DATE:	September 27, 2007
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Fletcher, Bulecza-Banks, Massoudi, Rendell) Office of the General Counsel (Brown)
RE:	Docket No. 060285-SU – Application for increase in wastewater rates in Charlotte County by Utilities, Inc. of Sandalhaven.
AGENDA:	10/09/07 – Proposed Agency Action – Except Issues 30 and 33 – Interested Persons May Participate
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		Carter
CRITICAL DATES:		10/09/07 (5-Month Effective Date (PAA Rate Case))
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\060285.RCM.DOC

 

Table of Contents

Issue       Description                                                                                                                     Page

               Case Background. 4

               QUALITY OF SERVICE. 8

1             Quality of Service (Massoudi) 8

               RATE BASE. 11

2             Utility Agreed Upon Audit Adjustments (Fletcher) 11

3             Adjustment to Franchises Account (Fletcher) 13

4             Affiliate Rate Base Allocations (Fletcher) 14

5             Adjustments to Projected Plant Additions (Fletcher, Massoudi) 16

6             Adjustment to Land (Fletcher) 23

7             Used and Useful of Wastewater Treatment Plant and Collection & Reuse Systems (Massoudi, Fletcher) 24

8             Appropriate Accumulated Depreciation Balance (Fletcher) 28

9             Appropriate Balances of Contribution-in-Aid of Construction (CIAC) and Accumulated Amortization of CIAC (Fletcher) 29

10           Appropriate Working Capital Allowance (Fletcher) 30

11           Appropriate Rate Base (Fletcher) 31

               COST OF CAPITAL. 32

12           Appropriate Return of Common Equity (Fletcher) 32

13           Appropriate Balance of Accumulated Deferred Income Taxes (Fletcher) 33

14           Appropriate Weighted Average Cost of Capital (Fletcher) 41

               NET OPERATING INCOME. 42

15           Adjustments to Projected Revenues (Fletcher) 42

16           Appropriate Miscellaneous Service Revenues (Fletcher) 43

17           Appropriated Allocated Expenses (Fletcher) 44

18           Appropriate Amortization of Hurricane Costs (Fletcher) 46

19           Other Expense Adjustments (Fletcher) 47

20           Appropriate Amount of Rate Case Expense (Fletcher) 48

21           Appropriate Net Depreciation Expense (Fletcher) 53

22           Loss on Early Retirement of Wastewater Treatment Plant (Fletcher) 54

23           Adjustment to Proprerty Taxes (Fletcher) 55

24           Appropriate Operating Income or Loss Before Any Revenue Increase (Fletcher) 56

               REVENUE REQUIREMENT. 57

25           Appropriate Revenue Requirement (Fletcher) 57

               RATES AND CHARGES. 58

26           Appropriate Multi-Residential Service Rate Structure (Rendell) 58

27           Appropriate Monthly Wastewater Rates (Fletcher) 60

28           Effective Dates for Phase-One and Phase-Two Rates (Fletcher) 61

29           Appropriate Miscellaneous Service Charges (Fletcher) 62

30           Statutory Four-Year Rate Reduction (Fletcher) 63

               OTHER ISSUES. 64

31           Appropriate Service Availability Charges (Fletcher, Brown) 64

32           Appropriate Allowance for Funds Prudently Invested Charges (Fletcher) 69

33           Proof of Adjustments (Fletcher) 72

34           Closure of Docket (Brown, Fletcher) 73

Attachment A - Wastewater Used and Useful Data. 74

Schedule No. 1-A - Phase-One Rate Base. 75

Schedule No. 1-B - Phase-Two Rate Base. 76

Schedule No. 1-C – Adjustments to Phase-One Rate Base. 77

Schedule No. 1-D – Adjustments to Phase-Two Rate Base. 78

Schedule No. 2-A – Phase-One Capital Structure. 79

Schedule No. 2-B – Phase-Two Capital Structure. 80

Schedule No. 3-A – Phase-One Operating Income Statement 81

Schedule No. 3-B – Phase-Two Operating Income Statement 82

Schedule No. 3-C – Adjustments to Phase-One Operating Income. 83

Schedule No. 3-D – Adjustments to Phase-Two Operating Income. 84

Schedule No. 4 – Phase-One and Phase-Two Monthly Service Rates. 85

Schedule No. 5 –Plant Capacity Charge Analysis Schedule. 87

 

 

 

 

 Case Background

Utilities, Inc. of Sandalhaven (Sandalhaven or utility) is a Class B wastewater utility providing service to approximately 910 customers in Charlotte County.  Sandalhaven is a wholly-owned subsidiary of Utilities, Inc. In its 2006 Annual Report, the utility reported operating revenues of $280,256 and a net operating income of $4,897.  Sandalhaven’s rates were last established in its 2002 rate case.[1]

On May 15, 2006, Sandalhaven filed an Application for Rate Increase at issue in this docket.  After review of the Minimum Filing Requirements (MFRs), staff determined that the MFRs contained a number of deficiencies that would require revisions by the utility.  On August 22, 2006, the utility satisfied all outstanding deficiencies, and the official filing date was established.  The test year for this docket was initially the historic test year ending December 31, 2005.  On July 27, 2006, staff commenced an audit of the historical 2005 test year.  On October 4, 2006, staff’s audit report for the 2005 test year (“2005 Audit”) was issued.

On September 29, 2006, staff held an informal meeting with Sandalhaven to discuss the case.  Due to the uncertainty surrounding the retirement of the utility’s wastewater treatment plant, Sandalhaven agreed to revise its filing, which included the utilization of a projected test year ending December 31, 2007.

On December 28, 2006, the utility filed its Amended Application for increase in rates, which included a request for increased service availability charges.  Sandalhaven requested the application be processed using the Proposed Agency Action (PAA) procedure.  On January 16, 2007, the utility filed a request for authority to collect revised system capacity charges on a temporary basis, pending the determination of final rates and charges in this proceeding.

After review of the revised Minimum Filing Requirements (MFRs), staff determined that the MFRs contained a number of deficiencies that would require revisions by the utility.  On February 9, 2007, Sandalhaven filed revisions which satisfied the MFR deficiencies; therefore, the official filing date was established as February 9, 2007.  The utility initially requested final rates designed to generate annual revenues of $1,118,134.  This represents a revenue increase of $841,571 (or 313.33%).  At the February 13, 2007, Agenda Conference, the Commission voted to suspend Sandalhaven’s final requested rates.

The intervention of the Office of Public Counsel (OPC) was acknowledged by Order No. PSC-06-0542-PCO-SU, issued June 26, 2006.  On January 23, 2007, Placida HG, LLP (Placida) filed a Petition for Leave to Intervene.  The intervention was granted by Order No. PSC-07-0135-PCO-SU, issued February 16, 2007.

On February 21, 2007, staff commenced its audit of the utility’s books and records for the historical test year ending December 31, 2006.  On April 17, 2007, staff’s audit report for the 2006 test year ( “2006 Audit”) was issued.

The Commission addressed Sandalhaven’s request for temporary service availability charges at the March 27, 2007, Agenda Conference.  After hearing discussion from Placida opposing temporary service availability charges, responses by Sandalhaven and OPC, and comments by staff, the Commission, by Order No. PSC-07-0327-PCO-SU, issued April 16, 2007, approved the temporary charges subject to refund at the conclusion of the case.  The Commission based its decision to approve temporary service availability charges on Section 367.101, Florida Statutes, Commission precedent, and Rule 25-30.580, Florida Administrative Code.  See Order No. PSC-07-0327-PCO-SU at page 3.

On April 25, 2007, Placida filed a Motion for Reconsideration of Order No. PSC-07-0327-PCO-SU.  By Order No. PSC-07-0561-FOF-SU, issued July 5, 2007, the Commission denied Placida’s Motion for Reconsideration of Order No. PSC-07-0327-PCO-SU.

The primary reason for the utility’s requested rates and service availability charges are to recover the costs incurred for its interconnection with the Englewood Water District (EWD). Before the utility completed its interconnection in April 2007, Sandalhaven’s wastewater treatment plant was the sole means of treating its wastewater effluent.  The disposal means of the utility’s treated effluent was reclaimed water irrigation at the Wildflower Golf Course (WGC).  There were plans to redevelop the WGC which would have eliminated Sandalhaven’s effluent disposal means.  However, in May 2007, Charlotte County revoked the developer agreement for the WGC that was initially approved in December 2006.  Moreover, due to bankruptcy of the WGC, the utility’s reuse water is not being used for irrigation purposes after reaching the holding pond.  Due to the uncertainty of the retirement date for the utility’s wastewater treatment plant, staff could not calculate a revenue requirement as initially proposed in Sandalhaven’s filing, which projected the plant would be retired by July 2007. 

On June 7, 2007, staff held another informal meeting with OPC, Placida, and the utility (collectively, “Parties”) to discuss the unique situation regarding the timing of Sandalhaven’s wastewater treatment plant retirement.  Based on discussions the utility has had with developers, Sandalhaven’s customer base is expected to double within the next three years.  The projected test year in this case is December 31, 2007, which will not encompass all the expected customer growth or the retirement of the utility’s wastewater treatment.  Until the wastewater treatment plant is retired, staff has concerns about the current customers paying for the costs of interconnection with the EWD.  Conversely, staff recognizes that all customers will eventually be served by the interconnection with the EWD.  In light of the above concerns, the Parties and staff discussed a two-phased rate increase for this utility, whereby phase-one would recognize the operation of both the wastewater treatment plant and the interconnection with the EWD and phase-two would establish rates in the same way the Commission treats original certificate cases at 80% of build-out. 

On July 9, 2007, Sandalhaven filed its two-phased rate proposal.  Sandalhaven attempted to calculate a precise phase-one revenue requirement and rates, but was unable to do so because of the complexity and unusual circumstances in this case.  Instead, the utility derived phase-one rates by simply adding 80% of the difference between the phase-two rates and the current rates to the current rates.  With the exception of a few adjustments, Sandalhaven used the existing MFR schedules for the rate base components through the projected 2007 test year as a starting point for its phase-two revenue requirement calculation. 

On August 2, 2007, the Parties and staff held a final informal meeting to discuss the utility’s rate proposal.  During the meeting, staff expressed several concerns regarding the utility’s errors in the calculations of contributions-aid-of-construction (CIAC) and accumulated amortization of CIAC, the necessity of other adjustments based on staff audit reports and responses to staff data requests, and the arbitrary nature of the utility’s calculation of phase-one rates.  In addition, OPC expressed concerns that the accumulated depreciation and accumulated amortization of CIAC balances were understated because they only represented the projected 2007 balances instead of the balances at the point the utility will reach 80% buildout.  Although there were several concerns, the Parties did agree conceptually to the two phase rate approach.

The phase-two rate approach recognizes 80% of the rate base and net operating income at build-out.  Specifically, in an effort to mitigate the level of the utility’s requested increase, this approach recognizes a substantial portion of the CIAC and revenues from future customers at 80% build-out.  As with original certificate cases and the speculative nature of growth at times, staff notes there is a risk to the utility that expected future growth might not materialize and place the utility in an under-earnings posture. 

By letter dated August 7, 2007, the utility waived the 5-month statutory deadline for this case to October 9, 2007.  On August 14, 2007, Sandalhaven filed its revised two phased rate proposal which corrected the CIAC, accumulated depreciation, accumulated amortization of CIAC and other errors noted by staff and OPC.  The utility included requests for the loss on its wastewater treatment plant retirement and AFPI charges for the amount of interconnection costs not recovered through rates.  Sandalhaven asserted that 80% buildout and total buildout will occur on June 30, 2010, and December 31, 2010, respectively. The utility requested phase-two rates designed to generate annual revenues of $1,125,682.  This revised request represents a revenue increase of $849,119 (or 307.02%).

To derive Sandalhaven’s requested phase-one rates, 80% of the difference between phase-two rates and current rates was added to the current rates.  Sandalhaven asserted that the phase-one rates would be in effect until such time that the infrastructure to redirect flows of its existing customers to the interconnection with the EWD is complete and the wastewater treatment plant is retired.  The utility projects the retirement and interconnection to be placed into service within two years.  Due to the arbitrary nature of the utility’s requested phase-one rates, staff has calculated a revenue requirement for phase-one which more appropriately recognizes the operation of both the wastewater treatment plant and the interconnection with the EWD through the projected 2007 test year.  Specifically, staff adjusted the utility’s requested rate base, capital structure, and NOI in the MFRs to derive its revenue requirement for phase-one.

On September 25, 2007, the Charlotte County Commission passed a resolution to rescind the Public Service Commission’s jurisdiction over privately-owned water and wastewater utilities in Charlotte County.  Section 367.171(5), Florida Statutes (F.S.), requires that all cases pending before the Commission shall remain within the jurisdiction of the Commission until disposed of in accordance with the law in effect.

This recommendation addresses the appropriate phase-one and phase-two revenue requirements and rates.  The Commission has jurisdiction pursuant to Sections 367.011, 367.081, 367.101, and 367,121, F.S.

Discussion of Issues

QUALITY OF SERVICE

Issue 1: 

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

Recommendation: 

 Yes.  The quality of service provided by Utilities Inc., of Sandalhaven should be considered satisfactory.  (Massoudi)

Staff Analysis: 

 Rule 25-30.433(1), Florida Administrative Code (F.A.C.), states that:

The Commission in every rate case shall make a determination of the quality of service provided by the utility.  This shall be derived from an evaluation of three separate components of water and wastewater utility operations: quality of utility's product (water and wastewater); operational conditions of utility's plant and facilities; and the utility’s attempt to address customer satisfaction.  Sanitary surveys, outstanding citations, violations and consent orders on file with the Department of Environmental Protection (DEP) and county health departments or lack thereof over the proceeding 3-year period shall also be considered.  DEP and county health departments officials’ testimony concerning quality of service as well as the comments and testimony of the utility’s customers shall be considered.

Staff’s analysis below addresses each of these three components based on the information available.

QUALITY OF UTILITY’S PRODUCT

Wastewater Plant (WWTP)

The WWTP at Sandalhaven is regulated by the Department of Environmental Protection (DEP). The DEP inspected the utility’s WWTP on February 9, 2007. According to DEP’s Compliance Inspection Report, the utility is currently up-to-date and all chemical analysis and all test results are satisfactory.

The quality of wastewater service appears to meet or exceed regulatory standards, and staff recommends that it should be considered satisfactory.

OPERATIONAL CONDITIONS AT THE PLANT

WWTP

The wastewater plant-in-service is reflective of the quality of product provided by the utility.  The utility’s operating permit was issued on March 8, 2007 and will expire on March 7, 2012.  According to DEP’s Compliance Inspection Report, the utility is in compliance status for its operation and maintenance, record keeping and the effluent disposal.

As discussed in the case background, the utility intends to retire the existing wastewater treatment plant in the near future and interconnect with the Englewood Water District (EWD).  According to the utility’s response dated May 10, 2007, to staff’s third data request dated April 26, 2007, the utility stated that in order for the existing Sandalhaven WWTP to remain in service for the benefit of existing customers, the utility must have 150,000 gallons per day of effluent disposal capacity.  Currently, the utility’s only reuse application point is the former WGC, which is in the process of being redeveloped as a residential community and will no longer provide a long-term disposal option.  The utility’s on-site percolation ponds do not have adequate percolation capacity during peak flow periods throughout the winter months to serve as the sole disposal option. There are no large tracts of vacant land suitable for effluent disposal within the utility’s service area. During the low flow portion of the year, and as long as the Wildflower property continues to be available as an effluent disposal option, the utility can continue to treat flows from existing customers at the existing plant. The utility stated that the retirement date of the WWTP is dependent on the timing of the redevelopment of the Wildflower property as a residential community.

In general, during the engineering field inspection, maintenance at the wastewater plant-site appeared to have been given adequate attention. The wastewater plant equipment and percolation ponds appeared to have been receiving periodic maintenance and were functioning properly.  The plant grounds within the fenced in area was organized.

All things considered, the operational conditions at the wastewater plant should be considered satisfactory at this time.

UTILITY’S ATTEMPT TO ADDRESS CUSTOMER SATISFACTION

An informal customer meeting was held on May 2, 2007, in the Tringali Recreation Center in Englewood, Florida.  Two customers requested to meet with staff to discuss issues related to the rate increase.  The first meeting occurred at 3:00 p.m. with Mr. Clark Wagar and Mr. William Lyons on behalf of Eagle Preserve Home Associations.  These representatives were concerned about the 309% rate increase.  They believed the current customers should not pay for the future customers.  Mr. Wagar stated that he had a vacant lot in the Eagle Preserve subdivision for many years. The utility charged him approximately $12 per month for the undeveloped lots.  Mr. Wagar informed staff that in the Eagle Preserve subdivision there are 90 lots, of which 73 lots are vacant and all lots are hooked up to the wastewater treatment plant.

The evening meeting was held at 6:00 p.m. at the Tringali Recreation Center.  Twenty-nine (29) people attended the meeting, including three utility representatives and one representative from OPC.  Seven customers provided comments and concerns about the utility. All customers were concerned about the proposed 309% rate increase. All customers believed it is unfair for the current customers to  pay for the future customers.  They also believed that current customers should not be penalized for the extreme increase in growth.

One customer who lives near the wastewater treatment plant was concerned about methane gas in his unit. He stated that once in a while, he smells methane gas in his house. He does not know the source of the methane odor.

 

Regarding the rate increase, staff explained to the customers that the major cost of the increase is for the interconnection costs to EWD. 

Regarding the methane gas odor, staff reported this matter to the DEP. According to the DEP’s e-mail dated May 22, 2007 to staff, the DEP’s inspector contacted the customer, Mr. Furman.  The DEP’s inspector stated that she explained to Mr. Furman that the smells permeating from his house cannot be the smell of methane gas because methane gas is odorless.  Additionally, the inspector stated that she inspected the utility recently and she did not smell any odor at the WWTP.  The inspector told Mr. Furman that she would investigate further if he would notify her when he has an odor problem at his house.

All things considered, it appears that the utility is putting forth a sufficient good faith effort to justify a finding that the utility’s attempts to resolve customer complaints are satisfactory.  Thus, it is recommended that the quality of service be considered satisfactory.

RATE BASE

Issue 2: 

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

Recommendation: 

 Yes.  Based on audit adjustments agreed to by the utility and staff, the following adjustments should be made for both phase-one and phase-two: (1) plant should be decreased by $12,941; (2) accumulated depreciation should be decreased by $310; (3) long-term debt should be increased by $55,955,797; (4) short-term debt should be decreased by $11,347,000; (5) common equity should be decreased by $17,464,864; (6) customer deposits should be increased by $263; (7) long-term debt cost rate of 6.81% should be decreased by 0.21%;  and (8) taxes other than income taxes (TOTI) should be decreased by $1,715.  Net depreciation expense should be increased by $34,921 for phase-one.  Revenues for phase one and phase-two should be increased by  $10,663 and $5,801, respectively.  (Fletcher)

Staff Analysis: 

 In its response to staff’s audit reports, Sandalhaven 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.

 

 

            Based on audit adjustments agreed to by the utility and staff, staff recommends that the following adjustments should be made for both phase-one and phase-two: (1) plant should be decreased by $12,941; (2) accumulated depreciation should be decreased by $310; (3) long-term debt should be increased by $55,955,797; (4) short-term debt should be decreased by $11,347,000; (5) common equity should be decreased by $17,464,864; (6) customer deposits should be increased by $263; (7) long-term debt cost rate of 6.81% should be decreased by 0.21%; and (9) TOTI should be decreased by $1,715.  In addition to the above adjustments, staff recommends that net depreciation expense should be increased by $34,921. 

 

The auditors recommended that a $10,663 adjustment be applied to the utility’s 2006 projected revenues.  On MFR Schedule B-2, the utility decreased revenues by $4,862 to arrive at its operating revenues of $271,700 for the year ending December 31, 2006.  Accordingly, staff recommends that revenues for phase-one should be increased by $10,663.  However, in its revised phase-two proposal, the utility reflected operating revenues of $276,562 for the year ending December 31, 2005.  Because the actual 2005 revenues exceed the utility’s projected 2006 revenues by $4,862, the effect of the auditor’s recommended adjustment should be $5,801 for phase-two. 

Issue 3: 

 Should any adjustment be made to the utility's Franchises account?

Recommendation: 

 Yes.  Plant and accumulated depreciation should be reduced by $9,826 and $1,116, respectively, for phase-one and phase-two.  In addition, phase-one and phase-two operation and maintenance (O&M) expenses should increased by $1,983.  (Fletcher)

Staff Analysis: 

 In its filing, Sandalhaven reflected an historical 2005 balance of $3,421 for Franchises.  On MFR Schedule A-6, the utility added $9,826 in 2006 which resulted in a projected 2007 balance of $13,247 for Franchises.  In Finding No. 4 of the 2006 Audit, the staff auditors stated Sandalhaven recorded a $9,916 addition to Franchises in 2006 for legal fees related to the bulk wastewater agreement with the EWD.  The auditors stated that the two agreements with EWD were for impact fees and that these agreements are not franchise agreements. 

In its MFRs, Sandalhaven reflected the plant capacity fees paid to EWD under Account No. 354 – Structures and Improvements.  The auditors stated that the National Association of Regulatory Utility Commissioners’ (NARUC) Uniform System of Accounts (USOA)  does not include legal costs related to plant projects.  As such, the auditors stated these costs would more appropriately be classified under Account 733 – Contractual Services Legal.  Thus, the auditors recommended that plant should be reduced by $9,916. 

In response to the 2006 Audit, the utility agreed to the auditors’ adjustment.  However, because the utility recorded 2006 additions of $9,826 in its filing instead of $9,916, staff recommends that plant and accumulated depreciation should be reduced by $9,826 and $1,116, respectively, for phase-one and phase-two.  Rule 25-30.433(8), F.A.C., states “non-recurring expenses shall be amortized over a five-year period unless a shorter or longer period of time can be justified.”  In accordance with Rule 25-30.433(8), F.A.C., staff also recommends that the legal fees of $9,916 should be amortized over 5 years, which results in an O&M expense increase of $1,983 for phase-one and phase-two.

Issue 4: 

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

Recommendation: 

 The appropriate WSC net rate base allocation for Sandalhaven is $7,561, which  represents an increase of $103.  WSC depreciation expense should also be increased by $4 for both phase-one and phase-two.  Further, the appropriate UIF rate base allocation for Sandalhaven is $9,921. This represents plant and accumulated depreciation decreases of $813 and $224, respectively.  In addition, depreciation expense should be decreased by $417 for both phase-one and phase-two.  Moreover, in its revised phase-two rate proposal, the utility combined its UIF net plant with WSC net plant as a separate line in rate base totaling $19,522.  For phase-two, the appropriate combined WSC and UIF rate base is $17,482, which is $2,040 less than the utility’s requested amount of $19,522.  Accordingly, staff recommends that phase-two WSC and UIF rate base should be reduced by $2,040.    (Fletcher)

 

Staff Analysis: 

 In its MFRs, Sandalhaven reflected a WSC rate base allocation of $7,458, but the utility did not include any UIF rate base allocation in the 2007 projected test year plant.  Staff performed an affiliate transactions (AT) audit of Utilities, Inc., the parent company of Sandalhaven and its sister companies.  WSC is a subsidiary service company of UI that supplies most of the 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.[2]  First, deferred income taxes were removed because they 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 that staff requested.  Third, the office structure and furniture balances were adjusted because WSC was unable to locate several missing invoices that staff 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 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 allocated its common plant and expenses quarterly as of June 30, 2005.  In addition, instead of using ERCs, 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 subsidiary’s 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.  The Commission has approved the above recommended audit and ERC methodology adjustments in several recent rate cases for UI’s other subsidiaries in Florida.[3]

 

Conclusion

 

            Based on the above,  staff recommends that the appropriate WSC net rate base allocation for Sandalhaven is $7,561, which represents an increase of $103.   WSC depreciation expense should also be increased by $4 for both phase-one and phase-two.  Further, staff recommends that the appropriate UIF rate base allocation for Sandalhaven is $9,921 (plant of $14,210 less accumulated depreciation $4,289). This represents plant and accumulated depreciation decreases of $813 and $224, respectively.  In addition, depreciation expense should be decreased by $417 for both phase-one and phase-two.  Moreover, in its revised phase-two rate proposal, the utility combined its UIF net plant with WSC net plant as a separate line in rate base totaling $19,522.  Staff’s recommended combined WSC and UIF rate base is $17,482.  Accordingly, staff recommends that phase-two WSC and UIF rate base should be reduced by $2,040.

Issue 5: 

 Should any adjustments be made to the utility's projected plant additions?

Recommendation: 

 Yes.  A summary of phase-one and phase-two plant and other adjustments is reflected in the following table.

 

 

(Fletcher, Massoudi)

 

Staff Analysis: 

 In its filing, Sandalhaven reflected $7,062,555 of projected average test year plant.  This represents an increase of $4,986,281 from the utility’s historical 2005 average plant balance of $2,076,274.  The following table reflects the plant projects and the proposed retirements that account for the majority of Sandalhaven’s average plant balance increase.

 

Acct No.	Plant Projects	In-Service Date	MFR Amount
354.2	Purchase of 100,000 gpd of Treatment Capacity at EWD	6/8/2006	$752,373
354.2	Purchase of 200,000 gpd of Treatment Capacity at EWD	12/8/2006	1,504,745
354.2	Master Lift Station	4/19/2007	546,920
360.2	Force Mains	4/19/2007	2,150,656
360.2	Force Mains to Redirect Flows from Existing Customers	2009	200,000
360.2	Survey and Route Selection for Master Lift Station Force Main	5/26/2006	98,147
360.2	Sandalhaven Lift Station No. 4 Force Main Repair	3/8/2006	16,000
361.2	Sanitary Sewer I&I Corrections	5/8/2006	132,585
380.4	Design/Permitting - Sandalhaven WWTP Expansion	4/20/2006	204,440
380.4	Variable Frequency Drive Units, Pipes and Pumps	6/26/2006	31,997
	Total Additions		$5,637,863
Acct No.	Plant Projects	In-Service Date	MFR Amount
380.4	Retirement of the Wastewater Treatment Plant	2009	($1,159,262)

           

            Staff requested and received the support documentation and other information from the utility for the above projects and for the retirement of the wastewater treatment plant.  Based on that information, staff recommends no adjustments to the Sanitary Sewer I&I Corrections, and the Variable Frequency Drive Units, Pipes, and Pumps projects for phase-one and phase-two.  Because the Force Mains to Redirect Flows from Existing Customers project and the Retirement of the Wastewater Treatment Plant are scheduled to be completed in two years, the requested adjustments for these projects should be removed from phase-one consideration but allowed for phase-two.  As discussed below, staff believes that several adjustments are necessary for the remaining projects.

 

Purchase of Treatment Capacity from EWD

 

              In its revised application filed on December 28, 2006, the utility stated that it has entered into an agreement with the EWD whereby the EWD will provide bulk wastewater treatment and disposal to serve new customers of Sandalhaven through an interconnection with the EWD’s existing system.  The utility also asserted that it is requesting a change in its service availability charges to enable it to pass through the costs of the interconnection to the future customers who will be connected after the interconnection is complete. 

 

            According to Audit Workpaper 16-2 of Staff’s 2006 Audit, Sandalhaven paid the EWD $752,373 and $1,504,745 on June 8, 2006, and December 8, 2006, respectively.  On April 19, 2007, Sandalhaven completed the interconnection with the EWD.  According to the utility’s two-phase rate proposal, Sandalhaven stated there are 1,382 additional ERCs to reach buildout.

 

            In its response to staff’s data request, the utility stated that the plant will continue to treat flow generated from the Northeast sector as long as the WGC property is available as a disposal site and until capital improvements are built on Gasparilla Pines Blvd. to pump the Northeast sector flow to the EWD interconnect. Sandalhaven also stated that the size, timing of construction, and exact location of the new Gasparilla Pines lift station are all dependent on when Wildflower is redeveloped or when that property is no longer available as a disposal site.

 

            On MFR Schedule E-13, Page 2 of 2, the utility listed by development, the anticipated growth for 2006 and 2007.  Based on a discussion with Mr. Patrick Flynn, Regional Director of UI’s Florida subsidiaries, the Hacienda Del Mar, Cape Haze, and Cape Haze Resort developments represent the only customers that would be served by the interconnection with EWD as long as Sandalhaven’s WWTP remains in-service.  The total anticipated growth from these developments in 2006 and 2007 are 223 customers.  A few developments can be served by either the EWD or the utility’s wastewater treatment plant, but Mr. Flynn stated that they were currently being served by Sandalhaven’s wastewater treatment plant.  The utility stated that the remaining developments were old subdivisions that could only be served by the utility’s wastewater treatment plant until the project to redirect the flows from existing customers is completed. 

            Based on the above, there will only be 223 ERCs of the additional 1,382 ERCs anticipated at buildout utilizing the interconnection with the EWD by the end of the projected 2007 test year.  The utility’s existing wastewater treatment plant will serve the remaining customers in 2007.  Until the wastewater treatment plant is retired, staff believes a non-used and useful adjustment is necessary for the interconnection costs, including the impact fees paid to the EWD. 

 

            Staff calculated a 5-year growth capped at 5% per year for the 223 customers to be 56 ERCs in accordance with Section 367.081(2)(a)2.b.2., F.S.  Using the designed 190 gallons per day (gpd) per ERC for the 279 (223 plus 56) future customers, the resulting wastewater flow is 52,963 gpd.  When dividing the 52,963 gpd by the 300,000 gpd capacity reserved from the EWD, it yields a used and useful percentage of 17.65%. 

 

            Therefore, staff recommends that phase-one rate base should be reduced by $1,800,560 to remove non-used and useful plant.  Corresponding adjustments should also be made to reduce depreciation expense by $58,083 and property taxes by $23,303.  Regarding phase-two rate base, staff believes no adjustments are necessary for the total impact fees paid to the EWD.

 

Survey and Route Selection, Master Lift Station and Force Mains

 

            On MFR Schedule A-6, the utility reflects survey and route selection, master lift station, and force main project costs of $98,147, $546,920, and $2,150,656, respectively.  In its response to a staff data request, Sandalhaven stated that survey and route selection entailed identifying the preferred location and route of the interconnecting force main and master lift station site.  The master lift station and force main have a total capacity of 500,000 gpd and 1,000,000 gpd, respectively.  

 

            The survey and route selection project was completed on May 26, 2006, and the master lift station and force main projects were completed on April 19, 2007.  Because the master lift station and force main projects were completed in 2007 instead of 2006, staff believes an averaging adjustment is necessary for phase-one.  As such, staff recommends that plant for phase-one should be reduced by $1,348,788.  In addition, based on the support documentation provided by the utility, the master lift station and force main costs were $441,414 and $1,735,775, respectively.  As such, projected plant should be reduced by $260,194 for phase-one and $520,387 for phase-two.

 

            As stated previously, there will only be 223 ERCs of the additional 1,382 ERCs utilizing the interconnection with the EWD by the end of the projected 2007 test year, and the utility’s existing wastewater treatment plant will serve the remaining customers in 2007.  Until such time that the wastewater treatment plant is retired, staff believes a non-used and useful adjustment for phase-one is necessary for the interconnection costs of the master lift station and force main. 

 

            Staff calculated a 5-year growth capped at 5% per year of the 223 customers to be 56 ERCs in accordance with Section 367.081(2)(a)2.b.2., F.S.  Using the designed 190 gpd per ERC for the 279 (223 plus 56) future customers, the resulting wastewater flow is 52,963 gpd.  Dividing the 52,963 gpd by the 500,000 gpd capacity of the master lift station yields a used and useful percentage of 10.59%.  Dividing the 52,963 gpd by the 1,000,000 gpd capacity of the force main yields a used and useful percentage of 5.30%.  Based on these used and useful percentages, staff recommends that phase-one rate base should be further reduced by $1,092,319.  Corresponding adjustments should also be made to reduce depreciation expense by $36,662 and property taxes by $27,535.

 

Force Mains to Redirect Flows from Existing Customers

 

            On MFR Schedule A-6, the utility requested $200,000 for the redirection of flow from existing customers served by the wastewater treatment plant to the EWD for treatment.  This project includes the construction of a sub-master lift station to direct the flows to the utility’s master lift station.  As stated previously, the requested adjustments for this project should be removed from phase-one consideration but allowed for phase-two because this project is scheduled to be completed in two years.

 

Lift Station No. 4 Force Main Repair

 

            In its filing, Sandalhaven reflected $16,000 for its Lift Station No. 4 Force Main Repair.  In response to a staff data request, the utility provided support documentation which totaled $16,474.  As such, staff recommends that plant should be increased by $474 for both phase-one and phase-two.

 

Design/Permitting for WWTP Expansion

 

            On MFR Schedule A-6, the utility requested $204,440 for the design and permitting of its wastewater treatment plant.  In Finding No. 5 of the 2006 Audit, the staff auditor stated that the utility capitalized two projects to plant in service that were actually cancelled when the utility decided to complete an interconnection with the EWD. The first project was for the wastewater treatment plant expansion and the second related to design and engineering of a deep well injection. The actual cost of the engineering for the wastewater plant was $227,056 and was charged to Account 3804005. The depreciation taken was $4,329. The actual cost for the deep well injection was charged to Account 3542011 and was $99,884. The depreciation was $1,940.  According to the USOA for Class A Wastewater Utilities, staff auditors stated that preliminary survey and investigation expenses related to abandoned projects should be charged to Account 426, Miscellaneous Non-utility Expenses, and recommended these costs be removed from plant in service.

 

            In response to the 2006 Audit, Sandalhaven asserted it developed a sewer master plan project in 2004, which was intended to increase capacity of the wastewater treatment plant. The utility stated that the project included a capacity analysis of its service area based on capacity commitments, proposed developer activity, Charlotte County land use and zoning information, and other information, as well as a feasibility study of alternatives to an expansion including the construction of an interconnection with either EWD or Charlotte County Utilities to treat and/or dispose of part or all of the utility’s flow. Sandalhaven contends that, after significant attempts to uncover the best alternative, it was determined that an interconnection with the EWD was the best option as opposed to the expansion of the wastewater treatment plant and deep well injection options.

            Specifically, the NARUC USOA states the following regarding Account 183 – Preliminary Survey and Investigation (PS&I) Charges:

 

This account shall be charged with all expenditures for preliminary survey, plans, investigations, etc., made for the purpose of determining the feasibility of projects under contemplation.  If construction results, this account shall be credited and the appropriate utility account charged.  If the work is abandoned, the charge shall be to account 426 – Miscellaneous Nonutility Expenses, or to the appropriate operating expense account unless otherwise authorized by the Commission (See account 775 – Miscellaneous Expenses).

 

In accordance with the requirements for the NARUC USOA Account No. 183, staff notes that the $227,056 for the wastewater treatment plant expansion project and the $99,884 for the deep well injection project cannot be capitalized because these projects were abandoned.

 

             In response to a staff data request, Sandalhaven asserted that the estimated costs of the wastewater treatment plant expansion and deep well injection would be $7,022,290.  This estimate total cost is $2,489,836 greater than the total actual cost of $4,532,454 for the impact fees to the EWD and the master lift station and force main interconnection costs.  As discussed in the case background, the disposal means of the utility’s treated effluent was reclaimed water irrigation at the WGC.  There were plans to redevelop the WGC which would have eliminated Sandalhaven’s effluent disposal means.  As such, staff believes the utility acted prudently to explore alternative treatment and disposal options to accommodate its existing and future customers, as well as to implement the most cost effective option.

 

            Staff believes that the total expenditures of $326,940 for the wastewater treatment plant expansion and deep well injection projects should be considered a non-recurring expense.  Rule 25-30.433(8), F.A.C., states “non-recurring expenses shall be amortized over a five-year period unless a shorter or longer period of time can be justified.”  Staff believes that a 15-year amortization period is a reasonable time over which to amortize these costs because it reflects the long-term nature of these costs had they resulted in assets being placed into service.  Staff recommends that miscellaneous expenses should be increased by $21,796 to reflect the amortization of Sandalhaven’s PS&I costs over a 15-year period.

 

            The recommended 15-year amortization period is consistent with the Commission’s decision in Florida Cities Water Company’s 1995 rate case.[4]  Florida Cities Water Company had expended $1,019,922 for its deep well injection viability project because its effluent disposal means through surface water discharge was being eliminated by a consent order with the DEP.  In that case, the Commission approved an increase of $67,995 ($1,019,922 divided by 15 years) to miscellaneous expenses in order to reflect the amortization of those PS&I costs over a 15-year period.

Retirement of Wastewater Treatment Plant

 

            In its filings, Sandalhaven reflected its wastewater treatment retirement adjustments to plant of $1,159,262, accumulated depreciation of $434,200, CIAC of $935,733, and accumulated amortization of CIAC of $678,441.  On MFR Schedule A-12, the utility only showed CIAC for main extension charges.  However, in accordance with its approved tariff, Sandalhaven had a plant capacity charge of $1,250 prior to filing, and no authorized main extension charge. 

 

            Pursuant to Rule 25-30.140(9)(a), F.A.C., states:

 

(a) Beginning with the year ending December 31, 2003, all Class A and B utilities shall maintain separate sub-accounts for: (1) each type of Contributions-in-Aid-of-Construction (CIAC) charge collected including, but not limited to, plant capacity, meter installation, main extension or system capacity; (2) contributed plant; (3) contributed lines; and (4) other contributed plant not mentioned previously. Establishing balances for each new sub-account may require an allocation based upon historical balances. Each CIAC sub-account shall be amortized in the same manner that the related contributed plant is depreciated. Separate sub-accounts for accumulated amortization of CIAC shall be maintained to correspond to each sub-account for CIAC.

(Emphasis added)

 

            When applying the utility’s 2005 year-end customers of approximately 803 and its $1,250 plant capacity charge, the CIAC associated with the wastewater treatment plant retirement should be at least $1,003,750.  As such, staff believes the retired amounts for CIAC is understated and for accumulated amortization of CIAC is overstated.  The retired plant amount of $1,159,262 represents 50.97% of the total 2005 year-end plant balance of $2,274,338.  When applying the 50.97% ratio to the total 2005 year-end CIAC balance of $2,293,750, staff calculated a retired CIAC amount of $1,169,155.  When applying the 50.97% ratio to the total 2005 year-end accumulated amortization of CIAC of $829,268, staff calculated a retired accumulated amortization of CIAC of $422,689. 

 

            Moreover, because the utility’s MFRs reflect reductions to plant and CIAC in 2007, the  projected average plant and CIAC adjustments equate to $579,631 and $467,867.  Staff recommends the average retirement plant and CIAC adjustments of $579,631 and $467,867, respectively, be removed from phase-one because the wastewater treatment plant will not be retired until 2009. 

 

            In its revised rate proposal, the utility’s projected plant balance at 80% buildout and the 2007 average plant balance in its MFRs were both $7,062,555.  Because this amount only contains the average plant retirement adjustment of $579,631, Sandalhaven has overstated its projected plant balance at 80% buildout.  Thus, staff recommends that plant for phase-two should be reduced by $579,631 in order to recognize the total plant retirement of $1,159,262.  Moreover, staff recommends that CIAC should be reduced by $584,578 in order to recognize the total CIAC associated with the wastewater treatment plant retirement.

Summary of Plant Adjustments

 

            A summary of phase-one and phase-two plant and other adjustments are reflected in the following table.

 

 

In subsequent issues, staff has addressed the appropriate adjustments to accumulated depreciation, CIAC, accumulated amortization of CIAC, and the loss on the early retirement of the wastewater treatment plant.

Issue 6: 

 Should an adjustment be made to land?

Recommendation: 

 Yes.  Land should be reduced by $73,089 for both phase-one and phase-two.  (Fletcher)

Staff Analysis: 

 In its filing, the utility reflected a land balance of $154,429.  In Finding No. 1 of the 2005 Audit, the staff auditors stated Sandalhaven added $93,588 for a 1.7 acre parcel of land related to a proposed treatment plant expansion.  Because this proposed plant expansion was abandoned, the auditors recommended that the $93,588 addition should be removed from rate base and reclassified to Account 103 – Property Held for Future Use pending final disposition. 

In its response to this audit finding, Sandalhaven stated that after the closing, 0.74 acres of the 1.7 acre parcel was swapped with another 0.74 acre parcel in order to provide legal ingress/egress to the wastewater treatment plant.  Because the new 0.74 acres is used daily to access its plant, the utility contends that the 0.74 acres should remain in rate base.  Sandalhaven asserted that the land was transferred at equal value and it only incurred survey and legal fees associated with putting this land swap together.  With regard to the 0.96 acres of the original 1.7 acre parcel, Sandalhaven stated that it is not in use and will not be used in the near term since the plant will not be expanded.

In Finding No. 2 of the 2006 Audit, the auditors stated that the $93,588 land addition in 2005 includes some legal costs but does not include a $10,000 deposit reflected on the closing statement for the original 1.7 acre parcel.  The auditors recommended that land be increased by $10,000 for the deposit.  On MFR Schedule A-6, the utility reflected a $25,841 land addition which represented legal and other costs related to the new land purchase. This results in the total land addition cost of $129,429.

Staff used Charlotte County’s GIS map database to investigate the utility’s claim regarding legal ingress to its plant.  With the assistance from Charlotte County’s Department of Real Estate Services, the new .74 acres represents the land between the Fiddler’s Green Condominium II property and the entrance to Sandalhaven’s wastewater treatment plant.  As such, staff believes that the new .74 acres should remain in rate base.  However, staff believes that the 0.96 acres of the original 1.7 acre panel should be considered non-used and useful land.  The 0.96 represents 56.47% of the total 1.7 acres of additional land.  Based on the above, staff recommends that the land should be reduced $73,089 for both phase-one and phase-two.

Issue 7: 

 What are the used and useful percentages of the utility's wastewater treatment plant, and its collection and reuse systems?

Recommendation: 

 The utility’s wastewater treatment plant should be considered 77.06% used and useful (U&U) and the wastewater collection system and reclaimed water system should be considered 100% used and useful.   However, since the net plant subject to used and useful consideration is 100% contributed, staff recommends that it would be inappropriate to make any non-used and useful adjustment to the wastewater treatment plant in this case.  (Massoudi, Fletcher)

Staff Analysis: 

 In its filing, the utility calculated the used and useful percentage for the wastewater treatment plant to be 100%.  The utility requested that the used and useful percentages for the collection and reclaimed water systems also be considered 100%.  Staff’s analysis of used and useful is discussed below.

 

Wastewater Treatment Plant

 

            Sandalhaven provides only wastewater service in Charlotte County and is located in Englewood, Florida.  Charlotte County provides the water service to this area.  Its customer base consists of multi-family residential, single-family residential, commercial, and general service customers.

 

            The plant is permitted by DEP based on an annual average daily flow (AADF) basis and has a capacity of 150,000 gallons per day (gpd). The wastewater treatment plant is an extended aeration domestic wastewater treatment plant. This facility processes the inflowing waste and directs it to the reclaimed water processing system of the plant.  The reclaimed system consists of a filtration system and a high-level chlorination system. The reclaimed water is then transported, via a wastewater distribution line, to a reuse holding pond which is located at the WGC.

 

            According to its filing, on October 2005, the utility entered into an agreement with the EWD whereby EWD will provide bulk wastewater treatment and disposal to serve new customers of Sandalhaven (newly built subdivisions) through an interconnection with EWD’s system.  The utility intends to retire the existing wastewater treatment plant in the future and interconnect to EWD.  As mentioned above, the utility stated that the retirement date of the WWTP is dependent on the timing of the redevelopment of the property as a residential community.  In Schedule F-6 of its revised MFRs dated December 2006, the utility stated that until the WWTP is taken off line, the utility will continue to utilize the existing WWTP.

 

            In Schedule F-6 of its revised MFRs dated December 2006, the utility calculated its used and useful percentage for the wastewater treatment plant based on the historical test year 2005 and projected year 2007. The utility calculated its projected used and useful percentage for the wastewater treatment plant by taking the sum of the current annual average daily flows (AADF) of 90,000 gpd and the anticipated flow from various developments of 249,550 gpd. The calculation resulted in a total average flow of 339,550 gpd. It then divided that total demand of 339,550 gpd by the purchased capacity of 300,000 gpd wastewater from EWD. The utility did not make any adjustments for inflow and infiltration (I&I) in its calculations.  This resulted in a 100% used and useful percentage for wastewater treatment plant. 

 

Staff’s Calculation of the Wastewater Treatment Plant U&U Percentage

 

            Staff disagrees with the utility’s methodology for its used and useful calculation.  Staff believes that the daily flow from the existing customers, which is still being treated by Sandalhaven’s WWTP, should not be added to the daily flow from the new customers that are interconnected to the EWD system or the anticipated flow from various developments.  As indicated previously, the utility stated that the retirement date of the existing WWTP is dependent on the timing of the redevelopment of the WGC as a residential community.  The utility does not know specifically when this property will be redeveloped.  Staff believes that at this point, the utility’s existing WWTP used and useful should be calculated separately since it is not yet retired.

 

            Also, since staff had data for the year 2006 to calculate U&U, staff believes that the U&U percentage would be more accurate and valid if the U&U is calculated based on the historical test year 2006.  Pursuant to Rule 25-30.432, F.A.C., used and useful percentages for a wastewater treatment plant shall be calculated by comparing test year flows to the DEP permitted capacity, using the same method of measuring flows.  Therefore, staff calculated the used and useful percentage for Sandalhaven’s WWTP by taking the 2006 annual average daily flow (AADF) plus a growth allowance, and subtracting the excessive I&I, then dividing by the permitted capacity of the system.

 

The existing WWTP is permitted to operate at a capacity of 150,000 gallons per day based on AADF.  According to the DEP discharge monitoring report (DMR), the annual average daily flow for the historical test year of 2006 for the WWTP was measured and calculated to be 88,896 gpd. The anticipated growth for the following year was calculated by regression analysis to be 67 ERCs.  Since this growth rate exceeds the 5% per year limit provided by Section 367.081(2)(a)2.b., F.S., the customer growth in ERCs was calculated  based on the statutory 5% per year cap of the average connections in 2006 (1,059 ERCS).  The customer growth using the 5% per year cap was determined to be 53 ERCs (1,059 x 5%). As a result, the total projected growth for 2007 was calculated to be 26,694 gpd. There does not appear to be an excessive infiltration problem occurring within the collection system. In accordance with the formula method and the calculation methodology used (See Attachment A), the used and useful percentage is calculated to be 77.06%.  

Contribution Level of Plant

Both the utility and staff analyzed used and useful on an engineering basis and calculated adjustments to rate base consistent with each of their methodologies.  However, if one looks at the engineering aspect of the test year equation in a vacuum, applying the used and useful adjustment to the utility’s rate base presents an illogical result.  There are two reasons for this.  The first reason is that neither the utility’s nor staff’s used and useful equations include an estimate of consumption for the 111 ERCs that result in monthly guaranteed revenues.  In its filing, the utility reflected those revenues above the line in calculating its requested revenues. Including the revenues, but not incorporating the usage in used and useful, clearly creates a mismatch between the rate calculation and the used and useful revenue requirement.  In order to reflect the proper amount of used and useful, staff believes that this estimate should be included in the test year flows.  The estimated flows should be included in the numerator of the equation, thus, increasing the total used and useful percentage.  However, staff does not believe that this adjustment is necessary as discussed below.

The second and most crucial aspect that was left out of the used and useful analysis is the amount of CIAC included in the utility’s rate base.  The purpose of making a used and useful calculation is to remove from rate base any investment that the utility has in non-used and useful plant held for future customers.  If non-used and useful plant is fully contributed, making a used and useful reduction to rate base would reduce rate base more than the book value originally included.  Thus, a negative rate base impact would result. 

Staff performed an analysis of the utility’s net book value excluding land, the impact fees to the EWD, and the interconnection costs.  The historical 2005 base year can best illustrate staff’s concerns for two reasons.  First, the contributions received through the 2005 calendar year related only to the utility’s wastewater treatment plant and collection system.  Second, the 2005 calendar year does not include the impact fees to the EWD and the interconnection costs for which staff has recommended a non-used and useful adjustments for phase-one.  In our analysis, staff also excluded land because staff has recommended a non-used and useful land adjustment for in a previous issue.

 

As the above table reflects, making any used and useful adjustment will penalize the utility, given the contribution level of the utility’s plant.  Based on the above, staff recommends that no used and useful adjustment should be made for the wastewater treatment plant in this case.  This recommendation of no used and useful adjustment for the wastewater treatment plant is consistent with the Commission’s decision in the utility’s 2002 rate case.  See Order No. PSC-03-0602-PAA-SU, pp. 16-20.

Wastewater Collection Systems

A calculation of the used and useful percentage of the collection system was not required because virtually all of the wastewater mains and lift stations were contributed by the developers.  Therefore, the wastewater collection system should be considered 100% used and useful.

Reclaimed Water System

 

Chapter 367.0817(3), F.S., states that all prudent costs of a reuse project shall be recovered in rates. The utility, in its filing, requested a 100% used and useful percentage for the reclaimed water system. As such, staff agrees with the utility that the reclaimed water system should be considered 100% used and useful.

Issue 8: 

 What is the appropriate balance of accumulated depreciation?

Recommendation: 

 Based on recommended plant adjustments in preceding issues and depreciation rates in accordance with Rule 25-30.140, F.A.C., the appropriate average accumulated depreciation balance for phase-one is $966,065 for the test year ending December 31, 2007, and  the appropriate accumulated depreciation for phase-two at 80% buildout is $839,459.   Accordingly, accumulated depreciation should be increased by $182,083 for phase-one and decreased by $273,528 for phase-two. (Fletcher)

Staff Analysis: 

 On MFR Schedule A-2, the utility reflected an accumulated depreciation balance of $785,632 for the test year ending December 31, 2007.  In its revised rate proposal, Sandalhaven reflected an accumulated depreciation balance of $1,114,412 at 80% buildout.  In Finding No. 12 in the 2006 Audit, staff auditors stated that the utility does not use the rates prescribed in Rule 25-30.140, F.A.C.  In its response to the 2006 audit, Sandalhaven agreed with the staff auditors’ adjustments to its depreciation.  Because staff’s recommended plant adjustments were not known at the time staff auditors recomputed the utility’s depreciation expense and phase-two was not contemplated until after the 2006 audit was issued, staff calculated the accumulated depreciation balance for phase-one and phase-two. 

Based on recommended plant adjustments in preceding issues and depreciation rates in accordance with Rule 25-30.140, F.A.C., staff recommends that the appropriate accumulated depreciation balance for phase-one is $966,065 for the average test year ending December 31, 2007.  In addition, staff recommends that the appropriate accumulated depreciation for phase-two at 80% buildout is $839,459.  Accordingly, accumulated depreciation should be increased by $182,083 for phase-one and decreased by $273,528 for phase-two. 

 

 

Issue 9: 

 What are the appropriate balances of contribution-in-aid-of construction (CIAC) and accumulated amortization of CIAC?

Recommendation: 

 To correct the utility’s errors for the 2007 average balances, CIAC and accumulated amortization of CIAC should be increased by $577,844 and $29,975, respectively.  Based on the corrections to average balances, staff’s recommended plant capacity charges, and depreciation rates in accordance with Rule 25-30.140, F.A.C., the appropriate CIAC and accumulated amortization of CIAC balances for phase-one are $2,867,354 and $926,450, respectively, for the average test year ending December 31, 2007.  Accordingly, for phase-one, CIAC should be decreased by $2,294,101 and accumulated amortization of CIAC increased by $283,179.  Based on the wastewater treatment plant retirement, staff’s recommended plant capacity charges, and the correct depreciation rates, the appropriate CIAC and accumulated amortization of CIAC balances for phase-two at 80% buildout are $3,442,559 and $700,504, respectively.  Accordingly, for phase-two, CIAC and accumulated amortization of CIAC should be decreased by $759,017 and $47,818, respectively.  (Fletcher)

Staff Analysis: 

 On MFR Schedule A-2, the utility reflected CIAC and accumulated amortization of CIAC balances of $4,115,745 and $613,297, respectively, for the test year ending December 31, 2007.  In its calculations of these balances, the utility took the 2006 average balance and the 2007 year-end balance to derive its 2007 average balance.  Sandalhaven should have used the 2006 and 2007 year-end balances to derive the 2007 average balances.  To correct the utility’s errors for the 2007 average balances, CIAC and accumulated amortization of CIAC should be increased by $577,844 and $29,975, respectively. 

On MFR Schedule A-12, Sandalhaven reflected 2006 and 2007 CIAC additions of $2,284,068 and $1,167,274, respectively.  The utility states that these additions were derived by simply utilizing its plant capacity charge prior to filing of $1,250 and its approved temporary charge of $2,627.75 that became effective April 2007.  Using the utility’s same basis to project CIAC, staff’s recalculation reflects that the utility overstated its CIAC by $1,199,068 in 2006 and $553 in 2007.

Based on the corrections to average balances, staff’s recommended plant capacity charges, and depreciation rates in accordance with Rule 25-30.140, F.A.C., staff recommends that the appropriate CIAC and accumulated amortization of CIAC balances for phase-one are $2,867,354 and $926,450, respectively, for the average test year ending December 31, 2007.  Accordingly, for phase-one, CIAC should be decreased by $2,294,101 and accumulated amortization of CIAC increased by $283,179.

In its revised rate proposal, Sandalhaven reflected phase-two CIAC and accumulated amortization of CIAC balances of $4,786,153 and $748,322, respectively.  Using the utility’s same basis to project CIAC, staff’s recalculation reflects that the utility overstated its CIAC by $1,291,633 in 2006 and $553 in 2007.  Based on the wastewater treatment plant retirement, staff’s recommended plant capacity charges, and the correct depreciation rates, staff recommends that the appropriate CIAC and accumulated amortization of CIAC balances for phase-two at 80% buildout are $3,442,559 and $700,504, respectively.  Accordingly, for phase-two, CIAC and accumulated amortization of CIAC should be decreased by $759,017 and $47,818, respectively.

Issue 10: 

 What is the appropriate working capital allowance?

Recommendation: 

 In accordance with Rule 25-30.433(2), F.A.C., the appropriate phase-one and phase-two working capital allowances are $63,948 and $80,796, respectively.  Accordingly, working capital for phase-one and phase-two should be increased by $4,817 and $6,482 respectively.  (Fletcher)

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 phase-one working capital of $63,948 should be approved.  This reflects an increase of $4,817 to the utility’s requested working capital allowance of $59,131. Staff recommends that phase-two working capital of $80,796 should be approved.  This represents an increase/decrease of $6,482 to the utility’s requested working capital of $74,314.

Issue 11: 

 What is the appropriate rate base?

Recommendation: 

 The appropriate phase-one rate base for the test year ending December 31, 2007, is $58,659, and the appropriate phase-two rate base is $2,333,909.  (Fletcher)

Staff Analysis: 

 Consistent with other previously recommended adjustments, the appropriate phase-one and phase-two rate bases are $58,659 and $2,333,909, respectively.  Staff’s calculated phase-one and phase-two rate bases are shown on Schedules 1-A and 1-B, respectively.  Staff’s adjustments to phase-one and phase-two rate bases are shown on Schedule 1-C and Schedule 1-D, respectively.

COST OF CAPITAL

Issue 12: 

 What is the appropriate return on common equity?

Recommendation: 

 The appropriate phase-one and phase-two return on common equity is 12.00% based on the Commission leverage formula currently in effect.  An allowed range of plus or minus 100 basis points should be recognized for ratemaking purposes.  (Fletcher)

Staff Analysis: 

 On MFR Schedule D-1, the utility used a return on equity (ROE) of 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%.[5]   As noted in Issue 2, Utilities, Inc.’s average common equity balance of $90,787,422 should be adjusted upward by $17,464,864 to $108,252,286.  In addition, UI’s average long-term debt balance of $124,044,203 should be increased by $55,955,797, and UI’s average short-term debt balance of $11,347,000 should be removed because the long-term debt issuance in 2006 extinguished all of its short-term debt.  The effect of the above adjustments decreased the equity ratio as a percentage of investor-supplied capital from 40.14% to 37.55%.  Based on the current leverage formula approved in Order No. PSC-07-0472-PAA-WS and an equity ratio of 37.55%, the appropriate ROE for phase-one is 12.00%.[6] 

 

            In its revised phase-two rate proposal, Sandalhaven used a ROE of 11.99%.  This return is based on the application of the Commission’s leverage formula approved in Order PSC-07-0472-PAA-WS and an equity ratio of 40.14%.  Because the utility simply reconciled UI’s average 2005 balances for long-term, short-term, and common equity balances to its projected 80% buildout rate base, staff recommends that the same above adjustments as discussed in Issue 2 should be made to the long-term, short-term, and common equity balances for phase-two as well.  The effect of the above adjustments decreased the equity ratio as a percentage of investor-supplied capital from 40.14% to 37.55%.  Based on the current leverage formula approved in Order No. PSC-07-0472-PAA-WS and an equity ratio of 37.55%, the appropriate ROE for phase-two is 12.00%.

 

Moreover, staff recommends an allowed range of plus or minus 100 basis points be recognized for phase-one and phase-two ratemaking purposes.

Issue 13: 

 What is the appropriate balance of accumulated deferred income taxes?

Recommendation: 

 As discussed in staff’s analysis below, the appropriate 2007 average net used and useful credit accumulated deferred income taxes (ADITs) balance is $176,511 for phase-one, which represents an increase of $30,633 from the utility’s MFR balance of $145,878.  Because the capital structure is reconciled to rate base, it is appropriate to set phase-two net credit ADITs balance equal to the average phase-one balance less the non-used and useful adjustment for the credit associated with the impact fees paid to the EWD and the force main and master lift station.  Accordingly, the appropriate net credit ADITs balance for phase-two is $178,894.  This represents an increase of $178,894, because the utility reflected a net debit balance in rate base of $88,867 in its revised phase-two proposal.  As such, phase-two rate base should be reduced by $88,867.  (Fletcher)

Staff Analysis: 

 On MFR Schedule D-1, Sandalhaven reflected an average credit ADITs balance of $145,878.  In Audit Finding No. 16, staff auditors noted that the general ledger reflected a debit balance of $99,410.  The auditors recalculated the utility’s average deferred tax balance before other adjustments as a debit of $95,694, requiring a debit adjustment to the MFRs of $241,572.  The auditors believe that the utility overstated its calculation of deferred taxes for accelerated depreciation for state income tax purposes by $16,321.  Finally, the auditors believe that deferred taxes for intangible plant were overstated by $1,381 for state tax purposes and understated by $18,196 for federal tax purposes.  The net of these adjustments would result in a 2005 year-end ADITs balance of $99,904.  The result of these audit adjustments yields an average 2005 ADITs balance of $95,941.  In its response to the audit report, Sandalhaven agreed with these findings. 

 

            The following table fully illustrates the auditors recommended adjustments to the utility’s ADITs.

 

	Utility	Utility	Utility			Audited
	Year-End	Year-End	Average	2005 Audit	Audited	Average
Account Name	2004	2005	2005	Adjustments	2005	2005
Federal DIT - Tap Fee Post 2000	$200,540	$211,987	$206,264	$0	$211,987	$206,264
Federal DIT - Rate Case	(11,652)	(7,120)	(9,386)	0	(7,120)	(9,386)
Federal DIT - Def Maint	(6,522)	(5,149)	(5,836)	0	(5,149)	(5,836)
Federal DIT- Org Exp	(26,262)	(28,004)	(27,133)	18,196	(9,808)	(18,035)
Federal DIT Depreciation	(95,343)	(104,607)	(99,975)	0	(104,607)	(99,975)
State DIT - Tap Fee Post 2000	34,328	36,288	35,308	0	36,288	35,308
State DIT - Rate Case	(1,995)	(1,220)	(1,608)	0	(1,220)	(1,608)
State DIT - Def Maint	(1,116)	(881)	(999)	0	(881)	(999)
State DIT- Org Exp	0	(298)	(149)	(1,381)	(1,679)	(840)
State DIT Depreciation	0	(1,586)	(793)	(16,321)	(17,907)	(8,954)
Total Debit or (Credit) Balance	$91,978	$99,410	$95,694	$494	$99,904	$95,941

 

            Based on a response to a staff data request, the utility explained that the “Tap Fee Post 2000” relates to the payment of taxes on plant capacity fees collected since 2000.  Sandalhaven stated that the “Rate Case” relates to rate case expense incurred for its prior case.  Staff notes that rate case expense will generate a ADIT credit because the costs are expensed in the year they are incurred for tax purposes and for book purposes the rate case expense is amortized over four years in accordance with Section 367.0816, F.S.  The utility explained that the “Def Maint” relates to periodic maintenance expenses that occur regularly but at intervals greater than one year, such as painting tanks.  Staff notes that non-recurring expenses are typically amortized over a five-year period in accordance with Rule 25-30.433(8), F.A.C., for book purposes, which will create a ADIT credit because the total amount of these costs are expensed in the year they are incurred for tax purposes.  Further, Sandalhaven stated that the “Org Exp” relates to the costs of organizing and acquiring companies.  Staff notes this expense creates a ADIT credit because the amortization period of 40 years for book purposes is less than the amortization period of 5 years for tax purposes.

 

            Based on our review, staff believes several adjustments to the utility’s ADITs are necessary.  The adjustments involve the following: (1) the appropriate ratemaking treatment of the utility’s ADITs for taxes paid on plant capacity charges; (2) the appropriate amount of any credit ADITs associated with rate case expense; (3) the appropriate projected 2007 average ADITs associated with the deferred maintenance expenses; (4) whether the credit ADITs for the utility’s organization and acquisition costs should be disallowed; (5) the appropriate projected 2007 average ADITs associated with depreciation timing differences between book and tax purposes; and (6) the appropriate non-used and useful adjustment to projected 2007 average ADITs associated with depreciation for the impact fees paid to the EWD and the force mains and master lift station interconnection costs.

 

Treatment of Debit ADITs from Taxes Paid on Plant Capacity Charges

 

In a staff data request, the utility was asked to explain why it has paid taxes on plant capacity charges since 2000.  In addition, Sandalhaven was asked to provide a copy of all documentation, including, but not limited to, treasury regulations, Internal Revenue Service (IRS) letter rulings, and federal tax cases, supporting the utility’s basis for paying taxes on these charges.  In its response, Sandalhaven asserted that it believes that paragraph (b)(4)(i) of IRS Treasury Regulation 1.118-2 requires the utility to treat plant capacity charges as taxable income.

In support of its position, the utility provided a copy of a portion of an order issued by the North Carolina Utilities Commission (NCUC) in Docket W-354 Sub 266 for Carolina Water Service, Inc. (CWS) which is another subsidiary of Utilities, Inc.  In that docket, the NCUC staff witness Fernald testified that the ADITs from CWS’s plant modification fees should be removed.  However, based on cross-examination and a late-filed hearing exhibit consisting of a page memorandum from PriceWaterhouseCoopers, the NCUC found that CWS had appropriately treated the plant modification fees as taxable income.

Specifically, the NCUC’s order states the following:

Witness Fernald has removed from federal ADIT $670,712 and from state ADIT $156,793 associated with plant modification fees received by the Company in 2001, 2002, and 2003.  CWS has included all cash payments received as tap fees as taxable income for tax purposes and has included a debit balance in ADIT associated with the receipt of plant modification fees.  Witness Fernald testified that CWS collects plant modification fees for the expansion of and improvements for the utility system.  Witness Fernald testified that the Public Staff had requested CWS’s external auditor’s opinion on the taxability of plant modification fees but has not received a response.  Witness Fernald removed an amount of ADIT related to plant modification fees based on information available as of the date of her testimony because the Company had not provided the basis for taxing plant modification fees under the tax law changes.

CWS takes the position that plant modification fees are taxable income under the Job Protection Act of 1996.  CWS has treated plant modification fees as taxable income and has actually paid tax on them.  CWS has followed this procedure based on consultation with its tax experts, PriceWaterhouseCoopers. 

On cross-examination, CWS asked witness Fernald to identify the authority she relied upon in support of her position that the post-2000 plant modification fees were not taxable.  She identified the IRS final regulation issued on January 11, 2001.  Witness Fernald cited portions of the regulation exempting Contributions in Aid of Construction from taxable income generally but listing as an exception customer connection fees.

In particular, witness Fernald cited Section (b)(1) on page 2,255:

(b) Contribution in aid of construction – (1) in general.  For purposes of Section 118(e) and this section, the term contribution in aid of construction means any amount of money or other property contributed to a regulated public utility that provides water or sewage disposal service to the extent that the purpose of the contribution is to provide for the expansion, improvement, or replacement of the utility’s water or sewage disposal facilities.

Witness Fernald also cited Section (b)(3)(i) on page 2,255.  This portion of the regulation exempts from the definition of nontaxable CIAC customer connection fees:

(3)  Customer connection fee – (i) In general.  Except as provided in paragraph (b)(3)(ii) of this section, a customer connection fee is not a contribution in aid of construction under this paragraph (b) and generally is includible in income.  The term customer connection fee includes any amount of money or other property transferred to the utility representing the cost of installing a connection or service line (including the cost of meters and piping) from the utility’s main water or sewer lines to the line owned by the customer or potential customer.  A customer connection fee also includes any amount paid as a service charge for starting or stopping service.

In support of its position that plant modification fees are taxable, CWS relies on other paragraphs of the same regulation.  CWS relied upon paragraph (b)(4)(i):

(4) Reimbursement for a facility previously placed in service – (i) In general.  If a water or sewage disposal facility is placed in service by the utility before an amount is contributed to the utility, the contribution is not a contribution in aid of construction under this paragraph (b) with respect to the cost of the facility unless, no later than 5 ½ months after the close of the taxable year in which the facility was placed in service, there is agreement, binding under local law, that the utility is to receive the amount as reimbursement for the cost of acquiring or constructing the facility.

            CWS also cites Section (b)(5):

(5)  Classification of ratemaking authority.  The fact that the applicable ratemaking authority classifies any money or other property received by a utility as a contribution is not conclusive as to its treatment under this paragraph (b).

In addition, CWS filed as a late filed exhibit a memorandum from PriceWaterhouseCoopers in which the firm stated that it agreed with CWS’s tax treatment of plant modification fees.  The Public Staff lodged no objection to Commission consideration of this late-filed exhibit.  Specifically, Mr. Jerry Cahill stated that, for 2001 through 2003 tax returns, “plant modification fees and tax/connection fees were properly included in taxable income on each return under the provisions of Internal Revenue Code 118 and Income Tax regulations thereunder.”  Finally, Public Staff witness Lucas testified on cross-examination that CWS serves in a number of subdivisions where the backbone facilities are in place before the residences in the subdivision are completely buildout.  Thereafter, infill occurs, and both tap fees and plant modification fees are assessed when residences make connection to the water and sewer system.  This testimony supports CWS’s position that paragraph (b)(4)(i) is controlling.  As a result the Commission concludes that CWS appropriately treated the plant modification fees as taxable.

            Staff believes that paragraph (b)(4)(ii) of IRS Treasury Regulation 1.118-2 clearly demonstrates that Sandalhaven’s plant capacity charges are non-taxable CIAC, if the charges were approved within 8½ months from the in-service date of the wastewater treatment plant.  Paragraph (b)(4)(ii) of IRS Treasury Regulation 1.118-2, states:

(ii)  Example.  The application of paragraph (b) (4) (i) of this section is illustrated by the following example: 

Example. M, a calendar year regulated public utility that provides water services, spent $1,000,000 for the construction of a water facility that can serve 200 customers.  M placed the facility in service in 2000.  In June 2001, the public utility commission that regulates M approves a tariff requiring new customers to reimburse M for the cost of constructing the facility by paying a service availability charge of $5,000 per lot.  Pursuant to the tariff, M expects to receive reimbursements for the cost of the facility of $100,000 per year for the years 2001 through 2010.  The reimbursements are contributions in aid of construction under paragraph (b) of this section because no later than 8½ months after the close of the taxable year in which the facility was placed in service there was a tariff, binding under local law, approved by the public utility commission requiring new customers to reimburse the utility for the cost of constructing the facility.  The basis of the $1,000,000 facility is zero because the expected contributions equal the cost of the facility.

            Pursuant to Section 367.171, F.S., on September 27, 1994, the Board of County Commissioners of Charlotte County adopted a resolution giving this Commission jurisdiction over privately owned water and wastewater utilities in Charlotte County.  By Order No. PSC-94-1451-FOF-WS, issued November 28, 1994, the Commission acknowledged the County's resolution.  By Order No. PSC-95-0478-FOF-SU,[7] the Commission approved a grandfather certificate for the utility and approved among other things the $1,250 plant capacity charge that Charlotte County had initially set.  By Order No. PSC-99-2114-PAA-SU,[8] the Commission approved the transfer from Sandalhaven Utility, Inc. to Utilities, Inc. of Sandalhaven and approved the adoption of the same $1,250 plant capacity charge.

            Moreover, in a staff data request, Sandalhaven was asked to provide a copy of the tax returns to support or verify that the taxes were in fact paid on the plant capacity charges from 2001 to present.  To date, the utility has only provided the state returns.  However, the federal returns contain the necessary detail to verify if the utility paid taxes on the plant capacity charges.

            In light of the above, staff believes that, absent the utility showing that Charlotte County approved a plant capacity charge more than 8½ months after the utility’s wastewater treatment plant was placed into service, the debit ADITs from taxes paid on plant capacity charges should be disallowed for ratemaking purposes.  The burden of proof in ratemaking cases in which a utility seeks an increase in rates rests on the utility.[9]

Appropriate Amount of Credit ADITs from Rate Case Expense

            As stated earlier, the audited 2005 average federal and state credit ADITs balances for rate case expense in the utility’s last case were $9,386 and  $1,608, respectively.  Based on the utility’s annual amortization of $4,532, the 2007 average federal and state credit ADITs would be $1,294 and $223, respectively.  By Order No. PSC-03-0602-PAA-SU, p. 25-27, the Commission approved a total rate case expense of $49,750 with an annual amortization amount of $12,438.  That order was later consummated,[10] and the PAA rates became effective on June 5, 2003.  In accordance with Section 367.0816, F.S., the statutory four-year rate reduction was completed on June 5, 2007.  Because the four year rate reduction was completed before any change in rates resulting from the current rate case, staff recommends that a normalization adjustment should be made to remove all credit ADITs associated with the rate case expense from the utility’s last case.

            According to the utility’s 2006 general ledger, Sandalhaven recorded total federal and state credit ADITs associated with rate case expense incurred in the current case of $28,533.  In Issue 20, staff has recommended a total rate case expense of $141,019 with an annual amortization of $35,255.  With those recommended amounts, staff recommends that the 2007 average credit ADITs from rate case expense should be $35,155.

Appropriate Amount of Credit ADITs from Deferred Maintenance Expenses

            As discussed above, the audited 2005 average federal and state credit ADITs balances for “Def Maint” were $5,836 and $999, respectively.  Staff notes it is common for water and wastewater utilities to have deferred maintenance expenses, such as painting tanks every five years.  Based on the utility’s annual amortization of $1,608, the 2007 average federal and state credit ADITs would be $3,090 and $529, respectively.  Therefore, staff recommends that the 2007 average credit ADITs from rate case expense should be $3,619.

Treatment of Credit ADITs from Acquisition Costs

            As stated earlier, the audited 2005 average federal and state credit ADITs balances for “Org Exp” were $18,035 and $840, respectively.  Sandalhaven asserted that the “Org Exp” relates to the costs of organizing and acquiring companies.  Per the NARUC USOA, the organization account shall include all fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and putting it into readiness to do business.  In addition, the USOA states that the Utility Plant Acquisition Adjustment account includes the difference between the cost of the purchasing utility of plant acquired and the original cost of the property acquired less accumulated depreciation, accumulated amortization, and contributions in aid of construction (CIAC) at the time of purchase.  The Commission has consistently interpreted the term “cost of acquisition” to include any consideration paid, plus any other costs incurred related to or given for the purchase of the assets.[11] 

By Order No. PSC-03-0602-PAA-SU, p. 7-9, the Commission disallowed all of the utility’s acquisition costs that it recorded as organization costs and franchise fees in its last rate case.  The acquisition costs were disallowed for the following reasons.  First, the expenses are acquisition costs and were inappropriately treated as organization costs and franchise fees. Second, the expenses should be borne by the stockholders of Sandalhaven’s parent company because the purchase of the utility was not the ratepayers' decision, nor did Sandalhaven demonstrated how the customers have benefited from this transaction.  Because these expenses are directly associated with the change of ownership, they should be recorded as acquisition costs.  Therefore, staff recommends that the utility’s credit ADITs for its acquisition costs should also be consistently removed for ratemaking purposes.

Appropriate Projected Net Credit ADITs of Timing Differences in Book and Tax Depreciation

            As discussed previously, the audited 2005 average federal and state net credit ADITs balance for timing differences between book and tax depreciation were $99,975 and $8,954, respectively.  Based on the utility’s general ledger ADITs balance, the recommended 2006 and 2007 plant and CIAC additions, the depreciation rates prescribed in Rule 25-30.140, F.A.C., and the IRS accelerated cost recovery system’s service life of 25 years for utility property, staff recommends that the appropriate net credit ADITs balance for timing differences between book and tax depreciation is $140,121. 

            In our calculations of the appropriate net credit ADITs balance for timing differences between book and tax depreciation, staff did consider any Section 179 Deductions of depreciation on eligible property.  However, pursuant to page 19 of the IRS Publication 946, an entity cannot take a Section 179 Deduction if the cost of an entity’s Section 179 property placed in service during 2006 is $538,000 or more.  Presently, staff is not aware of any proposed changes in this threshold limit for 2007 returns.  The 2007 eligible property additions for the force main and master lift station were $2,177,189, which are in excess of the present $538,000 threshold limit to claim a Section 179 Deduction.  Thus, no Section 179 deductions were included in staff’s recommended net credit ADITs balance for timing differences between book and tax depreciation.

Non-Used and Useful Credit ADITs for Impact Fees to the EWD and Interconnection Costs

In Issue 5, staff has recommended phase-one non-used and useful adjustments for the impact fees paid to the EWD and the force main and master lift station project.  The total recommended non-used and useful amount for these costs was $2,892,879.  With the costs of these plant additions totaling $4,532,454, the non-used and useful percentage equates to 63.83%.   Rule 25-30.433(3), F.A.C., states:

Used and useful debit deferred taxes shall be offset against used and useful credit deferred taxes in the capital structure.  Any resulting net debit deferred taxes shall be included as a separate line item in the rate base calculation.  Any resulting net credit deferred taxes shall be included in the capital structure calculation.  No other deferred debits shall be considered in rate base when the formula method of working capital is used. 

Staff calculated a credit ADITs of $3,733 for the impact fees paid to the EWD and the force main and master lift station project.  In accordance with Rule 25.30.433(3), F.A.C., staff recommends a corresponding non-used and useful adjustment of $2,383 to the above credit ADITs balance of $3,733.  With the $2,383 adjustment, the used and useful credit ADITs balance for the impact fees paid to the EWD and the force main and master lift station project is $1,350.

Summary

            Based on the above, staff recommends that the appropriate 2007 average net used and useful credit ADITs balance is $176,511 for phase-one, which represents an increase of $30,633 from the utility’s MFR balance of $145,878. The following table represents staff’s calculation of net credit ADITs balance for timing differences between book and tax depreciation only.

 

For further illustration, the following table shows staff’s recommended 2007 average net used and useful credit ADITs balance of $176,511.

 

Because the capital structure is reconciled to rate base, staff believes it is appropriate to set the phase-two net credit ADITs balance equal to the average phase-one balance excluding any non-used and useful adjustment to the credit ADITs.  Accordingly, staff recommends that the appropriate net credit ADITs balance for phase-two is $178,894.  This represents an increase of $178,894 because the utility reflected a net debit balance in rate base of $88,867 in its revised phase-two proposal.  As such, phase-two rate base should be reduced by $88,867. 

 

Issue 14: 

 What is the appropriate weighted average cost of capital including the proper components, amounts, and cost rates associated with the capital structure?

Recommendation:   The appropriate weighted average cost of capital for phase-one and phase-two are 1.71% and 7.95%, respectively. 

(Fletcher)

Staff Analysis: 

 On MFR Schedule D-1, the utility requested a weighted average cost of capital of 8.56%.  Regardless, based on our recommended adjustments in preceding issues, staff calculated a negative weighted average cost of capital of 18.07% for phase-one.  This resulting negative cost of capital is primarily due to the recommended non-used and useful rate base adjustments and the customer deposit and ADITs balances exceeding the recommended rate base.  Because the utility is required to pay customer deposits with interest at 6.00% per annum, staff believes it is appropriate to zero out the investor sources of capital and apply a pro rata adjustment to ADITs in order to reconcile the capital structure to phase-one rate base.  Accordingly, staff recommends a weighted average cost of capital of 1.71% for phase-one.   Schedule No. 2-A details staff’s recommendation for phase-one including the proper components, amounts, and cost rates associated with the capital structure.

In its revised phase-two rate proposal, the utility requested a weighted average cost of capital of 8.65%.  Based on our recommended adjustments in preceding issues, staff recommends a weighted average cost of capital of 7.95% for phase-two.  Schedule No. 2-B details staff’s recommendation for phase-two including the proper components, amounts, and cost rates associated with the capital structure.

 

NET OPERATING INCOME

Issue 15: 

 Should adjustments be made to the utility's projected revenues?

Recommendation: 

 Yes.  Using the incremental difference between the audited 2006 billing determinants and the projected 2007 billing determinants, a 2007 annualized revenue adjustment of  $91,942 should be made for phase-one.  For reasons set forth in staff’s analysis below, reuse revenues of $3,798 should be removed from phase-two because no reuse service will be provided once the wastewater treatment plant is retired.  Moreover, using the incremental difference between the audited 2006 billing determinants and the projected 80% buildout billing determinants, an annualized revenue adjustment of $170,698 should be made for phase-two.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-2, the utility reflected operating revenues of $271,700 for the year ending December 31, 2006.  Sandalhaven did not included an annualized revenue adjustment for its 2007 projected billing determinants.  Instead, the utility incorporated the effect of such an adjustment in its requested revenue increase of $841,571.  Consistent with  Commission practice, staff removed the requested revenue increase to determine adjusted operating revenues before any increase or decrease is calculated.  Using the incremental difference between the audited 2006 billing determinants and the projected 2007 billing determinants, staff calculated a 2007 annualized revenue adjustment of  $91,942 for phase-one.

In its revised phase-two proposal, the utility reflected operating revenues of $276,562 for the year ending December 31, 2005.  Moreover, staff recommends that reuse revenues of $3,798 should be removed because no reuse service will be provided once the wastewater treatment plant is retired for phase-two.  Using the incremental difference between the audited 2006 billing determinants and the projected 80% buildout billing determinants, staff calculated an annualized revenue adjustment of  $170,698 for phase-two.

 

Issue 16: 

 Should a miscellaneous service revenues adjustment be made?

Recommendation: 

 Yes.  Using the difference between the 167 initial connections and normal reconnections in 2006 and the projected 387 connections in 2007, staff recommends that miscellaneous service revenues of $3,298 should be imputed for phase-one and phase-two.  (Fletcher)

Staff Analysis: 

 In its filing, Sandalhaven reflected miscellaneous service revenue charges of $6,862.  The audited 2006 miscellaneous service revenues are $7,389, which included 167 combined initial connections and normal reconnections.  The utility’s initial connection and normal reconnections charges during normal hours are $15.  Using the difference between the 167 initial connections and normal reconnections in 2006 and the projected 387 connections in 2007, staff recommends that miscellaneous service revenues of $3,298 should be imputed for phase-one and phase-two.

Issue 17: 

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

Recommendation: 

 Based on the audit adjustments and the ERC-only methodology, the appropriate WSC O&M expenses and taxes other than income for Sandalhaven are $25,229 and $958, respectively, for phase-one and phase-two.  As such, O&M expenses and taxes other than income should be decreased by $5,410 and $332, respectively.  Further, the appropriate UIF O&M expenses for Sandalhaven are $1,869 for phase-one and phase-two, which results in an O&M expense reduction of $842.  (Fletcher)

Staff Analysis: 

 In its MFRs, the utility reflected total WSC allocated O&M expenses of $30,639 and taxes other than income of $1,290.  Sandalhaven 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 auditors recommended adjustments to WSC’s expenses consistent with Order No. PSC-03-1440-FOF-WS.[12]  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.

In Finding No. 11 of the 2006 Audit, the staff auditor stated that the utility included $401 for allocated hurricane costs from UIF.  Upon further review by staff auditors, these costs were for specific UIF plants and not the office, which can be allocated.  As such, staff auditors recommended the utility’s allocated expenses from UIF be reduced by $401.  In its response to the audit, Sandalhaven agreed with the audit recommendation.  The Commission has approved the above recommended audit and ERC methodology adjustments in several recent rate cases for UI’s other subsidiaries in Florida.[13]

As recommended in Issue 4, 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 Sandalhaven are $25,229 and $958, respectively, for phase-one and phase-two.  As such, O&M expenses and taxes other than income should be decreased by $5,410 and $332, respectively.  Further, staff recommends the appropriate UIF O&M expenses for Sandalhaven are $1,869 for phase-one and phase-two, which results in an O&M expense reduction of $842.

Issue 18: 

 What is the appropriate amortization amount for deferred hurricane costs?

Recommendation: 

 The appropriate amortization amounts for deferred hurricane costs are $5,373 and $1,100 for phase-one and phase two, respectively.  Accordingly, phase-one and phase-two O&M expenses should be increased by $5,373 and $1,100, respectively.  Moreover, depreciation expense should be reduced by $4,273.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-3 and in its revised phase-two rate proposal, the utility requested recovery of hurricane costs totaling $21,365 to be amortized over a 5-year period.  Sandalhaven included the annual amortization of $4,273 as an adjustment to its net depreciation expense which should be removed.  In response to a staff data request, Sandalhaven provided the invoices totaling $17,809 which were primarily for the rental of generators to maintain lift stations and to keep the wastewater treatment plant running during a hurricane.  The utility also provided timesheets supporting overtime wages of $3,556 associated with hurricane recovery efforts.

According to its general ledger, these costs were incurred in 2004 and have an unamortized balance of  $11,753 as of December 31, 2006.  Staff calculated the unamortized balance of $7,837 as of November 30, 2007.  Staff notes that these costs will be fully amortized by August 2009, which is before the phase-two rates would become effective.

In Finding No. 11 of the 2006 Audit, staff auditors stated that the utility charged two invoices totaling $5,500 to expenses in 2006.  The staff auditors stated the expenses were actually for 2005 repairs to fences that were not included with the utility’s deferred hurricane costs being amortized.  The auditors recommended that these costs be considered out of period expenses and be removed for ratemaking purposes.  In its response to the audit, Sandalhaven asserted that it believes the $5,500 was related to hurricanes, and, because it is nonrecurring, it should be deferred and amortized over a period of 5 years, with an annual amortization amount of $1,100.  Rule 25-30.433(8), F.A.C., states “non-recurring expenses shall be amortized over a five-year period unless a shorter or longer period of time can be justified.” 

Based on the above, staff recommends the appropriate amortization amounts for deferred hurricane costs are $5,373 for phase-one and $1,100 for phase two.  Accordingly, phase-one and phase-two O&M expenses should be increased by $5,373 and $1,100, respectively.  Moreover, staff recommends that depreciation expense should be reduced by $4,273.

 

 

Issue 19: 

 Should any further O&M expense adjustments be made?

Recommendation: 

 Yes. Because the wastewater treatment plant will not be retired for approximately two years, O&M expenses should be reduced by $20,014 for phase-one.  By applying the current bulk wastewater rate by the EWD, phase-two O&M expenses should be reduced by $2,421.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-6, Sandalhaven reflected increases of $194,075 and $7,238 for purchased sewage treatment and purchased power, respectively, and decreases of $24,042, $12,145, $29,165, and $3,361 for sludge removal expense, chemicals, materials & supplies, and transportation expenses, respectively.  The utility stated that these adjustments were to recognize the effect of purchased treatment costs by the EWD and the retirement of the wastewater treatment plant.  With the exception of the purchased sewage treatment costs, the remaining adjustments should be removed because the wastewater treatment plant will not be retired for approximately two years.  The reversal of the remaining adjustments represents an O&M expense increase of $61,475.

The utility reflected purchased sewage treatment of $1,034 for the year ending December 31, 2005.  With the above increase of $194,075, Sandalhaven had requested total purchased sewage treatment of $195,109.  As discussed in Issue 5, the Hacienda Del Mar, Cape Haze, and Cape Haze Resort developments represent the only customers that would be served by the interconnection with EWD as long as Sandalhaven’s WWTP remains in-service.  The total anticipated growth from these developments in 2006 and 2007 are 223 customers.  These customers have an estimated demand of 190 gpd, which equates to annual gallons of 15,465,050.  The EWD’s website reflects a current bulk wastewater rate of $7.28 per thousand gallons.  Based on the above, staff calculated phase-one purchased sewage treatment cost of $113,620.  As such, staff recommends that purchased sewage treatment should be reduced by $81,489.  Therefore, in summary, staff recommends that phase-one O&M expenses should be reduced by $20,014.

In its revised phase-two rate proposal, the utility reflected 80% buildout O&M expenses of $643,926.  Sandalhaven has projected annual gallons of 60,531,302 at 80% buildout.  At $7.32 per 1,000 gallons, the utility projected a purchased sewage treatment cost of $443,089.  As stated above, the EWD’s website reflects a current bulk wastewater rate of $7.28 per thousand gallons.  Based on the above, staff calculated a purchased sewage treatment cost for phase-two of $440,668.  Thus, staff recommends that phase-two O&M expenses should be reduced by $2,421.

Issue 20: 

 What is the appropriate amount of rate case expense?

Recommendation: 

 The appropriate total rate case expense for the current docket is $141,019.  This expense should be recovered over four years for an annual expense of $35,255.  Rate case expense should be reduced by $13,765.  (Fletcher)

Staff Analysis: 

 As discussed in detail below, in its determination of rate case expense, staff believes that adjustments are necessary to reflect the appropriate amount of test year amortization.

  The utility included a $196,080 estimate in the MFRs for current rate case expense.  Staff requested an update of the actual rate case expense incurred, with supporting documentation, as well as the estimated amount to complete the case.  On May 4, 2007, the utility submitted a revised estimated rate case expense through completion of the PAA process of $191,561.  The components of the utility’s estimated rate case expense are as follows:

 

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.[14] 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.[15]  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 re1ated to the utility’s test year approval letter.  By letter dated March 27, 2006, Sandalhaven filed its request for a historical December 31, 2005, test year.  The utility's 2005 annual report was not filed until April 26, 2006.  Commission staff could not complete its analysis of Sandalhaven's test year request until its 2005 annual report was received.  The utility incurred $550 of legal fees related to the 2005 annual report in order for staff to complete its analysis of the requested test year.  Staff believes that the ratepayers should not have to bear expenses because the utility knew or should have known that Commission staff would need the 2005 annual report to analyze the appropriateness of its requested 2005 test year.  Thus, staff recommends that the legal fees of $550 should be disallowed.

The second adjustment relates to legal costs associated with the utility’s initial MFRs filed on May 15, 2006.  As stated in the case background, Sandalhaven filed a revise application on December 28, 2006.  With the exception of the costs associated with the minimum filing requirements related to customer complaints and additional engineering information for the historical 2005 test year, staff believes the remaining legal fees for the May Application should be disallowed because these are duplicative costs. Such costs include the legal fees and costs associated with the submission of the initial MFRs, the time spent on the initial and customer meeting draft notices that were not sent out because the utility later filed a revised application and the customer meeting was rescheduled, and additional fees related to MFRs deficiencies above the amounts already removed by the utility.  Based on staff’s review of invoices provided, these legal fees and costs totaled $7,094.  Accordingly, staff recommends that these expenses should also be disallowed as duplicative.[16] 

The third adjustment relates to legal expense associated with errors.  UI made adjustments to correct errors in its consumptive reports that affected MFR Schedule E-14 totaling $440 in fees and $114 for an operator conference call for this matter.  UI’s adjustments were immaterial and did not result in any recommended changes by staff.  Thus, staff believes that the ratepayers should not have to bear any of these costs.

The fourth adjustment relates to the utility’s estimated legal fees of $19,250 to complete the case.  The estimated amount of $19,250 represents 70 hours for responding to staff data requests and telephone conferences between the utility and rate case consultants regarding the same; to review the staff recommendation and conferences with the client and rate case consultants regarding the same; to travel to Tallahassee and attend PSC Agenda Conference; to review PAA Order; to draft revised tariff sheets and miscellaneous post PAA matters.  The above estimate is based on the utility's supplemental response to Question 4.(b) of Staff's First Data Request which was provided to staff on May 4, 2007.  As stated in the case background, staff and the parties of record to this docket have had two informal meetings to discuss the two phase rates in which the utility’s legal counsel participated.  Given the lengthy discussions on the two phase rates and additional time for the utility to prepare and submit an initial and revised rate proposal, staff believes an additional 10 hours or $2,750 of estimated legal fees is reasonable to complete this case.  

The fifth adjustment relates to consulting fees from Virchow, Krause and Company (Virchow), one of the utility’s consulting firms.  This firm was responsible for the preparation of the utility’s MFRs with the exception of the U&U data.  Staff recommends that $571 of expenses to correct deficiencies by Virchow should be removed. In addition, Virchow estimated  additional expenses of $3,625 to complete this case.  Staff does not believe the additional $3,625 is prudent as the MFRs were completed and all deficiencies were corrected several months ago.  Accordingly, staff recommends that $4,196 in rate case expense for Virchow be disallowed.

 

Staff examined whether any adjustments should be made for the utility’s estimated consultant fees for Mr. Frank Seidman to complete the rate case.  Mr. Seidman estimated 44 hours or $5,940 plus $25 in expenses to complete the rate case.  Specifically, Mr. Seidman estimated 20 hours to assist with and respond to staff data requests, 20 hours to assist with and respond to OPC data requests, and four hours to prepare for and attend the agenda.  The OPC has not requested any discovery for the utility.  However, Mr. Seidman was primarily responsible for the utility’s initial and revised rate proposals which took a great deal of time to prepare.  Accordingly, staff believes that 40 hours is reasonable to respond to staff data requests and the preparation of the initial and revised rate proposal.  In addition, 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 2004 Indiantown Company, Inc. rate case[17] and the 2004 Mid-County Services, Inc. rate case.[18]  Thus, staff believes no adjustments are necessary to Mr. Seidman’s estimated hours to complete the case.

The sixth adjustment relates to the costs by WSC employees to complete the case.  In its rate case, the utility provided timesheets for WSC employees.  WSC timesheets reflected 376.16 total actual hours for 12 employees totaling $15,713 in salaries.  The timesheets indicated that Mr. Steven Dihel spent nine hours, or $496, for utility indexes, and Ms. Kirsten Weeks spent one hour, or $42,  on “Sandalhaven Hurricane Expenses,” and two hours, or $84, for correcting MFR deficiencies.  Staff believes that the utility has not met its burden of proof that these hours relate to the utility’s current case.  As such, staff recommends that the 12 hours or $622 should be disallowed.

Furthermore, in its rate case expense update, 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 WSC employees estimated 925 hours related to assistance with data requests and audit facilitation.  Using these hours, the utility asserted that the WSC employees estimates to complete are $44,975, based on MFR rates of pay.   Staff has two concerns regarding these estimated hours.  First, 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 are 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.[19]   Staff believes a reasonable method to estimate WSC employee hours to complete the case is to utilize the average monthly adjusted actual hours.  Using this method, staff calculated an estimate for WSC employees to complete the case of  338.38 hours, which represents a reduction of 586.63 hours or $25,851.  Thus, staff recommends that rate case expense associated with WSC employees should be decreased by $26,473.

 

            The seventh adjustment relates to WSC expenses for Office Temps.  The utility did not include this expense in its MFRs; however, in its update, $4,643 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 $2,208 in expenses for Office Temps, and provided invoices in support of this total.   Staff believes that the additional $2,436 estimated by Sandalhaven 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 $2,436.

 

            The eighth adjustment addresses WSC travel expenses.  In its MFRs, the utility estimated $3,200 for travel.  However, no WSC staff has attended the Agendas where increases in the previous nine UI utilities’ rates and charges were discussed.  Therefore, staff believes it is reasonable to assume that no one will attend the Agenda to discuss the increase in Sandalhaven’s rates and charges.  Accordingly, staff recommends that rate case expense be decreased by $3,200.

 

            The ninth adjustment relates to WSC expenses for Federal Express Corporation (Fed Ex), copies and other miscellaneous costs.  In its MFRs, the utility estimated $18,000 for these items. The utility later estimated that that the total costs would be $8,790.  In support of this expense, the utility provided only $790 in identifiable costs for Sandalhaven for FedEx invoices for services through April 2007.  There was no breakdown or support for the remaining estimated costs.  UI has requested and received authorization from the Commission to keep its books and 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 in 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 which then are 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 $8,790.

 

In summary, staff recommends that the utility’s requested rate case expense be decreased by $50,543 for MFR deficiencies, and unsupported and unreasonable rate case expense.  The appropriate total rate case expense is $141,019.  A breakdown of rate case expense is as follows:

 

 

 

In its MFRs, the utility requested total rate case expense of $196,080, which amortized over four years would be $49,020.  The recommended total rate case expense of $141,019 should be amortized over four years, pursuant to Section 367.016, F.S.  This represents annual amortization of $35,255.  Thus, rate case expense should be decreased by $13,765 ($49,020 less $35,255).

Issue 21: 

 What is the appropriate net depreciation expense?

Recommendation: 

  Based on staff’s recommended plant adjustments in preceding issues, application of depreciation rates pursuant to Rule 25-30.140, F.A.C., and recommended plant capacity charges, the appropriate net depreciation expense for phase-one is $72,874.  This represents a decrease of $21,769.  However, with the non-used and useful adjustments recommended in Issue 5, a negative net depreciation expense of $21,871 results for phase-one. As in cases where negative rate base is adjusted to zero, the Commission has previously adjusted test year depreciation expense to zero.  Accordingly, phase-one net depreciation expense should be increased by $21,871 to adjust to zero.  Moreover, based on recommended plant adjustments in preceding issues, depreciation rates in accordance with Rule 25-30.140, F.A.C., and staff’s recommended plant capacity charges, the appropriate net depreciation expense for phase-two is $40,514.  This represents a decrease of $193. (Fletcher)

Staff Analysis: 

 On MFR Schedule B-2, the utility reflected net depreciation expense of $64,409.  Based on staff recommended adjustments in preceding issues, the utility’s adjusted net depreciation before any non-used and useful adjustments is $94,643.  Staff recommends that the appropriate net depreciation expense for phase-one is $72,874 which represents a decrease of $21,769.  However, with the non-used and useful adjustments recommended in Issue 5, a negative net depreciation expense of $21,871 results for phase-one. 

The net depreciation expense resulted in a negative balance because amortization of CIAC net of non-used and useful amortization of CIAC exceeds net used and useful depreciation expense.  As in cases where negative rate base is adjusted to zero, the Commission has previously adjusted test year depreciation expense to zero.[20]  Accordingly, staff recommends that phase-one net depreciation expense should be increased by $21,871 to adjust to zero.

In its revised phase-two rate proposal, Sandalhaven reflected net depreciation expense of $45,394.  Based on staff recommended adjustments in preceding issues, the utility’s adjusted net depreciation before any non-used and useful adjustments is $40,707.  Based on staff’s recommended plant adjustments in preceding issues, application of depreciation rates pursuant to Rule 25-30.140, F.A.C., and recommended plant capacity charges, staff recommends that the appropriate net depreciation expense for phase-two is $40,514.  This represents a decrease of $193.

 

Issue 22: 

 Is there a resulting loss on the early retirement of the utility’s wastewater treatment plant, and, if so, should the utility be allowed to recover the loss and what is the appropriate amortization amount of the loss?

Recommendation: 

 No.  Because the wastewater treatment plant was fully contributed, there is no resulting loss on the early retirement of its wastewater treatment plant.  Accordingly, the utility’s phase-two requested annual amortization loss expense of $50,871 should be removed. (Fletcher)

Staff Analysis: 

 In its revised phase-two rate proposal, the utility requested a loss of $452,721 on the early retirement of its wastewater treatment plant with an amortization period of 8.9 years.  Rule 25-30.433(9), F.A.C., states:

The amortization period for forced abandonment or the prudent retirement, in accordance with the National Association of Regulatory Utility Commissioners Uniform System of Accounts, of plant assets prior to the end of their depreciable life shall be calculated by taking the ratio of the net loss (original cost less accumulated depreciation and contributions-in-aid-of-construction (CIAC) plus accumulated amortization of CIAC plus any costs incurred to remove the asset less any salvage value) to the sum of the annual depreciation expense, net of amortization of CIAC, plus an amount equal to the rate of return that would have been allowed on the net invested plant that would have been included in rate base before the abandonment or retirement. This formula shall be used unless the specific circumstances surrounding the abandonment or retirement demonstrate a more appropriate amortization period.

As discussed in the case background, Sandalhaven’s customer base is expected to double over the next three years.  Based on the utility’s cost benefit analysis of the treatment alternatives to accommodate its existing and future customers, the interconnection with the EWD was the most cost effective option.   However, staff calculated a 2009 net retired plant of $566,754  and a 2009 net CIAC of $588,057.  As a result the wastewater treatment plant was 103.76%  contributed.  Because the wastewater treatment plant was fully contributed, staff recommends that there is no resulting loss on the early retirement of its wastewater treatment plant.  Accordingly, staff recommends that the utility’s phase-two requested annual amortization loss expense of $50,871 should be removed.

 

Issue 23: 

 Should any adjustment be made to property taxes?

Recommendation: 

 Yes.  The appropriate phase-one and phase-two projected property taxes are $79,915 and $66,677, respectively.  Accordingly, phase-one and phase-two property taxes should be reduced by $82,052 and $28,718, respectively.  (Fletcher)

Staff Analysis: 

 On MFR Schedule B-15, the utility reflected historical 2005 property taxes of $21,275 and projected an increase of $140,692 for its 2006 and 2007 net plant additions.  This represents a total of $161,967 for 2007 projected property taxes related to phase-one.  Because the tax assessed value for the utility’s real estate significantly increased in 2006, the millage rate decreased from 15.7820 to 13.5470 in 2006, and the utility projected no land additions in 2007, staff believes it is appropriate to use the actual 2006 real estate taxes of $4,174 for the projected 2007 amount.  As stated in a preceding issue, staff has recommended that the appropriate taxes other than income allocated from WSC is $958 of which $243 relates to property taxes.  Staff calculated the 2007 projected personal tangible property taxes of $75,498 by multiplying its recommended 2007 year-end net plant of $5,739,406 by the 2006 millage rate of 13.1543.  Based on the above, staff recommends phase-one projected property taxes should be $79,915.  Accordingly, property taxes should be reduced by $82,052.

In its revised phase-two rate proposal, the utility reflected 80% buildout phase-two property taxes of $95,395.  Staff also believes it is appropriate to use the actual 2006 real estate taxes of $4,174 and the allocated WSC property taxes of $243 for phase-two.  Staff calculated the projected phase-two personal tangible property taxes of $62,260 by multiplying its recommended 80% buildout at June 30, 2009 year-end net plant of $4,731,778 by the 2006 millage rate of 13.1543.  Based on the above, staff recommends phase-one projected property taxes should be $66,677.  Accordingly, property taxes should be reduced by $28,718.

Issue 24: 

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

Recommendation: 

 Based on the adjustments discussed in previous issues, the 2007 test year operating loss before any provision for increased phase-one revenues is $116,629.  The phase-two test year operating loss before any provision for increased phase-two revenues is $168,508.  (Fletcher)

Staff Analysis: 

 As shown on Schedule 3-A, after applying staff’s adjustments, the 2007 test year net operating loss before any phase-one revenue increase is $116,629.  As shown on Schedule 3-B, after applying staff’s adjustments, the phase-two test year operating loss before any provision for increased revenues is $168,508.  Staff’s adjustments to phase-one and phase-two operating income and expenses are shown on Schedules 3-C and 3-D, respectively.

REVENUE REQUIREMENT

Issue 25: 

 What is the appropriate revenue requirement?

Recommendation: 

 The following phase-one and phase-two revenue requirements should be approved: 

 

	Test Year Revenues	$ Increase	Revenue Requirement	% Increase
Phase-One	$377,603	$197,496	$575,099	52.30%
Phase-Two	$452,561	$594,361	$1,046,922	131.33%

 

(Fletcher)

Staff Analysis: 

 In its MFRs, Sandalhaven requested final rates designed to generate annual revenues of $1,118,134.  These revenues exceed test year revenues by $841,571 (313.31%).  In its phase-two rate proposal, the utility requested rates designed to generate annual revenues of $1,125,682.  This represents a revenue increase of $849,119 (or 307.02%).

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 phase-one and phase-two revenue requirements of $575,099 and $1,046,922, respectively.  These revenues exceed staff’s adjusted phase-one and phase-two test year revenues by $197,496, or 52.30%, and $594,361, or 131.33%, respectively.  These increases are shown on attached Schedules Nos. 3-A and 3-B.  These increases will allow the utility the opportunity to recover its expenses and earn a 1.71% return on its phase-one rate base and 7.95% return on its phase-two rate base.

RATES AND CHARGES

Issue 26:  

 What is the appropriate rate structure for Multi-Residential Service customers?

Recommendation: 

 The Multi-Residential Service (MRS) customers should be charged the rate structure applicable to the General Service (GS) class of customers.  The base facility charge should be based on the meter size and meter equivalency determined by the American Water Works Association (AWWA).  The gallonage charge should be equal to the general service gallonage charge with no cap on usage.  (Rendell)

Staff Analysis: 

 Typically, MRS customers are considered the same as GS customers for rate design purposes.  This methodology is consistent with not only past Commission practice, but also the industry-wide standard. 

In Sandalhaven’s last rate case, the Commission established a base facility charge for all meter sizes for the MRS customers.  However, there was no specific description or mention of this rate structure contained in the body of Order No. PSC-03-0602-PAA-SU (the Commission order for the utility’s last rate case).

In Sandalhaven’s MFRs dated December 28, 2006, the utility indicated that in 2005, there were 11 invoices submitted for the 3” MFS customers consisting of roughly 23 units per billed invoice.  This equated to 251 units charged the BFC for one ERC ($13.13).  In addition, the utility indicated that in 2005, there were also 11 invoices submitted for the 6” MFS customers consisting of roughly 45 units per billed invoices.  This equated to 495 units charged the BFC for one ERC.

Staff does not believe it is appropriate for the utility to go behind the meter in order to count and bill the number of units for each multi-family residential complex.  Staff believes it is more appropriate for the utility to base the base facility charge (BFC) on the American Water Works Association (AWWA) meter equivalency.  In Sandalhaven’s revised filing submitted on July 9, 2007, the utility is projecting a significant increase in multi-family residential customers.  The utility has projected the following:

 

Staff believes this is a significant increase in the number of MFS customers projected to be served.  Further, there is no way to verify the number of units to be constructed for these meter sizes.  In addition, in the last rate case, the Commission determined that for multi-family and general service customers, approximately 96% of water usage is returned.  Thus, the Commission established a higher wastewater gallonage charge for both the general service and multi-family customers.  This is consistent with past Commission practice and the industry-wide standard.

            The following is the AWWA meter equivalency:

 

 

It is the utility’s burden to show that a variation from the standard AWWA meter equivalency to determine the BFC for this MRS rate class is appropriate and not discriminatory.  The utility has not supplied any information to show that this customer class produces a higher demand on the reserved capacity of the system than any other general service customer.  Therefore, staff recommends the MRS customers should be charged the rate structure applicable to the GS class of customers.  The base facility charge should be based on the meter size and meter equivalency determined by the AWWA.  The gallonage charge should be equal to the general service gallonage charge with no cap on usage.

Issue 27: 

 What are the appropriate monthly wastewater rates?

Recommendation: 

 The appropriate wastewater monthly rates are shown on Schedule No. 4.  Excluding miscellaneous service charges and reuse revenues, the recommended rates produce revenues of $564,412 for phase-one and $1,040,035 for phase-two.  (Fletcher)

Staff Analysis: 

 The appropriate revenue requirement, excluding miscellaneous service charges and reuse revenues, is $564,412 for phase-one and $1,040,035 for phase-two.  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 8,000 gallon cap.    Staff believes that the appropriate rate structure for the general service classes are a continuation of Sandalhaven’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.  As discussed in Issue 26, staff has recommended that the rate structure for multi-residential service should be the same structure as general service customers.

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

Issue 28: 

 What are the appropriate effective dates for phase-one and phase-two rates?

Recommendation:   The utility should be allowed to implement phase-one rates after the utility has  filed 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 25-40.475(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.

The utility should not be allowed to implement phase-two rates until the construction of a sub-master lift station to direct the flows to the utility’s master lift station has been completed and approved by DEP.  The utility should provide staff with the approval documentation no later than 15 days after the utility receives the final approval from DEP.  At that time, the utility should also filed 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 25-40.475(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.  (Fletcher)

Staff Analysis: 

 Phase-one 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.

            The utility should not be allowed to implement phase-two rates until the construction of a sub-master lift station to direct the flows to the utility’s master lift station has been completed and approved by DEP.  The utility should provide staff with the approval documentation no later than 15 days after the utility receives the final approval from DEP.  At that time, the utility should also filed 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 25-40.475(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.

Issue 29: 

 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 in staff’s analysis. 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 that customers have received notice within 10 days after the date that the notice was sent.  (Fletcher)

Staff Analysis: 

 In its filing, the utility requested an increase in its after hours initial connection, normal reconnection and premises visit charges.  The current and requested charges are shown below.

 

            The miscellaneous service charges currently in effect were approved for Sandalhaven on June 30, 1995, and have not changed since that date.  The approved charges have been the standard charges approved by the Commission since at least 1990 - a period of 16 years.  In support of its requested charges for after hours, the utility stated that its miscellaneous service charges consists of only labor cost of a field employee who makes $30 an hour and receives time and a half or $45 ($30 multiplied by 1.5) an hour during after hours.  Sandalhaven asserted that the average time for a connection and premise visit are 0.50 hours and 0.33 hours.

            Based on the above, staff recommends that Sandalhaven be allowed to increase its miscellaneous service charges from $15 to $22.50 for its after hours initial connections and normal reconnections and from $10 to $15 for its after hours premises visits.  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 that customers have received notice within ten days after the date the notice was sent.

Issue 30: 

 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 phase-two wastewater rates should be reduced as shown on Schedule No. 4, to remove $36,916 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 $36,916. The decreased phase-two revenues will result in the rate reductions 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 31: 

 What are the appropriate service availability charges for Sandalhaven?

Recommendation: 

 The appropriate plant capacity charge for the utility is $2,628.  This represents a increase of $0.25 from its approved temporary system capacity charge of $2,627.75.  The appropriate main extension charge should be at actual cost.  The utility should provide written notice to all persons who have submitted a written request for service within 12 months preceding the date of the Consummating Order.  The plant capacity charge should become effective for service rendered on or after the stamped approval date of the tariff pursuant to Rule 25-30.475(2), F.A.C., provided that customers have received notice and the notice has been approved by Commission staff.  Within 10 days after the notice is given, the utility should provide proof that all such persons have received notice.  Within 30 days from the issuance of the Consummating Order, the utility should file a revised tariff reflecting its approved plant capacity charge.  The revised tariff sheets should be approved upon staff’s verification that the tariffs are consistent with the Commission’s  decision.  (Fletcher, Brown)

Staff Analysis: 

 Service availability charges are those charges set forth in a utility’s approved service availability policy and must be paid in order to obtain water or wastewater service.  A system capacity charge is designed to defray a portion of the cost of the plant, as well as a portion of the cost of lines.  A plant capacity charge represents the reimbursement by a developer or a customer to offset the cost of the plant.  A main extension charge represents the reimbursement by a developer or a customer to offset the cost of the lines.

By Order No. PSC-95-0478-FOF-SU, the Commission approved a grandfather certificate of the utility and approved among other things the $1,250 plant capacity charge that Charlotte County had initially set.  Prior to April 2007, the utility’s plant capacity charge has been $1,250.  By Order No. PSC-07-0327-PCO-SU, the Commission approved the utility’s requested temporary system capacity charge of $2,627.50 which is being held subject to refund.  In addition, Sandalhaven requested a main extension charge at actual cost, which equates to the total cost incurred for the services rendered.

            When calculating service availability charges, it is more reasonable to have separate charges for the cost of the plant and the cost of the lines, instead of one system capacity charge.  One reason for this delineation is to avoid a possible over contribution by customers.  For instance, when a utility accepts donated lines from a developer and only has an authorized system capacity charge, this could create a situation in which the utility would not only accept the donated lines but also collect system capacity charges from customers for those lines that were donated.

            For phase-two, the wastewater treatment plant will be retired, and the interconnection with the EWD will act as a surrogate treatment plant for the utility.  Specifically, the utility’s remaining wastewater system will consist of the remaining wastewater facilities (such as lift stations and collection system), the 500,000 gpd master lift station and the 1,000,000 gpd force main connection to the EWD’s treatment system.  Staff believes a plant capacity charge is more appropriate than the proposed system capacity charge to recover the cost of the utility’s wastewater system because Sandalhaven can recover the cost of lines through its requested main extension charge at actual cost. 

Rule 25-30.580, F.A.C., states:

A utility’s service availability policy shall be designed in accordance with the following guidelines:

(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.

            This rule recognizes that any given utility is in some sense unique by providing flexibility for utility management to establish its service availability policy.  However, there are some drawbacks to the rule because the guidelines are a moving target, looking forward in time when the utility plant is at designed capacity.  This type of analysis requires projections of growth rates and many assumptions.  The factors used to calculate this forward look in time are constantly changing.  Depreciation, replacements of facilities, and customer growth can vary significantly from a utility’s projections.  To bring utilities within the guidelines of the above rule, the Commission has implemented or increased charges if a utility experienced low CIAC levels and has eliminated service availability charges[21] if a utility experienced over-contributions.

            Staff calculated a plant capacity charge of $2,628 which complies with the minimum and maximum levels of Rule 25-30.580, F.A.C.  This charge results in a CIAC ratio of approximately 73.33%.  In order to further mitigate the level of the rate increase for phase-one and phase-two, staff believes it is reasonable to approve plant capacity charges based on a CIAC ratio of 73.33%.  The analysis of staff’s calculated charge is shown on Schedule 5.

            In its analysis of the appropriate plant capacity charge, staff also considered the issue of competitive and market-based rates.  Utilities sometimes set service availability charges that are lower than the prevailing charges of a county or city.  However, it is important to not set charges too low because it may be difficult to meet environmental, growth, and infrastructure requirements.  Charlotte County’s (County) current wastewater impact fees total $3,770, consists of a plant capacity charge, transmission capacity charge, and collection charge.  Because the interconnection with the EWD will act as a surrogate treatment plant for the utility and Sandalhaven’s collection system will remain in tact,  staff believes it is appropriate to compare the County’s impact fees for plant capacity and collection with staff’s calculated charge.  The County’s plant capacity and collection charges total $2,230 which represents a difference of $398 from staff’s calculated charge. 

            As stated in the case background, Placida HG, LLP (Placida), a developer of a 418 unit residential development in Charlotte County, was granted intervention on February 13, 2007.  Placida’s concerns relate to Sandalhaven’s proposed system capacity charges.  Placida has paid the utility $522,500 in plant capacity charges to ensure wastewater service would be available for its future development.  Placida has not connected any of the units to Sandalhaven’s system.

At its March 27, 2007, Agenda Conference, the Commission approved Sandalhaven’s request for a temporary system capacity charge.  During that agenda conference, Placida expressed concerns that the utility’s proposed charge was too high.  Placida asserted that the hydraulic share of future customers equates to a lesser charge.  Placida argues that the legal decision and principle that should control the Commission’s decision on service availability charges in this docket is City of Cooper City v. PCH Corp., 496 So. 2d 843 (Fla. 4th  DCA 1986).  In that case, the Court held that the municipal utility's proposed connection fee increase was unreasonable because the fees would recover costs for new facilities that would benefit both existing and future customers, but the fees would be imposed only on new customers. 

Staff believes that Placida’s argument regarding hydraulic share is addressed in Rule 25-30.585, F.A.C.  Rule 25-30.585, F.A.C., entitled “Developer Service Availability Charges,” states:

Subject to the limitation in Rule 25-30.580, F.A.C., service availability charges for real estate developments shall not be less than the cost of installing the water transmission and distribution facilities and sewage collection system and not more than the developer’s hydraulic share of the total cost of the utility’s facilities and the cost of installing the water transmission and distribution facilities and sewage collection system. The terms of a developer’s agreement shall be consistent with the basic principles embodied in the rules in this part of the utility’s approved tariff. A statement of the potential impact of the developer agreement on the rates of the utility shall be submitted along with the developer agreement pursuant to Rule 25-30.055, F.A.C. 

(Emphasis added)

            However, in the 1992 rate case for Mid-County Services, Inc. (Mid-County), the Commission addressed a similar argument related to a hydraulic share approach.  Initially, the Commission approved a service availability charge of $1,179 through a PAA order.  That order was protested by Suntech Homes, Inc. (Suntech).  At hearing, Suntech argued that Rule 25-30.585, F.A.C., requires that the methodology used to calculate a fair and equitable service availability charge assumes all existing and future connections to the system paid the same charge that results in an CIAC ratio of 75% at buildout.  According to its methodology, Suntech asserted the service availability charge should be $370. 

            The Commission found Suntech’s interpretation of Rule 25-30.585, F.A.C., inappropriate[22] because some of the existing customers paid a previously approved charge of $136.60, and the Commission has no authority to require those customers to pay the $370 charge.  In addition, when the service availability guideline rules were being promulgated, the Commission considered and adopted a service availability policy that would fix charges for the individual residential and commercial applicants and allow some flexibility within the guidelines for negotiated charges between developers and utilities.  See Order No. PSC-94-1042-FOF-SU, p. 5.  The Commission approved the utility’s proposed charge of $1,235.  Suntech appealed the Commission’s final order approving the charge, and, subsequently, the First District Court of Appeal affirmed the Commission’s decision.[23]

            Moreover, Placida’s argument that it is inequitable for existing customers to pay less than future customers was addressed by the Commission in the 1995 rate case for Southern States Utilities, Inc.[24]  In that case, the Commission recognized that intergenerational inequities can occur.   Specifically, page 249 of Order No. PSC-96-1320-FOF, states in part the following:

Mr. Williams also testified that intergenerational inequities are inherent in utility ratemaking and exist in the implementation of service availability charges.  Some customers may have connected to the utility system and paid little or nothing, future customers may have to pay very substantial charges.  The reverse may also occur, where existing customers may have paid substantial service availability charges, while future customers will have to pay little or no charges.  We recognized these intergenerational inequities at the time the rules were adopted.

            Staff points out that the case law recognizes that the Commission must have the ability to alter service availability charges to defray the expenses of preserving plant capacity with changing economic factors.   H. Miller & Sons, Inc. v. Hawkins, 373 So. 2d 913, 916 (Fla. 1979).  Further, since Rule 25-30.585, F.A.C., is subject to the limitation in Rule 25-30.580, F.A.C., staff believes its calculated charge of $2,628 is appropriate because it complies with the maximum 75% CIAC ratio level in accordance with Rule 25-30.580(1), F.A.C.  Based on the above, staff recommends the appropriate plant capacity charge for the utility is $2,628.  This represents an increase of $0.25 from its approved temporary system capacity charge of $2,627.75.  In addition, staff recommends that the appropriate main extension charge should be at actual cost.  Staff also points out that the Commission’s decision should be controlled by the Commission’s governing statutes, its existing rules, and case law applying those statutes and rules.

            The utility should provide written notice to all persons who have submitted a written request for service within 12 months preceding the date of the Consummating Order.  The plant capacity charge should become effective for service rendered on or after the stamped approval date of the tariff pursuant to Rule 25-30.475(2), F.A.C., provided that customers have received notice and the notice has been approved by Commission staff.  Within 10 days after the notice is given, the utility should provide proof that all such persons have received notice.  Within 30 days from the issuance of the Consummating Order, the utility should file a revised tariff reflecting its approved plant capacity charge.  The revised tariff sheets should be approved upon staff’s verification that the tariffs are consistent with the Commission’s  decision.

 

Issue 32: 

 Should the utility be authorized to charge Allowance for Funds Prudently Invested (AFPI) charges, and, if so, what are the appropriate charges?

Recommendation: 

 Yes, Sandalhaven should be authorized to collect wastewater AFPI charges that are recommended in the table set forth in staff analysis.  The beginning date of the AFPI charges should be January 1, 2008.  After December 31, 2010, the utility should be allowed to collect the constant charge until all projected 872 wastewater ERCs in the calculation have been added, at which time the charge should be discontinued.  The utility should file revised tariff sheets which are consistent with the Commission’s vote within 30 days of the issuance of the Consummating Order.  The revised tariff sheets should be approved upon staff’s verification that the tariffs are consistent with the Commission’s decision and provided future customers have been noticed pursuant to Rule 25-30.475(2), F.A.C.  In no event should the rates be effective for services rendered prior to the stamped approval date.  (Fletcher)

Staff Analysis: 

 An AFPI charge is a mechanism designed to allow a utility the opportunity to earn a fair rate of return on prudently constructed plant held for future use from the future customers that will be served by that plant, in the form of a charge paid by those customers.  This charge allows the recovery of carrying costs on the non-used and useful plant.  By providing this type of charge, the existing customers do not pay for plant expansion used to serve future customers.  Future customers bear their equitable share of the carrying costs related to the facilities being constructed to provide service to them.

 

            This one-time charge is based on the number of ERCs and is generally applicable to all future customers who have not already prepaid the connection fees, CIAC charge, or customer advances.  The charge should be assessed based on the date the future customers make some form of “prepayment” (connection charge, CIAC, or advance) or on the date the customer connects to the system, whichever comes first.

 

            In its revised phase-two rate proposal, the utility states that the Commission should consider the implementation of an AFPI type charge to recover carrying costs not covered until 80% of buildout is reached.  Sandalhaven believes an AFPI charge is appropriate because it is implicit that rates based on a projected 80% of buildout cannot provide an opportunity to earn a fair return until the projected growth through buildout occurs.  In United Telephone Company of  Florida v. Mann,  403 So. 2d 962, 966 (Fla. 1981), the Florida Supreme Court held the following:

 

A regulated public utility is entitled to an opportunity to earn a fair or reasonable rate of  return on its invested capital.  A fair rate of return is for the benefit of the utility's investors.  This amount 'should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain credit and to attract capital.'  Therefore, the purpose of establishing a fair or reasonable rate of return is to 'fairly compensate investors for the risks they have assumed.'

 

            Because the phase-two rates are based on CIAC and revenue levels at 80% buildout, which is not expected to occur until June 30, 2010, staff agrees with the utility that, without an AFPI charge, Sandalhaven would not be given the opportunity to earn a fair return on its investment until the growth at buildout occurs.  Further, as discussed in Issue 5, staff has recommended phase-one non-used and useful adjustments totaling $2,892,879 for the utility’s impact fees paid in 2006 to the EWD and its interconnection costs for the force main and master lift station.  As such, staff recommends that Sandalhaven should be authorized to collect a wastewater AFPI charge.

 

            As stated in Issue 22, staff believes it was a prudent decision for Sandalhaven to interconnect with the EWD to accommodate the wastewater demand of its existing and future customers.  As such, staff believes that an AFPI charge is appropriate for this utility.  The AFPI charges should be based upon the number of ERCs required by a particular customer.  The AFPI charge is intended to recover the carrying costs associated with the interconnection facilities to supply wastewater to its future customers.  Therefore, the charge will vary based upon the date a future customer makes a prepayment on such connection, or on the date the customer actually connects to the system. 

 

            The test year used in this case for establishing the amount of non-used and useful plant is the year ending December 31, 2007.  Pursuant to Rule 25-30.434(4), F.A.C., the beginning date for accruing the AFPI charge should agree with the month following the end of the test year that was used to establish the amount of non-used and useful plant.  Therefore, the beginning date for accruing the AFPI in this case is January 1, 2008.  Further, in accordance with Rule 25-30.434(4), F.A.C., no charge may be collected for any connections made between the beginning dates and the effective date of the AFPI charges.  Typically, an AFPI charge is calculated for a five-year period.  Rule 25-30.434(5), F.A.C., states: “unless the utility demonstrates that the 5-year period is inappropriate, it is prudent for a utility to have an investment in future use plant for a period of no longer than 5 years beyond the test year.”

 

            As discussed in Issue 5, the projected 2007 year-end ERCs are 1,040 ERCs, and the total buildout ERCs are 2,298 ERCs.  As such, there are 872 ERCs remaining to reach buildout.  Rule 25-30.434(3)(d), F.A.C., states that an AFPI charge shall be calculated for one ERC on a monthly basis up to the time the utility reaches the designed capacity of the plant for which the charge applies.  Because the utility’s estimated buildout date is December 31, 2010, staff recommends that the AFPI charge should stop accruing after December 31, 2010.  Because future growth can take unforeseen and unpredictable paths sometimes, customer growth may not exactly materialize as the utility has estimated, wherein Sandalhaven might reach buildout after December 31, 2010.  As such, staff recommends that the AFPI charge should remain constant after December 31, 2010, until all remaining 872 ERCs in the calculation have been connected.  Once the 872 ERCs have been connected to the utility’s system, the charge should be discontinued.  

 

            Staff has prepared the following schedule which represents the recommended wastewater AFPI charges based upon the time of the initial connection or prepayment.  These charges represent one ERC, and if a future customer requires more than one ERC, the connection fee should be multiplied by the number of connections or ERCs which are required to provide service to the customer.  Using the supported cost figures of the interconnection facilities, staff recommends the following wastewater AFPI charges:

 

 

The appropriate AFPI charges should be those recommended above.  The utility should file revised tariff sheets which are consistent with the Commission’s vote within 30 days of the issuance of the Consummating Order.  The revised tariff sheets should be approved upon staff’s verification that the tariffs are consistent with the Commission’s decision and provided future customers have been noticed pursuant to Rule 25-30.475(2), F.A.C.  In no event should the rates be effective for services rendered prior to the stamped approval date.

Issue 33: 

 Should the utility be required to provide proof, within 90 days of a Consummating  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 its books in accordance with the Commission’s decision, Sandalhaven should provide proof, within 90 days of the Consummating Order, 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 Sandalhaven should provide proof, within 90 days of the Consummating Order, that the adjustments for all the applicable NARUC USOA primary accounts have been made.

Issue 34: 

 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.  However, the docket should remain open to allow staff to monitor the appropriate implementation of phase-two rates.  (Brown, Fletcher)

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.  However, the docket should remain open to allow staff to monitor the appropriate implementation of phase-two rates.  

Utilities, Inc. of Sandalhaven DKT #: 060285-SU			Attachment A Test Year Jan 06 - Dec 06
WASTEWATER TREATMENT PLANT – USED AND USEFUL DATA
1)		Permitted Capacity of Plant (AADF)		150,000	gallons per day
2)	a)	Average Daily Flow (AADF)- 2006		88,896	gallons per day
3)		Growth		26,694	gallons per day
	a)	Average Test Year Customers in ERCs: Historical Test Year: Jan 2006 - Dec 2006		1,059	ERCs
	b)	Customer Growth in ERCs using Regression Analysis for most recent 5 years including Test Year		67	ERCs
	c)	Customer Growth in ERCs using 5% per year Cap for 5 year period (1,059x5%)		53	ERCs
	d)	Statutory Growth Period		5	Years
	e	Projected growth  year 2007		1	Year
	f)	Growth = [(3c)x(3d)x(2a)]\(3a) +[(3c)x(3e)x(2a)]\(3a)		26,694	gallons per day
4)		Excessive Infiltration or Inflow (I&I)		0	gallons per day
	a)	Total I & I		28,174	gallons per day
	b)	Percent of Excessive
	c)	Reasonable Amount (500 gpd per inch dia pipe per mile)		29,626	gallons per day
	d)	Excessive Amount		0	gallons per day

 

USED AND USEFUL FORMULA

 

[Average Daily Flow + Growth – Excessive Amount] / Permitted Capacity of Plant

[88,896 + 26,694– 0] / 150,000= 77.06%      Used & Useful

	Utilities Inc. of Sandalhaven				Schedule No. 1-A
	Schedule of Wastewater Rate Base				Docket No. 060285-SU
	Test Year Ended 12/31/07 - Phase One
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year
		12/31/2005		12/31/2007
1	Plant in Service	$2,076,274	$4,986,281	$7,062,555	($1,356,896)	$5,705,659
2	Land and Land Rights	81,794	72,635	154,429	(73,089)	81,340
3	Non-used and Useful Components	0	0	0	(2,892,879)	(2,892,879)
4	Accumulated Depreciation	(839,983)	54,351	(785,632)	(180,433)	(966,065)
5	CIAC	(2,266,445)	(1,849,300)	(4,115,745)	1,248,391	(2,867,354)
6	Amortization of CIAC	794,500	(181,203)	613,297	313,153	926,450
7	WSC Rate Base	7,458	0	7,458	103	7,561
8	Deferred Tax Asset	0	0	0	0	0
9	Working Capital Allowance	39,156	19,975	59,131	4,817	63,948
10	Rate Base	($68,529)	$3,102,739	$3,034,940	($2,936,834)	$58,659

 

 

	Utilities Inc. of Sandalhaven				Schedule No. 1-B
	Schedule of Wastewater Rate Base				Docket No. 060285-SU
	Test Year Ended 6/30/10 - Phase-Two 80% Buildout
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year
		12/31/2005		80% Buildout
1	Plant in Service	$2,076,274	$4,986,281	$7,062,555	($1,326,751)	$5,735,804
2	Land and Land Rights	81,794	72,635	154,429	(73,089)	81,340
3	Non-used and Useful Components	0	0	0	0	0
4	Accumulated Depreciation	(839,983)	(274,429)	(1,114,412)	274,953	(839,459)
5	CIAC	(2,266,445)	(2,519,708)	(4,786,153)	1,343,594	(3,442,559)
6	Amortization of CIAC	794,500	(46,178)	748,322	(47,818)	700,504
7	WSC and UIF Rate Base	19,522	0	19,522	(2,040)	17,482
8	Deferred Tax Asset	95,694	(6,827)	88,867	(88,867)	0
9	Working Capital Allowance	39,156	35,158	74,314	6,482	80,796
10	Rate Base	$39,229	$2,246,932	$2,247,444	$86,465	$2,333,909

	Utilities Inc. of Sandalhaven	Schedule No. 1-C
	Adjustments to Rate Base	Docket No. 060285-SU
	Test Year Ended 12/31/07 - Phase One
	Explanation		Wastewater
	Plant In Service
1	Reflect audit adjustments agreed to by the utility and staff. (Issue 2)		($12,941)
2	Reflect appropriate projected test year balance for franchises.  (Issue 3)		(9,826)
3	Reflect appropriate UIF allocated plant. (Issue 4)		(813)
4	Reflect appropriate projected plant additions.  (Issue 5)		(1,912,947)
5	To remove retirement adjustment.  (Issue 5)		579,631
	Total		($1,356,896)
	Land
	To reflect non-used and useful adjustment to land.  (Issue 6)		($73,089)
	Non-used and Useful
1	Reflect net non-used & useful adjustment for Impact Fees to EWD.  (Issue 5)		($1,800,560)
2	Reflect net non-used & useful adjustment for Interconnection Costs.  (Issue 5)		(1,092,319)
	Total		($2,892,879)
	Accumulated Depreciation
1	Reflect audit adjustments agreed to by the utility and staff. (Issue 2)		$310
2	Reflect appropriate projected test year balance for franchises.  (Issue 3)		1,116
3	Reflect appropriate UIF allocated plant. (Issue 4)		224
4	Reflect appropriate projected 2007 accum. depreciation balance. (Issue 8)		(182,083)
	Total		($180,433)
	CIAC
1	To remove retirement adjustment.  (Issue 5)		($467,867)
2	To correct utility's averaging error for projected 2007 test year.  (Issue 9)		(577,844)
3	Reflect appropriate amount of CIAC for projected 2007 test year.  (Issue 9)		2,294,101
	Total		$1,248,391
	Accumulated Amortization of CIAC
1	To correct utility's averaging error for projected 2007 test year.  (Issue 9)		$29,975
2	Reflect the appropriate amount of projected Acc. Amort. of CIAC.  (Issue 9)		283,179
	Total		$313,153
	WSC Rate Base
	To reflect the appropriate WSC rate base allocation.  (Issue 4)		$103
	Working Capital
	To reflect the appropriate working capital allowance.  (Issue 10)		$4,817

 

	Utilities Inc. of Sandalhaven	Schedule No. 1-D
	Adjustments to Rate Base	Docket No. 060285-SU
	Test Year Ended 6/30/10 - Phase-Two 80% Buildout
	Explanation		Wastewater
	Plant In Service
1	Reflect audit adjustments agreed to by the utility and staff. (Issue 2)		($12,941)
2	Reflect appropriate projected test year balance for franchises.  (Issue 3)		(9,826)
3	Reflect appropriate projected plant additions.  (Issue 5)		(724,353)
4	Reflect appropriate full retirement of the wastewater treatment plant.  (Issue 5)		(579,631)
	Total		($1,326,751)
	Land
	To reflect non-used and useful adjustment to land.  (Issue 6)		($73,089)
	Accumulated Depreciation
1	Reflect audit adjustments agreed to by the utility and staff. (Issue 2)		$310
2	Reflect appropriate projected test year balance for franchises.  (Issue 3)		1,116
3	To reflect the appropriate amount of Acc. Depr for 80% Buildout.  (Issue 8)		273,528
	Total		$274,953
	CIAC
1	Reflect appropriate full retirement of the wastewater treatment plant.  (Issue 5)		$584,577
2	To reflect the appropriate amount of CIAC for 80% Buildout.  (Issue 9)		759,017
	Total		$1,343,594
	Accumulated Amortization of CIAC
	Reflect appropriate amount of Acc. Amort. of CIAC for 80% Buildout.  (Issue 9)		($47,818)
	WSC and UIF Rate Base
	To reflect the appropriate WSC and UIF rate base allocation. (Issue 4)		($2,040)
	Deferred Tax Asset
	To remove utility’s net debit ADITs balance in rate base.  (Issue 13)		($88,867)
	Working Capital
	To reflect the appropriate working capital allowance.  (Issue 10)		$6,482

	Utilities Inc. of Sandalhaven						Schedule No. 2-A
	Capital Structure-Simple Average						Docket No. 060285-SU
	Test Year Ended 12/31/07 - Phase One
			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	$124,044,203	$0	$124,044,203	($122,490,425)	$1,553,778	51.87%	6.81%	3.53%
2	Short-term Debt	11,347,000	0	11,347,000	(11,204,867)	142,133	4.74%	2.00%	0.09%
3	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
4	Common Equity	90,787,422	0	90,787,422	(89,650,219)	1,137,203	37.96%	11.77%	4.47%
5	Customer Deposits	16,500	0	16,500	0	16,500	0.55%	6.00%	0.03%
6	Deferred Income Taxes	145,878	0	145,878	0	145,878	4.87%	0.00%	0.00%
7	Total Capital	$226,341,003	$0	$226,341,003	($223,345,511)	$2,995,492	100.00%		8.13%
Per Staff
8	Long-term Debt	$124,044,203	$55,955,797	$180,000,000	($180,000,000)	$0	0.00%	6.60%	0.00%
9	Short-term Debt	11,347,000	(11,347,000)	0	0	0	0.00%	0.00%	0.00%
10	Preferred Stock	0	0	0	0	0	0.00%	0.00%	0.00%
11	Common Equity	90,787,422	17,464,864	108,252,286	(108,252,286)	0	0.00%	12.00%	0.00%
12	Customer Deposits	16,500	263	16,763	0	16,763	28.58%	6.00%	1.71%
13	Deferred Income Taxes	145,878	30,633	176,511	(134,615)	41,896	71.42%	0.00%	0.00%
14	Total Capital	$226,341,003	$62,104,556	$288,445,559	($288,386,900)	$58,659	100.00%		1.71%
							LOW	HIGH
					RETURN ON EQUITY		11.00%	13.00%
				OVERALL RATE OF RETURN			1.71%	1.71%

 

	Utilities Inc. of Sandalhaven								Schedule No. 2-B
	Capital Structure-Simple Average								Docket No. 060285-SU
	Test Year Ended 6/30/10 - Phase-Two 80% Buildout
			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	$124,044,203	$0	$124,044,203	($122,820,677)		$1,223,526		54.44%	6.81%	3.71%
2	Short-term Debt	11,347,000	0	11,347,000	(11,235,077)		111,923		4.98%	2.00%	0.10%
3	Preferred Stock	0	0	0	0		0		0.00%	0.00%	0.00%
4	Common Equity	90,787,422	0	90,787,422	(89,891,928)		895,494		39.85%	11.99%	4.78%
5	Customer Deposits	16,500	0	16,500	0		16,500		0.73%	6.00%	0.04%
6	Deferred Income Taxes	0	0	0	0		0		0.00%	0.00%	0.00%
7	Total Capital	$226,195,125	$0	$226,195,125	($223,947,682)		$2,247,443		100.00%		8.63%
Per Staff
8	Long-term Debt	$124,044,203	$55,955,797	$180,000,000	($178,664,762)		$1,335,238		57.21%	6.60%	3.78%
9	Short-term Debt	11,347,000	(11,347,000)	0	0		0		0.00%	0.00%	0.00%
10	Preferred Stock	0	0	0	0		0		0.00%	0.00%	0.00%
11	Common Equity	90,787,422	17,464,864	108,252,286	(107,449,271)		803,014		34.41%	12.00%	4.13%
12	Customer Deposits	16,500	263	16,763	0		16,763		0.72%	6.00%	0.04%
13	Deferred Income Taxes	0	178,894	178,894	0		178,894		7.66%	0.00%	0.00%
14	Total Capital	$226,195,125	$62,252,817	$288,447,942	($286,114,033)		$2,333,909		100.00%		7.95%
									LOW	HIGH
					RETURN ON EQUITY				11.00%	13.00%
				OVERALL RATE OF RETURN					7.60%	8.29%

 

	Utilities Inc. of Sandalhaven						Schedule No. 3-A
	Statement of Wastewater Operations						Docket No. 060285-SU
	Test Year Ended 12/31/07 - Phase One
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement
		12/31/2005		12/31/2007
1	Operating Revenues:	$270,518	$847,616	$1,118,134	-$740,531	$377,603	$197,496	$575,099
							52.30%
	Operating Expenses
2	Operation & Maintenance	$313,247	$209,214	$522,461	-$10,878	$511,583		$511,583
3	Depreciation	-32,297	96,706	64,409	-64,409	0		0
4	Amortization	529	-529	0	0	0		0
5	Taxes Other Than Income	43,260	178,625	221,885	-168,261	53,624	8,887	62,511
6	Income Taxes	-44,051	97,109	53,058	-124,031	-70,973	70,973	0
7	Total Operating Expense	280,688	581,125	861,813	-367,580	494,233	79,861	574,094
8	Operating Income	-$10,170	$266,491	$256,321	-$372,950	-$116,629	$117,635	$1,006
9	Rate Base	-$68,529		$3,034,940		$58,659		$58,659
10	Rate of Return	14.84%		8.45%		-198.83%		1.71%

 

	Utilities Inc. of Sandalhaven						Schedule No. 3-B
	Statement of Wastewater Operations						Docket No. 060285-SU
	Test Year Ended 6/30/10 - Phase-Two 80% Buildout
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement
		12/31/2005		12/31/2007
1	Operating Revenues:	$270,518	$855,163	$1,125,681	-$673,120	$452,561	$594,361	$1,046,922
							131.33%
	Operating Expenses
2	Operation & Maintenance	$313,247	$330,679	$643,926	$2,441	$646,367		$646,367
3	Depreciation	-32,297	77,691	45,394	-4,880	40,514		40,514
4	Amortization	529	50,342	50,871	-50,871	0		0
5	Taxes Other Than Income	43,260	107,428	150,688	-61,056	89,632	26,746	116,378
6	Income Taxes	-44,051	84,560	40,509	-195,952	-155,443	213,593	58,150
7	Total Operating Expense	280,688	650,700	931,388	-310,319	621,069	240,340	861,409
8	Operating Income	-$10,170	$204,463	$194,293	-$362,801	-$168,508	$354,021	$185,513
9	Rate Base	$39,229		$2,247,444		$2,333,909		$2,333,909
10	Rate of Return	-25.92%		8.65%		-7.22%		7.95%