Recommendation

Issue 1:

Should the quality of service provided by Sunrise be considered satisfactory?

Recommendation:

No. The overall quality of service provided by Sunrise should be considered unsatisfactory because the Utility has failed to address maintenance and repairs recommended by the Polk County Health Department (PCHD) in 2012. Furthermore, the Utility has demonstrated a pattern of non-responsiveness to Commission inquiries. As such, staff recommends decreasing the officers’ salaries by 25 percent. (Lewis)

Staff Analysis:

Pursuant to Rule 25-30.433(1), F.A.C., in water and wastewater rate cases, the Commission shall determine the overall quality of service provided by the Utility. This is derived from an evaluation of three separate components of the Utility operations. These components are; (1) the quality of the Utility’s product, (2) the operating conditions of the Utility’s plant and facilities, and (3) the Utility’s attempt to address customer satisfaction. The Rule further states that sanitary surveys, outstanding citations, violations, and consent orders on file with the Department of Environmental Protection (DEP) and the county health department over the preceding three-year period shall be considered. Additionally, Section 367.0812(1)(c), F.S., requires the Commission to consider the extent to which the utility provides water service that meets secondary water quality standards as established by the DEP.

Quality of Utility’s Product

Staff’s evaluation of Sunrise’s product quality consisted of a review of the Utility’s compliance with the DEP primary and secondary drinking water standards, county health department standards, and customer complaints. Primary standards protect public health while secondary standards regulate contaminants that may impact the taste, odor, and color of drinking water.

Based on staff’s review of the DEP and the PCHD records, Sunrise was in compliance with all primary and secondary standards in 2012 and 2013. On May 21, 2014, the PCHD conducted a Sanitary Survey and four deficiencies were noted. Sunrise corrected the four deficiencies identified by the PCHD within 30 days. Staff’s review of monthly microbiological laboratory reports indicates no compliance issues during the remainder of 2014.

On June 9, 2015, the PCHD conducted a sanitary survey and found that the chlorination was insufficient. Follow up inspections on July 9, 2015, and July 17, 2015, showed that the chlorination issue had not been resolved. On July 21, 2015, the PCHD issued a warning notice against both Sunrise and its sister company, Alturas Utilities L.L.C., for not properly maintaining chlorine residuals. Sunrise’s triennial test, for both primary and secondary standards, completed on December 15, 2015, indicated that the Utility was in compliance with the DEP and the PCHD standards. Therefore, it appears the Utility has corrected the chlorination issues and is now in compliance with the DEP and the PCHD primary and secondary standards.

Staff’s review of complaints filed by customers did not reveal any issues or concerns regarding the quality of Sunrise’s product. At the customer meeting held by staff, three customers stated the water quality was bad at times and not suitable for consumption. Based on staff’s review, giving consideration to the Utility’s current compliance with the DEP and the PCHD standards, as well as the relatively low number of customer complaints, the quality of Sunrise’s product should be considered satisfactory.

Operating Condition of the Utility’s Plant and Facilities

Sunrise’s water system provides finished water that is obtained from two wells. Sunrise’s water system is served by an 8-inch diameter well rated 400 gallons per minute (gpm) and a 4-inch diameter well rated at 150 gpm. The raw water is injected with liquid chlorine prior to entering either a 6,000 gallon or 3,000 gallon hydropneumatic tank. The treated water is then pumped into the water distribution system.

Staff’s evaluation of Sunrise’s facilities included a review of the Utility’s compliance with the DEP and the PCHD standards of operation.[7] On December 13, 2012, the PCHD conducted a plant inspection which concluded that the 6,000 gallon hydropneumatic tank would have to be cleaned and recoated within 36 months of the inspection date (December 2015). On January 14, 2016, the Utility and the PCHD entered into a Consent Order stating that the Utility failed to perform the recommended maintenance and that the Utility faced escalating financial penalties until the recommended maintenance was completed. Despite multiple requests, staff has not received any documentation from the Utility indicating that it is planning on performing the maintenance recommended by the PCHD. Based on the Utility’s non-compliance and non-responsiveness to the PCHD requirements, staff believes that the operating condition of the Utility’s plant and facilities should be considered unsatisfactory.

The Utility’s Attempt to Address Customer Satisfaction

The final component of the overall quality of service which must be assessed is customer satisfaction. As part of staff’s evaluation of customer satisfaction staff held a customer meeting (May 20, 2015) to receive customer comments concerning Sunrise’s quality of service. Approximately 20 customers attended the meeting in which 5 spoke about their problems with the service provided by the Utility. The primary concern expressed by the five speakers dealt with billing issues. The customers were angered by multiple instances of their monthly payments not being credited properly resulting in late payment fees. In addition, they stated the Utility had a policy of knocking on the customers doors in the evening hours threatening to disconnect the service if a cash payment was not made to them immediately. In some instances, customers claim that they paid in cash as requested, and then received a double bill the following month with neither of their payments credited, although their bank or payment agent verified the payment. The customers characterized the Utility’s practice of collecting payments as intimidating. In addition, a petition, with 71 signatories, objecting to the rate increase was given to staff at the customer meeting. The petition, however, lacked sufficient information (addresses) to quantify how many of the signatories were customers of the Utility.

Staff also requested the complaint records filed against the Utility, directly with the DEP/PCHD from 2011 through 2015. The DEP/PCHD responded that it had not received any complaints against the Utility during the specified time frame. The same request was sent to Sunrise, which responded that it did not have any customer complaints outside of the ones forwarded by the Commission’s Office of Consumer Assistance and Outreach for the requested period. The review of the Commission’s complaint records indicated 22 complaints against the Utility were received from January 1, 2011, through December 31, 2015. Similar to the concerns expressed at the customer meeting, many of the complaints reflected dissatisfaction with billing issues. Fourteen of the Utility’s 22 responses, to staff inquiries, were beyond the 15 days required by Rule 25-22.032, (6)(b) F.A.C. Because the Utility’s responses were late, they were recorded as apparent violations of the aforementioned Rule. OPC also raised concerns about the Utility’s responsiveness to customer and staff inquiries. Table 1-1 below, summarizes the customer complaints gathered by staff in this docket.

Table 1-1

Subject of Complaint	PSC’s Records (CATS)	Customer Meeting
Billing Related	14	4
Opposing Rate Increase	-	1
Other	2	-
Quality of Service	6	3
Total*	22	8

*A complaint may appear twice in this table if it meets multiple categories.

On October 19, 2015, the Utility notified staff that its daily customer service and repair operations were under new management. Additionally, the Utility has entered a contractual arrangement with a bookkeeper in Bartow, Florida, which would allow customers to make service requests and bill payments in person from 8:30 am to 5:00 pm Monday through Friday.[8] Although the Utility has demonstrated a willingness to address customer satisfaction, staff notes that complaints regarding billing have been occurring for several years now.

Staff believes that the Utility’s untimely responses to the Commission as well as other regulatory agencies, relates to its attempts to address customer satisfaction. As discussed in this issue, Sunrise has not been responsive to the PCHD with respect necessary maintenance of it facilities, and the Utility has not been timely in its responses to the Commission’s Office of Consumer Assistance and Outreach. Based on the summation of these concerns, as well as the customer’s complaints regarding the Utility’s practice of collecting payments, staff believes Sunrise’s attempt to address customer satisfaction is unsatisfactory. If Sunrise continues to show a pattern of non-responsiveness to Commission inquiries or customers continue to complain about the Utility’s practice of collecting payments, staff believes the initiation of a show-cause proceeding may be a reasonable action for the Commission to take.

Conclusion

The overall quality of service provided by Sunrise should be considered unsatisfactory because the Utility has failed to address maintenance and repairs recommended by the PCHD in 2012. Furthermore, the Utility has demonstrated a pattern of non-responsiveness to Commission inquiries. As such, staff recommends decreasing the officers’ salaries by 25 percent.
Issue 2:

What is the used and useful percentage (U&U) of Sunrise’s water treatment plant and distribution system?

Recommendation:

Staff recommends Sunrise’s water treatment plant and its distribution system should both be considered 100 percent U&U. Additionally, staff recommends a 9.3 percent adjustment for excessive unaccounted for water (EUW) should be made to operating expenses for chemicals and purchased power. (Lewis)

Staff Analysis:

Sunrise’s water system is served by an 8-inch diameter well rated at 400 gallons per minute (gpm) and a 4-inch diameter well rated at 150 gallons per minute (gpm). The raw water is injected with liquid chlorine prior to entering either a 6,000 gallon or 3,000 gallon hydropneumatic tanks, and then pumped into the water distribution system. The Utility is permitted to withdraw an average of 58,400 gallons per day (gpd) up to 73,000 gpd peak. The treated water is then pumped into the water distribution system. According to the Utility, there are no fire hydrants and there was no growth in the service area during the last five years. During the previous SARC, both the water treatment plant and distribution system were deemed 100 percent U&U.

Water Treatment Plant and Distribution System Used &Useful

As noted above, the Commission found both the water treatment plant and distribution system to be 100 percent U&U in the prior SARC. There have been no major plant additions or growth in the last five years. Therefore, consistent with the prior Commission decision, the water treatment plant and distribution system should be considered 100 percent U&U.

Excessive Unaccounted for Water

Rule 25-30.4325, F.A.C., describes EUW as unaccounted for water in excess of 10 percent of the amount produced. When establishing the Rule, the Commission recognized that some uses of water are readily measurable and others are not. Unaccounted for water is all water that is produced that is not sold, metered, or accounted for in the records of the Utility. The Rule provides that to determine whether adjustments to plant and operating expenses, such as purchased electrical power and chemicals cost, are necessary, the Commission will consider all relevant factors as to the reason for EUW, solutions implemented to correct the problem, or whether a proposed solution is economically feasible. The unaccounted for water is calculated by subtracting both the gallons used for other purposes, such as flushing, and the gallons sold to customers from the total gallons pumped for the test year.

The Utility treated 17,560,851 gallons and sold 14,161,000 gallons of water during the test year. Sunrise did not record any gallons used for other purposes. Therefore, the amount of unaccounted water (17,560,851 – 14,161,000) equals 3,399,851 gallons. Ten percent of the gallons produced, (17,560,851 x 0.10) or 1,756,085 gallons, are allowed per Rule; therefore, the EUW (3,399,851 – 1,756,085) equals 1,643,766 gallons. This divided by the total gallons produced (1,643,766/17,560,851) equates to 9.3 percent EUW. Therefore, staff is recommending a 9.3 percent adjustment be made to operating expenses for chemicals and purchased power due to the EUW.

Conclusion

Staff recommends Sunrise’s water treatment plant and its distribution system should both be considered 100 percent U&U. Additionally, staff recommends a 9.3 percent adjustment for EUW should be made to operating expenses for chemicals and purchased power.
Issue 3:

What is the appropriate allocation of common costs to Sunrise?

Recommendation:

The appropriate allocation of common costs to Sunrise is 78 percent. (Golden, Vogel)

Staff Analysis:

Sunrise and its sister company, Alturas Utilities, L.L.C. (Alturas), receive services from several shared contractual service providers. During the test year, the Utility’s allocation of the common costs varied for each of the contractual service providers. In its June 10, 2015, letter OPC expressed concern about the variability in the Utility’s test year contractual service expense allocations. Commission practice is to allocate shared administrative and general expenses based on the number of ERCs.^{^[9]} In addition, the Commission previously approved this methodology for Sunrise and Alturas when the systems were owned by Keen Sales, Rentals, and Utilities, Inc. The appropriate allocation percentages are calculated as follows:

Table 3-1

Allocation Percentages

	Number of	Percentage of
Name of System	ERCs	Allocation

Alturas Utilities, L.L.C.	69	22%
Sunrise Utilities, L.L.C.	247	78%
Total	316	100%

As shown above, Sunrise represents 78 percent of the ERCs for both utilities. Therefore, staff recommends that shared reasonable and prudent common expenses should be allocated to the Sunrise water system based on the allocated portion of 78 percent. This equitably reflects the distribution of costs between the two systems.
Issue 4:

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

Recommendation:

The appropriate average test year rate base for Sunrise is $49,773. Staff recommends that the Utility be required to file written documentation in this docket showing that Sunrise owns or has the right to continued long-term use of the land upon which its treatment facilities are located by December 31, 2016. Also, in the event the Utility is unable to issue customer deposit refunds and interest payments to former customers, staff recommends that the resulting total of the unclaimed refunds and associated accrued interest be credited to contributions-in-aid-of-construction in the Utility’s next rate proceeding. (Golden, Vogel)

Staff Analysis:

The appropriate components of the Utility’s rate base include utility plant in service, land, contributions-in-aid-of-construction (CIAC), accumulated depreciation, amortization of CIAC, and working capital. Sunrise’s rate base was last established by Order No. PSC-12-0533-PAA-WU in a 2011 SARC.^{^[10]} Staff selected the test year ended December 31, 2014, for the instant case. A summary of each component of rate base and the recommended adjustments are discussed below.

Pursuant to Rule 25-30.115, F.A.C., water and wastewater utilities are required to maintain their accounts and records in conformity with the 1996 National Association of Regulatory Utility Commissioners’ Uniform System of Accounts (NARUC USOA). As will be discussed further in Issues 7 and 14, the Utility is not currently maintaining its books and records on a monthly basis as prescribed by the NARUC USOA. Commission audit staff determined that the Utility’s accounting activities are compiled at the end of each calendar year by the Utility’s officers and their Certified Public Accounting (CPA) firm to prepare the Utility’s Annual Report and its Federal Tax Return. Consequently, a 2014 income statement and balance sheet were not available, and the 2014 Annual Report was not compiled before the end of the audit staff’s field work. Audit staff used the Utility’s 2009 through 2013 Annual Reports, 2013 Federal Tax Return, and other supporting documents to compile the Utility’s rate base, capital structure, and net operating income for the test year ended December 31, 2014.

Utility Plant in Service (UPIS)

As discussed above, no rate base balances were available for 2014. Using the Utility’s 2009 through 2013 Annual Reports, audit staff calculated a test year UPIS balance of $124,367. In the Utility’s last SARC, with a test year ended September 30, 2011, the Commission approved and included $6,755 of pro forma plant additions, without retirements. The projects included replacing the following plant items: a fence, a master flow meter, a well cover, isolation valves, and piping between the well and tank. On November 23, 2013, the Utility filed documents with the Commission that supported an actual cost of $1,733 for the approved projects to replace the fence, master flow meter, and well cover that were completed during 2012 and 2013. The Utility did not complete the two projects to replace the isolation valves and tank piping. The uncompleted projects accounted for $5,113 of the $6,755 pro forma plant additions approved. Commission staff reviewed and approved the Utility’s filed documents and administratively closed the docket in that proceeding.

A review of the Utility’s Annual Reports indicates that the Utility has experienced a net operating loss immediately prior to and during each year since the pro forma projects were completed. Specifically, the Utility reported net operating losses of $9,544, $7,830, and $4,630 for 2011, 2012, and 2013, respectively. In addition, audit staff calculated a loss of $5,688 for 2014. The ongoing level of operating losses indicates that the $5,113 overstatement of UPIS was offset by other costs, and therefore, did not cause the Utility to exceed its authorized rate of return. In addition, due to a billing error, the Utility did not begin charging the Phase II rates when initially approved, thereby, minimizing the impact of the pro forma overstatement. However, staff believes it would be appropriate to adjust the rate base prospectively to correctly reflect the pro forma that was completed. Audit staff determined the Utility’s UPIS should be decreased by $13,767 to remove the uncompleted pro forma projects, to remove unsupported plant additions, and to reclassify meter replacement costs that were covered as an expense item under a meter replacement program approved in the Utility’s last SARC. Based on audit staff’s review, staff has decreased UPIS by $13,767 to reflect the correct test year UPIS balance.

Audit staff noted the previously approved pro forma projects did not include any plant retirements. The three completed pro forma projects each involve the replacement of existing plant, and therefore, should include associated retirements. It is Commission practice to use 75 percent of the cost of the replacement as the retirement value when the original cost or original in-service date is not known. Accordingly, staff has decreased this account by $1,300 ($1,733 x .75 = $1,300) to reflect the plant retirements associated with the 2012 and 2013 pro forma projects to replace the fence, master flow meter, and well cover. No plant additions were made during the test year, therefore, no averaging adjustment is necessary.

Based on the adjustments shown above, staff’s total adjustment to UPIS is a decrease of $15,067 ($13,767 + $1,300). Staff recommends a UPIS balance of $109,300.

Land and Land Rights

No land balance was available for 2014. The Commission previously approved a land balance of $553 in the Utility’s 2011 SARC. Audit staff determined that there has been no activity related to land since the last case, and therefore, no adjustments are necessary to the previously approved land value. Therefore, staff increased this account by $553 to reflect the previously approved land balance.

However, audit staff determined that there is an error in the warranty deed that must corrected in order for the Sunrise to be in compliance with Commission regulations. On February 10, 2004, the Utility’s former owner, Keen Sales, Rentals and Utilities, Inc., executed a warranty deed that transferred the real properties containing the Sunrise and Alturas systems to Sunrise. Subsequently, on November 8, 2004, the same former owner executed a corrective warranty deed that incorrectly transferred both real properties back to Alturas, rather than only transferring the Alturas land. Based on audit staff’s review, the land occupied by the Sunrise water plant is still owned by Alturas.

Pursuant to Rule 25-30.433(10), F.A.C., utilities are required to own the land upon which the utility treatment facilities are located, or possess the right to the continued use of the land, such as a 99-year lease. The Rule specifies that the Commission may consider a written easement or other cost-effective alternative. The Utility owner indicated that he had contacted the Utility’s legal counsel regarding this issue, however, as of the writing of this recommendation, the land ownership issue has not be corrected. Therefore, staff recommends that the Utility be required to provide written documentation showing that Sunrise owns the land upon which its treatment facilities are located no later than six months after the issuance of an order finalizing this docket. Acceptable forms of documentation include a copy of the corrected warranty deeds for both Sunrise and Alturas, an executed long-term lease, or written easement. In addition, the Utility should be put on notice that failure to correct Sunrise’s land ownership may result in the initiation of show cause proceedings, including penalties and fines.

Staff’s total adjustment to this account is an increase of $553. Therefore, staff recommends a land and land rights balance of $553 for ratesetting purposes.

Non-Used and Useful Plant

As discussed in Issue 2, Sunrise’s water treatment plant and distribution system are considered 100 percent U&U. Therefore, no U&U adjustment is necessary.

Contribution in Aid of Construction (CIAC)

No CIAC balance was available for the 2014 test year. The Commission approved a CIAC balance of $12,393 in the Utility’s 2011 SARC. However, a review of the Utility’s 2011, 2012, and 2013 Annual Reports indicates that the Utility never adjusted its previous CIAC balance of $5,168 to reflect the Commission approved balance. Therefore, staff increased this account by $7,225 ($12,393 - $5,168 = $7,225) to reflect the Commission approved balance. Audit staff determined there has been no activity related to CIAC since that case, therefore, no additional adjustments are necessary. Staff recommends a CIAC balance of $12,393.

In addition, as will be discussed later in this recommendation, Sunrise appears to be in violation of the Commission’s rules and regulations regarding customer deposits. The Utility is working with Commission staff to correct the apparent violations, however, the final results of those corrections are not yet known. In the event the Utility is unable to issue customer deposit refunds and interest payments to former customers, staff recommends that the resulting total of the unclaimed refunds and associated accrued interest should be credited to CIAC in the Utility’s next rate proceeding.

Accumulated Depreciation

Audit staff calculated a test year accumulated depreciation balance of $68,952. A review of the Utility’s 2011, 2012, and 2013 Annual Reports indicates that the Utility never adjusted its records to reflect the accumulated depreciation balance approved by the Commission in the 2011 SARC. Further, audit staff determined the depreciation accruals had been recorded inconsistently since 2011. Therefore, audit staff calculated the annual accruals to accumulated depreciation beginning with the Utility’s last SARC in 2011 through the end of the test year, using the prescribed rates set forth in Rule 25-30.140, F.A.C., and determined that accumulated depreciation should be increased by $3,131 to reflect the correct test year balance. In addition, staff decreased this account by a total of $1,412 to reflect retirement of the replaced fence, master flow meter, and well cover discussed above. Staff’s retirement adjustment includes removal of $1,300 in accumulated depreciation for the retired fence, master flow meter, and well cover, as well as removal of $112 in additional accumulated depreciation that continued to accrue during the years following the plant replacements ($1,300 + $112 = $1,412). Also, staff decreased this account by $2,254 to reflect an averaging adjustment. Staff’s net adjustment to accumulated depreciation is a decrease of $535, resulting in an accumulated depreciation balance of $68,417.

Accumulated Amortization of CIAC

The Commission approved an accumulated amortization of CIAC balance of $10,395 in the Utility’s 2011 SARC, however, the Utility’s records were never adjusted to reflect that balance. Audit staff calculated CIAC amortization using the amortization rates established by Rule 25-30.140(9)(c), F.A.C., as of December 31, 2014, and determined that this account should be increased $6,900 to reflect the appropriate test year balance. However, audit staff also noted the Utility’s CIAC would be fully amortized by August 2015. Because the CIAC is now fully amortized, staff believes it would be appropriate to make a pro forma adjustment to reflect the full amortization of the CIAC in August 2015. Therefore, staff increased this account by $325 to reflect the full amortization of CIAC. Due to the recognition of the full amortization of CIAC in this proceeding, no averaging adjustment is necessary. Staff’s total adjustment to accumulated amortization of CIAC is an increase of $7,225 ($6,900 + $325). Therefore, staff recommends an accumulated amortization of CIAC balance of $12,393.

Working Capital Allowance

Working capital is defined as the investor-supplied funds that are necessary to meet operating expenses of the Utility. Consistent with Rule 25-30.433(2), F.A.C., staff used the one-eighth of the operation and maintenance (O&M) expense formula approach for calculating the working capital allowance. Applying this formula, staff recommends a working capital allowance of $8,337 (based on O&M expense of $66,697/8).

Rate Base Summary

Based on the foregoing, staff recommends that the appropriate average test year rate base is $49,773. Rate base is shown on Schedule No. 1-A. The related adjustments are shown on Schedule No. 1-B. Staff recommends that the Utility be required to file written documentation in this docket showing that Sunrise either owns or has continued long-term use of the land upon which its treatment facilities are located by December 31, 2016. Also, in the event the Utility is unable to issue customer deposit refunds and interest payments to former customers, staff recommends that the resulting total of the unclaimed refunds and associated accrued interest be credited to CIAC in the Utility’s next rate proceeding.
Issue 5:

What are the appropriate return on equity and overall rate of return for Sunrise?

Recommendation:

The appropriate return on equity (ROE) is 8.74 percent with a range of 7.74 percent to 9.74 percent. The appropriate overall rate of return is 8.13 percent. (Golden, Vogel)

Staff Analysis:

No capital structure balance was available for 2014. Based on a review of the Utility’s Annual Reports, audit staff initially determined the Utility’s capital structure is composed entirely of owners’ equity because no debt or customer deposits were disclosed. However, audit staff could not determine the Utility’s equity balance from its 2013 Annual Report or 2013 Federal Tax Return. Pursuant to Order No. PSC-05-0308-PAA-WU, which approved the transfer of Sunrise to the current owner, the purchase price was $90,000 for the system.^{^[11]} The purchase price was paid with cash in several installments. Therefore, staff has increased common equity by $90,000 to reflect the owner’s equity in the system. In addition, Alturas subsequently provided customer deposit records that indicated the Utility was holding $4,480 in customer deposits during the test year. Accordingly, staff increased customer deposits by $4,480 to reflect the Utility’s customer deposit balance as of December 31, 2014.

The Utility’s capital structure has been reconciled with staff’s recommended rate base. The appropriate ROE is 8.74 percent based upon the Commission-approved leverage formula currently in effect.^{^[12]} Staff recommends an ROE of 8.74 percent, with a range of 7.74 percent to 9.74 percent, and an overall rate of return of 8.13 percent. The ROE and overall rate of return are shown on Schedule No. 2.

Issue 6:

What are the appropriate test year revenues for Sunrise’s water system?

Recommendation: The appropriate test year revenues for Sunrise’s water system are $74,938. (Bruce)

Staff Analysis: At the time of staff’s audit, the Utility had not closed its books for calendar year 2014, which is the test year in this docket. As a result, staff’s adjustments are to the Utility’s estimated test year revenues. Sunrise estimated test year revenues of $69,416, excluding any miscellaneous revenues. The Utility recorded five months of miscellaneous revenues during the test year, which totaled $1,320. Because no records were provided for the remaining seven months of the test year, staff estimated that a similar number of miscellaneous service events would occur throughout the remaining months and determined that additional miscellaneous revenues of $1,320 should be added. Therefore, test year revenues should be increased by $2,640. As discussed in Issue 7, the Utility has taken steps to properly record miscellaneous revenues. During the test year, the Utility had a Phase II rate increase that became effective on July 1, 2014. Staff has verified that the rates were implemented in May 2015. Based on the appropriate test year billing determinants and the annualized increased rates, service revenues should be increased by $2,882 to reflect service revenue of $72,298. Staff recommends that the appropriate test year revenues for Sunrise’s water system are $74,938 ($72,298 + $2,640).
Issue 7:

What is the appropriate amount of operating expenses?

Recommendation:

The appropriate amount of operating expenses for the Utility is $75,778. Staff recommends that the Utility be required to file documentation in this docket by December 31, 2016, showing that the pro forma trihalomethane and haloacetic acid tests have been completed. The documentation should include a copy of the test results and final invoices. (Golden, Vogel)

Staff Analysis:

As discussed in Issue 4, the Utility had not yet prepared its accounting records for 2014 at the time of staff’s audit. Instead, the Utility provided audit staff with an Expense Summary schedule of actual and estimated expenses of $84,912, some invoices, and some cancelled checks. The Utility’s sister company, Alturas, has also filed an application for a SARC that is being processed concurrently under Docket No. 140219-WU. Audit staff noted the majority of information used to verify Sunrise’s test year expenses involved shared operator services between the two Utilities or comingled banking operations due to severe cash flow problems. Based on a review of the available information for both Sunrise and Alturas, audit staff initially determined Sunrise’s test year operating expenses to be $75,104 for the test year ended December 31, 2014.

Subsequent to the audit, the Utility made several changes in its contractual service providers. The Utility also changed some procedures to improve the operation of the Utility and address some concerns discussed in staff’s audit report and raised by customers. In response to several staff data requests, the Utility also provided additional documentation to support some previously unsupported expenses, some requested pro forma expenses, and some new pro forma expenses related to the Utility’s efforts to improve its operations. Based on both the test year and supplemental information, staff made several adjustments to the Utility’s operating expenses, as summarized below. In addition, staff made several adjustments in response to concerns raised by OPC in its June 10, 2015, letter filed in this docket and at a December 9, 2015, noticed informal meeting.

Operation and Maintenance (O&M) Expenses

Salaries and Wages – Officers (603)

The Utility’s Expense Summary reflects $12,000 in this account. The Utility currently has two officers; an administration officer and a president. The administration officer is the Utility owner and serves as the primary officer responsible for overseeing the daily operations of the Utility. In the Utility’s last SARC, the Commission approved an annual officer’s salary of $12,000 for the owner.^{^[13]} At that time, the owner’s duties included interfacing with the Utility’s contractual manager on the day-to-day operations, reviewing the monthly meter reading reports, reviewing monthly bank statements, preparing the annual report, and compiling financial data for the certified public accountant (CPA) to prepare the federal income tax return. Currently, the owner works with the Utility’s four contractual service providers to oversee the financial and operational functions of Sunrise and Alturas.

As discussed in Issue 3, staff recommends that common costs be allocated between Sunrise and Alturas based on ERCs, with 78 percent allocated to Sunrise and the remaining 22 percent allocated to Alturas. Staff determined that the appropriate allocation of the administration officer/owner’s salary to Sunrise is $9,360 ($12,000 x .78 = $9,360). Accordingly, staff decreased this account by $2,640 to allocate the remaining 22 percent of the $12,000 salary to Alturas ($12,000 x .22 = $2,640).

During the test year, the Utility also paid $750 to the Utility’s president who assists the owner with utility matters as needed, including annual work related to preparation of the annual report and income tax forms. Staff increased this account by $585 to reflect the appropriate 78 percent allocation of the president’s salary to Sunrise ($750 x .78 = $585).

In its June 10, 2015, letter OPC suggested that the administration officer/owner’s salary should be re-evaluated due to the severe accounting record deficiencies and the owner’s lack of response to several warning letters from the PCHD. As discussed in Issue 1, staff recommends that a 25 percent penalty be applied to the officers’ salaries for unsatisfactory quality of service. The penalty was applied to the administration officer/owner’s adjusted salary of $9,360, resulting in a $2,340 penalty decrease. The penalty was also applied to the president’s salary of $585, resulting in a $146 decrease. Therefore, staff decreased this account by a total of $2,486 to reflect a 25 percent reduction in both officers’ salaries allocated to Sunrise. The resulting officers’ salaries allocated to Sunrise following the penalty reduction are $7,020 for the administration officer/owner and $439 for the president. As additional information, the total combined salaries for Sunrise and Alturas following all of staff’s adjustments are $9,000 for the administration officer/owner and $563 for the president.

In summary, staff’s total adjustment to this account is a decrease of $4,541. Staff recommends salaries and wages – officers’ expense of $7,459.

Purchased Power (615)

The Utility’s Expense Summary reflects $2,340 in this account. The Utility was only able to provide nine electric power invoices for the test year. Audit staff was able to substantiate the amounts for two of the three missing invoices using payment information included on subsequent invoices. Also, audit staff estimated the missing December 2014 invoice amount by using the average of the billed amounts for January through November 2014. Consequently, staff decreased this account by $63 to reflect the correct test year purchased power expense, resulting in an adjusted balance of $2,277. The $63 adjustment includes removal of $5 in late payment fees that are not recoverable through the Utility’s rates.

In addition, as discussed in Issue 2, staff is recommending an EUW adjustment of 9 percent. Therefore, staff decreased the adjusted balance by $205 ($2,277 x .09 = $205) to reflect a 9 percent EUW adjustment. Staff’s total adjustment is a decrease of $268. Therefore, staff recommends purchased power expense of $2,072.

Fuel for Power Production (616)

The Utility’s Expense Summary does not include this account. Audit staff determined the Utility paid a total of $219 for propane fuel for its emergency generator at the water plant during the test year. Therefore, staff increased this account by $219, and recommends fuel for power production expense of $219 for the test year.

Chemicals (618)

The Utility’s Expense Summary reflects chemicals expense of $1,431. Based on audit staff’s review, staff increased this account by $131 to reflect the appropriate test year chemicals expense, resulting in an adjusted chemicals expense of $1,562. However, as discussed Issue 2, staff is recommending an EUW adjustment of 9 percent. Accordingly, staff decreased this account by $141 to reflect an EUW adjustment of 9 percent ($1,562 x .09 = $141). Staff’s net adjustment is a decrease of $10, resulting in a recommended chemicals expense of $1,421.

Contractual Services – Overview

Subsequent to the test year, the Utility made several changes in its contractual service providers that will affect the contractual service expenses going forward. The changes are intended to address concerns raised by staff and the Utility’s customers, and improve the Utility’s operations going forward. Staff believes these changes will be beneficial to both the Utility and its customers. Accordingly, staff believes it would be appropriate to make some pro forma adjustments to reflect those changes. Due to the level of changes made, staff believes it will be helpful to provide an overview of the changes between the test year and current year’s contractual service providers. It should be noted that the Utility does not have written contracts for any of the current contractual service providers.

As background information, the Utility began the test year with four part-time contractual service providers; an office manager, management assistant, billing assistant, and plant operator. The contractual office manager and plant operator services also included on-call work for emergency purposes. The first office manager left abruptly in the middle of the test year, causing the management assistant to immediately assume the office manager’s duties, in addition to continuing the management assistant duties. Due to cash flow shortages, the Utility did not replace the management assistant, and only requested assistance from the billing assistant a few times during the test year. Consequently, the Utility only operated with an office manager and plant operator for part of the test year and much of 2015. It appears that the abrupt management changes during the test year and limited staffing may have contributed to many of the billing and service issues raised by the Utility’s customers.

In September 2015, the second office manager discontinued working for the Utility. The Utility subsequently hired three additional contractual service providers; an accountant, a Utility service technician, and the former billing assistant. The Utility expanded the duties of the new contractual service providers to cover more utility functions than were covered by the previous workers. The expanded duties and specific skills of the new contractual service providers are expected to improve the Utility’s operations and customer service.

In order to reduce overhead costs, the Utility owner never established a physical office in the service area. Previously, the only option for customers who wanted to pay their bill in person was to go to the office manager’s house to drop off the payment or arrange for the office manager to pick up the payment at their house. The recently hired contractual accountant has an office near the service area and has agreed to accept customer payments at that location in order to help address this concern. The contractual accountant now serves as the office manager and bookkeeper for the Utility. The contractual accountant’s services include: updating and maintaining the Utility’s books and records; preparing and issuing monthly bills; preparing the monthly billing detail reports; collecting customer payments and deposits; providing a location where customers may mail or drop-off payments; providing a utility drop-box where customers may drop off payments during non-business hours; checking for payments daily during the work week; transmitting customer payments electronically to the bank on a daily basis when received during the work week; reviewing payment records and assisting with service disconnections due to non-payment; accepting customer calls regarding billing questions; handling customer complaints regarding billing issues; and assisting with preparing the financial information for the Utility’s annual report. The accountant’s contractual fees will be discussed under the Contractual Services – Professional (631) section below.

The contractual utility service technician’s duties include assisting with general system repairs, customer service repairs, new customer connections, service disconnections, monthly meter reading, mowing, answering the Utility’s emergency cell phone, and being on-call 24 hours a day, 7 days a week. The utility service technician’s meter reading fees will be discussed in Contractual Services – Billing (630), and the fees for the remaining duties will be discussed in the Contractual Services – Other (636).

During the test year, the Utility hired a contractual billing assistant to analyze the monthly accounts receivable and assist the office manager with collection of past due accounts for both Sunrise and Alturas. Due to cash flow shortages, the Utility only requested service from the billing assistant during part of the test year. In September 2015, the Utility re-hired the contractual billing assistant with expanded duties. The billing assistant’s current duties include: answering the Utility’s main phone number; assisting with customer complaints; assisting with reviewing and correcting the Utility’s customer deposit records; assisting with researching customer records as needed; analyzing the monthly accounts receivable; and assisting with collection of past due accounts. The billing assistant’s fees will be discussed in the Contractual Services – Billing (630) section below.

Contractual Services - Billing (630)

The Utility’s Expense Summary reflects $9,802 in this account for meter reading provided by the former office manager and bill collection services provided by the billing assistant. In September 2015, the Utility hired a contractual utility service technician to begin providing the monthly meter reading services. The utility service technician’s contractual fee for meter reading is $250 per month or $3,000 per year, representing an annual increase of $60 over the test year fees of $2,940. Staff believes the new meter reading fee is reasonable, and that it would be appropriate to include a pro forma adjustment to reflect the $60 increase going forward.

During the test year, the Utility hired a contractual billing assistant to review the monthly accounts receivable and assist with the collection of past due accounts for both Sunrise and Alturas at a monthly fee of $400, for an annual total of $4,800. However, the Utility only incurred $2,100 of the contracted $4,800 fees for Sunrise and Alturas combined. The Utility indicated that it had only requested billing assistance from this vendor for part of the test year due to cash flow shortages.

As discussed above, in September 2015, the Utility re-hired the contractual billing assistant and indicated that the previous duties would be expanded to include answering the Utility’s main phone number, assisting with customer complaints, and assisting with reviewing and correcting the Utility’s customer deposit records. The new contractual fee is still $400 per month, which covers approximately 40 hours of work per month at $10 per hour, for an annual total of $4,800 for Sunrise and Alturas combined. The Utility has not fully supported its request for the increase in this expense over the audited test year expense. However, staff confirmed that the billing assistant is currently working with the office manager to review delinquent accounts and address customer complaints. Staff believes it will be beneficial to both the Utility and its customers to have a billing assistant available on a regular basis to assist customers with service complaints. Staff believes the hourly rate of $10 is reasonable. Also, staff believes the request for 40 hours of work per month is reasonable considering that the work will cover both Alturas and Sunrise. At the December 9, 2015, noticed informal meeting, OPC requested that the contractual worker expenses be reviewed to avoid any duplication of duties. Based on staff’s review, it does not appear that there will be a duplication of duties between the billing assistant and office manager. Staff determined that the appropriate allocation of the contractual billing assistant’s expense to Sunrise is $3,744 ($4,800 x .78 = $3,744). Staff decreased this account by $3,118 to remove the unsupported expenses in this account and reflect a pro forma increase in the contractual billing services expense.

Staff’s net adjustment to this account is a decrease of $3,058 ($60 - $3,118 = -$3,058). Therefore, staff recommends contractual services – billing expense of $6,744.

Contractual Services - Professional (631)

The Utility’s Expense Summary reflects $400 in this account for preparation of the Utility’s Annual Report and Federal Tax Return by its CPA. Audit staff verified that this amount is appropriate for the test year, and that no adjustments are necessary.

As discussed in Issue 4, Rule 25-30.115, F.A.C., requires that water and wastewater utilities maintain their accounts and records in conformity with the 1996 NARUC USOA. Audit staff determined that the Utility was not maintaining its books and records on a monthly basis as required. During the test year, the Utility did not have any employees or contractual service providers specifically hired to work on the Utility’s day-to-day bookkeeping operations. Therefore, in the May 1, 2015 Staff Report, staff recommended a pro forma adjustment to include an allowance for contractual bookkeeping expense to assist the Utility in meeting the rule requirement going forward.

Subsequently, in September 2015, the Utility hired a contractual accountant to handle the Utility’s bookkeeping, billing, payment collections, billing inquiries, and billing complaints. As of the end of January 2016, the Utility had not yet begun providing any accounting records to the accountant to begin maintaining the Utility’s books and records. Due to the severe accounting deficiencies and the Utility’s difficulty in complying with both audit and technical staffs’ requests for accounting supporting documentation during this case, staff believes it will be beneficial to the Utility and its customers for the Utility to allow a trained accountant to handle the Utility’s day-to-day bookkeeping activities. Further, staff believes that properly maintained accounting records may help the Utility to better monitor and manage its cash flow. Therefore, despite the Utility’s delay in implementing this process, staff believes it would be appropriate to make a pro forma adjustment to recognize the contractual bookkeeping expense going forward.

By a letter dated January 15, 2016, the contractual accountant estimated that the initial set-up fee for Sunrise will be $250, for setting up the Utility’s books and bringing forward the beginning balances. After the set-up is complete, the monthly fee will be $135 per month, which equals $1,620 per year. Because the initial set-up fee is non-recurring in nature, staff believes it would be appropriate to amortize that portion of the bookkeeping expense over a five-year period, resulting in an annual expense of $50 ($250 / 5 = $50). Therefore, staff increased this account by $1,670 to reflect the pro forma increase for the recurring annual bookkeeping fees of $1,620 and the non-recurring fees of $50.

In addition, the Utility has requested recovery of $4,577 in outstanding legal fees related to Sunrise’s defense in a 2013 law suit filed by the Utility’s former contract operator, Blount Utilities, Inc. (Blount), for outstanding payments that occurred prior to the test year. The outstanding legal fees were due in full before the end of 2015. On July 22, 2014, a Judgment was issued against Sunrise for $2,926 by the Tenth Judicial Circuit Court in favor of Blount for the uncontested outstanding balance owed for contractual services performed by Blount prior to the test year. The parties subsequently reached a settlement agreement regarding a payment plan for the balance owed, and payments of $271 per month started on August 2014, which are to continue until the balance is extinguished. The outstanding payable balance to Blount was approximately $2,440 as of December 31, 2014, the end of the test year.

In order to determine if it is appropriate to allow recovery of utility litigation costs from the ratepayers, the Commission generally considers whether the litigation resulted in a benefit to the customers, whether the customers gained a benefit that would not have occurred absent the litigation process, and the materiality of the litigation costs. For example, if a utility engaged in legal action to oppose government required plant improvements that it deemed to be unnecessary and won the law suit, the customers would receive the direct benefit of a lower rate base and thus lower rates. In the instant case, staff does not believe the litigation resulted in any direct benefit to the customers. The litigation was the result of one of the Utility’s former managers not paying the plant operator in a timely manner for services rendered. The Utility was successful in receiving a lower interest rate as a result of the litigation. However, since Commission practice is to disallow recovery of late payment fees or interest charges resulting from untimely payments, the reduced interest rate is a direct benefit to the stockholders/owners rather than the customers. In addition, the interest savings is not sufficient to offset the litigation costs. Consequently, the legal action only served to increase the Utility’s expenses rather than reduce them to the benefit of the customers. Based on the above, staff does not believe it would be appropriate to require the customers to pay the litigation costs.

Staff reviewed the Utility’s last SARC and recent Annual Reports to determine if the Utility incurred any other legal fees in recent years that would be more representative of routine, recurring legal services. Based on the information available, it appears that the Utility has not incurred any other legal fees in recent years. Also, staff requested supporting documentation for any legal fees incurred by the Utility to correct the warranty deed error discussed in Issue 4. As of the writing of this recommendation, the Utility has not provided that information. Consequently, staff does not recommend an allowance for annual legal fees at this time.

Staff’s total adjustment to this account is an increase of $1,670 to include the new contractual accountant’s bookkeeping services. Therefore, staff recommends contractual services – professional expense of $2,070.

Contractual Services – Testing (635)

The Utility’s Expense Summary does not include this account. Audit staff determined the Utility incurred $2,340 in testing expense for the test year. Accordingly, staff increased this account by $2,340.

In addition, the Utility was required by the PCHD on behalf of the DEP to conduct triennial water tests by the end of 2015. The Utility provided invoices from the contract operator totaling $4,525 for the triennial tests. Therefore, staff increased this account by $1,508 ($4,525 / 3 = $1,508) to include a pro forma adjustment to reflect the three-year amortization of the triennial water test costs.

Finally, the Utility requested a pro forma increase to cover $3,800 in testing expenses for additional trihalomethane (TTHM) and haloacetic acid (HAA5) testing required by the PCHD on a quarterly basis beginning in the last quarter of 2015 and continuing through the third quarter of 2016. The first quarter’s tests have been completed and it is anticipated that the second quarter’s test will be completed prior to implementation of any rates approved by the Commission in this case. According to the operator’s invoices, the cost for the first quarter’s tests is $950 and the estimated cost for the remaining three quarters is $2,850, for a total of $3,800. The Utility’s operator also provided documentation from the PCHD to support that the additional testing is required. The additional testing requirement was caused by the Utility exceeding the TTHM limit on one test, and therefore, is not part of the Utility’s normally recurring tests. Rule 25-30.433(8), F.A.C., requires that non-recurring expenses be amortized over a five-year period unless a shorter or longer period of time can be justified. Amortizing the $3,800 testing expense, over a five-year period, results in an annual increase of $760 in the Utility’s testing expense. Due to the serious nature of this testing requirement, staff believes it warrants inclusion in this rate proceeding.

In accordance with Commission practice, staff calculated a Phase II revenue requirement for the pro forma testing that will not be completed until the second and third quarters of 2016 and determined that the Phase II revenue requirement would be only $438 or 0.56 percent above the Phase I revenue requirement. If all of the pro forma testing expense is included in Phase I, rate case expense can be reduced by a total of $182 or $46 per year over the four-year amortization period due to elimination of the additional customer noticing that would be required upon implementation of the Phase II rate increase. Although pro forma plant additions and expenses are often addressed using a phased approach, staff believes it would be appropriate to include the pro forma testing expenses in the initial revenue requirement in this case because of the minimal impact of the pro forma testing expense on the initial revenue requirement, as well as the additional benefit of reducing rate case expense. Therefore, staff increased this account by $760 to reflect a pro forma increase to cover the additional TTHM and HAA5 testing expense. Staff recommends that the Utility be required to file documentation in this docket by December 31, 2016, showing that the tests have been completed. The documentation should include a copy of the test results and final invoices. However, staff does not believe it is necessary to hold the docket open until this information is filed since the PCHD is monitoring the Utility’s completion of these tests and the test results.

Staff’s total adjustment to this account is an increase of $4,608. Therefore, staff recommends contractual services – testing expense of $4,608.

Contractual Services - Other (636)

The Utility’s Expense Summary reflects $29,173 in this account broken down by $10,008 for contractual office management; $10,139 for contractual utility operations; and $9,026 for supplies, maintenance, and repairs. In September 2015, the Utility hired a contractual accountant to take over the majority of the office management duties. Staff confirmed that the contractual accountant has charged Sunrise and Alturas a combined fee of $1,200 per month beginning September 10, 2015, through January 10, 2016. It was initially expected that the $1,200 fee would only be charged for the first three months for additional work required to learn the billing system, bring the billing records up-to-date, and address unresolved billing inquiries and complaints. However, the workload has not yet decreased as expected. Consequently, the $1,200 per month fee will continue until the office begins to operate more smoothly, and then will decrease to $800 per month thereafter. At this time, it is expected that the $1,200 per month fee will be needed through May 2016. In addition to the monthly fee, the contractual accountant will also be reimbursed for any additional costs incurred, such as postage and utility office supplies.

Because the additional $400 per month fee is considered to be temporary and part of the initial set-up cost under the new office management arrangement, staff believes it would be appropriate to allow recovery of those costs as non-recurring expenses over a five-year period. The total non-recurring expense for Sunrise and Alturas combined is $3,600 ($400 x 9 months = $3,600), which translates to an annual expense of $720 when amortized over five years. Staff determined that the appropriate allocation of the non-recurring contractual office management fees to Sunrise is $562 ($720 x .78 = $562). The remaining $800 per month fee should be treated as a recurring expense, which equals $9,600 per year. The appropriate allocation of the recurring contractual office management expense to Sunrise is $7,488 ($9,600 x .78 = $7,488). Sunrise’s total contractual office management expense allocation, including both the recurring and non-recurring fees, is $8,050. Therefore, staff decreased this account by $1,958 to reflect the pro forma change in contractual office management expense ($8,050 - $10,008 = -$1,958).

As additional information, in its June 10, 2015, letter, OPC expressed concern about the Utility’s procedures for handling cash payments from customers. Specifically, OPC expressed concern about whether or not the cash payments are being properly recorded against accounts receivable, whether or not the cash collections of miscellaneous service charges are being recorded and included in test year revenues, and whether or not the accounts receivable aging reports accurately reflect these collections.

Staff determined that the Utility includes the type of payment in its billing records when recording monthly bill payments. For example, the records indicate if the payment was made by cash, check, money order, or money transfer. In addition, the Utility’s customer deposit records indicate if the initial customer deposits were paid by cash, check, money order, or money transfer.

The area of concern appears to be limited the handling of miscellaneous service charges. The Utility owner acknowledged that he had authorized the contractual office manager and office manager assistant to keep any miscellaneous service charges collected as payment for their work related to the customer disconnections and reconnections. Because miscellaneous service charges are designed to cover the additional costs incurred to provide a specific miscellaneous service, it is acceptable for the Utility to use those funds to pay for the contractual work needed to accomplish those services. However, it is incorrect for the Utility to omit the miscellaneous service charge assessments and payments from the billing records and revenues.

In addition, staff attempted to review the Utility’s billing records to determine whether or not the Utility properly assessed the miscellaneous service charges in accordance with Commission rules and the Utility’s approved tariff. The Utility was not able to provide all of the records that are needed to complete this type of review. The Utility owner informed staff that the former office manager had deleted 11 months of billing records in error. Therefore, the only records available during that time period are the specific reports that were printed prior to the deletion. Based on the available records, staff believes that the Utility does regularly experience issues with delinquent payments. However, staff was unable to determine if the customers were given proper disconnection notices and assessed the miscellaneous service charges within the proper timeframes prescribed by Commission rules during the test year.

Based on staff’s review, it appears the Utility may be in violation of the following rules and statute. Rule 25-30.335(7), F.A.C., requires that utilities shall maintain a record of each customer’s account for the most current two years so as to permit reproduction of the customer’s bills during the time that the utility provided service to that customer. Rule 25-30.320, F.A.C., sets forth the guidelines that utilities must follow when refusing or discontinuing service, including disconnection for non-payment of bills. Section 367.081, F.S., requires that a utility may only charge rates and charges that have been approved by the Commission.

Staff does not believe show cause proceedings should be initiated at this time for the apparent violations related to the maintenance of customer records and handling of miscellaneous service charges. It appears that the Utility has taken steps to correct these issues. The Utility indicated that it has discontinued accepting customer payments in the field. As discussed previously, customers now have the additional option of paying in person or using a drop box at the contractual accountant’s office. Based on staff’s review, it appears that the Utility has taken the necessary steps to ensure that future miscellaneous service charges are correctly recorded. Also, the separation of duties between the office manager and utility service technician working in the field allows for better oversight of the handling of cash collections. Finally, under the Utility’s current procedures, customers are first sent a letter regarding their past due payment, and then sent a second notice regarding disconnection only if the bill remains unpaid. Providing a past due notice prior to a disconnection notice goes beyond what it required in the Rule and helps to demonstrate the Utility’s willingness to work with customers to resolve payment issues prior to disconnecting service. However, staff believes Sunrise should be put on notice that if the Utility fails to maintain its customer records or to properly account for miscellaneous service charges in compliance with Commission regulations in the future, Sunrise may be subject to a show cause proceeding by the Commission, including penalties.

As noted above, the Utility included $10,139 in this account for contractual utility operations. Staff determined that the appropriate contractual operator’s expense for Sunrise is $10,312, which includes the plant operator’s monthly fees, inspection reports, repairs, and flushing. In its June 10, 2015, letter, OPC expressed a concern about possible duplication of mowing expenses because the test year included charges for mowing by the office manager and plant operator. As discussed above, the new contractual utility service technician will be responsible for mowing the plant site going forward. Therefore, staff did not include any mowing expense in the $10,312 operator’s expense calculation. Although the utility service technician will be assisting with repairs in the field going forward, staff believes there will still be a need for the operator to make utility repairs related to the plant. Consequently, staff does not believe a reduction to the repair portion of the operator’s expenses is necessary. The operator’s monthly fees are allocated between Sunrise and Alturas based on ERCs. The inspection report, repair, and flushing expenses are based on direct costs for Sunrise. Staff increased this account by $173 to reflect the appropriate contractual operator’s expense ($10,312 - $10,139 = $173).

The Utility’s Expense Summary reflected $9,026 for supplies, maintenance, and repairs. The Utility’s total includes test year repairs of $2,299 based on one invoice for a broken water main repair. Staff believes it is reasonable to expect that the Utility may require this level of repairs on an annual basis. Therefore, staff does not believe it is necessary to amortize the test year repair as non-recurring. As noted above, the Utility’s Expense Summary also includes expenses related to chemicals, testing, and miscellaneous expenses. Audit staff reclassified those expenses to the correct expense accounts. In addition, audit staff determined that some expenses were unsupported and should be removed. Accordingly, staff decreased this account by $6,727 ($2,299 - $9,026 = -$6,727) to reflect the appropriate repair expense for the test year.

In its June 10, 2015, letter regarding the Alturas SARC, OPC noted that the Alturas test year expenses included an invoice for $225 for checking meters, but that only $56 of that expense was for checking meters for Alturas. The remaining $159 was for checking meters for Sunrise. OPC proposed that $159 should be removed from the Alturas expenses. Staff agrees that it would be appropriate to reclassify $159 of the meter testing expense to Sunrise. Therefore, staff increased this account by $159.

In September 2015, the Utility hired a contractual utility service technician to assist with general system repairs, customer service repairs, new customer connections, service disconnections, monthly meter reading, mowing, answering the Utility’s emergency cell phone, and being on-call 24 hours a day, 7 days a week. As discussed above under Account 630 – Contractual Services – Billing, the utility service technician’s contractual fee for meter reading is $250 per month or $3,000 per year. In addition to the meter reading fees, the Utility indicated that it intends to pay this contractual service worker $250 per week for 25 hours of work at an hourly rate of $10 for the remaining work duties. This results in an annual expense of $13,000 for Sunrise and Alturas combined for the remaining field work and on-call duties. In addition, the Utility has requested a transportation expense allowance for this contractual service worker, which is discussed in more detail below under Account 650 – Transportation Expense.

The Utility has not fully supported its request for this level of contractual service fees. However, audit staff did verify test year expenses for the former office manager and office manager assistant related to some of these duties. In addition, the Utility provided several invoices for work performed by a new utility service technician in September and October 2015. Staff also confirmed that the Utility currently has a contractual service worker performing these job duties. Staff believes it will be beneficial to both the Utility and its customers to have a contractual utility service technician available on a regular basis to assist customers with service issues and to work on utility maintenance. Staff believes the hourly rate of $10 is reasonable and comparable to fees approved for other utilities. Also, staff believes the request for 25 hours of work per week is reasonable considering that the work will cover both the Sunrise and Alturas service territories. Consequently, staff increased this account by $10,140 to reflect Sunrise’s allocation of this expense ($13,000 x .78 = $10,140).

In the Utility’s 2011 SARC, the Commission approved a pro forma project related to the inspection and cleaning of the Utility’s two hydropneumatic tanks. The project was completed during 2013, and the Utility provided documentation to support an actual expense of $3,811. Therefore, staff increased this account by $762 to reflect the five-year amortization of this non-recurring expense ($3,811 / 5 = $762). Based on audit staff’s review, the expense should continue to be amortized through 2018.

Also in the Utility’s 2011 SARC, the Commission approved a meter replacement program that would allow the Utility to replace 23 meters per year over 10 years at an annual expense of $1,359. In the instant proceeding, the Utility requested to continue the meter replacement program and to increase the annual expense to $3,500 based on the plant operator’s cost estimate and the Utility’s previous meter replacement expenses. In its June 10, 2015, letter, OPC indicated that it did not object to continuing the previously approved expense of $1,359, but had concerns about increasing the expense.

It appears that Sunrise may not be prepared to continue work on the meter replacement program at this time. The Utility has only completed slightly more than one year of the 10-year program. No meters have been installed since early 2014. The Utility does not have a meter testing program, has not identified the next batch of meters that need to be replaced, and has not stated when it will begin replacing meters again.

Staff determined that the Utility’s actual cost to replace the first batch of meters was $4,439, which exceeded the estimated annual expense by $3,080. Based on the annual expense allowance of $1,359 that was included in the Utility’s rates, the Utility is due to finish recovering the initial $4,439 expense by March 2016. Based on a review of the Utility’s actual meter replacement costs and additional meter replacement cost research conducted by staff, it appears that an increase of the expense from $1,359 to $3,450 would be warranted if the program were continued. However, due to the Utility’s lack of progress and a clear plan for getting the program back on track, staff believes it would appropriate to require the Utility to establish an escrow account to hold the meter replacement funds if the program were continued. Based on the updated expense of $3,450, the Utility would need to escrow $287.50 each month for the remaining eight to nine years of the program.

Staff advised the Utility’s owner that staff intended to recommend discontinuation of the meter replacement program expense if Sunrise is unwilling to establish and properly maintain an escrow account for this purpose. Staff also advised the Utility owner that discontinuation of the program would simply result in the Utility returning to the traditional method of capitalizing meter replacements and reflecting the adjustments in rate base. In response to staff’s request for information received January 26, 2016, letter, the Utility indicated that it would return to the traditional method of capitalizing meter replacements on an as needed basis. Therefore, staff recommends that the meter replacement program be discontinued at this time. The Utility’s test year did not include any expenses related to this program, therefore, no accounting adjustments are necessary to reflect discontinuation of the meter replacement program.

Finally, as discussed above, a Judgment was issued against the Utility for $2,926 for outstanding payments owed to Blount for contractual services related to the plant operation and maintenance. The Utility has requested consideration of the outstanding balance and monthly payments of $271 in the instant case. Although the Judgment and payment plans were finalized during the 2014 test year, the outstanding balance is for work performed by Blount prior to the test year. Historically, the Commission has determined that the recovery of past expenses from current customers constitutes retroactive ratemaking and is disallowed. Accordingly, staff does not believe it would be appropriate to recognize the past amounts owed to Blount in the instant proceeding.

Staff’s net adjustment to this account is an increase of $2,549 (-$1,958 + $173 - $6,727 + 159 + 10,140 + 762 = $2,549). Therefore, staff recommends contractual services – other expense of $31,722.

Transportation Expense (650)

The Utility’s Expense Summary reflects $1,976 in this account. Audit staff could not verify how this amount was determined. Staff determined that the former office manager’s expense included mileage reimbursements of approximately $97 for Sunrise and $14 for Alturas during January through May 2014. The expense was primarily related to mileage incurred conducting customer disconnections and reconnections, and was calculated based on a mileage rate of $0.50 per mile. The second office manager during the test year did not claim any mileage, but expressed concern about having to use her personal vehicle for utility work at her own expense.

In response to staff’s request for information received January 26, 2016, the Utility requested a transportation expense for the contractual utility service technician of $75 per month, or $900 annually, for Sunrise and Alturas combined. The Utility did not provide any documentation to support this request, such as records of any recent mileage reimbursements or written contracts indicating that transportation expense will be provided. However, in consideration of the Utility’s previous practice of reimbursing the former office manager’s mileage expense and the physical distance between the Sunrise and Alturas service areas, staff believes it would be appropriate to include a mileage allowance. Also, it appears that the lack of full reimbursement of additional expenses incurred by the Utility’s contractual service workers may be a contributing factor in the high level of turnover experienced by Sunrise and Alturas. Inclusion of a mileage allowance may help the Utility retain its contractual service workers longer, thereby improving the consistency and stability in the Utility’s field operations.

The requested $75 per month transportation expense would allow reimbursement of approximately 34 miles per week at the test year mileage rate of $0.50 per mile. The Alturas and Sunrise service territories are located approximately 18 miles a part. The Utility did not explain how it calculated the requested $75 per month transportation allowance. Staff believes the majority of the utility service technician’s work will be conducted within each Utilities’ service territory with minimal driving required. However, on occasion it will be necessary for the utility service technician to drive between the Alturas and Sunrise service territories or to a store to purchase parts for repairs. Staff believes the Utility’s requested expense should be sufficient to cover the transportation expense for both the more frequent in-territory driving, as well as the less frequent out-of-territory driving. Staff determined that the appropriate allocation of the transportation expense to Sunrise is $702 ($900 x .78 = $702). The remaining $198 will be allocated to Alturas. Consequently, staff decreased this account by $1,274 to remove the unsupported test year expenses and reflect a pro forma transportation expense increase. Staff recommends transportation expense of $702.

Insurance Expense (655)

The Utility’s Expense Summary reflects $2,010 in this account. Staff decreased this account by $182 to reflect the current year’s general liability insurance premium, and recommends insurance expense for the test year of $1,828.

Regulatory Commission Expense (665)

The Utility’s Expense Summary does not include this account. Staff increased this account by $344 to reflect the annual amortization of rate case expense approved in the Utility’s 2011 SARC that will continue to be amortized until December 1, 2016. Regarding the instant case, the Utility is required by Rule 25-22.0407, F.A.C., to provide notices to its customers of the customer meeting and notices of final rates in this case. For noticing, staff estimated $241 for postage expense, $132 for printing expense, and $25 for envelopes. This results in $398 for the noticing requirement. The Utility paid a $1,000 rate case filing fee.

The Utility also provided an invoice for accounting fees of $450 for work performed by the Utility’s CPA related to the SARCs for both Sunrise and Alturas. The work performed was similar for both Utilities. Therefore, staff believes it would be appropriate to allow Sunrise to recover half or $225 of the accounting expense and allow Alturas to recover the remaining $225 of rate case related accounting expense. The Utility also provided invoices for $1,025 in additional work performed by the Utility’s contract operator to assist with the Sunrise SARC, such as answering staff data requests related to plant operations and attending the customer meeting. Staff has reviewed the invoices and believes it would be appropriate to allow recovery of these expenses in rate case expense. Pursuant to Section 367.0816, F.S., rate case expense is amortized over a four-year period. Based on the above, staff recommends total rate case expense for the instant case of $2,648 ($398 + $1,000 + $225 + $1,025), which amortized over four years is $662. Staff’s total adjustment to this account is an increase of $1,006, resulting in a recommended regulatory commission expense of $1,006.

Bad Debt Expense (670)

The Utility’s Expense Summary reflects $3,899 in this account. During the audit, the Utility provided a list of 11 accounts that were written-off during the test year for a total of $4,167, which equals 5.56 percent of the test year revenues or 5.05 percent of staff’s recommended revenue requirement. In its June 10, 2015, letter, OPC expressed concern that the Utility’s bad debt expense is excessive and noted that one account had an unusually large write-off of $1,094. The Utility did not provide any supporting documentation showing how it calculated the bad debt write-offs, but did acknowledge that the test year bad debt expense included multiple years of bad debt write-offs.

Commission practice is to calculate bad debt expense using a three-year average, typically based on the test year plus two years of Annual Report data. It appears that the bad debt expense for the two years prior to the test year may have included multiple years of write-offs as well. Therefore, staff is unable to calculate a reliable three-year average using the traditional method. As an alternative, staff believes it would be appropriate to calculate an average bad debt expense based solely on the test year expense. This approach results in a bad debt expense of $1,389 ($4,167 / 3 = $1,389), that is 1.68 percent of staff’s recommended revenue requirement.

At the December 9, 2015, noticed informal meeting, OPC indicated that it believes the large write-offs may be the result of errors in the recording of cash payments and poor bookkeeping practices, and that bad debt expense should not exceed 1 percent. Staff shares OPC’s concerns about the accuracy of the bad debt write-offs. However, staff reviewed a sample of the Utility’s billing records and determined that the Utility is experiencing issues with delinquent customer accounts, and may need to write-off bad debt periodically.

In addition, staff reviewed a sample of 15 SARCs, which had bad debt expense ranging from zero to over 4 percent, with 87 percent of the sample falling below the 2 percent range. Therefore, staff believes a bad debt expense of 1.68 percent falls within a reasonable range. Although staff is not opposed to OPC’s 1 percent suggestion, that approach would actually increase the bad debt expense for Sunrise’s sister company, Alturas, above the amount recommended by staff in that docket. In an effort to provide as much uniformity in the ratesetting methods used for both companies, staff believes it would be more appropriate calculate a specific bad debt expense for each company based on the test year data. In addition, based on staff’s review of the available billing records, it appears that Sunrise has a larger incidence of high delinquent balances than Alturas. Based on the above, staff decreased this account by $2,510, and recommends a bad debt expense of $1,389.

Miscellaneous Expense (675)

The Utility’s Expense Summary reflects $6,342 in this account. Staff decreased this account by $1,371 to reflect the appropriate test year miscellaneous expense for the Utility’s annual permit and license renewal fees, cell phones, postage, and office supplies. Staff used the Utility’s direct actual expense for the PCHD annual drinking water permit, the Southwest Florida Water Management District annual water permit, and the Department of State’s Division of Corporation’s annual filing fee. In addition, staff used the ERC allocation method to allocate the common miscellaneous expenses related to the Utility’s cell phone, postage, and office supplies.

In its June 10, 2015, letter, OPC noted the Utility’s test year miscellaneous expense included additional work performed by the contractual plant operator to assist with the transition between office mangers. OPC believes this is a non-recurring expense that should not be included in setting future rates. Staff agrees that this work is outside the scope of the operator’s regularly recurring duties, however, staff believes it would be more appropriate to amortize the non-recurring expense over a five-year period consistent with Rule 25-30.433(8), F.A.C. The operator’s expense was $740 for Sunrise and Alturas combined. Staff increased this account by $115 to reflect Sunrise’s amortized allocation of that expense ($740 / 5 = $148; $148 x .78 = $115).

The Utility’s 2011 SARC included recovery of the Utility’s annual membership dues to the Florida Rural Water Association (FRWA). However, the Utility did not renew its membership each year following that case. Subsequent to the test year, in August 2015, the Utility became a member of the FRWA again and provided proof of payment of the Utility’s annual membership dues. Therefore, staff increased this account by $202 to reflect a pro forma adjustment for the Utility’s annual FRWA membership dues. Staff believes the Utility should be reminded that the membership dues included in the Utility’s revenue requirement are intended to serve as annual recurring expense for the purpose of renewing the Utility’s FRWA membership each year.

In addition, staff increased this account by $108 to make a pro forma adjustment to reflect Sunrise’s amortized allocation of the Utility’s purchase of a billing software update, an additional billing software license, and billing software training for the contractual office manager. Finally, staff increased this account by $60 to make a pro forma adjustment to reflect Sunrise’s amortized allocation of an electronic bank deposit machine that enables the contractual office manager to electronically deposit customer’s payments on the business day the payments are received. The Utility made these pro forma purchases in an effort to improve the Utility’s billing and collection practices. Therefore, staff believes it would be appropriate to make these pro forma adjustments and allow the Utility to recover these expenses as non-recurring expenses over a five-year period. Staff’s net adjustment to this account is a decrease of $885 (-$1,371 + 115 + 202 + 108 + 60 = -$885), resulting in a recommended miscellaneous expense of $5,457 for the test year.

Operation and Maintenance Expense (O&M Summary)

Based on the above adjustments, O&M expense should be decreased by $2,676, resulting in total O&M expense of $66,697. Staff’s recommended adjustments to O&M expense are shown on Schedule Nos. 3-A and 3-B.

Depreciation Expense (Net of Amortization of CIAC)

No depreciation or CIAC amortization expense balances were available for 2014. Audit staff calculated depreciation expense using the prescribed rates set forth in Rule 25-30.140, F.A.C., and determined a test year depreciation expense of $4,559. Staff decreased this account by $51 to reflect retirement of certain pro forma items from the Utility’s last SARC, as discussed in Issue 4, reducing the test year depreciation expense to $4,508.

As discussed in Issue 4, the Utility’s CIAC became fully amortized in August 2015. Consequently, the CIAC amortization expense ended in August 2015 as well. Therefore, staff recommends no CIAC amortization expense. This results in a net depreciation expense of $4,508 ($4,508 - $0). Therefore, staff recommends depreciation expense of $4,508.

Taxes Other Than Income (TOTI)

The Utility’s Expense Summary reflects $5,731 in TOTI for the test year, although an official balance for 2014 was not yet available at the time of staff’s audit. Staff increased this account by $249 to reflect the appropriate test year RAFs. Also, staff decreased this account by $1,745 to reflect the appropriate property taxes and remove license and permit renewal fees that are already included in Account No. 675 – Miscellaneous Expense. Staff’s adjustment includes a $19 decrease from the Utility’s test year property taxes based upon the 2015 tax assessments. Staff’s net adjustment to test year TOTI is a decrease of $1,496. In addition, as discussed in Issue 9, revenues have been increased by $7,510 to reflect the change in revenue required to cover expenses and allow the recommended operating ratio. As a result, TOTI should be increased by $338 to reflect RAFs of 4.5 percent of the change in revenues. Therefore, staff recommends TOTI of $4,573.

Operating Expenses Summary

The application of staff’s recommended adjustments to Sunrise’s test year operating expenses result in operating expenses of $75,778. Staff recommends that the Utility be required to file documentation in this docket by December 31, 2016, showing that the pro forma trihalomethane and haloacetic acid tests have been completed. The documentation should include a copy of the test results and final invoices. Operating expenses are shown on Schedule No. 3-A. The adjustments are shown on Schedule No. 3-B.
Issue 8:

Should the Commission utilize the operating ratio methodology as an alternative means to calculate the revenue requirement for Sunrise, and, if so, what is the appropriate margin?

Recommendation:

Yes. The Commission, on its own motion, should utilize the operating ratio methodology for calculating the revenue requirement for Sunrise. The margin should be 10 percent of O&M expense. (Golden, Vogel)

Staff Analysis:

Section 367.0814(9), F.S., provides that the Commission may, by Rule, establish standards and procedures for setting rates and charges of small utilities using criteria other than those set forth in Sections 367.081(1), (2)(a), and (3), F.S. Rule 25-30.456, F.A.C., provides an alternative to a staff-assisted rate case as described in Rule 25-30.455, F.A.C. As an alternative, utilities with total gross annual operating revenue of less than $275,000 per system may petition the Commission for staff assistance in alternative rate setting.

Although Sunrise did not petition the Commission for alternative rate setting under the aforementioned Rule, staff believes that the Commission should exercise its discretion to employ the operating ratio methodology to set rates in this case. The operating ratio methodology is an alternative to the traditional calculation of revenue requirements. Under this methodology, instead of applying a return on the Utility’s rate base, the revenue requirement is based on the margin of Sunrise’s O&M expenses. This methodology has been applied in cases in which the traditional calculation of revenue requirements would not provide sufficient revenue to protect against potential variances in revenues and expenses.

By Order No. PSC-96-0357-FOF-WU (March 1996 Order), the Commission, for the first time, utilized the operating ratio methodology as an alternative means for setting rates. This order also established criteria to determine the use of the operating ratio methodology and a guideline margin of 10 percent of O&M expense. This criteria was applied again in Order No. PSC-97-0130-FOF-SU and most recently, the Commission approved the operating ratio methodology for setting rates in Order No. PSC-15-0535-PAA-WU.^{^[14]}

By the March 1996 Order, the Commission established criteria to determine whether to utilize the operating ratio methodology for those utilities with low or non-existent rate base. The qualifying criteria established by the March 1996 Order, and how they apply to the Utility are discussed below:

1. Whether the Utility=s O&M expense exceeds rate base. The operating ratio method substitutes O&M expense for rate base in calculating the amount of return. A Utility generally would not benefit from the operating ratio method if rate base exceeds O&M expense. The decision to use the operating ratio method depends on the determination of whether the primary risk resides in capital costs or operating expenses. In the instant case, the rate base is less than the level of O&M expense. The Utility’s primary risk resides with covering its operating expense. Based on the staff’s recommendation, the adjusted rate base for the test year is $49,773, while adjusted O&M expense is $66,697.

2. Whether the Utility is expected to become a Class B utility in the foreseeable future. Pursuant to Section 367.0814(9), F.S., the alternative form of regulation being considered in this case only applies to small utilities with gross annual revenue of $275,000 or less. Sunrise is a Class C utility and the recommended revenue requirement of $82,448 is below the threshold level for Class B status ($200,000 per system).

3. Quality of service and condition of plant. As discussed in Issue 1, staff is recommending that the Utility’s quality of service is unsatisfactory. As discussed in Order No. PSC-96-0357-FOF-WU, poor condition of plant and/or unsatisfactory quality may be due to a variety of factors such as age of the system, poor maintenance, neglect or malfeasance. These factors should not necessarily disqualify a utility from the operating ratio method. Instead, this highlights the need for an adequate revenue stream to properly test and treat the water, and maintain or renovate the system. The Order specifies that in those cases where the owner has contributed to the system's decline, it may be appropriate to pursue certificate revocation and/or an escrow of operating ratio method funds when improvements are needed to restore the utility system.

4. Whether the Utility is developer-owned. The current Utility owner is not a developer.

5. Whether the Utility operates treatment facilities or is simply a distribution system. The issue is whether or not purchased water costs should be excluded in the computation of the operating margin. Sunrise operates a water treatment plant and water distribution system.

Based on staff’s review of the Utility’s situation relative to the above criteria, staff recommends that Sunrise is a viable candidate for the operating ratio methodology. As outlined in Order Nos. PSC-96-0357-FOF-WU and PSC-97-0130-FOF-WU, the Commission determined that a margin of 10 percent shall be used unless unique circumstances justify the use of a greater or lesser margin. The important question is not what the return percentage should be, but what level of operating margin will allow the Utility to provide safe and reliable service and remain a viable entity. The answer to this question requires a great deal of judgment based upon the particular circumstances of the Utility.

Several factors must be considered in determining the reasonableness of a margin. First, the margin must provide sufficient revenue for the Utility to cover its interest expense. As discussed in Issue 4, the Utility does not currently hold any debt. Therefore, coverage of interest expense is not a concern in this case.

Second, use of the operating ratio methodology rests on the contention that the principal risk to the Utility resides in operating cost rather than in capital cost of the plant. Also, the operating ratio method recognizes that a major issue for small utilities is cash flow, therefore, the operating ratio method focuses more on cash flow than on investment. In the instant case, the Utility’s primary risk resides with covering its operating expense. A traditional calculation of the revenue requirement may not provide sufficient revenue to protect against potential variances in revenues and expenses. Under the rate base method, the return to Sunrise would be $4,048, which is enough to cover an approximate 6.07 percent variance in O&M expense. Staff believes $4,048 may be an insufficient financial cushion.

Third, if the return on rate base method was applied, a normal return would generate such a small level of revenue that in the event revenue or expenses vary from staff’s estimates, Sunrise could be left with insufficient funds to cover operating expenses. Therefore, the margin should provide adequate revenue to protect against potential variability in revenue and expenses. If the Utility’s operating expenses increase or revenues decrease, Sunrise may not have the funds required for day-to-day operations. Staff determined that a 10 percent margin would be applicable in this case.

At the December 9, 2015, noticed informal meeting, OPC proposed that the operating margin should be reduced from 10 percent to 9 percent due to the Utility’s unsatisfactory quality of service. OPC’s proposal would reduce the operating income by $667 and reduce the rate increase by 0.93 percent. Staff does not believe it is appropriate to use the operating margin as a penalty since the intended purpose of this methodology is to ensure that a utility will have an adequate revenue stream to operate the utility and make repairs. As discussed previously in Issues 1 and 7, staff recommends that Sunrise’s officers’ salaries be reduced by a 25 percent penalty due to the unsatisfactory quality of service. Staff’s recommended salary penalty for Sunrise equals $2,486, which exceeds OPC’s proposed reduction and sends a stronger signal regarding the Utility’s need to address the unsatisfactory quality of service.

Conclusion

Staff believes the above factors show the Utility needs a higher margin of revenue over operating expenses than the traditional return on rate base method would allow. Therefore, in order to provide Sunrise with adequate cash flow to provide some assurance of safe and reliable service, staff recommends application of the operating ratio methodology. Applying a 10 percent margin would result in an operating margin of $6,670. When the criteria were established, the Commission found it was reasonable and prudent to initially limit the dollar amount of the margin to $10,000.^{^[15]} Because Sunrise’s operating margin is well below the $10,000 limit, staff believes it would be appropriate to apply the full 10 percent margin. Therefore, staff is recommending a 10 percent operating margin ratio in the instant case.

Issue 9:

What is the appropriate revenue requirement?

Recommendation:

The appropriate revenue requirement is $82,448, resulting in an annual increase of $7,510 (10.02 percent). (Golden, Vogel)

Staff Analysis:

Sunrise should be allowed an annual increase of $7,510 (10.02 percent). This will allow the Utility the opportunity to recover its expenses and a 10 percent cushion over its O&M expenses. The calculations are as follows:

Table 9-1

Water Revenue Requirement

Adjusted O&M Expense		$66,697
Operating Margin Ratio		x 10.00%
Operating Margin		$6,670
Adjusted O&M Expense		66,697
Depreciation Expense (Net)		4,508
Taxes Other Than Income		4,573
Income Taxes		0
Revenue Requirement		$82,448
Less Adjusted Test Year Revenues		74,938
Annual Increase		$7,510
Percent Increase		10.02%

Issue 10:

What is the appropriate rate structure and rates for Sunrise?

Recommendation: The recommended rate structure and monthly water rates are shown on Schedule No. 4. 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: Sunrise is located in Polk County within the SWFWMD. The Utility provides water service to approximately 247 residential customers and no general service customers. Approximately 5 percent of the residential customer bills during the test year had zero gallons, indicating a non-seasonal customer base. The average residential water demand is 4,797 gallons per month. The Utility’s current water system rate structure for residential customers consists of a base facility charge (BFC) and a three-tier inclining block rate structure. The rate blocks are: (1) 0-5,000 gallons; (2) 5,001-10,000 gallons; and (3) all usage in excess of 10,000 gallons per month. The General service rate structure includes a BFC based on meter size and uniform gallonage charge.

Staff performed an analysis of the Utility’s billing data in order to evaluate the appropriate rate structure for the residential water customers. The goal of the evaluation was to select the rate design parameters that: (1) produce the recommended revenue requirement; (2) equitably distribute cost recovery among the utility’s customers; (3) establish the appropriate non-discretionary usage threshold for restricting repression; and (4) implement, where appropriate, water conserving rate structures consistent with Commission practice.

Staff evaluated whether it was appropriate to change the design of the Utility’s current rate structure to a less aggressive rate structure due to its average residential consumption. Based on staff’s analysis, establishing a BFC and two-tier inclining block rate structure with a separate block for non-discretionary usage results in a non-equitable distribution of cost recovery. The Alternative 1 and 2 rate designs shown in Table 10-1 reflect price decreases at the 0 and 1,000 gallon consumption levels and price decreases at the higher levels of consumption, which is contrary to our rate setting goals. Typically, when designing rates, all levels of consumption should receive price increases with increases escalating as consumption increases. Therefore, staff recommends an across-the-board increase of 10.39 percent to the existing rates and no repression adjustment to water consumption. The 10.39 percent increase reflects the recommended revenue increase excluding miscellaneous revenues. Table 10-1, on the following page, contains staff’s recommended rates as an across-the-board increase to the existing rate structure and rates and two alternative rate structures, which include a block for non-discretionary usage.

Table 10-1

Staff’s Recommended and Alternative Water Rate Structures and Rates

	RATES AT	STAFF	ALTERNATIVE	ALTERNATIVE
	TIME OF	RECOMMENDED	I	II
	FILING	ACROSS-THE-BOARD	(30% BFC)	(30% BFC)
Residential
5/8” x 3/4” Meter Size	$9.07	$10.01	$8.11	$8.10

Charge per 1,000 gallons
0-5,000 gallons	$2.89	$3.19	$3.80
5,001-10,000 gallons	$3.18	$3.51	$3.96
Over 10,000 gallons	$6.35	$7.01	$5.95

0-5,000 gallons				$3.95
Over 5,000 gallons				$4.33

Typical Residential 5/8" x 3/4" Meter Bill Comparison
3,000 Gallons	$17.74	$19.58	$19.51	$19.95
5,000 Gallons	$23.52	$25.96	$27.11	$27.85
10,000 Gallons	$39.42	$43.51	$46.91	$49.50

Source: Current tariffs and staff’s calculations

Summary

The recommended rate structures and monthly water rates are shown on Schedule No. 4. 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 sheets pursuant to Rule 25-30.475(1), F.A.C. In addition, the approved rates should not be implemented until staff has approved the proposed customer notice 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 11:

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

Recommendation:

The water rates should be reduced as shown on Schedule No. 4, to remove rate case expense grossed-up for RAFs 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. 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 Sunrise 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, Golden, Vogel)

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 the rates. The reduction will reflect the removal of revenues associated with the amortization of rate case expense, the associated operating margin, and the gross-up for RAFs which is $763. Using the Utility’s current revenues, expenses, and customer base, the reduction in revenues will result in the rate decrease shown on Schedule No. 4.

Sunrise should be required to file revised tariff sheets no later than one month prior to the actual date of the required rate reduction. The Utility also should be required to file a proposed customer notice setting forth the lower rates and the reason for the reduction. If Sunrise 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 12:

What are the appropriate initial customer deposits for Sunrise and in what manner should the Utility’s noncompliance with Rule 25-30.311, F.A.C. be addressed?

Recommendation:

The Utility’s current initial customer deposits of $52 for the 5/8 inch x 3/4 inch residential meter size and two times the estimated average bill for all other residential and general service meter sizes should remain unchanged. The approved customer deposits should be effective for services rendered or connections made on or after the stamped approval date on the tariff sheets, pursuant to Rule 25-30.475, F.A.C. The Utility should be required to charge the approved charges until authorized to change them by the Commission in a subsequent proceeding.

Staff recommends that the Utility continue to work on its compliance with Rule 25-30.311 F.A.C. The Utility should complete refunds within three months of the Commission Order. Sunrise should be required to reconcile its customer deposit accounts and records within a reasonable time. The Utility should be required to provide monthly reports beginning March 31, 2016, until it has satisfactorily refunded the appropriate amount of customer deposits and applied the appropriate interest on customer deposits. Staff should be given administrative authority to determine when the Utility is in compliance with Rule 25-30.311, F.A.C. Staff believes the Utility is moving forward to make corrective actions to resolve the issues regarding the customer deposits. Therefore, staff recommends that enforcement action is not warranted at this time. (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 times the average estimated bill.^{^[16]} Currently, the Utility’s existing initial deposit for residential and general service is $52 for the 5/8 inch x 3/4 inch meter size. Based on staff’s recommended rates, the appropriate initial customer deposit for residential should be $51 for the 5/8 inch x ¾ inch meter size. Therefore, staff believes it is appropriate for the Utility’s initial customer deposits remain unchanged for residential and general service meter sizes.

In response to staff’s request for information, staff discovered that the utility was in apparent violation of Rule 25-30.311, F.A.C. During staff’s review of the Utility’s deposit records, staff noted that the Utility failed to properly record the amount of each deposit, failed to pay the appropriate amount of interest on customer deposits, and failed to refund residential customer deposits after 23 months. The Utility is working on correcting these issues and has taken some corrective actions to resolve the issues regarding the customer deposits. On February 15, 2016, the Utility provided a copy of its current Customer Deposit Report, which indicated that only a few customers had received a credit for interest payments on their deposits. Due to approximately the $3,400 of customer deposits that are due to be refunded, the utility has requested to pay customer deposits to those customers, who are entitled a refund, in a three month period to avoid financial hardship. Staff believes the request is reasonable. Staff recommends that the Utility continue to work on its compliance with Rule 25-30.311 F.A.C. The Utility should complete refunds within three months of the Commission Order. The Utility should be required to provide monthly reports until it has satisfactorily refunded the appropriate amount of customer deposits and applied the appropriate interest on customer deposits. Staff should be given administrative authority to determine when the Utility is in compliance with Rule 25-30.311, F.A.C. Staff believes the Utility is moving forward to make corrective actions to resolve the issues regarding the customer deposits. Therefore, staff recommends that enforcement action is not warranted at this time. However, staff believes Sunrise should be put on notice that the if the Utility does not resolve the customer deposit errors within a reasonable times and/or its deposit records are found to be out of compliance with Commission regulations in the future, the Utility may be subject to a show cause proceeding by the Commission, including penalties.

Based on the above, staff recommends that the Utility’s current initial customer deposits of $52 for the 5/8 inch x 3/4 inch residential meter size and two times the estimated average bill for all other residential and general service meter sizes should remain unchanged. The approved customer deposits should be effective for services rendered or connections made on or after the stamped approval date on the tariff sheets, pursuant to Rule 25-30.475, F.A.C. The Utility should be required to charge the approved charges until authorized to change them by the Commission in a subsequent proceeding.

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

Recommendation:

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

Staff Analysis:

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

The Utility should be authorized to collect the temporary rates upon staff’s approval of an appropriate security for the potential refund and the proposed customer notice. Security should be in the form of a bond or letter of credit in the amount of $5,018. Alternatively, the Utility could establish an escrow agreement with an independent financial institution.

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

1. The Commission approves the rate increase; or,

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

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

1. The letter of credit is irrevocable for the period it is in effect.

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

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

1. The Commission Clerk, or his or her designee, must be a signatory to the escrow agreement.

2. No monies in the escrow account may be withdrawn by the Utility without the prior written authorization of the Commission Clerk, or his or her designee.

3. The escrow account shall be an interest bearing account.

4. If a refund to the customers is required, all interest earned by the escrow account shall be distributed to the customers.

5. If a refund to the customers is not required, the interest earned by the escrow account shall revert to the Utility.

6. All information on the escrow account shall be available from the holder of the escrow account to a Commission representative at all times.

7. The amount of revenue subject to refund shall be deposited in the escrow account within seven days of receipt.

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

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

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

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

Issue 14:

Should Sunrise be required to notify the Commission, in writing, that it has adjusted its books in accordance with the Commission’s decision?

Recommendation:

Yes. The Utility should be required to notify the Commission, in writing, that it has adjusted its books in accordance with the Commission's decision. Sunrise should submit a letter within 90 days of the final order in this docket, confirming that the adjustments to all the applicable NARUC USOA primary accounts as shown on Schedule No. 5 have been made to the Utility’s books and records. In the event the Utility needs additional time to complete the adjustments, notice should be provided within seven days prior to deadline. Upon providing good cause, staff should be given administrative authority to grant an extension of up to 60 days. In addition, the Utility should be required to maintain its books and records on a monthly basis in accordance with the NARUC USOA. (Golden, Vogel)

Staff Analysis:

The Utility should be required to notify the Commission, in writing that it has adjusted its books in accordance with the Commission’s decision. Schedule No. 5 reflects the accumulated plant, depreciation, CIAC, and amortization of CIAC balances as of December 31, 2014. Sunrise should submit a letter within 90 days of the final order in this docket, confirming that the adjustments to all the applicable NARUC USOA primary accounts as shown on Schedule No. 5 have been made to the Utility’s books and records. In the event the Utility needs additional time to complete the adjustments, notice should be provided within seven days prior to deadline. Upon providing good cause, staff should be given administrative authority to grant an extension of up to 60 days.

In addition, as discussed in Issues 4 and 7, Rule 25-30.115, F.A.C., requires that water and wastewater utilities maintain their accounts and records in conformity with the 1996 NARUC USOA. The Utility is not currently maintaining its books and records on a monthly basis as required. The lack of properly maintained books and records proved to be a significant impediment to the audit staff, substantially increasing the work required to process the audit for this docket, as well as the audit in the Alturas SARC docket. The lack of properly maintained books and records also proved to be a significant impediment to technical staff’s work on this docket as well. Further, staff believes the lack of frequent bookkeeping activities may hinder the Utility’s ability to detect and respond to cash flow concerns on a more regular basis. Therefore, staff recommends that the Utility be required to maintain its books and records on a monthly basis in accordance with the NARUC USOA.

Due to the Utility’s recent efforts to hire a contractual accountant to begin maintaining the books and records going forward, staff does not believe it is necessary to initiate a show cause proceeding at this time. However, staff believes the Utility should be put on notice that if the Utility’s books and records are found to be out of compliance with Commission regulations in the future, the Utility may be subject to a show cause action by the Commission.

Issue 15:

Should this docket be closed?

Recommendation:

No. If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, a consummating order will be issued. The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff, and the Utility has provided staff with proof that the adjustments for all the applicable NARUC USOA primary accounts have been made. Also, the docket should remain open to allow staff to verify that the Utility has adjusted its customer deposit records and all deposit amounts that may be owed to customers have been properly refunded and to verify the Utility has properly refunded the rate case expenses it over-collected. Once the above actions are completed this docket will be closed administratively. (Corbari)

Staff Analysis:

If no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, a consummating order will be issued. The docket should remain open for staff’s verification that the revised tariff sheets and customer notice have been filed by the Utility and approved by staff, and the Utility has provided staff with proof that the adjustments for all the applicable NARUC USOA primary accounts have been made. Also, the docket should remain open to allow staff to verify that the Utility has adjusted its customer deposit records and all deposit amounts that may be owed to customers have been properly refunded and to verify the Utility has properly refunded the rate case expenses it over-collected. Once the above actions are completed this docket will be closed administratively.

[1]Order No. PSC-97-0832-FOF-WU, issued July 11, 1997, in Docket No. 961249-WU, In re: Application for grandfather certificate to provide water service in Polk County by Sunrise Water Company, Inc.

[2]Order No. Order PSC-00-1388-PAA-WU, issued July 31, 2000, in Docket No. 990731-WU, In re: Application for transfer of water facilities from Sunrise Water Company, Inc., holder of Certificate No. 584-W, to Keen Sales. Rentals and Utilities, Inc., holder of Certificate No. 582-W, in Polk County, for cancellation of Certificate No. 584-W, and for amendment of Certificate No. 582-W to include additional territory.

[3]Order No. PSC-05-0308-PAA-WU, issued March 20, 2005, in Docket No. 040159-WU, In re: Application for transfer of portion of Certificate No. 582-W by Keen Sales, Rentals and Utilities, Inc. to Sunrise Utilities, LLC, in Polk County.

[4]Order No. PSC-12-0533-PAA-WU, issued October 9, 2012, in Docket No. 110238 - WU, In re: Application for staff-assisted rate case in Polk County by Sunrise Utilities, LLC.

[5]Document No. 03572-15 filed on June 10, 2015, in Docket No. 140220-WU.

[6]Document No. 07808-15, filed on December 10, 2015, in Docket Nos. 140219-WU and 140220-WU.

[7]Staff conducted a plant site visit on May 19, 2015.

[8]Document 06695-15, filed on October 20, 2015, in Docket No. 140219-WU.

[9]Order Nos. 17043, issued December 31, 1986, in Docket No. 860325-WS, In re: Request by Southern States Utilities, Inc. for approval of test year ended 12/31/85 for rate increase in Seminole County; Order No. PSC-01-0323-PAA-WU, issued February 5, 2001, in Docket No. 000580-WU, In re: Application for staff-assisted rate case in Polk County by Keen Sales, Rentals and Utilities, Inc. (Alturas Water Works); Order No. PSC-05-0442-PAA-WU, issued April 25, 2005, in Docket No. 040254-WU, In re: Application for staff-assisted rate increase in Polk County by Keen Sales, Rentals and Utilities, Inc.; Order No. PSC-09-0716-PAA-WU, issued October 28, 2009, in Docket No. 090072-WU, In re: Application for staff-assisted rate case in Polk County by Keen Sales, Rentals and Utilities, Inc.; Order No. PSC-13-0320-PAA-WU, issued July 12, 2013, in Docket No. 120269-WU, In re: Application for staff-assisted rate case in Polk County by Pinecrest Utilities, LLC; and Order No. PSC-13-0327-PAA-SU, issued July 16, 2013, in Docket No. 120270-SU, In re: Application for staff-assisted rate case in Polk County by West Lakeland Wastewater, LLC.

[10]Order No. PSC-12-0533-PAA-WU, issued October 9, 2012, in Docket No. 110238-WU, In Re: Application for staff-assisted rate case in Polk County by Sunrise Utilities, LLC.

[11]Order No. PSC-05-0308-PAA-WU, issued March 21, 2005, in Docket No. 040159-WU, In re: Application for transfer of portion of Certificate No. 582-W by Keen Sales, Rentals, and Utilities, Inc. to Sunrise Utilities, L.L.C., in Polk County.

[12]Order No. PSC-15-0259-PAA-WS, issued July 2, 2015, in Docket No. 150006-WS, In re: Water and wastewater industry annual reestablishment of authorized range of return on common equity for water and wastewater utilities pursuant to Section 367.081(4)(f), F.S.

[13]Order No. PSC-12-0533-PAA-WU, issued on October 9, 2012, in Docket No. 110238-WU, In re: Application for staff-assisted rate case in Polk County by Sunrise Utilities, LLC.

[14]Order Nos. PSC-96-0357-FOF-WU, issued March 13, 1996, in Docket No. 950641-WU, In re: Application for staff-assisted rate case in Palm Beach County by Lake Osborne Utilities Company, Inc.; Order No. PSC-97-0130-FOF-SU, issued February 10, 1997, in Docket No. 960561-SU, In re: Application for staff-assisted rate case in Citrus County by Indian Springs Utilities, Inc.; and Order No. PSC-15-0535-PAA-WU, issued November 19, 2015, in Docket No. 140217-WU, In re: Application for staff-assisted rate case in Sumter County by Cedar Acres, Inc.

[15]Order No. PSC-96-0357-FOF-WU, issued on March 13, 1996, in Docket No. 950641-WU, In re: Application for staff-assisted rate case in Palm Beach County by Lake Osborne Utilities Company, Inc., p. 8.

[16]Order No. PSC-13-0611-PAA-WS, issued November 19, 2013, in Docket No. 130010-WS, In re: Application for increase in water rates in Lee County and wastewater rates in Pasco County by Ni Florida, LLC and Order No. PSC-14-0016-TRF-WU, issued January 6, 2014, in Docket No. 130251-WU, In re: Application for approval of miscellaneous service charges in Pasco County, by Crestridge Utility Corporation.


DATE:	February 18, 2016
TO:	Office of Commission Clerk (Stauffer)
FROM:	Division of Engineering (Lewis) Division of Accounting and Finance (Golden, Vogel) Division of Economics (Bruce) Office of the General Counsel (Corbari)
RE:	Docket No. 140220-WU – Application for staff-assisted rate case in Polk County by Sunrise Utilities, L.L.C.
AGENDA:	03/01/16 – Proposed Agency Action – Except for Issue Nos. 11, 13, and 14 - Interested Persons May Participate
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		Edgar
CRITICAL DATES:		05/06/2016 (15-Month Effective Date (SARC))
SPECIAL INSTRUCTIONS:		Place item on Agenda immediately after Docket No. 140219-WU, In re: Application for staff-assisted rate case in Polk County by Alturas Utilities, L.L.C.

	SUNRISE UTILITIES, LLC.		SCHEDULE NO. 1-A
	TEST YEAR ENDED 12/31/14				DOCKET NO. 140220-WU
	SCHEDULE OF WATER RATE BASE
		BALANCE		STAFF		BALANCE
		PER		ADJUST.		PER
	DESCRIPTION	UTILITY		TO UTIL. BAL.		STAFF

1.	UTILITY PLANT IN SERVICE	$124,367		($15,067)		$109,300

2.	LAND & LAND RIGHTS	0		553		553

3.	NON-USED AND USEFUL COMPONENTS	0		0		0

4.	CIAC	(5,168)		(7,225)		(12,393)

5.	ACCUMULATED DEPRECIATION	(68,952)		535		(68,417)

6.	AMORTIZATION OF CIAC	5,168		7,225		12,393

7.	WORKING CAPITAL ALLOWANCE	0		8,337		8,337

8.	WATER RATE BASE	$55,415		($5,642)		$49,773

	SUNRISE UTILITIES, LLC.	SCHEDULE NO. 1-B
	TEST YEAR ENDED 12/31/14	DOCKET NO. 140220-WU
	ADJUSTMENTS TO RATE BASE

	UTILITY PLANT IN SERVICE
1.	To reflect appropriate plant in service per audit.	($13,767)
2.	To reflect retirements associated with 2012 and 2013 plant additions.	(1,300)
	Total	($15,067)

	LAND & LAND RIGHTS
	To reflect appropriate land and land rights.	$553

	CIAC
	To reflect appropriate CIAC.	($7,225)

	ACCUMULATED DEPRECIATION
1.	To reflect accumulated depreciation per Rule 25-30.140, F.A.C.	($3,131)
2.	To reflect retirements associated with 2012 and 2013 plant additions.	1,412
3.	To reflect an averaging adjustment.	2,254
	Total	$535

	AMORTIZATION OF CIAC
1.	To reflect appropriate amortization of CIAC.	$6,900
2.	To reflect pro forma adjustment to fully amortize CIAC in August 2015.	325
	Total	$7,225

	WORKING CAPITAL ALLOWANCE
	To reflect 1/8 of test year O&M expenses.	$8,337

	SUNRISE UTILITIES, LLC.							SCHEDULE NO. 2
	TEST YEAR ENDED 12/31/14							DOCKET NO. 140220-WU
	SCHEDULE OF CAPITAL STRUCTURE
				BALANCE	PRO
			SPECIFIC	BEFORE	RATA	BALANCE	PERCENT
		PER	ADJUST-	PRO RATA	ADJUST-	PER	OF		WEIGHTED
	CAPITAL COMPONENT	UTILITY	MENTS	ADJUSTMENTS	MENTS	STAFF	TOTAL	COST	COST

1.	COMMON STOCK	$0	$0	$0
2.	RETAINED EARNINGS	0	0	0
3.	PAID IN CAPITAL	0	0	0
4.	OTHER COMMON EQUITY	0	90,000	90,000
	TOTAL COMMON EQUITY	$0	$90,000	$90,000	($44,707)	$45,293	91.00%	8.74%	7.95%

5.	LONG TERM DEBT	$0	$0	$0	$0	$0	0.00%	0.00%	0.00%
6.	SHORT-TERM DEBT	0	0	0	0	0	0.00%	0.00%	0.00%
7.	PREFERRED STOCK	0	0	0	0	0	0.00%	0.00%	0.00%
	TOTAL DEBT	$0	$0	$0	$0	$0	0.00%

8.	CUSTOMER DEPOSITS	$0	$4,480	$4,480	$0	$4,480	9.00%	2.00%	0.18%

9.	TOTAL	$0	$94,480	$94,480	($44,707)	$49,773	100.00%		8.13%

				RANGE OF REASONABLENESS			LOW	HIGH
				RETURN ON EQUITY			7.74%	9.74%
				OVERALL RATE OF RETURN			7.22%	9.04%

	SUNRISE UTILITIES, LLC.				SCHEDULE NO. 3-A
	TEST YEAR ENDED 12/31/14				DOCKET NO. 140220-WU
	SCHEDULE OF WATER OPERATING INCOME
				STAFF	ADJUST.
		TEST YEAR	STAFF	ADJUSTED	FOR	REVENUE
		PER UTILITY	ADJUSTMENTS	TEST YEAR	INCREASE	REQUIREMENT

1.	OPERATING REVENUES	$69,416	$5,522	$74,938	$7,510	$82,448
					10.02%
	OPERATING EXPENSES:
2.	OPERATION & MAINTENANCE	$69,373	($2,676)	$66,697	$0	$66,697

3.	DEPRECIATION (NET)	0	4,508	4,508	0	4,508

4.	TAXES OTHER THAN INCOME	5,731	(1,496)	4,235	338	4,573

5.	INCOME TAXES	0	0	0	0	0

6.	TOTAL OPERATING EXPENSES	$75,104	$336)	$75,440	$338	$75,778

7.	OPERATING INCOME/(LOSS)	($5,688)		($502)		$6,670

8.	WATER RATE BASE	$55,415		$49,773		$49,773

9.	RATE OF RETURN	(10.26%	)	(1.01%)

10.	OPERATING RATIO					10.00%

	SUNRISE UTILITIES, LLC. SCHEDULE NO. 3-B
	TEST YEAR ENDED 12/31/14 DOCKET NO. 140220-WU
	ADJUSTMENTS TO OPERATING INCOME Page 1 of 2

	OPERATING REVENUES

1.	To reflect the appropriate test year revenues.	$2,882
2.	To reflect the appropriate test year miscellaneous service revenues.	2,640
	Subtotal	$5,522

	OPERATION AND MAINTENANCE EXPENSES

1.	Salaries and Wages - Officers (603)
	a. To reflect appropriate allocation of administration officer/owner's salary.	($2,640)
	b. To reflect appropriate allocation of president's salary.	585
	c. To reflect reduction in officers' salaries due to quality of service penalty.	(2,486)
		($4,541)
2.	Purchased Power (615)
	a. To reflect appropriate purchased power expense and removal of late fees..	($63)
	b. To reflect 9% excessive unaccounted for water adjustment.	(205)
	Subtotal	($268)

3.	Fuel for Power Production (616)
	To reflect propane fuel expense for emergency generator.	$219

4.	Chemicals (618)
	a. To reflect appropriate chemicals expense.	$131
	b. To reflect 9% excessive unaccounted for water adjustment.	(141)
	Subtotal	($10)

5.	Contractual Services - Billing (630)
	a. To reflect pro forma meter reading expense.	$60
	b. To reflect pro forma contractual bookkeeping expense.	($3,118)
	Subtotal	($3,058)

6.	Contractual Services - Professional (631)
	a. To reflect pro forma contractual bookkeeping expense.	$1,670

7.	Contractual Services - Testing (635)
	a. To reflect appropriate annual testing expense.	$2,340
	b. To reflect pro forma 3-year amortization of triennial water tests.	1,508
	c. To reflect pro forma 5-year amortization of DEP-required additional tests.	760
	Subtotal	$4,608

8.	Contractual Services - Other (636)
	a. To reflect appropriate contractual office manager expense.	($1,958)
	b. To reflect appropriate test year contractual operator expense.	173
	c. To reflect appropriate test year maintenance expense.	(6,727)
	d. To reclassify meter checking expense from Alturas to Sunrise.	159
	e. To reflect pro forma contractual utility service technician expense.	10,140
	f. To reflect annual amortization of hydropneumatic tank inspection/cleaning.	762
	Subtotal	$2,549

	SUNRISE UTILITIES, LLC. SCHEDULE NO. 3-B
	TEST YEAR ENDED 12/31/14 DOCKET NO. 140220-WU
	ADJUSTMENTS TO OPERATING INCOME Page 2 of 2


	OPERATION AND MAINTENANCE EXPENSES (CONTINUED)

9.	Transportation Expense (650)
	To reflect pro forma transportation expense.	($1.274)

10.	Insurance Expense (655)
	To reflect appropriate insurance expense.	($182)

11.	Regulatory Commission Expense (665)
	a. To reflect 4-year amortization of rate case expense (Docket No. 110238-WU).	$344
	b. To reflect 4-year amortization of rate case expense for current case ($2,648/4).	662
	Subtotal	$1,006

12.	Bad Debt Expense (670)
	a. To reflect appropriate bad debt expense.	($2,510)

13.	Miscellaneous Expense (675)
	a. To reflect appropriate test year miscellaneous expense.	($1,371)
	b. To reflect 5-year amortization of non-recurring miscellaneous operator expense.	115
	c. To reflect pro forma annual FRWA membership dues.	202
	d. To reflect pro forma 5-year amort. of software update, additional license, and training.	108
	e. To reflect pro forma 5-year amortization of electronic bank deposit machine.	60
	Subtotal	($885)


	TOTAL OPERATION & MAINTENANCE ADJUSTMENTS	($2,676)


	DEPRECIATION EXPENSE
	To reflect test year depreciation calculated per Rule 25-30.140, F.A.C.	$4,508


	TAXES OTHER THAN INCOME
1.	To reflect appropriate test year RAFs.	$249
2.	To reflect appropriate test year utility property taxes.	(1,745)
	Total	($1,496)

SUNRISE UTILITIES, LLC.		SCHEDULE NO. 3-C
TEST YEAR ENDED 12/31/14		DOCKET NO. 140220-WU
ANALYSIS OF WATER OPERATION AND MAINTENANCE EXPENSE
	TOTAL	STAFF	TOTAL
	PER	ADJUST-	PER
	UTILITY	MENTS	STAFF
(601) SALARIES AND WAGES - EMPLOYEES	$0	$0	$0
(603) SALARIES AND WAGES - OFFICERS	12,000	(4,541)	7,459
(604) EMPLOYEE PENSIONS AND BENEFITS	0	0	0
(610) PURCHASED WATER	0	0	0
(615) PURCHASED POWER	2,340	(268)	2,072
(616) FUEL FOR POWER PRODUCTION	0	219	219
(618) CHEMICALS	1,431	(10)	1,421
(620) MATERIALS AND SUPPLIES	0	0	0
(630) CONTRACTUAL SERVICES - BILLING	9,802	(3,058)	6,744
(631) CONTRACTUAL SERVICES - PROFESSIONAL	400	1,670	2,070
(635) CONTRACTUAL SERVICES - TESTING	0	4,608	4,608
(636) CONTRACTUAL SERVICES - OTHER	29,173	2,549	31,722
(640) RENTS	0	0	0
(650) TRANSPORTATION EXPENSE	1,976	(1,274)	702
(655) INSURANCE EXPENSE	2,010	(182)	1,828
(665) REGULATORY COMMISSION EXPENSE	0	1,006	1,006
(670) BAD DEBT EXPENSE	3,899	(2,510)	1,389
(675) MISCELLANEOUS EXPENSE	6,342	(885)	5,457

	$69,373	($2,676)	$66,697

SUNRISE UTILITIES, LLC.		SCHEDULE NO. 4
TEST YEAR ENDED 12/31/14		DOCKET NO. 140220-WU
MONTHLY WATER RATES

	UTILITY	STAFF	4 YEAR
	CURRENT	RECOMMENDED	RATE
	RATES	RATES	REDUCTION

Residential and General Service
Base Facility Charge by Meter Size
5/8"X3/4"	$9.07	$10.01	$0.10
3/4"	$13.61	$15.02	$0.14
1"	$22.68	$25.03	$0.24
1-1/2"	$45.35	$50.05	$0.48
2"	$72.56	$80.08	$0.77
3"	$145.12	$160.16	$1.54
4"	$226.75	$250.25	$2.40
6"	$453.50	$500.50	$4.80

Charge per 1,000 Gallons - Residential
0-5,000 gallons	$2.89	$3.19	$0.03
5,001-10,000 gallons	$3.18	$3.51	$0.03
Over 10,000 gallons	$6.35	$7.01	$0.07

Charge per 1,000 gallons - General Service	$3.29	$3.63	$0.03 12

Typical Residential 5/8" x 3/4" Meter Bill Comparison
3,000 Gallons	$17.74	$19.58
5,000 Gallons	$23.52	$25.96
10,000 Gallons	$39.42	$43.51

SUNRISE UTILITIES, LLC.			SCHEDULE NO. 5
TEST YEAR ENDED 12/31/2014			DOCKET NO. 140220-WU
SCHEDULE OF WATER PLANT, DEPRECIATION, CIAC, & CIAC AMORTIZATION BALANCES
ACCTNO.	DEPR. RATE PER RULE 25-30.140	DESCRIPTION		UPIS 12/31/2014 (DEBIT)	ACCUM. DEPR. 12/31/2014 (CREDIT)*

301	2.50%	ORGANIZATION		$750	$285
303	0.00%	LAND AND LAND RIGHTS (NON-DEPRECIABLE)		553	0
304	3.70%	STRUCTURES AND IMPROVEMENTS		5,412	3,408
307	3.70%	WELLS AND SPRINGS		16,972	14,676
309	3.13%	SUPPLY MAINS		649	(273)
310	5.88%	POWER GENERATION EQUIPMENT		15,070	7,104
311	5.88%	PUMPING EQUIPMENT		17,377	4,341
320	5.88%	WATER TREATMENT EQUIPMENT		4,055	4,055
330	3.03%	DISTRIBUTION RESERVOIRS AND STANDPIPES		21,485	15,903
331	2.63%	TRANSMISSION AND DISTRIBUTION MAINS		12,393	8,253
334	5.88%	METERS AND METER INSTALLATIONS		12,257	10,408
340	6.67%	OFFICE FURNITURE AND EQUIPMENT		494	123
348	10.00%	OTHER TANGIBLE PLANT		2,388	2,388
		TOTAL INCLUDING LAND		$109,855	$70,671

				CIAC AMORT. 12/31/2014 (DEBIT)*	CIAC 12/31/2014 (CREDIT)

				$12,068	$12,393


*The accumulated depreciation balance excludes the staff-recommended averaging adjustment and the CIAC amortization balance excludes the staff-recommended $325 pro forma adjustment that are only used for ratesetting purposes and should not be reflected on the Utility’s books.