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Case Background
COL Utility Systems, L.L.C. (COL Utility or Utility) has been providing potable
water and wastewater service to the Grand Island Resort Mobile Home Park (Grand
Island MHP), located south of
County Road 44 on Lake Eustis near the town of Grand Island, since
approximately 1973. Grand Island MHP is in the St. Johns River Water Management
District (SJRWMD) in a Water Resource Caution Area. COL
Utility currently serves approximately 362 residential connections in addition
to a clubhouse, billiards room, laundry room, and pool,
and its facilities are at designed capacity. Based on projected revenues, the Utility is a
Class C water and wastewater utility.
COL 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 Lake
County on behalf of the Utility. Historically, ELPI included the cost of water
and wastewater service in customers’ lot rental fees. As such, ELPI was exempt from the
Commission’s regulation, pursuant to Section 367.022(5), Florida Statutes
(F.S.). However, the Commission’s
approval of the Utility’s request for original certificates makes the Utility
subject to regulation by the Commission, pursuant to Section 367.031, F.S. ELPI intends to offset the establishment of
rates and charges with appropriate decreases in lot rental fees.
On September 8,
2011, the Commission granted the Utility Certificate Nos. 655-W and 559-S to
provide service to its requested service territory.
Staff conducted a customer meeting on November 8, 2011, in order to
allow COL 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. 110020-WS), HV Utility
Systems, L.L.C. (Docket No. 110022-WU),
and MFL Utility Systems, L.L.C. (Docket No. 110023-WS).
The purpose of
this recommendation is to address the appropriate initial rates and charges for
COL Utility. The Commission has jurisdiction pursuant to
Sections 367.031, 367.045, 367.081, 367.091, and 367.101, F.S.
Discussion
of Issues
Issue 1:
What are the appropriate initial water and wastewater
rates and return on investment for COL
Utility?
Recommendation:
The water and wastewater rates, as shown on Schedule
Nos. 1 and 2, respectively, are reasonable and should be approved. COL
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, 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. COL
Utility should be required to charge the approved rates and charges 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, Klancke)
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
COL Utility’s
service territory covers a 54-acre area near Grand
Island.
This area encompasses the Grand Island MHP,
which consists of mobile homes, a clubhouse, billiards
room, laundry room, and pool. COL Utility has not yet completed installation and
calibration of meters in conjunction with its application for initial rates and
charges. The
Utility’s Consumptive Use Permit, issued by the SJRWMD, authorizes the
use of 1.53 million gallons per year of surface water from Lake Eustis.
The existing water treatment facilities include two
interconnected plants. Each plant
consists of one 6-inch water supply well and a steel hydropneumatic tank with a
capacity of 5,000 gallons. The west
plant has a designed capacity of 0.144 million gallons per day (MGD), which is
sufficient to accommodate the current average flows of 0.075 MGD annual average
daily flow (AADF). The east plant has a
designed capacity of 0.180 million MGD, which is sufficient to accommodate the
current average flows of 0.009 MGD AADF.
The west plant’s well is equipped with a 200 gallon per minute (GPM)
pump while the east plant’s well is equipped with a 250 GPM pump, for a combined
pumping capacity of 450 GPM. Both
plants’ treatment processes consist of hypochlorination for disinfection and a
sequestering agent for iron control.
The existing wastewater treatment facilities have a
capacity of 0.035 MGD AADF. The
treatment process is extended aeration with land application of the treated effluent. The plant consists of flow equalization,
influent screening, aeration, secondary clarification, chlorination, and
aerobic digestion of residuals. The
Utility’s DEP permit provides for a rapid infiltration basin (RIB) system for
treated effluent, which consists of 2 RIBs with a total wetted area of 0.26
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, COL 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 $498,839 and $422,094 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 Grand Island MHP in the future, it must request a service
availability policy and charges that are
consistent with the guidelines in Rule 25-30.580, F.A.C., which require that at
a minimum the cost of the lines should be contributed.
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 ($232,182) and ($203,762),
respectively. Estimated working capital allowances of $10,539 and $11,381 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 COL Utility’s estimated rate
base of $277,196 for water and $229,713 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.
Cost of Capital
As required by Rule 25-30.033(1)(w), F.A.C., the application contained a schedule of COL 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. 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.
Staff recommends an overall cost of capital of 6.89 percent for COL
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
COL 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 estimated cost of
capital of 6.89 percent, as previously discussed. The resulting net operating income figures
for water and wastewater service are $19,099 and $15,827, respectively.
Revenue Requirement
COL 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 $126,106 includes $84,312 for O&M, $13,108 for depreciation expense, and $9,587 for taxes other than
income. Staff recommends that the
proposed revenue requirement for the water system of $126,106 is reasonable and
should be used to set initial rates for water service.
The Utility’s proposed revenue
requirement for the wastewater system of $127,370 includes $91,047 for O&M, $11,588 for depreciation expense, and $8,908 for taxes other than
income. Staff recommends that the
proposed revenue requirement for the wastewater system of $127,370 is reasonable and
should be used to set initial rates for wastewater service.
Rates
COL Utility’s proposed residential and general service rates
are based on revenue requirements of $126,106
and $127,370 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 $10.92 for 5/8” x 3/4” meters. For both residential and general service water
usage, the Utility proposed a gallonage charge of $2.80 per 1,000
gallons for all levels of usage. For wastewater
service, the Utility proposed a BFC of $15.81
for all residential customers with meters of all sizes and $15.81 for all
general service customers with a 5/8” x 3/4” meter. For residential wastewater usage, the Utility
proposed a gallonage charge of $2.51 per 1,000 gallons, capped at 6,000 gallons.
For general service wastewater usage, the Utility proposed a gallonage
charge of $2.51 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, F.S.,
requires that 90 days’ written notice be provided to the affected residents
when a mobile home park wishes to change its lot rental fees. In addition, the Grand Island MHP’s prospectus must be amended. The Florida Department of Business and
Professional Regulation enforces this section of the
statutes. Therefore, the Utility
anticipates that it will begin collecting rates in mid-2012. If the Commission approves COL Utility’s request for initial rates, staff will work with the Utility to establish the effective
date of its tariffs once Grand Island MHP’s
prospectus has been amended.
Customer Meeting
Approximately 175 COL Utility customers attended a noticed customer
meeting held at the Grand Island MHP
Clubhouse on November 8, 2011. The
purpose of the meetings was to allow customers to ask questions and provide
input regarding the Utility’s quality of service. Approximately 9 customers spoke during this
meeting and raised 17 specific complaints. At the
customer meeting, Commission staff gave opening remarks, and representatives of
the Utility and the Office of Public Counsel (OPC) were present.
Of the 17
specific complaints received, summarized in Table 1-1, staff identified plant
issues as the most prevalent category.
|
Table 1-1
Customer
Meeting Complaints by Category
|
|
Type of
Complaint
|
Total
|
|
Plant
Issues
|
4
|
|
Meters
|
3
|
|
Water
Pressure
|
2
|
|
Outages
|
1
|
|
Other
|
7
|
|
Total
|
17
|
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 nine 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 also complained about when meter
installations would be completed and whether actual or estimated readings would
be used for billing. They described
concerns with respect to numerous issues, including poor water pressure, main
breaks, and lack of sufficient valves for shutoffs.
COL 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.
In response to water pressure concerns, the Utility stated that ELPI, a
third-party operator, and the Florida Rural Water Association are reviewing a
program to address pressure issues and flushing. 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. Meter readings will be done
by radio read technology. 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, appear reasonable and should be
approved. COL
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. COL
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 COL Utility?
Recommendation:
The appropriate miscellaneous service charges for COL Utility are those described in staff’s
analysis. COL
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. COL
Utility should be required to collect the approved charges until authorized to
change them by the Commission in a subsequent proceeding. (Jones-Alexis, Klancke)
Staff Analysis:
Pursuant to Section 367.091, F.S.,
COL Utility requested authority to
apply certain miscellaneous service charges.
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. COL
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. 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.
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. 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. COL
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 COL
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. COL
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, 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.
COL 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 COL
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, Klancke)
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 COL
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.
