DATE:	March  25, 2010
TO:	Director, Office of the Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Wright, Bulecza-Banks, Daniel, Deason, Fletcher, Linn, Rieger, Salnova, Walden) Office of the General Counsel (Young)
RE:	Docket No. 090462-WS – Application for increase in Water and Wastewater rates in Marion, Orange, Pasco, Pinellas, and Seminole Counties by Utilities, Inc. of Florida. County(ies):  Marion, Orange, Pasco, Pinellas, Seminole
AGENDA:	4/06/10 – Regular Agenda – Decision on Suspension of Rates and on Interim Rates – Participation is at the Discretion of the Commission
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Skop
CRITICAL DATES:			60-Day Suspension Date Waived by Company to 04/06/10
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ECR\WP\090462.RCM.DOC

 

 Case Background

Utilities, Inc. of Florida (UIF or Utility) is a Class A utility providing water and wastewater service to 22 systems in the following counties:  Marion, Orange, Pasco, Pinellas, and Seminole.  UIF is a wholly-owned subsidiary of Utilities, Inc. (UI). The Utility’s last rate  case was in 2007.[1]

By letter dated September 30, 2009, UIF requested test year approval in order to file an application for general rate relief for all of its counties.  The Utility requested that the application be processed using the Proposed Agency Action (PAA) procedure and requested interim rates. 

UIF’s requested test year for final and interim purposes is the historical year ended December 31, 2008.  On February 1, 2010, the Utility filed minimum filing requirements (MFRs) to justify its requested rate increase.  By letter dated February 25, 2010, UIF was notified that the MFRs were deficient.  UIF corrected the deficiencies through information submitted on March 5, 2010.

In its MFRs, the Utility requested the following annual interim revenue increases for Marion, Orange, Pasco, Pinellas and Seminole Counties. 

 

County	Water Revenue Increase	% Increase	Wastewater Revenue Increase	% Increase
Marion	$8,727	4.83%	$14,271	35.83%
Orange	$23,627	23.44%	N/A	N/A
Pasco	$467,774	58.03%	$283,313	63.48%
Pinellas	$46,332	46.38%	N/A	N/A
Seminole	$246,035	31.56%	$134,541	18.08%
Total	$792,495	40.29%	$432,125	35.16%

 

The original 60-day statutory deadline for the Commission to suspend the Utility’s requested final rates was April 1, 2010.  However, by letter dated February 2, 2010, the Utility agreed to extend the statutory time frame by which the Commission is required to address UIF’s interim rate request.  This recommendation addresses the suspension of UIF’s requested final rates and the Utility’s requested interim rates. The Commission has jurisdiction pursuant to Section 367.081 and 367.082, Florida Statutes (F.S.).

Discussion of Issues

Issue 1: 

 Should the Utility’s proposed final water and wastewater rates be suspended?

Recommendation: 

 Yes. UIF’s proposed final water and wastewater rates should be suspended. (Wright, Deason, Linn)

Staff Analysis: 

 Section 367.081(6), F.S., provides that the Commission may, for good cause, withhold consent to the implementation of the requested rates by a vote to that effect within 60 days after the date the rate request is filed. Further, Section 367.081(8), F.S., permits the proposed rates to go into effect (secured and subject to refund) at the expiration of five months if: (1) the Commission has not acted upon the requested rate increase; or (2) if the Commission’s PAA action is protested by a party other than the Utility.

Staff has reviewed the filing and has considered the information filed in support of the rate application and the proposed final rates.  Staff recommends further investigation of this information, including on-site investigations by staff accountants and engineers.  Based on the foregoing, staff recommends that the Utility’s proposed rate increase be suspended.

`
Issue 2: 

 Should any interim revenue increase be approved?

Recommendation: 

 Yes, the Utility should be authorized to collect annual water and wastewater revenues as indicated below:

County	Adjusted Test Year Revenues	Revenue Increase	Revenue Requirement	% Increase
Marion - Water	$180,504	$0	$175,317	N/A
Marion - Wastewater	$39,829	$12,040	$51,869	30.23%
Orange – Water	$100,789	$15,579	$116,368	15.46%
Pasco  – Water	$806,112	$386,802	$1,192,914	47.98%
Pasco -Wastewater	$446,272	$253,166	$699,438	56.73%
Pinellas – Water	$99,904	$34,827	$134,731	34.86%
Seminole - Water	$779,689	$177,124	$956,813	22.72%
Seminole - Wastewater	$743,954	$62,074	$806,028	8.34%

  (Wright, Deason, Linn)

Staff Analysis: 

  UIF filed rate base, cost of capital, and operating statements to support its requested interim water and wastewater increases.  Pursuant to Section 367.082(5)(b)1., F.S., the achieved rate of return for interim purposes must be calculated by applying adjustments consistent with those used in the Utility’s most recent rate proceeding and annualizing any rate changes.  Staff reviewed UIF's interim request, as well as Order No. PSC-07-0505-SC-WS, the Utility’s most recent rate proceeding.  Staff’s recommended adjustments are discussed below.  Staff has attached accounting schedules for each county to illustrate staff's recommended rate base, capital structure, and test year operating income amounts.  The rate base schedules are labeled as Nos. 1-A and 1-B, for water and wastewater, respectively, with the adjustments shown on No. 1-C.  The capital structure schedule is No. 2. The operating income schedules for water and wastewater, respectively, are labeled as Nos. 3-A and 3-B, with the adjustments shown on No. 3-C.    

                                                RATE BASE

            For the historical test year ended December 31, 2008, the Utility used the balance sheet approach to calculate interim working capital, which is appropriate for a Class A Utility.  The calculated total company working capital was $2,835,097, and it was allocated to each of UIF’s systems based on Equivalent Residential Connections (ERCs) at December 31, 2008. 

 

            In Order No. PSC-07-0505-SC-WS, working capital was decreased by $1,903,373 from the Utility’s thirteen-month average cash balance of $1,979,643 or by approximately 96.15 percent to remove the cash amounts that were transferred to the parent company.  Consistent with the last rate case, staff believes a similar adjustment is appropriate. Applying the same 96.15 percent to the average cash balance of $2,364,377 included in the working capital calculation for this filing results in a reduction of $2,273,284 to working capital.  Staff’s $2,273,284 reduction to the cash balance in working capital results in a working capital allowance of $561,813.  The following table shows the working capital allowance by county and by water or wastewater service as filed by the utility and as adjusted by staff.

 

 

            UIF made a net used and useful adjustment to reduce Marion County’s wastewater rate base in the amount of  $20,958, consistent with the last rate order.  No other used and useful adjustments were made for the remaining counties, also consistent with the last rate order.

 

COST OF CAPITAL

 

In its interim request, UIF used a 10.46 percent return on equity (ROE), which is the minimum of the range of its last authorized ROE from Order No. PSC-07-0505-SC-WS.  Based on a 10.46 percent ROE and staff’s adjustments to rate base discussed earlier, staff recommends an interim weighted average cost of capital for each system as follows:

 

NET OPERATING INCOME

 

            In the Utility’s last rate case, the Commission determined that the Ravenna Park system in Seminole County had excessive Infiltration and Inflow (I&I)  in the amount of 19.3 percent of the wastewater treated by the City of Sanford.  An adjustment of $20,600 was made in the last rate case reducing the total purchased wastewater treatment expense for Seminole County for excessive I&I.  Additional information is still needed related to excessive I&I at Ravena Park for this docket, therefore staff recommends applying the same 19.3 percent from the last rate case to the purchased wastewater treatment expense for 2008 of $172,240.  This results in an adjustment to reduce purchased wastewater treatment expense in the amount of  $33,242.

 

            Based on the above adjustments, staff recommends the revenue requirements reflected in the following table.  These recommended revenue increases will allow the Utility the opportunity to recover its water and/or wastewater operating expenses and earn at the minimum of the last previously recommended return on equity of its water and/or wastewater rate bases. 

 

County	Adjusted Test Year Revenues	Revenue  Increase	Revenue Requirement	% Increase
Marion - Water	$180,504	$0	$175,317*	N/A
Marion - Wastewater	$39,829	$12,040	$51,869	30.23%
Orange – Water	$100,789	$15,579	$116,368	15.46%
Pasco  – Water	$806,112	$386,802	$1,192,914	47.98%
Pasco -Wastewater	$446,272	$253,166	$699,438	56.73%
Pinellas – Water	$99,904	$34,827	$134,731	34.86%
Seminole - Water	$779,689	$177,124	$956,813	22.72%
Seminole - Wastewater	$743,954	$62,074	$806,028	8.34%

 

*  This revenue requirement is based on the low point of the last authorized return on equity. Staff has determined that for the interim test year, the company earned within its authorized range.  As a result, neither a revenue increase nor decrease would be appropriate.

Issue 3: 

 What are the appropriate interim water and wastewater rates?

Recommendation: The service rates for UIF in effect as of December 31, 2005, should be increased as shown below to generate the recommended revenue increase for the interim period.

 

 

            The rates, as shown on Schedules No. 4-A and 4-B, should be effective for service rendered on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C., provided the customers have received notice.  The rates should not be implemented until the required security has been filed and proper notice has been received by the customers.  The Utility should provide proof to staff of the date notice was given within 10 days after the date of the notice.  (Wright, Deason, Linn)

Staff Analysis:  Staff recommends that interim service rates for UIF be designed to allow the Utility the opportunity to generate additional annual operating revenues as shown below.  To determine the appropriate increase to apply to the service rates, miscellaneous service and other revenues should be removed from the test year revenues.  The calculations are as follows:

 

The rates should be effective for service rendered on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C., provided the customers have received notice.  The rates should not be implemented until the required security has been filed and proper notice has been received by the customers.  The Utility should provide proof to staff of the date notice was given within 10 days after the date of the notice.

Schedule Nos. 4-A and 4-B reflects each of the above systems’ current rates, the requested interim and final rates, and staff’s recommended interim rates.

Issue 4:

  What is the appropriate security to guarantee the interim increase?

Recommendation:

  A corporate undertaking is acceptable contingent upon receipt of the written guarantee of the parent company, Utilities, Inc. (UI), and written confirmation of UI’s continued attestation that it does not have any outstanding guarantees on behalf of UI-owned utilities in other states.  UI should be required to file a corporate undertaking on behalf of its subsidiaries to guarantee any potential refunds of revenues collected under interim conditions. UI’s maximum amount of revenue that needs to be protected is $714,789 subject to refund in this docket.  Pursuant to Rule 25-30.360(6), F.A.C., the Utility should provide a report by the 20th of each month indicating the monthly and total revenue collected subject to refund.  Should a refund be required, the refund should be with interest and undertaken in accordance with Rule 25-30.360, F.A.C.  (Wright, Salnova)

Staff Analysis:

  Pursuant to Section 367.082, F.S., revenues collected under interim rates shall be placed under bond, escrow, letter of credit, or corporate undertaking subject to refund with interest at a rate ordered by the Commission.  Utilities, Inc. of Florida (UIF or Company) has requested annual interim revenue increases of $792,495 for water and $432,125 for wastewater for systems in the counties referenced in this docket.  In accordance with Rule 25-30.360, F.A.C., staff has calculated the potential refund of revenues and interest collected under interim conditions to be $714,789.  This amount is based on an estimated seven months of revenue being collected from staff’s recommended interim rates over the Utility’s current authorized rates shown on Schedules Nos. 4-A and 4-B.

            The criteria for a corporate undertaking include sufficient liquidity, ownership equity, profitability, and interest coverage to guarantee any potential refund.  Staff reviewed the financial statements of the parent company to determine if UI can support a corporate undertaking on behalf of its subsidiary.  UI’s 2007, 2008, and 2009 financial statements were used to determine the financial condition of the Company.  UI reported deficient liquidity and low levels of interest coverage over the review period.  In addition, UI experienced a net loss in the amount of $635,405 in 2008.  However, UI improved profitability to sufficient levels in 2009 achieving net income in the amount of $5,662,600.  In addition, over the three year period net income has been on average three times greater than the requested corporate undertaking amount.  The Company has also improved its interest coverage ratio in 2009.  Finally, UI’s average equity ratio has increased to 45.5 percent in 2009 from 40.7 percent in 2008. 

 

Staff believes UI has adequate resources to support a corporate undertaking in the amount requested. Based on this analysis, staff recommends that a corporate undertaking of $714,789 is acceptable contingent upon receipt of the written guarantee of UI and written confirmation that UI does not have any outstanding guarantees on behalf of UI-owned utilities in other states.
            Pursuant to Rule 25-30.360(6), F.A.C., the Utility shall provide a report by the 20th day of each month indicating the monthly and total revenue collected subject to refund.  Should a refund be required, the refund should be with interest and undertaken in accordance with Rule 25-30.360, F.A.C.  In no instance should maintenance and administrative costs associated with any refund be borne by the customers.  These costs are the responsibility of, and should be borne by, the Utility. 

 

 

Issue 5:

  Should this docket be closed?

Recommendation:

  No.  The docket should remain open pending the Commission’s final action on the Utility’s requested rate increase.  (Young)

Staff Analysis:

  The docket should remain open pending the Commission’s final action on the Utility’s requested rate increase.

 

 

 

 

	Utilities, Inc. of Florida - Marion County						Schedule No. 2
	Capital Structure						Docket No. 090462-WS
	Test Year Ended 12/31/08						Interim
			Specific	Subtotal	Pro rata	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	$180,000,000	$0	$180,000,000	($179,706,107)	$293,893	41.72%	6.65%		2.77%
2	Short-term Debt	39,713,462	0	39,713,462	(39,648,605)	64,857	9.21%	4.30%		0.40%
3	Preferred Stock	0	0	0	0	0	0.00%	0.00%		0.00%
4	Common Equity	158,595,058	0	158,595,058	(158,336,126)	258,932	36.76%	10.46%		3.85%
5	Customer Deposits	4,586	0	4,586	0	4,586	0.65%	6.00%		0.04%
6	Tax-credits - Zero Cost	6,398	0	6,398	0	6,398	0.91%	0.00%		0.00%
7	Deferred Income Taxes	75,720	0	75,720	0	75,720	10.75%	0.00%		0.00%
10	Total Capital	$378,395,224	$0	$378,395,224	($377,690,838)	$704,386	100.00%			7.06%
Per Staff
11	Long-term Debt	$180,000,000	$0	$180,000,000	($179,775,006)	$224,994	40.21%	6.65%		2.67%
12	Short-term Debt	39,713,462	0	39,713,462	(39,663,821)	49,641	8.87%	4.30%		0.38%
13	Preferred Stock	0	0	0	0	0	0.00%	0.00%		0.00%
14	Common Equity	158,595,058	0	158,595,058	(158,396,819)	198,239	35.43%	10.46%		3.71%
15	Customer Deposits	4,586	0	4,586	0	4,586	0.82%	6.00%		0.05%
16	Tax-credits - Zero Cost	6,398	0	6,398	0	6,398	1.14%	0.00%		0.00%
17	Deferred Income Taxes	75,720	0	75,720	0	75,720	13.53%	0.00%		0.00%
20	Total Capital	$378,395,224	$0	$378,395,224	($377,835,646)	$559,578	100.00%			6.81%
							LOW	HIGH
				RETURN ON EQUITY			10.46%	12.46%
				OVERALL RATE OF RETURN			6.81%	7.52%

 

	Utilities, Inc. of Florida - Marion County						Schedule No. 3-A
	Statement of Water Operations						Docket No. 090462-WS
	Test Year Ended 12/31/08						Interim
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement
1	Operating Revenues:	$169,225	$20,006	$189,321	($8,727)	$180,504	($5,187)	$175,317
							(2.87%)
	Operating Expenses
2	Operation & Maintenance	105,959	(7,756)	98,203	0	98,203		98,203
3	Depreciation	30,432	(7,253)	23,179	0	23,179		23,179
4	Amortization	0	0	0	0	0		0
5	Taxes Other Than Income	17,285	(2,863)	14,422	(393)	14,029	(233)	13,796
6	Income Taxes	0	13,221	13,221	(1,436)	11,785	(1,864)	9,921
7	Total Operating Expense	153,676	(4,651)	149,025	(1,829)	147,196	(2,098)	145,098
8	Operating Income	$15,549	$24,657	$40,206	($6,898)	$33,308	($3,090)	$30,218
9	Rate Base	$345,594		$569,896		$443,729		$443,729
10	Rate of Return	4.50%		7.06%		7.51%		6.81%

 

 

	Utilities, Inc. of Florida - Marion County						Schedule No. 3-B
	Statement of Wastewater Operations						Docket No. 090462-WS
	Test Year Ended 12/31/08						Interim
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted	Revenue	Revenue
	Description	Utility	ments	Per Utility	ments	Test Year	Increase	Requirement
1	Operating Revenues:	$37,332	$16,768	$54,100	($14,271)	$39,829	$12,040	$51,869
							30.23%
	Operating Expenses
2	Operation & Maintenance	18,425	13,019	31,444	0	31,444		31,444
3	Depreciation	4,347	2,121	6,468	0	6,498		6,468
4	Amortization	0	0	0	0	0		0
5	Taxes Other Than Income	0	3,578	3,578	(642)	2,936	542	3,478
6	Income Taxes	0	3,121	3,121	(4,858)	(1,737)	4,327	2,590
7	Total Operating Expense	22,772	21,839	44,611	(5,500)	39,111	4,869	43,980
8	Operating Income	$14,560	($5,071)	$9,489	($8,771)	$718	$7,171	$7,889
9	Rate Base	$126,728		$134,490		$115,849		$115,849
10	Rate of Return	11.49%		7.06%		0.62%		6.81%

 

	Utilities, Inc. of Florida - Marion County								Schedule No. 4-A
	Water Monthly Service Rates								Docket No. 090462-WS
	Test Year Ended 12/31/08								Interim
						Rates		Utility	Utility	Staff
						Prior to		Requested	Requested	Recomm.
						Filing		Interim	Final	Interim
	Residential
	Base Facility Charge by Meter Size:
	5/8" x 3/4"			$3.73			$4.03		$4.22	$3.84
	1"			$9.32			$10.07		$10.55	$9.60
	1-1/2"			$18.63			$20.13		$21.10	$19.20
	2"			$29.81			$32.31		$33.75	$30.72
	3"			$59.62			$64.43		$67.51	$61.44
	4"			$93.16			$100.67		$105.48	$96.00
	6"			$186.32			$201.34		$210.97	$192.00
Gallonage Charge, per 1,000 Gallons				$2.24			$2.42		$2.53	$2.31
	General Service
	Base Facility Charge by Meter Size:
	5/8" x 3/4"				$3.73		$4.03		$4.22	$3.84
	1"				$9.32		$10.07		$10.55	$9.60
	1-1/2"				$18.63		$20.13		$21.10	$19.20
	2"				$29.81		$32.31		$33.75	$30.72
	3"				$59.62		$64.43		$67.51	$61.44
	4"				$93.16		$100.67		$105.48	$96.00
	6"				$186.32		$201.34		$210.97	$192.00
	Gallonage Charge, per 1,000 Gallons				$2.24		$2.42		$2.53	$2.31
					Typical Residential Bills 5/8" x 3/4" Meter
	3,000 Gallons				$10.45		$11.29		$11.81	$10.77
	5,000 Gallons				$14.93		$16.13		$16.87	$15.39
	10,000 Gallons				$26.13		$28.23		$29.52	$26.94