DATE:	August 15, 2013
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Accounting and Finance (Fletcher, Maurey) Division of Economics (Roberts, Hudson) Division of Engineering (Watts, Rieger) Office of the General Counsel (Barrera)
RE:	Docket No. 120317-WS – Application for approval to transfer water and wastewater system and Certificate Nos. 567-W and 494-S in Lake County from Shangri-La by the Lake Utilities, Inc. to Lakeside Waterworks, Inc.
AGENDA:	08/27/13 – Regular Agenda – Proposed Agency Action for Issue 2 – Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Edgar
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\AFD\WP\120317.RCM.DOC

 

 Case Background

Shangri-La by the Lake Utilities, Inc. (Shangri-La or Utility or Seller) is a Class C water and wastewater utility serving approximately 186 water and 179 wastewater customers in Lake County.  The Utility was granted Certificate Nos. 567-W and 494-S on January 12, 1996, by Order No. PSC-96-0062-FOF-WS.^[1]  The Utility has had two subsequent amendments.^[2] According to the Utility’s 2012 annual report, total gross revenues were $34,658 for water and $25,799 for wastewater, and total operating expenses were $34,639 for water and $39,425 for wastewater.

On December 20, 2012, an application was filed for the transfer of the Shangri-La’s water and wastewater systems, and Certificate Nos. 567-W and 494-S, to Lakeside Waterworks, Inc. (Lakeside or Buyer).  The closing is contingent upon Commission approval.  The Utility also has a staff-assisted rate case pending in Docket No. 130194-WS.  The Commission has jurisdiction pursuant to Section 367.071, Florida Statutes, (F.S.).

Discussion of Issues

Issue 1: 

 Should the Commission approve the transfer of Shangri-La by the Lake Utilities, Inc. water and wastewater system and Certificate Nos. 567-W and 494-S to Lakeside Waterworks, Inc.?

Recommendation: 

 Yes.  The transfer is in the public interest and should be approved effective the date of the Commission vote.  The territory being transferred is described in Attachment A.  The resultant order should serve as Lakeside’s water and wastewater certificates and should be retained as such.  Pursuant to Rule 25-9.044(1), Florida Administrative Code (F.A.C.),  the Utility’s existing rates and charges should remain in effect until a change is authorized by the Commission in a subsequent proceeding.  The tariffs reflecting the transfer should be effective for services rendered or connections made on or after the stamped approval date on the tariffs, pursuant to Rule 25-30.475(1), F.A.C.  Lakeside should be responsible for annual reports and regulatory assessment fees (RAFs) for 2013 and all future years.  (Fletcher, Roberts, Watts)

Staff Analysis: 

 On December 20, 2012, an application was filed for approval of the transfer of Shangri La’s water and wastewater system and Certificate Nos. 567-W and 494-S to Lakeside in Lake County.  The application is in compliance with the governing statutes, Section 367.071, F.S., and administrative rules concerning applications for transfer of certificates.  The closing occurred on October 18, 2012, contingent upon Commission approval, pursuant to Section 367.071(1), F.S.

Noticing, Territory, and Land Ownership

The application contains proof of compliance with the noticing provisions set forth in Section 367.071, F.S., and Rule 25-30.030, F.A.C.  No objections to the transfer were timely filed with the Commission.  The application contains a description of the Utility’s authorized service territory, which is appended to this recommendation as Attachment A.  The application contains a copy of a 99-year land lease that was executed on November 16, 2012, as evidence that Lakeside has continued use of the land upon which the water and wastewater treatment facilities are located.

Purchase Agreement and Financing

Pursuant to Rule 25-30.037(2)(h), F.A.C., the application contains a copy of the executed purchase agreement, which includes the purchase price, terms of payment, and a list of the assets purchased.  The Utility’s assets were purchased by Lakeside for $85,000.  There are no guaranteed revenue contracts, developer agreements, or debt of Shangri La that must be disposed of with regard to the transfer.  Customer deposits were transferred from Shangri-La to Lakeside and have been credited to customer accounts.  As noted, the sale took place on October 18, 2012, subject to Commission approval, pursuant to Section 367.071(1), F.S.

Facility Description and Compliance

Shangri-La’s water system consists of two wells (one 6-inch and one 8-inch) treated with chlorine.  The treated water is channeled into a 3,000-gallon hydropneumatic tank, a 5,000-gallon hydropneumatic tank, and a 15,000-gallon storage tank for distribution to customers.  The wastewater system includes PVC collection lines, 15 manholes, and 4 lift stations.  The treatment process consists of activated sludge and effluent discharge into spray fields.  Staff has verified that the water and wastewater systems are currently in substantial compliance with all applicable standards set by the Florida Department of Environmental Protection.

Technical and Financial Ability

 

Pursuant to Rule 25-30.037(2)(j), F.A.C., the application contains a statement indicating that the transfer is in the public interest.  The application also included information attesting to the fact that Lakeside’s president, Mr. Gary Deremer, has 27 years of experience in the water and wastewater industry, including utility ownership in the following systems previously regulated by the Commission and subsequently sold to FGUA:

Utility System	Location
Holiday Utility System	Holiday, FL
Virginia City Utility System	New Port Richey, FL
Dixie Groves Utility System	Holiday, FL
Colonial Manor Utility System	Holiday, FL
Pasco Utilities, Inc.	Zephyrhills, FL

 

 

 

 

 

In addition, Lakeside’s vice president, Mr. Cecil Delcher, has approximately 35 years in operations and construction, including private utility ownership.  According to the application, both Mr. Deremer and Mr. Delcher have operated more than 450 facilities within the State of Florida, including customer service to more than 70,000 customers daily.  Lakeside has attested to the fact that the Utility has secured the services of U.S. Water Services Corporation to provide operating, billing, and collection services required to maintain the Utility.  Staff also obtained the personal financial statements for the President and Vice President of Lakeside.^[3]  The purchase of the water and wastewater systems for $85,000 will be a cash transaction.  Based on the above, it appears that Lakeside has demonstrated its technical and financial ability to provide service to the existing service territory.

Rates and Charges

The Utility’s initial rates and charges were granted in an application for certificate in 1996.^[4]  In 2000,  the rates and charges were adjusted, and a new class of service for irrigation was approved by the Commission.^[5]   Also, the Utility’s rates were indexed in 2012.  The Utility’s existing rates and charges are shown on Schedule Nos. 3 and 4.  Rule 25-9.044(1), F.A.C., provides that, in the case of a change of ownership or control of a utility, the rates, classifications, and regulations of the former owner must continue unless authorized to change by the Commission.  Therefore, staff recommends that the Utility’s existing rates and charges remain in effect until a change is authorized by the Commission in a subsequent proceeding.

Regulatory Assessment Fees (RAFs) and Annual Reports

Staff has verified that the Utility is current on its annual report for 2012 including all prior years and there are no outstanding RAFs, fines or refunds due.  According to the application, Lakeside will be responsible for filing the annual reports and paying RAFs for 2013 and all future years.

 

Conclusion

 

Based on the above, staff recommends that the transfer of Shangri-La’s water and wastewater systems and Certificate Nos. 567-W and 494-S to Lakeside is in the public interest and should be approved effective the date of Commission vote.  The territory being transferred is described in Attachment A.  The resulting order should serve as Lakeside’s water and wastewater certificates and should be retained as such.  The Utility’s existing rates and charges should remain in effect until a change is authorized by the Commission in a subsequent proceeding.  The tariffs reflecting the transfer should be effective for services rendered or connections made on or after the stamped approval date on the tariffs, pursuant to Rule 25-30.475(1), F.A.C.  Lakeside should be responsible for annual reports and RAFs for 2013 and all future years.

Issue 2:  What are the appropriate net book values for Shangri-La's water and wastewater systems for transfer purposes and should an acquisition adjustment be approved?

Recommendation: 

 The net book value of Shangri La’s water and wastewater system for transfer purposes is $22,370 and $42,984, respectively, as of December 31, 2012.  An acquisition adjustment should not be included in rate base.  Within 30 days of the final order,  Lakeside should be required to provide general ledgers that show its books have been updated to reflect the Commission-approved balances as of December 31, 2012, along with a statement that these adjustments will also be reflected in the Utility’s 2013 annual report.  (Fletcher)

Staff Analysis: 

 Rate base for the Utility’s water and wastewater system was established as of June 30, 1994, pursuant to Order No. PSC-0259-PAA-WS.^[6]  An audit was conducted to establish rate base as of March 31, 2011, in Docket No. 110130-WS.^[7]  That docket was subsequently withdrawn.  However, the audit was used in determining the net book value (NBV) at the time of transfer in the instant docket.  The purpose of establishing NBV for transfers is to determine whether an acquisition adjustment should be approved.  The NBV does not include normal ratemaking adjustments for used and useful plant or working capital.  Staff’s recommended NBV for water and wastewater, as described below, are shown on Schedule Nos. 1 and 2, respectively.

Utility Plant in Service (UPIS)

            In its 2012 annual report, Shangri-La reflected plant balances of $0 for both water and wastewater.  After reviewing the audit report issued in Docket No. 110130-WS, staff has determined that the Commission-ordered adjustments from the Utility’s last rate proceeding had not been made and that subsequent plant additions should have been included in UPIS.  By Order No. PSC-0259-PAA-WS, the Commission-approved UPIS balances of $79,127 and $86,332 for water and wastewater, respectively.  Audit staff reconciled the beginning balances, including Commission-ordered adjustments, with the Utility’s books and records, and traced the plant additions and retirements from July 1, 1994, to March 31, 2011.  Additionally, Shangri-La provided an update of UPIS items through December 31, 2012.  Based on the above, staff has determined that UPIS should be increased by $56,588 for water, and $63,284 for wastewater to reflect plant additions.  Also, staff has determined that UPIS should be decreased by $1,179 for water and $4,816 for wastewater to reflect plant retirements.  Therefore, staff recommends that the appropriate UPIS balances as of December 31, 2012, of $134,536 for water and $144,800 for wastewater.  The appropriate UPIS amounts for the Utility’s water and wastewater systems are shown on Schedule Nos. 1 and 2, respectively.

Land and Land Rights

            The appropriate land value has never been established for Shangri-La.  Rule 25-30.037(2)(q), F.A.C., requires that the application for transfer include “evidence that the utility owns the land upon which the utility treatment facilities are located, or a copy of an agreement which provides for the continued use of the land, such as a 99-year lease.”  Included in its application, the Utility provided a 99-year lease for the water and wastewater facilities including all lines and lift stations.  Staff believes that the lease satisfies the requirements of Rule 25-30.037(2)(q), F.A.C.  Although the amount included in the lease may be considered rent expense for future ratemaking purposes, this amount has no effect on land and land rights.  Staff recommends land and land rights for both water and wastewater is $0.

Accumulated Depreciation

            As noted above, staff determined that the Utility did not make the adjustments to the plant accounts required in its last rate proceeding.  In its 2012 annual report, the Utility reflected accumulated deprecation balances of $0, for both water and wastewater.  Using the previously approved plant balances and depreciation rates as per Rule 25-30.140, F.A.C., accumulated depreciation should be $104,221 for water and $89,658 for wastewater as of December 31, 2012.  Staff recommended accumulated depreciation balances are shown on Schedule Nos. 1 and 2.

Contribution in Aid of Construction (CIAC) and Accumulated Amortization

In its 2012 annual report, the Utility reflected CIAC balances of $0, for both water and wastewater.  As previously mentioned, an audit was conducted in Docket No. 110130-WS, and it was recommended that $13,776 and $18,257 were the appropriate amounts of CIAC for water and wastewater, respectively.  No additions have been made subsequent to the last rate proceeding; therefore, staff recommends an increase of $13,776 for water and $18,257 for wastewater to reflect the corrected balances for the Utility’s water and wastewater systems.

The accumulated amortization of CIAC balances were adjusted by $5,830 for water and $6,099 for wastewater prior Commission-ordered adjustments that were not made.  Staff recommends that the Utility’s accumulated amortization of CIAC balances as of December 31, 2012, are $5,830 for water and $6,099 for wastewater.  These adjustments are shown on Schedule Nos. 1 and 2.

Net Book Value

            Based on the adjustments described above, staff recommends that the NBV of the Utility’s water system is $22,370, and the NBV of the Utility’s wastewater system is $42,984, as of December 31, 2012.  Schedule Nos. 1 and 2 contain the resulting NARUC USOA balances for UPIS and accumulated depreciation as of December 31, 2012, for water and wastewater, respectively.

Acquisition Adjustment

An acquisition adjustment results when the purchase price of a utility differs from the original cost of the assets adjusted to the NBV.  The Utility and its assets were purchased for $85,000.  As stated above, staff has determined the appropriate NBV to be  $22,370 for the water system and $42,539 for the wastewater system.  Pursuant to Rule 25-30.0371(2), F.A.C., a positive acquisition adjustment may be appropriate when the purchase price is greater than the NBV, and a negative acquisition adjustment may be appropriate when the purchase price is less than NBV.  Based on this methodology, a positive acquisition adjustment could be included in rate base.  However, Rule 25-30.0371(2), also states that,

 

Any entity that believes that a full or partial positive acquisition adjustment should be made has the burden to prove the existence of extraordinary circumstances.  In determining whether extraordinary circumstances have been demonstrated, the Commission shall consider evidence provided to the Commission such as anticipated improvements in quality of service, anticipated improvements in compliance with regulatory mandates, anticipated rate reductions or rate stability over a long-term period, anticipated cost efficiencies, and whether the purchase price was made as part of an arms-length transaction.

 

            In this case, the Buyer stated in the application that Lakeside was not seeking an acquisition adjustment.  Given that the Buyer did not request an acquisition adjustment and there is no evidence of extraordinary circumstances, staff recommends that no acquisition adjustment be made in this case.

Conclusion

Based on the above, staff recommends that the NBV of the Utility’s water system is $22,370 and its wastewater system is $42,984, as of December 31, 2012.  A positive acquisition adjustment should not be included in rate base.  Within 30 days of the date of the final order, Lakeside should be required to provide general ledger balances, which show its books have been updated to reflect the Commission-approved balances as of December 31, 2012, along with a statement that these numbers will also be reflected in the Utility’s 2013 annual report.

Issue 3: 

 Should this docket be closed?

Recommendation: 

 Yes.  If no protest to the proposed agency action issue is filed by a substantially affected person within 21 days of the date of the order, the docket should be closed upon the issuance of a consummating order.  (Barrera, Fletcher)

Staff Analysis: 

 If no protest to the proposed agency action issue is filed by a substantially affected person within 21 days of the date of the order, the docket should be closed upon the issuance of a consummating order.

Attachment A

Page 1 of 2

 

LAKESIDE WATERWORKS, INC.

 

Lake County

 

Description of Water and Wastewater Territory

 

PER ORDER NO. PSC-96-0062-FOF-WS

The following described lands located in Section 6, Township 19 South, Range 26 East, Lake County, Florida:

 

Begin for a Point of Beginning at the Southeast corner of Section 6, Township 19 South, Range 26 East, Lake County, Florida, also described as the Southwest corner of Government Lot 9 of said Section 6, run thence N. 0°28’58” E. a distance of 1285.90 feet to the Northwest corner of said Government Lot 9, run thence North 89°59’40” E. a distance of 2711.55 feet, more or less to the waters of Lake Eustis to a point hereby designated as Point “A”; begin again at the point of beginning and run East along the South line of said Section 6 a distance of 1363.00 feet, run thence North 100.00 feet, run thence East 450.00 feet, more or less, to the waters of Lake Eustis, run thence in a Northeasterly direction along the waters of Lake Eustis t the aforesaid point “A” and point of termination.

 

Also, the South 685 feet of the East 380 feet of the Southeast ¼ of the Southeast ¼ of Section 1, Township 19 South, Range 35 East.  Less the East 50 feet and less the South 25 feet thereof.

 

PER ORDER NO. PSC-06-0095-FOF-WS

 

PARCEL 1 (HARBOR SHORES) WATER SERVICE ONLY:

 

That part of Government Lot 7, Section 6, Township 19 South, Range 26 East, Lake County, Florida, being described as follows:

 

Commence at the Southwest corner of Government Lot 7, thence run North 89°2652 East along the South line of Government Lot 7, 66.00 feet to the Southerly extension of the East right of way line of Harbor Shores Drive; thence run North 00°0408 West along said Southerly extension, 33.00 feet to the intersection of the North right of way line and East right of way line of said Harbor Shores Drive for the Point of Beginning; thence run  North 00°04'08" West along said east right of way line, 951.09 feet to a point 300.00 feet south of the northwest corner of Government Lot 7; thence run North 89°26'52" East parallel with the North line of Government Lot 7, 726.00 feet; thence run  North 00°04'08" West parallel with the West line of Government Lot 7, 300.00 feet to a point 759.00 East of the Northwest corner of Government Lot 7; thence run North 89°26'52" East along said North line, 594.19 feet to the meander line as

Attachment A

Page 2 of 2

 

established by U.S. General Land Office in 1926; thence run  South 02°31'38" East along said meander line, 299.29 feet; thence continue along said meander line  South 29°50'19" West, 667.71 feet to the Westerly right of way line of Harbor Shores Drive; thence run South 39°23'45" West along said Westerly right of way line, 490.42 feet to the intersection of the North right of way line and Westerly right of way line of Harbor Shores Drive; thence run South 89°26'52" West along said North right of way line, 688.37 feet to the Point of Beginning.

 

PARCEL 2 (INSIM ESTATES) WATER AND WASTEWATER SERVICE:

 

That part of Government Lots 7 and 12, Section 6, Township 19 South, Range 26 East, Lake County, Florida, being described as follows:

 

Commence at the Southwest corner of Government Lot 7, thence run North 89°26’52” East along the South line of Government Lot 7, 813.11 feet to the Easterly right of way line of Harbor Shores Drive for the Point of Beginning; thence run North 39°23'45" East along said Easterly right of way line, 130.44 feet to a line 100 feet North of, when measured perpendicular to, the South line of Government Lot 12; thence run North 89°26'52" East along said line 100 feet North of Government Lot 12, 784 feet more or less to the water’s edge of Lake Eustis; thence run Southwesterly along said water’s edge to the South line of Government Lot 12; thence run South 89°26'52" West along the South line of Government Lot 12 and 7, 790 feet more or less to the Point of Beginning.

 

PER ORDER NO. PSC-06-0106-FOF-WS

 

AMENDMENT TO WATER AND WASTEWATER SERVICE TERRITORY FOR    SHANGRI-LA-BY-THE-LAKE UTILITIES, INC. IN LAKE COUNTY

That portion of Section 6, Township 19 South, Range 26 East and that portion of Section 7, Township 19 South, Range 26 East, all in Lake County, Florida bounded and described as follows:

Beginning at the Southwest corner of said Section 6, said corner also being the Northwest corner of said Section 7 run thence East 1363 feet to a point on the South line of said Section 6; thence North, 100.00 feet; thence East 450 feet, more or less, to the waters of Lake Eustis and a point hereby designated as point “A”. 

Thence return to the Point of Beginning and run South 00º09'59" East, 460.00 feet along the West line of said Section 7; thence South 63º00'00" East to the waters of Lake Eustis, thence Northerly and Easterly along and with the said waters of Lake Eustis to the aforementioned point “A” for Point of Terminus.

 

 

 

Attachment B

Page 1 of 2

 

 

FLORIDA PUBLIC SERVICE COMMISSION

 

Authorizes

 

Lakeside Waterworks, Inc., Inc.

 

Pursuant to

 

Certificate Number 567-W

 

to provide water service in Lake County in accordance with the provisions of Chapter 367, Florida Statutes, and the Rules, Regulations, and Orders of this Commission in the territory described by the Orders of this Commission.  This authorization shall remain in force and effect until superseded, suspended, cancelled or revoked by Order of this Commission.

 

Order Number                         Date Issued      Docket Number           Filing Type

 

PSC-96-0062-FOF-WS         01/12/1996      940653-WS                 Original Certificate

 

PSC-06-0062-FOF-WS         02/10/2006      050875-WS                 Certificate Amendment

 

PSC-06-0106-FOF-WS         02/13/2006      050642-WS                 Certificate Amendment

 

*                                              *                      120317-WS                 Transfer

 

 

*Order Number and date to be provided at time of issuance.

Attachment B

Page 2 of 2

 

 

FLORIDA PUBLIC SERVICE COMMISSION

 

Authorizes

 

Lakeside Waterworks, Inc.  

 

Pursuant to

 

Certificate Number 494-S

 

to provide wastewater service in Lake County in accordance with the provisions of Chapter 367, Florida Statutes, and the Rules, Regulations, and Orders of this Commission in the territory described by the Orders of this Commission.  This authorization shall remain in force and effect until superseded, suspended, cancelled or revoked by Order of this Commission.

 

Order Number                         Date Issued      Docket Number           Filing Type

 

PSC-96-0062-FOF-WS         01/12/1996      940653-WS                 Original Certificate

 

PSC-06-0062-FOF-WS         02/10/2006      050875-WS                 Certificate Amendment

 

PSC-06-0106-FOF-WS         02/13/2006      050642-WS                 Certificate Amendment

 

*                                              *                      120317-WS                 Transfer

 

 

*Order Number and date to be provided at time of issuance.

 

Schedule No. 1

Page 1 of 3

 

Schedule No. 1

Page 2 of 3

 

 

Schedule No. 1

Page 3 of 3

 

 

Schedule No. 2

Page 1 of 3

 

 

Schedule No. 2

Page 2 of 3

 

 

Schedule No. 2

Page 3 of 3

 

 

Schedule No. 3

Lakeside Waterworks, Inc.

 Lake County

Water

Schedule No. 4

Lakeside Waterworks, Inc.

 Lake County

Wastewater