DATE:	November 1, 2013
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Accounting and Finance (T. Brown, Maurey) Division of Economics (Bruce, Daniel) Office of the General Counsel (Lawson)
RE:	Docket No. 130155-WU – Application for limited proceeding increase in rates in Escambia County by Peoples Water Service Company of Florida, Inc.
AGENDA:	11/14/13 – Regular Agenda – Proposed Agency Action – Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Brown
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None

 Case Background

Peoples Water Service Company of Florida, Inc. (Peoples or Utility) is a Class A utility providing water service to more than 11,700 customers in Escambia County.  Rates were last established for Peoples in its 2009 rate proceeding.[1] 

 

            On May 28, 2013, Peoples filed its application for a limited proceeding pursuant to Section 367.0822, Florida Statutes (F.S.).  Unlike a full rate case, Peoples' request consists only of the recovery of the revenue requirement authorized by the Commission in Docket No. 080695-WU, plus index increases authorized since that time, rate case expense estimated to be incurred in this proceeding, and regulatory assessment fees.  The Utility is seeking recovery of no other items of expense or investment, or changes to cost of capital.  Staff believes that Peoples has met the filing requirements of Rule 25-30.445, Florida Administrative Code (F.A.C.).

On August 6, 2013, the Office of Public Counsel (OPC) asked to be added as an interested party in this docket.  A customer meeting was held August 22, 2013, in Pensacola.  Only one customer attended the meeting and did not wish to address the matter through public comment.

The Utility sent an amended filing which it referred to as a proposed “settlement agreement” to staff and OPC on September 16, 2013 (see Attachment A).  This was followed by an informal meeting with Utility representatives, the Utility’s attorney, and OPC on October 2, 2013, to discuss the amended filing.  On October 9, 2013, OPC provided its concerns with regard to the limited proceeding increase in rates and the Utility’s proposed “settlement.”  Peoples responded to OPC’s concerns regarding rate case expense on October 14, 2013.

            This recommendation addresses the Utility’s amended filing for a limited proceeding rate increase and whether the Commission should grant it. The Commission has jurisdiction to consider this matter pursuant to Section 367.0822, F.S.

 

Discussion of Issues

Issue 1: 

 Should the Commission approve the Utility’s amended request for a limited proceeding rate increase?

Recommendation: 

  The Commission should approve in part and deny in part the Utility’s requested rate increase.  The appropriate monthly water rates are shown on Table 1-6.  Within 15 days of the Commission vote, the Utility should file a proposed customer notice and revised tariff sheets which are consistent with the Commission's decision.  The approved rates should be effective for service rendered on or after the stamped approval date of the tariff pursuant to Rule 25-30.475(1), F.A.C., after staff has verified that the proposed customer notice is adequate and the notice has been provided to the customers. Peoples should provide proof that the customers have received notice within 10 days after the date of the notice.  (T. Brown, Maurey)

Staff Analysis: 

 Peoples filed its application for a limited proceeding rate increase pursuant to Section 367.0822, F.S., on May 28, 2013.  Unlike a full rate case, however, Peoples’ is seeking recovery for a limited number of items.  As stated in its petition, the Utility’s request for a limited proceeding was to achieve the revenues previously authorized by the Commission, plus the additional revenues authorized by approved price indices since the issuance of the Order in the last rate case,[2] and to recover an allowance for the estimated rate case expense, income taxes and regulatory assessment fees related to making this change in rates.

 

            Limited proceedings generally address a specific or significant change that would adversely affect the normal operating income of the utility and are usually narrow in scope.[3]  Staff believes that Peoples’ case as filed is sufficiently narrow in scope to qualify for a limited proceeding, especially in light of the number of issues that would have been addressed if the Utility had instead elected to file its case as a general file and suspend case.  Staff also believes that Peoples’ filing meets the minimum filing requirements of Rule 25-30.445, F.A.C. 

 

            In the Utility’s last rate proceeding, the Commission established rates for the Utility including recognition of repression in usage characteristics for Peoples’ customers.  In its final order, the Commission ultimately established rates which were substantially different than those initially proposed by the Utility in an effort to shift a portion of the revenue requirement to gallonage charges rather than base charges.  According to the Utility, the rates established by the Commission have resulted in decreases in usage by Peoples’ customers well beyond those anticipated in the repression adjustments underlying the rates established.  The Utility asserts that it has been unable to recover its expenses and earn a fair rate of return on its investment since the establishment of rates in Docket No. 080695-WU.

 

            Peoples did not request review of any changes in operating expenses, rate base, or cost of capital established in its last rate case over three years ago, but is simply seeking to have rates adjusted so that the Utility will be able to achieve the revenues authorized in that proceeding.  In addition, Peoples asserted that, in accordance with the requirements of Section 25-30.445(7), F.A.C., its rate base has not declined other than due to depreciation since the filing of the last rate case and that there are no expenses sought for recovery through this proceeding that are offset by customer growth since its most recent rate proceeding or that will be offset by future customer growth expected to occur within the next year of the date new rates are implemented.[4]

 

            Staff believes that the Utility’s amended filing accomplishes the same end result as Peoples’ request for a limited proceeding, while expediting the outcome and potentially reducing rate case expense.  Instead of the 14.74 percent increase included in its initial filing, the increase contained in the amended filing is reduced to 9.02 percent, before any staff adjustments are made.  Staff notes that while OPC did not formally endorse the Utility’s requested rate increase, it does not oppose the proposal either.  In fact, OPC stated in its response “that as long as the PAA order is consistent with what has been filed and discussed at our informal meetings, we do not plan to protest or prolong this proceeding.”[5]  In the same document, OPC encouraged an administratively efficient solution to Peoples’ request.  While agreeing with the expeditious processing of the Utility’s request, OPC was concerned with the amount of requested rate case expense.  Staff addresses the appropriate amount of rate case expense in more detail below.   

 

            Based on staff’s review of the Utility’s filing and the information above, staff believes that the amended filing in large part is a reasonable resolution to address the concerns raised in the limited proceeding.  Further, staff believes that it is in the public interest for the Commission to approve the amended filing in part because it promotes administrative efficiency and avoids the time and expense of a lengthy rate case or hearing.  For these reasons, staff recommends that the Commission approve the amended filing in part and deny it in part with regard to rate case expense as addressed below.

 

Rate Case Expense

 

            Peoples submitted $69,156 in rate case expense, with an annual amortization expense of $17,289.  The breakdown of fees, as reflected in the Utility’s October 9, 2013, filing, is shown below.

Table 1-1

	Utility	Utility	Total Actual
Expense	Actual	Estimated	& Est. RCE
Legal Services - Fees (SFF)	$36,039	$17,325	$53,364
Accounting Services (CJN&W)	2,678	0	2,678
Out of Pocket	7,682	5,432	13,114
Total	$46,399	$22,757	$69,156

            According to OPC, rate case expense amortization represents approximately 6 percent of the requested increase in revenues in this docket.  The total estimated expense of $69,156 is 42 percent of what the Commission approved in the last full rate case in 2009.  OPC expressed great concern with the fact that the requested legal fees in this case are 71 percent of what was approved in the last full rate case.  OPC asserted that this is a very focused docket that should not require such a high level of rate case expense.[6]

 

            The Utility, on the other hand, asserted that its estimate to complete is fair and reasonable under the circumstances and that most of the items contained therein are very similar to those required in any limited proceeding.  Peoples contended that it sought to utilize a limited proceeding in this instance in order to attempt to save money on rate case expense.  Peoples also utilized in-house accounting services in an attempt to reduce rate case expense.  In its October 14, 2013, response to OPC, Peoples stated: “as would be expected when not utilizing as much in the way of professional outside accounting services, the Utility relies a bit more on advice from its legal counsel and as such it can be expected in those circumstances that legal expenses would be slightly higher than otherwise might be anticipated were an outside accounting consultant utilized.”[7]

 

            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 case.  Based on its review, staff believes some adjustments are necessary to the Utility’s proposed actual and estimated rate case expense.

 

Legal Services

 

The first adjustment relates to Peoples’ legal fees.  The Utility included $53,364  in legal fees and costs to complete this limited proceeding.  Peoples provided invoices from Sundstrom, Friedman & Fumero, LLP (SFF) through August 2013, showing actual expenses associated with the rate case totaling $36,039 and estimated an additional $17,325 to complete.  These amounts included 102.4 hours of actual time and estimated that an additional 46.5 hours would be required to complete the limited proceeding.

            In support, the Utility asserted that it has utilized its in-house staff to prepare the majority of the filing requirements in this proceeding in an attempt to realize cost savings in rate case expense to the benefit of its customers.  According to Peoples, “its estimate to complete is a fair and reasonable one under the circumstances and most of the items contained therein are very similar to those required in any limited proceeding.”[8]  When looking at the reasonableness of this particular request, staff believes that it is important to keep in mind that this limited proceeding was only filed at the end of May 2013.  OPC’s assertion that this is a very focused docket that should not require such a high level of rate case expense is persuasive, especially when compared to other dockets.  While the components (legal services, accounting services, postage/copying) are similar to other limited proceedings and other dockets in general, the amounts being requested by the Utility for this short amount of time, especially as they relate to legal services, are high.

 

            Staff notes that, in the Cypress Lakes Utilities, Inc. (Cypress Lakes) limited proceeding,[9] the Commission authorized the recovery of $53,971 in legal fees as part of $78,481 of total rate case expense.  Cypress Lakes filed its application for a limited proceeding rate increase in June 2009 with a Consummating Order issued in mid-December the following year.  Staff believes that the Cypress Lakes limited proceeding was much more complex than the instant docket and included responses to eight staff data requests as well as other correspondence over the 18-month period.   

 

            Even more telling is that in the current Utilities, Inc. of Florida (UIF) docket, this same law firm has actual and estimated costs to complete of only $47,068.  This is a docket that has been ongoing since July 2012, had a full set of MFRs filed, MFR deficiencies, interim rates, two customer meetings, two audit reports, and five staff data requests.  The UIF docket addresses multiple systems in four counties.  The requested total actual and estimated number of hours filed in the UIF docket is approximately 92 (65.1 actual hours + 26.5 hours estimated).  While it has not been voted on by the Commission, staff’s recommendation in the UIF docket is that SFF’s total hours be reduced to 89.  Both the Cypress Lakes and UIF cases involve the same law firm used in the instant docket, SFF.[10]

 

            In short, staff believes that the amount of requested rate case expense for legal services fees (actual and estimated) is overstated, especially when compared to other dockets that involved more complex matters.  Even though the UIF docket is far more involved than the instant case, staff believes that the actual and estimated hours recommended for UIF (89 hours) should be the upper limit of what is ultimately approved for legal expenses here.  Accordingly, staff believes that the appropriate amount for legal services fees is $31,150 (89 x $350/hr.), a reduction of $20,681 ($31,150 - $51,831).

 

            In addition, the Utility included $483 in actual costs and $1,050 in estimated costs related to processing documents. Staff believes that actual expenses appear reasonable and no adjustment is needed.  However, staff believes an adjustment is necessary for the costs related to the estimate to complete.  According to the estimate to complete, these costs include fax, FedEx, photocopies, postage, telephone, and other expenses.  Based on the lack of detailed information provided by the Utility, staff believes that this amount is unreasonable and unsupported.  As such, staff questions the need for the level of estimated costs the Utility is seeking.  Accordingly, staff looks again to UIF’s legal services estimate to complete, where SFF included $50 in estimated photocopier costs and an additional $60 in courier costs.  Given the previous discussion comparing dockets above, staff believes the $110 ($50 + $60) in estimated costs should be adequate to complete the instant docket.

 

Accounting Services

 

            The next adjustment relates to the Utility’s accounting fees.  The Utility requested actual accounting expenses of $2,679 for services rendered by Cronin, Jackson, Nixon, and Wilson CPAs (CJN&W).  Based on the Utility’s filing, no additional estimated costs were provided.  In support of its actual costs, the Utility provided a series of five CJN&W invoices from 2012. 

 

            Staff notes that the submitted invoices provided a brief description of the activities that took place and reflected the resulting amount due.  However, the invoices did not reflect a breakdown of the actual number of hours required for each activity, the individual providing the service, or the applicable hourly rate.  Additionally, it is unclear from several of the invoices if all of the expense actually related to the limited proceeding or if the expenses related to routine accounting costs incurred by a company.  Moreover, only the invoices from October and November specifically reference activities related to the Utility’s limited proceeding.  Given the lack of detailed support, staff believes that the portion of the expense related to the remaining invoices is unsupported.  Absent the additional supporting detail that is routinely provided through documents such as job detail reports, staff believes that the following adjustment to the Utility’s actual accounting services expense is warranted.

Table 1-2

 

Invoice Date	Invoice Amount	Staff Rec. Amount	Staff Rec. Adjust.
May 29, 2012	$638	$0	($638)
July 31, 2012	638	0	(638)
October 25, 2012	510	510	0
November 20, 2012	638	638	0
December 21, 2012	255	0	(255)
Total	$2,679	$1,148	($1,531)

 

Accordingly, staff believes that the Utility’s requested amount for accounting services should be reduced by $1,531.

 

Out of Pocket

 

            Peoples has requested actual out of pocket expenses of $2,250 for the filing fee and $5,432 for costs associated with copying and mailing the required notices.  According to the docket file, the Utility paid the $2,250 filing fee on May 15, 2013.  In support of the $5,432 related to the noticing requirement, Peoples provided an invoice showing actual copying and mailing costs related to the combined initial customer notice and notice of customer meeting to all of the Utility's customers.  Staff verified the costs associated with this invoice and believes that it accurately reflects the Utility’s actual incurred expense.  Given the cost of mailing the previous notice, staff believes that the Utility’s estimate that an additional $5,432 will be required to copy and mail the remaining notice also appears reasonable. Accordingly, no adjustment is warranted.

 

            In summary, staff believes that Peoples’ total rate case expense should be decreased by $23,151 for unsupported and unreasonable rate case expense.  The appropriate total rate case expense is $46,005, which amortized over four years would be $11,501 per year.  A breakdown of rate case expense is as follows:

 

Table 1-3

	Utility	Staff	Staff Rec.
Expense	Act. & Est.	Adjustment	Total RCE
Legal Services - Fees (SFF)	$51,831	($20,681)	$31,150
Legal Services - Costs (SFF)	1,533	(940)	593
Accounting Services (CJN&W)	2,678	(1,530)	1,148
Out of Pocket	13,114	0	13,114
Total	$69,156	($23,151)	$46,005

 

Revenues

            As mentioned previously, the Utility filed its request to achieve the revenue requirement authorized in its last rate case of $3,427,667, plus $95,947 for Commission-approved price indices from 2010-2012, and $18,104 for grossed-up amortized rate case expense.  As shown in Table 1-4 below, staff’s recommended revenue level reflects the rate case expense adjustment discussed above.

 

Table 1-4

 

Description	Peoples’ Request	Staff Recommended
Revenue Requirement from Last Rate Case	$3,427,667	$3,427,667
Approved 2010-2012 Indices	95,947	95,947
Amortized RCE w/Gross-up	18,103	12,043
Total Operating Revenue	$3,541,717	$3,535,657

 

 

            Table 1-5 shows the Utility’s requested adjustments and projected annual revenue contained in the amended filing as well as staff’s recommended adjustments and projected annual revenue.  Based on the recommendation above, staff notes that in addition to the adjustment to operation and maintenance expense for rate case expense, additional flow-through adjustments are necessary for taxes other than income and provisions for income taxes.

 

 

 

 

 

 

 

 

 

 

 

 

Table 1-5

 

	Adj. 2012	Utility	Utility	Staff	Staff
	Annualized at	Requested	Projected	Recom.	Recom. Proj.
Description	Current Indexed Rates	Adjustment	Annual Rev.	Adjustment	Annual  Rev.
Water Revenues	$3,138,502	$283,223	$3,421,725	$277,163	$3,415,665
Misc. Service Revenue	119,992		119,992	0	119,992
Operating Revenues	$3,258,494	$283,223	$3,541,717	$277,163	$3,535,657
Operation & Maintenance	$2,421,156	$17,289	$2,438,445	$11,501	$2,432,657
Depreciation	479,808		479,808	0	479,808
Amortization of CIAC	(132,319)		(132,319)	0	(132,319)
Taxes Other than Income	323,905	12,745	336,550	12,473	336,378
Operating Expenses	$3,092,550	$30,034	$3,122,584	$23,974	$3,116,524
Misc. Revenues	$1,800		$1,800	0	$1,800
Income before Income Taxes	167,744	253,189	420,933	253,189	420,933
Provisions for Income Taxes	62,941	95,275	158,216	93,575	156,516
NET OPERATING INCOME	$104,803	$157,915	$262,718	$159,615	$262,618
RATE BASE	$4,056,715		$4,056,715		$4,056,715
RATE OF RETURN	2.58%		6.48%		6.47%

 

Rates

 

            In the Utility’s last rate case, a base facility charge (BFC) allocation of 25 percent was approved.  The Utility’s proposed rates are based on a BFC allocation of 35 percent.  Staff’s recommended rates are based on the Utility’s proposed rate structure and staff’s recommended revenue requirement.  The recommended rates are shown on Table 1-6.

 

 

 

 

Table 1-6

		Utility	Staff
		Proposed	Recommended
	Present Rate	Rates	Rates
Residential and General Service
Base Facility Charges by Meter Size
5/8" x 3/4"	$5.68	$7.60	$7.59
1"	$14.20	$19.00	$18.98
1 1/4"	$22.71	$30.40	$30.36
1 1/2"	$28.40	$38.00	$37.95
2"	$45.43	$60.80	$60.72
3"	$90.86	$121.60	$121.44
4"	$141.96	$190.00	$189.75
6"	$283.93	$380.00	$379.50
8"	$510.25	$684.00	$683.10
10"	$823.38	$1,102.00	$1,100.55
Charge per 1,000 gallons - Residential
First 3,000	$1.31	$1.47	$1.47
3,001-6,000	$4.43	$4.40	$4.40
6,001-12,000	$6.59	$6.61	$6.59
Over 12,000	$8.76	$8.81	$8.79
Charge per 1,000 gallons - General Service	$3.63	$3.37	$3.36
Multi-Family - per unit
Base Facility Charge - All Meter Sizes	$5.68	$7.60	$7.59
Charge Per 1,000 gallons	$3.63	$3.37	$3.36
Private Fire Protection
2"	$3.79	$5.07	$5.06
3"	$7.57	$10.13	$10.12
4"	$11.83	$15.83	$15.81
6"	$23.66	$31.67	$31.63
8"	$42.52	$57.00	$56.93
10"	$68.62	$91.83	$91.71

 

Conclusion

 

            For the reasons discussed above, the Commission should approve in part and deny in part the Utility’s amended filing.  The appropriate monthly water rates are shown on Table 1-6.  Within 15 days of the Commission vote, the Utility should file a proposed customer notice and revised tariff sheets which are consistent with the Commission's decision.  The approved rates should be effective for service rendered on or after the stamped approval date of the tariff pursuant to Rule 25-30.475(1), F.A.C., after staff has verified that the proposed customer notice is adequate and the notice has been provided to the customers.  Peoples should provide proof that the customers have received notice within 10 days after the date of the notice.

 

Issue 2: 

 Should this docket be closed?

Recommendation: 

  No.  If no person whose substantial interests are affected by the proposed agency action files a protest within twenty-one days of the issuance of the order, a consummating order will be issued.  The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff.  When the tariff and notice actions are complete, this docket may be closed administratively.  (T. Brown, Lawson)

Staff Analysis: 

 If no person whose substantial interests are affected by the proposed agency action files a protest within twenty-one days of the issuance of the order, a consummating order will be issued.  The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff.  When the tariff and notice actions are complete, this docket may be closed administratively.