DATE:	July 20, 2012
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Accounting and Finance (Smith, Fletcher, Maurey) Division of Economics (Bruce, Hudson) Division of Engineering (Simpson, Ballinger) Office of the General Counsel (Tan)
RE:	Docket No. 110141-WS – Application for staff-assisted rate case in Polk County by Grenelefe Resort Utility, Inc.
AGENDA:	08/02/12 – Regular Agenda – Proposed Agency Action – Except Issue Nos. 12 and 16 – Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Brown
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\AFD\WP\110141.RCM.DOC

 

Table of Contents

Issue       Description                                                                                                                     Page

               Case Background. 3

1             Quality of Service (Simpson) 3

2             Used and Useful (Simpson) 3

3             Rate Base (Smith) 3

4             Rate of Return (Smith) 3

5             Test Year Revenue (Bruce, Smith) 3

6             Operating Expenses (Smith) 3

7             Non-Potable Water Revenue Requirement (Smith, Bruce) 3

8             Revenue Requirement (Smith) 3

9             Rate Structure (Bruce) 3

10           Repression (Bruce) 3

11           Rates (Bruce) 3

12           Four-Year Rate Reduction. 3

13           Miscellaneous Service Charges (Bruce) 3

14           Customer Deposits. 3

15           Rates in Event of Protest (Smith) 3

16           Proof of Adjustments (Smith) 3

17           Close Docket (Tan, Smith) 3

               Schedule No. 1-A Water Rate Base. 3

               Schedule No. 1-B Wastewater Rate Base. 3

               Schedule No. 1-C Adjustments to Rate Base. 3

               Schedule No. 2 Capital Structure. 3

               Schedule No. 3-A Potable Water NOI 3

               Schedule No. 3-B Wastewater NOI 3

               Schedule No. 3-C Adjustments to NOI 3

               Schedule No. 3-D Potable Water O&M Expense. 3

               Schedule No. 3-E Wastewater O&M Expense. 3

               Schedule No. 3-F Non-Potable Water NOI 3

               Schedule No. 3-G Adjustments to Non-Potable Water NOI 3

               Schedule No. 3-H Non-Potable Water O&M Expense. 3

               Schedule No. 4-A Potable and Non-Potable Water Rates. 3

               Schedule No. 4-B Wastewater Rates. 3

 

 Case Background

Grenelefe Resort Utility, Inc. (Grenelefe or Utility) is a Class C water and wastewater facility located in Polk County.  Grenelefe serves approximately 1,254 water customers and approximately 1,210 wastewater customers.  The Utility was issued Grandfather Certificate Nos. 589-W and 507-S on December 9, 1997.[1]  According to Grenelefe=s 2011 Annual Report, gross revenues were $296,191 and $167,985 for water and wastewater, respectively.  The Utility’s reported operating expenses were $208,168 for water and $179,598 for wastewater.

On May 10, 2011, the Commission received Grenelefe’s application for a staff-assisted rate case.  Rate base was established when the Utility transferred majority organizational control and changed its name from Sports Shinko to Grenelefe Resort Utility, Inc. in Docket No. 030103-WS.[2]  The instant docket is the Utility’s first rate case.  The Commission has the authority to consider this rate case pursuant to Section 367.0814, Florida Statutes (F.S.).

 

Discussion of Issues

Issue 1: 

 Is the quality of service provided by Grenelefe satisfactory?

Recommendation: 

 Yes.  The quality of service provided by the Utility should be considered satisfactory.  (Simpson)

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 components of water and wastewater 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 from customers are reviewed and the Utility’s compliance with the Florida Department of Environmental Protection (DEP) and the Polk County Health Department (PCHD) are also considered.

Quality of Utility’s Product and Operational Condition of the Plant and Facilities

The PCHD conducted a sanitary survey of Grenelefe water facilities in January 2012 and noted three deficiencies, which include an inoperable hour meter on well #10, improper color coding for the piping at both water plants, and insufficient casing height for both wells.  According to the PCHD, those deficiencies have been corrected.

 

The Utility’s wastewater operating permit was renewed on January 20, 2012, with an expiration date of January 19, 2017.  DEP conducted a compliance inspection of the wastewater system on February 2, 2012, and found no deficiencies.

 

A staff field investigation of Grenelefe’s water and wastewater facilities was conducted on August 4, 2011.  The facilities appeared to be operating normally.  Therefore, staff recommends that quality the of the drinking water delivered to the customers, the wastewater effluent quality, and the operating condition of the water and wastewater facilities is satisfactory.

 

The Utility’s Attempt to Address Customer Satisfaction

 

            A customer meeting was held on March 22, 2012, at the Grenelefe Resort Golf Clubhouse in Haines City, Florida.  Three customers attended and all spoke.  Representatives of the Utility were also present.  Staff explained the rate making process to the customers and answered questions about staff’s analysis of the Utility’s application.  The customers expressed satisfaction regarding the remarkable and reliable service provided by the Utility.  In addition, the customers stated that the Utility has been responsive to customers’ concerns.  One customer, who is the owner of another utility, made a comparison of rates for other utilities in the area and found Grenelefe’s rates to be the lowest in the area.  The customers were, however, concerned about upgrades to the water and wastewater systems.  They had indicated that the system is antiquated, some capital improvements are needed, and, therefore, the Utility should look into future improvements.  The Utility has indicated that there are no immediate plans for any type of upgrade for the systems at this time.  Also, the Aspenwood at Grenelefe Condominium Owners Association (AGCOA) was unable to attend the customer meeting.  However, the AGCOA sent in a letter which outlined concern with the rate structure.  Staff followed up with the AGCOA and explained how the rate structure is applied in calculating customers’ bills.  AGCOA was satisfied with the response.  Staff reviewed the Commission’s Consumer Activity Tracking System to determine whether any complaints had been filed on Grenelefe during the past three years.  Two closed billing complaints were found. Staff recommends that the Utility’s attempts to address customer satisfaction be found satisfactory.

 

Summary

 

Grenelefe is in compliance with DEP rules and regulations, the water and wastewater treatment plants are 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 Grenelefe be considered satisfactory.

Issue 2: 

 What are the used and useful percentages for Grenelefe?

Recommendation: 

 The water treatment plant, wastewater treatment plant, and distribution and collections systems should be considered 100 percent used and useful.  A 10 percent adjustment should be made to chemicals and purchased power to reflect excessive unaccounted for water.  (Simpson)

Staff Analysis: 

 The Utility has been providing water and wastewater service to the Grenelefe community in Polk County since 1977.  The Utility currently provides potable water and wastewater service to residential, multi-family, and general service customers.  Non-potable irrigation service is also provided to residential customers.  Utility records for the test year ended March 31, 2011, were used in analyzing the used and usefulness of the water and wastewater facilities.

Water Treatment Plant (WTP)

 

            Pursuant to Rule 25-30.4325, F.A.C., the used and useful (U&U) calculation for a WTP is determined by dividing the peak demand by the firm reliable capacity of the water treatment plant.  Because the system has no storage facilities, the calculation is in gallons per minute (gpm).  Consideration of growth, fire flow requirements, unaccounted for water, and other factors may also be included.

 

            Grenelefe provides water service via seven wells.  Two of the wells provide potable water and five non-potable wells are used to provide residential irrigation service.  The service area is made up of residential, multi-family, and general service customers.  The two potable wells at the WTP are both rated at 1,500 gpm.  Therefore, based on Rule 25-30.4325, F.A.C., the firm reliable capacity of the water system is 1,500 gpm.  The water is chlorinated for disinfection and polyphosphate is added for lead and copper corrosion control.  Staff reviewed the Utility’s monthly operating reports (MORs) and found that the flows for November 5, 2010 (436,000 gallons) and December 11, 2010 (398,000 gallons) appear to be unusual occurrences.  Pursuant to Rule 25-30.4375(7), F.A.C., the peak day is the single maximum day in the test year where there is no unusual occurrence.  Therefore, staff recommends that 382,000 gallons (531 gpm), which occurred on May 26, 2010, be used as the peak day flow.  Staff communicated with the Polk County Fire Marshall and was informed that the fire flow requirement for the service area is 1,500 gpm.  There has been no significant growth in the past five years.

 

            In addition, irrigation is provided through both potable and non-potable wells.  There are five non-potable wells used for irrigation to approximately 113 customers in three separate areas within the Utility’s service area.  Because the service area is close to built out, staff recommends that the non-potable irrigation wells be considered 100 percent U&U.

 

            The Utility’s MORs indicate that 67.292 million gallons of finished water were produced and treated in the test year.  According to staff’s billing analysis, 53.189 million gallons of potable water were sold.  The Utility uses about one percent of the water produced for flushing activities.  Therefore, 20 percent of the water produced is unaccounted for water.  Pursuant to Rule 25-30.4325, F.A.C., unaccounted for water in excess of 10 percent of the amount produced is considered excessive unaccounted for water (EUW).  Therefore, 10 percent or 26 gpm of the amount produced is considered EUW.

 

            Based on a peak day of 531 gpm, a fire flow allowance of 1,500 gpm, EUW of 26 gpm, and a firm reliable capacity of 1,500 gpm, the WTP is 100 percent U&U.  Therefore, staff recommends that the WTP be considered 100 percent U&U, pursuant to Rule 25-30.4325, F.A.C.  A 10 percent adjustment should be made to chemicals and purchased power to reflect EUW.

 

Wastewater Treatment Plant (WWTP)

 

Rule 25-30.432, F.A.C., provides that the U&U percentage for a WWTP should be calculated based on customer demand and the permitted capacity of the plant.  The rule also provides that customer demand should be determined using the same basis as the permitted capacity.  Consideration is given to growth, infiltration and inflow (I&I), conservation, and other factors.

 

Grenelefe’s WWTP is an extended aeration, activated sludge plant with a design capacity of 680,000 gallons per day (gpd).  The plant is permitted by DEP to operate at 340,000 gpd, based on the three-month rolling average daily flow (3MRADF). Liquid disinfection is applied prior to the treated wastewater effluent flowing into the percolation pond.

 

            The customer demand for the test year was 142,744 gpd based on the 3MRADF.  There does not appear to be excessive I&I in the collection system.   The system is almost built out, with about six vacant lots within the development, and there are no plans for expansion.  Based on the customer demand and capacity of the WWTP, the system is 42 percent U&U.  However, pursuant to Rule 25-30.432, F.A.C., staff recommends that the WWTP be considered 100 percent U&U because the service area is close to built out.

 

Water Distribution and Wastewater Collection Systems

 

            The U&U calculations for the water distribution and wastewater collection systems are based on the number of customers connected to the systems divided by the capacity of the system.  Consideration is given for growth.  The cost of the distribution and collection systems was imputed as contributions-in-aid-of-construction (CIAC) in Docket No. 030123-WS.[3]  Because the Utility’s current distribution and collection systems are needed to serve the existing customers, the system is almost built out, and the lines are fully contributed, staff recommends that the water distribution and wastewater collection systems be considered 100 percent U&U.

 

Issue 3: 

 What is the appropriate average test year rate base for Grenelefe?

Recommendation: 

 The appropriate average test year rate base for Grenelefe is $215,553 for water and $90,680 for wastewater.  (Smith)

Staff Analysis: 

 The appropriate components of the Utility’s rate base include utility plant in service (UPIS), contributions-in-aid-of-construction (CIAC), accumulated depreciation, amortization of CIAC, and working capital.

Staff selected a test year ended March 31, 2011, for this rate case.  A summary of each component and the adjustments follows:

Utility Plant in Service:   The Utility recorded $3,504,720 and $2,975,704 in UPIS for water and wastewater, respectively.  Table 3-1 includes staff’s recommended adjustments to reflect the appropriate plant additions and retirements to water and wastewater UPIS amounts.

Table 3-1

Staff’s adjustments to UPIS result in a net decrease of $490,962 for water and $33,492 for wastewater.  Staff recommends UPIS balances of $3,013,758 for water and $2,942,212 for wastewater.

Non-Used and Useful Plant:  As discussed in Issue 2 of this recommendation, Grenelefe’s water plant, water distribution system, wastewater treatment plant, and the wastewater collection system are 100 percent U&U.  Therefore, a non-U&U adjustment is not necessary.

Land:  Grenelefe recorded $7,000 for water and $49,400 for wastewater in this account.  Staff has reduced the amount for water by $4,000 to reflect the Commission-approved land value determined when the Utility changed its name in 2005.[4]  Staff recommends land of $3,000 for water and $49,400 for wastewater.

Contribution in Aid of Construction:  The Utility recorded $2,302,685 and $1,051,361 in this account for water and wastewater, respectively.  Staff has compiled CIAC additions through March 31, 2011, to determine the Utility’s CIAC balance as of March 31, 2011.  Staff used information from the Utility’s 2002-2010 annual reports, customer service connection records, and the Utility’s authorized service availability tariff to determine the number of new customers connected since the Utility transferred majority organizational control.  No adjustments have been made to this account.  Staff recommends CIAC of $2,302,685 for water and $1,051,361 for wastewater.

Accumulated Depreciation:  Grenelefe recorded a balance for accumulated depreciation of $2,343,557 for water and $2,540,965 for wastewater.  Staff has calculated accumulated depreciation using the prescribed rates set forth in Rule 25-30.140, F.A.C.  Staff has decreased this account by $47,060 for water and $23,874 for wastewater to reflect depreciation calculated by staff. 

            According to Audit Finding 3, two carbon filter systems, one non-potable water well, and a pumping station, totaling $466,175, are no longer being used to serve the Utility’s customers.  In the Staff Report dated March 7, 2012, staff recommended that the above three plant items be reclassified to Account No. 103 – Property Held for Future Use.  Further, staff recommended removing the associated accumulated depreciation of $276,039.  On March 15, 2012, an informal meeting was held between the Utility and staff, and the Utility’s attorney, Mr. Martin Friedman, expressed concern with staff’s recommended accumulated depreciation adjustment as contained in the Staff Report.  Mr. Friedman asserted that the three plant items are no longer in use.  In addition, Mr. Friedman stated that Grenelefe does not intend on placing the three plant items back in service. Mr. Friedman suggested that all accumulated depreciation should be removed if the three plant items are classified to a below-the-line account. 

            After further analysis, staff believes that it would be more appropriate to remove the three plant items and their associated accumulated depreciation from rate base as opposed to reclassifying the plant items to Account No. 103 – Property Held for Future Use.  Moreover, staff believes that any loss associated with accumulated depreciation should be treated as an early retirement loss and amortized in accordance with Rule 25-30.433(9) F.A.C.  As such, staff is recommending that the amounts related to the carbon filter systems, non-potable water well and pumping station be removed from UPIS.  Staff determined that the appropriate amount of associated accumulated depreciation is $291,267.

            In addition to the above mentioned adjustments, staff has decreased this account by $28,068 and $15,605 to reflect averaging adjustments for water and wastewater, respectively.  The aforementioned adjustments result in average accumulated depreciation of $1,977,162 ($2,343,557 - $47,060 - $291,267 - $28,068) for water and $2,501,486 ($2,540,965 - $23,874 - $15,605) for wastewater.

Amortization of CIAC:  The Utility recorded $1,524,464 and $707,138 for amortization of CIAC for water and wastewater, respectively.  The balance of amortization of CIAC has been recalculated since rate base was established by Order No. PSC-05-0142-PAA -WS.  In order to reflect amortization of CIAC as calculated by staff, this account has been decreased by $32,787 and $69,812 for water and wastewater, respectively.  Staff has decreased this account by $29,521 for water and $6,741 for wastewater to reflect averaging adjustments.  Staff’s net adjustments to CIAC result in Amortization of CIAC of $1,462,156 ($1,524,464 - $32,787 - $29,521) for water and $630,585 ($707,138 - $69,812 - $6,741) for wastewater.

Working Capital Allowance:  Grenelefe did not record any working capital allowance for this account.  Working capital is defined as the investor-supplied funds necessary to meet operating expenses or going-concern requirements of the utility.  Consistent with Rule 25-30.433(2), F.A.C., staff recommends that the one-eighth of the O&M expense formula approach be used for calculating working capital allowance.  Applying this formula, staff recommends a working capital allowance of $16,487 (based on water O&M of $131,894) and $21,329 (based on wastewater O&M of $170,634) for water and wastewater, respectively.

Rate Base Summary:  Based on the foregoing, staff recommends that the appropriate test year average rate base is $215,553 for water and $90,680 for wastewater.  Rate base is shown on Schedule Nos. 1-A and 1-B, and staff’s adjustments are shown on Schedule No. 1-C.

Issue 4: 

 What is the appropriate rate of return on equity and overall rate of return for Grenelefe?

Recommendation: 

 The appropriate return on equity (ROE) is 8.74 percent with a range of 7.74 percent to 9.74 percent.  The appropriate overall rate of return is 8.74 percent.  (Smith)

Staff Analysis: 

 According to Audit Finding 7, and supporting documentation provided by the Utility, Grenelefe’s capital structure consists of the following components:

Table 4-1

 

The Utility’s capital structure has been reconciled with staff’s recommended rate base.  Consistent with the Commission-approved leverage formula currently in effect, the appropriate ROE is 8.74 percent.[5]  Staff recommends an ROE of 8.74 percent with a range of 7.74 percent to 9.74 percent, and an overall rate of return of 8.74 percent.  The ROE and overall rate of return are shown on Schedule No. 2.

 

Issue 5: 

 What is the appropriate amount of test year revenue in this case?

Recommendation: 

 The appropriate test year revenue for Grenelefe is $305,485, of which $164,803 is related to potable water service and $140,682 is related to non-potable water service.  The appropriate test year revenue for wastewater is $169,690.  (Bruce, Smith)

Staff Analysis: 

 Staff analyzed the Utility’s reported revenue, and based on the billing determinants, staff recommends test year revenue of $305,485, of which $164,803 is related to potable water service and $140,682 is related to non-potable water service.   Grenelefe recorded total revenue of $305,485 for water and $169,690 for wastewater for the 12-month period ended March 31, 2011.  Therefore, staff has not made any adjustments to this account.  Test year revenue amounts are shown on Schedule Nos. 3-A, 3-B and 3-F.

Issue 6: 

 What is the appropriate amount of operating expense?

Recommendation: 

 The appropriate amount of operating expense for Grenelefe is $209,764 for water and $228,125 for wastewater.  (Smith)

Staff Analysis: 

 Grenelefe recorded operating expense of $287,931 for water and $231,786 for wastewater, for the test year ended March 31, 2011.  The test year O&M expenses have been reviewed, and invoices, canceled checks, and other supporting documentation have been examined.  As discussed in Issue 7, a portion of Grenelefe’s UPIS is related to non-potable water.  However, the Utility contends it “does not differentiate non-potable water system assets from total water assets.”[6]  Since the amount of non-potable plant could not be distinguished from total plant, staff separated expenses that could be identified to determine a revenue requirement for non-potable expenses.  Based on workpapers contained in the Utility’s grandfather certificate Order No. PSC-97-1546-FOF-WS,[7] staff has determined the portion of non-potable expenses to be 34 percent for salaries and wages and approximately 74 percent for purchased power.  In accordance with the above-mentioned order, staff removed the portion of salaries, payroll taxes, purchased power, and allowance for regulatory assessment fees that is associated with the provision of non-potable water service.  Staff has made several adjustments to the Utility’s operating expenses which are summarized below:

Salaries and Wages - Employees (601/701) – Grenelefe recorded $63,613 in this account for both water and wastewater.  The Utility has 3 full-time employees who perform operations, maintenance, and administrative work.  Staff has increased this account by $1,401 for both water and wastewater to reflect the actual gross salary amount paid to each of the three employees.  In addition, staff has increased these amounts for water and wastewater by $20,678 each to recognize the Utility’s office manager’s salary that was not included.  Staff’s recommended salaries expense is $85,692 ($63,613 + $1,401 + $20,678).  The adjustment for removing 34 percent of salaries expense related to non-potable service equals $29,135 ($85,692 x 34 percent) for both water and wastewater.  Staff recommends salaries and wages – employees expense of $56,557 for water and $56,557 for wastewater.

Employee Pensions and Benefits (604/704) – Grenelefe recorded $1,159 in this account for both water and wastewater.  Staff has determined employee pensions and benefits to be $912 each for water and wastewater.  Therefore, staff has made an adjustment to reduce this account by $247 each for water and wastewater.  Staff recommends employee pensions and benefits expense of $912 for both water and wastewater.

Sludge Removal Expense (711) – Grenelefe recorded $39,150 in this account for sludge removal expense.  The Utility included two invoices totaling $650 in this account for sludge analysis.  Staff believes that sludge analysis should be included in testing expense as opposed to sludge removal expense.  As such, staff has reclassified $650 to testing expense.  Staff recommends sludge removal expense of $38,500 ($39,150 - $650).

Purchased Power (615/715) – Grenelefe recorded $71,372 in this account for water and $21,740 for wastewater.  The Utility presented monthly electric bills totaling $69,667 and $21,709 for water and wastewater respectively.  Accordingly, staff has removed $1,705 from water and $31 from wastewater to reflect actual electric bills.  As explained above, staff has removed a portion of purchased power expense in order to determine the appropriate amount of revenue requirement associated with non-potable water service.  Again, the portion of purchased power expense determined to be related to non-potable services is approximately 74 percent.  Staff’s recommended purchased power is $69,667.  Therefore, the adjustment for removing approximately 74 percent of purchased power expense related to non-potable water service equals $51,644 ($69,667 x 74 percent[8]) for water.

In Issue 2, staff has determined that 10 percent of the amount of water produced is considered EUW.  When there is EUW, the percentage of EUW is applied to purchased power expense for the water system to calculate a reduction to this expense.  Based on the above adjustments, purchased power expense before consideration of EUW is $18,023 ($71,372 - $1,705 - $51,644) for water.  Staff has made an adjustment to reduce water by $1,802 ($18,023 x 10 percent) for EUW.  Staff recommends purchased power expense of $16,221 for water and $21,709 for wastewater.

Chemicals (618) – Grenelefe recorded $6,298 in this account for water and $7,555 for wastewater.  In Issue 2, staff determined that 10 percent of the amount of water produced is considered EUW.  The percentage of EUW is also applied to chemicals expense for the water system to calculate a reduction to this expense.  Staff has reduced this account by $630 ($6,298 x 10 percent) for water.  Staff recommends chemicals expense of $5,668 for water and $7,555 for wastewater.

Materials and Supplies (620/720) – The Utility recorded $4,344 in this account for both water and wastewater.  The items in Table 6-1 should be reclassified accordingly.

Table 6-1

 

Staff recommends materials and supplies expense of $3,979 ($4,344 - $365) for water and $4,327 ($4,344 - $17) for wastewater.

Contractual Services – Professional (731) – Grenelefe recorded $11,042 in this account for water and $6,242 for wastewater.  Staff has reduced this account by $4,800 for water to remove two invoices related to work performed at River Ranch Water Management, LLC, a sister system owned by CFI Resort Management, Inc. (CFI).  This work is unrelated to Grenelefe.  Staff recommends contractual services – professional expense of $6,242 ($11,042 - $4,800) for water and $6,242 for wastewater.

Contractual Services – Testing (635/735) – Grenelefe recorded $699 for water and $1,055 for wastewater in this account.  The Utility included $171 in its general ledger for transactions that were not supported by documentation.  Accordingly, staff has removed $171 from water for unsupported transactions.  Staff has reduced this account by $31 to reflect the actual cost for testing water samples that were reflected on invoices.  Also, staff has increased this account by $650 for wastewater to reflect sludge testing reclassified from sludge removal expense.  Staff recommends contractual services – testing expense of $497 ($699 - $171 - $31) for water and $1,705 ($1,055 + $650) for wastewater.

Contractual Services – Other (636/736) – Grenelefe recorded $55,939 for water and $33,485 for wastewater in this account.  A portion of these amounts are attributed to a $70,000 management contract ($48,000 for water and $22,000 for wastewater) between the Utility’s parent company, CFI, and Grenelefe.  The duties and responsibilities included in the management contract include billing, payment processing, and collection payments.  These are the same duties and responsibilities performed by one of the Utility’s employees.  Thus, the cost of performing these functions is included in both salaries and wages - employees and also in the total for the management fee, for the same duties and responsibilities.  As such, staff has removed $31,050 for water and $13,950 for wastewater.  This adjustment represents the amount of salary assigned to water and wastewater, respectively, based on the relative percentages used to assign the management fee.

            Staff has made offsetting adjustments that increased water and reduced wastewater by $367 for an invoice that the Utility split equally between each system that was related to the water system only.  The Utility’s general ledger balance for wastewater was overstated by $560.  Accordingly, staff has reduced this account by $560 for wastewater.  Grenelefe included two general ledger transactions: one for repairs to a lift station and another for a wastewater plant clarifier totaling $669.  However, after reviewing each of the invoices, staff has determined the appropriate total to be $625.  Accordingly, staff has reduced this account by $44 for wastewater.  Staff recommends contractual services – other expense of $25,256 ($55,939 - $31,050 + $367) for water and $18,564 ($33,485 - $13,950 - $367 - $560 - $44) for wastewater.

Rent Expense (640/740) – Grenelefe recorded $90 in this account for both water and wastewater.  Staff has increased this account by $253 for water and $254 for wastewater to include three quarterly invoices for the lease of a postage meter.  Staff recommends rent expense of $343 for water and $344 for wastewater.

Insurance Expenses (655/755) – Grenelefe recorded $1,135 in this account for both water and wastewater.  The Utility included $597 each for water and wastewater to reflect the annual auto insurance policy.  Based on the current annual auto insurance policy of $754, the appropriate auto insurance is $377 each for water and wastewater.  Staff has made an adjustment to reduce this account by $220 each for water and wastewater to reflect the current annual auto insurance policy.  Staff recommends insurance expense of $915 ($1,135 - $220) each for water and wastewater.

Regulatory Commission Expense (665/765) – Grenelefe did not record any regulatory commission expenses for either water or wastewater.  By Rule 25-22.0407, F.A.C., the Utility is required to mail notices of the customer meeting and notices of final rates in this case to its customers.  For these notices, staff has estimated $1,203 for postage expense, $1,094 for printing expense, and $137 for envelopes.  The above results in $2,433 for postage, mailing notices, and envelopes.  The Utility paid a $2,000 rate case filing fee.  The Utility consultant fees total $7,893 for the instant docket.  The total rate case expense is $6,163 for water and $6,163 for wastewater.  Pursuant to Section 367.0816, F.S., rate case expense is amortized over a four-year period.  Staff recommends regulatory commission expense of $1,541 for water and $1,541 for wastewater.

Miscellaneous Expense (675/775) – The Utility recorded $5,414 each for water and wastewater.  The Utility included an invoice for renewal of its annual drinking water permit of $2,000.  The invoice was split equally between water and wastewater.  Staff has increased water by $1,000 and decreased wastewater by $1,000 to include the invoice in the water account only.  Grenelefe included an invoice for a “boat slip fee.” Staff believes this is non-utility item and should be removed from miscellaneous expenses.  As such, staff has decreased this account by $351 each for water and wastewater.  Staff recommends miscellaneous expense of $6,063 ($5,414 + $1,000 - $351) for water and $4,063 ($5,414 - $1,000 - $351) for wastewater.

Operation and Maintenance Expenses (O&M) Summary – Total adjustments to O&M expense result in a decrease of $96,911 for water and a decrease of $22,048 for wastewater.  Staff=s recommended O&M expense is $131,894 for water and $170,634 for wastewater.  O&M expenses are shown on Schedule Nos. 3-A and 3-B.

 

Depreciation Expense (Net of Related Amortization of CIAC) – Grenelefe recorded $22,179 for water and $8,411 for wastewater in this account.  Staff has calculated depreciation expense using the prescribed rates set forth in Rule 25-30.140, F.A.C.  Staff=s calculated test year depreciation is $68,144 and $37,126 for water and wastewater, respectively.  Thus, staff has made an adjustment to increase the amount reported for water by $45,965, and to increase the amount reported for wastewater by $28,715.  Staff has decreased amortization of CIAC by $52,026 for water and $13,323 for wastewater based on composite rates.  This results in a net depreciation expense of $16,118 ($22,179 + $45,965 - $52,026) for water and $23,803 ($8,411 + $28,715 - $13,323) for wastewater.

 

Amortization – Grenelefe did not record any amortization expense for either water or wastewater.  As stated in Issue 3, two carbon filter systems, one non-potable water well, and a pumping station, totaling $466,175, are no longer being used to serve the Utility’s customers.  Therefore, staff is recommending that the amounts related to the carbon filter systems, non-potable water well and pumping station be removed from UPIS.  Staff believes that any loss associated with accumulated depreciation should be treated as an early retirement loss and amortized in accordance with Rule 25-30.433(9) F.A.C., which states:

 

“The amortization period for forced abandonment or the prudent retirement, in accordance with the National Association of Regulatory Utility Commissioners Uniform System of Accounts, of plant assets prior to the end of their depreciable life shall be calculated by taking the ratio of the net loss (original cost less accumulated depreciation and contributions-in-aid-of-construction (CIAC) plus accumulated amortization of CIAC plus any costs incurred to remove the asset less any salvage value) to the sum of the annual depreciation expense, net of amortization of CIAC, plus any amount equal to the rate of return that would have been allowed on the net invested plant that would have been included in rate base before the abandonment or retirement.  This formula shall be used unless the specific circumstances surrounding the abandonment or retirement demonstrate a more appropriate amortization period.”

 

The purpose of allowing recovery of an early retirement loss is to allow the Utility to recover the cost of prudent investments of plant that would have otherwise been recovered through rate base.[9]  Staff’s calculated early retirement loss is as follows:

 

Table 6-2

 

 

Further, the amortization period has been calculated as follows:

 

Table 6-3

 

Application of the formula described in Rule 25-30.433 above, results in an amortization period of 6 years.  The annual amortization of the loss results in an increase to operating expenses.  Therefore, staff has increased this account by $29,151 ($174,908 / 6 years) to reflect the annual amortization of the early retirement loss.

 

Taxes Other Than Income (TOTI) – Grenelefe’s general ledger reflected the following amounts for TOTI:

 

Table 6-4

 

            Staff has reviewed Polk County’s non-ad valorem and ad valorem tax assessment notices.  Based on these notices, staff has determined the appropriate property taxes are $16,008 for water and $16,759 for wastewater.  Therefore, staff has reduced this account by $1,645 for water and $894 for wastewater to reflect property taxes paid by the Utility.  Staff has calculated payroll tax of $6,306 for both water and wastewater.  Accordingly, staff has increased this account by $902 for both water and wastewater to reflect staff’s calculated payroll tax.

           

            The non-potable water revenue requirement has been calculated separately.  One component staff has used in determining the appropriate potable and non-potable water revenue requirements is RAFs.  Staff is recommending potable water revenues of $164,803 and non-potable water revenues of $140,682.  Staff has attributed RAFs of $7,416 ($164,803 x 4.5 percent) to potable water and $6,331 ($140,682 x 4.5 percent) to non-potable water.  The Utility recorded $13,890 for RAFs.  Therefore staff has decreased this account by $6,474 ($13,890 - $7,416) for water, and increased RAFs for the non-potable water revenue requirement by $6,331.

 

            As discussed in Issue 8, revenues have been increased by $63,801 for water and $66,360 for wastewater to reflect the change in revenue required to cover expenses and afford the Utility an opportunity to earn the recommended return on investment.  As a result, TOTI should be increased by $2,871 for water and $2,986 for wastewater to reflect RAFs of 4.5 percent on the change in revenue.  Staff recommends TOTI of $32,601 ($36,947 - $1,645 + $902 - $6,474 + $2,871) for water and $33,687 ($30,693 - $894 + $902 + $2,986) for wastewater.

 

Income Tax – The Utility did not have any income tax expense for the test year.  Grenelefe is an S Corporation.  The tax liability is passed on to the owners’ personal tax returns.  Therefore, staff did not make an adjustment to this account.

 

Operating Expenses Summary – The application of staff=s recommended adjustments to Grenelefe=s recorded test year operating expenses result in staff=s recommended operating expenses of $209,764 for water and $228,125 for wastewater.  Operating expenses are shown on Schedule Nos. 3-A and 3-B.  The related adjustments are shown on Schedule No. 3-C.

Issue 7: 

 What is the appropriate revenue requirement for non-potable water service?

Recommendation: 

 The appropriate revenue requirement for non-potable water service is $121,896.  (Smith, Bruce)

Staff Analysis: 

 On May 14, 1996, the Board of County Commissioners of Polk County (County Commission, Polk County or County) adopted a resolution pursuant to Section 367.171, F.S., declaring the privately-owned water and wastewater utilities in that County subject to the provisions of Chapter 367, F.S.  This Commission acknowledged the County's resolution by Order No. PSC-96-0896-FOF-WS.[11]

By letter dated July 30, 1996, Grenelefe was advised of the Commission's jurisdiction and the Utility's responsibility to obtain a certificate.  On August 30, 1996, Grenelefe filed an application for grandfather certificates to provide water and wastewater service in Polk County in accordance with Section 367.171(2)(b), F.S.

Subsequently, the County Commission requested the right to complete a hearing with respect to new rates for Grenelefe which was initiated prior to the transfer of jurisdiction to this Commission.  This rate proceeding originated from a mandate by the Southwest Florida Water Management District (SWFWMD) to Grenelefe to install meters for all water usage.  This included water used for domestic use, as well as for irrigation.  Grenelefe has both potable and non-potable water sources available to provide irrigation service; therefore, meters were installed to measure both sources.

On July 2, 1996, the County Commission approved monthly rates using the base facility and gallonage charge rate structure.  The County Commission also approved an irrigation rate, which Grenelefe had been charging all irrigation sources since September 1, 1996.  The rates that Grenelefe began charging for non-potable water irrigation service on September 1, 1996 were identical to the rates approved for potable water irrigation service by Polk County on July 2, 1996.  Although the Utility was mandated by the SWFWMD to implement metered irrigation service, application of the rate to non-potable water irrigation service had not been officially approved by either the County or this Commission.

By Order No. PSC-97-1546-FOF-WS,[12] the Commission granted grandfather water and wastewater certificates, and established rates, including non-potable water rates, as required by the SWFWMD.  Since the amount of non-potable plant could not be distinguished from total plant in the grandfather certificate docket, the common expenses were allocated between potable and non-potable service.  The Utility is unable to distinguish between the potable and non-potable assets.  Therefore, staff has used the same methodology from the grandfather certificate docket to determine the revenue requirement for non-potable service.  In accordance with the above-mentioned order, staff has removed the portion of salaries, payroll taxes, purchased power, and allowance for regulatory assessment fees that is associated with the provision of non-potable water service.  Based on workpapers contained in the docket file for the Utility’s grandfather certificate, staff has determined the portion of non-potable expenses to be 34 percent for salaries and wages and approximately 74 percent for purchased power.  Staff’s total recommended salaries in the instant docket is $171,382 ($85,691 for both water and wastewater.)  Therefore, staff has made an adjustment to allocate $58,270 ($171,382 x 34 percent) to the salaries and wages – employees account for the non-potable water revenue requirement calculation.  Staff’s total recommended purchased power expense in the instant docket is $69,667.  As such, staff has made an adjustment to allocate $51,644 ($69,667 x 74 percent[13]) to the purchased power account for the non-potable water revenue requirement calculation. 

Staff has calculated payroll tax of $6,497 ($58,270 x 11.15 percent) based on the recommended salaries and wages adjustment mentioned above.  Hence, staff has increased TOTI by $6,497 to reflect payroll tax.  As discussed in Issues 5 and 7, the portion of revenues attributed to non-potable water is $140,682.  Accordingly, staff has increased TOTI by $6,331 to reflect RAFs of 4.5 percent on revenues for non-potable water service.

Based on staff’s calculated revenue requirement, the Utility earned $18,786 more than the recommended rate of return for non-potable water service.  As a result, TOTI should be decreased by $845 to reflect RAFs of 4.5 percent on the change in revenue.  Staff is recommending in Issue 9 that the non-potable water service overearnings be netted against the potable water system revenue requirement.  The application of staff=s recommended adjustments to non-potable water operating expenses total $109,914.  Operating expenses are shown on Schedule No. 3-F, and staff’s adjustments are shown on Schedule No. 3G. 

Staff’s recommended non-potable water revenue requirement of $121,896 has been calculated as follows:

Table 7-1

Issue 8: 

 What is the appropriate revenue requirement?

Recommendation: 

 The appropriate revenue requirement is $228,604 for potable water.  This revenue requirement for potable water includes all adjustments contained in Issue 6.  A separate revenue requirement for non-potable water is contained in Issue 7.  The appropriate revenue requirement for wastewater is $236,050.  (Smith)

Staff Analysis: 

 Grenelefe should be allowed an annual increase of $63,801 (38.71 percent) for potable water and an annual increase of $66,360 (39.11 percent) for wastewater.  This will allow the Utility the opportunity to recover its expenses and earn a 8.74 percent return on its investment.  The calculation is as follows:

Table 8-1

 

Issue 9: 

 What are the appropriate rate structures for the Utility's water and wastewater systems?

Recommendation: 

 The appropriate rate structure for the Utility’s residential water class, which includes potable irrigation service for the residential customers, is a four tier inclining block rate structure.  Staff’s preliminary rate design called for a three-tier rate structure with usage blocks of: a) 0-10 kgals in the first usage block; b) 10-15 kgals in the second usage block; and c) all usage in all excess of 15 kgals in the third block.  However, as discussed in Issue 10, by restricting any cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 5 kgal per month.  This results in a four-tier rate structure for monthly consumption with usage blocks of: a) 0-5 kgal; b) 5-10 kgal; c) 10-15 kgal; and d) all usage in excess of 15 kgals in the fourth usage block with usage block rate factors of .82, 1.0, 1.5, and 2.0 respectively.  The appropriate rate structure for the water system’s non-residential class, which includes potable irrigation for the non-residential customers, is a BFC/uniform gallonage charge rate structure.  The BFC cost recovery percentage for the water system should be set at 55 percent.  Furthermore, the appropriate rate structure for the wastewater residential class and non-residential class is a continuation of the traditional BFC/gallonage charge rate structure.  The BFC cost recovery percentage for the wastewater system should be set at 65 percent. The residential wastewater gallonage cap should be set at 8 kgals.  Also, the Utility’s non-potable rate structure should remain unchanged.  (Bruce)

Staff Analysis: 

 The Utility provides water and wastewater service for its customers.  Furthermore, the Utility serves both potable and non-potable water sources to provide irrigation throughout the service area. 

 

            Currently, Grenelefe’s rate structure for the Utility’s residential water system consists of a monthly base facility charge (BFC) of $5.98 which includes a three tier inclining block rate structure.  The usage blocks are set at:  a) 0-10 kgals in the first block, b) 10-35 kgals in the second block, and c) usage in excess of 35 kgals in the third block.  The usage charges are $0.78, $1.56, and $2.34 per kgal, respectively.  The Utility’s potable irrigation service consists of a monthly BFC of $5.98 which includes a two tier inclining block rate structure.  The usage blocks are set at: a) 0-10 kgals in the first block and b) usage in excess of 10 kgals in the second block.  The usage charges are $1.56 and $2.34, respectively.  The non-residential class consists of a traditional BFC/gallonage charge rate structure.  The BFC is $5.98 and usage charge is $0.78 per kgal.  These rates were grandfathered by Order No. PSC-97-1546-FOF-WS.

           

Potable Water Rates:  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 goals and practices.

 

            The Utility is located in the Southwest Florida Water Management District (SWFWMD or District).  Currently, as mentioned above, Grenelefe’s rate structure includes an inclining block as required by the District.  However, staff has been in contact with the District and its staff has suggested that the current rate structure be adjusted in an effort to bring down per capita usage by the residential customers. 

 

            Staff’s analysis of the residential billing data indicates that the customer base is seasonal.  Furthermore, staff’s analysis of the residential billing data coupled with the potable irrigation billing data for residential customers indicates that the overall average monthly consumption is 2,867 gallons per month.  Such overall average consumption is considered low.  However, staff’s billing data show that at 10 kgals and above, the remaining 4 percent of the customers account for the remaining 32 percent of water billed.   This is an indication of high discretionary usage.  To restrict cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 5 kgal per month.  This results in a four-tier rate structure for monthly consumption with usage blocks of: a) 0-5 kgal; b) 5-10 kgal; c) 10-15 kgal; and d) all usage in excess of 15 kgals in the fourth usage block with usage block rate factors of .82, 1.0, 1.50, and 2.00 respectively.

 

            Furthermore, according to Utility representatives, the service area is comprised of primarily retirees and some families that consist of least four people.  For this reason, staff believes it is appropriate to set the threshold for customer’s essential usage to approximately 5,000 gallons per month.  This number is derived based on the average number of persons per household, gallons per day and, days per month (3.0 x 50 x 30).  Staff’s recommended rate structure will minimize repression in the first block and minimize price increases at non-discretionary levels of consumption while targeting those customers with higher levels of usage.

 

             Staff’s recommended rate design for the water system is shown on Table 9-1.  Staff also presents two alternate rate structures to illustrate other recovery methodologies.

 

Table 9-1

 

Staff’s estimated fixed cost for the water system is 63.8 percent of its revenue requirement.  Staff recommends decreasing the BFC cost recovery of 63.8 percent to 55 percent.  The Commission typically sets the BFC cost recovery no greater than 40 percent.  In recent cases, when a customer base is seasonal, the Commission has set the BFC cost recovery greater than 40 percent.[14]   Staff’s recommended BFC allocation will help insure that the Utility will have sufficient cash flow to cover fixed costs while seasonal customers are not in residence.  Also, the recommended BFC allocation is appropriate because it sends the appropriate pricing signals of minimizing price increases at non-discretionary levels of consumption allowing those users to pay a lower price for their water consumption while targeting those customers who use a greater volume of water.

 

Based on the foregoing, staff recommends that the appropriate rate structure for the Utility’s residential water class which includes potable irrigation service for residential customers is a four tier inclining block rate structure.  Staff’s preliminary rate design called for a three-tier rate structure with usage blocks of: a) 0-10 kgals in the first usage block; b) 10-15 kgals in the second usage block; and c) all usage in all excess of 15 kgals in the third block.  However, as discussed in Issue 10, by restricting any cost recovery due to repression being applied to non-discretionary usage, an additional tier is necessary for non-discretionary usage below 5 kgal per month.  This results in a four-tier rate structure for monthly consumption with usage blocks of: a) 0-5 kgal; b) 5-10 kgal; c) 10-15 kgal d) all usage in excess of 15 kgals in the fourth usage block and usage block rate factors of .80, 1.0, 1.5, and 2.0 respectively.  The appropriate rate structure for the water system’s non-residential class, which includes potable irrigation for the non-residential class, is a continuation of its BFC/uniform gallonage charge rate structure.  The BFC cost recovery percentage for the water system should be set at 55 percent.

            Non-potable water:  Grenelefe’s current rate structure for non-potable irrigation service consists of a BFC of $3.07 which includes an inclining block rate structure.  The gallonage charge for consumption above 50 kgals ranges from $0.66 to $2.34 for consumption per month, based on meter size.  These rates were stipulated by Order No. PSC-98-1459-AS-WS. [15]

 

            As mentioned earlier, staff has been in contact with the District, and the District staff indicated that the non-potable rates are low compared to the domestic rates.  The District staff believes that if these irrigation customers were residential customers, then they would reduce the effectiveness of the residential domestic inclining block rate structure.  However, based on staff’s analysis of the billing data, the majority of these customers are non-residential. 

 

            Nonetheless, as mentioned in Issue 7, the non-potable water system is overearning.  Staff has recommended that the non-potable water system overearnings be netted against the potable water system.   Typically, this is only done when the customer bases are similar.  In this case, there are dissimilarities in the potable water and non-potable water customer bases.  Of the 1,367 water customers, approximately ten percent (113 customers) are also non-potable water customers.  However, the potable water system and non-potable water system use the same plant.  Due to the fact that the Utility is unable to determine the appropriate plant components for non-potable water coupled with the District’s concern, staff believes netting the non-potable water system overearnings against the water system is appropriate in this case.   This will allow non-potable rates to remain constant rather than decrease.  Although the non-potable rates are already low, decreasing the rates would further undercut the SWFWMD’s efforts to promote conservation.

 

            Based on the foregoing, staff recommends that the non-potable rate structure remain unchanged.

 

            Wastewater:  Grenelefe’s current rate structure for the wastewater system’s residential and non-residential classes is the traditional BFC/gallonage charge rate structure.  The BFC is $8.46 and the gallonage charge is $1.13 per 1,000 gallons.

 

            Staff’s estimated fixed cost for the wastewater system represents 58 percent of its revenue requirement.  This BFC cost recovery falls within the Commission’s practice of setting the BFC allocation to at least 50 due to the capital intensive nature of wastewater plants.  However, in this case, staff believes it is appropriate to increase the BFC cost recovery to 65 percent due the Utility’s seasonal customer base.

 

            The Utility’s current wastewater cap is set at 10 kgals per month.  It is Commission practice to set the residential wastewater gallonage cap at a consumption level equal to 80 percent of gallons sold.  Staff’s review of the billing data captures 81 percent of the gallons sold at 8 kgals.  For this reason, the Utility’s wastewater gallonage cap of 10 kgal should be changed to 8 kgals.  Furthermore, staff recommends that the non-residential gallonage charge be 1.2 times greater than the residential charge.

 

Staff’s recommended rate design for the wastewater system is shown on Table 9-2 on the following page.   Staff also presents two alternative rate structures to illustrate other recovery methodologies.

Table 9-2

 

Based on the foregoing, staff recommends that the appropriate rate structure for the wastewater system’s residential and non-residential classes is a continuation of the monthly BFC/uniform gallonage charge rate structure.  The current wastewater gallonage cap should be changed from 10 kgal to 8 kgals per month.  The general service gallonage charge should be 1.2 times greater than the residential charge, and the BFC cost recovery percentage for the wastewater system should be set at 65 percent.

Issue 10: 

 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 for water should be reduced by 10.4 percent, resulting in a consumption reduction of 3,992 kgals.  Purchased power expense should be reduced by $1,217, chemical expense should be reduced by $425, and regulatory assessment fees (RAFs) should be reduced by $77.  The final post-repression revenue requirement for the water system should be $208,098.  For the wastewater system, test year kgals sold should be reduced by 15.99 percent, resulting in a consumption reduction of 3,575 kgals.  Sludge removal expense should be reduced by $6,155, purchased power should be reduced by $3,471, chemical expense should be reduced by $1,208, and RAFs should be reduced by $488.  The final post-repression revenue requirement for the wastewater system should be $224,729.

In order to monitor the effect of the changes to 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  (Bruce)

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.   The customer base is seasonal and the analysis showed the overall average consumption is 2.8 kgals per month.  However, the billing data indicates that 4 percent of the customers consume 32 kgals of water per month.   This is an indication that there is a high level of discretionary or non-essential consumption, such as outdoor irrigation.  Non-essential consumption is relatively responsive to changes in price, and is therefore subject to the effects of repression.  Furthermore, in Issue 9, staff recommended that the threshold for the customer’s essential usage be 5 kgals per month.  Therefore, staff’s recommended repression adjustment only applies to water consumption above 5 kgals 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.[16]  This methodology also restricts any price changes due to repression from being applied to non-discretionary consumption (consumption less than 5 kgals per month), and allocates all cost recovery due to repression to discretionary levels of consumption (consumption above 5 kgals per month). 

            Therefore, based on this methodology, staff calculated that the test year residential consumption for this Utility should be reduced by 3,992 kgals.  Purchased water expense should be reduced by $1,217, chemical expenses should be reduced by $425, and regulatory assessment fees (RAFs) should be reduced by $77.  The final post-repression revenue requirement for the water system should be $208,098.  For the wastewater system, test year kgals should be reduced by 3,575 kgals.  Sludge removal expense should be reduced by $6,155, purchased power should be reduced by $3,471, chemical expense should be reduced by $1,208, and RAFs should be reduced by $488.  The final post-repression revenue requirement for the wastewater system should be $224,729.

 

            In order to monitor the effect of the response to 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 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 11: 

 What are the appropriate rates for Grenelefe?

Recommendation: 

 The appropriate monthly water and wastewater rates are shown on Schedule Nos. 4-A and 4-B, respectively.  The recommended rates should be designed to produce revenue of $208,098 for water and $224,729 for wastewater, excluding miscellaneous service charges.  The Utility should 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 on the tariff sheet, 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 and the notice has been received by the customers.  The Utility should provide proof of the date notice was given within 10 days of the date of the notice.  (Bruce)

Staff Analysis: 

 Excluding miscellaneous service revenues, the recommended rates should be designed to produce revenue of $208,098 for the water system and $224,729 for the wastewater system.

           

            The approved rates should be effective for service rendered on or after stamped approval date on the tariff sheet, 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 and the notice has been received by the customers.  The utility should provide proof of the date notice was given within 10 days of the date of the notice.

 

            If the effective date of the new rates falls within a regular billing cycle, the initial bills at the new rate may be prorated.  The old charge shall be prorated based on the number of days in the billing cycle before the effective date of the new rates.  The new charge shall be prorated based on the number of days in the billing cycle on and after the effective date of the new rates.  In no event shall the rates be effective for service rendered prior to the stamped approval date.

 

Based on the foregoing, the appropriate rates for monthly service for the water and wastewater systems are shown on Schedule Nos. 4-A and 4-B.

Issue 12: 

 What is the appropriate amount by which rates should be reduced four years after published effective date to reflect the removal of the amortized rate case expense as required by Section 367.0816 F.S.?

Recommendation: 

 The water and wastewater rates should be reduced as shown on Schedule Nos. 4-A and 4-B, to remove rate case expense grossed-up for regulatory assessment fees and amortized over a four-year period.  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.  Grenelefe 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 one month prior to the actual date of the required rate reduction.  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 the reduction in the rates due to the amortized rate case expense.  (Smith)

Staff Analysis: 

 Section 367.0816, F.S., requires that the rates be reduced immediately following the expiration of the four-year period by the amount of the rate case expense previously included in rates.  The reduction will reflect the removal of revenue associated with the amortization of rate case expense, the associated return in working capital, and the gross-up for RAFs.  The total reduction is $1,631 each for water and wastewater.  Using Grenelefe's current revenue, expenses, capital structure and customer base, the reduction in revenue will result in the rate decreases as shown on Schedule Nos. 4-A and 4-B.

 

            The Utility should be required to file revised tariff sheets no later than one month prior to the actual date of the required rate reduction.  Grenelefe also should be required to file a proposed customer notice setting forth the lower rates and the reason for the reduction.

 

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 the reduction in the rates due to the amortized rate case expense.

Issue 13: 

 Should the Commission approve the Utility's requested increase in miscellaneous service charges, after hour charges, late fee, and NSF check fees?

Recommendation: 

 Yes.  The Commission should approve Utility’s requested after hour charges, increase in miscellaneous service charges, late fee, and NSF check fees.  Within five working days of the issuance of the order, staff recommends that the Utility be required to provide a proposed customer notice of the approved charges for staff’s review and approval.   Once staff has approved the proposed customer notice, the Utility may choose to either mail the notice separately to customers or insert it with the next billing cycle.  The tariff sheet containing the approved miscellaneous service charges and the after hour charges should become effective for services rendered on or after the stamped approval date on the tariff sheet pursuant to Rule 25-30.475, 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 within ten days of the date of the notice.  This notice may be combined with the notice required in other issues.  (Bruce)

Staff Analysis: 

 Pursuant to Rule 25-30.460, F.A.C., all water and wastewater utilities may apply for miscellaneous service charges.  These charges include initial connection, normal connections, violation connections, and premises visit charges.   Furthermore, pursuant to Rule 25-30.460(2), F.A.C., a utility may request an additional charge (after hours charge) for overtime when a customer requests that the service be performed after normal working hours.   The after-hours charge may be at the same rate specified for the existing charge during normal working hours.  If the Utility seeks a charge other than the normal working hours charge, the Utility must file cost support.  The Utility’s request to increase its miscellaneous service charges and add after-hour charges was accompanied by its reasons for requesting the changes, as well as the cost justification required by Section 367.091, F.S.

 

Miscellaneous Service Charges

 

            The Utility has requested to increase its connection and reconnection fees as well as an additional charge for after hour reconnections.  The Utility’s current miscellaneous service charges were approved in Order No. PSC-97-1546-FOF-WS.[17]   The miscellaneous service charges have not been updated since that time.  As presented in the cost justification, the Utility indicated that the total cost associated with connections, reconnections, violation reconnections, and premises visits during business hours is $28.90 and after hours rates are 1.5 times the normal business hours rates.  However, the Utility has requested a lower amount for miscellaneous service charges of $21.00 during business hours and $42.00 for after hours.  These charges are consistent with the majority of the miscellaneous service charges previously approved by the Commission.[18]

 

 

Table 13-1

           

            As indicated above, the miscellaneous service charges are based on the hourly rate of the contractor and transportation costs.  Staff believes the proposed cost-based charges are reasonable, and consistent with fees the Commission has approved for other utilities.[20] Based on the above, staff recommends that the Utility’s requested amount for miscellaneous service charges be approved so that the Utility is able to recover its costs of performing these services.  The tariff sheets containing the approved miscellaneous service charges should become effective for services rendered on or after the stamped approval date on the tariff sheet pursuant to Rule 25-30.475. 

 

Late Payment Charge

 

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.  The Utility’s request for a late payment fee was accompanied by its reason for requesting the fee, as well as the cost justification required by Section 367, F.S.  The Utility has requested a $5.25 late payment fee.  

Grenelefe requested that the cost basis be consistent with late payment fees the Commission has approved for other utilities.  The computation on the following page is consistent with prior Commission decisions.[21]

 

 

 

Table 13-2

 

The purpose of a late payment charge is not only to provide an incentive for customers to make timely payments, thereby reducing the number of delinquent accounts, but also to place the cost burden of processing such delinquencies solely upon those who are the cost causers.

 

            Based on the above, staff recommends that Grenelefe’s proposed late payment charge be approved.  The charges should be effective for services rendered on or after the stamped approval date on the tariff sheets pursuant to Rule 25-30.475, F.A.C.

 

Non-Sufficient Funds Fees

 

 

 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.  Grenelefe has requested an NSF fee in accordance with the Section 832.08(5), F.S. 

 

Staff believes that Grenelefe 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 Sections 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 Grenelefe’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.[22]  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 Grenelefe’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 within ten days of the date of the notice.  This notice may be combined with the notice required in other issues.

Issue 14: 

 What are the appropriate customer deposits for Grenelefe?

Recommendation: 

 The appropriate customer deposits to be charged 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. The Utility should be required to charge the approved charges until authorized to change them by the Commission in a subsequent proceeding.  (Bruce)

Staff Analysis: 

 The Utility requested authority to collect initial customer deposits pursuant to Section 367.091, F.S.  This statute authorizes the Commission to establish, increase, or change a rate or charge other than monthly rates or service availability charges.

Rule 25-30.311, F.A.C., contains the criteria for collecting, administering, and refunding customer deposits. Customer deposits are designed to minimize the exposure of bad debt expense for the Utility and, ultimately, the general body of ratepayers.  Historically, the Commission has set initial customer deposits equal to the amount of two months’ bills based on estimated average consumption for the customer class.[23]

  Staff notes that consumption-based charges are based on the prior month’s meter readings.  It generally takes five to seven days from the meter reading date until customers are billed.  Pursuant to Rule 25-30.335(4), F.A.C., payment may not be considered delinquent until 21 days after the bill is mailed or presented.  Pursuant to Rule 25-30.320(2)(g), F.A.C., a utility may discontinue service for nonpayment of bills, provided there has been a diligent attempt to have the customer comply and the customer has been provided at least five working days’ written notice.  It is likely that the service would not be disconnected until well after two months subsequent to the service being rendered.  Not only is collecting a customer deposit to recover this two-month period of service consistent with past practice, it is also consistent with one of the fundamental principles of rate making – ensuring that the cost of providing service is recovered from the cost causer.[24]

The Utility’s proposed initial customer deposits are $19.80 and $26.56 for 5/8” x 3/4” meters for water and wastewater, respectively. Furthermore, the Utility’s proposed initial customer deposits for non-potable are $16.48 for 5/8” x 3/4" meters; $100.46 for 1” meters; $110.38 for 1.5” meter; and $224.90 for 2” meters.  All other classes are two times the average estimated monthly bill for both water and wastewater.  These amounts were calculated in compliance with Rule 25-30.311(7), F.A.C.  These proposed charges are consistent with Commission rules and staff recommends they be approved in this case.

 

Issue 15: 

 Should the recommended rates be approved for the Utility on a temporary basis, subject to refund, in the event of a protest filed by a party other than the Utility?

Recommendation: 

 Yes.  Pursuant to Section 367.0814(7), F.S., the recommended rates should be approved for the Utility on a temporary basis, subject to refund, in the event of a protest filed by a party other than the Utility.  Grenelefe should 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 on the tariff sheet, pursuant to Rule 25-30.475(1), F.A.C.  In addition, the temporary rates should not be implemented until staff has approved the proposed notice, and the notice has been received by the customers.  Prior to implementation of any temporary rates, the Utility should provide appropriate security.  If the recommended rates are approved on a temporary basis, the rates collected by the Utility should be subject to the refund provisions discussed below in the staff analysis.  In addition, after the increased rates are in effect, pursuant to Rule 25-30.360(6), F.A.C., the Utility should file reports with the Commission Clerk’s Office no later than the 20th of each month indicating the monthly and total amount of money subject to refund at the end of the preceding month.  The report filed should also indicate the status of the security being used to guarantee repayment of any potential refund.  (Smith)

Staff Analysis: 

 This recommendation proposes an increase in water and wastewater rates.  A timely protest might delay what may be a justified rate increase resulting in an unrecoverable loss of revenue to the Utility.  Therefore, pursuant to Section 367.0814(7), F.S., in the event of a protest filed by a party other than the Utility, staff recommends that the recommended rates be approved as temporary rates.  Grenelefe should 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 on the tariff sheet, pursuant to Rule 25-30.475(1), F.A.C.  In addition, the temporary rates should not be implemented until staff has approved the proposed notice, and the notice has been received by the customers.  The recommended rates collected by the Utility should be subject to the refund provisions discussed below.

 

Grenelefe should be authorized to collect the temporary rates upon staff’s approval of an appropriate security for the potential refund and the proposed customer notice.  Security should be in the form of a bond or letter of credit in the amount of $86,849.  Alternatively, the Utility could establish an escrow agreement with an independent financial institution.

 

If Grenelefe chooses a bond as security, the bond should contain wording to the effect that it will be terminated only under the following conditions:

 

1)                  The Commission approves the rate increase; or,

 

2)                  If the Commission denies the increase, the Utility shall refund the amount collected that is attributable to the increase.

 

            If Grenelefe chooses a letter of credit as a security, it should contain the following conditions:

1)         The letter of credit is irrevocable for the period it is in effect, and,

 

2)         The letter of credit will be in effect until a final Commission order is rendered, either approving or denying the rate increase.

 

            If security is provided through an escrow agreement, the following conditions should be part of the agreement:

 

1)         No monies in the escrow account may be withdrawn by the Utility without the express approval of the Commission;

 

2)         The escrow account shall be an interest bearing account;

 

3)         If a refund to the customers is required, all interest earned by the escrow account shall be distributed to the customers;

 

4)         If a refund to the customers is not required, the interest earned by the escrow account shall revert to Grenelefe;

 

5)         All information on the escrow account shall be available from the holder of the escrow account to a Commission representative at all times;

 

6)         The amount of revenue subject to refund shall be deposited in the escrow account within seven days of receipt;

 

7)         This escrow account is established by the direction of the Florida Public Service Commission for the purpose(s) set forth in its order requiring such account.  Pursuant to Cosentino v. Elson, 263 So. 2d 253 (Fla. 3d DCA 1972), escrow accounts are not subject to garnishments;

 

8)                  The Commission Clerk must be a signatory to the escrow agreement; and,

 

9)                  The account must specify by whom and on whose behalf such monies were paid.

 

In no instance should the maintenance and administrative costs associated with the refund be borne by the customers.  These costs are the responsibility of, and should be borne by, the Utility.  Irrespective of the form of security chosen by Grenelefe, an account of all monies received as a result of the rate increase should be maintained by the Utility.  If a refund is ultimately required, it should be paid with interest calculated pursuant to Rule 25-30.360(4), F.A.C. 

 

Grenelefe should maintain a record of the amount of the bond, and the amount of revenues that are subject to refund.  In addition, after the increased rates are in effect, pursuant to Rule 25-30.360(6), F.A.C., the Utility should file reports with the Commission Clerk’s Office no later than the 20th of each month indicating the monthly and total amount of money subject to refund at the end of the preceding month.  The report filed should also indicate the status of the security being used to guarantee repayment of any potential refund.

Issue 16: 

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

Recommendation: 

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

Staff Analysis: 

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

Issue 17: 

 Should this docket be closed?

Recommendation: 

 No.  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the 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.  Once these actions are complete, this docket should be closed administratively.  (Tan, Smith)

Staff Analysis: 

 No.  If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the 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.  Once these actions are complete, this docket should be closed administratively.