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DATE: |
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TO: |
Office of Commission Clerk ( |
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FROM: |
Division of Economic Regulation (Jones-Alexis, Mouring, Walden) Office of the General Counsel (Young) |
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RE: |
Docket No. County(ies): |
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AGENDA: |
12/06/11 – Regular Agenda – Proposed Agency Action for Issues 1 and 2 – Interested Persons May Participate |
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COMMISSIONERS
ASSIGNED: |
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PREHEARING
OFFICER: |
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SPECIAL
INSTRUCTIONS: |
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S:\ |
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MFL Utility
Systems, L.L.C. (MFL Utility or Utility) has been providing potable water and
wastewater service to the Mid-Florida Lakes Yacht Club mobile home park
(Mid-Florida
MFL Utility is a
wholly-owned subsidiary of Equity LifeStyle Properties, Inc. (ELPI). On January 7, 2011, ELPI filed an application
for original water and wastewater certificates in
On September 20, 2011, the Commission granted the Utility Certificate Nos. 656-W and 560-S to provide service to its requested service territory.[1] Staff conducted a customer meeting on November 9, 2011, in order to allow MFL Utility’s customers to provide input regarding the Utility’s quality of service and to answer customers’ questions about the Utility’s proposed rates and charges.
ELPI has also
requested certificates and initial rates and charges for three additional
wholly-owned utilities, including OB Utility Systems, L.L.C. (Docket No.
The purpose of this recommendation is to address the appropriate initial rates and charges for MFL Utility. The Commission has jurisdiction pursuant to Sections 367.031, 367.045, 367.081, 367.091, and 367.101, F.S.
Issue 1:
What are the appropriate initial water and wastewater rates and return on investment for MFL Utility?
Recommendation:
The water and wastewater rates, as shown on Schedule Nos. 1 and 2, are reasonable and should be approved. MFL Utility should be required to file a proposed customer notice to reflect the Commission-approved rates for the water and wastewater systems. The approved rates should be effective for services rendered or connections made on or after the stamped approval date on the tariff sheets, pursuant to Rule 25-30.475(1), Florida Administrative Code (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. MFL Utility should be required to charge the approved rates until authorized to change them by the Commission in a subsequent proceeding. A return on equity of 10.85 percent plus or minus 100 basis points should also be approved. (Jones-Alexis, Walden, Young)
Staff Analysis:
Rule
25-30.033(1)(t), (u), (v), and (w), F.A.C., specifies the requirements
for establishing rates and charges for original certificates, including
submission of a cost study, growth projections, and data related to the
projected plant, capital structure, and operating and
maintenance (O&M) expenses. In
the instant case, the Utility’s water and wastewater facilities are currently in
operation and are built out. Therefore,the requested
rates and charges in the application are based on the actual operating costs of
the existing systems at designed capacity.
This is consistent with Commission policy for setting initial rates and
charges. The cost study provided in the
application includes data related to the existing plant, capital structure, and
O&M expenses and excludes customer growth projections.
Utility Facilities
MFL Utility’s service territory
covers a 196-acre area near Leesburg.
This area encompasses the Mid-Florida
The existing water treatment facilities include 2 water
supply wells and a steel ground storage tank with a capacity of 62,000 gallons. The plant has a designed capacity of 1.209
million gallons per day (MGD), which is sufficient to accommodate the current
average flows of 0.293 MGD annual average daily flow (AADF). One 12-inch well
is equipped with a 1,700 gallon per minute (GPM) pump, and a second 12-inch
well is equipped with a 1,500 GPM pump, for a combined pumping capacity of 3,200
GPM. A third well has been installed but
has not yet been cleared for service.
The storage tank has high service pumping provided by two 30-horsepower
motors, capable of pumping 750 GPM each.
The plant uses aeration and chlorination for treatment and has an ammonia feed pump for disinfection using
chloramines. According to the Florida
Department of Environmental Protection’s (DEP) November 2010 inspection report,
conversion to chloramines is awaiting clearance.
The existing wastewater treatment facilities have a capacity of 0.18 MGD, permitted on a three-month average daily flow (TMADF) basis. The treatment process is extended aeration with land application of the treated effluent. The plant consists of flow equalization, aeration, clarification, chlorination, and aerobic digestion of residuals. The Utility’s DEP permit provides for a slow-rate restricted public access system for treated effluent, which consists of a sprayfield with a total wetted area of 10 acres.
Rate Base
In setting initial rates and
charges for a new utility, Commission practice has been to set rates so that
the utility will have an opportunity to earn a fair return on its investment
when approximately 80 percent of its projected customers are being served. Typically, in the early years of development,
the customer base of a utility is not sufficient to allow the utility to
recover its O&M expenses and earn a fair return on its investment; but as
growth reaches 80 percent of a utility’s projected designed capacity, the
initial rates become compensatory. In the
instant case, MFL Utility’s water and wastewater facilities are in existence and
serving its customers at designed capacity.
Schedule Nos. 1 and 2 contain the
Utility’s estimated rate base and revenue
requirement and the resulting proposed rates and charges for water and
wastewater, respectively.
MFL Utility did not have
documentation to support the original costs of the water and wastewater
facilities. Therefore, an original cost
study was prepared by an accounting firm to estimate the costs of the assets
when first dedicated to public service. The
Utility’s estimated costs for Utility Plant in Service (UPIS) are $999,313 and $1,017,217 for the water and
wastewater facilities, respectively.
Rule 25-30.580(1)(a), F.A.C.,
provides that the maximum amount of contributions-in-aid-of-construction (CIAC),
net of amortization, should not exceed 75 percent of the total original cost, net of accumulated
depreciation, of a utility's facilities and plant when the facilities and plant
are at their designed capacity. Rule
25-30.580(1)(b), F.A.C., provides that the minimum
amount of CIAC should not be less than the percentage of such facilities and
plant that is represented by the water transmission and distribution and
wastewater collection systems. Because
the service territory is a mobile home park in which ELPI rents, rather than
sells, lots to customers, no CIAC have been collected by the Utility. Therefore, the CIAC balances are $0 for both
the water and wastewater systems.
In addition, because the proposed
service territory is a mobile home park in which ELPI rents, rather than sells,
lots to customers, the Utility has not collected, and will not collect, CIAC. Should the
Utility wish to extend its service territory outside of the Mid-Florida
The Utility’s estimated accumulated depreciation balance is based on the average service life guidelines for Class B
utilities, as set forth in Rule 25-30.140, F.A.C. Based on the guidelines, the water and
wastewater accumulated depreciation balances are ($428,370) and ($828,223),
respectively. Estimated working capital allowances of $21,984 and $33,242 for water and wastewater, respectively,
are based on 12.50 percent of the estimated water and wastewater O&M
expenses, pursuant to Rule 25-30.433(2), F.A.C.
Staff recommends that MFL Utility’s
estimated rate base of $592,927 for water and $222,236
for wastewater, as shown on Schedule Nos. 1 and
2, are reasonable. This rate base
is established only as a tool to aid the Commission in setting initial rates
and is not intended to formally establish rate base. This is consistent with Commission practice
in applications for original certificates.[2]
Cost of Capital
As required by Rule 25-30.033(1)(w), F.A.C., the application contained a schedule of MFL Utility’s
capital structure, including a statement of the methods of financing the
operation of the Utility. The Utility’s
capital structure, as shown on Schedule No. 3, consists of 40 percent equity and 60 percent debt. Equity
contributions or advances from related entities will be made as required by the
Utility to finance and support its operations.
The Utility’s proposed cost of
equity of 10.85 percent is consistent with the Commission’s current leverage formula in effect at the time of the Commission’s vote.[3] The Utility’s cost
of debt of 4.25 percent is based on the prime rate in effect at the time the
application was filed (3.25 percent) plus 100 basis points.[4]
Staff recommends an overall cost of capital of 6.89 percent for MFL Utility
based on a capital structure consisting of 40 percent
equity and 60 percent debt, a cost of equity of 10.85 percent, and a cost of
debt of 4.25 percent. Staff believes
this is a reasonable overall cost of capital for calculating the revenue
requirement for this original certificate case.
Staff further recommends that the Commission set the Utility’s authorized
return on equity at 10.85 percent with a range
of plus or minus 100 basis points.
Net Operating Income
MFL Utility’s estimated net operating income for water and wastewater
services are shown on Schedule Nos. 1 and 2, respectively, and are based on the
rate base for each system and the overall cost of capital of 6.89 percent, as previously
discussed. The resulting net operating
income figures for water and wastewater service are $40,853 and $15,312,
respectively.
Revenue Requirement
MFL Utility’s proposed revenue
requirements are based on O&M expenses, depreciation, taxes other than
income, and net operating income, as described above. Included in O&M expenses are chemicals,
purchased power, plant maintenance, laboratory testing, insurance, and
contractual services. Taxes other than
income include projected regulatory assessment fees of 4.50 percent of gross revenues
and personal property taxes.
The Utility’s proposed revenue
requirement for the water system of $269,088 includes $175,870 for O&M, $31,748 for depreciation expense, and $20,617 for taxes other
than income. Staff recommends that the
proposed revenue requirement for the water system of $269,088 is reasonable and
should be used to set initial rates for water service.
The Utility’s proposed revenue
requirement for the wastewater system of $325,840 includes $265,932 for O&M, $27,241 for depreciation expense, and $17,355 for taxes other
than income. Staff recommends that the
proposed revenue requirement for the wastewater system of $325,840 is reasonable and
should be used to set initial rates for wastewater service.
Rates
MFL
Utility’s proposed residential and general service rates
are based on revenue requirements of $269,088
and $325,840 for water and wastewater, respectively. As shown on Schedule Nos. 1 and 2, the
Utility’s requested rates include a monthly base facility charge (BFC) and a single
gallonage charge for all water and wastewater customers.
For
water service, the Utility proposed a residential and general service BFC of $7.10 for 5/8” x 3/4” meters. For both residential and general service water
usage, the Utility proposed a gallonage charge of $1.65 per 1,000
gallons for all levels of usage. For wastewater
service, the Utility proposed a BFC of $8.17
for all residential customers with meters of all sizes and $8.17 for all general
service customers with a 5/8” x 3/4” meter.
For residential wastewater usage, the Utility proposed a gallonage
charge of $1.65 per 1,000 gallons, capped at
6,000 gallons. For general service
wastewater usage, the Utility proposed a
gallonage charge of $2.58 per 1,000 gallons.
Staff recommends that the Utility’s proposed rates and rate structure
are reasonable, consistent with Commission practice for setting initial water
and wastewater rates, and should be approved.
Section 723.037,
Customer Meeting
Approximately 280 MFL
Utility customers attended a noticed customer meeting held at the Mid-Florida
Of the 17 specific complaints received, summarized in Table 1-1, staff identified water quality and aging infrastructure as the most prevalent categories.
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Table 1-1 Customer
Meeting Complaints by Category |
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Type of
Complaint |
Total |
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Water Quality |
5 |
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Plant Issues |
5 |
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Affordability |
3 |
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Meters |
2 |
|
Other |
2 |
|
Total |
17 |
The majority of those who attended the meetings repeatedly expressed concern over the Utility’s water quality and testing. Most of the comments made by the eight customers who spoke were about the Utility’s aging infrastructure and whether the cost of plant improvements would be borne by the customers rather than by the Utility as a result of the Utility’s certification and Commission-approved rates and charges.
Customers’ complaints about the quality of their water and wastewater service included statements that the water quality is poor and has declined each year. They described concerns with respect to numerous issues, including leaks that could cause customers to incur high bills, meter installations and readings, and that the Utility’s new rates would cause the community’s upkeep to decline as a result of charges incurred for water usage.
MFL Utility
filed a response to concerns raised at the customer meeting. The Utility’s response indicated that both
the water and wastewater plants are in compliance with and routinely inspected
by the DEP. According to the Utility,
customers will begin to be billed Commission-approved rates after all meters
have been installed and the appropriate noticing to customers has been
completed. The Utility anticipates that
this will occur in mid-2012. Finally,
the Utility stated in its response that ELPI site staff and a third-party plant
operator are establishing an emergency preparedness plan that will be filed by
the end of 2011.
Conclusion
The water and wastewater rates, as discussed and recommended in staff’s analysis and shown on Schedule Nos. 1 and 2, respectively, appear reasonable and should be approved. MFL Utility should be required to file a proposed customer notice to reflect the Commission-approved rates for the water and wastewater systems. The approved rates should be effective for services rendered or connections made on or after the stamped approval date on the 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. MFL Utility should be required to charge the approved rates until authorized to change them by the Commission in a subsequent proceeding. A return on equity of 10.85 percent plus or minus 100 basis points should also be approved.
Issue 2:
What are the appropriate miscellaneous service charges for MFL Utility?
Recommendation:
The appropriate miscellaneous service charges for MFL Utility are those described in staff’s analysis. MFL Utility should be required to file a proposed customer notice to reflect the Commission-approved charges for the water and wastewater systems. The approved miscellaneous service charges should be effective for services rendered or connections made on or after the stamped approval date on the tariff sheets, pursuant to Rule 25-30.475(1), F.A.C. In addition, the approved charges 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. MFL Utility should be required to collect the approved charges until authorized to change them by the Commission in a subsequent proceeding. (Jones-Alexis, Young)
Staff Analysis:
Pursuant to Section 367.091,
Pursuant to Rule 25-30.460,
F.A.C., utilities may apply for miscellaneous service charges, including
initial connection, normal reconnection, violation reconnection, and premises
visit charges. MFL Utility’s proposed
miscellaneous service charges, which are based upon actual expenses, are shown
on Schedule No. 3. The Utility’s
proposed charges are similar to or lower than charges previously approved by the
Commission for other Class B utilities.[5] Additionally,
Commission practice has been to place the burden of such charges on the cost
causer rather than the general body of ratepayers. This is consistent with one of the fundamental
principles of rate making – ensuring that the cost of providing service is
recovered from the cost causer.[6]
The Utility proposed a wastewater
violation reconnection charge equal to the actual cost incurred for providing
that service. However, Commission
practice has been to set this charge equal to the normal reconnection charge.[7] Therefore, staff
recommends that the violation reconnection charge be set at $15.
The Utility excluded from its proposed
miscellaneous service charges a nonsufficient funds (NSF) check charge, which
is a service fee authorized by Sections 68.065 and 832.08(5), F.S., based on
the amount of a check that is returned for nonpayment. Staff notes that the Utility incurs expenses
in receiving and processing returned checks.
Therefore, staff recommends that a NSF check charge be approved. MFL Utility should be authorized to collect
the following NSF check charges: $25 if the face value of the check does not
exceed $50; $30 if the face value is more than $50 but does not exceed $300;
and $40 if the face value is more than $300.
Conclusion
Staff recommends that MFL Utility’s request for authority to apply certain miscellaneous service charges, as reflected on Schedule No. 3, is reasonable and should be approved. In addition, staff recommends that the changes and additions to the Utility’s miscellaneous service charges recommended herein are reasonable and should be approved. MFL Utility should be required to file a proposed customer notice to reflect the Commission-approved charges for the water and wastewater systems. The approved miscellaneous service charges should be effective for services rendered or connections made on or after the stamped approval date on the tariff sheets, pursuant to Rule 25-30.475(1), F.A.C. In addition, the approved charges 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. MFL Utility should be required to collect the approved charges until authorized to change them by the Commission in a subsequent proceeding.
Issue 3:
Should this docket be closed?
Recommendation:
If no timely protest to the proposed agency action issues is filed with the Commission by a substantially affected person, a Consummating Order should be issued. However, the docket should remain open to allow MFL Utility to file a proposed customer notice reflecting the Commission-approved water and wastewater rates and charges and to provide proof of the date notice was given no less than ten days after the date of the notice. (Jones-Alexis, Young)
Staff Analysis:
If no timely protest to the proposed agency action issues is filed with the Commission by a substantially affected person, a Consummating Order should be issued. However, the docket should remain open to allow MFL Utility to file a proposed customer notice reflecting the Commission-approved water and wastewater rates and charges to provide proof of the date notice was given no less than ten days after the date of the notice.