DATE:	March 24, 2011
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Deason, Fletcher, Maurey, Stallcup, Thompson, Williams) Office of the General Counsel (Jaeger)
RE:	Docket No. 100149-WU – Application for increase in water rates in Lee County by Ni Florida, LLC.
AGENDA:	04/05/11 – Proposed Agency Action Except Issues Nos. 21 and 22 – Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Brisé
CRITICAL DATES:			5-Month Effective Date waived through 04/05/11
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ECR\WP\100149.RCM.DOC

 

 

 

 

 

 

Table of Contents

 

               Case Background. 3

1             Quality of Service (Williams) 3

2             Uncontested Audit Adjustments (Deason) 3

3             Pro Forma Plant Additions (Deason) 3

4             Used and Useful Percentage (Williams) 3

5             Working Capital (Deason) 3

6             Rate Base (Deason) 3

7             Return on Equity (Deason) 3

8             Cost of Capital (Deason) 3

9             Rate Case Expense (Deason) 3

10           Bad Debt Expense (Deason) 3

11           Allocated Overhead (Deason) 3

12           Operating Income (Deason) 3

13           Revenue Requirement (Deason) 3

14           Rate Structures (Thompson) 3

15           Repression (Thompson) 3

16           Rates (Thompson, Deason) 3

17           Miscellaneous Service Charges (Thompson) 3

18           Late Fee (Thompson) 3

19           Non-Sufficient Funds Fee (Thompson) 3

20           Interim Refund (Deason) 3

21           Four-Year Rate Reduction (Deason) 3

22           Proof of Adjustments (Deason) 3

23           Docket Closure (Jaeger, Deason) 3

1-A        Rate Base. 3

1-B         Adjustments to Rate Base. 3

2             Capital Structure. 3

3-A        Water Operating Income. 3

3-B         Adjustments to Operating Income. 3

4             Monthly Service Rates. 3

 

 

 

 Case Background

Ni Florida, LLC (Ni Florida or Utility) is a Class A utility providing service to approximately 744 water customers in Lee County.  Ni Florida is a wholly-owned subsidiary of Ni America.  Water rates were last established for this Utility in its 1992 rate case.[1]

 

On June 22, 2010, Ni Florida filed its application for the rate increase at issue in the instant docket.  The Utility requested that the application be processed using the Proposed Agency Action (PAA) procedure and requested interim rates.  Ni Florida had deficiencies in the Minimum Filing Requirements (MFRs).  The deficiencies were corrected and July 28, 2010, was established as the official filing date.  The test year established for interim and final rates is the 13-month average period ended December 31, 2009.

By Order No. PSC-10-0564-PCO-WU, the Commission approved interim rates designed to generate annual water revenues of $338,385, an increase of $117,668 or approximately 53 percent.[2]  The Utility requested final rates designed to generate annual water revenues of $411,671, an increase of $191,525 or approximately 87 percent.

This recommendation was originally discussed at the January 25, 2011, Commission Conference.  The Commission voted to defer this recommendation in order for staff to review the Utility’s 2010 allocated overhead O&M expenses.  Staff requested the information for the 2010 O&M expenses for Ni America in its data requests dated January 27, 2011, and February 16, 2011.  As a result of this review, Issues 9 and 11 were revised and original Issue 10 (audited 2009 overhead) was rendered moot.  Based on these revisions, the original Issue 10 was deleted, the remaining issues were renumbered, and all fall-out amounts were updated throughout all issues and the attached schedules.

  This recommendation addresses Ni Florida’s requested final rates.  The Commission has jurisdiction pursuant to Sections 367.081 and 367.082, Florida Statutes (F.S.).

Discussion of Issues

QUALITY OF SERVICE

Issue 1:  Is the quality of service provided by Ni Florida satisfactory?

Recommendation: 

 Yes, the quality of service provided by Ni Florida is satisfactory.  (Williams)

Staff Analysis: Pursuant to Rule 25-30.433(1), Florida Administrative Code (F.A.C.), the Commission determines the overall quality of service provided by a utility by evaluating three separate components of water operations.  These components are the quality of the utility’s product, the operating condition of the utility’s plant and facilities, and the utility’s attempt to address customer satisfaction.  Comments or complaints received by the Commission from customers are also reviewed.  The Utility’s compliance with the Lee County Health Department (LCHD) is also considered.

 

Quality of Utility’s Product and Operating Condition of Utility’s Plant and Facilities

           

Ni Florida purchases all of the water it sells to customers from Lee County Utilities.  The Utility maintains and operates the distribution system that delivers the treated water to its customers.  Ni Florida files monthly operating reports with the LCHD.  The LCHD also conducts periodic inspections of the water distribution system.  The most recent inspection report from LCHD cited no deficiencies and stated that the Utility was in compliance with all regulations and requirements.

A staff field investigation of the service area was conducted on September 30, 2010.  The water distribution facilities appeared to be operating normally.  The Utility recently installed isolation valves and replaced a majority of the water meters throughout the distribution system. This improvement project was included as a pro forma project in Ni Florida’s filing, but at the time of the field investigation all of the associated work had been completed.  These improvements are intended to help the Utility operate more efficiently by allowing portions of the distribution system to be isolated as needed, and by decreasing the amount of unaccounted for water.  Therefore, staff recommends that the quality of drinking water delivered to the customers and the operating condition of the water distribution facilities should be considered satisfactory.

Utility’s Attempt to Address Customer Satisfaction

            A customer meeting was held on September 29, 2010, in the Tamiami Village Clubhouse, in North Ft. Myers, Florida. Approximately 80 customers attended and 18 spoke.  Representatives of the Utility and the Office of Public Counsel were also present.  The customer comments dealt mainly with their opposition to the level of the rate increase and the burden it would place on the residents of the retirement community who live on fixed incomes.  Staff explained the rate making process to the customers and followed up on specific inquiries about cost allocation, rate of return, rate base calculations, and depreciation.  One customer had concerns about the shut-off valve on his water meter.  Staff inspected the customer’s meter and determined that there is a shut-off valve on both sides of the meter.  Staff informed the customer that the maintenance of the valve on the Utility side of the meter is Ni Florida’s responsibility; however, the shut-off valve on the customer’s side of the meter is the customer’s responsibility and may be used by him to shut-off the flow of water into his residence.

 

            A review of all customer complaints received on the Commission’s complaint tracking system in the last three years revealed one complaint.  This complaint related to a billing issue and was subsequently resolved.  Staff also reviewed customer complaints filed with the Utility.  It appears that all 10 complaints filed with the Utility were resolved in a timely manner.  In addition, there are approximately 28 letters in opposition to the proposed rate increase that have been filed in the correspondence side of the docket file.

 

Conclusion

 

In summary, Ni Florida meets all required testing and maintenance standards for the distribution system, the distribution system is operating normally, and the Utility appears to address customer complaints in a timely manner.  Therefore, staff recommends that the overall quality of service provided by Ni Florida be considered satisfactory.
RATE BASE

Issue 2: 

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

Recommendation: 

 Yes.  Based on audit adjustments agreed to by the Utility, staff recommends the following adjustments to rate base and operating expenses be made. 

Audit Finding	Plant	Accum. Depr.	Accum. Amortz. of CIAC	Amortz. Expense	Depr. Expense	O&M Expense
No. 1	($5,512)	($69)	$0	$0	($138)	($981)
No. 2	(4,312)	4,312	0	0	(100)	0
No. 3	0	(435)	(1,293)	861	1,251	0
Total:	($9,824)	$3,808	($1,293)	$861	$1,013	($981)

           

(Deason)

Staff Analysis: 

 In its response to the staff’s audit report, Ni Florida agreed to the adjustment amounts listed below.  Staff recommends the following adjustments to rate base and operating expenses.

Table 2-1

Audit Finding	Plant	Accum. Depr.	Accum. Amortz. of CIAC	Amortz. Expense	Depr. Expense	O&M Expense
No. 1	($5,512)	($69)	$0	$0	($138)	($981)
No. 2	(4,312)	4,312	0	0	(100)	0
No. 3	0	(435)	(1,293)	861	1,251	0
Total:	($9,824)	$3,808	($1,293)	$861	$1,013	($981)

 

 

Issue 3:  

 Should adjustments be made to the Utility's pro forma plant additions and associated expenses?

Recommendation: 

 Yes.  The Utility’s pro forma plant additions should be increased by $391.  Accordingly, accumulated depreciation and depreciation expense should be decreased by $288.  (Deason)  

Staff Analysis: 

 Ni Florida included $42,194 of pro forma plant in its MFRs associated with the installation of isolation valves.  When the water needs to be shut off to one customer, isolation valves allow the Utility to shut-off water to a small section of the service territory and not the entire subdivision.  The Utility provided documentation showing a total of $53,726 for the installation of the isolation valves.  Therefore, staff recommends that pro forma plant be increased by $11,532 and that accumulated depreciation and depreciation expense be increased by $269.

Ni Florida included $173,478 of pro forma plant additions in its MFRs associated with new meters.  The Utility installed the new meters in order to improve on the water loss the subdivision has experienced in recent years.  The Utility provided documentation showing a total of $162,337 for the installation of meters.  Therefore, staff recommends that pro forma plant be decreased by $11,141, and that accumulated depreciation and depreciation expense be decreased by $557.

In summary, staff recommends pro forma plant additions of $216,063.  As a result, plant should be increased by $391.  Accordingly, accumulated depreciation and depreciation expense should be decreased by $288.    Staff’s recommended pro forma plant and expense is as follows:

Table 3-1

Ni Florida, LLC Pro Forma Plant
Pro Forma Plant Adjs.	Per MFRs	Staff Adjs. to Plant	Staff Adjusted Plant	Staff Adjs. to Accum. Depr.	Staff Adjs. to Depr. Exp.
Isolation Valves	$42,194	$11,532	$53,726	$269	$269
Meters	173,478	(11,141)	162,337	(557)	(557)
Adjustment Totals	$215,672	$391	$216,063	($288)	($288)

 

 

Issue 4: 

 What is the used and useful percentage for the water distribution system?

Recommendation: 

 The Ni Florida water distribution system should be considered 100 percent used and useful (U&U).  (Williams)

Staff Analysis: 

 In the Utility’s last rate case, there was a stipulation between the parties that the Utility’s facilities would be considered 100 percent U&U.[3]  The U&U calculation for the water distribution system is based on the number of customers connected to the system divided by the number of available lots in the service territory.  Consideration is also given to growth.  The Utility’s distribution system currently serves approximately 96 percent of the total number of lots in the service territory.  Also, the service territory is built out and has experienced no growth over the past five years. In fact, the customer base has remained relatively constant with no growth since the last rate case. Therefore, staff recommends that the water distribution system be considered 100 percent U&U. 

The Utility’s filing also indicates that there was 2.84 percent excessive unaccounted for water (UFW) during the test year.  However, in March 2010, Ni Florida completed a meter replacement project that replaced the majority of the older water meters throughout the system with newer, more accurate meters.  As a result, the amount of UFW decreased after April 2010 to within acceptable levels.  Therefore, staff recommends that no adjustment be made to purchased water expense for UFW.  However, as discussed in Issue 14, staff adjusted test year billing determinants to increase the amount of accounted for water billed to customers.

Issue 5:

 What is the appropriate working capital allowance?

Recommendation: 

 The appropriate amount of working capital is $26,347.  (Deason) 

Staff Analysis: 

 Rule 25-30.433(2), F.A.C., requires Class A utilities to use the balance sheet approach to calculate the working capital allowance.  The balance sheet approach is essentially current assets less current liabilities.  According to its filing, Ni Florida utilized the balance sheet approach and calculated a working capital allowance of $76,744, which included a current asset of $91,804 for unamortized rate case expense for this instant case.  However, as discussed below, staff believes that an adjustment to the Utility’s working capital balance is necessary.

As addressed in Issue 9, staff is recommending total rate case expense of $82,815.  Based on Commission practice,[4] only one-half of the balance of rate case expense should be included in working capital.  To determine the appropriate amount of working capital, one-half of the total rate case expense of $82,815 should be subtracted from the 13-month average balance of Ni Florida’s unamortized rate case expense of $91,804.  Thus, staff recommends that the balance of working capital proposed by the Utility be decreased by $50,397 [$91,804-($82,815/2)].  Therefore, the appropriate amount of working capital is $26,347 ($76,744-$50,397).

Issue 6:  

 What is the appropriate rate base for the December 31, 2009, test year?

Recommendation: 

 Consistent with other recommended adjustments, the appropriate 13-month average rate base for the test year ended December 31, 2009, is $277,597.  (Deason)  

Staff Analysis: 

 Consistent with other recommended adjustments, the appropriate 13-month average rate base for the test year ended December 31, 2009, is $277,597.  Staff’s recommended schedule for rate base is shown on Schedule No. 1-A.  The adjustments are shown on Schedule No. 1-B.

COST OF CAPITAL

Issue 7:  

 What is the appropriate return on equity?

Recommendation: 

 The appropriate return on equity (ROE) is 8.82 percent based on the Commission’s leverage formula currently in effect.  Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.  (Deason)  

Staff Analysis: 

 The ROE requested in the Utility’s filing is 8.81 percent.  Based on the current leverage formula approved in Order No. PSC-10-0401-PAA-WS[5] and an equity ratio of 100 percent as a percentage of investor capital, the appropriate ROE is 8.82 percent.  Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.

Issue 8:

 What is the appropriate weighted average cost of capital including the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2009?

Recommendation: 

 The appropriate weighted average cost of capital for the test year ended December 31, 2009, is 8.77 percent.  (Deason)  

Staff Analysis: 

 In its filings, the Utility requested an overall cost of capital of 8.81 percent.  Based upon the proper components, amounts, and cost rates associated with the capital structure for the test year ended December 31, 2009, staff recommends a weighted average cost of capital of 8.77 percent.  This represents a four-basis point reduction from Ni Florida’s requested overall cost of capital of 8.81 percent.  Schedule No. 2 details staff’s recommended overall cost of capital.

NET OPERATING INCOME

Issue 9: 

 What is the appropriate amount of current rate case expense?

Recommendation: 

 The appropriate amount of rate case expense is $82,815.  This expense should be recovered over four years for an annual expense of $20,704.  Thus, Ni Florida’s requested annual rate case expense should be reduced by $2,447.  (Deason) 

Staff Analysis: 

 The Utility included in its MFRs an estimate of $92,604 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 February 10, 2011, the Utility submitted a revised estimate of rate case expense through completion of the PAA process of $83,503 with $62,143 already incurred.  The components of the estimated rate case expense are as follows:

Table 9-1

 

	MFR Estimated	Actual	Additional Estimated	Total
Legal and Filing Fees	$50,800	$35,380	$19,360	$54,740
Tangibl, LLC	35,000	$25,330	0	$25,330
Key Engineering	0	421	0	421
Customer Mailings	6,804	1,012	2,000	3,012
Total Rate Case Expense	$92,604	$62,143	$21,360	$83,503

Pursuant to Section 367.081(7), F.S., the Commission shall determine the reasonableness of rate case expenses and shall disallow all rate case expenses determined to be unreasonable.  Staff has examined the requested actual expenses, supporting documentation, and estimated expenses as listed above for the current rate case.  Based on our review, staff believes several adjustments are necessary to the revised rate case expense estimate. 

            The first adjustment relates to the Utility’s legal fees.  The Utility included in its MFRs $50,800 in legal fees to complete the rate case.  The Utility provided invoices through December 31, 2010, showing legal expenses associated with the rate case totaling $35,380 plus an additional $13,547 for unbilled legal fees for a total of $48,927 invoiced legal fees.  Additionally, the Utility also included an estimate of $8,888 [$7,682 (estimated legal fees) + $1,206 (other miscellaneous expenses)] to complete the rate case through the PAA Order.  According to the invoices, the law firm of Rose, Sundstrom & Bentley, LLP, billed the Utility 8.1 hours related to the correction of MFR deficiencies.  Based on the law firm’s hourly rate of $305 per hour, the total amount billed to Ni Florida was $2,471 ($305x8.1).  The Commission has previously disallowed rate case expense associated with correcting MFR deficiencies because of duplicate filing costs.[6]  Accordingly, staff recommends that $2,471 be removed as duplicative and unreasonable rate case expense.  Thus, the appropriate invoiced legal fees should be $46,456 ($48,927-$2,471).  Therefore, total legal fees included in rate case expense should be $55,345 [$46,456 (invoiced legal fees) + $8,888 (estimated legal fees and other miscellaneous expenses)].

            The second adjustment relates to customer notices and postage.  The Utility estimated $6,804 for customer mailings.  Staff estimated the postage cost for the interim notice, the combined initial and customer meeting notice, and notice of the final rate increase to be $1,718.  Staff recommends that rate case expense be decreased by $5,086 ($6,804-$1,718) for customer notices and postage costs.

 

            In summary, staff recommends that the Utility’s revised rate case expense be decreased by $688.  The appropriate total rate case expense is $82,815.  A breakdown of rate case expense is as follows:

 

Table 9-2

 

 

            In its MFRs, Ni Florida requested total rate case expense of $92,604, which amortized over four years would be $23,151.  Based on the adjustments recommended above, the requested annual rate case expense should be decreased by $2,447 ($20,704 - $23,151).

  

The recommended total rate case expense should be amortized over four years, pursuant to Section 367.016, F.S.  Based on the data provided by Ni Florida and the recommended adjustments discussed above, staff recommends annual rate case expense of $20,704.

 Issue 10: 

 Should any adjustment be made to bad debt expense?

Recommendation: 

 Yes.  The Utility should be entitled to bad debt expense of $957.  As a result, Ni Florida’s bad debt expense of $3,853 should be reduced by $2,896.  (Deason)

Staff Analysis: 

 The Utility recorded bad debt expense of $3,853 for the test year.  Consistent with Commission practice, bad debt expense should be based on a three-year average.  The Commission has previously approved the application of a three-year average to determine the appropriate level of bad debt expense.  The Commission has set bad debt expense using the three-year average in three electric cases,[7] two gas cases,[8] and one water and wastewater case.[9] 

The Commission approved a three-year average in these cases based on the premise that a three-year average fairly represented the expected bad debt expense.  Overall, the basis for determining bad debt expense has been whether the amount is representative of the bad debt expense expected to be incurred by the utility.  Based on this calculation, Ni Florida should be entitled to bad debt expense of $957, which staff believes is representative of Ni Florida’s bad debt expense.  Based on the above, staff recommends that the Utility’s bad debt expense of $3,853 be reduced by $2,896.

Issue 11: 

 Should any adjustment be made to the Utility’s allocated overhead?

Recommendation: 

 Yes.  The Utility should be entitled to allocated overhead of $43,589.  As a result, the Utility’s allocated overhead of $175,649 should be reduced by $132,060.  (Deason)

Staff Analysis: 

 The Utility recorded allocated overhead of $175,649 for the test year.  The allocated overhead was recorded in the Utility’s miscellaneous expense account. 

According to the audit, Ni America, the Utility’s parent company, has an allocation policy that is based on two factors; ERCs and payroll charges allocable to the utilities.  During the test year, Ni America estimated that 47.09 percent of parent company O&M expenses were allocable to the utilities.

According to the audit, Ni America had $2,133,221 in O&M expenses in 2009.  Ni America allocated $1,004,534 ($2,133,221 x 0.4709) to its various subsidiaries.   The Utility’s allocated share was $175,649 or 17.49 percent of the total allocated overhead.

The Utility states that Ni America functions include:

·        Accounting

·        Annual Reporting Requirements

·        Business Development

·        Capital Improvements

·        Cash Management

·        Contract Administration

·        Engineering Services

·        Finance

·        Financial Reporting

·        Human Resources

·        Income Tax Administration

·        Legal Services

·        Operations Management

·        Payroll Administration

·        Rate Case Administration

·        Risk Management (Insurance)

·        Treasury Management

In January 2010, Ni America purchased Palmetto Utilities located in South Carolina.  The acquisition of Palmetto Utilities added over 15,000 additional ERCs to the approximately 4,700 existing ERCs used to allocate O&M expenses during the test year.  Staff believes that this is a known and measurable change that must be taken into account for this rate case. 

Staff  recalculated the allocated overhead using Ni America’s average ERC count through September 2010.  Accordingly, the Utility’s share of allocated overhead is 3.71(753/20,283) percent or $37,287 ($1,004,534 x .0371).

At the January 25, 2011, Commission Conference, the Utility disagreed with staff’s inclusion of Palmetto’s ERCs.  The Utility requested that if the Commission wished to include the Palmetto ERCs, then the Ni America overhead from 2010 should be considered as well.  In their presentation, representatives of Ni America provided a schedule which they argued supported allocated overhead of approximately $87,000 for the Utility based on 2010 parent company expenses.  As stated in the Case Background, the Commission voted to defer this recommendation in order for staff to review the 2010 O&M expenses for Ni America.  Staff requested the information for the 2010 O&M expenses for Ni America in its data requests dated January 27, 2011 and February 16, 2011.

According to Ni America’s response to staff’s January 27, 2011 data request, it had $3,093,638 in O&M expenses for 2010.  Ni America allocated $2,725,030 [$3,093,638 – $39,357 (utility excluded overhead) x 0.8954][10] to its various subsidiaries.   The Utility’s allocated share was $101,826 or 3.73 percent of the total allocated overhead.

However, on March 14, 2011, Ni America revised its estimate of O&M expenses for 2010 that should be allocated to utilities to $2,522,256 [$2,866,039 – $39,357 (utility excluded overhead) x 0.8954]. The Utility’s allocated share as proposed by Ni America increased to $94,276, or 3.73 percent of the total allocated overhead.

Based on staff’s review of the documentation provided by the Utility, staff believes several adjustments should be made to Ni America’s allocated overhead.

The first adjustment relates to the equity sponsor fee.  According to Ni America, it pays 0.5 percent to have access to funds from a private equity fund.  The Utility states that the equity sponsor fee is the interest it pays to have access to funds for investment.  However, according to the Utility’s capital structure, it has no debt.  Staff’s recommended capital structure includes an ROE of 8.82 percent.  Staff believes that the Utility’s share of this equity sponsor fee is recovered through the recommended ROE.  Therefore, the entire $315,000 equity sponsor fee should be removed.

The second adjustment relates to due diligence expenses for Ni America.  According to Ni America’s general ledger, it appears that Ni America recorded $379,169 for due diligence expenses related to various successful and potential acquisitions.  It is Commission practice that the costs incurred for acquisitions or transfers not related to the jurisdictional utility shall be recorded as below-the-line costs of the shareholder.[11] Staff believes that due diligence expenses should be recorded below-the-line for rate setting purposes.  Therefore, the entire $379,169 in due diligence expenses should be removed.

The third adjustment relates to various expenses that staff believes should be removed.  The Ni America general ledger included various expenses that were not related to the Utility or were non-recurring.  These expenses include travel to utilities in other states, shipping expenses to utilities in other states, gifts for employees, and legal expenses relating to utilities in other states.  Staff also identified several non-recurring expenses, such as background checks, apartment fees, travel for interviews, and CPA study materials.  Based on staff’s review of the Ni America general ledger, staff believes an additional $141,785 should be removed as non-utility related or non-recurring expenses.

Based on the above adjustments, staff believes that $1,990,728 [$2,866,039  – $315,000 –$379,169 – $39,357 (utility excluded overhead) – $141,785] is a more reasonable amount to allocate from Ni America.

Additionally, staff believes an adjustment is necessary to the allocation percentage the Utility proposed for 2010.  In order to determine the allocation percentage, Ni America estimates the amount of time each employee spends on utility operation-related matters verses time spent on utility acquisitions.  As stated above, Ni America estimated that its employees spent 47.09 percent of their time on utility operation related matters in 2009.  In 2010, Ni America estimated that its employees spent 89.54 percent of their time on utility operation-related matters.  Staff is concerned by the dramatic change in the allocation percentage. 

Staff noted from its review of the Ni America general ledger that it appears that the company spent considerable time and expense on various potential utility acquisitions.   In its February 16, 2011 data request, staff requested that Ni America identify the number and size of potential acquisitions through December 31, 2013.  In response, the Utility stated:

Although Ni America seeks additional acquisitions, it is unsure whether such acquisitions would develop.  Ni America does have one additional potential acquisition for which it has signed a non-binding letter of intent.  However, there have been many potential acquisitions at this stage in the past which have not been acquired.  Since its inception in March 2007, Ni America has looked at many potential acquisitions, being successful in acquiring a small number of systems to date.  Therefore, it is impossible to forecast what the pipeline would look like for the period ending December 31, 2013.  

Based on the wide variance in estimated time spent on utility operations from 2009 to 2010, staff does not believe that 89.54 percent is appropriate on a prospective basis.  As stated above, the Utility could not provide an estimate for the acquisition activity for Ni America for the next two years.  Based on staff’s review of the past two years of allocated overhead and staff’s review of the job descriptions for Ni America’s employees, staff believes several adjustments should be made to the Utility’s overhead allocation percentage.

First, several employees are based in South Carolina, not at the corporate offices in Texas.  After reviewing their job descriptions, staff believes that three employees work entirely for the South Carolina systems, and, therefore, their allocation percentage should be zero percent.  An additional employee is based in South Carolina but has duties that involve other utility systems outside South Carolina.  Therefore, staff has decreased this employee’s allocation percentage to 50 percent from 75 percent.

Second, staff has identified several employees who have worked on acquisitions for Ni America over the past two years.  As stated above, the Utility provided very little clarity regarding future acquisition activity.  Therefore, staff has taken a two-year average of these employees’ allocation percentage.

The final adjustment relates to the allocated time of the Ni America’s Chief Financial Officer (CFO).  Ni America estimates that the CFO allocation percentage is 100 percent related to utility operations.  Staff does not believe it is reasonable to assume the CFO spends his entire time on utility operations and no time on utility acquisitions. Thus, staff has decreased the CFO’s allocation percentage from 100 percent to 90 percent.

Below is a breakdown of staff’s adjustments to the Utility’s allocation percentages:

Table 11-1

Employee	% per Ni America	2010 Salaries	Amt. per Ni America	% per staff	2010 Salaries	Amt. per staff
VP	90.00%	$103,000	$92,700	70.00%	$103,000	$72,100
Associate	75.00%	$31,224	$23,418	50.00%	$31,224	$15,612
VP	100.00%	$103,000	$103,000	100.00%	$103,000	$103,000
Associate	100.00%	$56,458	$56,458	62.50%	$56,458	$35,286
Manager	100.00%	$10,585	$10,585	75.00%	$10,585	$7,939
Controller	100.00%	$56,052	$56,052	0.00%	$56,052	$0.00
President	90.00%	$190,035	$171,032	70.00%	$190,035	$133,025
Manager	100.00%	$37,957	$37,957	100.00%	$37,957	$37,957
Manager	100.00%	$25,000	$25,000	0.00%	$25,000	$0.00
President	100.00%	$174,583	$174,583	0.00%	$174,583	$0.00
CFO	100.00%	$45,481	$45,481	90.00%	$45,481	$40,933
Employee	% per Ni America	2010 Salaries	Amt. per Ni America	% per staff	2010 Salaries	Amt. per staff
VP	25.00%	$100,000	$25,000	25.00%	$100,000	$25,000
VP	100.00%	$137,247	$137,247	62.50%	$137,247	$85,780
Associate	100.00%	$8,750	$8,750	100.00%	$8,750	$8,750
Associate	75.00%	$79,181	$59,386	75.00%	$79,181	$59,386
VP	100.00%	$103,000	$103,000	62.50%	$103,000	$64,375
	89.54%	$1,261,555	$1,129,650	54.63%	$1,261,555	$689,142

 

Based on staff’s recommended calculated allocation percentage of 54.63 percent set out above, the total  O&M overhead that should be allocated to Ni America’s various utility systems is $1,087,463 $1,990,728 x .5463).

The Utility’s share of the total O&M overhead allocated to Ni America’s various utility systems based on ERCs is 3.73 percent.  Therefore, the Utility’s share is $40,605 ($1,087,463 x .0373)

The last adjustment relates to specific expenses staff identified in Ni America’s general ledger that should be allocated to the Utility only.  The specific expenses included regulatory legal expenses, travel to Tamiami Village, and shipping expenses to Florida.  These expenses totaled $2,984.  This amount should be added to the Utility’s $40,605 share of O&M overhead allocated from Ni America.  Therefore, the Utility’s allocated overhead is $43,589 ($40,605 + $2,984).

Below is a breakdown of staff’s adjustments to the Utility’s allocated overhead:

 

Table 11-2

Total Allocated Overhead per General Ledger:	$2,866,039
Removal of Equity Sponsor Fee:	(315,000)
Removal of Due Diligence Expenses:	(379,169)
Utility Excluded Overhead:	(39,357)
Staff  Excluded Overhead:	(141,785)
Allocated Overhead after Exclusions:	$1,990,728
Percent Allocated per Staff:	54.63%
Total Allocated to Ni America’s systems:	$1,087,463
Percent Allocated to the Utility:	3.73%
The Utility’s share of Allocated Overhead	$40,604
Specific expenses related to the Utility	2,984
Total Corporate Overhead	$43,589

 

Based on the above, the Utility should be entitled to recover allocated overhead of $43,589 ($40,605 + $2,984).  As a result, staff recommends that the Utility’s allocated overhead of $175,649 be reduced by $132,060 ($175,649 - $43,589).

Issue12: 

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

Recommendation: 

 Based on the adjustments discussed in previous issues, the test year operating loss is $16,633.  (Deason)

Staff Analysis: 

 As shown on Schedule No. 3-A, the Utility’s net operating loss is $16,633 after applying staff’s adjustments.  Staff’s adjustments to operating income are shown on Schedule No. 3-B.

REVENUE REQUIREMENT

Issue 13: 

 What is the appropriate revenue requirement for the December 31, 2009 test year?

Recommendation: 

 The following revenue requirement should be approved:

	Test Year Revenues	$ Increase	Revenue Requirement	% Increase
Water	$220,146	$42,905	$263,051	19.49%

(Deason)

Staff Analysis: 

 Ni Florida requested an annual revenue requirement of $411,671.  This requested revenue requirement represents a revenue increase of $191,525 or approximately 87 percent.  Consistent with staff’s recommendations concerning the underlying rate base, cost of capital, and operating income issues, staff recommends approval of rates designed to generate a revenue requirement of $263,051.  The recommended water revenue requirement exceeds staff’s adjusted test year revenues by $42,905, or 19.49 percent.  This recommended pre-repression revenue requirement will allow the Utility the opportunity to recover its expenses and earn an 8.77 percent return on its investment in rate base. 

RATES AND CHARGES

Issue 14: 

 What are the appropriate rate structures?

Recommendation: 

 The appropriate rate structure for the water system’s residential class is a three-tier inclining-block rate structure.  Staff’s preliminary rate design called for a two-tier rate structure with usage blocks of: a) 0-6 kgals in the first usage block; and b) all usage in excess of 6 kgals in the second usage block.  However, as discussed in Issue 15, by restricting any cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 3 kgals per month.  This results in a three-tier rate structure for monthly consumption with usage blocks of: a) 0-3 kgal; b) 3.001-6 kgal; and c) all usage in excess of 6 kgals in the third usage block, and usage block rate factors of 0.91, 1.0, and 1.5 respectively.  The appropriate rate structure for the water system’s nonresidential classes is a continuation of its BFC/uniform gallonage charge rate structure.  The BFC cost recovery percentage for the water system should be set at 54.80 percent.  (Thompson)

Staff Analysis: 

 The Utility’s current water system rate structure for the residential and general service classes consists of a base facility charge (BFC) and a uniform gallonage charge.  The current BFC for 5/8” x 3/4” meter customers is $13.61 per month and the gallonage charge is $3.36 per kgal.

In 1991, the Commission entered into a Memorandum of Understanding (MOU) with the state’s five Water Management Districts (WMDs), in which the agencies recognized that it is in the public interest to engage in a joint goal to ensure the efficient and conservative utilization of water resources in Florida, and that a joint cooperative effort is necessary to implement an effective, state-wide water conservation policy.  The WMDs also have a policy that recommends not recovering more than 40 percent of revenues through the BFC.  The Commission tries to support this policy whenever possible.

Ni Florida is located in Lee County within the South Florida Water Management District (SFWMD or District).  The entire District has a designated year-round Landscape Irrigation Rule. Within these areas, the existing and reasonably anticipated sources of water and water conservation efforts may not be adequate to supply water for all existing legal uses and anticipated future needs, or to sustain the water resources and related natural systems.[12] 

As discussed in Issue 4, the Utility’s filing indicates that there was excessive unaccounted for water during the test year. However, in March 2010, Ni Florida completed a meter replacement project that replaced the majority of the older water meters throughout the system with newer, more accurate meters. As a result, the amount of unaccounted for water decreased after April 2010 to within acceptable levels. In order to be consistent with staff’s recommendation in Issue 4 that no adjustment for unaccounted for water be made, staff adjusted test year billing determinants to increase the amount of accounted for water billed to customers.

Staff performed a detailed analysis of the Utility’s billing data in order to evaluate various BFC cost recovery percentages, usage blocks, and usage block rate factors for the residential rate class.  The goal of the evaluation was to select the rate design parameters that: (1) allow the Utility to recover its revenue requirement; (2) equitably distribute cost recovery among the Utility’s customers; and (3) implement where appropriate water conserving rate structures consistent with the Commission’s MOU with the state’s Water Management Districts.

 

The Utility’s service area contains a 243 unit, highly seasonal RV park.  The RV park’s current rate is based on a settlement between the Utility and Tamiami Master Association, Inc., whereby they agreed that the estimated number of ERCs for the RV park should be 104.76.[13]  The Utility states that there are now 243 units in the RV park, with the vast majority of residents  being seasonal in nature.  The estimated number of ERCs for the RV park, divided by the number of units in the park, equates to approximately 0.43 ERC per unit.  Staff believes this number is reasonable because: a) the units are RVs, which use less water than homes; b) the customer base is seasonal; and c) the Utility did not request a change in the number of ERCs assigned to the RV park.

           

During the 2009 test year, about 50 percent of residential bills were at 1 kgal or less and average residential consumption was 1.9 kgal/month.  These factors are indicative of a very seasonal customer base.  When recommending rates for a very seasonal customer base, it is not unusual to recommend a BFC greater than 40 percent.  This is typically done to not only address the seasonal nature of the customer base but to better meet the cash flow needs that arise due to a seasonal customer base.  Therefore, in order to address the seasonality of the Utility’s customer base, staff recommends that the entire increase in water system revenue requirements be allocated to the gallonage charge, and that the BFC remain unchanged at $13.61 for a 5/8” x 3/4” meter customer.  This would result in a BFC allocation of 54.80 percent.  Although staff’s recommended BFC cost recovery allocation does not comply with the WMD’s policy that no more than 40 percent of revenues should be recovered through the BFC, in this instance, staff recommends that, due to the extreme seasonality of the customer base and the accompanying cash flow concerns, the BFC not be reduced.   

 

In addition to the recommended rate structure described above, staff also evaluated two alternative water rate structures.  The first alternative rate structure consists of a three-tiered rate structure as described above, but with a higher rate factor in the third block.  The second alternative represents a continuation of the Utility’s current rate structure.  These rate structures and their resulting bills are shown on the following table. 

 

 

 

 

 

Table 14-1

 

NI FLORIDA, LLC STAFF’S RECOMMENDED AND ALTERNATIVE RATE STRUCTURES FOR TYPICAL RESIDENTIAL CUSTOMERS ON 5/8” x 3/4” METERS POST-REPRESSION ANALYSIS
Current Rate Structure and Rates					Recommended Rate Structure and Rates
BFC/uniform gallonage charge rate structure					Three-tiered inclining-blocks – consumption of  0-3 kgals, 3-6 kgals and 6+ kgals; rate factors at 0.91, 1.0, and 1.50; BFC = 54.80 percent
BFC		$13.61			BFC			$13.61
Gallonage Charge, all kgals		$3.36			0-3 kgals (no repression adjustment)			$4.78
					3.001-6 kgals			$5.23
					In excess of 6 kgals			$7.84
Typical Monthly Bills					Typical Monthly Bills
Cons (kgal)					Cons (kgal)
0		$13.31			0			$13.61
1		$16.97			1			$18.39
3		$23.69			3			$27.96
5		$30.41			5			$38.42
10		$47.21			10			$75.02
15		$64.01			15			$114.24
20		$80.81			20			$153.46
25		$97.61			25			$192.68
30		$114.41			30			$231.90
Alternative 1					Alternative 2
Three-tiered inclining-blocks – consumption of  0-3 kgals, 3-6 kgals, 6+ kgals; rate factors at 0.88, 1.0, and 2.00; BFC = 54.85 percent					BFC and Uniform Gallonage Charge BFC = 54.40 percent
BFC		$13.61			BFC			$13.61
0-3 kgals (no repression adjustment)		$4.63			Gallonage Charge, all kgals			$4.99
3.001-6 kgals		$5.28
In excess of 6 kgals		$10.57
Typical Monthly Bills					Typical Monthly Bills
Cons (kgal)					Cons (kgal)
0		$13.61			0			$13.61
1		$18.24			1			$18.60
3		$27.50			3			$28.57
5		$38.07			5			$38.54
10		$85.63			10			$63.47
15		$138.47			15			$88.40
20		$191.32			20			$113.34
25		$244.16			25			$138.27
30		$297.01			30			$163.20

 

 

The traditional BFC/uniform gallonage charge rate structure has been the Commission’s water rate structure of choice for nonresidential customer classes.  The uniform gallonage charge should be calculated by dividing the total revenues to be recovered through the gallonage charge by the total number of gallons attributable to all rate classes.  This should be the same methodology used to determine the general service gallonage charge in this case.  With this methodology, the general service customers would continue to pay their fair share of the cost of service.

 

Based on the foregoing, the appropriate rate structure for the water system’s residential class is a three-tier inclining-block rate structure.  Staff’s preliminary rate design called for a two-tier rate structure with usage blocks of: a) 0-6 kgals in the first usage block; and b) all usage in excess of 6.001 kgals in the second usage block.  However, by restricting any cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 3 kgals per month.  This results in a three-tier rate structure for monthly consumption with usage blocks of: a) 0-3 kgal; b) 3.001-6 kgal; and c) all usage in excess of 6 kgals in the third usage block.  The appropriate usage block rate factors are 0.91, 1.0 and 1.50, respectively.  The appropriate rate structure for the water system’s nonresidential classes is a continuation of its BFC/uniform gallonage charge rate structure.  The BFC cost recovery percentage for the water system should be set at 54.80 percent.

Issue 15: 

 Is a repression adjustment appropriate in this case, and, if so, what are the appropriate adjustments?

Recommendation: 

 Yes, a repression adjustment is appropriate for this Utility.  Test year residential kgals sold should be reduced by 506 kgal to 16,280 kgals, purchased water expense should be reduced by $1,830, and regulatory assessment fees (RAFs) should be reduced by $86.  The final post-repression revenue requirement should be $260,140.

In order to monitor the effect of the rate structure and rate changes, the Utility should be ordered to file reports detailing the number of bills rendered, the consumption billed, and the revenues billed on a monthly basis.  In addition, the reports should be prepared by customer class, usage block, and meter size.  The reports should be filed with staff, on a semi-annual basis, for a period of two years beginning with the first billing period after the approved rates go into effect.  To the extent the Utility makes adjustments to consumption in any month during the reporting period, the Utility should be ordered to file a revised monthly report for that month within 30 days of any revision.  (Thompson)

Staff Analysis: 

 Staff conducted a detailed analysis of the consumption patterns of the Utility’s residential customers as well as the increase in residential bills resulting from the increase in revenue requirements.  This analysis showed that about 50 percent of the residential bills rendered during the test year were for consumption levels below 1 kgal per month.  This indicates that the bulk of the customer base of the Utility are seasonal residents.  This analysis also showed that average residential consumption per customer was 1.9 kgal per month. 

Using the database of utilities that have previously had repression adjustments made, staff calculated a repression adjustment for this Utility based upon the recommended increase in revenue requirements in this case, and the historically observed response rates of consumption to changes in price.  This is the same methodology for calculating repression adjustments that the Commission has approved in prior cases.[14]  This methodology also restricts any price changes due to repression from being applied to non-discretionary consumption (consumption less than 3 kgals per month), and allocates all cost recovery due to repression to discretionary levels of consumption (consumption above 3 kgals per month). 

Therefore, based on this methodology, staff calculated that test year residential consumption for this Utility should be reduced by 506 kgal, purchased water expense should be reduced by $1,830, and RAFs should be reduced by $86.  The final post-repression revenue requirement should be $260,140.  In order to monitor the effect of the rate changes, the Utility should be ordered to file reports detailing the number of bills rendered, the consumption billed, and the revenues billed on a monthly basis.  In addition, the reports should be prepared by customer class, usage block, and meter size.  The reports should be filed with staff, on a semi-annual basis, for a period of two years beginning with the first billing period after the approved rates go into effect.  To the extent the Utility makes adjustments to consumption in any month during the reporting period, the Utility should be ordered to file a revised monthly report for that month within 30 days of any revision.

Issue 16: 

 What are the appropriate monthly water rates?

Recommendation: 

 The appropriate monthly water rates are shown on Schedule No. 4.  Excluding miscellaneous service charges, the recommended water rates produce revenues of $260,140.  The Utility should file revised water tariff sheets and a proposed customer notice to reflect the Commission-approved rates for the water system.  The approved rates should be effective for service rendered on or after the stamped approval date of the revised tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the approved rates should not be implemented until staff has approved the proposed customer notice.  The Utility should provide proof of the date notice was given no less than ten days after the date of the notice.  (Thompson, Deason)

Staff Analysis: 

 The appropriate post-repression revenue requirement, excluding miscellaneous service charges, is $260,140.  As discussed in Issue 14, staff recommends that the appropriate rate structure for the water system’s residential class is a three-tier inclining-block rate structure.  Staff’s preliminary rate design called for a two-tier rate structure with usage blocks of: a) 0-6 kgals in the first usage block; and b) all usage in excess of 6.001 kgals in the second usage block.  However, by restricting any cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 3 kgals per month.  This results in a three-tier rate structure for monthly consumption with usage blocks of: a) 0-3 kgal; b) 3.001-6 kgal; and c) all usage in excess of 6 kgals in the third usage block.  The usage block rate factors should be 0.91, 1.0 and 1.50, respectively.  The BFC cost recovery percentage should be set at 54.80 percent, causing the Utility’s BFC for a 5/8” x 3/4" meter customer to remain unchanged from the corresponding rate prior to filing.  Staff recommends that the traditional BFC/uniform gallonage charge rate structure be applied to all non-residential rate classes.  As discussed in Issue 15, staff recommends that a repression adjustment be made.  Applying these rate designs and repression adjustments to the recommended pre-repression revenue requirements results in the final rates contained in Schedule No. 4.  These rates are designed to recover a post-repression revenue requirement of $260,140.

Issue 17: 

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

Recommendation: 

 Yes.  Ni Florida should be authorized to revise its miscellaneous service charges.  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 revised tariff, pursuant to Rule 25-30.475(1), F.A.C., provided the notice has been approved by staff.  The Utility should provide proof the customers have received notice within ten days after the date that the notice was sent.  The appropriate charges are reflected below.  This notice may be combined with the notice required in other issues.

Miscellaneous Service Charges

(Thompson)

Staff Analysis: 

 The Utility believes that its miscellaneous service charges should be updated to reflect current costs.  Staff agrees with this request.  Ni Florida provided the following cost estimates for the expenses associated with initial connection, normal reconnection, and violation reconnection fees during business hours and after hours:

Table 17-1

Business Hours			After Hours
Item:		Cost:	Item:		Cost:
Labor ($32.00/hr. x 0.7 hours)		$22.40	Labor ($48.00/hr. x 0.7 hours)[15]		$33.60
Transportation		5.00	Transportation		6.00
Total		$27.40	Total		$39.60

However, staff notes that in response to staff’s data request, the Utility stated that Florida Utility Group, the Utility’s contract operator, charges an hourly rate for these tasks of $27.50.  As this service is provided by a contract operator, staff recommends that the transportation charge, during business hours and after, should be consistent with one another. Based on this information, staff lowered the labor charge to $27.50 and kept the transportation charges consistent.

Staff recommends the following cost estimates for the expenses associated with miscellaneous service charges, during business hours and after hours:

                                                      Table 17-2

Business Hours			After Hours
Item:		Cost:	Item:		Cost:
Labor ($27.50/hr. x 0.7 hours)		$19.25	Labor ($41.25/hr. x 0.7 hours)[16]		$28.86
Transportation		5.00	Transportation		5.00
Total		$24.25	Total		$33.86

 

Staff believes that the recommended charges shown above are cost based, reasonable, and similar to fees the Commission has approved for other utilities.[17]  Additionally, Ni Florida has also requested increased charges for premises visit fees.  The Utility’s requested premises visit fees are lower than the requested initial connection and normal reconnection fees.  Reduced activities are required for this function.  As a result, staff believes the Utility’s requested premises visit fees of $18 and $27 for business hours and after hours, respectively, are cost-based and appropriate.

Therefore, staff recommends that Ni Florida be allowed to implement initial connection and normal reconnection fees for work performed during business hours of $24 and initial connection and normal reconnection fees for work performed after business hours of $34.  Also, Ni Florida should be allowed to implement a premises visit fee for work performed during business hours of $18 and a premises visit fee for work performed after business hours of $27.  Ni Florida should be allowed to implement these charges because the increased charges are cost-based, reasonable, and similar to the labor costs approved in prior Commission decisions.[18]  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 revised 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.  Ni Florida should provide proof the customers have received notice within ten days after the date the notice was sent.  Below is a breakdown of the Utility’s current and staff recommended miscellaneous service charges:

                                                       Table 17-3

Issue 18: 

 Should the Utility's request for approval of a $5 late fee be granted?

Recommendation: 

 Yes.  The Utility's requested late fee of $5 should be approved.  The late fee should be effective on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the rates should not be implemented until staff has approved the proposed customer notice.  The Utility should provide proof of the date the notice was given within ten days after the date of the notice.  This notice may be combined with the notices required in other issues.  (Thompson)

Staff Analysis: 

 : 

 Section 367.091, F.S., authorizes the Commission to establish, increase, or change a rate or charge other than monthly rates or service availability charges.  Ni Florida has requested a $5.00 late fee.  The Utility's request for a late fee was accompanied by its reason for requesting the fee, as well as the cost justification required by Section 367.091, F.S.  Ni Florida's cost analysis breakdown for its proposed late fee is shown below: 

                                                      Table 18-1

 

This cost is comprised of one-fifth of an hour of employee time at $22.50 per hour to research and verify that the payment is late, process the bill and assess the late payment fee, or $4.50 ($22.50/5).  In addition, the $5.00 fee also recognizes the cost of an envelope, printer and printing supplies, and postage to send the notice to the customer, totaling approximately $0.50.

The late payment fee is designed to encourage customers to pay their bills on time to ensure that the cost associated with late payment is not passed onto customers who do pay on time.  The Utility's justification for the late fee is to place the burden of these costs on the cost causer rather than the general body of ratepayers.  Staff believes the estimated cost provided by the Utility is reasonable.

Based on the above, staff recommends that Ni Florida’s proposed late fee of $5 should be approved.  This fee should be effective on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the rates should not be implemented until staff has approved the proposed customer notice.  The Utility should provide proof of the date the notice was given within ten days after the date of the notice.  This notice may be combined with the notices required in other issues.

Issue 19: 

 Should the Utility's request for approval of a Non-Sufficient Funds fee be granted?

Recommendation: 

 Yes.  The Utility's requested Non-Sufficient Funds (NSF) fee should be approved.  The NSF fee should be effective on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the rates should not be implemented until staff has approved the proposed customer notice.  The Utility should provide proof of the date the notice was given within ten days after the date of the notice. This notice may be combined with the notice required in other issues.  (Thompson)

Staff Analysis: 

 Section 367.091, F.S., requires that rates, charges, and customer service policies be approved by the Commission.  The Commission has authority to establish, increase, or change a rate or charge.  Ni Florida has requested an NSF fee in accordance with the Section 832.08(5), F.S. 

Staff believes that Ni Florida should be authorized to collect an NSF fee.  Staff believes the NSF fee should be established consistent with Section 68.065, F.S., which allows for the assessment of charges for the collection of worthless checks, drafts, or orders of payment.  As currently set forth in Section 832.08(5), the following fees may be assessed:

1)      $25, if the face value does not exceed $50, 

2)      $30, if the face value exceeds $50 but does not exceed $300,

3)      $40, if the face value exceeds $300,

4)      or  five percent of the face amount of the check, whichever is greater.

            Staff recommends that Ni Florida’s tariff for an NSF fee be revised to reflect the charges set by Sections 68.065 and 832.08(5), F.S.  Approval of an NSF fee is consistent with the Commission’s prior decisions.[19]  Furthermore, as discussed in prior Commission orders, an NSF fee places the cost on the cost-causer, rather than requiring that the costs associated with the return of the NSF checks be spread across the general body of ratepayers. 

As such, staff recommends that Ni Florida’s proposed NSF fee be approved.   The fee should be effective on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1), F.A.C.  In addition, the fees should not be implemented until staff has approved the proposed customer notice.  The Utility should provide proof of the date the notice was given no less than ten days after the date of the notice.  This notice may be combined with the notice required in other issues.

OTHER ISSUES

Issue 20: In determining whether any portion of the interim increase granted should be refunded, how should the refund be calculated, and what is the amount of the refund, if any?

 

Recommendation: 

 The proper refund amount should be calculated by using the same data used to establish final rates, excluding rate case expense and other items not in effect during the interim period. This revised revenue requirement for the interim collection period should be compared to the amount of interim revenue requirement granted.  This results in a refund of 28.75 percent.  The refunds should be made with interest in accordance with Rule 25-30.360(4), F.A.C.  The Utility should be required to submit proper refund reports pursuant to Rule 25-30.360(7), F.A.C.  The Utility should treat any unclaimed refunds as CIAC pursuant to Rule 25-30.360(8), F.A.C.  Further, the escrow account should be released upon staff’s verification that the required refunds have been made.   (Deason)  

Staff Analysis: 

 By Order No. PSC-10-0564-PCO-WU, the Commission authorized the collection of interim rates, subject to refund, pursuant to Section 367.082, F.S.  The approved interim revenue requirement was $338,385, which represented an increase of $117,668 or approximately 53 percent.  This interim increase was effective for service rendered after September 30, 2010, and was protected by an escrow account.

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

In this proceeding, the test period for establishment of interim and final rates is the 12-month period ended December 31, 2009.  Ni Florida’s approved interim rates did not include any provisions for pro forma or projected operating expenses or plant.  The interim increase was designed to allow recovery of actual interest costs, and the floor of the last authorized range of return on equity. 

To establish the proper refund amount, staff has calculated a revised interim revenue requirement utilizing the same data used to establish final rates.  Rate case expense was excluded because this item is prospective in nature and did not occur during the interim collection period.

Using the principles discussed above, the $338,385 revenue requirement granted in Order No. PSC-10-0564-PCO-WU for the interim test year is greater than the revenue requirement for the interim collection period of $241,372.  This results in a refund of 28.75 percent. The refund should be made with interest in accordance with Rule 25-30.360(4), F.A.C.  The Utility should be required to submit proper refund reports pursuant to Rule 25-30.360(7), F.A.C.  The Utility should treat any unclaimed refunds as CIAC pursuant to Rule 25-30.360(8), F.A.C.  Further, the escrow account should be released upon staff’s verification that the required refunds have been made.

Issue 21: 

 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 water rates should be reduced as shown on Schedule No. 4.  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 25-40.475(1), F.A.C.  The rates should not be implemented until staff has approved the proposed customer notice.  Ni Florida should provide proof of the date notice was given no less than ten days after the date of the notice.  (Deason)  

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, the associated return included in working capital, and the gross-up for regulatory assessment fees which is $25,482. The decreased revenue 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 25-40.475(1), F.A.C. The rates should not be implemented until staff has approved the proposed customer notice.  Ni Florida should provide proof of the date notice was given within ten days of the date of the notice.

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

Issue 22: 

 Should the Utility be required to provide proof, within 90 days of the final order issued in this docket, that it has adjusted its books for all the applicable National Association of Regulatory Utility Commissioners (NARUC) Uniform System of Accounts (USOA) primary accounts associated with the Commission approved adjustments?

Recommendation: 

 Yes. To ensure that the Utility adjusts its books in accordance with the Commission decision, Ni Florida should provide proof, within 90 days of the final order issued in this docket, that the adjustments for all the applicable NARUC USOA primary accounts have been made.  (Deason)  

Staff Analysis: 

 To ensure that the Utility adjusts its books in accordance with the Commission decision, Ni Florida should provide proof, within 90 days of the final order issued in this docket, that the adjustments for all the applicable NARUC USOA primary accounts have been made.

Issue 23: 

 Should this docket be closed?

Recommendation: 

 No. If no person whose substantial interests are affected by the proposed agency action (PAA) files a protest within 21 days of the issuance of the PAA order, a consummating order will be issued.  The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff, that the interim refund has been completed and verified by staff, and that the Utility has provided proof that it has adjusted its books for all the applicable NARUC USOA primary accounts associated with the Commission approved adjustments.  Once these actions are complete, this docket should be closed administratively.  (Jaeger, Deason)

Staff Analysis: 

 If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the PAA order, a consummating order will be issued.  The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff, that the interim refund has been completed and verified by staff, and that the Utility has provided proof that it has adjusted its books for all the applicable NARUC USOA primary accounts associated with the Commission approved adjustments.  Once these actions are complete, this docket should be closed administratively.

	NI Florida, LLC				Schedule No. 1-A
	Schedule of Water Rate Base				Docket No. 100149-WU
	Test Year Ended 12/31/09
		Test Year	Utility	Adjusted	Staff	Staff
		Per	Adjust-	Test Year	Adjust-	Adjusted
	Description	Utility	ments	Per Utility	ments	Test Year
1	Plant in Service	$292,084	$173,478	$465,562	($9,433)	$456,129
2	Land and Land Rights	0	0	0	0	0
3	Non-used and Useful Components	0	0	0	0	0
4	Accumulated Depreciation	(203,862)	0	(203,862)	4,096	(199,766)
5	CIAC	(110,779)	0	(110,779)	0	(110,779)
6	Amortization of CIAC	106,959	0	106,959	(1,293)	105,666
7	Net Debit Deferred Income Taxes	0	0	0	0	0
8	Acquisition Adjustment	713,630	(713,630)	0	0	0
9	Working Capital Allowance	76,744	0	76,744	(50,397)	26,347
	Rate Base	$874,776	($540,152)	$334,624	($57,027)	$277,597

 

 

		NI Florida, LLC										Schedule No. 2
		Capital Structure-Simple Average										Docket No. 100149-WU
		Test Year Ended 12/31/09
					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		$0	$0		$0		$0	$0			0.00%	0.00%	0.00%
2	Short-term Debt		0	0		0		0	0			0.00%	0.00%	0.00%
3	Preferred Stock		0	0		0		0	0			0.00%	0.00%	0.00%
4	Common Equity		713,563	(381,111)		332,452		0	332,452			99.35%	8.82%	8.77%
5	Customer Deposits		4,660	(2,489)		2,171	0		2,171			0.65%	6.00%	0.04%
6	Tax Credits-Zero Cost		0	0		0	0		0			0.00%	0.00%	0.00%
7	Tax Credits-Weighted Costs		0	0		0	0		0			0.00%	0.00%	0.00%
8	Deferred Income Taxes		0	0		0	0		0			0.00%	0.00%	0.00%
9	Total Capital		$718,223	($383,600)		$334,623	$0		$334,623			100.00%		8.81%
Per Staff
10	Long-term Debt		$0	$0		$0	$0		$0			0.00%	0.00%	0.00%
11	Short-term Debt		0	0		0	0		0			0.00%	0.00%	0.00%
12	Preferred Stock		0	0		0	0		0			0.00%	0.00%	0.00%
13	Common Equity		713,563	0		713,563	(440,626)		272,937			98.32%	8.82%	8.67%
14	Customer Deposits		4,660	0		4,660	0		4,660			1.68%	6.00%	0.10%
15	Tax Credits-Zero Cost		0	0		0	0		0			0.00%	0.00%	0.00%
16	Tax Credits-Weighted Costs		0	0		0	0		0			0.00%	0.00%	0.00%
17	Deferred Income Taxes		0	0		0	0		0			0.00%	0.00%	0.00%
18	Total Capital		$718,223	$0		$718,223	($440,626)		$277,597			100.00%		8.77%
												LOW	HIGH
							RETURN ON EQUITY					7.82%	9.82%
							OVERALL RATE OF   RETURN					7.79%	9.75%

 

	NI Florida, LLC	Schedule No. 3-B
	Adjustment to Operating Income	Docket No. 100149-WU
	Test Year Ended 12/31/09
	Explanation		Water
	Operating Revenues
	To remove Utility’s requested final revenue increase.		($191,525)
	Operation and Maintenance Expense
1	Reflect Agreed-Upon Audit Adjustments.(Issue 2)		($981)
2	Reflect the appropriate amount of rate case expense. (Issue 9)		(2,447)
3	Reflect the appropriate amount of bad debt expense. (Issue 11)		(2,896)
4	Reflect the appropriate amount of allocated overhead. (Issue 12)		(132,060)
	Total		($132,060)
	Depreciation Expense - Net
1	Reflect Agreed-Upon Audit Adjustments.(Issue 2)		$1,013
2	Reflect Appropriate Pro Forma Depreciation Expense. (Issue 3)		(288)
	Total		$724
	Amortization – Other Expense
	Reflect Agreed-Upon Audit Adjustments.(Issue 2)		$861
	Taxes Other Than Income
	RAFs on revenue adjustments above.		($8,619)