DATE:	February 1, 2007
TO:	Director, Division of the Commission Clerk & Administrative Services (Bayó)
FROM:	Division of Economic Regulation (Joyce, Rieger, Lingo, Springer, Kyle, Rendell) Office of the General Counsel (Fleming)
RE:	Docket No. 060260-WS – Application for increase in water and wastewater rates in Highlands County by Lake Placid Utilities, Inc.
AGENDA:	02/13/07 – Regular Agenda – Proposed Agency Action Except Issues 19 and 21 - Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Pending
CRITICAL DATES:			02/13/07 (5-Month Effective Date (PAA Rate Case))
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ECR\WP\060260.RCM.DOC

 

Table of Contents

Issue       Description                                                                                                                     Page

               Case Background. 4

1             Quality of Service. 5

2             Audit Adjustments to Rate Base. 7

3             WSC and UIF Rate Base Allocations. 8

4             Other Rate Base Adjustments. 10

5             Used and Useful 11

6             Working Capital 14

7             Rate Base. 15

8             Return on Equity. 16

9             Cost of Capital 17

10           Adjustments to Test Year Revenues. 18

11           Audit Adjustments to NOI 19

12           WSC and UIF Allocated Expenses. 20

13           Adjustments to Pro Forma Salaries, Wages, Pensions & Benefits. 21

14           Additional adjustments to Taxes Other Than Income. 23

15           Rate Case Expense. 24

16           Test Year Operating Income. 30

17           Revenue Requirement 31

18           Rate Structure. 32

19           Water and Wastewater Rates. 35

20           Four Year Rate Reduction. 36

21           Miscellaneous Service Charges. 37

22           Books and Records. 39

23           Close the Docket 40

               Schedule No 1-A.. 43

               Schedule No 1-B.. 44

               Schedule No. 1-C.. 45

               Schedule No. 2. 46

               Schedule No. 3-A.. 47

               Schedule No. 3-B.. 48

               Schedule No. 3-C.. 49

               Schedule No. 4-A.. 50

               Schedule No. 4-B.. 51

 

 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 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 Pennbroke

060262-WS                                         Labrador Utilities, Inc.

060285-SU                                          Utilities Inc. of Sandalhaven

 

            This recommendation addresses Docket No. 060260-WS.

Lake Placid Utilities, Inc. (Lake Placid or utility) is a Class C utility providing water and wastewater service to approximately 125 water and 194 wastewater customers in Highlands County. According to its 2005 annual report, Lake Placid reported revenues of $45,173 and $70,362 for water and wastewater, respectively.  Lake Placid reported a net operating income of $29,387 for water and a net operating loss of $14,944 for wastewater.

 

On May 15, 2006, the utility filed its application for approval of a final and interim rate increase in this docket and requested that the Commission process the case under the Proposed Agency Aaction (PAA) procedure.  After review of the Minimum Filing Requirements (MFRs), staff determined that the MFRs contained a number of deficiencies that required revisions by the utility. Those revisions were filed, and the official filing date for the utility’s final rate increase was established as August 22, 2006.

The utility’s requested test year for interim and final purposes is the historical test year ended December 31, 2005.  Lake Placid requested an annual interim revenue increase of $49,376 or 70.12% for wastewater only.  However, on July 19, 2006, the wastewater revenue increase was denied and rates were unchanged.  The utility has requested final revenue increases of $30,017 or 66.12% for water and $41,902 or 102.12% for wastewater.  Water and wastewater rates were last established for this utility in its 1995 rate proceeding.[1]  In that case, Lake Placid was granted revenue increases of 69.41% and 118.43% for water and wastewater, respectively.

This recommendation addresses Lake Placid’s final rates.  The Commission has jurisdiction pursuant to Sections 367.081, Florida Statutes.

Discussion of Issues

Quality of Service

Issue 1: 

 Is the quality of service provided by Lake Placid Utilities, Inc. considered satisfactory?

Recommendation: 

 Yes.  The utility’s overall quality of service is satisfactory.   (Rieger)

Staff Analysis: 

 Pursuant to Rule 25-30.433(1), Florida Administrative Code (F.A.C.), in every water and/or wastewater rate case, the Commission shall determine the overall quality of service provided by the utility by evaluating three separate components of water and/or wastewater operations.  The components are: 1) quality of 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 also be considered, along with input from the DEP and health department officials and consideration of customer comments and complaints.

 

            Our analysis of the overall quality of service provided by the utility is derived from the quality of the utility’s water and wastewater product, operational condition of the utility’s plants or facilities, and customer satisfaction.  Comments or complaints received by the Commission from customers are reviewed.  Staff has also considered the utility’s current compliance with the DEP.                    

 

Quality of the product

 

            In Highlands County, the water and wastewater programs are regulated by the DEP South District Office located in Fort Myers.  The utility is current in all of the required chemical analyses and the utility has met all required standards for both water and wastewater.  The quality of drinking water delivered to the customers and the wastewater effluent quality are both considered to be satisfactory by the DEP.

 

Condition of Plants and Facilities

 

            A field investigation for Lake Placid was conducted on August 17-18, 2006.  The water and wastewater treatment facilities appeared to be operating adequately at the time of the field investigation.  However, due to continued safety and reliability concerns, the utility was beginning preparations at that time to replace a hydropneumatic tank, internal plant piping and defective check valves at the water treatment plant.  Replacements have been completed and the conditions of these facilities (water and wastewater) are currently in compliance with the DEP rules and regulations.  A review of the maintenance records and the general condition of the plants appear to be adequate.

 

            A review of flow data during the test year indicates there is excessive unaccounted for water.  Staff believes that for water, the utility has adequately addressed the excessive unaccounted for water situation with the recent replacement of leaking check valves at the water treatment plant.  Therefore, staff believes that the quality of service concerning the condition of the facilities is satisfactory.

 

Customer Satisfaction

 

Test Year Complaints.  The utility provided in its filing copies of customer complaints received during the test year.  Although there appeared to be no water quality complaints, there were a few complaints concerning customer billing and consumption and various water leaks.  For wastewater, there were several complaints concerning liftstation alarms and liftstation overflows.  A review of these complaints found that the utility satisfactorily addressed the above mentioned concerns in a proper fashion.

 

            Correspondence.  The Commission received no correspondence concerning quality of service from customers of the utility.

 

            Customer Meeting.  A customer meeting was held within the utility’s service area on November 8, 2006, in the DeeAnn Lakefront Estates Clubhouse near Lake Placid, Florida.  The 10 customers who attended the meeting had no specific comments about the quality of service provided by the utility. 

 

Complaints on file.  The PSC Complaint Tracking System (CATS) was reviewed.  There are currently no active or recently closed complaints on file.

 

Staff’s Conclusion

 

The overall quality of service provided by the utility should be considered satisfactory.  Staff believes the quality of product and the condition of the plants are adequate when it comes to regulatory compliance standards.  Also, after review of the complaint records, and the fact that no one brought up any quality of service concerns during the customer meeting, the utility appears to be adequately addressing customer concerns in an acceptable matter.

 

Rate Base

Issue 2: 

 Should the audit rate base adjustments to which the utility agrees be made?

Recommendation: 

 Yes.  Based on audit adjustments which the utility agrees with, plant should be reduced by $14,150 for water and $3,093 for wastewater.  In addition, accumulated depreciation should be increased by $ 4,555 for water and $4,424 for wastewater.  (Joyce)

Staff Analysis: 

 Staff auditors recommended the following adjustments to the utility’s average rate base:

	Plant		Accumulated Depreciation
Audit Adjustment	Water	Wastewater	Water	Wastewater
Audit Findings 1& 2	($14,150)	($3,093)	$4,555	$4,424

 

The utility agrees with all of the above audit adjustments.  Therefore, staff recommends that plant be reduced by $14,150 for water and $3,093 for wastewater; accumulated depreciation be increased by $4,555 for water and $4,424 for wastewater.

 

Issue 3: 

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

Recommendation: 

 The appropriate WSC net rate base allocation for Lake Placid is $824 for water and $1,591 for wastewater.  This represents an increase of $197 and $308 for water and wastewater, respectively.   WSC depreciation expense should also be increased by $12 and $16, for water and wastewater, respectively.  Further, the appropriate UIF rate base allocation for Lake Placid is $4,781 for water and $4,837 for wastewater. This represents water plant and accumulated depreciation decreases of $12,591 and $7,350, respectively, and wastewater plant and accumulated depreciation increases of $12,582 and $7,745, respectively.  In addition, depreciation expense should be decreased by $764 for water and increased by $1,656 for wastewater.  (Fletcher)

Staff Analysis: 

 On MFR Schedule A-3, the utility reflected a WSC rate base allocation of $845 for water and $1,065 for wastewater.  Lake Placid also recorded UIF rate base allocation of  $10,022 for water only.  Staff performed an affiliate transactions (AT) audit of Utilities, Inc., the parent company of Lake Placid and its sister companies.  WSC (a subsidiary service company of UI) supplies most of accounting, billing, and other services required by UI’s other subsidiaries.  UIF (a subsidiary of UI) 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[2].  First, deferred income taxes were removed because they should be a component of the capital structure.  Second, the net computer plant 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.  As there were no audit findings in the AT audit regarding UIF’s rate base, 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 Lake Placid is $824 for water and $1,591 for wastewater.  This represents an increase of $197 and $308 for water and wastewater, respectively.   WSC depreciation expense should also be increased by $12 and $16, for water and wastewater, respectively.  Further, the appropriate UIF rate base allocation for Lake Placid is $4,781 for water and $4,837 for wastewater. This represents water plant and accumulated depreciation decreases of $12,591 and $7,350, respectively, and wastewater plant and accumulated depreciation increases of $12,582 and $7,745, respectively.  In addition, depreciation expense should be decreased by $764 for water and increased by $1,656 for wastewater.

Issue 4: 

 Should other rate base adjustments be made?

Recommendation: 

 Yes.  Pro forma plant should be reduced by $22,424 for water and $1,343 for wastewater.  Corresponding adjustments should be made to increase accumulated depreciation by $17,036 for water, decrease accumulated depreciation by $30 for wastewater and  decrease depreciation expense by $1,083 and $30 for water and wastewater, respectively.  Accumulated  Amortization of Acquisition should be decreased by $9,204 for water.  Historical plant should be increased by $17,900 for wastewater. (Joyce)

Staff Analysis: 

 In Schedule A-3 of its MFRs, the utility requested the inclusion of $71,331 in pro forma plant additions. Also included was $1,914 of related accumulated amortization and depreciation expense.  In its first data request, staff asked the utility to provide invoices and signed contracts for the requested pro forma plant.  In its response, the utility provided three invoices related to the requested pro forma  projects.

 After an examination of the company-provided invoices, staff determined the invoices totaling $30,788 related to pro forma projects. Staff recommends disallowance of all requested costs that the utility did not provide sufficient documentation in response to data requests from staff. 

Overall, staff recommends that pro forma plant be reduced by $22,424 and $1,343 for water and wastewater, respectively.  Corresponding adjustments should be made to increase accumulated depreciation by $17,036 for water and reduce accumulated depreciation by $30 for wastewater.  Adjustments should also be made to reduce depreciation expense by $1,083 and $30 for water and wastewater, respectively.

In schedule A-1 of its MFRs, the utility included a $9,204 Accumulated Amortization of Acquisition Adjustment.  The utility has not booked an acquisition adjustment for the test year, nor has one been approved by this Commission.  Therefore, staff has remove this amount from its rate base calculation.

Staff believes the utility erred by reducing plant in service by $17,900. As such, staff has increased plant in service by this amount.

In conclusion, staff recommends that pro forma plant should be reduced by $22,424 for water and $1,343 for wastewater.  Corresponding adjustments should be made to increase accumulated depreciation by $17,036 for water, decrease accumulated depreciation by $30 for wastewater and  decrease depreciation expense by $1,083 and $30 for water and wastewater, respectively.  Accumulated  Amortization of Acquisition should be decreased by $9,204 for water.  Historical plant should be increased by $17,900 for wastewater.

Issue 5: 

 What is the used and useful percentage for the water treatment plant?

Recommendation: 

Lake Placid’s water treatment plant should be considered 100% used and useful.  The wastewater treatment plant should be considered 18.68% used and useful, and the water distribution system and wastewater collection system, with the exception of Account 354, should be considered 100% used and useful as reflected in Attachment A.  As a result of the above adjustments, net wastewater rate base should be reduced by $112,842.  Corresponding adjustments should also be made to reduce wastewater depreciation expense by $2,344 and property taxes by $689. An adjustment should be made to reduce O&M expense by $681 for excessive unaccounted for water. (Rieger, Joyce)

Staff Analysis: 

6.0               In its application, the utility asserts the water treatment plant is 100% used and useful, the wastewater treatment plant is 86% used and useful, and the water distribution and wastewater collection systems are 100% used and useful.  Attachment A contain a used and useful analysis for the water and wastewater plants.

 

Water Treatment Plant

 

      In its application, the utility calculated the water treatment plant to be 100% used and useful, the wastewater treatment plant to be 43% used and useful, and the water distribution and wastewater collection systems at 100% used and useful.  The Commission recognized in the prior rate case, Order No. PSC-96-0910-FOF-WS, that the used and useful was 40.36% for the water treatment plant, 30.46% for the wastewater treatment plant, 100% for water distribution, 100% for wastewater collection gravity lines, and 84% for force mains.

 

Because this is a system without storage, the used and useful calculation of the water treatment plant is determined by dividing the peak demand in gallons per minute by the firm reliable capacity of the water treatment system in gallons per minute.  Consideration is given to fireflow, unaccounted for water, and growth.   In accordance with the American Waterworks Association Manual of Water Supply Practices, the highest capacity well should be removed from the calculation to determine the plant’s reliability.  In this case, the firm reliable capacity is determined by assuming that one of the utility’s two wells, rated at 200 gpm each, is out of service.  As indicated in Attachment A, since it does not appears to be an anomaly, the peak usage day of 91 gpm (March 1, 2005) should be used.  The local fire flow requirement is 500 gpm for 2 hours.

 

Total unaccounted for water is 2.612 million gallons for the test year or 4.84 gpm (26.92%).  Therefore, excessive unaccounted for water (in excess of 10% of average daily flow) is 16.92% or 3.04 gpm.  As noted in the application, excessive unaccounted for water during the test year is attributed to two defective water valves located at the water treatment plant.  These valves, which were replaced in the fall of 2006, allowed pumped and metered water to seep back into the wells.  In the prior rate case, a 47% adjustment was made for excessive unaccounted for water.  In this case, in addition to the above plant gallonage adjustment, it is also appropriate to make a 16.92% operation and maintenance (O&M) adjustment for excessive unaccounted for water to Account Nos. 615 (purchased power) and 618 (chemicals). As a result, staff recommends an adjustment should be made to reduce O&M expense by $681 for excessive unaccounted for water.

 

In reference to growth, a 9.4 gpm allowance based on annual customer growth of 5 ERCs should be used.  As reflected in Attachment A, the water treatment plant is 100% used and useful based on a peaking factor of two times the peak day demand of 91 gpm minus 3.04 gpm excessive unaccounted for water and a growth allowance of 9.4 gpm, plus the required fireflow of 500 gpm, divided by the firm reliable plant capacity of 200 gpm.

 

It should be noted that the utility does not have sufficient total well capacity (400 gpm) to meet the fire flow requirement of 500 gpm.  Staff considered a used and useful analysis based on gallons per day instead of gallons per minute, even though the utility does not have storage capacity.  However, even using a gallons per day analysis, the utility’s water system does not have sufficient capacity (144,000 gallons) to meet the fire flow requirement for two hours (60,000 gallons) plus the peak day demand (131,000 gallons).

 

Wastewater Treatment Plant

 

The used and useful calculation of the wastewater treatment plant is determined by dividing the annual average daily flow (AADF) by the permitted plant capacity based on AADF.  Consideration is given for growth and infiltration and inflow (I&I).  The average annual daily flow for the test year as reported in the utility’s filing is 35,200 gpd.  However, due to recent data received from the utility, that number has since been determined erroneous because of an inaccurate plant flow meter.  That meter was recalibrated during the middle of the test year.  Staff recommends that twelve months of flows after recalibration should be used to reflect customer usage.  There appears to be little change in customer growth, therefore the average daily flows from July, 2005 through June, 2006 (15,597 gpd) are a reasonable basis for calculating used and useful.  For growth, 1,218 gpd should be allowed.  As determined in Attachment A, the wastewater treatment plant is recommended to be 18.68% used and useful.  

 

However, in a review of Schedule A-6 of the MFRs, staff discovered that the utility appears to have transferred a large portion of the balance in Account 380 to Account 354.  This transfer occurred during the test year.  This transfer has the effect of decreasing the average balance in Account 380, Treatment and Disposal, while increasing the average balance in Account 354, Structures and Improvements.  In some situations, a transfer of this type would have no effect on rate base, but it does here.  In this case, staff has applied an 18.68% non-U&U adjustment to Account 380.  No adjustment was approved in the last case for Account 354. Therefore, a transfer from Account 380 to Account 354 in December 2005, has the effect of increasing rate base and revenue requirement.

 

 Furthermore, Account 380 is the primary account used by the utility for its facilities used in its wastewater treatment operations, while Account 354 is normally used for such items as the utility offices, landscaping, or out-buildings.  Account 354 does not usually contain costs for treatment plant.  The utility has not justified this transfer.  Therefore, staff has applied the same 18.68% non-U&U percentage recommended by staff for Account 380 to the amount of plant staff calculated was transferred to Account 354.

 

Overall, the utility’s wastewater treatment plant should be considered 18.68% used and useful. As discussed below, the wastewater collection system, with the exception of Account 354, should be considered 100% used and useful.  A portion of plant in Account 354 should be considered 18.68% used and useful.  As a result of the above adjustments, net wastewater rate base should be reduced by $112,842.  Corresponding adjustments should also be made to reduce wastewater depreciation expense by $2,344 and property taxes by $689.

 

The utility has indicated that the used and useful for the wastewater treatment plant should be higher because Rule 25-30.432, F.A.C., permits the Commission to consider other factors such as the seasonality of customer occupancy causing swings in the flows.  Also, the utility believes that it should not be penalized for a plant that was originally designed to serve a development that has since been cancelled because of environmental concerns.  Staff believes that by using the DEP permitted plant capacity, the recommended 18.69% used and useful is consistent with Rule 25-30.432, F.A.C.  The customers should not be held responsible for a now oversized facility with available capacity that may never be fully utilized.  However, increased flows due to customer growth may eventually happen.  The utility did indicate in its application that growth is anticipated.  Although no commitments have been made, it was pointed out in its filing that there are ongoing discussions with developers for a 52 unit townhouse project presently being constructed and a 200 lot single family subdivision.

 

 It should be noted that the wastewater treatment plant was found to be 30.46% used and useful in the last rate case based on a maximum month demand.  However, that calculation was made prior to the current rule which requires that the basis for the demand be consistent with the basis for the permitted capacity which is annual AADF.

 

Water Distribution and Wastewater Collection Systems

 

            The used and useful calculations for the water distribution and wastewater collection systems are determined by the number of customers connected to the systems divided by the capacity of the systems.  Consideration is given for growth.  In this case, with only five vacant lots remaining that have mains available for service, the water distribution and wastewater collection systems are considered built out.  Therefore, the water distribution and wastewater collection systems are recommended to be 100% used and useful.

Issue 6: 

 What is the appropriate working capital allowance?

Recommendation: 

 The appropriate amount of working capital is $2,210 for water and $7,091 for wastewater based on the formula method.  (Joyce)

Staff Analysis: 

 Rule 25-30.433(2), F.A.C., requires that Class B utilities use the formula method , or one-eighth of operation and maintenance (O&M) expenses, to calculate the working capital allowance.  The utility has properly filed its allowance for working capital using the formula method. Staff has recommended several adjustments to the utility’s balance of O&M expenses.  Due to the adjustments recommended in other issues, staff recommends that working capital of $2,210 and $7,091 should be approved for water and wastewater, respectively.  This reflects a decrease of $1,963 to the utility’s requested working capital allowance of $4,173 for water and a decrease of $2,299 from the utility’s request of $9,390 for wastewater.

Issue 7: 

 What is the appropriate rate base?

Recommendation: 

 The appropriate water rate base for the test year ending December 31, 2005, is $159,685.  The appropriate wastewater rate base of the period ending December 31, 2005, is $85,569.  (Joyce)

Staff Analysis: 

 Staff has calculated Lake Placid’s water and wastewater rate base using the utility’s MFRs with adjustments as recommended in the proceeding issues, as $159,685 and $85,569, respectively.

Capital Structure

Issue 8: 

 What is the appropriate return on common equity?

 

RECOMMENDATION:  The appropriate return on common equity is 11.45% 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 11.77%.  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 40.14%.[3] 

 

As noted in Audit Finding No. 11, Utilities, Inc.’s average common equity balance of $90,787,422  should be adjusted upward by $3,093,004  to $93,880,426 .  Per its response to the Audit Report, the utility is in agreement with the audit opinion.  This adjustment increased the equity ratio as a percentage of investor-supplied capital from 40.14% to 40.95%.

 

            Based on the current leverage formula approved in Order No. PSC-06-0476-PAA-WS and an equity ratio of 40.95%, the appropriate ROE is 11.45%.[4]  Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.

Issue 9: 

  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 7.43%.  (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 7.43%.  The weighted average cost of capital included in the utility’s filing is 8.17%.  Schedule No. 2 details staff’s recommendation.

 

            The test year per book amounts were taken directly from Lake Placid Utility’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. 11, Utilities, Inc.’s average common equity balance should be adjusted upward by $3,093,004 .  Also in Audit Finding No. 11, the staff auditors noted that an average balance of $1,602 for customer deposits was reflected in the utility’s general ledger but was not included in its filing.  Staff made an adjustment of $1,602 to recognize the amount of customer deposits in the capital structure.  Finally, staff made an adjustment of $8,996 to increase the balance of deferred income taxes. 

 

            In Audit Finding No. 12, staff auditors noted that the utility understated its calculation of deferred taxes for accelerated depreciation for state income tax purposes by $3,564.  Further, the auditors discovered that deferred taxes for intangible plant were understated by $1,422 for state tax purposes and were understated by $4,010 for federal tax purposes.  Accordingly, staff recommends that the balance of deferred taxes be increased by $8,996, the total of these amounts.  Per its response to the Audit Report, the utility is in agreement with the audit opinion regarding these adjustments.

 

Staff revised the respective cost rates proposed by the utility.  The appropriate cost rate for common equity of 11.45% is discussed in Issue 8.   In addition, the auditors in staff Audit Finding No. 11 recommended an adjustment to the cost rate for long-term debt.  The long-term debt cost rate was reduced from the utility proposed rate of 6.81% to 6.73%.  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 7.43%.  Schedule No. 2 details staff’s recommendation.

Net Operating Income

Issue 10: 

 What adjustments, if any, should be made to the utility's test year revenue?

Recommendation: 

 Water revenues should be increased by $1,809 and wastewater revenues should be increased by $20,353.  (Joyce)

Staff Analysis: 

 A utility is required to annualize test year revenues to reflect the effect of any rate increase that accrued during the test year.  In its MFRs, the utility made  annualized revenue adjustments of $222 and $50 for water and wastewater, respectively.  However, staff determined  the  proper annualized adjustments for water and wastewater should be $2,031 and $20,403, respectively.

Therefore, staff recommends that annualized water test year revenues be increased by $1,809 ($2,031-$222), and annualized wastewater revenues should be increased by $20,353 ($20,403-$50).

 

Issue 11: 

 Should audit net operating income adjustments to which the utility agrees be made?

Recommendation: 

 Yes.  Water O&M expense should be reduced by $2,602.  Taxes Other Than Income should be increased by $468 and $2,064 for water and wastewater, respectively. Additionally water depreciation expense should be increased by $957, and wastewater depreciation expense should be increased by $762.  (Joyce)

Staff Analysis: 

 The audit findings and recommended adjustments are listed in the table below:

Audit Finding	O&M Expense		Taxes Other Than Income		Depreciation Expense
	Water	Wastewater	Water	Wastewater	Water	Wastewater
AF 1					($725)	($71)
AF 2					$371	$306
AF 6		($2,602)
AF 8					$1,311	$527
AF 9			$468	$2,064
Total		($2,602)	$468	$2,064	$957	$762

 

The utility agrees with all of the above audit adjustments.  Therefore, staff recommends  that water O&M expense be reduced by $2,602.  Taxes Other Than Income should be increased by $468 and $2,064 for water and wastewater, respectively.  Additionally water depreciation expense should be increased by $957, and wastewater depreciation expense should be increased by $762.

Issue 12: 

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

Recommendation: 

 The appropriate WSC O&M expenses and taxes other than income for Lake Placid are $2,825 and $3,724, respectively.  As such, water and wastewater O&M expenses should be increased by $62 and $81, respectively, and water and wastewater taxes other than income should be decreased by $4 and $6, respectively.  Further, the appropriate UIF O&M expenses for Lake Placid are $1,913 for water and $2,522 for wastewater.  As such, water and wastewater O&M expense should be increased by $178 and $235, respectively.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-12, the utility reflected total WSC allocated O&M expenses of $6,406 and taxes other than income of $338.  Lake Placid also recorded total UIF allocated O&M expenses of $4,021.  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, pp. 82-84.  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 Lake Placid are $2,825 and $3,724, respectively.  As such, water and wastewater O&M expenses should be increased by $62 and $81, respectively, and water and wastewater taxes other than income should be decreased by $4 and $6, respectively.  Further, the appropriate UIF O&M expenses for Lake Placid are $1,913 for water and $2,522 for wastewater.  As such, water and wastewater O&M expense should be increased by $178 and $235, respectively.

Issue 13: 

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

Recommendation: 

 Yes.  Lake Placid’s salaries and wages should be decreased by $705 for water and $749 for wastewater.  Accordingly, pensions and benefits should be reduced by $48 for water and $52 for wastewater, respectively, and payroll taxes should be reduced by $78 and $96 for water and wastewater, respectively.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-5, Lake Placid reflected historical water salaries and wages and pensions and benefits of $925 and $682, respectively.  On MFR Schedule B-6, the utility reflected historical wastewater salaries and wages and pensions and benefits of $4,266 and $1,063, respectively.  On MFR Schedule B-15, Lake Placid reflected historical payroll taxes of $243 for water and $378 for wastewater. 

On MFR Schedule B-3, the utility requested pro forma increases in water salaries and wages, pensions and benefits, and payroll taxes of $747, $79, and $89, respectively, and requested increases in wastewater salaries and wages, pensions and benefits, and payroll taxes of $941, $100, and $113, respectively.  The pro forma salaries and wages represents increases of 80.76% for water and 22.06% for wastewater.  The pro forma pensions and benefits represents increases of 11.58% for water and 9.41% for wastewater.

In Staff’s First Data Request in Docket No. 060261-WS, the utility was asked to explain why its pro forma salaries and 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 Docket No. 060256-SU, 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 through September 2006.  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 June 2006.  The total average salaries from 2005 to 2006 increased $74,616; however, staff notes 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 2006 employee changes to the respective pro forma salary increases in the UI docketed cases.  The utility has the burden of proving that its costs are reasonable.  See, Florida Power Corp. v. Cresse, 413 So. 2d 1187, 1191 (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.

On January 18, 2007, the utility hand delivered a two-page document reflecting the title and duties of two new employees.  However, this document did not contain the annual salary for these two employees nor did it show the utility’s calculation of how their respective salaries are allocated to the UI’s Florida subsidiaries.  Further, the utility has not provided any information regarding any other employee changes from July 1, 2006 to the present.

As such, with the exception of Sandalhaven[5]  (a negative pro forma salary adjustment of $573), 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 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.[6] Thus, staff recommends that Lake Placid’s salaries and wages should be decreased by $705 for water and $749 for wastewater.  Accordingly, pensions and benefits should be reduced by $48 for water and $52 for wastewater, respectively, and payroll taxes should be reduced by $78 and $96 for water and wastewater, respectively.

Issue 14: 

 Should additional adjustments be made to Taxes Other Than Income?

Recommendation: 

  Yes.  Taxes other than income (TOTI) should be increased by $931 and $1,451 for water and wastewater, respectively to reflect the appropriate amount of test year regulatory assessment fees (RAFs).  (Joyce)

Staff Analysis: 

 Staff has reviewed Lake Placid’s operating income and believes one adjustment is appropriate.  The utility reflected test year RAFs of $1,102 for water and $1,715 for wastewater.  Based on staff review, these amounts do not reflect 4.5% of test year revenues.  To correct this, staff believes that RAFs should be increased by $931 for water and $1,451 for wastewater.

 

Issue 15: 

 What is the appropriate amount of rate case expense?

Recommendation: 

 The appropriate rate case expense is zero for water and $12,000 for wastewater.  This expense should be recovered over four years for an annual expense of $3,000 for wastewater.  Thus rate case expense should be reduced by $57,755 for water and $61,506 for wastewater.  (Joyce)

Staff Analysis: 

 The utility included in its MFRs an estimate of $131,261 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 November 22, 2006,         the utility submitted a revised estimated rate case expense through completion of the PAA process of $171,859.  The components of the estimated rate case expense are as follows:

 

	MFR Estimated	Actual	Additional Estimated	Total
Legal and Filing Fees	51,000	16,421	48,500	66,921
Consultant Fees - VK	18,032	18,031	0	18,031
Consultant Fees - Seidman	5,000	2,794	3,025	5,819
WSC In-house Fees	41,600	15,919	28,242	44,161
Various Office Temp Fees	0	1,830	19,431	21,261
Travel – WSC	3,200	0	3,200	3,200
Miscellaneous	12,000	509	11,491	12,000
Notices	429	88   0	378	466
Total Rate Case Expense	$131,261	$55,592	$114,267	$171,859

 

Pursuant to Section 367.081(7), F.S., the Commission shall determine the reasonableness of rate case expenses and shall disallow all rate case expenses determined to be unreasonable.  Staff has examined the requested actual expenses, supporting documentation, and estimated expenses as listed above for the current rate case.  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.  Based on staff’s review of invoices, the utility’s consultants, and the WSC employees, a combined amount of $2,074 was billed for correcting the MFR deficiencies and revising the utility’s filing.  The amount associated with deficiency corrections ($571) was easily identified in the consultants invoices.  However, the invoices and the documentation provided for WSC employees did not provide sufficient detail to specifically identify work done on corrections.  Staff estimated the deficiency corrections by removing invoice amounts during the months of June through August when the corrections were in progress.  This amounted to $1,503 for WSC employees.  The Commission has previously disallowed rate case expense associated with correcting MFR deficiencies because of duplicate filing costs.[7]  Accordingly, staff recommends that $2,074 ($571 + $1,503) should be removed as duplicative and unreasonable rate case expense. 

            The second adjustment relates to the utility’s estimated legal fees 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.  Counsel 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 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.  The estimate for additional legal services for eight out of the ten rate cases was 150 hours for each rate case.  Staff analyzed the reasonableness of this estimated time to complete each of these cases.  Using the 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 below, 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.[8]  This amounts to $11,000 of rate case expense, a reduction of $30,250.

There was no breakdown provided of 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 Labrador case.  Further, because legal counsel will also represent Cypress Lakes Utilities, Inc., Docket No. 060257-SU and Sanlando Utilities, Inc., at this same agenda, staff believes that travel expenses should be allocated between the three rate 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 $947 is a reasonable amount for miscellaneous disbursements.  Therefore, staff believes disbursements should be decreased by $4,915 ($6,000 - $138 - $947).  Accordingly, staff recommends that rate case expense be decreased by $35,165 ($30,250 + $4,915).

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 for 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.[9]  However, staff is aware only of one subsequent data request from OPC regarding the 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 relates to the 491 hours and $26,267 of estimated costs to complete this case by WSC employees.  As of the November 22, 2006 date of the updated rate case expense, the audit was complete and there were no data requests outstanding.  The utility failed to provide any detailed documentation of what tasks were involved in its estimate to complete the case for each employee. The utility simply stated that the $26,267 was to assist with data requests and audit facilitation.  The hours needed to complete data requests and audit facilitation was not broken down to estimate the hours needed to complete each item.  In addition, there were no timesheets provided to show actual hours worked.  Therefore, staff had no basis to determine whether the individual hours estimated were reasonable.  As discussed below, it is the utility’s burden to justify its requested costs.  Thus, the utility’s requested expense of $26,267 should be removed in its entirety.  In those cases where rate case expense has not been supported by detailed documentation, Commission practice has been to disallow some portion or remove all unsupported amounts.[10]

            It is the utility’s burden to justify its requested costs.  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.  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.  Meadowbrook Util. Sys., Inc. v. FPSC, 518 So. 2d 326, 327  (Fla. 1^st DCA 1987), review denied by 529 So. 2d 694 (Fla. 1988).

 

The fifth adjustment relates to WSC expenses for the temporary office workers, Office Team.  The utility did not include this expense in its MFRs; however, in its update, $20,000 was estimated to assist with data and audit requests.  The hours needed to complete data and audit requests was not broken down to estimate the hours needed to complete each item.  Therefore, staff had no basis to determine whether the individual hours estimated were reasonable, although as mentioned above, the estimated hours appear to be excessive.  As discussed above, it is the utility’s burden to justify its requested costs.  The utility indicated that it had incurred $568 in expenses for Office Team, and provided invoices in support of this total.   Staff believes that the additional $19,432 estimated by Lake Placid is excessive, given the number of hours the utility estimated for the WSC employees, consultants and law firm to complete the case.  Therefore, staff recommends that rate case expense be decreased by $19,432.

 

            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 Labrador rate case.   Staff calculated travel expenses of $624, using the airfare for January 8, 2007 ($346), current rental car rates ($104), hotel rates from a website ($109), and  a meal allowance ($65), but recommends $750 consistent with the Labrador case.  Further, because WSC will also be present on behalf of Cypress Lakes Utilities, Inc. and Sanlando Utilities, Inc. at this same agenda, staff believes that travel expenses should be allocated between the 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 $577 in costs from FedEx invoices for services through October 16, 2006.  There was no breakdown or support for the remaining $11,423.  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 that 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 the documents 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.

 

            In summary, staff recommends that the utility’s revised rate case expense be decreased by $101,340 for MFR deficiencies, and for unsupported and unreasonable rate case expense.  The appropriate total rate case expense is $70,519.  A breakdown of rate case expense is as follows:

 

 

            In its MFRs, the utility requested total rate case expense of $131,261, which amortized over four years would be $32,815.  The utility actually included in its MFRs $14,513 and $18,302 for rate case expense in the test year for water and wastewater.  Thus rate case expense should be decreased by $6,756 and $8,429 for water and wastewater, respectively.

 

            Using staff’s recommended adjustments to the utility’s MFRs, including rate case expense, staff determined the revenue requirement to be $56,412, or a $9,208 increase for water and $94,656, or $3,892 increase for wastewater.  These amounts include an allowance for rate case expense.  Upon further examination, staff determined that in fact the wastewater system was actually overearning by $6,586 when rate case expense is removed.  Further, the water system would be entitled to an increase of $965 without rate case expense to bring them to the mid-point of its recommended allowed rate of return range.  Thus, for the water system, the utility’s earnings were within its allowed rate of return range.  Therefore, the utility should not have applied for a rate increase for its water system.

 

Staff is concerned the increase for water and wastewater was for the sole purpose of rate case expense recovery.  Staff does not believe it is appropriate to increase rates just to recover rate case expense, when an increase was actually not needed.  The Commission has previously disallowed rate case expense in a limited proceeding where the rate increase was denied.[11]  However, staff realizes that if an overearnings investigation was opened on the wastewater system, there would be some expenses related to the processing of such a case.  Further, as addressed in Issues 18 and 19, staff is recommending a revenue neutral wastewater rate restructuring.  For those reasons, staff believes a minimal amount of rate case expense should be allowed for the wastewater system.

 

 Although the utility is overearning in wastewater, staff has allowed an annual amortization amount of $3,000, or $12,000 total for rate case expense for the wastewater system.  For the wastewater rate restructuring, there would be minimal rate case expense.  The utility would have to file its wastewater billing determinants.  Further, a customer meeting would be held.  Staff believes that $12,000 is a reasonable amount for a wastewater only rate restructuring docket.  Thus rate case expense should be reduced by $57,755 for water and $61,506 for wastewater.

Issue 16: 

 What is the test year operating income?

Recommendation: 

 Based on the adjustments discussed in previous issues, the test year operating income before any provision for increased revenues is $11,282 and $8,382 for water and wastewater, respectively.  (Joyce)

Staff Analysis: 

 As shown on Schedules 3-A and 3-B, after applying staff’s adjustments, the test year net operating income before any revenue increase is $11,282 and $8,382 for water and wastewater, respectively.  Staff’s adjustments to operating income and expenses are shown on Schedule 3-C.

 

Issue 17: 

 What are the appropriate revenue requirements for water and wastewater?

Recommendation: 

 The following revenue requirement should be approved.  (Joyce)

	Test Year Revenues	$ Increase	Revenue Requirement	% Increase
Water	$47,204	$969	$48,172	2.05%
Wastewater	$90,765	($3,403)	$87,361	(3.75%)

 

Staff Analysis: 

 Lake Placid’s requested final rates are designed to generate annual revenues of $75,413 and $142,314 for water and wastewater, respectively.  These revenues exceed test year revenues by $30,017  (66.12%), and $71,902 (102.12%) for water and wastewater, respectively.

Based on 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 wastewater revenue requirement of $84,182.  These revenues are a reduction to staff’s adjusted test year revenues by ($3,403), or (3.75%),  for wastewater.  These revenue requirement amounts are shown on attached Schedules 3-A and 3-B.  These amounts allow the utility the opportunity to recover its expenses and earn an 7.43% return on its investment in water and wastewater rate base.

Staff is recommending that the water rates should not be revised, since the utility is earning within its allowed rate of return range.

Rate and Rate Structure

Issue 18:   What are the appropriate rate structures for the water and wastewater systems?

 

Recommendation:  The appropriate rate structure for the water system is a continuation of the current base facility charge (BFC)/uniform gallonage charge rate structure.  The residential wastewater-only flat rate structure should be discontinued and replaced with the BFC/gallonage charge rate structure.  The BFC/gallonage charge rate structure should be continued for the remaining wastewater customers.  The multi-residential gallonage charge rate should be set at an amount equal to the general service gallonage charge rate.  (Lingo)

 

Staff Analysis:  The current rate structures for the utility’s respective water and wastewater systems were approved in the utility’s last rate case.  In that case, the Commission approved a BFC/uniform gallonage charge rate structure for the water system.  The Commission also found that the BFC/gallonage charge was appropriate for the wastewater system, with the exception of a 72-unit condominium that was served by a water source other than the utility.  Because these customers’ water consumption data was not available, a flat monthly rate was approved by the Commission for each condominium customer.[12]

 

As discussed in Issue 17, staff recommends that the water system is earning within its allowed rate of return range and the wastewater system is overearning. Staff does not recommend a change to the water system’s rate structure or its rates.  Staff recommends a revenue-neutral rate restructuring for the wastewater system to eliminate the residential wastewater-only flat rate structure.  An explanation of staff’s rationale follows.

 

DeeAnn Estates is a 72-unit condominium community within the utility’s service area.  During the utility’s last rate case, based on limited available data, a residential wastewater-only flat rate was approved for the residents of DeeAnn Estates.  Each DeeAnn Estates resident is currently billed a flat rate of $23.51 per month for wastewater service.  Before the scheduled customer meeting in the instant case, staff met with several representatives of the DeeAnn Estates Homeowners Association (DEHOA).  During that meeting, customers expressed their concerns that the revenues from the flat rate structure were disproportionately great compared to the revenues generated by the remaining wastewater rates.  The customers suggested that, rather than continuing to bill each individual customer a flat rate every month, the DEHOA be billed each month based on a BFC/gallonage charge rate structure.  The DEHOA would pay the bill, and subsequently bill each resident an equal portion of the total bill.  Each resident of DeeAnn Estates is a member of the DEHOA.

 

Before recommending a BFC/gallonage charge rate for DeeAnn Estates, staff had to first determine whether the requisite consumption data would be available to the utility each month.  DeeAnn Estates receives water service from its own well, which is of sufficient size that monthly operating reports must be supplied to the Florida Department of Environmental Protection (DEP).  Therefore, monthly consumption data is available.  The utility may obtain this data in one of three ways -- either by:  1) directly reading the utility’s water well meter each month; 2) obtaining the data from DEP; or 3) obtaining the monthly meter readings from Short Utility Services, the well operator contracted by DeeAnn Estates.  In addition to the availability of consumption data, a 2” wastewater meter is located downstream from DeeAnn Estates.  Therefore, the appropriate BFC may also be calculated.

 

Staff noticed during its analysis that the current gallonage charge for multi-residential service is equal to the gallonage charge for residential service.  This is incorrect – the multi-residential service gallonage charge should be set equal to the general service gallonage charge rate.  This is to correctly reflect the anticipation that approximately 80 percent of residential water consumption is returned to the wastewater system, while approximately 100% of multi-residential and general service water consumption is returned to the wastewater system. 

 

Staff obtained test year 2005 water flow data for DeeAnn Estates, and recalculated wastewater rates based on the application of the BFC/gallonage charge rate structure to all classes, the elimination of the residential wastewater-only flat rates, and the correction of the multi-residential kgal charge so that it was equal to the general service kgal rate.  Staff then calculated, by customer class and meter size, a comparison of typical bills based on average usage.  The results, shown in Table 1 below, indicate that the 72 customers at DeeAnn Estates have been subsiziding the remaining 117 customers of the utility.

 

TABLE 1

LAKE PLACID UTILITIES, INC. REVISED WASTEWATER RATE STRUCTURE: CUSTOMERS’ CHANGE IN AVERAGE MONTHLY BILLS
Customer Class	Average Kgal per Month	Bill Under Current Rate Structure	Bill Under Recom Rate Structure	Amt Chg in Bill	Pct Chg in Bill
Residential 5/8”	2.100	$19.73	$26.26	$6.53	33%
Gen Serv 5/8”	7.189	$36.58	$63.46	$26.89	74%
Multi Resid 5/8”	0.833	$16.45	$19.99	$3.54	22%
Gen Serv 1”	18.750	$93.83	$163.97	$70.15	75%
Multi Resid 1”	8.250	$57.07	$92.15	$35.08	61%
DeeAnn Estates / Multi Resid 2” (1)	140.667	$23.51	$14.95	($8.56)	(36%)
Gen Serv 4”	197.385	$968.75	$1,707.32	$738.57	76%
Multi Resid 4”	20.792	$410.71	$499.42	$88.71	22%
(1)   DeeAnn Estates customers currently billed $23.51 per unit per month.  Bill under recommended rate structure is based on (monthly sum of charge for 2” BFC plus monthly charge for average water usage of 140.667 kgal.) divided by 72 units.
Source:  Lake Placid Utility Company, MFRs, Schedule No. E-2; Short Utility Services, 2005 monthly water well flow data for DeeAnn Estates.

 

            As shown in Table 1, under staff’s recommended wastewater rate structure, the average bill for a resident of DeeAnn Estates would decrease by 36 percent, while the average bills for all other customers would increase.  The subsidization of the remaining wastewater customers by the customers of DeeAnn Estates represents a rate structure inequity.  Staff believes such inequities, when discovered, must be corrected. 

As stated previously, the utility does not provide DeeAnn Estates its water.  In the last rate case, due to the utility’s lack of consumption data, a residential wastewater-only flat rate was established for DeeAnn Estates’ customers.  Staff recommends that, because the rate structure inequity began because of insufficient consumption data, it is appropriate to correct the inequity by revising the gallonage charges, while keeping the current base facility charges constant. 

 

            Based on the foregoing, staff recommends that the appropriate rate structure for the water system is a continuation of the current BFC/uniform gallonage charge rate structure.  The residential wastewater-only flat rate structure should be discontinued and replaced with the BFC/gallonage charge rate structure.  The BFC/gallonage charge rate structure should be continued for the remaining wastewater customers.  The multi-residential gallonage charge rate should be set at an amount equal to the general service gallonage charge rate.

Issue 19: 

 What are the appropriate rates for monthly service for the water and wastewater systems?

 

Recommendation:  The appropriate water and wastewater rates are indicated in Schedules Nos. 4-A and 4-B.  (Joyce, Lingo)

 

Staff Analysis:  As discussed in Issue 17, staff recommends that the appropriate revenue requirement is $87,361 for the wastewater system.  As discussed in Issue 18, staff recommends that the appropriate rate structure for the water system is a continuation of the current BFC/uniform gallonage charge rate structure, with no change in rates.  As also discussed in Issue 18, staff recommends that for the wastewater system, the residential wastewater-only flat rate structure should be discontinued and replaced with the BFC/gallonage charge rate structure.  The BFC/gallonage charge rate structure should be continued for the remaining wastewater customers.  The multi-residential gallonage charge rate should be set at an amount equal to the general service gallonage charge rate.   

 

Approximately 40% of the wastewater system monthly service revenues ($34,806) represents revenue recovery through the base facility charges.  The remaining 60% of wastewater system monthly service revenues ($52,552) are recovered through consumption charges.          

 

Based on the foregoing, the appropriate rates for monthly service for the water and wastewater systems are shown on Schedules Nos. 4-A and 4-B. 

 

Issue 20: 

 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, F.S.?

Recommendation: 

 The wastewater rates should be reduced as shown on Schedule No. 4-A to remove $3,000 of rate case expense, grossed-up for regulatory assessment fees, which is being amortized over a four-year period.  The decrease in water 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 one month prior to the actual date of the required rate reduction.  (Joyce)

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 $3,000.  The decreased water revenues will result in the rate reduction recommended by staff on Schedule No. 4-B.

The utility should be required to file revised tariff sheets and a proposed customer notice to reflect the Commission-approved rates.  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 one month 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 25-40.475(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.

Issue 21: 

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

Recommendation: 

 Yes.  The utility should be authorized to revise its miscellaneous service charges. The appropriate charges are 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.  (Joyce)

Staff Analysis: 

 The miscellaneous service charges currently in effect were approved for Lake Placid in 1993, and have not changed since that date.  Similar charges have been the standard charge in other cases since at least 1990 - a period of 16 years.  Staff believes these charges should be updated to reflect current costs.  Staff recommends that Lake Placid be allowed to increase its water and wastewater miscellaneous service charges from $15 to $21 for normal hours and from $15 to $42 for after hours, and to modify its Premises Visit (in lieu of disconnection) charge.  If both water and wastewater services are provided, a single charge is appropriate unless circumstances beyond the control of the utility requires multiple actions.  The current and recommended charges are shown below. 

                                     Water Miscellaneous Service Charges

 

                               Wastewater Miscellaneous Service Charges

 

The general industry-wide miscellaneous service charges had 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, involving Southern States Utilities Inc.,[13] 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 believes a $21 charge is reasonable and is cost based.  By Order No. PSC-06-0684-PAA-WS, issued August 8, 2006,[14] and by Order No. PSC-05-0776-TRF-WS, issued July 26, 2005,[15] the Commission approved a $20 charge for connection and reconnections during normal hours and a $40 after hours charge.

In summary, staff recommends the utility’s miscellaneous service charges for normal hours of $21 and after hours charges of $42, be approved because the increased charges are cost-based, reasonable, and consistent with fees the Commission has approved for other utilities.  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.

 

Other Issues

Issue 22: 

 Should the utility be required to provide proof that is has adjusted its books for all Commission approved adjustments?

Recommendation: 

 Yes.  To ensure that the utility adjusts its books in accordance with the Commission’s decision, Lake Placid should provide proof, within 90 days of the issuance of the Consummating Order, that the adjustments for all the applicable NARUC USOA primary accounts have been made.  (Joyce)

Staff Analysis: 

 To ensure that the utility adjusts its books in accordance with the Commission’s decision, staff recommends that Lake Placid should provide proof, within 90 days of the issuance of the Consummating Order, that the adjustments for all the applicable NARUC USOA primary accounts have been made.

 

Issue 23: 

 Should this docket be closed?

Recommendation: 

 No.  If no timely protest is filed by a substantially affected person within 21 days of the Proposed Agency Action Order, a Consummating Order should be issued and the corporate undertaking released.  However, the docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the utility and approved by staff.  (Fleming, Joyce)

Staff Analysis:   If no timely protest is filed by a substantially affected person within 21 days of the Proposed Agency Action Order, a Consummating Order should be issued and the corporate undertaking released.  However, the docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the utility and approved by staff.

 

                                                                                                           Attachment A

                                                                                                            Page 1 of 2   

 

Lake Placid Utilities Inc. of Florida

Water Treatment System Without Storage

Used and Useful Analysis

 

 

 

 

 

                                                                                                                             Attachment A

                                                                                                                                    Page 2 of 2

 

Lake Placid Utilities Inc. of Florida

 Wastewater Treatment System

Used and Useful Analysis

 

 

	Lake Placid Utilities, Inc.				Schedule No. 1-A
	Schedule of Water Rate Base				Docket No. 060260-WS
	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	$320,753	$39,279	$360,032	($48,968)	$311,064
2	Utility Land & Land Rights	$2,707	$0	$2,707	$0	$2,707
3	Construction Work in Progress	$14,528	($14,528)	$0	$0
4	Non-used and Useful Components	$0	$0	$0	$0	$0
5	Accumulated Depreciation	($123,370)	$30,983	($92,387)	($14,241)	($106,628)
6	CIAC	($89,440)	$0	($89,440)	$0	($89,440)
7	Amortization of CIAC	$39,772	$0	$39,772	$0	$39,772
8	Acquisition Adjustment	$0	$0	$0	$0	$0
9	Accum Amort of Acq Adjustment	$9,204	$0	$9,204	($9,204)	$0
10	Working Capital Allowance	$0	$4,173	$4,173	($1,963)	$2,210
11	Other	$0	$0	$0	$0	$0
12	Rate Base	$174,154	$59,907	$234,061	($74,376)	$159,685

 

	Lake Placid Utilities, Inc.				Schedule No. 1-B
	Schedule of Wastewater Rate Base				Docket No. 060260-WS
	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	$560,019	($15,492)	$544,527	$26,354	$570,881
2	Utility Land & Land Rights	$21,665	$0	$21,665	$0	$0
3	Construction Work in Progress	$0	($13,188)	($13,188)	$0	($13,188)
4	Non-used and Useful Components	$0	$0	$0	($112,842)	($112,842)
5	Accumulated Depreciation	($302,910)	($30)	($302,940)	($12,139)	($315,079)
6	CIAC	($154,466)	$0	($154,466)	$0	($154,466)
7	Amortization of CIAC	$103,172	$0	$103,172	$0	$103,172
8	CWIP	$0	$0	$0	$0	$0
9	Advances for Construction	$0	$0	$0	$0	$0
10	Working Capital Allowance	$0	$9,390	$9,390	($2,299)	$7,091
11	Other	$0	$0	$0	$0	$0
12	Rate Base	$227,480	($19,320)	$208,160	($100,926)	$85,569

 

 

 

	Lake Placid Utilities, Inc.						Schedule No. 3-B
	Statement of Wastewater Operations						Docket No. 060260-WS
	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:	$70,362	$71,952	$142,314	($51,549)	$90,765	($3,403)	$87,361
							-3.75%
	Operating Expenses
2	Operation & Maintenance	$52,976	$22,147	$75,123	($18,393)	$56,730		$56,730
3	Depreciation	$13,194	$30	$13,224	$60	$13,284		$13,284
4	Amortization	$529	($529)	$0	$0	$0		$0
5	Taxes Other Than Income	$5,271	$3,348	$8,619	$405	$9,024	($153)	$8,871
6	Income Taxes	$13,559	$13,971	$27,530	($24,186)	$3,344	($1,223)	$2,121
7	Total Operating Expense	$85,529	$38,967	$124,496	($42,113)	$82,383	($1,376)	$81,006
8	Operating Income	($15,167)	$32,985	$17,818	($9,436)	$8,382	($2,027)	$6,355
9	Rate Base	$227,480		$208,160		$85,569		$85,569
10	Rate of Return	-6.67%		8.56%		9.80%		7.43%

	Lake Placid Utilities, Inc.	Schedule 3-C
	Adjustment to Operating Income	Docket No. 060260-WS
	Test Year Ended 12/31/05
	Explanation	Water	Wastewater
	Operating Revenues
1	Remove requested final revenue increase	($30,017)	($71,902)
2	To reflect the appropriate amount of annualized revenues.	$1,809	$20,353
	Total	($28,208)	($51,549)
	Operation and Maintenance Expense
1	To properly record the utility's misc exp (AF-6)	$0	($2,606)
2	Adjustment to Proforma Salaries and Benefits	($753)	($801)
3	Adjustment to Rate Case Expense	($14,513)	($15,302)
4	To reflect the appropriate WSC allocated expenses.	$62	$81
5	To reflect the appropriate UIF allocated expenses.	$178	$235
6	Adjustment for excessive accounted for water	($681)	$0
	Total	($15,707)	($18,393)
	Depreciation Expense – Net
1	Unsupported Plant Additions (AF-1)	($725)	($71)
2	Unrecorded A/D (AF-2)	$371	$306
3	To adjust understated DE (AF-8)	$1,311	$527
4	To remove net depreciation on non-U&U adjustment above.	$0	($2,344)
5	Reflect appropriate WSC rate base allocation.	$12	$16
6	Reflect appropriate UIF rate base allocation.	($764)	$1,656
7	To adjust for unsupported Pro Forma Plant	($1,083)	($30)
	Total	($878)	$60
	Taxes Other Than Income
1	RAFs on revenue adjustments above	($1,269)	($2,320)
2	To adjust understated TOTI (AF-9)	$468	$2,064
3	To the appropriate WSC allocated property taxes.	($4)	($6)
4	Adjustment to Payroll Taxes	($78)	($96)
5	To reflect reduced property taxes on NU & U Property.	$0	($689)
6	To reflect appropriate TY RAFs	$931	$1,451
	Total	$47	$405