by $32,336 ($27,836 plus $4,500) in order to reflect the removal of the utility’s CPI adjustments and the appropriate amortization amount for tank and equipment painting.

 

Issue 18: 

 What is the appropriate amount of rate case expense?

Recommendation: 

 Consistent with the Commission’s previous decision in the utility’s last rate proceeding, Regulatory Commission Expense – Rate Case Amortization should be decreased by $27,977.  The appropriate rate case expense for the current docket is $111,961.  This expense should be recovered over four years for an annual expense of $27,990.  Thus, rate case expense should be reduced by $18,254.  (Fletcher)

Staff Analysis: 

 As discussed in detail below, staff believes that adjustments are necessary to reflect the appropriate amount of test year amortization for the utility’s prior case and the appropriate amount of rate case expense for this current case.

 

Rate Case Expense for Prior Rate Proceeding

 

            On MFR Schedule B-6, the utility reflected $57,264 for Account No. 766 Regulatory Commission Expense – Rate Case Amortization.  According to Audit Finding No. 9, the staff auditors stated that the $57,264 amount includes $30,012 for Alafaya’s last rate proceeding.  By Order No. PSC-04-0363-PAA-SU, p. 35, the Commission approved total rate case expense of $93,360, which represents an annual amortization of $23,340 pursuant to Section 367.0816, F.S.  Consistent with the previously approved amount of $23,340, the staff auditors recommended that the test year Regulatory Commission Expense – Rate Case Amortization be decreased by $6,672 ($30,012 less $23,340). 

 

            In its response to the audit, Alafaya disagreed with the removal of $6,672 for the prior rate case.  The utility stated that, although the annual amount was only $23,340, Alafaya would incur costs shortly before hearing, during the hearing, and post hearing.  The utility asserted that, while these costs could not have been known and measurable at the time the rate case expense from the prior case was approved, those costs are known and measurable now and should remain in test year O&M expenses. 

 

            First, staff notes that the utility confused the Commission’s regular agenda with a formal hearing because the last rate case did not go to hearing.  Second, Alafaya did not protest Order No. PSC-04-0363-PAA-SU regarding the Commission’s decision of the prior rate case expense, and that order was consummated by Order No. PSC-04-0435-CO-SU, issued April 28, 2004.  Third, the approved $23,340 annual amortization included Alafaya’s estimated costs to complete the prior case.  Fourth, the incremental increase of $6,672 would translate into a total amount of $26,688 above the total $93,360 amount approved in the prior case.  Fifth, in response to the audit, the utility did not provide any invoices or other documentation in support of the additional $26,688.  Based on the above, staff recommends that the test year Regulatory Commission Expense – Rate Case Amortization should be decreased by $6,672, in order to reflect the previously approved amortization amount of $23,340 in test year O&M expenses.

 

            On MFR Schedule B-10, the utility combined $85,221 for prior unamortized rate case expense with its estimated rate case expense of $184,974 for this current docket.  This represents a total requested amount of $270,195 with a requested annual amortization amount of $67,549 ($270,195 divided by four).    Of the $67,549 proposed amortization expense, $21,305 relates to Alafaya’s prior rate case expense.   However, Alafaya’s reported O&M expense already contains $23,340 in amortization expense related to Alafaya’s prior rate case.  As Alafaya failed to remove $23,340 from its O&M expenses, the utility has actually requested a total amortization expense of $44,645 for its prior rate case.  Staff believes the appropriate amount to include for Alafaya’s prior rate case is $23,320 as reflected in Order No. PSC-04-0363-PAA-SU.  It is Commission practice to remove the unamortized balance of prior rate cases from the rate case expense for current cases.[14] As a result, staff recommends that O&M expense be reduced by $21,305 to remove duplicative prior rate case expense amortization.

 

Section 367.0816, F.S., required water and wastewater utilities to automatically reduce their rates when rate case expense has been fully amortized.  As such, Alafaya is required to reduce its rates by $23,320 effective April 4, 2008, which is the time when its prior rate case expense would be fully amortized.

 

Rate Case Expense for Current Case

 

            Alafaya included in its MFRs an estimate of $184,974 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.  On December 1, 2006,         the utility submitted a revised estimated rate case expense through completion of the PAA process of $236,776.  The components of the estimated rate case expense are as follows:

 

	MFR Estimated	Actual	Additional Estimated	Revised Total
Legal and Filing Fees	$54,500	$29,943	$47,250	$77,193
Accounting Consultant Fees	56,000	23,950	32,037	55,987
Engineering Consultant Fees	5,000	2,451	3,025	5,476
Fees for Service Area Maps	0	10,923	0	10,923
WSC In-house Fees	49,500	23,726	21,216	44,942
Office Temp Fees	0	2,215	17,785	20,000
Travel – WSC	3,200	0	3,200	3,200
Miscellaneous	12,000	1,213	10,787	12,000
Notices	4,774	2,848	4,207	7,055
Total Rate Case Expense	$184,974	$97,269	$139,507	$236,776

 

            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.    Also, it is the utility’s burden to justify its requested costs.  See Florida Power Corp. v. Cresse, 413 So. 2d 1187, 1191 (Fla. 1982).  Further, the Commission has broad discretion with respect to allowance of rate case expense; however, it would constitute an abuse of discretion to automatically award rate case expense without reference to the prudence of the costs incurred in the rate case proceedings.  See Meadowbrook Util. Sys., Inc. v. FPSC, 518 So. 2d 326, 327  (Fla. 1st DCA 1987), review denied 529 So. 2d 694 (Fla. 1988).  As such, staff has examined the requested actual expenses, supporting documentation, and estimated expenses as listed above for the current rate case.  Based on our review, staff believes several adjustments are necessary to the revised rate case expense estimate.

 

            The first adjustment relates to costs incurred to correct deficiencies in the MFR filing.  Rose, Sundstrom & Bentley, LLP (RS&B), the law firm representing Alafaya, reduced its invoice amounts by $1,678 which were attributable to MFR deficiencies.  However, based on staff’s review of invoices, RS&B’s actual costs related to MFR deficiencies were $2,378, which represents an additional $701.  Milian, Swain & Associates, Inc. (MSAI), the utility’s accounting consulting firm, and Management & Regulatory Consultants, Inc. (MRCI), Alafaya’s engineering consultant, had actual costs of $818 and $125, respectively, for MFR deficiencies.  Based on the descriptions for hours reflected on the timesheets provided by the utility, Ms. Weeks, a WSC employee spent 3 hours or $126 on MFR deficiencies.  The Commission has previously disallowed rate case expense associated with correcting MFR deficiencies because of duplicative filing costs.[15]  Accordingly, staff recommends that $1,770 ($701 + $818 + $125 + 126) should be removed as duplicative and unreasonable rate case expense.

 

            The second adjustment relates to the utility’s estimated legal fees and expenses to complete the rate case.  The utility’s counsel estimated 150 hours or $41,250 in fees plus $6,000 in expenses to complete the rate case.  A list of tasks to complete the case was provided by legal counsel, but no specific amount of time associated with each item.  It provided only a total number of hours and the total cost.  While the descriptions of the activities or tasks appeared reasonable, staff had no basis to determine whether the individual hours estimated were reasonable.  Staff reviewed these requested legal fees and expenses and believes these estimates reflect an overstatement.  As noted in the case background, UI currently has ten pending rate cases with the Commission.  In eight out of the ten rate cases, the same 150 hour amount of estimated legal hours to complete was submitted for the estimated processing of each of the cases.

 

            Although the estimate to complete did not indicate the period of time it included, staff made the assumption it included November, 2006 through February, 2007.  This would allow time for reviewing the recommendation, attending the agenda conference, reviewing the Commission’s PAA order, and submitting the appropriate customer notice and tariffs for approval.  Using an estimated amount of time to complete of four months for each of the eight rate cases, the legal office would have to work over 11 hours each day, including all holidays and all weekends.  This would be exclusive work on just these cases.  However, staff is aware of numerous other pending dockets, including the other two remaining UI rate cases, and undocketed projects also being worked on by this legal firm.  Further, when the recognized holidays and weekends are removed, this firm would require work of approximately 18 hours everyday exclusively for these eight rate cases.  Staff does not believe this is a reasonable assumption.

 

            As discussed above, it is the utility’s burden to justify its requested costs.  Staff believes that 40 hours is a reasonable amount of time to respond to data requests, conference with the client and consultants, review staff’s recommendation, travel to agenda and attend to miscellaneous post PAA matters.  This is consistent with hours allowed for completion by the Commission in the 2004 Labrador Utilities, Inc. (Labrador) rate case.[16]   This amounts to $11,000 of rate case expense, a reduction of $30,250. 

 

            Further, there was no breakdown provided for the $6,000 in disbursements required for legal counsel to complete the case.  Thus, this amount is unsupported.  However, staff calculated a travel allowance.  Staff believes that a reasonable cost for one person traveling from Orlando to Tallahassee, including meals, vehicle mileage and one day’s lodging is $414.  This was the amount of travel expense the Commission allowed for this law firm in the 2004 Labrador rate case supra.  Staff calculated travel expenses of $389, using the current state mileage rate (215 miles x 2 trips x $.455 = $215), hotel rates from a website ($109) and a meal allowance ($65), but recommends $414 consistent with the 2004 Labrador case.  Further, because legal counsel will also represent Mid-County Services, Inc. (Docket No. 060254-SU) and Labrador Utilities, Inc., (Docket No. 060262-WS) at this same agenda, staff believes that travel expenses should be allocated equally among these three cases.  Therefore, staff believes $138 is the appropriate travel expense.  In addition to travel expense, staff calculated an amount for miscellaneous disbursements.  Staff added the actual and unbilled legal disbursements less the filing fee, divided by eight, the number of months represented by the data, then multiplied by two, the time remaining until the agenda.  Thus, staff believes $1,494 is a reasonable amount for miscellaneous disbursements.  Therefore, staff believes disbursements should be decreased by $4,368 ($6,000 - $138 - $1,494).  Accordingly, staff recommends that rate case expense be decreased by $34,618 ($30,250 + $4,368).

 

            The third adjustment relates to the utility’s estimated consultant fees for Mr. Seidman to complete the rate case.  Mr. Seidman estimated 24 hours or $3,000 plus $25 in expenses to complete the rate case.  Specifically, Mr. Seidman estimated 20 hours to assist with and respond to data requests and four hours to prepare for and attend the agenda.  Staff believes that four hours is a reasonable amount of time to prepare for and attend the agenda in this docket.  This is consistent with the hours allowed for completion by the Commission in the Indiantown Company, Inc. and the Mid-County Services, Inc. rate cases.[17]   However, staff is only aware of one subsequent data request from OPC regarding used and useful percentage.  Staff believes that no more than two hours at $125 per hour is reasonable for this data request.  Therefore, staff recommends that rate case expense be decreased by $2,250 (18 hours x $125).

 

            The fourth adjustment addresses the utility’s estimated $32,037 of consultant fees for MSAI to complete the rate case.  MSAI estimated 17.50 hours or $2,800 for Ms. Swain, 29.70 hours or $3,861 for Ms. Yapp, and 195.20 hours or $25,376 for Ms. Bravo.  The utility asserted that these estimated hours were to assist with data requests and audit facilitation.  First, on December 1, 2006, Alafaya provided staff with an update on MSAI’s actual and estimated costs to complete this case.  Staff notes that MSAI had no actual costs from August 30, 2006 to December 1, 2006.  Based on the types of questions in staff’s data requests subsequent to December 1, 2006, staff believes the utility, with some assistance of its legal counsel, would be responsible for addressing them, not MSAI.  Second, the staff audit report was issued on October 1, 2006, and the utility’s response to this audit, in which most audit findings were agreed to, was filed with the Commission on October 30, 2006.  As such, there should be no estimated hours related to the audit in this case.  Third, according to MFR Schedule B-10, the type of services to be rendered by MSAI were only to assist with the MFRs, data requests and audit facilitation.  Based on the above, staff believes the utility has not met its burden to justify any of the $32,037 estimated fees for MSAI to complete the rate case.  Thus, staff recommends that rate case expense be decreased by $32,037. 

 

            The fifth adjustment relates to WSC In-house and Office Temps fees.  In its rate case expense update, the utility provided time sheets for WSC employees and invoices for the Office Temps who were assisting WSC.  WSC timesheet reflected 616.23 total actual hours for twelve employees, which totaled $23,726.  As stated earlier, staff has recommended disallowing 3 hours related to Ms. Weeks working on MFR deficiencies.  Further, in January 2005 which represents approximately 14 months prior to the utility’s test year request letter for this case, Ms. Weeks spent one hour or $42 related to "Alafaya Hurricane Expenses."  In addition, Mr. Thomas spent 23 hours or $897 for indexing training, and Mr. Dihel reflected 13 hours or $403 for Alafaya’s last index and pass-through application.  Staff believes that the utility's has not met its burden of proof that these hours relate to the utility's current rate case.  As such, staff recommends that the additional 37 hours or $1,342 ($42 + $897 + $403) should be disallowed. 

 

            In the utility’s last rate proceeding, the Commission approved 382 hours or $13,181 for WSC employees.  Based on staff’s analysis, the total adjusted actual hours for WSC employees should be 576.23.  According to staff’s review of invoices provided, the Office Temps have total actual hours of 91.91 hours, which equals actual costs of $2,215.  In its rate case expense update, Alafaya reflected estimated hours for WSC employees of 439.94 hours or $21,216 and an additional 1,046.18 hours or $17,785, for Office Temps.  Total requested actual plus estimated hours to complete are 2,154.25 hours.  This represents an increase of 1,772 hours or 563.94% above the 382 hours allowed in the last case.  Staff realized that UI has experienced employee turnover since the last case and currently has 10 active rate cases in Florida which are possible reasons for an increase in hours to process the current case.  However,  staff does not believe these possible reasons explain the significant increase in hours above the last rate case.

 

            Moreover, the utility’s last rate case involved an original cost study from the inception of the utility to 1994, and an audit of Alafaya’s books and records from 1995 to 2001 (six years).  The audit report for the last case contained twenty-eight (28) audit findings, and Alafaya disagreed to eight (8).  For this current case, an audit of the utility’s books and records from 2001 to 2005 (four years) was performed.  This audit report contained sixteen (16) audit findings for which the utility disagreed with only two (2).  In the last case, the Commission approved five pro forma projects totaling $2,86,414.  As discussed in an earlier issue, staff is recommending five pro forma projects totaling $1,355,733 which includes a pro forma plant retirement of $259,080.  Based on the above, staff does not believe there are any foreseeable reasons why the utility would require the total requested actual and estimated hours of 2,154.25 in order to complete the current case.

 

              Furthermore, in its rate case expense update, the utility simply stated that the estimated hours for WSC employees and the Office Temps related to assistance with data requests and audit facilitation.  Staff has several additional concerns regarding these estimated hours.  First, as stated earlier, there should be no estimated hours related to the audit in this case because the utility has already responded to the audit and those associated hours reflected in the actual hours.  Second, in those cases where rate case expense has not been supported by detailed documentation, the Commission’s practice has been to disallow some portion or remove all unsupported amounts.[18]  Third, based on the types of questions in staff’s data requests subsequent to December 1, 2006, staff believes that the utility, with some assistance of its legal counsel, would be responsible for addressing them, not the Office Temps.

 

            For all of the reasons discussed above, staff believes that a reasonable and conservative level of hours for WSC employees is a 20% increase above the 382 hours approved in the last case which equals 458.40 hours.  This represents a reduction of actual hours of 117.83 hours or $4,551 for WSC employees.  Staff also believes that the 91.91 actual hours for the Office Temps is reasonable.  This results in total staff recommended hours of 550.31 for WSC employees and the Office Temps, which represents an increase of 168.31 hours or 44.06% over the hours approved in the last case.  Accordingly, staff recommends that rate case expense should be reduced by $44,894 ($1,342 + $21,216 + $17,785 + $4,551).

 

            The sixth adjustment addresses WSC travel expenses.  In its MFRs, the utility estimated $3,200 for travel.  Staff believes that a reasonable cost for one person traveling round trip from Chicago to Tallahassee, airfare, car rental, parking and lodging is $750.  This was the amount of travel expense the Commission allowed for WSC in the 2004 Labrador rate case.   On December 20, 2006, staff calculated travel expenses of $606, using the airfare for January 22, 2007 ($333), current rental car rates ($107), hotel rate from a website ($86) and a meal allowance ($80).  Staff realizes its calculated travel expenses are subject to change.  Thus, consistent with the 2004 Labrador case, staff recommends total travel expenses of $750 for the January 23, 2007, Agenda Conference.  Further, because WSC is also present on behalf of Mid-County Services, Inc. and Labrador Utilities, Inc. at this same agenda, staff believes that travel expenses should be allocated equally among these three utilities.  Therefore, staff believes $250 is the appropriate travel expense.  Accordingly, staff recommends that rate case expense be decreased by $2,950.

 

            The seventh adjustment relates to WSC expenses for FedEx Corporation (FedEx), copies and other miscellaneous costs.  In its MFRs, the utility estimated $12,000 for these items.  In support of this expense, the utility provided only $1,118 in costs from FedEx invoices for services through October 20, 2006.  There was no breakdown or support for the remaining $10,882.  Staff is also concerned with the amount of requested costs for FedEx expense.  UI has requested, and received authorization from the Commission, to keep its records outside the state in Illinois.  This is pursuant to Rule 25-30.110(2)(b), F.A.C.  However, when a utility receives this authorization, it is required to reimburse the Commission for the reasonable travel expense incurred by each Commission representative during the review and audit of the books and records.  Further, these costs are not included rate case expense or recovered through rates.  By Order No. PSC-93-1713-FOF-SU, p. 19., issued November 30, 1993, in Docket No. 921293-SU, In Re: Application for a Rate Increase in Pinellas County by Mid-County Services, Inc., the Commission found the following: "The utility also requested recovery of the actual travel costs it paid for the Commission auditors. Because the utility's books are maintained out of state, the auditors had to travel out of state to perform the audit. We have consistently disallowed this cost in rate case expense. See Order No. 25821, issued February 27, 1991, and Order No. 20066, issued September 26, 1988.”  Staff believes that the requested amount of shipping costs in this rate case directly relates to the records being retained out of state.  The utility typically ships its MFRs, answers to data request, etc., to its law firm located in central Florida.  Then, these are submitted to the Commission.  Staff does not believe that the ratepayers should bear the related costs of having the records located out of state.  This is a decision of the shareholders of the utility, and, therefore, they should bear the related costs.  Therefore, staff recommends that rate case expense be decreased by $12,000.

 

            The eighth adjustment relates to customer notices and postage thereof.  The utility is requesting costs of $2,848 for notices and $4,207 for postage.  Alafaya provided invoices totaling $2,848 for copying costs of its initial, customer meeting, and interim notices  On one invoice, Alafaya spent $605 for copies of a two-page double-sided notice.  However, on another invoice, the utility spent $1,108 for 7,100 copies of a four-page single-sided notice.  Thus, since the utility chose to make single sided copies for $503 more than the cost of double sided copies, staff believes Alafaya should bear this additional cost for singled sided copies.  Further, as the utility must also notice its customers of the final rate increase, staff believes rate case expense should be increased by $605 for the final notice.  In its update of rate case expense, the utility did not provide any support for its postage.  However, Alafaya has already sent out an initial notice, customer meeting notice, and an interim notice.  Also, the utility will be sending a final notice.  Based on a discussion with the utility, WSC presort service postage rate is $0.341.  Using the utility’s approximate 7,100 total customers count and a unit cost of $0.341 for the above-mentioned notices, staff calculated the total postage for notices to be $9,684.  This represents an increase of $5,477.  Based on the above, staff recommends that rate case expense should increased by $5,579 ($605 less $503 plus $5,477).

 

            In summary, staff recommends that the utility’s revised rate case expense be decreased by $124,940 for MFR deficiencies, unsupported and unreasonable rate case expense.  The appropriate total rate case expense is $111,961.  A breakdown of rate case expense is as follows:

 

	MFR Estimated	Utility Revised Actual & Estimated	Staff Adjustments	Allowed Total
Legal and Filing Fees	$54,500	$77,193	($35,319)	$41,874
Accounting Consultant Fees	56,000	55,987	(32,855)	23,132
Engineering Consultant Fees	5,000	5,601	(2,375)	3,226
Fees for Service Area Maps	0	10,923	0	10,923
WSC In-house Fees	49,500	44,942	(27,235)	17,707
Office Temp Fees	0	20,000	(17,785)	2,215
Travel – WSC	3,200	3,200	(2,950)	250
Miscellaneous	12,000	12,000	(12,000)	0
Notices	4,774	7,055	5,579	12,634
Total Rate Case Expense	$184,974	$236,901	($124,940)	111,961

 

In its MFRs, the utility requested total rate case expense of $184,974 which amortized over four years would be $46,244.   The recommended total rate case expense should be amortized over four years, pursuant to Section 367.016, F.S.  This represents annual amortization of $27,990 ($111,961 divided by four).  Thus, rate case expense should be decreased by $18,254 ($46,244 less $27,990).

Issue 19: 

 Should any adjustments be made to property taxes?

Recommendation: 

 Yes.  In order reflect the recommended adjustments to pro forma plant, property taxes should be decreased by $18,120.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-15, the utility reflected per book property taxes of $287,293.  Alafaya adjusted its property taxes to include $34,341 for pro forma plant additions and to remove $3,722 related to its 2004 real estate taxes.  As discussed in Issue 4, staff is recommending pro forma plant reductions.  In order to reflect the recommended adjustments to pro forma plant, staff recommends that property taxes should be decreased by $18,120.

 

Issue 20: 

 What is the test year wastewater operating income or loss before any revenue increase?

Recommendation: 

 Based on adjustments discussed in previous issues, the test year operating income before any provision for increased revenues is $357,493.  (Fletcher)

Staff Analysis: 

 As shown on attached Schedule 3-A, after applying staff’s adjustments, the test year net operating income before any revenue increase is $357,493.  Staff’s adjustments to operating income and expenses are shown on Schedule 3-B.

REVENUE REQUIREMENT

Issue 21: 

 What is the appropriate wastewater revenue requirement for the December 31, 2005, test year?

Recommendation: 

 The following wastewater revenue requirement should be approved:  (Fletcher)

	Test Year Revenues	$ Increase	Revenue Requirement	% Increase
Wastewater	$2,882,842	$535,309	$3,418,151	18.57%

 

Staff Analysis: 

 Alafaya requested final rates designed to generate annual revenues of $4,142,462.  This revenue exceeds historical test year revenues by $1,284,377.  Consistent with staff’s recommendations concerning the underlying rate base, cost of capital, and operating income issues, staff recommends approval of rates that are designed to generate a pre-repression wastewater revenue requirement of $3,418,151. The recommended wastewater revenue requirement exceeds staff’s adjusted test year revenues by $535,309 or 18.57%.  The recommended pre-repression revenue requirement will allow the utility the opportunity to recover its expenses and earn a 8.50% return on its investment in wastewater rate base.

 

RATES AND CHARGES

Issue 22: 

 What are the appropriate monthly wastewater rates?

Recommendation: 

 The appropriate wastewater monthly rates are shown on Schedule No. 4.  Excluding miscellaneous service charge and reuse revenues, the recommended wastewater rates produce revenues of $3,251,036.  The utility should file revised wastewater tariff sheets and a proposed customer notice to reflect the Commission-approved rates for the wastewater system.  The approved rates should be effective for service rendered on or after the stamped approval date of the revised tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the approved rates should not be implemented until staff has approved the proposed customer notice.  The utility should provide proof of the date notice was given no less than 10 days after the date of the notice.  (Fletcher)

Staff Analysis: 

 The appropriate wastewater revenue requirement, excluding miscellaneous service charge and reuse revenues, is $3,251,036.  Staff believes that the appropriate rate structure for the residential class is a continuation of the utility’s base facility charge and gallonage charge rate structure with a 10,000 gallon cap.  Also, staff believes that the appropriate rate structure for the general service class is a continuation of Alafaya’s base facility charge and gallonage charge rate structure with a 20% differential above the residential gallonage charge.  The differential is designed to recognize that approximately 80% of the residential customer’s water usage will not return to the wastewater system.  This wastewater gallonage rate differential is employed by the Commission in wastewater rate settings and is widely recognized as an industry standard.

 

            The utility should file revised wastewater tariff sheets and a proposed customer notice to reflect the Commission-approved wastewater rates.  The approved rates should be effective for service rendered on or after the stamped approval date of the revised tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  The approved wastewater rates should not be implemented until staff has approved the proposed customer notice.  The utility should provide proof of the date notice was given no less than ten days after the date of the notice.

 

            A comparison of the utility’s rates prior to rates, its requested rates, and staff’s recommended rates are shown on Schedule No. 4.

 

Issue 23: 

 What are the appropriate reuse rates for this utility?

Recommendation: 

 The appropriate residential reuse rate structure is a BFC of $3.65 and gallonage charge of $0.39 per thousand gallons.  Alafaya’s current flat rate should be assessed to all unmetered reuse customers pending the completion of their meter installation.  Once the utility has completed all meter installations on or before December 31, 2007, the flat rate should be discontinued.  Further, the utility’s reuse availability fee should be eliminated and its general service reuse rate should be $0.60 per thousand gallons.  (Fletcher)

Staff Analysis: 

 Reuse rates for this utility were original approved by Order No. PSC-98-0391-FOF-SU, issued March 16, 1998, in Docket No. 960288-SU.  In that docket, the Commission approved a general service rate of $0.60 per thousand gallons, a $5.00 monthly reuse availability fee for residential customers for which reuse was available, and a $9.00 monthly flat rate for residential customers who connected to the reuse system.  The $5.00 monthly reuse availability fee is assessed on all residential customers that have access to reuse regardless of whether they actually use the service.

 

            In the utility’s last rate proceeding, the Commission approved a general service rate of $0.25 per thousand gallons, a $5.00 monthly reuse availability fee for residential customers for which reuse was available, and a $6.00 monthly flat rate for residential customers who connected to the reuse system.  These rates have increased nominally by index adjustments and the interim increase approved in this docket.

 

            Generally, reuse rates cannot be determined in the same fashion as other water and wastewater rates set by the Commission.  Reuse rates based on rate base and revenue requirement would typically be so high that it would be impractical to use reuse at all based on the revenue needed to supply the service.  When staff analyzes reuse rates, staff must consider the type of customer being served and balance the disposal needs of the utility with the consumption needs of the customer.

 

            In cases where a utility has excess reuse capacity, rates typically should be set lower to encourage customers to use reuse at a level sufficient to meet the utility’s disposal needs.  In cases where a utility’s reuse capacity is unable to meet demand, rates should be set higher or rate structure should be changed in order to promote conservation.  In this case, the utility is able to meet its disposal needs.  In fact, the utility’s reuse capacity is unable to meet demand.

 

            In Order No. PSC-98-0391-FOF-SU, the Commission contemplated eventually moving Alafaya’s reuse rate to a consumption-based rate for residential service.  It was anticipated that this would be the next step in a maturing reuse system to curb excessive use.  However, at the time of the utility’s last rate proceeding, excessive use was not a problem; in fact, the opposite was true.  As a result, the Commission kept a flat rate in order to encourage consumption.  However, as discussed earlier in the quality of service issue, excessive use is now a problem, and during the dry season, all the reuse quantity available is being utilized.  As discussed in the pro forma plant issue (Issue 4), staff is recommending the cost of metering existing reuse customers be considered as a utility investment and recovered through reuse and wastewater rates pursuant to Section 367,0817(3), F.S.  Based on the above, staff believes that a BFC and gallonage charge reuse rate structure is appropriate, Alafaya’s flat fee should be discontinued once the utility has completed the meter installations of all its 1,200 current reuse customers, and the utility’s reuse availability fee should be eliminated.

 

            The utility’s residential reuse rates prior to filing the instant case were a $6.93 monthly flat rate for reuse customers and a $5.78 monthly availability fee for residences where reuse was available.  For comparative purposes, the following table illustrates the City of Oviedo’s proposed residential reuse rates and its current irrigation rates.

 

 

Further, staff notes that the City charges Alafaya’s reuse customers for backflow preventor maintenance.  Specifically, the City collects a monthly charge of $5.00 for residents who have potable irrigation systems and $8.00 per month for those residents who have irrigation systems other than potable.  These charges imposed by the City are in addition to the monthly reuse charges paid to Alafaya.

 

            In determining the appropriate amount for the BFC and gallonage charges, staff also considered the average reuse charge of utilities in Seminole County with the same proposed residential reuse rate structure.  According to DEP’s 2005 Reuse Inventory report issued June 2006, the average BFC was $6.10 with a range from $3.65 to $8.55, and the average gallonage charge was $0.39 per thousand gallons with a range of $0.25 to $0.54.  Based on the above, staff believes a BFC of $3.65 and a gallonage charge of $0.39 per thousand gallons is reasonable.  Using the utility’s historical average monthly residential reuse usage and staff’s proposed charges, a reuse customer would pay $12.07 per month which represents a $5.14 increase above the $6.93 flat fee prior to filing.  If the monthly backflow preventor maintenance is added, the total monthly cost under staff’s proposed charges, the City’s proposed charges, and the City’s existing irrigation rates would be $20.07, $26.66, and $85.47, respectively.  Therefore, staff recommends that the appropriate residential reuse rate structure is a BFC of $3.65 and gallonage charge of $0.39 per thousand gallons.  Staff also recommends that Alafaya’s current flat rate should be assessed to all unmetered reuse customers pending the completion of their meter installation.  Once the utility has completed all meter installations on or before December 31, 2007, staff recommends that the flat rate be discontinued.  Further, staff recommends that Alafaya’s reuse availability fee should be eliminated.

 

            As stated above, Alafaya’s general service reuse rate was initially $0.60 per thousand gallons.  The major general service user of reuse was the golf course in the utility’s service area. However, from the point when the $0.60 per thousand gallon rate was initially set to the time of the utility’s last rate case, the consumption at the golf course had dropped to half of its prior use.  As a result, in the last rate proceeding, the Commission decreased the general service reuse rate to $0.25 per thousand gallons in order to double the golf course’s reuse consumption and help the utility meet its disposal needs.  Due to index adjustments, the general service reuse rate increased nominally to $0.29 per thousand gallons prior to filing the current case. 

 

            In the last rate case, the utility stated that the golf course normally utilized approximately 100,000 gallons on an average daily basis, which equated to 36 million  gallons on a yearly basis.  See Order No. PSC-04-0363-PAA-SU, p. 30.  According to its filing in this current case, the total general service reuse was 26,782,000 which represents a significant decrease in consumption by the golf course.  Because the utility’s reuse system has matured with 1,200 existing residential customers and due to the decrease in general service reuse consumption in spite of the rate reduction approved in the prior case, staff recommends that the utility’s general service reuse rate should be $0.60 per thousand gallons. 

 

Issue 24: 

 Should the utility be authorized to assess miscellaneous service charges, and, if so, what are the appropriate charges?

Recommendation: 

  Yes.  There should be no refund for the utility’s collection of miscellaneous service charges without a tariff.  Further, the utility should be authorized to collect miscellaneous service charges as reflected below.  The utility should file a proposed customer notice to reflect the Commission-approved charges.  The approved charges should be effective for service rendered on or after the stamped approval date of the tariff, pursuant to Rule 25-30.475(1), F.A.C., provided the notice has been approved by staff.  Within 10 days of the date the order is final, the utility should be required to provide notice of the tariff changes to all customers.  The utility should provide proof the customers have received notice within 10 days after the date that the notice was sent.  (Fletcher)

Staff Analysis: 

 The Commission granted the utility’s original certificate and set its rates and charges pursuant to the provisions of what was then Section 367.041, F.S.[19]  In 1986, Alafaya (formerly named Oviedo Utilities, Inc.) began serving customers.  In 1995, the Commission approved the transfer of majority organizational control from the utility’s previous parent corporation to Utilities, Inc.[20]

 

            On MFR Schedule E-4, Alafaya reflected the following as its present and proposed miscellaneous service revenue charges.

 

 

According to staff’s of review Alafaya’s current tariff and the canceled tariff of the utility’s previous owner, the Commission has not approved any miscellaneous service charges for Alafaya.  However, according to its past annual reports and MFR in its last rate case and this current case, the utility has utilized the standard charges that the Commission has allowed since at least 1990.  The charges assessed by the utility were not excessive.  The Commission routinely authorizes these charges in order to place the burden of payment on the person who causes the cost to be incurred, rather than on the entire ratepaying body as a whole.  Thus, staff recommends that there should be no refund for the utility’s collection of miscellaneous service charges without a tariff.  However, as discussed in Issue 29, staff is recommending that Alafaya be required to show cause why it should not be fined $1,200 for assessing miscellaneous service charges without an approved tariff.

 

The utility’s sister companies that are currently in for rate cases do have authorization to assess the standard miscellaneous service charges.  As discussed below, staff believes the Commission should authorize Alafaya to assess miscellaneous service charges.

 

            The four types of miscellaneous service charges are defined as follows:

 

1)         Initial Connection:  This charge is to be levied for service initiation at a             location where service did not exist previously.

 

2)         Normal Reconnection:  This charge is to be levied for transfer of service            to a new customer account at a previously served location, or reconnection    of service subsequent to a customer requested disconnection.           

 

3)         Violation Reconnection:  This charge is to be levied prior to reconnection    of an existing customer after disconnection of service for cause according        to Rule 25-30.320(2), F.A.C., including a delinquency in bill payment.

 

4)         Premises Visit (in lieu of disconnection):  This charge is to be levied when    a service representative visits a premises for the purpose of discontinuing   service for nonpayment of a due and collectible bill, but does not       discontinue service because the customer pays the service representative or otherwise makes satisfactory arrangements to pay the bill.

 

These charges are designed to more accurately reflect the costs associated with each service and to place the burden of payment on the person who causes the cost to be incurred (the "cost causer"), rather than on the entire ratepaying body as a whole. 

 

            The standard industry-wide miscellaneous service charges have not been updated in over 16 years and costs for fuel and labor have risen substantially since that time.  Further, the Commission’s price index has increased approximately 60% in that period of time.  The Commission has expressed concern with miscellaneous service charges that fail to compensate utilities for the cost incurred.  By Order No. PSC-96-1320-FOF-WS, issued October 30, 1996,[21] involving Southern States Utilities Inc., the Commission expressed “concern that the rates [miscellaneous service charges] are eight years old and cannot possibly cover current costs” and directed staff to “examine whether miscellaneous service charges should be indexed in the future and included in index applications.”  Currently, miscellaneous service charges may be indexed if requested in price index applications pursuant to Rule 25-30.420, F.A.C.  However, few utilities request their miscellaneous service charges be indexed. 

 

            Staff applied the approved price indices from 1990 through 2005 to the standard $15 for initial connections and normal reconnections,  and the result was a charge of $21.00.  By Order No. PSC-06-0684-PAA-WS, issued August 8, 2006,[22] and by Order No. PSC-05-0776-TRF-WS, issued July 26, 2005,[23]  the Commission approved a $20 charge for connection and reconnections during normal hours and a $40 after hours charge.  Therefore, staff recommends that the Commission approve a $21 charge for connection and reconnections during normal hours and a $42 after hours charge for Alafaya because the increased charges are cost-based, reasonable, and consistent with fees the Commission has approved for other utilities.

 

            Staff’s recommended charges are shown below.

 

 

            The utility should file a proposed customer notice to reflect the Commission-approved charges.  The approved charges should be effective for service rendered on or after the stamped approval date of the tariff, pursuant to Rule 25-30.475(1), F.A.C., provided the notice has been approved by staff.  Within ten days of the date the order is final, the utility should be required to provide notice of the tariff changes to all customers.  The utility should provide proof the customers have received notice within ten days after the date the notice was sent.

 

Issue 25: 

 In determining whether any portion for the interim increase granted should be refunded, how should the refund be calculated, and what is the amount of the refund, if any?

Recommendation: 

 The proper refund amount should be calculated by using the same data used to establish final rates, excluding rate case expense and other items not in effect during the interim period. This revised revenue requirement for the interim collection period should be compared to the amount of interim revenues granted. Based on this calculation, no refund is required.  Further, upon issuance of the Consummating Order in this docket, the corporate undertaking should be released.  (Fletcher)

Staff Analysis: 

 By Order No. PSC-06-0664-FOF-SU, issued August 7, 2006, the Commission authorized the collection of interim wastewater rates, subject to refund, pursuant to Section 367.082, F.S.  The approved interim revenue requirement was $3,397,156, which represents an increase of $539,070 or 18.86%.  The interim collection period is September 2006 through January 2007.

 

            According to Section 367.082, F.S., any refund should be calculated to reduce the rate of return of the utility during the pendency of the proceeding to the same level within the range of the newly authorized rate of return.  Adjustments made in the rate case test period that do not relate to the period interim rates are in effect should be removed.  Rate case expense is an example of an adjustment which is recovered only after final rates are established.

 

            In this proceeding, the test period for establishment of interim and final rates is the 12-month period ending December 31, 2005.  Alafaya’s approved interim rates did not include any provisions for pro forma or projected operating expenses or plant.  The interim increase was designed to allow recovery of actual interest costs, and the lower limit of the last authorized range for equity earnings. 

 

            To establish the proper refund amount, staff has calculated a revised interim revenue requirement utilizing the same data used to establish final rates.  Rate case expense was excluded because this item is prospective in nature and did not occur during the interim collection period.  Using the principles discussed above, because the $3,397,156 revenue requirement granted in Order No. PSC-06-0664-FOF-SU, for the interim test year is less than the revenue requirement for the interim collection period of $3,528,150, staff recommends that no refund is required.  Further, upon issuance of the Consummating Order in this docket, the corporate undertaking should be released.

 

Issue 26: 

 What is the appropriate amount by which rates should be reduced four years after the established effective date to reflect the removal of the amortized rate case expense as required by Section 367.0816, Florida Statutes?

Recommendation: 

 The wastewater rates should be reduced as shown on Schedule No. 4 to remove $29,309 of  rate case expense, grossed-up for regulatory assessment fees, which is being amortized over a four-year period.  The decrease in rates should become effective immediately following the expiration of the four-year rate case expense recovery period, pursuant to Section 367.0816, F.S.  The utility should be required to file revised tariffs and a proposed customer notice setting forth the lower rates and the reason for the reduction no later than 30 days prior to the actual date of the required rate reduction.  The approved rates should be effective for service rendered on or after the stamped approval date of the revised tariff sheets pursuant to Rule 25-30.475(1), F.A.C. The rates should not be implemented until staff has approved the proposed customer notice. The utility should provide proof of the date notice was given no less than ten days after the date of the notice.  (Fletcher)

Staff Analysis: 

 Section 367.0816, F.S., requires rates to be reduced immediately following the expiration of the four-year amortization period by the amount of the rate case expense previously included in the rates. The reduction will reflect the removal of revenues associated with the amortization of rate case expense and the gross-up for regulatory assessment fees which is $29,309. The decreased revenue will result in the rate reduction recommended by staff on Schedule No. 4.  

 

            The utility should be required to file revised tariff sheets and a proposed customer notice to reflect the Commission-approved rates. The approved rates should be effective for service rendered on or after the stamped approval date of the revised tariff sheets pursuant to Rule 25-30.475(1), F.A.C. The rates should not be implemented until staff has approved the proposed customer notice. The utility should provide proof of the date notice was given no less than ten days after the date of the notice.

 

            If the utility files this reduction in conjunction with a price index or pass-through rate adjustment, separate data should be filed for the price index and/or pass-through increase or decrease, and for the reduction in the rates due to the amortized rate case expense.

 

OTHER ISSUES

Issue 27: 

 What are the appropriate service availability charges and/or policy for the utility?

Recommendation: 

 Consistent with guidelines set forth in Rule 25-30.580, F.A.C., the appropriate plant capacity and meter installation charges are $1,762 and $150, respectively, for this utility.  If there is no timely protest to the Commission’s Proposed Agency Action by a substantially affected person, the utility should file the appropriate revised tariff sheets within 10 days of the issuance of the Consummating Order for the Commission-approved tariff changes.  Staff should be given administrative authority to approve the revised tariff sheets upon staff”s verification that the tariff is consistent with the Commission’s decision. If the revised tariff sheets are filed and approved, the tariff sheets should become effective on or after the stamped approval date. Within ten days of the issuance of the Consummating Order for the Commission approved tariff changes, the utility shall also provide notice of the Commission’s decision to all persons in the service area who are affected by the recommended plant capacity charges and the authorization to collect donated property. The notice should be approved by Commission staff prior to distribution. The utility should provide proof that the appropriate customers or developers have received noticed within ten days of the date of the notice.  (Fletcher)

Staff Analysis: 

 By Order No. PSC-98-0391-FOF-SU, p. 19, the Commission increased Alafaya’s plant capacity charge from $410 to $640.  According to Rule 25-30.580, F.A.C., the guidelines for designing a utility’s service availability policy are as follows:

 

(1) The maximum amount of contributions-in-aid-of-construction, net of amortization, should not exceed 75% of the total original cost, net of accumulated depreciation, of the utility’s facilities and plant when the facilities and plant are at their designed capacity; and

(2) The minimum amount of contributions-in-aid-of-construction should not be less than the percentage of such facilities and plant that is represented by the water transmission and distribution and sewage collection systems.

 

Based on staff’s adjusted rate base components, the utility’s test year CIAC ratio is 55.89%. 

 

            As mentioned in a previous issue, the utility’s pro forma investments total $1,355,733 which includes a pro forma plant retirement of $259,080 in this current case, and the Commission-approved pro forma investments totaling $2,865,414 in the utility’s last rate proceeding.  Further, in 2007, the utility has plans for three additional reuse pro forma projects which include the construction of a 1.5 million gallon ground storage tank, the looping of the reuse distribution system in the Live Oak subdivision, and the installation of four augmentation wells for the reuse system.  The total cost of these projects is approximately $2 million. 

 

            In determining where the utility’s plant capacity charge should be revised, staff took the total cost of the wastewater treatment plant, including pumping equipment, and Alafaya’s reuse investment and divided the sum by the estimated 8,816 equivalent residential connections at buildout.  Using this methodology, staff calculated a plant capacity charge of $1,762.  This represents an increase of $1,122 ($1,762 less $640).  Further, as discussed in Issue 4, staff is recommending the utility be allowed to recover the cost to install meters for its 1,200 existing reuse customers.  Thus, staff believes a meter installation charge of $150 is reasonable for future reuse connections.  Utilizing the above charges, the CIAC ratio at the buildout date of 2012 is 70.98%.  Therefore, consistent with the guidelines of the above-mentioned rule, staff recommends a plant capacity charge of $1,762 and a meter installation charge of $150 for this utility.

 

            If there is no timely protest to the Commission’s Proposed Agency Action by a substantially affected person, the utility should file the appropriate revised tariff sheets within ten days of the issuance of the Consummating Order for the Commission-approved tariff changes.  Staff should be given administrative authority to approve the revised tariff sheets upon staff”s verification that the tariff is consistent with the Commission’s decision. If the revised tariff sheets are filed and approved, the tariff sheets should become effective on or after the stamped approval date. Within ten days of the issuance of the Consummating Order for the Commission approved tariff changes, the utility shall also provide notice of the Commission’s decision to all persons in the service area who are affected by the recommended plant capacity charges and the authorization to collect donated property. The notice should be approved by Commission staff prior to distribution. The utility should provide proof that the appropriate customers or developers have received noticed within ten days of the date of the notice.

 

Issue 28: 

 Should the utility be required to show cause, in writing within 21 days, why it should not be fined for its apparent failure to: (1) comply with the requirements of Order No. PSC-04-0363-PAA-WS to adjust its books to reflect the adjustments to all the applicable primary accounts required by that Order, and to provide proof within 90 days that such adjustments were made; and, (2) comply with the requirements of Rule 25-30.110(2), F.A.C., in that it appears that schedules provided in the minimum filing requirements are not consistent with and reconcilable with the utility’s annual report to the Commission?

Recommendation: 

 Yes.  Alafaya Utilities, Inc. should be ordered to show cause in writing, within 21 days, why it should not be fined a total of $3,000 for its apparent failure to timely comply with the requirements of Order No. PSC-04-0363-PAA-SU, and for its apparent violation of Rule 25-30.110(2), F.A.C.  The order to show cause should incorporate the conditions stated below in the staff analysis.  (Jaeger, Fletcher)

Staff Analysis: 

 Pursuant to Order No. PSC-04-0363-PAA-SU (PAA Order),[24] the Commission required Alafaya to adjust its books to reflect the adjustments to all the applicable primary accounts required by that Order, and provide proof of such adjustments within 90 days of the issuance date of a final order.  That PAA Order was finalized by a Consummating Order, Order No. PSC-04-0435-CO-SU, issued April 28, 2004.  Therefore, the appropriate adjustments to all the applicable primary accounts should have been accomplished and proof of such adjustments should have been provided by no later than July 27, 2004. 

A review of Docket No. 020408-SU, the docket in which the PAA Order was issued, shows that the utility never provided any proof that such adjustments had been made.  Moreover, pursuant to Audit Finding No. 1, in the Audit Report filed in this docket, under the STATEMENT OF FACT section, the auditors stated: 

 

The utility adjusted its general ledger in December 2005 to record the utility plant in service adjustments required as of December 31, 2002, for its last rate case proceeding in Docket No. 020408-SU.

 

Staff believes that, because these adjustments were made at such a late date, this has led to problems with reconciling the minimum filing requirements to the adjustments which should have been made pursuant to the PAA Order in Docket No. 020408-SU.  Based on this audit finding, staff believes that the required adjustments to plant in service and accumulated depreciation were not made until December 2005.  Therefore, it appears that the appropriate adjustments were not made until almost 17 months after the due date of  July 27, 2004.  Also, it appears that several schedules filed in its minimum filing requirements (MFRs) were not “consistent with and reconcilable with the utility’s annual report to the Commission,” as required by Rule 25-30.110(2), F.A.C. 

 

Utilities are charged with the knowledge of the Commission's rules and statutes.  Additionally, "[i]t is a common maxim, familiar to all minds that ‘ignorance of the law’ will not excuse any person, either civilly or criminally."  Barlow v. United States, 32 U.S. 404, 411 (1833).  Section 367.161(1), F.S., authorizes the Commission to assess a penalty of not more than $5,000 for each offense if a utility is found to have knowingly refused to comply with, or to have willfully violated, any provision of Chapter 367, Florida Statutes, or any lawful order of the Commission.  By failing to comply with the above-noted requirements of the PAA Order in a timely manner and Rule 25-30.110(2), F.A.C., the utility’s acts were “willful” in the sense intended by Section 367.161, F.S.  In Commission Order No. 24306, issued April 1, 1991, in Docket No. 890216-TL titled In Re: Investigation Into The Proper Application of Rule 25-14.003, F.A.C., Relating To Tax Savings Refund for 1988 and 1989 For GTE Florida, Inc., the Commission, having found that the company had not intended to violate the rule, nevertheless found it appropriate to order it to show cause why it should not be fined, stating that “willful” implies an intent to do an act, and this is distinct from an intent to violate a statute or rule.  Id. at 6. 

 

Staff believes that the circumstances in this case are such that show cause proceedings should be initiated.  Staff is especially concerned with Alafaya’s apparent failure to adjust its books to reflect the adjustments to all the applicable primary accounts required by the PAA Order.  Staff notes that in the Order Approving Settlement Agreement Filed by Utilities, Inc. (Settlement Order),[25] issued December 23, 2004, in Docket No. 040316-WS, the utility specifically agreed that:  “Beginning with the year ended December 31, 2003, and continuing through December 31, 2004, UI shall review all Commission transfer and rate case orders to determine if proper adjustments have been made to correctly state rate base balances.”  Both the Settlement Order and the PAA Order, issued just eight months apart, should have made the utility acutely aware of the problems that it was having in maintaining its books and records.  Also, see Docket No. 060262-WS, In re:  Application for increase in water and wastewater rates in Pasco County by Labrador Utilities, Inc., where staff notes that another Utilities, Inc. utility has failed to adjust its books and records.  Staff believes that the continued pattern of disregard for the Commission’s rules, statutes, and orders warrants more than just a warning.  Accordingly, staff recommends that Alafaya be made to show cause in writing, within 21 days, why it should not be fined $2,500 for its apparent failure to adjust its books to reflect the adjustments to all the applicable primary accounts required by the PAA Order and provide proof of such adjustments within 90 days of the Consummating Order.

Also, staff notes that the MFR schedules filed with this rate case were not “consistent with and reconcilable with the utility’s annual report,” as required by Rule 25-30.110(2), F.A.C.  However, for this other apparent violation, staff believes that it may be attributable to the utility’s failure to timely adjust its books to reflect the adjustments reflected in the PAA Order.  Accordingly, staff recommends that Alafaya be made to show cause in writing, within 21 days, why it should not be fined $500 for its apparent failure to file MFR schedules consistent with its annual report.

Based on the above, staff recommends that Alafaya be made to show cause in writing, within 21 days, why it should not be fined a total of $3,000 for its two apparent violations noted above.  Staff recommends that the show cause order incorporate the following conditions:

1.                      The utility’s response to the show cause order should contain specific allegations of fact and law;

2.                      Should Alafaya file a timely written response that raises material questions of fact and makes a request for a hearing pursuant to Sections 120.569 and 120.57(1), F.S., a further proceeding will be scheduled before a final determination of this matter is made;

3.                      A failure to file a timely written response to the show cause order should constitute an admission of the facts herein alleged and a waiver of the right to a hearing on this issue;

4.                      In the event that Alafaya fails to file a timely response to the show cause order, the fine should be deemed assessed with no further action required by the Commission;

5.                      If the utility responds timely but does not request a hearing, a recommendation should be presented to the Commission regarding the disposition of the show cause order; and

6.                      If the utility responds to the show cause order by remitting the fine, this show cause matter should be considered resolved.

Further, the utility should be put on notice that failure to comply with Commission orders, rules, or statutes will again subject the utility to show cause proceedings and fines of up to $5,000 per day per violation for each day the violation continues as set forth in Section 367.161, F.S.

Issue 29: 

 Should the utility be required to show cause, in writing within 21 days, why it should not be fined $1,200 for assessing customers miscellaneous service charges without an authorized tariff?

Recommendation: 

 Yes.  Alafaya Utilities, Inc. should be ordered to show cause in writing, within 21 days, why it should not be fined a total of $1,200 for assessing miscellaneous service charges without an approved tariff.  The order to show cause should incorporate the conditions stated below in the staff analysis.  (Jaeger, Fletcher)

Staff Analysis: 

 Section 367.091(3), F.S., states that “[e]ach utility's rates, charges, and customer service policies must be contained in a tariff approved by and on file with the commission.”  As discussed in Issue 24, according to staff’s review Alafaya’s current tariff and the canceled tariff of the utility’s previous owner, the Commission has not approved any miscellaneous service charges for Alafaya.  However, according to its past annual reports and MFRs in its last rate case and this current case, the utility began in 1995 assessing the standard charges that the Commission has allowed since at least 1990.  The utility’s sister companies that are currently in for rate cases do have authorization to assess the standard miscellaneous service charges.  This appears to be an oversight on UI’s part in not obtaining the Commission’s approval to collect these charges when it acquired Alafaya in 1995.

 

            Utilities are charged with the knowledge of the Commission's rules and statutes.  Additionally, "[i]t is a common maxim, familiar to all minds that ‘ignorance of the law’ will not excuse any person, either civilly or criminally."  Barlow v. United States, 32 U.S. 404, 411 (1833).  Section 367.161(1), F.S., authorizes the Commission to assess a penalty of not more than $5,000 for each offense if a utility is found to have knowingly refused to comply with, or to have willfully violated, any provision of Chapter 367, F.S., or any lawful order of the Commission.  By failing to comply with Section 367.091(3), F.S., and charging miscellaneous service charges without an approved tariff, the utility’s acts were “willful” in the sense intended by Section 367.161, Florida Statutes.  In Commission Order No. 24306, issued April 1, 1991, in Docket No. 890216-TL titled In Re: Investigation Into The Proper Application of Rule 25-14.003, F.A.C., Relating To Tax Savings Refund for 1988 and 1989 For GTE Florida, Inc., the Commission, having found that the company had not intended to violate the rule, nevertheless found it appropriate to order it to show cause why it should not be fined, stating that “willful” implies an intent to do an act, and this is distinct from an intent to violate a statute or rule.  Id. at 6.

 

For the reason set forth in Issue 24, staff is recommending that Alafaya be allowed to collect miscellaneous service charges.  However, given the number of years the utility has assessed unauthorized charges, staff recommends that Alafaya be required to show cause why it should not be fined $1,200 for assessing miscellaneous service charges without an approved tariff.  This equates to approximately $100 per year.  Staff recommends that the show cause order incorporate the following conditions:

1.               The utility’s response to the show cause order should contain specific allegations      of fact and law;

2.               Should Alafaya file a timely written response that raises material questions of fact      and makes a request for a hearing pursuant to Sections 120.569 and 120.57(1),             F.S., a further proceeding will be scheduled before a final    determination of this      matter is made;

3.               A failure to file a timely written response to the show cause order should             constitute an admission of the facts herein alleged and a waiver of the right to a             hearing on this issue;

4.               In the event that Alafaya fails to file a timely response to the show cause order,             the fine should be deemed assessed with no further action required by the             Commission;

5.               If the utility responds timely but does not request a hearing, a recommendation             should be presented to the Commission regarding the disposition of the show             cause order; and

6.               If the utility responds to the show cause order by remitting the fine, this show             cause matter should be considered resolved.

Further, the utility should be put on notice that failure to comply with statutes will  subject the utility to additional show cause proceedings and fines of up to $5,000 per day per violation for each day the violation continues as set forth in Section 367.161, F.S.

 

 

Issue 30: 

 Should the utility be required to provide proof, within 90 days of an effective order finalizing this docket, that it has adjusted its books for all the applicable NARUC USOA primary accounts associated with the Commission approved adjustments?

Recommendation: 

 Yes.  To ensure that the utility adjusts is books in accordance with the Commission’s decision, Alafaya should provide proof, within 90 days of the final order issued in this docket, that the adjustments for all the applicable NARUC USOA primary accounts have been made.   (Fletcher)

Staff Analysis: 

 To ensure that the utility adjusts its books in accordance with the Commission’s decision, staff recommends that Alafaya provide proof within 90 days of the final order issued in this docket that the adjustments for all the applicable NARUC USOA primary accounts have been made.

 

Issue 31: 

 Should this docket be closed?

Recommendation: 

 Yes.  If no person whose substantial interests are affected by the proposed agency action issues files a protest within twenty-one days of the issuance of the order, a consummating order will be issued.  If Alafaya pays the $4,200 in fines, the docket should be closed administratively upon staff’s verification of the above items.  If the utility timely responds in writing to the Order to show cause, the docket should remain open to allow for the appropriate processing of the response, and this docket should be closed.  (Jaeger, Fletcher)

Staff Analysis: 

 If no person whose substantial interests are affected by the proposed agency action issues files a protest within twenty-one days of the issuance of the order, a consummating order will be issued.  If Alafaya pays the $4,200 in fines, the docket should be closed administratively.  If the utility timely responds in writing to the Order to show cause, the docket should remain open to allow for the appropriate processing of the response, and this docket should be closed.

 

		Attachment A

Wastewater Treatment System

Used and Useful Analysis

 

 

 

	Alafaya Utilities, Inc.				Schedule No. 1-A
	Schedule of Wastewater Rate Base				Docket No. 060256-SU
	Test Year Ended 12/31/05
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year
1	Plant in Service	$21,402,133	$2,267,717	$23,669,850	($830,449)	$22,839,401
2	Land and Land Rights	60,843	0	60,843	0	60,843
3	Non-used and Useful Components	0	(75,568)	(75,568)	94,730	19,162
4	Accumulated Depreciation	(6,497,520)	533,163	(5,964,357)	(388,990)	(6,353,347)
5	CIAC	(13,634,102)	0	(13,634,102)	(128,582)	(13,762,684)
6	Amortization of CIAC	4,483,331	0	4,483,331	32,611	4,515,942
7	CWIP	356,711	(356,711)	0	0	0
8	Deferred Tax Asset	0	0	0	116,251	116,251
9	Working Capital Allowance	0	309,962	309,962	207,944	517,906
10	Rate Base	$6,171,396	$2,678,563	$8,849,959	($896,486)	$7,953,473

 

 

	Alafaya Utilities, Inc.	Schedule No. 1-B
	Adjustments to Rate Base	Docket No. 060256-SU
	Test Year Ended 12/31/05
	Explanation	Wastewater
	Plant In Service
1	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	($76,749)
2	To included the appropriate net WSC rate base. (Issue 3)	56,853
3	To reflect the appropriate allocated plant from UIF. (Issue 3)	81,966
4	To reflect the appropriate amount of pro forma plant. (Issue 4)	(892,520)
	Total	($830,449)
	Non-used and Useful
	To reflect the appropriate net non-used and useful adjustment. (Issue 5)	$94,730
	Accumulated Depreciation
1	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	($7,495)
2	To reflect the appropriate allocated plant from UIF. (Issue 3)	(25,629)
3	To reflect the appropriate amount of pro forma plant. (Issue 4)	(355,866)
	Total	($388,990)
	CIAC
	To reflect the appropriate amount of pro forma plant. (Issue 4)	($128,582)
	Accumulated Amortization of CIAC
1	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	$29,621
2	To reflect the appropriate amount of pro forma plant. (Issue 4)	2,990
	Total	$32,611
	Deferred Tax Asset
	To reflect the utility's deferred tax asset in rate base. (Issue 9)	$116,251
	Working Capital
	To reflect the appropriate working capital allowance. (Issues 2 & 6)	$207,944

 

 

	Alafaya Utilities, Inc.						Schedule No. 2
	Capital Structure 13-Month Average						Docket No. 060256-SU
	Test Year Ended 12/31/05
			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	$133,025,102	$0	$133,025,102	($127,970,572)	$5,054,530	57.11%	6.65%	3.80%
2	Short-term Debt	4,522,923	0	4,522,923	(4,351,030)	171,893	1.94%	6.62%	0.13%
3	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
4	Common Equity	91,510,699	0	91,510,699	(88,033,669)	3,477,030	39.29%	11.79%	4.63%
5	Customer Deposits	125,672	0	125,672	0	125,672	1.42%	6.00%	0.09%
6	Deferred Income Taxes	20,833	0	20,833	0	20,833	0.24%	0.00%	0.00%
7	Total Capital	$229,205,229	$0	$229,205,229	($220,355,271)	$8,849,958	100.00%		8.65%
Per Staff
8	Long-term Debt	$133,025,102	$0	$133,025,102	($128,537,393)	$4,487,709	56.42%	6.58%	3.71%
9	Short-term Debt	4,522,923	(119,308)	4,403,615	(4,255,055)	148,560	1.87%	5.14%	0.10%
10	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
11	Common Equity	91,510,699	3,093,004	94,603,703	(91,412,171)	3,191,532	40.13%	11.46%	4.60%
12	Customer Deposits	125,672	0	125,672	0	125,672	1.58%	6.00%	0.09%
13	Deferred Income Taxes	20,833	(20,833)	0	0	0	0.00%	0.00%	0.00%
14	Total Capital	$229,205,229	$2,952,863	$232,158,092	($224,204,619)	$7,953,473	100.00%		8.50%
							LOW	HIGH
				RETURN ON EQUITY			10.46%	12.46%
				OVERALL RATE OF RETURN			8.10%	8.90%

 

 

	Alafaya Utilities, Inc.							Schedule No. 3-A
	Statement of Wastewater Operations							Docket No. 060256-SU
	Test Year Ended 12/31/05
			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:		$2,781,124	$1,361,339	$4,142,463	($1,259,621)	$2,882,842	$535,309	$3,418,151
								18.57%
	Operating Expenses
2	Operation & Maintenance		$2,013,286	$190,644	$2,203,930	($507,746)	$1,696,184		$1,696,184
3	Depreciation		295,596	77,035	372,631	(31,910)	340,721		340,721
4	Amortization		0	0	0	0	0		0
5	Taxes Other Than Income		437,478	108,654	546,132	(86,060)	460,072	24,089	484,161
6	Income Taxes		45,626	349,997	395,623	(367,251)	28,372	192,372	220,744
7	Total Operating Expense		$2,791,986	$726,330	$3,518,316	($992,967)	$2,525,349	$216,461	$2,741,810
8	Operating Income		($10,862)	$635,009	$624,147	($266,654)	$357,493	$318,848	$676,341
9	Rate Base		$6,171,396		$8,849,959		$7,953,473		$7,953,473
10	Rate of Return		-0.18%		7.05%		4.49%		8.50%

 

	Alafaya Utilities, Inc.	Schedule 3-B
	Adjustment to Operating Income	Docket No. 060256-SU
	Test Year Ended 12/31/05
	Explanation	Wastewater
	Operating Revenues
1	Remove requested final revenue increase	($1,284,377)
2	To impute pro forma miscellaneous service revenues. (Issue 11)	2,118
3	To impute pro forma reuse revenues. (Issue 12)	22,638
	Total	($1,259,621)
	Operation and Maintenance Expense
1	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	($49,104)
2	To reflect the appropriate WSC allocated expenses. (Issue 13)	(37,053)
3	To reflect the appropriate UIF allocated expenses. (Issue 13)	(3,950)
4	Reflect appropriate pro forma salaries and pension & benefits. (Issue 14)	(18,676)
5	To reflect the appropriate Sludge Removal Expense. (Issue 15)	(300,000)
6	Reflect appropriate Rental Real property and Insurance expense. (Issue 16)	(20,396)
7	To reflect the appropriate pro forma O&M expenses. (Issue 17)	(32,336)
8	To remove prior rate case expense. (Issue 18)	(27,977)
9	To reflect the appropriate amount of rate case expense. (Issue 18)	(18,254)
	Total	($507,746)
	Depreciation Expense - Net
1	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	($694)
2	To included the appropriate net WSC rate base. (Issue 3)	9,213
3	To reflect the appropriate allocated plant from UIF. (Issue 3)	(5,430)
4	To reflect the appropriate amount of pro forma plant. (Issue 4)	(43,466)
5	To remove net depreciation on non-U&U adjustment. (Issue 5)	8,467
	Total	($31,910)
	Taxes Other Than Income
1	RAFs on utility's revenue increase adjustment above	($68,575)
2	To reflect audit adjustments agreed to by the utility and staff. (Issue 2)	10,778
3	To remove property on Non-U&U plant. (Issue 5)	(4,407)
4	Adjust RAFs for pro forma misc. service charge revenue. (Issue 11)	95
5	Adjust RAFs for pro forma reuse revenue. (Issue 12)	1,019
6	To the appropriate WSC allocated property taxes. (Issue 13)	(2,461)
7	To reflect the appropriate pro forma payroll taxes. (Issue 14)	(4,389)
8	To reflect the appropriate property taxes. (Issue 19)	(18,120)
	Total	($86,060)
	Income Taxes
	To reflect the appropriate income taxes.	($367,251)

 

	Alafaya Utilities, Inc.							SCHEDULE NO. 4
	Wastewater Monthly Service Rates						Docket No. 060256-SU
	Test Year Ended 12/31/05
					Rates	Commission	Utility	Staff	Four-Year
					Prior to	Approved	Requested	Recomm.	Rate
					Filing	Interim	Final	Final	Reduction
	Residential
	Base Facility Charge All Meter Sizes:				$16.69	$19.85	$24.50	$19.98	$0.17
	Gallonage Charge - Per 1,000
	gallons (10,000 gallon cap)				$2.23	$2.65	$3.27	$2.66	$0.02
	General Service
	Base Facility Charge by Meter Size:
	5/8" x 3/4"				$16.69	$19.85	$24.50	$19.98	$0.17
	1"				$41.73	$49.63	$61.25	$49.95	$0.43
	1-1/2"				$83.48	$99.27	$122.54	$99.89	$0.86
	2"				$133.56	$158.83	$196.05	$159.82	$1.37
	3"				$267.13	$317.67	$392.11	$319.65	$2.74
	4"				$417.38	$496.35	$612.66	$499.45	$4.28
	Gallonage Charge, per 1,000 Gallons				$2.65	$3.09	$8.48	$3.19	$0.03
	Reuse Irrigation Service
	Residential Flat Rate (1)				$6.93	$8.24	$10.17	$8.24	N/A
	Residential Availability Fee				$5.78	$6.87	$8.48	$0.00	N/A
	Residential Base Charge				$0.00	$0.00	$0.00	$3.65	N/A
	Residential Gallonage Charge				$0.00	$0.00	$0.00	$0.39	N/A
	General Service Gallonage Charge				$0.29	$0.34	$0.43	$0.60	N/A
					Typical Residential Bills 5/8" x 3/4" Meter
	3,000 Gallons				$23.38	$27.80	$34.31	$27.96
	5,000 Gallons				$27.84	$33.11	$40.85	$33.28
	10,000 Gallons				$38.99	$46.37	$57.20	$46.58
	(Wastewater Gallonage Cap - 10,000 Gallons)
	Footnote:
	(1) Alafaya’s flat rate prior to filing should be assessed to all unmetered reuse customers pending
	the completion of their meter installation.  Once the utility has completed all meter installations on
	or before December 31, 2007, the flat rate should be discontinued.

 

 

UTILTIY CO.:	Alafaya Utilities, Inc.						SCHEDULE NO. 5
Docket No.:	060256-SU
Wastewater Operation
Staff Recommended:
Plant Capacity Charge:			$1,762
Meter Installation Charge:			$150
		2005	2006	2007	2008	2009	2010	2011	2012
Capacity		1,535,000	1,535,000	1,535,000	1,535,000	1,535,000	1,535,000	1,535,000	1,535,000
Demand		1,216,277	1,262,797	1,309,318	1,355,838	1,402,359	1,448,879	1,495,399	1,535,002
% Used		75.00%	75.00%	85.30%	88.33%	91.36%	94.39%	97.42%	100.00%
Growth (in ERCs)			269	269	269	269	269	269	229
Utility Plant			$21,784,192	$23,139,925	$25,157,770	$25,198,120	$25,238,470	$25,278,820	$25,319,170
Accumulated Depreciation			(6,817,282)	(7,298,212)	(8,078,092)	(8,886,434)	(9,696,794)	(10,509,171)	(11,323,565)
Net Plant			$14,966,910	$15,841,713	$17,079,678	$16,311,686	$15,541,676	$14,769,650	$13,995,605
CIAC			$14,058,897	$14,231,057	$14,873,974	$15,388,309	$15,902,644	$16,416,978	$16,931,313
Accumulated Amortization			(4,759,861)	(5,099,872)	(5,450,732)	(5,817,077)	(6,196,832)	(6,589,999)	(6,996,577)
Net CIAC			$9,299,036	$9,131,185	$9,423,242	$9,571,232	$9,705,811	$9,826,979	$9,934,736
Net Investment			$5,667,874	$6,710,528	$7,656,436	$6,740,454	$5,835,865	$4,942,670	$4,060,869
CIAC Ratio:			62.13%	57.64%	55.17%	58.68%	62.45%	66.53%	70.98%