Discussion of Issues
Issue 1:
Should the quality of service provided by Raintree be
considered satisfactory?
Recommendation:
Yes. The overall quality of service provided by
Raintree should be considered satisfactory. (M.Watts)
Staff Analysis:
Pursuant to Rule
25-30.433(1), Florida Administrative Code (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’s 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 Raintree’s water quality consisted
of a review of the Utility’s compliance with the DEP primary and secondary
drinking water 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 DEP
records, the Utility was in compliance with all primary and secondary
standards during the three-year period (2012-2014) that preceded the test year.
On April 27, 2015, water testing for primary and
secondary water standards was conducted by Advanced Environmental Laboratories,
Inc., and all results remained in compliance with the DEP primary and secondary
water quality standards.
Staff’s review of complaints filed with the Commission
(none were filed with DEP), did not reveal any issues or concerns regarding the
quality of Raintree’s product. Based on staff’s review, giving consideration to
the Utility’s current compliance with DEP standards, as well as the lack of
customer complaints, the quality of Raintree’s product should be considered
satisfactory.
Operating Condition of the Utility’s
Plant and Facilities
Raintree provides finished
potable water obtained from three wells, which draw ground water from the
aquifer. The raw water is treated by reverse osmosis chlorination filtration
and pumped into a 3,000 gallon hydropneumatic tank and then into the
distribution system. The distribution system is composed of PVC pipe. Staff’s
evaluation of Raintree’s facilities included a review of the Utility’s
compliance standards of operation as well as a site visit.
On October 11, 2013, DEP
conducted a sanitary survey, and found one deficiency, stating that the Well #1
check valve was not holding. The survey report, issued on January 16, 2014,
stated that the Utility advised that the check valve was replaced on October
14, 2013, and deemed the water treatment plant in compliance. Staff did not
identify any issues or concerns during its March 9, 2016, site visit. Therefore,
the operating condition of Raintree’s water treatment plant and facilities should
be considered satisfactory.
The Utility’s Attempt to
Address Customer Satisfaction
The final
component of the overall quality of service that must be assessed is customer
satisfaction. As part of staff’s evaluation of customer satisfaction, staff
held a customer meeting (March 9, 2016) to receive customer comments concerning
Raintree’s quality of service. The Utility mailed the customer meeting notice
to its customers on February 17, 2016, advising them of the time, place, and
purpose of the meeting, as well as the procedures for filing comments with the
Commission. No customers attended the meeting, and, as of the filing date of
this recommendation, no customer correspondence has been received.
Staff also requested copies of complaints filed with the
Utility during the test year and four years prior to the test year. The Utility
responded on February 8, 2016, with the complaints that it had received since
it acquired the Utility in 2014. The response shows 34 customer contacts, 21 of
which were related to two general power outage events that occurred on May 22
and September 1, 2015, that affected the water treatment plant. Seven
complaints were for leaks. The Utility investigated and either fixed the leak
or advised that it was on the customer’s side of the meter, as appropriate. One
of the leaks was found to be a wastewater leak which did not involve Raintree’s
system. Three customer contacts were regarding water service that had been shut
off due to nonpayment, and were resolved when payment was made. The last three
customer contacts regarded a quality of service issue that Raintree tried to
follow up on to obtain additional information, but the customers in each case
failed to pursue the matter.
On April 26, 2016, staff requested complaints against the
system filed with the DEP for the test year and four years prior. DEP responded
on May 9, 2016, stating that it had received no complaints against the system
in the last five years.
Finally, staff reviewed the
Commission’s complaint records from January 1, 2010, through May 9, 2016. There
were no complaints filed against any of the three utilities that had ownership
of the water system during this period. Therefore, staff recommends the
Utility’s attempt to address customer satisfaction should be considered
satisfactory.
Conclusion
Based on the summation of staff’s analysis and review
described above, the overall quality of service provided by Raintree should be
considered satisfactory.
Issue 2:
What are the used and useful percentages (U&U)
of Raintree’s water treatment plant and distribution system?
Recommendation:
Raintree’s water treatment plant (WTP) and
distribution system should be considered 100 percent U&U. Staff recommends
that WTP purchased power and chemical expenses should be reduced by 8.5 percent
for excessive unaccounted for water (EUW). (M. Watts)
Staff Analysis:
Raintree’s water system is served by two 4-inch wells
and one 8-inch diameter well rated at 88, 88, and 90 gallons per minute,
respectively. The raw water is treated by reverse osmosis chlorination
filtration prior to entering the 3,000-gallon hydropneumatic tank for
pressurization, and then pumped into the water distribution system. The Utility
is permitted to withdraw an average of 0.062 million gallons per day for the
years 2014 through 2028. Analysis of the system indicates there has been no
growth of the system in the past five years. Staff notes that Raintree’s water
treatment plant and distribution system were deemed 100 percent U&U in the
Utility’s previous SARC.
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
Pursuant to Rule 25-30.4325, F.A.C., the calculation of
U&U for a water treatment plant must consider EUW. 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 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 Rule additionally 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.
While reviewing the Utility’s filing, staff noted that
Raintree reported that it sold more water in June and July of 2015 than it
produced. Staff requested clarification of this data, and the Utility reported
that Well #3’s flow meter had been inoperable for several months, and during
that time the flows from that well were estimated. The Utility attached an
invoice showing that the flow meter was replaced on November 18, 2015, and
requested it be included as pro forma in the instant docket. Staff agrees that
the flow meter repair is necessary and should be included as pro forma as
requested.
Since the actual amount of water produced by Well #3
during June and July of 2015 cannot be determined, staff excluded those months
from its EUW calculations. Therefore, based on the ten-month period during the
test year of August 1, 2014, to May 31, 2015, the Utility’s Monthly Operating
Reports filed with DEP indicate that it treated 13,035,970 gallons. The Utility
sold 10,140,000 gallons of water for the stated ten-month period. The Utility
reported that it used 488,349 gallons for other uses. Adding the water sold to
the water used for other uses, and subtracting the sum from the amount produced
yields an unaccounted for water total of 2,407,621 gallons, or 18.5 percent,
yielding an EUW of 8.5 percent. Therefore, staff recommends that an 8.5 percent
adjustment be made to operating expenses for chemicals and purchased power due
to EUW.
Conclusion
Raintree’s WTP and distribution system should be
considered 100 percent U&U. Staff recommends that WTP purchased power and
chemical expenses should be reduced by 8.5 percent for EUW.
Issue 3: What is the appropriate average test year rate base
for Raintree?
Recommendation:
The appropriate average test year rate base for
Raintree is $51,282. (Golden)
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. Raintree’s net book value was last
determined by Order No. PSC-14-0692-PAA-WU in a 2014 certificate transfer
docket.[8] Rate base
was last established in the Utility’s last SARC in 2008.
Staff selected the test year ending July 31, 2015, for the instant case.
Commission audit staff determined that the Utility’s books and records are in
compliance with the National Association of Regulatory Utility Commissioners’
Uniform System of Accounts (NARUC USOA). A summary of each component of rate
base and the recommended adjustments are discussed below.
Utility Plant in Service (UPIS)
The Utility recorded $252,519 in UPIS. Staff decreased
UPIS by $750 to reclassify Raintree’s 2014 certificate transfer application
filing fee from plant Account No. 302 – Franchises to expense Account No. 665 –
Regulatory Commission Expense. Although the NARUC USOA allows the filing fee to
be recorded as either a plant or expense item, current Commission practice is
to record this type of filing fee as a non-recurring expense. This enables the
Utility to recover the filing fee over 5 years, rather than 40 years associated
with plant Account No. 302. This approach is particularly helpful to Class C
utilities which often operate with limited cash resources. The exception is
that the filing fee for an original certificate application for a utility that
has not been built yet will typically be recorded to plant Account No. 301 –
Organization as part of the cost to establish a new utility.
As discussed in Issue 2, the Utility replaced an
inoperable flow meter subsequent to the test year. In its response to Staff’s
First Data Request, the Utility requested recovery of the repair as a pro forma
plant item and provided supporting documentation.
Based on engineering staff’s review, staff increased UPIS by $929 to reflect
the pro forma replacement of the new flow meter. 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
decreased this account by $697 ($929 x .75 = $697) to reflect the plant
retirement associated with the flow meter replacement. According to Raintree’s
2015 Annual Report, the Utility also recorded this replacement using a 75
percent retirement value. No plant additions were made during the test year,
therefore, no averaging adjustment is necessary for ratemaking purposes.
Staff’s net adjustment to UPIS is a decrease of $518. Therefore, staff
recommends a UPIS balance of $252,001.
Land and Land Rights
The Commission approved a land balance of $5,740 in the
Utility’s 2014 transfer docket. Audit staff determined that there has been no
subsequent activity related to land, therefore, no adjustments are necessary.
Staff recommends a land and land rights balance of $5,740.
Non-Used and Useful Plant
As discussed in Issue 2, Raintree’s water treatment plant
and distribution system are considered 100 percent U&U. Therefore, a
U&U adjustment is not necessary.
Contribution in Aid of Construction
The Commission approved a CIAC balance of $29,750 in the
Utility’s 2014 transfer docket. Audit staff determined there has been no
subsequent activity related to CIAC, therefore, no adjustments are necessary.
Staff recommends a CIAC balance of $29,750.
Accumulated Depreciation
The Utility recorded $201,496 in accumulated depreciation.
Staff calculated accumulated depreciation using the prescribed rates set forth
in Rule 25-30.140, F.A.C. Staff’s calculation includes a $22 decrease to remove
the accumulated depreciation associated with the $750 filing fee
reclassification discussed above. However, that decrease is offset by a total
of $22 in minor increases to four other accounts, resulting in no change to
total accumulated depreciation for the test year. Consequently, no adjustments
are needed to correct the test year balance for rate setting purposes. As will
be discussed further in Issue 12, staff’s adjusted account balances for the
test year are reflected on Schedule No. 5 to assist the Utility with adjusting
its books and records.
In addition, staff recommends two pro forma adjustments associated
with the flow meter replacement discussed above. Staff decreased this account
by $697 to remove the accumulated depreciation associated with the retired flow
meter. Staff also increased this account by $7 to reflect the minor incremental
increase in accumulated depreciation associated with the new flow meter.
Finally, staff decreased the test year total accumulated depreciation by $5,419
to reflect an averaging adjustment. Staff’s net adjustment to this account is a
decrease of $6,109. Therefore, staff recommends an accumulated depreciation
balance of $195,387.
Accumulated Amortization of CIAC
Raintree recorded an amortization of CIAC balance of
$15,143. Staff calculated amortization of CIAC using composite depreciation
rates, and determined that no adjustments are necessary. Staff decreased this
account by $640 to reflect an averaging adjustment. Staff recommends an
accumulated amortization of CIAC balance of $14,503.
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 $4,175 (based on O&M expense of $33,402/8).
Rate Base Summary
Based on the foregoing, staff
recommends that the appropriate average test year rate base is $51,282. Rate
base is shown on Schedule No. 1-A. The related adjustments are shown on
Schedule No. 1-B.
Issue 4:
What is the appropriate rate of return on
equity and overall rate of return for Raintree?
Recommendation:
The appropriate return on equity (ROE) is 8.74
percent with a range of 7.74 percent to 9.74 percent. The appropriate overall
rate of return is 8.74 percent. (Golden)
Staff Analysis:
Raintree’s capital structure consists of $49,929 in
common equity. Audit staff verified that the Utility has no debt. In addition,
audit staff verified that the Utility does not collect customer deposits and
does not have a tariff in effect for customer deposits. Therefore, no
adjustments are necessary.
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.[11] Staff
recommends an ROE of 8.74 percent, with a range of 7.74 percent to 9.74
percent, and an overall rate of return of 8.74 percent. The ROE and overall
rate of return are shown on Schedule No. 2.
Issue 5: What is the appropriate test year revenue for
Raintree’s water system?
Recommendation: The
appropriate test year revenue for Raintree’s water system is $42,540. (Bruce)
Staff Analysis: Raintree
recorded a total revenue of $40,670. The water revenue included $40,660 of
service revenues and $10 of miscellaneous revenues. In order to determine the
appropriate service revenues, staff corrected billing determinants to reflect
credits issued to customers. During the test year, the Utility had a rate
increase as a result of a price index. Therefore, staff annualized test year
revenue by applying the rates in effect as of June 26, 2015, to staff’s
adjusted billing determinants. Based on the corrected billing determinants,
staff determined that service revenues should be $42,322, which is an increase
of $1,652.
On July 15, 2015, the Utility
began charging a $2.60 convenience charge to customers who opted to pay their
water bill online or by way of telephone.
During the test year, there were only four occurrences. However, since the
implementation of the convenience charge through March of 2016, there were
approximately 66 occurrences. In order to recognize the revenues associated
with this charge on a going forward basis, staff annualized the number of
occurrences. As a result, the approximate annual average of occurrences is 84,
which calculates to be $218 of miscellaneous revenues. Therefore, staff increased miscellaneous revenues by $208
($218-$10). The appropriate test year revenue for Raintree’s water system,
including miscellaneous revenues, is $42,540 ($42,322+$218).
Issue 6:
What is the appropriate amount of operating
expenses?
Recommendation:
The appropriate amount of operating expense for the
Utility is $42,568. (Golden)
Staff Analysis:
Raintree recorded operating expense of $46,531 for
the test year ended July 31, 2015. The test year O&M expenses have been
reviewed, including invoices, canceled checks, and other supporting
documentation. Staff has made several adjustments to the Utility's operating
expenses as summarized below.
Operation and Maintenance Expenses
Purchased Power (615)
Raintree recorded $4,689 for test year purchased power
expense. As discussed in Issue 2, staff is recommending an EUW adjustment of
8.5 percent. Therefore, staff decreased this account by $399 ($4,689 x .085 =
$399) to reflect an 8.5 percent EUW adjustment. Therefore, staff recommends
purchased power expense of $4,290.
Chemicals (618)
The Utility recorded $345 for test year chemicals expense.
As discussed in Issue 2, staff is recommending an EUW adjustment of 8.5
percent. Therefore, staff decreased this account by $29 ($345 x .085 = $29) to
reflect an 8.5 percent EUW adjustment. Therefore, staff recommends purchased
power expense of $316.
Contractual Services - Professional (631)
Raintree recorded $2,107 for test year contractual
services – professional expense, comprised of $1,667 in accrued accounting
expense and $440 in legal expense. The Utility’s actual test year accounting
services expense was $1,000, therefore, staff decreased this account by $667 to
remove the excess accrued accounting expense. Staff recommends contractual
services – professional expense for the test year of $1,440.
Contractual Services - Other (636)
The Utility recorded $21,744 in this account. Raintree
receives all of its operational and administrative services under a contract
with an affiliated company, U.S. Water Services Corporation (USWSC). The
Commission previously reviewed and approved expenses related to the USWSC
management services contracts for five of Raintree’s sister utilities.
In the three most recent related dockets, the Commission found USWSC’s costing
and allocation model to be reasonable with the exception of some allocated
expenses related to salary overtime, fuel, and vehicle maintenance which were
adjusted in those dockets.
Subsequent to the test year, USWSC increased Raintree’s
annual contract by $348 to reflect an increase in the Consumer Price Index
(CPI).
USWSC previously adjusted Raintree’s contract to remove the salary overtime
allowance, but did not adjust the fuel and vehicle maintenance expenses at that
time. USWSC subsequently determined that Raintree’s actual test year fuel and vehicle
maintenance expenses were $642 less than the amount allocated in the test year
contract, or $652 less than the amount allocated in the current contract
following the CPI adjustment. Consistent with the Commission’s decisions
related to Raintree’s sister utilities, staff increased this account by $348 to
annualize the increase in the monthly contract price. Staff also decreased this
account by $652 to reflect Raintree’s actual test year fuel and vehicle
maintenance expenses including the CPI adjustment. Staff’s net adjustment to
this account is a decrease of $304 ($348 - $652 = -$304). The adjusted annual
contract fee of $21,440 equals an average of $195 per equivalent residential
connection (ERC), which is comparable to the amounts approved by the Commission
for Raintree’s sister utilities which ranged from $170 to $247 per water ERC.
The Utility
confirmed that USWSC’s current cost model continues to include 1,000 additional
projected ERCs.
Inclusion of 1,000 potential future ERCs that are expected to be added through
growth or acquisitions serves to spread the costs over a larger base and lowers
the cost per ERC. Also, USWSC did not include any salary for the Manager of
Regulated Utilities in the administrative services cost, which also serves to lower
costs to customers.
In addition, USWSC’s contract with Raintree uses a 14 percent margin for
overhead and profit rather than the 18 percent markup previously used. As a
result of including the additional ERCs and reducing the margin by 4 percent,
Raintree receives an annual subsidy of $1,821 from USWSC. Staff also notes that
Raintree’s O&M expenses have decreased by more than $6,000 when compared to
the Utility’s last SARC in 2008. In addition to the $1,821 cost subsidy
resulting from USWSC’s cost model, Raintree is experiencing additional cost
savings related to expenses such as chemicals, testing, and miscellaneous
expenses that are attributable to economies of scale achieved through
operations provided under the USWSC contract.
USWSC and
its managers bring considerable management and operator experience and
expertise at a comparably reasonable cost. By spreading costs over multiple
systems, and adding ERCs to recognize potential future growth, Raintree’s
customers are realizing operational and cost benefits that would not be
available if the Utility operated on a stand-alone basis. Staff believes the
adjusted cost of the USWSC management services contract is reasonable.
Therefore, staff recommends contractual services – other expense for the test
year of $21,440.
Insurance Expense (655)
The Utility recorded $835 in this account. During the test
year, the Utility’s general liability insurance policy was renewed at a higher
premium. Staff increased this account by $479 to reflect the Utility’s current
annual general liability insurance expense of $1,314. Therefore, staff
recommends insurance expense for the test year of $1,314.
Regulatory Commission Expense (665)
The Utility did not record any regulatory commission
expense in this account. As discussed in Issue 3, staff reclassified the
Utility’s $750 certificate transfer application filing fee from plant to this
expense account. 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. Accordingly, staff
increased this account by $150 to reflect the five-year amortization of the
certificate transfer application filing fee ($750/5 = $150). The remaining
unamortized portion of the filing fee should be recorded in Account No. 186 –
Miscellaneous Deferred Debits.
Regarding the instant case, the Utility is required by
Rule 25-22.0407, F.A.C., to provide notices of the customer meeting and notices
of final rates in this case to its customers. For noticing, staff estimated
$106 for postage expense, $77 for printing expense, and $11 for envelopes. This
results in $194 for the noticing requirement. The Utility paid a $500 rate case
filing fee. The Utility also requested additional rate case expense of $500 to
cover travel expenses to attend both the customer meeting and Commission Agenda
Conference. The Commission previously approved rate case related travel
expenses ranging from $450 to $1,570 in the three most recent dockets for
Raintree’s sister utilities. Based on staff’s review, the requested travel
expense appears reasonable. 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 of $1,194 ($194 +
$500 + $500), which amortized over four years is $298. Based on the above,
staff’s total adjustment to this account is an increase of $448 ($150 + $298 =
$448). Therefore, staff recommends regulatory commission expense of $448.
Bad Debt Expense (670)
Raintree recorded $568 in this account for test year bad
debt expense. Commission practice is to calculate bad debt expense using a
three-year average, however, three years of records are not yet available for
the current owners who purchased Raintree on May 23, 2014. The Utility reported
$234 in bad debt expense for June through December 2014.
Subsequent to the test year, Raintree reported $479 in bad debt expense for
2015, which equals 1.02 percent of staff’s recommended revenue requirement.
Raintree indicated it is amenable to using $479 for the test year.
Staff believes the 2015 expense is more representative of Raintree’s expected
bad debt expense going forward, and provides a reasonable alternative to a
traditional three-year average in this case. Therefore, staff has decreased
this account by $89 ($479 - $568 = -$89), and recommends a test year bad debt
expense of $479.
Miscellaneous Expense (675)
The Utility recorded $698 for miscellaneous expense. This
account includes the Department of State’s Division of Corporation’s annual
filing fee of $150, the DEP’s drinking water annual operating license fee of
$500, and several Sunshine State Florida One Call fees totaling $48. Staff
decreased this account by $24 to remove the Sunshine State Florida One Call
fees that occurred outside the test year. Staff recommends miscellaneous
expense of $674 for the test year.
Operation
and Maintenance Expense (O&M Summary)
Based on the above adjustments, O&M expense should be
decreased by $584, resulting in total O&M expense of $33,402. Staff’s
recommended adjustments to O&M expense are shown on Schedule Nos. 3-A, 3-B,
and 3-C.
Depreciation Expense (Net of Amortization of
CIAC)
The Utility’s records reflect test year depreciation of
$10,875 and CIAC amortization of $1,280, for a net depreciation expense of
$9,595 ($10,875 - $1,280 = $9,595). Staff calculated depreciation expense using
the prescribed rates set forth in Rule 25-30.140, F.A.C., and determined depreciation expense to be $7,752. Also, staff
determined that the pro forma flow meter replacement results in a minor
incremental increase of $7 in depreciation expense. Accordingly, staff
decreased this account by a net adjustment of $3,116 ($7,752 + 7 - $10,875 =
-$3,116). Staff’s decrease to depreciation expense is primarily due to the
elimination of $3,123 in depreciation expense going forward for plant Account
No. 320 – Water Treatment Equipment that became fully depreciated during the
test year. In addition, staff calculated CIAC amortization based on composite
rates, and determined that no adjustments are necessary. This results in
a net depreciation expense of $6,479 ($7,752 + $7 - $1,280 = $6,479).
Therefore, staff recommends net depreciation expense of $6,479.
Taxes Other Than Income (TOTI)
Raintree recorded TOTI of $2,951 for the test year. The
Utility recorded $1,997 for
regulatory assessment fees (RAFs). Based on staff’s recommended test
year revenues of $42,540, the Utility’s RAFs should be $1,914. Therefore, staff
decreased this account by $83 to reflect the appropriate RAFs. Also, the
Utility recorded property tax accruals of $954 during the test year. Audit
staff determined that the Utility’s actual property taxes for the 2014 tax year
were $671. However, subsequent to the audit, the 2015 property tax records
became available, indicating that Raintree paid lower property taxes of $567
for the 2015 tax year. In addition, the pro forma flow meter replacement
discussed in Issue 3 results in a minor $3 increase in the Utility’s property
taxes. Based on the 2015 property taxes plus the minor pro forma adjustment,
staff decreased this account by $384 to reflect the appropriate property taxes
going forward ($567 + $3 - $954 = -$384). Staff’s total adjustment to test year
TOTI is a decrease of $467 (-$83 - $384 = -$467).
In addition, as discussed in Issue 7, revenues have been
increased by $4,510 to reflect the change in revenue required to cover expenses
and allow the recommended rate of return. As a result, TOTI should be increased
by $203 to reflect RAFs of 4.5 percent of the change in revenues. Therefore,
staff recommends TOTI of $2,687.
Operating Expenses Summary
The application of staff’s recommended adjustments to
Raintree’s test year operating expenses result in operating expenses of
$42,568. Operating expenses are shown on Schedule No. 3-A. The adjustments are
shown on Schedule No. 3-B.
Issue 7:
What is the appropriate revenue requirement?
Recommendation:
The appropriate revenue requirement is $47,050,
resulting in an annual increase of $4,510 (10.60 percent). (Golden)
Staff Analysis:
Raintree
should be allowed an annual increase of $4,510 (10.60 percent). This will allow
the Utility the opportunity to recover its expenses and earn an 8.74 percent
return on its investment. The calculations are as follows in Table 7-1 below:
Table 7-1
Water Revenue Requirement
|
Adjusted Rate Base
|
|
$51,282
|
|
Rate of Return
|
|
x 8.74%
|
|
Return on Rate Base
|
|
$4,482
|
|
Adjusted O&M Expense
|
|
33,402
|
|
Depreciation Expense (Net)
|
|
6,479
|
|
Taxes Other Than Income
|
|
2,687
|
|
Income Taxes
|
|
0
|
|
Revenue Requirement
|
|
$47,050
|
|
Less Adjusted Test Year Revenues
|
|
42,540
|
|
Annual Increase
|
|
$4,510
|
|
Percent Increase
|
|
10.60%
|
Issue 8:
What is the appropriate rate structure and
rates for Raintree’s water system?
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:
Water
Rates
Raintree’s service territory is
located in the St. Johns River Water Management District (SJRWMD), which has
water restrictions in place. The Utility provides water only service to 109
residential customers and one general service customer. The general service
customer is the home owners’ association and water is provided to irrigate the
common areas. The billing data indicates that approximately 11 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 10,029
gallons per month. Currently, the water system rate structure for residential
customers consists of a base facility charge (BFC) and a two-tier inclining block
rate structure. The rate blocks are: (1) 0-8,000 gallons per month, and (2) all
usage in excess of 8,000 gallons per month. General service customers are
billed based on a BFC 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.
In this case, staff recommends that 40 percent of the
water revenues should be generated from the BFC, which will provide sufficient
revenues to design gallonage charges that send pricing signals to customers
using above the non-discretionary level. The average people per household
served by the water system is two; therefore, based on the number of people per
household, 50 gallons per day per person, and the number of days per month, the
non-discretionary usage threshold should be 3,000 gallons per month. Staff
recommends a BFC and a three-tier inclining block rate structure, which
includes separate gallonage charges for discretionary and non-discretionary
usage for residential water customers. The rate blocks are: (1) 0-3,000
gallons; (2) 3,001-8,000 gallons; and (3) all usage in excess of 8,000 gallons
per month. This rate structure sends the appropriate pricing signals because it
targets customers with high consumption levels and minimizes price increases
for customers at non-discretionary levels. In addition, the third tier provides
an additional pricing signal to customers using in excess of 8,000 gallons of
water per month, which includes approximately 52 percent of the demand. General
service customers should be billed a BFC and uniform gallonage charge.
Based on a
recommended revenue increase of 10.7 percent, which excludes $218 of
miscellaneous revenues, the residential consumption can be expected to decline
by 572,000 gallons resulting in anticipated average residential demand of 9,602
gallons per month. Staff recommends a 4.3 percent reduction in test year
residential gallons for rate setting purposes and corresponding reductions of
$182 for purchased power, $13 for chemicals, and $9 for RAFs to reflect the
anticipated repression, which results in a post repression revenue requirement
of $46,627. Table 8-1 below, contains staff’s recommended rate structure and
two alternative rate structures at another BFC allocation and tiers.
Table 8-1
Staff’s Recommended and
Alternative Water Rate Structures and Rates
|
RATES AT
TIME OF
FILING
|
STAFF
RECOMMENDED
RATES
|
ALTERNATIVE
I
(40% BFC)
|
ALTERNATIVE
II
(40% BFC)
|
|
Residential
|
|
(40% BFC)
|
|
|
|
5/8” x
3/4” Meter Size
|
$13.60
|
$13.79
|
$13.80
|
$13.79
|
|
|
|
|
|
|
|
Charge per 1,000
gallons
|
|
|
|
|
|
0-8,000 gallons
|
$1.58
|
|
|
|
|
Over 8,000 gallons
|
$1.96
|
|
|
|
|
|
|
|
|
|
|
0-3,000 gallons
|
|
$1.66
|
|
|
|
3,001-8,000 gallons
|
|
$1.76
|
|
|
|
Over 8,000 gallons
|
|
$2.64
|
|
|
|
|
|
|
|
|
|
0-3,000 gallons
|
|
|
$1.70
|
|
|
3,001-10,000 gallons
|
|
|
$1.79
|
|
|
Over 10,000 gallons
|
|
|
$2.69
|
|
|
|
|
|
|
|
|
0-3,000 gallons
|
|
|
|
$2.09
|
|
Over 3,000 gallons
|
|
|
|
$2.22
|
|
|
|
|
|
|
|
Typical
Residential 5/8" x 3/4" Meter Bill Comparison
|
|
|
3,000 Gallons
|
$18.34
|
$18.77
|
$18.90
|
$20.06
|
|
8,000 Gallons
|
$26.24
|
$27.57
|
$27.85
|
$31.16
|
|
10,000 Gallons
|
$30.16
|
$32.85
|
$31.43
|
$35.60
|
|
|
|
|
|
|
|
|
|
|
|
Source:
Current tariff and staff’s calculations
Summary
The recommended rate structure and 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.
Issue 9:
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 Raintree 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)
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 return on working capital,
and the gross-up for RAFs which is $316. 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.
Raintree
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 Raintree 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 10:
What are the appropriate initial customer deposits
for Raintree?
Recommendation:
The appropriate water initial customer deposit
should be $64 for the residential 5/8” x 3/4” meter size. The initial customer
deposits for all other residential meter sizes and all general service meter
sizes should be two times the average estimated bill for water service. The approved initial customer deposits should be effective
for connections made on or after the stamped approval date on the tariff sheet
pursuant to Rule 25-30.475, F.A.C. (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.[23] Currently, the Utility does not have initial
customer deposits. Based on the staff recommended water rates and the post
repression average residential demand, the appropriate initial customer deposit
should be $64 for water to reflect an average residential customer bill for two
months.
Staff
recommends that the appropriate water initial customer deposit should be
$64 for the residential 5/8” x 3/4” meter size. The initial customer deposits
for all other residential meter sizes and all general service meter sizes
should be two times the average estimated bill for water service. The approved initial customer deposits should be effective
for connections made on or after the stamped approval date on the tariff sheet
pursuant to Rule 25-30.475, F.A.C.
Issue 11:
Should the recommended rates be approved for Raintree
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 20th 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)
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 $3,014. 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; and
2.
The letter of credit will be in effect until a final Commission
order is rendered, either approving or denying the rate increase.
If
security is provided through an escrow agreement, the following conditions
should be part of the agreement:
1.
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 20th 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 12:
Should Raintree 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. Raintree 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 the deadline. Upon providing good cause, staff should be
given administrative authority to grant an extension of up to 60 days. (Golden)
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 July 31, 2015.
Raintree 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 the deadline.
Upon providing good cause, staff should be given administrative authority to
grant an extension of up to 60 days.
Issue 13:
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 should be issued. The docket should remain open for staff’s
verification that the revised tariff sheets and customer notice have been filed
by the Utility and approved by staff. Once these actions are complete, this
docket should be closed administratively. (Tan, Lherisson)
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 should be issued. The docket should
remain open for staff’s verification that the revised tariff sheets and
customer notice have been filed by the Utility and approved by staff. Once
these actions are complete, this docket should be closed administratively.
