DATE:	October 14, 2013
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Engineering (Rieger, L'Amoreaux) Division of Accounting and Finance (Fletcher) Division of Economics (Bruce, Hudson) Office of the General Counsel (Brownless, Crawford)
RE:	Docket No. 130010-WS – Application for increase in water rates in Lee County and wastewater rates in Pasco County by Ni Florida, LLC.
AGENDA:	10/24/13 – Regular Agenda – Proposed Agency Action except for Issues 19 and 20.  Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Graham
CRITICAL DATES:			PAA five month deadline:  November 4, 2013
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ENG\WP\130010.RCM.10-24-2013.DOC

 

 Case Background

Ni Florida, LLC (Ni Florida or Utility) is a Class A utility serving approximately 744 water connections in Lee County and 2,583 wastewater connections in Pasco County.  Water rates were last established for this Utility in 2011.^[1]  Wastewater rates were last established for this Utility in 2010.^[2]  On February 27, 2013, Ni Florida filed an application with the Florida Public Service Commission (Commission) for an increase in its rates and charges for water and wastewater service.

 

Ni Florida had deficiencies in the Minimum filing Requirements (MFRs).  The deficiencies were corrected and June 4, 2013, was established as the official filing date.  The Utility requested that the application be processed using the Proposed Agency Action (PAA) procedure and did not request interim rates.  The historic test year established for final rates is the period ending September 30, 2012.

 

By Order No. PSC-13-0179-PCO-WS, the Commission suspended the final water and wastewater rates proposed by the Utility to allow staff sufficient time to process this case.^[3]  In its filing, the Utility requested final revenue increases of $52,030 (21.1 percent) for water and $337,300 (19.3 percent) for wastewater.

 

By Order No. PSC-13-0218-PCO-WS, issued May 23, 2013, the Commission acknowledged Pasco County’s intervention in this docket pursuant to Section 367.091(2), Florida Statutes (F.S.)

 

The recommendation addresses Ni Florida’s requested final rates.  The Commission has jurisdiction pursuant to Sections 367.081 and 367.082, F.S.

 

 

Table of Contents

 

 

Case Background. 1

Issue 1:  Quality of Service (L’Amoreaux, Rieger, Bruce) 2

Issue 2:  Agreed Upon Audit Adjustments (Fletcher) 2

Issue 3:  Pro Forma Plant Additions (Fletcher, Rieger) 2

Issue 4:  Used and Useful (Rieger, L’Amoreaux) 2

Issue 5:  Working Capital (Fletcher) 2

Issue 6:  Rate Base (Fletcher) 2

Issue 7:  Return on Equity (Fletcher) 2

Issue 8:  Weighted Average Cost of Capital (Fletcher) 2

Issue 9:  Test Year Revenues (Bruce) 2

Issue 10:  Test Year Expenses (Fletcher) 2

Issue 11:  Allocated Parent Overhead (Fletcher) 2

Issue 12:  Rate Case Expense (Fletcher) 2

Issue 13:  Bad Debt Expense (Fletcher, Hudson) 2

Issue 14:  Pro Forma Expenses (Fletcher, Rieger) 2

Issue 15:  Revenue Requirement (Fletcher) 2

Issue 16:  Rate Structure (Bruce) 2

Issue 17:  Elder Valve Installation Fee (Bruce) 2

Issue 18:  Customer Deposits (Bruce) 2

Issue 19:  Four-Year Rate Reduction (Bruce) 2

Issue 20:  Proof of Adjustments (Fletcher) 2

Issue 21:  Docket Closure (Brownless, Rieger) 2

Schedule No. 1-A – Water Rate Base. 2

Schedule No. 1-B – Wastewater Rate Base. 2

Schedule No. 1-C – Adjustments to Rate Base. 2

Schedule No. 2 – Capital Structure. 2

Schedule No. 3-A – Water Operating Income. 2

Schedule No. 3-B – Wastewater Operating Income. 2

Schedule No. 3-C – Adjustments to Operating Income. 2

Schedule No. 4-A – Monthly Water Rates. 2

Schedule No. 4-B – Monthly Wastewater Rates. 2

 

Discussion of Issues

Issue 1:  Is the quality of service provided by Ni Florida satisfactory?

Recommendation:  The overall quality of water and wastewater services provided by Ni Florida should be considered satisfactory.  (L’Amoreaux, Rieger, Bruce)

 

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 separate 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’s satisfaction.  Comments or complaints received by the Commission from customers are also reviewed.  The Utility’s compliance with the Department of Environmental Regulation (DEP) regulations is also considered.

 

Quality of Utility’s Product and Operating Condition of Utility’s Plant and Facilities

 

            Ni Florida provides water to customers in Lee County and wastewater service in Pasco County (County).  Ni Florida purchases all of the water it sells to customers from Lee County Utilities.  The Utility maintains and operates the distribution system that delivers the treated water to its customers.  There are currently no issues with Ni Florida’s water system and the customers seem satisfied with the quality of water the Utility provides. 

 

Ni Florida’s wastewater collection system is located in Pasco County.  All wastewater is pumped to Pasco County for treatment and disposal pursuant to an agreement made in 1990.  By Order No. PSC-10-0168-PAA-SU, issued March 23, 2010, in Docket No. 090182-SU (the last rate case), it was noted that the Utility’s wastewater collection system in Pasco County had problems with elevated chloride concentrations.  Pasco County had identified the Utility as a high chloride source and required it to meet 250 milligrams per liter (mg/l) chloride levels as part of the contractual agreement for wastewater service.  In that case, the Commission determined the overall quality of service was marginal because the 250 mg/l chloride level had not yet been achieved.  In Pasco County’s petition to intervene in the present case,^[4] the County alleges the service charges for maintenance related to inflow and infiltration (I&I) are not accurately stated by the Utility.  The County believes that Ni Florida is in breach of its contract with Pasco County because it has failed to stem the infiltration of salt water into its collection system, which results in Pasco County being in non-compliance with state regulatory standards.  The County believes the Commission must consider operating expenses and environmental compliance costs.

 

            In a May 31, 2013, letter to the County, the Utility stated it had made over $1,031,000 in capital expenditures to the collection system since the 2008 purchase and continues to address the chloride issue and its contractual obligations.  Attached to the letter were several reports and summaries, addressing the Utility’s chloride reduction efforts.  With a weighted average base flow, a chloride amount of 538.5 mg/l was recorded for 2012.  Although the chloride levels still exceed the level required by the County, the Utility pointed out in its letter that it is important to remember that tap water enters the system with elevated chloride levels, so minor leaks in the pipeline can bring sampled levels to the 250 mg/l level.  The Utility believes factors other than inflow and infiltration (I&I) affect the chloride level of the Utility’s system including, but not limited to, commercial water softeners, residential water softeners, and salt water pools.  Also, the Utility noted in the letter to the County that its collection system is on the coast, and every storm or related activity adds to the normal problems any system experiences.

           

In addition to the collection system improvements made by the Utility since the 2008 purchase, the current rate case filing also indicated that $577,500 in additional pro forma capital expenditures are planned.  The pro forma improvements related to chloride reduction include lift station flow monitoring and sampling device installations, and sewer line rehabilitation and replacement.  Also, to reflect a line cleaning and collection system repair program, the Utility proposes an annual pro forma expense of $100,000.  These pro forma plant, operational and maintenance expenses are discussed further in Issues 3 and 14.  Staff believes that the Utility is addressing the chloride levels to achieve compliance with the Pasco County agreement.  Most of the pro forma improvements have been or will soon be completed by the Utility, and the most recent chloride level tests at its largest flow lift station indicate a 310 mg/l chloride level.  Recent tests also show that all the Utility’s other lift stations flowing to Pasco County now have chloride levels below the 250 mg/l target.  Although the County maintains the costs of treatment is understated in Ni Florida’s filing, it has not indicated what it believes the correct costs should be.  The County’s contract with Ni Florida for bulk wastewater treatment is not under the jurisdiction of the PSC and disputes concerning the contract are properly resolved in circuit court.

 

A staff field investigation of Ni Florida’s service area was conducted on August 14, 2013, in Pasco County for wastewater and August 15, 2013 in North Fort Myers Florida for water.  The wastewater and water facilities were in good working order and no deficiencies were observed.  The Utility’s systems are meeting all DEP requirements and appear to be operating properly.  Improvement projects are underway and are intended to help the Utility operate more efficiently and reduce the chloride levels as discussed above.  Staff believes that the Utility is showing initiative in its action plan and is working on correcting collection system operational issues.  Therefore, staff recommends that the quality of the wastewater and water product and the operational condition of the facilities be considered satisfactory.

 

Utility’s Attempt to Address Customer Satisfaction

 

Customer meetings were held on August 14, 2013, in New Port Richey, Florida and on August 15, 2013, in the Tamiami Village Clubhouse, in North Ft. Myers, Florida.  At the customer meeting in New Port Richey, approximately eight customers attended and four customers spoke.  At the customer meeting in North Ft. Myers, approximately thirty customers attended and five spoke.  Representatives of the Utility and the Office of Public Counsel were also present at both meetings.  In addition, a County Commissioner from Pasco County was present and made comments.  Staff explained the rate making process to the customers and followed up on specific inquires about cost allocation, rate of return, and rate base calculations.  Other customer comments dealt mainly with their opposition to the level of the rate increase and the burden it would place on the residents of the retirement community who live on fixed incomes.

 

One of the customers in New Port Richey spoke concerning Ni Florida’s policy regarding the initiation of service.  The customer purchased property and the Utility started billing for wastewater service eight months before service was requested.  In accordance with the Utility’s tariff, the initiation, continuation or resumption of water service to a customer’s property constitutes the initiation, continuation or resumption of wastewater service regardless of occupancy.  The customer’s meters were read for billing and indicated that water usage was detected at the customer’s property; therefore, staff believes the customer was charged properly for wastewater services. 

 

Customer concerns in North Fort Myers dealt with two main issues.  The first concern dealt with boil water notices.  A representative of Tamiami Village Clubhouse and other customers complained about:  (1) the number of notices; and (2) that sometimes notices were not given to the whole community.  In addition, customers stated that Ni Florida would leave the distribution of the notices up to the Tamiami Village Clubhouse representative for disbursement.  In a data request to the Utility about the customer meetings, Ni responded:

           

Boil water notices are proper and necessary way to inform customers that the water may be unsafe to drink for a period of time due to a water line break or other conditions.  As per an agreement requested by the management of Tamiami Village, and in an attempt to keep the management aware of all issues related to water provided to the community, Tamiami Village is emailed the boil water notice, then prints and collates them and gives them to [Ni Florida employee] for distribution to the affected customers.  Utility Group [of] Florida [LLC] is charged and Tamiami Village is paid on a per-event basis for this service.

 

In addition, Ni Florida explained that since acquiring the water system the Utility has installed isolation valves throughout Tamiami Village.  Therefore, when a leak does occur, only the affected street would need to be notified.  This has significantly improved uninterrupted service for all customers.

           

The second issue concerned Ni Florida’s customer call center.  Many customers expressed difficulty in contacting a representative.  In response, the Utility stated that it had experienced higher than usual call volumes over the past several months due to transitioning from the Florida call center to the Ni America call center.  In addition, the Utility expressed that numerous call center improvements have been made including additional personnel and improved telephone software.  Staff believes Ni Florida is taking steps to improve the call center and will continue to monitor the situation.

           

A review of all customer complaints received on the Commission’s complaint tracking system in the last three years revealed 26 complaints.  Of the 26 complaints, 21 were related to billing issues and have been subsequently resolved.  There is currently only one open complaint in the tracking system concerning quality of service.  This complaint deals with a possible break in the wastewater line leading to wastewater spillage in a nearby canal.  After investigation, it appears the Utility is addressing this situation with new construction in the area.  Staff will continue to follow this complaint to ensure it is resolved. 

 

Conclusion

 

            In summary, Ni Florida meets all the DEP required testing and maintenance standards for the water distribution and wastewater collection systems.  The distribution and collection systems are operating normally, and the Utility appears to address customer complaints in a timely manner.  Staff believes that the overall quality of water and wastewater services provided by Ni Florida should be considered satisfactory.

 

Issue 2: 

 Should the audit adjustments to rate base and operating expenses agreed to by the Utility be made?

Recommendation:  Yes.  Based on audit adjustments agreed to by the Utility, staff recommends that:  (1) plant be increased by $88 for water and decreased by $442 for wastewater; (2) accumulated depreciation be reduced by $185 for water and $9,467 for wastewater; (3) deprecation expense be increased by $3,872 for water and decreased by $1,224 for wastewater; (4) wastewater contribution in aid of construction (CIAC) be decreased by $575; (5)  wastewater accumulated amortization of CIAC be increased by $11,479; (6) working capital be decreased by $42,277 for water and increased by $41,229 for wastewater; (7) wastewater revenues be increased by $1,681; and (8) operation and maintenance (O&M) expenses be reduced by $5,462 for water and $14,905 for wastewater.  (Fletcher)

 

Staff Analysis:  In its response to staff’s audit report, Ni Florida agreed to the adjustment amounts listed below in Table 2-1.  Staff recommends the following adjustments to rate base and operating expenses.

 

Table 2-1

Adjustment to Rate Base and Operating Expenses

 

 

Issue 3: 

 Should adjustments be made to the Utility’s pro forma wastewater plant additions?

Recommendation:  Yes.  The Utility’s pro forma wastewater plant additions should be decreased by $189,584.  Accordingly, wastewater accumulated depreciation and depreciation expense should be decreased by $195,356 and $12,174, respectively.  In addition, property taxes should be increased by $9,143.  Further, consistent with Rule 25-30.433(9), F.A.C., the Utility should be allowed to recover an annual amortized loss of $7,799 on the forced abandonment of lines on US Highway 19.  (Fletcher, Rieger)

 

Staff Analysis:  Ni Florida included $577,500 of pro forma wastewater plant additions in its MFRs.  The following table reflects each requested pro forma plant addition.

 

Table 3-1

Pro Forma Plant Addition

 

In response to a staff data request, the Utility provided the following justifications for each plant addition:  (1) Delmar LS refurbishment is due to the deterioration of the facility wall; (2) Flounder LS fence is for safety and property protection reasons; (3) Mission units are needed to improve response times for high water warnings in LSs; (4) elder valves are for shutting wastewater customers off for non-payment; (5) Sewer Line Relocation is mandated by the Florida Department of Transportation; (6) Installation of 5 Liners is to prevent inflow & infiltration and sources of chlorides; and (7) Auto Sampler is used for composite, flow-proportional, chloride testing at its lift stations that connect to Pasco County’s force main.

 

In its response dated May 20, 2013, to a staff data request, the Utility stated that there are no retirements yet for these pro forma projects.  Staff notes that most of the requested pro forma plant additions are new plant items, instead of replacement items, which do not result in any retirements.  However, the refurbishment of the Delmar LS, the installation of elder valves for normal shut-offs, and the relocation of the sewer line along Highway 19 requires corresponding retirements.  As such, corresponding retirement adjustments to plant, accumulated depreciation, and depreciation expense are needed for these projects.

 

During staff’s field inspection of Ni Florida’s facilities, the Utility stated that the elder valve installations for the owner/resident project relate to installation of elder valves at locations where the owner of a dwelling is not the customer of record.  As discussed in Issue 17, staff has recommended an elder valve charge for normal shut-offs for wastewater customers of record, not be approved as a miscellaneous service charge.  However; staff recommends the approval of the elder valve installations as part of the pro forma.

 

In addition, staff noticed that the Utility failed to include corresponding pro forma adjustments to accumulated depreciation and depreciation expense, as well as a pro forma property tax adjustment associated with its requested pro forma plant additions.  The Commission typically allows a corresponding increase of property taxes associated with approved pro forma plant, net of retirements and accumulated depreciation, at the current applicable millage rate.^[5]  Thus, staff recommends pro forma property taxes as reflected in Table 3-3 below.

 

Initially, Ni Florida provided support documentation of $136,785 for its requested pro forma plant additions of $577,500.  In response to a subsequent staff data request, the Utility provided support documentation for $375,940 of its requested pro forma plant additions of $577,500.  In response to another subsequent staff data request, the Utility provided support documentation of $576,650 for its requested MFR pro forma plant additions of $577,500, as well as $93,801 for a force main replacement at its Del Mar lift station which was not included in its MFRs.  The purpose of the Del Mar Force Main Replacement is to replace 1,800 feet of force main related to a main break.  Further, consistent with the recommended elder valve issue discussed in Issue 17, staff recommends a corresponding pro forma plant investment of $25,000.

 

Based on the above, staff recommends pro forma wastewater plant additions and retirements of $601,650 and $213,734, respectively.  As a result, wastewater plant should be reduced by $189,584.  Accordingly, accumulated depreciation should be reduced by $195,356 and depreciation expense should be increased by $12,174.   In addition, a corresponding adjustment should be made to increase property taxes by $9,143.  Further, consistent with Rule 25-30.433(9), F.A.C., the Utility should be allowed to recover an annual amortized loss of $7,799 for the forced abandonment of lines on US Highway 19. Staff’s recommended adjustments are reflected more fully in Tables 3-2 and 3-3 below.

 

 

Table 3-2

Pro Forma Plant Additions

 

 

 

Table 3-3

Corresponding Pro Forma Adjustments

                                   

Issue 4: 

 What are the used and useful (U&U) percentages for the Utility’s water distribution system and wastewater collection system?

Recommendation: 

 The Utility’s water distribution system and wastewater collection system should both be considered 100 percent used and useful.  (Rieger, L’Amoreaux)

Staff Analysis: 

 The U&U calculation for the water distribution system as well as the wastewater collection system is based on the number of customers connected to each system divided by the number of available lots in the service territory.  Consideration is also given to growth.  The Utility’s distribution system currently serves approximately 97 percent of the total number of lots in the service territory.  With no growth experienced over the past five years, staff believes that the service territory is built out.  Also, little or no growth has occurred during the course of the previous two rate cases as well.  In its filing, the Utility pointed out that unoccupied lots are spread throughout the system.  Therefore, consistent with the Commission’s U&U findings of the past two rate cases, staff recommends that the water distribution system should be considered 100 percent U&U.

 

The Utility’s wastewater collection system currently serves approximately 79 percent of the total number of lots in the service territory, with less than 2 percent growth over the previous five years.  In its filing, the Utility asserts that the collection system should be considered 100 percent U&U because the unoccupied lots are spread throughout the system.  Staff believes that given the fact that there are no large blocks of unoccupied lots left to be served, the existing wastewater collection system is necessary to serve the current customer base.  Therefore, consistent with the Commission’s U&U findings of the last rate case, staff recommends that the wastewater collection system should be considered 100 percent U&U.

 

Issue 5: 

 What is the appropriate working capital allowance?

Recommendation:  The appropriate amount of working capital is zero for water and $572,449 for wastewater.  (Fletcher)

 

Staff Analysis:  Rule 25-30.433(2), F.A.C., requires Class A utilities to use the balance sheet approach to calculate the working capital allowance.  According to its filing, Ni Florida utilized the balance sheet approach and calculated a working capital allowance of $26,038 for water and $483,499 for wastewater.  The balance sheet approach is essentially current assets less current liabilities.  As discussed in Issue 2, the Utility has agreed to audit adjustments to decrease water working capital by $42,277 and increase wastewater working capital by $41,229.  Based on further review, staff believes additional adjustments are necessary to address the appropriate amounts for cash and deferred rate case expense (DRCE).

Cash

 

In its filing, the Utility’s working capital allowance for water and wastewater included cash of $132,599 and $498,826, respectively.  These amounts included $1,906 for water and $7,170 for wastewater associated with an escrow account related to interim rates approved in the Utility’s last rate case.  The escrow account was closed at some point in December of 2011 with all funds released to Ni Florida.  In the instant case, the Utility did not request interim rates.  Because ratemaking is prospective in nature, staff believes a normalization adjustment is necessary to remove the cash amounts associated with this closed escrow account.  As such, working capital should be reduced by $1,906 for water and $7,170 for wastewater.

 

Deferred Rate Case Expense

According to its filing, Ni Florida’s working capital allowance for water and wastewater included DRCE of $67,287 and $53,183, respectively.  As addressed in a subsequent issue, staff is recommending total rate case expense of $149,321.  Based on Commission practice,^[6] one-half of the balance of rate case expense should be included in working capital.  Consistent with Commission practice, the allocation of one-half of the recommended rate case expense for the instant case results in $15,679 for water and $58,982 for wastewater.  In addition, to determine the appropriate amount of working capital, one-half of the previously approved rate case expense for the water system is $46,302 and for the wastewater system is $49,092.  In light of the above, the total DRCE should be $61,981 for water and $108,074 for wastewater.  As such, working capital should be decreased by $5,306 ($61,981-$67,287) for water and increased by $54,891 ($108,074-$53,183) for wastewater.  These adjustments are illustrated in the table 5-1 below.

 

 

 

Table 5-1

Adjustments

 

Conclusion

 

A negative working capital balance is not typical of a “normal” utility or the expected future condition of a utility.^[7]  Therefore, consistent with Commission practice, the working capital allowance for the water system should be set at zero.^[8]  In addition, the appropriate amount of working capital for wastewater is $572,449, which results in an increase of $88,950. 

 

Issue 6: 

 What is the appropriate rate base for the test year ending September 30, 2012?

Recommendation:  The appropriate 13-month average rate base for the test year ending September 30, 2012, is $276,050 for water and $3,366,898 for wastewater.  (Fletcher)

 

Staff Analysis:  In its MFRs, the Utility recorded rate base of $301,815 for water and $3,250,202 for wastewater.  Staff has calculated Ni Florida’s water and wastewater rate bases using the Utility’s filing with adjustments as recommended in the preceding issues.  Accordingly, staff recommends that the appropriate 13-month average rate base for the test year ending September 30, 2012, is $276,050 for water and $3,366,898 for wastewater.  Staff’s recommended water and wastewater rate bases are shown on Schedule Nos. 1-A and 1-B, respectively.  The adjustments are shown on Schedule No. 1-C.

Issue 7: 

 What is the appropriate return on equity?

Recommendation:  Based on the Commission leverage formula currently in effect, the appropriate return on equity (ROE) is 9.42 percent with an allowed range of plus or minus 100 basis points.  (Fletcher)

 

Staff Analysis:  The ROE included in the Utility’s filing is 9.46 percent.  Based on the current leverage formula in effect and an equity ratio of 70.23 percent, the appropriate ROE is 9.42 percent.^[9]  Staff recommends an allowed range of plus or minus 100 basis points be recognized for ratemaking purposes.

 

Issue 8: 

 What is the appropriate weighted average cost of capital including the proper components, amounts, and cost rates associated with the capital structure?

Recommendation:  The appropriate weighted average cost of capital for the test year ending September 30, 2012, is 7.84 percent. (Fletcher)

 

Staff Analysis:  In its filing, the Utility requested an overall cost of capital of 8.01 percent.  In the affiliate audit, staff auditors recommended a reduction of $181,487 to the balance of long-term debt and an increase of $14,805 to the balance of common equity.  Also, staff auditors recommended a reduction to the cost rate of the Bank of America (BOA) debt issuance from 4.32 percent to 3.60 percent^[10] and a reduction to the cost rate of another debt issuance from 10.00 percent to 8.50 percent.  In its response to the affiliate audit, the Utility asserted that the debt interest rate should include amortization of its debt expense as well as the impact of the costs of an interest rate swap that Ni Florida utilized to protect the customers if interest rates went higher. 

 

Derivatives are a form of risk management and are common in business operations in many industries.  Hedging instruments, like interest rate swaps, are utilized if a utility reasonably expects the use of such instruments to result in lower overall costs to customers.  Unlike the investor-owned electric utilities that have numerous debt issuances with an interest rate swap mechanism, Ni America only employed an interest rate swap provision with its BOA debt issuance.  Staff believes cost recovery associated with Ni America’s interest rate swap should be allowed for ratemaking purposes.  However, the Utility failed to quantify and support the amount used to determine the effective interest rate for the BOA loan.  Based on a review of the audit workpapers, additional issuance costs included two refinances of the BOA loan, as well as the amount that Ni Florida recorded as a miscellaneous current and accrued liability for the interest swap on the BOA loan.  With that information, staff calculated an annual amortization cost of approximately $23,000 for the two refinancings of Ni America’s largest debt issuance and its interest rate swap provision.  With this additional cost, staff calculated an effective cost rate of 3.74 percent for BOA Loan and affirmed the 8.50 percent for the Utility’s other debt issuance.  Accordingly, staff recommends a weighted average long-term debt cost rate of 4.20 percent. 

 

Based upon the proper components, amounts, and cost rates associated with the capital structure, staff recommends a weighted average cost of capital of 7.84 percent.  Schedule No. 2 details staff’s recommended overall cost of capital.

 

Issue 9: 

 Should any further adjustments be made to test year revenues?

Recommendation:  Yes.  Test year service revenues should be increased by $1,757 for water and $180 for wastewater.  (Bruce)

 

Staff Analysis:  It is Commission practice that the appropriate test year service revenues are produced from the Utility’s billing determinants and the rates in effect at the end of the test year. 

Staff has applied the Utility’s rates in effect during the test year to test year billing determinants and determined test year service revenues should be increased by $1,757 for water and $180 for wastewater.

Issue 10: 

 Should any further test year expense adjustments be made?

Recommendation:  Yes.  O&M expenses should be reduced by $2,101, and plant should be increased by $2,101.  Corresponding adjustments should be made to increase both accumulated depreciation and depreciation expense by $55.  Further, property taxes should be increased by $33.  (Fletcher)

 

Staff Analysis:  In its MFRs, the Utility reflected test year Contractual Services – Other expenses of $124,501.  Ni Florida included $2,101 in that amount for installing elder valves and 6 feet of 4 inch pipe at two different locations.  As with staff’s recommended pro forma plant addition for Elder Valve Installations for Normal Shut-offs, these elder valves and additional piping should also be capitalized to plant.  Thus, staff recommends that O&M expenses be reduced by $2,101, and plant be increased by $2,101.  Corresponding adjustments should be made to increase both accumulated depreciation and depreciation expense by $55.  Further, property taxes should be increased by $33.

 

           

Issue 11: 

 Should any further adjustments be made to the Utility’s allocated parent overhead?

Recommendation:  Yes.  The Utility should be entitled to allocated parent overhead of $43,049 for water and $181,745 for wastewater.  As a result, Ni Florida’s allocated overhead for water and wastewater should be further reduced by $19,464 and $74,280, respectively.  (Fletcher)

 

Staff Analysis:  The Utility recorded test year allocated parent overhead of $64,226 for water and $245,855 for wastewater.  The allocated overhead was recorded in the Utility’s miscellaneous expense account.  In its filing, Ni America, the Utility’s parent company, stated that its allocation policy is based on two factors: allocation assignment based on equivalent residential connections (ERC) and direct assignment of costs to the utilities.

 

On MFR Schedule B-12, Ni America reported $3,312,516 in allocable O&M expenses for the test year ending September 30, 2012.  Ni America allocated $3,010,584 to its various subsidiaries.   The Utility’s allocated share was $301,932 or 9.11 percent of the total allocated overhead.  Of the $301,932, Ni Florida allocated $62,537 or 21 percent to water, and $239,395 or 79 percent to wastewater.^[11]  The remaining amount of parent company O&M expenses was allocated to the subsidiaries through direct assignment.  The direct assignment to Ni Florida was $4,880 for water and $21,434 for wastewater.

 

The Utility states that Ni America provides the following functions:^[12]

 

•     Accounting                                                 •      Human Resources

•     Annual Reporting Requirements                  •      Income Tax Administration

•     Business Development                                •      Legal Services

•     Capital Improvements                                 •      Operations Management

•     Cash Management                                      •      Payroll Administration

•     Contract Administration                              •      Rate Case Administration

•     Engineering Services                                   •      Risk Management (Insurance)

•     Finance                                                      •      Treasury Management

•     Financial Reporting

 

As addressed in Issue 2, the allocated expenses from Ni America have been reduced by $3,870 for water and $14,784 for wastewater, and directly assigned costs have been decreased by $1,034 for water and increased by $9,980 for wastewater.  In its response to the affiliate audit, the Utility objected to two findings related to due diligence costs and the equity sponsor fee.  In addition to these contested audit adjustments, staff believes additional adjustments are necessary which relate to:  (1) corporate salaries; (2) non-utility costs; (3) director and officer liability insurance; and (4) the ERC count used to allocate costs.

 

 

 

Contested Audit Adjustments

 

Due Diligence Costs

 

In its affiliate audit report, staff auditors noted that Order No. PSC-11-0199-PAA-WU required the removal of all due diligence costs and salaries related to future acquisitions.^[13]  Staff auditors noted that the costs included in the filing for Account 680-Due Diligence were $302,402.  This amount does not include salaries.  The Utility identified the Senior VP of Business development who spends 100 percent of his time on due diligence and three employees (President, VP of Financial Due Diligence, and VP of Operations) who spend 10 percent of their time on due diligence.  The total amount of salaries allocated based on these time allocations was $152,099 in the test year.  Based on the above, staff auditors recommended that water expenses be reduced by $7,672 and wastewater expenses by $29,300 to remove the allocated portion of salaries related to acquisitions. 

 

In its response to the affiliate audit, Ni Florida stated that due diligence costs are prudently paid by Ni Florida and result in lower costs to Ni Florida’s customers and should therefore be included in determining the proper rates to be set for Ni Florida's customers.  By way of background, the Utility asserted that the due diligence costs paid by Ni America as reflected in its schedules resulted in obtaining approximately 11,000 ERCs in an acquisition with the City of Columbia, South Carolina.  Ni Florida included these ERCs in the allocation of corporate overhead and therefore Ni Florida had a lower expense for allocated overhead than it would have had otherwise.  

 

It is Commission practice that the costs incurred for acquisitions or transfers not related to the jurisdictional utility be recorded as below-the-line costs of the shareholders.^[14]  As stated above, the Utility represented that three employees spend 10 percent of their time on due diligence.  Based on job duties for these positions, staff notes that the President and VP of Operations duties do not specifically mention due diligence.  However, the listed duties of the VP of Financial Due Diligence specifically include analyzing the financial condition of new potential acquisitions.  In addition, staff notes Ni America officers do not keep time sheets.

 

Based on the above, staff believes additional salaries are attributable to due diligence costs.  First, the VP of Financial Due Diligence has four main duties with one being the analysis of the financial condition of new potential acquisitions.  As such, staff believes that a 25 percent assignment to due diligence is more appropriate than the 10 percent proposed by the Utility.  This would represent an O&M expense reduction of $310 for water and $1,184 for wastewater.

 

Second, the Chief Financial Officer (CFO) has the overall responsibility for the day-to-day management of Ni America and all its subsidiaries.  In addition, the CFO leads and directs the Ni America staff, and manages all affairs of Ni America.  Given the CFO’s duties and with the President and the VP of Operations spending 10 percent of their time on due diligence, staff believes an assignment of 10 percent of the CFO’s salary for due diligence is appropriate as well.  This represents an O&M expense reduction of $204 for water and $781 for wastewater.

 

Based on the above, staff recommends that O&M expense be reduced by $8,202 ($7,672+$310+$220) for water and $31,324 ($29,300+$1,184+$840) for wastewater in order to remove due diligence costs consistent with Commission practice.

 

Equity Sponsor Fee

 

In its affiliate audit report, staff auditors noted that Order No. PSC-11-0199-PAA-WU removed the equity sponsor fee paid to Metalmark Capital, LLC (Metalmark) because the Utility’s share of the equity sponsor fee was recovered through the approved return on equity.  Staff auditors noted that Metalmark was paid $315,000 in the test year for the sponsor fee which represents a 0.50 percent fee to have access to funds from a private equity fund.  The removal of this fee represents an O&M expense reduction of $5,953 for water and $22,743 for wastewater.  In addition, staff auditors stated that Metalmark was reimbursed $61,313 by Ni America for audit, tax and compliance expenses, travel costs, and various other expenses.  This $61,313 amount equates to an allocated share of $1,159 for water and $4,427 for wastewater.  Ni America received invoices from Metalmark listing the expenses, but did not provide any additional backup. 

 

In its response to the affiliate audit, Ni Florida asserted that the equity sponsor fee should not be removed and the resulting water and wastewater expenses should not be reduced by the Commission.  As a general rule, the Utility stated that Ni America pays a fee/salary to each member of its Board of Directors but there are two exceptions to that general rule.  Ni Florida indicated that two partners of Metalmark serve on Ni America's Board of Directors but neither of these partners receives any direct fee or salary from Ni America for their service on the Board.  The Utility contended that each of the two members attends the Board meetings, and discusses and votes on all pertinent board matters relating to Ni America.  Because Board of Director fees are generally included in valid corporate expenses, Ni Florida asserted that the equity sponsor fee paid to Metalmark is the equivalent of a Board of Director’s fee in that it is Ni America’s method of payment to the two Metalmark partners that serve on the Ni America Board of Directors.

 

            Staff believes the Utility’s assertion that the equity sponsor is equivalent to Board of Director’s fee does not address the Commission’s previous finding that the equity sponsor fee is being recovered through the approved return on equity.  Based on the above, staff recommends that O&M expenses be reduced by $7,112 ($5,953+$1,159) for water and $27,170 ($22,743+$4,427) for wastewater.

 

Corporate Salaries

 

Staff was able to compare the duties and responsibilities of nine corporate employees in order to examine the reasonableness of their salary levels with the American Water Works Associations’ (AWWA) 2012 Compensation Survey (CS), which are reflected in the Table 11-1 below.

 

Table 11-1

Corporate Salaries at AWWA CS’ Maximum Salary Limit

 

Recently, the Commission has used the AWWA CS’ maximum salary limit as a guide for determining corporate salaries.^[15]  The Commission has previously used the AWWA CS’ mid-point salary level to determine the appropriate employee salary where a utility failed to include any salary or only a minimal amount.^[16]  Based on the above, and taking into account the amount of capitalized salary to plant and previous audit adjustments, staff recommends corporate salaries prior to any allocation, be reduced by $244,948.  This represents a reduction of $4,686 for water and $17,629 for wastewater.

 

Non-Utility Costs

 

Upon review of Ni America’s general ledger, staff identified $28,884 of costs related to a possible sale of Ni Florida’s systems to the Florida Governmental Utility Authority.  The sale did not materialize.  However, any such divestiture costs should be borne by the shareholders.  In addition, staff identified $2,741 of costs that should have been directly assigned costs to Ni America’s South Carolina systems.  Based on the above, Ni Florida’s allocated expenses should be reduced by $2,881 [($28,884+$2,741) multiplied by Ni Florida’s 9.11 percent].  This represents a reduction of $605 ($2,881 multiplied by 21 percent) for water and $2,276 ($2,881 multiplied by 79 percent) for wastewater.

 

Director and Officer Liability (DOL) Insurance

 

According to Ni America’s general ledger, it recorded an expense for DOL insurance of $13,554.  Consistent with Commission practice, the cost of DOL insurance benefits both the ratepayer and the shareholder, and should be shared equally between both of them.^[17]  As such, DOL insurance costs prior to any allocation should be reduced by $6,777 ($13,554 divided by 2).  Based on the above, Ni Florida’s allocated expenses should be reduced by $617 ($6,777 multiplied by Ni Florida’s 9.11 percent).  This represents a reduction of $129 ($617 multiplied by 21 percent) for water and $488 ($617 multiplied by 79 percent) for wastewater.

 

ERC Count to Allocate Costs

            On MFR Schedule B-12, the Utility reflected the ERC count used to allocate its parent corporate overhead costs.  Specifically, Ni Florida took the sum of its monthly ERC count from October 2011 to September 2012, as well as its sister companies to derive its water allocation of 1.88 percent and wastewater allocation of 7.22 percent.  Staff believes two adjustments are necessary to the ERC count to allocate parent corporate overhead costs.  First, because ratemaking is prospective in nature, staff believes using the monthly ERC count as of September 30, 2012 would be a more representative allocation on a going-forward basis.  Second, the Utility’s September 2012 ECR monthly count of 11,300 for the City of Columbia is understated.  In a 2012 order issued by the Public Service Commission of South Carolina, the Utility’s sister company stated in its application that the City of Columbia system provides service to 11,370 customers.^[18]  With these proposed revisions, Ni Florida would receive a revised water allocation of 1.87 percent and wastewater allocation of 7.17 percent.  Using these allocation percentages, staff recommends an O&M expense reduction of $419 for water and $1,853 for wastewater.

Summary

Based on the above, staff recommends total allocated and directly assigned costs of $43,049 ($39,203+$3,846) for water and $181,745 ($150,331+$31,414) for wastewater.  As addressed in Issue 2, the allocated expenses from Ni America have been reduced by $3,870 for water and $14,784 for wastewater, and directly assigned costs have been decreased by $1,034 for water and increased by $9,980 for wastewater.  Therefore, staff recommends that allocated O&M expenses be reduced further by $19,464 ($23,334-$3,870) for water and $74,280 ($89,064-$14,784) for wastewater, as reflected in the table below.

 

Table 11-2

Summary of Allocated and Directly Assigned Costs

 

Issue 12: 

 What is the appropriate amount of current rate case expense?

Recommendation:  The appropriate amount of rate case expense for the instant case is $149,321.  This expense should be recovered over four years for an annual expense of $7,839 for water and $29,491 for wastewater.  Thus, Ni Florida’s requested annual rate case expense should be reduced by $3,735 for water and increased by $2,485 for wastewater.  This recommendation reflects a reduction of $14,234 for water and $12,478 for wastewater to remove duplicative costs from prior cases that are already included in test year expenses.  (Fletcher)

 

Staff Analysis:  The Utility included in its MFRs an estimate of $154,320 for current rate case expense.  Staff requested an update of the actual rate case expense incurred, with supporting documentation, as well as the estimated amount to complete the case.  On September 12, 2013, the Utility submitted a revised estimate of rate case expense through completion of the PAA process of $159,521 with $149,621 already incurred.  The components of the estimated rate case expense are presented in the table below:

 

Table 12-1

Estimated Rate Case Expense

	MFR Estimated	Actual	Additional Estimated	Total
Legal and Filing Fees	$53,000	$64,112	$5,400	$69,512
Accounting Fees	70,000	81,000	0	81,000
Customer Mailings	31,320	4,509	4,500	9,009
Total Rate Case Expense	$154,320	$149,621	$9,900	$159,521

 

Pursuant to Section 367.081(7), F.S., the Commission shall determine the reasonableness of rate case expenses and shall disallow all rate case expenses determined to be unreasonable.  Staff has examined the requested actual expenses, supporting documentation, and estimated expenses as listed above for the current rate case. 

 

Based on its review, staff believes the revised accounting fees of $81,000 for MFR preparation, audit facilitation, and responding to data requests are fully supported which represents an $11,000 increase over the initial estimate of $70,000.  However, three adjustments are necessary to other costs included in the revised rate case expense estimate. 

 

The first adjustment relates to the Utility’s legal fees.  The Utility included in its MFRs $53,000 in legal and filing fees to complete the rate case.  The Utility provided invoices through August 21, 2013, showing legal expenses associated with the rate case totaling $55,793 plus an additional $8,388 for unbilled legal fees for a total of $64,181 actual legal fees.  Additionally, the Utility included an estimate of $5,331 to complete this PAA rate case.  According to the invoices, the law firm of Rutledge Ecenia, P.A., billed the Utility 16 hours related to the correction of MFR deficiencies.  Based on the law firm’s hourly rate of $300 per hour, the total amount billed to Ni Florida was $4,800 ($300x16).  The Commission has previously disallowed rate case expense associated with correcting MFR deficiencies because of duplicate filing costs.  Accordingly, staff recommends that $4,800 be removed as duplicative rate case expense.  Thus, the appropriate legal and filing fees should be $59,312 ($64,112-$4,800).  This results in an increase of $6,312 from its MFR amount of $53,000.

 

The second adjustment relates to customer mailings.  In its filing, Ni Florida requested $31,320 for customer mailings.  The Utility revised total amount was $9,009, which included actual costs of $4,509 and estimated amount of $4,500 for customer mailings.  Staff recommends that rate case expense be decreased by $22,311 ($31,320-$9,009) for customer mailings.

 

The third adjustment relates to allocation of rate case expense.  In its filings, Ni Florida allocated rate case expense 30 percent to water and 70 percent to wastewater.  Staff notes that the Utility allocated all other allocated test year expenses based on ECRs of its systems which yields a 21 percent water allocation and a 79 percent wastewater allocation.  If the ERC allocation method is not utilized, staff believes water customers in Lee County would subsidize wastewater customers in Pasco County.  Thus, staff recommends that the annual amortization be allocated 21 percent to water and 79 percent to wastewater.

 

In summary, staff recommends that the Utility’s revised rate case expense be decreased by $4,999.  The appropriate total rate case expense is $149,321.  A breakdown of rate case expense is as follows:

 

Table 12-2

Rate Case Expense

 

 

Based on the adjustments recommended above, the requested annual rate case expense should be decreased by $1,250 ($37,330-$38,580).  The recommended total rate case expense should be amortized over four years, pursuant to Section 367.016, F.S.  Based on the data provided by Ni Florida and the recommended adjustments discussed above, staff recommends annual rate case expense of $37,330.  Using the recommended 21 percent water allocation and a 79 percent wastewater allocation, results in a reduction of $3,735 for water and an increase of $2,485 for wastewater.

The Utility requested that $106,845 of unamortized rate case expense from two prior rate cases be amortized over four year with the current rate case.  Specifically, the Utility requested annual amortization of $31,603 for water and $52,227 for wastewater.  In its filing, the Utility’s test year O&M expenses already include annual rate case expense of $20,704 for water and $24,546 for wastewater which are consistent with the previously Commission-approved amounts in Ni Florida’s prior rate cases.  Ni Florida’s request to include the unamortized rate case expense from its two prior rate cases and amortize it over four years with the rate case expense from the instant case would result in double recovery.  As such, staff recommends disallowance of that request as the Utility is recovering the prior rate case expense through the amounts included in test year expenses.  This results in a reduction of $14,234 for water and $12,478 for wastewater.  After removing the portion associated with the prior cases, the requested annual amortization for the instant case is $38,580 which represents $11,574 for water and $27,006 for wastewater.

 

Issue 13: 

 Should any adjustment be made to bad debt expense?

Recommendation:  Yes.  The Utility should be entitled to bad debt expense of $1,166 for water and $73,591 for wastewater.  Based on a three-year average, Ni Florida’s requested level of bad debt expense of $5,222 for water should be reduced by $4,056.  Using an adjusted test year methodology, Ni Florida’s requested level of bad debt expense of $36,412 for wastewater should be increased by $37,180.  Further, based on staff’s recommended bad debt expense, wastewater operating revenues should be increased by $27,249.  (Fletcher, Hudson)

 

Staff Analysis:  On MFR Schedules B-5 and B-6, the Utility recorded test year bad debt expense of $1,232 for water and $47,346 for wastewater.  According to audit workpapers, staff notes that the Utility also made a corresponding reduction to its test year billing units totaling $27,249 in reduced revenues.  Ni Florida adjusted its test year bad debt expense to $4,311 and $30,509 for water and wastewater, respectively, to reflect an amount equal to 1.75 percent of test year revenues.  Further, the Utility requested further bad debt expense increases of $911 for water and $5,903 for wastewater in order to reflect an amount equal to 1.75 percent of its requested revenue increases.  This represents total requested bad debt expense of $5,222 for water and $36,412 for wastewater.

In response to an audit data request, the Utility provided its bad debt policy.  According to its policy, Ni Florida considers all accounts receivable (AR) balances over 60 days to be uncollectible.  However, the Utility analyzes each account on a quarterly basis to determine the likelihood of collecting the accounts receivable balance, such as customer payments and other extenuating circumstances.  Any customer who makes no payments for three months has their account classified as an uncollectible account.  The total amount deemed to be uncollectible is compared to the balance in Account No. 143, Accumulated Provision for Uncollectible Accounts, and the difference is recorded in Account Nos. 670 for water and 770 for wastewater.

            In response to a staff data request, Ni Florida provided further detail of how it analyzes each account on a quarterly basis.  First, on a monthly basis, the allowance for doubtful AR is calculated by multiplying the total water revenues by 0.5 percent and wastewater revenues by 1.5 percent.  In 2011, Ni America began reviewing the allowance on a quarterly basis which includes analyzing the previous and current individual customer balances and comparing them to subsequent activity, like customer payments.  For example, in the months of April, December, and March, AR aging reports are reviewed.  Based on subsequent activity, an allowance is calculated.  The entire calculated balance per the analysis is compared to the allowance per the general ledger and adjusted if necessary.

            Staff notes that the ratio of unadjusted test year bad debt expense to total revenues is 0.50 percent for water and 4.21 percent for wastewater.  The Utility’s water service in Lee County is easier to turn-off for non-payment than its wastewater service in Pasco County because Ni Florida can shut-off water service at the meter whereas the Utility must either cut and cap the wastewater service lateral or install an elder valve on the service lateral. 

Consistent with Commission practice, bad debt expense is typically based on a three-year average.  The Commission has previously approved the application of a three-year average to determine the appropriate level of bad debt expense.  The Commission has set bad debt expense using a three-year average in three electric cases,^[19] two gas cases,^[20] and several water and wastewater cases.^[21]  The Commission approved a three-year average in these cases based on the premise that a three-year average fairly represented the expected bad debt expense.  Overall, the basis for determining bad debt expense has been whether the amount is representative of the bad debt expense expected to be incurred by the Utility.

As such, staff believes the Commission practice regarding a three-year average basis should be utilized for the Utility’s water system because its level of bad debt for this system has experienced insignificant change over the last three years.  According to its annual reports, the Utility’s bad debt expense for its water system was $1,126 in 2010, $1,179 in 2011, and $1,193 in 2012.  Based on this calculation, Ni Florida should be entitled to bad debt expense of $1,166 for water, which staff believes is representative of Ni Florida’s bad debt expense for its water system.  Based on the above, staff recommends that the Utility’s requested bad debt expense for water of $5,222 be reduced by $4,056.

However, staff believes an adjusted test year methodology should be used for Ni Florida’s wastewater system for the following reasons:  (1) the Utility’s wastewater system has an exceptionally high test year ratio of bad debt expense to total revenues;^[22] (2) the Utility’s current bad debt policy commenced approximately two years ago; (3) there should be a normalization adjustment to test year bad debt expense resulting from the recommended increase in wastewater customer deposits discussed below; and (4) there should be a normalization adjustment to test year bad debt expense resulting from the recommended pro forma plant related to the installation of elder valves going forward. 

An adjusted test year methodology would involve making the two normalization adjustments mentioned above to the Utility’s unadjusted test year bad debt expense for its wastewater system.  By utilizing this adjusted test year methodology, staff believes it will result in an amount that will be representative of the bad debt expense expected to be incurred by the Utility.

Based on its current rates, the average wastewater bill is approximately $36 which results in a two month average amount of approximately $72.  According to its tariff, the Utility has an authorized wastewater customer deposit of $60.  The collection of a customer deposit is consistent with one of the fundamental principals of ratemaking which is ensuring that the cost of providing service is recovered from the cost causer.  If utilities do not collect adequate deposits to cover the cost of providing service, the result would be an increase in its bad debt expense.  Ultimately, the bad debt expense is included in a utility’s revenue requirement, and, therefore, is included in the service rates charged to the general body of ratepayers.  Given that the Utility’s wastewater system has an exceptionally high test year ratio of bad debt expense to total revenues, staff is recommending in Issue 18 that the wastewater customer deposits be increased from $60 to $72 in order to place the burden on the cost causer rather than the general body of ratepayers. 

As discussed in Issue 3, staff has recommended pro forma plant of $33,051 related to the installation of elder valves.  Because of these installations, it will now be possible for Ni Florida to shut-off wastewater service for any future non-payment for those customer accounts which should mitigate the amount of bad debt expense going forward.  In response to a staff data request, the Utility stated the test year bad debt expense associated with formally past due accounts that are now current was $560.  Thus, staff recommends that the unadjusted test year bad debt expense for wastewater be reduced by $560.  In addition, a corresponding adjustment should be made to further reduce test year bad debt expense by $444 related to the incremental $25,000 pro forma plant investment for elder valves discussed in Issue 3.

In summary, the Utility should be entitled to bad debt expense of $1,166 for water and $73,591 for wastewater.  Based on a three-year average, Ni Florida’s bad debt expense of $5,222 for water should be reduced by $4,056.  Using an adjusted test year methodology, Ni Florida’s bad debt expense of $36,411 for wastewater should be increased by $37,180.  Further, based on staff’s recommended bad debt expense, wastewater operating revenues should be increased by $27,249 to reverse most of the Utility’s reduction of test year billing units totaling $27,249 in reduced revenues.

Issue 14:

 Should the Commission approve any pro forma expense items for the Utility?

Recommendation:  Yes.  Pro forma expenses of $5,615 for water and $17,011 for wastewater should be approved.  This represents reductions to O&M expense of $4,893 for water and $120,181 for wastewater.  (Fletcher, Rieger)

 

Staff Analysis:  In its filing, the Utility requested pro forma water expenses of $5,615 for purchased water expense and $4,893 for bank charges related to a new payment system.  Also, Ni Florida requested pro forma wastewater expenses of $19,200 for purchased wastewater expense, $17,992 for bank charges related to a new payment system, and $100,000 for a line cleaning program. 

 

Staff verified the Utility’s requested pass-through pro forma purchased water expense of $5,615 through support documentation from Lee County and thus recommends this amount be recognized in rates.  However, based on staff’s review of the support documentation for the rate charged by Pasco County for purchased wastewater treatment, the prospective purchased wastewater expense represents an increase of $17,011.  As such, staff recommends an O&M expense reduction of $2,189 ($19,200-$17,011) for wastewater.

 

The Utility requested new bank charges be included in O&M expense for both the water and wastewater systems.  The bank charges are for the new payment system and assume a participation rate of 40 percent multiplied by a $1.37 transaction fee.  Staff believes this request is inconsistent with the Commission’s practice of placing the burden on the cost causer rather than on the general body of ratepayers.  As such, staff recommends these requested expenses be disallowed.  This represents a reduction of $4,893 for water and $17,992 for wastewater.  Finally, staff believes an adjustment is necessary to the requested pro forma line cleaning program which is discussed in detail below.

 

Line Cleaning Program

 

As stated above, the Utility is requesting $100,000 for a line cleaning program for its wastewater system.  According to staff’s audit, Ni Florida incurred $43,104 for TV viewing and line cleaning in its test year expenses.  With the test year and pro form amounts, this represent a total request of $143,104 ($100,000+$43,104).  In the Utility’s last rate case for its wastewater system, the Commission granted an annual allowance of $143,474 for inflow & infiltration (I&I) issues present in its collection system, including leaks in pipes, manholes, and lift stations.  In response to a staff data request, Ni Florida stated it spent $94,404 in 2009, $0 in 2010, and $4,722 in 2011 for I&I repairs.  Because the Utility spent significantly less than the previously granted amount for I&I repairs and given the recommended pro forma plant additions discussed below, staff recommends disallowance of Ni Florida’s requested pro forma line cleaning program totaling $100,000.  However, staff believes the test year amount of $43,104 is appropriate for prospective ratemaking purposes.^[23] 

Pasco County has intervened in this docket and has expressed concerns regarding the I&I issue related to chlorides.  However, even with the recommended disallowance above, staff believes the chlorides issue is being addressed through its recommended $43,104 in test year expenses and certain recommended pro forma plant additions.  Specifically, the recommended Delmar LS refurbishment and the Mission units installation address I&I issues, as well as the installation of 5 Liners which prevent I&I and sources of chlorides.  These recommended pro forma plant additions represent a cumulative incremental investment of approximately $251,000.

 

Conclusion

 

Based on the above, staff recommends that O&M expenses be reduced by $4,893 for water and $120,181 ($2,189+$17,992+$100,000) for wastewater.

Issue 15:

 What is the appropriate revenue requirement?

Recommendation:  The following revenue requirement should be approved.  (Fletcher)

 

Table 15-1

Revenue Requirement

 

 

Staff Analysis:  In its filing, Ni Florida requested revenue requirements to generate annual revenue of $298,368 and $2,080,651 for water and wastewater, respectively.  Staff believes the appropriate revenue requirement is $245,502 for water and $1,920,772 for wastewater.  This represents a decrease in revenues of $2,593 (or 1.05 percent) for water and an increase in revenues of $148,311 (or 8.37 percent) for wastewater.  These revenue levels should allow the Utility the opportunity to recover its operating expenses and earn a 7.84 percent return on its combined investment in water and wastewater rate base.

Issue 16: 

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

Recommendation:  The appropriate rate structure for the water system’s residential customers is a continuation of the base facility charge (BFC) and three tier inclining block rate structure.  The usage blocks should be:  (1) 0-3,000 gallons; (2) 3,000-6,000 gallons; and (3) usage in excess of 6,000 gallons with usage block rate factors of 1.00, 1.20, and 1.50, respectively.  The appropriate rate structure for the water system’s general service customers is a continuation of the BFC and uniform gallonage charge.  The appropriate rate structure for the RV park is a continuation of a BFC based on the settlement number of ERCs in the RV park and the general service gallonage charge.  The appropriate rate structure for the wastewater system’s residential, general service, and bulk customer is a traditional BFC and gallonage charge.  The residential wastewater gallonage cap should be reduced to 8,000 gallons per month.  The general and bulk service gallonage charge should be 1.2 times greater than the residential gallonage charge. 

 

The appropriate monthly water and wastewater rates are shown on Schedule Nos. 4-A and 4-B, respectively.  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: 

 

Water Rates

           

Ni Florida’s water system is located in Lee County within the South Florida Water Management District.  The Utility buys bulk water from Lee County and resells the water to a mobile home and RV park, as well as several general service customers.  Approximately 28 percent of the residential customer bills during the test year had zero gallons indicating a seasonal customer base.  The average residential water demand was 1,633 gallons per month.  The customers’ overall average consumption has decreased since the Utility’s last rate case.

 

Currently, the Utility’s water system rate structure consists of a BFC and three tier inclining block rate structure for residential customers.  The rate blocks are:  (1) 0-3,000 gallons; (2) 3,000-6,000 gallons; and (3) usage in excess of 6,000 gallons, with usage block rate factors of 1.00, 1.09, and 1.50, respectively.  The RV park’s rate structure, which was approved in a settlement in Docket No. 050819-WU, includes a base charge based on the number of ERCs in the RV park, rather than based on the RV park’s meter size, and a gallonage charge.^[24]  General service customers are billed based on a BFC and gallonage charge.

 

As discussed in Issue 15, staff has recommended that the revenue requirement be reduced by 1.05 percent for water.  Typically, when there is a revenue decrease, staff would recommend an across-the-board decrease to the Utility’s existing rates.  In this case, staff found that the general service rates for the larger meter sizes were calculated incorrectly in the prior rate case.  Therefore, the existing rate structure needed to be addressed. 

 

Staff performed an 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) produce revenue of $239,477 which is the recommended revenue requirement of $245,502 less miscellaneous revenues of $6,025; (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.

 

Due to the customers’ low average consumption, staff attempted to design a less aggressive inclining block rate structure for residential customers using two tiers instead of three.  Transitioning from three tiers to two tiers resulted in percentage price increases for consumption of 3,000 to 6,000 gallons.  Since an overall rate decrease is being recommended, staff recommends that the BFC remain unchanged to ensure that the Utility will have sufficient cash flow to cover fixed costs due to a high number of seasonal residents.  This results in 59.45 percent of the revenue requirement being generated from the BFC.  In addition, staff recommends that the three-tier rate structure be continued with usage block rate factors of 1.0, 1.20, and 1.50, respectively.  This rate structure results in a reduction to bills at all consumption levels. 

 

Staff recommends that the BFC for the RV park continue to be based on the estimated number of ERCs in the RV park, pursuant to the 2006 settlement.  In addition, the BFC for general service customers should be corrected for the larger meter sizes.  The gallonage charge for both the general service customers and RV park should be reduced to reflect the staff recommended revenue reduction.

 

Staff’s recommended rates for the water system are shown on Table 16-1 below.  Staff also presents two alternate rate structures. 

 

 

Table 16-1

Water Rate Structures and Rates

 

 

Wastewater

 

Ni Florida’s wastewater system is located in Pasco County.  The Utility purchases bulk wastewater treatment from Pasco County.  Ni Florida provides service to residential and general service customers.  The Utility also provides service to a mobile home park as a bulk customer.  Approximately 24 percent of the residential customers’ bills during the test year had zero gallons indicating a seasonal customer base.  The average water demand for wastewater customers was 2,750 gallons per month.

 

            Currently, the Utility’s wastewater system rate structure consists of a uniform BFC for all meter sizes and a gallonage charge with a 10,000 gallon cap for residential customers.  General service customers are billed a BFC by meter size and a gallonage charge that is 1.2 times higher than the residential gallonage charge.  The bulk customer is billed a BFC for a 4 inch meter and the general service gallonage charge. 

                                                                                                               

Staff performed an analysis of the Utility’s billing data to evaluate various BFC cost recovery percentages and gallonage caps for the residential customers.  The goal of the evaluation was to select the rate design parameters that:  (1) that produce revenue of $1,867,119 which is the recommended revenue requirement of $1,920,772 less miscellaneous revenues of $53,653; (2) equitably distribute cost recovery among the Utility’s customers; and (3) implement a gallonage cap that considers approximately the amount of water that may return to the wastewater system.

 

The Utility’s proposed BFC allocation is 37.62 percent.  Typically, the Commission’s practice it to set the BFC allocation to at least 50 percent due to the capital intensive nature of wastewater plants.  However, Ni Florida purchases bulk wastewater service and does not have the same capital investment level as a system with a wastewater treatment plant.  Therefore, staff designed rates with a BFC allocation of 40 percent.

 

The Utility’s existing residential gallonage cap is set at 10,000 gallons.  The gallonage cap recognizes that not all water used by residential customers is returned to the wastewater system.  It also creates the maximum amount a residential customer would pay for wastewater service.  Typically, the residential wastewater cap is set at approximately 80 percent of the water demand.  Based on the Utility’s wastewater billing analysis, the 4,000 gallon level is where 80 percent of the water demand is captured.  However, reducing the gallonage cap lowers the number of gallons being used in the rate design and results in a significant increase to the gallonage charge.  Staff believes it is appropriate to gradually reduce the gallonage cap.  Therefore, staff recommends that the gallonage cap be set at 8,000 gallons.  This rate structure minimizes the rate increase at lower usage levels.

 

            The general service gallonage charge is 1.2 times greater than the residential gallonage charge which is consistent with Commission practice.  Currently, the bulk service gallonage charge is higher than the general service charge.  This is not typical because bulk service is considered general service as well.  Therefore, staff recommends that the bulk service gallonage charge also be 1.2 times greater than the residential gallonage charge.

Staff’s recommended rate design for the wastewater system is shown on Table 16-2 below.  Staff also presents two alternative rate structures to illustrate other recovery methodologies.

Table 16-2

Wastewater Rate Structures and Rates

 

As shown on Table 16-1 and 16-2, staff recommends that the appropriate rate structure for the water system’s residential customers is a continuation of the base facility charge (BFC) and three tier inclining block rate structure.  The usage blocks should be:  (1) 0-3,000 gallons; (2) 3,000-6,000 gallons; and (3) usage in excess of 6,000 gallons with usage block rate factors of 1.00, 1.20, and 1.50, respectively.  The appropriate rate structure for the water system’s general service customers is a continuation of the BFC and uniform gallonage charge.  The appropriate rate structure for the RV park is a continuation of a BFC based on the settlement number of ERCs in the RV park and the general service gallonage charge.  The appropriate rate structure for the wastewater system’s residential, general service, and bulk customer is a traditional BFC and gallonage charge.  The residential wastewater gallonage cap should be reduced to 8,000 gallons per month.  The general and bulk service gallonage charge should be 1.2 times greater than the residential gallonage charge. 

 

The appropriate monthly water and wastewater rates are shown on Schedule Nos. 4-A and 4-B, respectively.  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.
Issue 17:  Should the Commission approve Ni Florida’s requested elder valve charge for its wastewater system?

Recommendation:  No.  Ni Florida’s requested elder valve miscellaneous service charge for its wastewater system should not be approved.  (Bruce)

 

Staff Analysis:  Ni Florida is the wastewater provider for its customers in Pasco County; water service is provided by two utilities:  Hudson Water Works and Pasco County.   The Utility does not have the ability to disconnect water service when a customer is delinquent in paying for wastewater service.  As a result, as discussed in Issue 13, the Utility has experienced a high level of bad debt expense due to uncollectible accounts.  In an effort to reduce the bad debt expense, the Utility has installed some elder valves as an enforcement measure for those customers who are delinquent in paying their bills.  An elder valve is a lockable disconnection cleanout device consisting of a special tee and plunger.  The elder valve is owned by the Utility and installed on the customer’s property.  It is used to physically stop all flow from the customer’s property to the wastewater system.

 

            For the existing elder valve installations, no customers were assessed a charge.  The Utility provided a cost justification requesting a $400 charge for elder valve installations on a going forward basis.  Although the Utility requested $400 for the elder valve, the actual cost of installing the existing elder valves ranged from $300 to $2,700.  Staff does not believe it is appropriate to require a delinquent customer to pay an elder valve charge.  This could potentially increase bad debt expense due to the fact that the customers were already not paying their wastewater bill.  The Utility should continue to record elder valves as plant with no offsetting CIAC from the customers.  The Utility’s request for $25,000 in pro forma plant in service will benefit all customers by potentially lowering bad debt expense on a going forward basis without increasing the likely uncollectable cost of the elder valve installation for the delinquent account.  We anticipate that the Utility will judiciously install elder valves to achieve the greatest impact in lowering bad debt expense.

             

Now that the Utility is able to discontinue wastewater service with the elder valves, the discontinuance of wastewater service should be in accordance with the rule.  Pursuant to Rule 25-30.320(2) (g), F.A.C., when a customer fails to pay its wastewater bill within 20 days, the Utility is required to mail a notice which states that the delinquent customer has five business days to remit payment before services may be discontinued.  In order to restore wastewater service, the customer will be assessed a violation reconnection fee.  Currently, the wastewater violation reconnection fee is set at actual cost.  With the presence of an elder valve, the only action required for restoring wastewater service is turning the valve.  Staff believes that the fee should be similar to the water violation reconnection fee wherein the fee is the same as the initial and normal reconnection fee.  The Utility’s wastewater initial and normal reconnection fees are $27 each.  Therefore, staff recommends that the wastewater violation reconnection fee be $27.

 

            In addition to installing elder valves as a means to help reduce bad debt expense, the Utility’s customer deposits can be adjusted.  As discussed in Issue 18, staff recommends increasing the Utility’s initial customer deposit.  Also, Pursuant to Rule 25-30.311(7), the Utility can require a new deposit, where previously waived or returned, or an additional deposit, in order to secure payment of current bills.

 

            Based on the above, staff recommends Ni Florida’s requested elder valve miscellaneous service charge for its wastewater system should not be approved.

Issue 18:  What is the appropriate initial customer deposit for Ni Florida’s wastewater?

Recommendation:  Staff recommends that the appropriate initial customer deposit for residential wastewater be set at $72 for 5/8” x 3/4” meters.  General services should beset at two times the average estimated monthly bill.  The approved initial customer deposits 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.  Ni Florida should be required to collect the approved initial customer deposit until authorized to change them by the Commission in a subsequent proceeding.  (Bruce)

Staff Analysis:  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 two months bills based on estimated average consumption for the customer class.^[25]

Staff notes that consumption-based charges are based on the prior month 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 our 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.^[26]

Staff recommends that the appropriate initial customer deposit for residential wastewater is $72 for 5/8” x 3/4” meters.  General services should be two times the average estimated monthly bill.  The approved initial customer deposits 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.  Ni Florida should be required to collect the approved initial customer deposit until authorized to change them by the Commission in a subsequent proceeding.

Issue 19:  What is the appropriate amount by which rates should be reduced four years after the established 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.  Ni Florida 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.  (Bruce)

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 reductions are $9,496 and $35,723 for water and wastewater, respectively.  Using Ni Florida's current revenues, expenses, capital structure and customer base, the reduction in revenues will result in the rate decreases as shown on Schedule Nos. 4-A and 4-B.

            The Utility 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.

 

Issue 20:  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 the applicable National Association of Regulatory Utility Commissioners (NARUC) Uniform System of Accounts (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, Ni Florida should provide proof, within 90 days of the final order in this docket, that the adjustments for all the applicable NARUC USOA primary accounts have been made.  (Fletcher)

 

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

Issue 21:  Should this docket be closed?

Recommendation: 

 No.  If no timely protest is received from a substantially affected person upon expiration of the protest period, the PAA Order should become final upon issuance of a Consummating Order.  However, this docket should remain open for staff’s verification that the tariff sheets and customer notice have been filed by the Utility and approved by staff, verification that the Utility has provided proof that the adjustments for all the NARUC USOA primary accounts have been made and approved by Commission staff.  Once these actions are complete, this docket should be closed administratively.  (Brownless, Rieger)

Staff Analysis: 

 If no timely protest is received from a substantially affected person upon expiration of the protest period, the PAA Order should become final upon issuance of a Consummating Order.  However, this docket should remain open for staff’s verification that the tariff sheets and customer notice have been filed by the Utility and approved by staff, verification that the Utility has provided proof that the adjustments for all the NARUC USOA primary accounts have been made and approved by Commission staff.  Once these actions are complete, this docket should be closed administratively.