Discussion
of Issues
Issue 1:
Should the utility's proposed final water and
wastewater rates be suspended?
Recommendation:
Yes. Ni Florida’s proposed final water and wastewater
rates should be suspended. (Bruce)
Staff Analysis:
Section 367.081(6), F.S., provides that the Commission may, for
good cause, withhold consent to the implementation of requested rates within 60
days after the date the rate request is filed. Further, Section 367.081(8),
F.S., permits the proposed rates to go into effect (secured and subject to
refund) at the expiration of five months from the official date of filing if:
(1) the Commission has not acted upon the requested rate increase; or (2) if
the Commission’s PAA action is protested by a party other than the utility.
Staff reviewed the filing and considered the information
filed in support of the rate application and the proposed final rates. Staff
believes that further investigation of this information, including on-site inspections,
is needed. Staff initiated an audit of Ni Florida’s books and records, as well
as an audit of the utility’s proposed allocation of parent company investment
and operating expenses. Both of these audits are tentatively due on July 29,
2016. In addition, staff sent its first data request to the utility on May 26,
2016. The utility’s response to the data request is due on June 14, 2016. Based
on the foregoing, staff recommends Ni Florida’s proposed final water and wastewater
rates be suspended.
Issue 2:
Should any interim revenue increase be approved?
Recommendation:
Yes, Ni Florida should be authorized to collect
annual water and wastewater revenues as indicated below:
|
|
Adjusted
Test
Year
Revenues
|
$
Increase
|
Revenue
Requirement
|
%
Increase
|
|
Water
|
$223,689
|
$87,202
|
$310,891
|
38.98%
|
|
Wastewater
|
$1,932,151
|
$332,619
|
$2,264,770
|
17.21%
|
(T. Brown, Hill)
Staff Analysis:
On April 4, 2016, Ni Florida filed its rate base,
cost of capital, and operating statements to support its requested interim
increase in water and wastewater rates. Pursuant to Section 367.082(1), F.S.,
in order to establish a prima facie entitlement for interim relief, the utility
shall demonstrate that it is earning outside the range of reasonableness on its
rate of return. Pursuant to Section 367.081(2)(a), F.S., in a proceeding for an
interim increase in rates, the Commission shall authorize, within 60 days of
the filing for such relief, the collection of rates sufficient to earn the
minimum of the range of rate of return. Based on the utility’s filing and the
recommended adjustments below, staff believes that the utility has demonstrated
a prima facie entitlement in accordance with Section 367.082(1), F.S.
Pursuant to Section 367.082(5)(b)1, F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the utility’s most recent rate proceeding
and annualizing any rate changes. Staff has reviewed Ni Florida’s interim
request, as well as Order No. PSC-13-0611-PAA-WS, in which the Commission last
established rate base.
Staff’s recommended adjustments are discussed below. Staff has attached
accounting schedules to illustrate staff's recommended rate base, capital
structure, and test year operating income amounts. Rate base schedules are
labeled as Schedule Nos. 1-A and 1-B, with the adjustments shown on Schedule
No. 1-C. Capital structure is labeled as Schedule No. 2. Operating income
schedules for water and wastewater, respectively, are labeled as Schedule Nos.
3-A and 3-B, with the adjustments shown on Schedule No. 3-C.
Rate Base
Pursuant to Section 367.082(5)(b)1., F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the utility’s most recent rate proceeding.
Based on staff’s review, there are several adjustments necessary for interim
purposes.
Based on staff’s review, adjustments are necessary to
remove amounts from the wastewater plant in service balance associated with the
utility’s pro forma plant projects of $812,142 ($82,880 + $729,262) and plant
retirements of $545,254. Those adjustments net to a $266,889 ($812,142 –
$545,254) reduction for wastewater only. No pro forma plant projects were
included for water. A corresponding adjustment is necessary to increase
accumulated depreciation for wastewater by $545,254.
Ni Florida also included pro forma deferred income taxes
of $2,173 and $100,742 for water and wastewater respectively. Staff removed the
utility’s pro forma deferred income tax adjustments in totality.
In its filing, the utility used the balance sheet approach
to calculate interim working capital, which is appropriate for a Class A
utility. The calculated total company working capital was $282,538, and it was
allocated to each of Ni Florida's systems based on Equivalent Residential
Connections (ERCs) as of December 31, 2015.
The utility included $60,448 in its working capital
calculation for deferred rate case expense. In Ni Florida's last rate case, the
Commission approved total rate case expense of $149,321.
Consistent with the Utility's last rate case and Commission practice, one-half
of the total rate case expense shall be included in working capital. Staff believes that one-half of the prior
Commission-approved rate case expense, or $74,661, is the appropriate amount of
deferred rate case expense to be included in working capital for interim
purposes. As such, deferred rate case expense should be increased by $14,213
($74,661 - $60,448). Staff increased working capital by $2,738 for water and
$11,475 for wastewater. The increase results in a working capital allowance of
$296,751.
Pursuant to Section 367.082, F.S., the method used to
calculate Used and Useful (U&U) in Ni Florida’s last rate case must be used
for interim purposes. By Order No. PSC-13-0611-PAA-WS, the Commission found
that Ni Florida’s water and wastewater systems were 100 percent U&U.
Therefore, no U&U adjustments are necessary for interim purposes.
Based on the above, staff recommends that Ni Florida’s
interim water rate base should be $332,657 and wastewater rate base should be
$3,178,663.
Cost of Capital
Based on an analysis of the MFRs and staff’s review of
Order No. PSC-13-0611-PAA-WS from the utility's last rate proceeding,
staff believes adjustments are necessary to the utility's capital structure. In
its interim request, the utility used a return on equity (ROE) of 9.27 percent.
However, the minimum of the range of its last authorized ROE was 8.42 percent.
The utility also included $102,915 of deferred income taxes in its capital
structure. This amount is consistent with the amount of pro forma deferred
income taxes the utility included in its requested interim rate base.
Consistent with the removal of pro forma deferred income taxes discussed
previously, staff believes deferred income taxes should be removed from the
utility’s interim cost of capital. With these adjustments, staff recommends an
interim weighted average cost of capital for Ni Florida of 7.52 percent.
Net Operating Income
In order to attain the appropriate amount of interim test
year operating revenues, staff removed the utility's requested interim revenue
increase of $75,950 for water and $432,000 for wastewater. Based on staff’s
annualized revenue calculations, water revenues should be reduced by $11,252
and wastewater revenues increased by $2,413.
Based on staff’s review, several adjustments to operation
and maintenance (O&M) expenses are necessary for interim purposes. Pursuant to Section 367.082(5)(b)l., F.S., the only
adjustments that should be made to the interim test year are those consistent
with the most recent individual rate proceeding or adjustments to annualize
rate changes occurring during the interim test year. As such, staff believes
that the utility's adjustments to bad debt expense based on a percentage of the
proposed revenue increase are pro forma in nature and should be removed. Staff
reduced bad debt expense by $367 for water and $5,978 for wastewater.
Staff made an adjustment to
correct an error made in calculating the allocable portion of miscellaneous
expense in MFR Schedule B-12. The utility calculated that Ni Florida’s portion
of allocable miscellaneous expenses was $367,338. Staff calculated Ni Florida’s
portion of allocable miscellaneous expenses to be $367,138. Staff reduced
allocable miscellaneous expense by $200, which resulted in a $45 reduction to
water and a $155 reduction to wastewater.
In the last rate case, the Commission also made
adjustments to the utility’s director and officer liability (DOL) insurance,
due diligence costs, and equity sponsor fee. According to the utility, due
diligence costs and the equity sponsor fee were excluded from allocable
expenses during the preparation of the rate filing. As such, no adjustments are
necessary for due diligence or the equity sponsor fee. However, the utility’s
parent company recorded DOL insurance expense of $47,862 for the test year.
Consistent with the methodology used in the last rate case,
DOL insurance costs prior to any allocation should be reduced by $23,931
($47,862 divided by 2). Based on the above, Ni Florida's allocated expenses
should be $2,058 ($23,931 multiplied by Ni Florida's 8.60 percent allocation
factor), or $425 for water and $1,633 for wastewater. The utility included $851
for water and $3,267 for wastewater in the current test year. Based on staff’s
calculations, DOL insurance should be reduced by $426 ($425 - $851) and $1,634
($1,633 - $3,267) for water and wastewater, respectively.
Staff also removed the utility’s depreciation expense
adjustments related to year-end plant in service and changes in depreciation
due to wastewater plant replacements. The resulting adjustments totaled $817
and $18,132 for water and wastewater, respectively.
Finally, staff made adjustments to taxes other than income
(TOTI) to reflect the revenue and O&M expense adjustments cited above.
Staff reduced regulatory assessment fees (RAFs) by $3,924 for water and $19,331
for wastewater to reflect the removal of the utility's requested revenue
increase. Staff also removed the utility’s wastewater property tax adjustment
of $4,564 for pro forma plant projects.
Based on the above, staff recommends that the appropriate
test year operating income, before any revenue increase, is a $27,366 loss for water and income
of $40,818 for wastewater.
Revenue Requirement
Based on the above
adjustments, allowing the utility to earn a 7.52 percent return on its water rate base would result in
a revenue requirement of $311,615. The utility has requested an interim revenue requirement
of $310,891. In such circumstances, it has been Commission practice to limit
the revenue requirement to the level requested by the utility. Consistent with
Commission practice,
staff recommends a revenue requirement of $310,891 for water. This represents
an interim increase in annual revenues of $87,202 (or 38.98 percent). This will
allow the utility the opportunity to recover its water operating expenses and
earn a 7.39 percent return on its water rate base.
Staff recommends a wastewater
revenue requirement of $2,264,770. This represents an increase in annual revenues of $332,619
(or 17.21 percent) for wastewater. The increase
will allow the utility the opportunity to recover its wastewater operating
expenses and earn a 7.52 percent return on its wastewater rate base.
Issue 3:
What are the appropriate interim water and
wastewater rates?
Recommendation:
The recommended interim rate increase of 40.12
percent for water and 17.71 percent for wastewater should be applied as an across-the-board
increase to the existing service rates. The rates, as shown on Schedule Nos.
4-A and 4-B, 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. The utility
should file revised tariff sheets and a proposed customer notice to reflect the
Commission-approved rates. In addition, the approved rates should not be
implemented until the required security has been filed, 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:
Staff recommends that
interim service rates for Ni Florida be designed to allow the utility the
opportunity to generate annual operating revenues of $310,891 and $2,264,770
for water and wastewater, respectively. Before removal of miscellaneous
revenues, this would result in an increase of $87,202 (38.98 percent) for water
and $332,619 (17.21 percent) for wastewater. To determine the appropriate
increase to apply to the service rates, miscellaneous revenues should be
removed from the test year revenues. The calculation is as follows:
Table 3
Percentage Service Rate Increase
|
|
|
Water
|
Wastewater
|
|
|
|
|
|
|
1
|
Total Test Year Revenues
|
$223,689
|
$1,932,151
|
|
|
|
|
|
|
2
|
Less: Miscellaneous
Revenues
|
$6,357
|
$53,756
|
|
|
|
|
|
|
3
|
Test Year Revenues from Service Rates
|
$217,332
|
$1,878,395
|
|
|
|
|
|
|
4
|
Revenue Increase
|
$87,202
|
$332,619
|
|
|
|
|
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
40.12%
|
17.71%
|
Source: Staff’s
Recommended Revenue Requirement and MFRs
Staff recommends that the interim
rate increases of 40.12 percent for water and 17.71 percent for wastewater
should be applied as an across-the-board increase to the existing service rates.
The rates, as shown on Schedule Nos. 4-A and 4-B, 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. The utility should file revised tariff
sheets and a proposed customer notice to reflect the Commission-approved rates.
In addition, the approved rates should not be implemented until the required
security has been filed, 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 4:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
The utility should be required to secure a letter of
credit, or alternately an escrow account or surety bond, to guarantee any
potential refund of revenues collected under interim conditions. If the
security provided is a letter of credit or surety bond, it should be in the
amount of $245,203. Otherwise, the utility should deposit $34,985 into the
escrow account each month. Pursuant to Rule 25-30.360(6), F.A.C., the utility
should provide a report by the 20th of each month indicating the monthly and
total revenue collected subject to refund. Should a refund be required, the
refund should be with interest and in accordance with Rule 25-30.360, F.A.C. (D.
Buys, T. Brown)
Staff Analysis:
Pursuant to Section 367.082, F.S., revenues
collected under interim rates shall be placed under bond, escrow, letter of
credit, or corporate undertaking subject to refund with interest at a rate
ordered by the Commission. As recommended in Issue 2, the total interim
increase is $419,821. In accordance with Rule 25-30.360, F.A.C., staff
calculated the potential refund of revenues and interest collected under
interim conditions to be $245,203. This amount is based on an estimated seven
months of revenue being collected from staff’s recommended interim rates over
the utility’s current authorized rates shown on Schedule Nos. 4-A and 4-B.
The criteria for a corporate undertaking include
sufficient liquidity, ownership equity, profitability, and interest coverage to
guarantee any potential refund. The utility has indicated to staff that it intends
to utilize a letter of credit as security for any potential refund of
interim rates granted. As such, staff did not perform an analysis
regarding the utility’s financial capability to support a corporate
undertaking. Staff recommends Ni Florida be required to secure a letter of
credit, or alternately an escrow account or surety bond, to guarantee any
potential refund of water and wastewater revenues. The requirements associated with
each are discussed below.
If the security provided is a surety bond or a letter of
credit, said instrument should be in the amount of $245,203. If the utility
chooses a surety bond as security, the surety bond should state that it will be
released or terminated only upon subsequent order of the Commission. If the
utility chooses to provide a letter of credit as security, the letter of credit
should state that it is irrevocable for the period it is in effect and that it
will be in effect until a final Commission order is rendered releasing the
funds to the utility or requiring a refund.
If the security provided is an escrow account, said
account should be established between the utility and an independent financial
institution or the Division of Treasury for the Florida Department of Financial
Services pursuant to a written escrow agreement. The Commission should be a
party to the written escrow agreement and a signatory to the escrow account.
The written escrow agreement should state the following: the account is
established at the direction of the Commission for the purpose set forth above;
no withdrawals of funds shall occur without the prior approval of the
Commission through the Commission Clerk, Office of Commission Clerk; the
account shall be interest bearing; information concerning that escrow account
shall be available from the institution to the Commission or its representative
at all times; the amount of revenue subject to refund shall be deposited in the
escrow account within seven days of receipt; and, pursuant to Cosentino v.
Elson, 263 So. 2d 253 (Fla 3d DCA 1972), escrow accounts are not subject to
garnishments.
If the security provided is an escrow account, the utility
should deposit $34,985 into the escrow account each month. The escrow agreement
should also state that “if a refund to the customers is required, all interest
earned on the escrow account shall be distributed to the customers, and if a
refund to the customers is not required, the interest earned on the escrow
account shall revert to the utility.”
Regardless of the type of security provided, the utility
should keep an accurate and detailed account of all monies it receives.
Pursuant to Rule 25-30.360(6), F.A.C., the utility should provide a report by
the 20th day of each month indicating the monthly and total revenue collected
subject to refund. Should a refund be required, the refund should be with
interest and undertaken in accordance with Rule 25-30.360, F.A.C.
In no instance should maintenance
and administrative costs associated with any refund be borne by the customers.
Such costs are the responsibility of, and should be borne by, the utility.
Issue 5:
Should this docket be closed?
Recommendation:
The docket should remain open pending the Commission’s
PAA decision on the utility’s requested rate increase. (Mapp)
Staff Analysis:
The docket should remain open pending the
Commission’s PAA decision on the utility’s requested rate increase.
