|
DATE: |
|||
|
TO: |
Office of Commission Clerk ( |
||
|
FROM: |
Division of Economic Regulation (Jones-Alexis, Mouring, Walden) Office of the General Counsel (Jaeger) |
||
|
RE: |
Docket No. County(ies): |
||
|
AGENDA: |
12/06/11 – Regular Agenda – Proposed Agency Action for Issues 1 and 2 – Interested Persons May Participate |
||
|
COMMISSIONERS
ASSIGNED: |
|||
|
PREHEARING
OFFICER: |
|||
|
SPECIAL
INSTRUCTIONS: |
|||
|
|
S:\ |
||
OB Utility
Systems, L.L.C. (OB Utility or Utility) has been providing potable water and
wastewater service to the Oak Bend Mobile Home Park (Oak Bend
OB 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. 657-W and 561-S to provide service to its requested service territory.[1] Staff conducted a customer meeting on November 8, 2011, in order to allow OB 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
The purpose of this recommendation is to address the appropriate initial rates and charges for OB 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 OB Utility?
Recommendation:
The water and wastewater rates, as shown on Schedule Nos. 1 and 2, respectively, are reasonable and should be approved. OB 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. OB 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, Jaeger)
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 utility
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. 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
OB Utility’s service territory covers a 62-acre area near
The existing water treatment facilities include 2 water
supply wells and a steel hydropneumatic tank with a capacity of 5,000 gallons. The plant has a designed capacity of 0.465
million gallons per day (MGD), which is sufficient to accommodate the current average
flows of 0.059 MGD annual average daily flow (AADF). One 6-inch well is equipped with a 115 gallon
per minute (GPM) pump, and one 10-inch well is equipped with a 252 GPM pump,
for a combined pumping capacity of 367 GPM.
Treatment consists of a hypochlorination disinfection process.
The existing wastewater treatment facilities have a capacity of 0.06 MGD AADF. The treatment process is extended aeration with land application of the treated effluent. The plant consists of a surge tank, aeration, secondary clarification, chlorination, and aerobic digestion of residuals. The Utility’s DEP permit provides for a restricted public access rapid infiltration basin (RIB) system for treated effluent, which consists of 3 RIBs with a total wetted area of 57,000 square feet.
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, OB 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.
OB 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 $443,249 and $615,431 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 Oak Bend
The Utility’s estimated accumulated depreciation balance is based on the average service life guidelines for Class C
utilities, as set forth in Rule 25-30.140, F.A.C. Based on the guidelines, the water and
wastewater accumulated depreciation balances are ($233,237) and ($516,065),
respectively. Estimated working capital allowances of $6,272 and $8,656 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 OB Utility’s
estimated rate base of $216,284 for water and $108,022
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 OB Utility’s capital
structure, including a statement of the methods of financing the operation of
the Utility. The Utility’s capital structure,
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 OB 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
OB 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 $14,902 and $7,443, respectively.
Revenue Requirement
OB 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 $86,334 includes $50,177 for O&M, $14,279 for depreciation expense, and $6,976 for taxes other than
income. Staff recommends that the
proposed revenue requirement for the water system of $86,334 is reasonable and
should be used to set initial rates for water service.
The Utility’s proposed revenue
requirement for the wastewater system of $103,316 includes $69,249 for O&M, $20,592 for depreciation expense, and $6,032 for taxes other than
income. Staff recommends that the
proposed revenue requirement for the wastewater system of $103,316 is reasonable and
should be used to set initial rates for wastewater service.
Rates
OB Utility’s proposed
residential and general service rates are based on revenue requirements of $86,334 and $103,316 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 $10.58 for 5/8” x 3/4” meters. For both residential and general service water
usage, the Utility proposed a gallonage charge of $2.77 per 1,000
gallons for all levels of usage. For wastewater service, the Utility proposed a BFC of $16.60 for all residential customers
with meters of all sizes and $16.60 for all general service customers with a
5/8” x 3/4” meter. For residential
wastewater usage, the Utility proposed a gallonage charge of $3.29 per 1,000 gallons, capped at 6,000
gallons. For general service wastewater
usage, the Utility proposed a gallonage
charge of $3.29 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 120 OB
Utility customers attended a noticed customer meeting held at the Oak Bend
Of the 31 specific complaints received, summarized in Table 1-1, staff identified affordability and water quality as the most prevalent categories.
|
Table 1-1 Customer
Meeting Complaints by Category |
|
|
Type of
Complaint |
Total |
|
Affordability |
7 |
|
Water Quality |
6 |
|
Plant Issues |
4 |
|
Outages |
3 |
|
Meters |
3 |
|
Boil Water Noticing |
2 |
|
Other |
6 |
|
Total |
31 |
The majority of those who attended the meetings repeatedly expressed concern over the Utility’s justification for charging rates and charges for specific compensation for providing water and wastewater services. Most of the comments made by the 11 customers who spoke were about affordability and the economic burden placed on them in paying separately for these essential services. They complained that the Utility’s new rates would cause the community’s upkeep to decline as a result of customers’ concerns about charges incurred for water usage.
Customers also complained about the quality of their water and wastewater service, particularly regarding odor, water quality testing, and the quality of the water from one of the Utility’s wells. They described concerns with respect to numerous issues, including the Utility’s aging infrastructure, outages due to main breaks, lack of sufficient valves for shutoffs, poor boil water noticing, meter installations and readings, and lack of fire hydrants. Regarding the Utility’s infrastructure, customers were concerned that the cost of plant improvements would be borne by them rather than by the Utility as a result of the Utility’s certification and Commission-approved rates and charges.
OB 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, all valves are operable and will be reviewed with the Florida Rural Water Association (FRWA). The Utility stated that meter installation at all residential sites has been completed, and common areas will be metered during the first quarter of 2012. All meters will be checked and calibrated with the FRWA, and those that do not properly function will be replaced. Meter readings will be done by radio read technology. In response to infrastructure concerns, the Utility stated that it will review a feasibility study of the lines and create a line item in its 2012 budget to address replacement of infrastructure as needed. 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. OB 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. OB 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 OB Utility?
Recommendation:
The appropriate miscellaneous service charges for OB Utility are those described in staff’s analysis. OB 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. OB Utility should be required to collect the approved charges until authorized to change them by the Commission in a subsequent proceeding. (Jones-Alexis, Jaeger)
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. OB 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 C 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. OB 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.
Staff recommends that OB 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. OB 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. OB 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 OB 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, Jaeger)
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 OB 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.