Discussion
of Issues
Issue 1:
Should the Utility's requested increases be approved
as filed?
Recommendation:
No. However, the Commission should approve water rate
increases of $45,663 (or 28.85 percent) for Marion County and $16,142 (or 1.61
percent) for Seminole County, excluding Longwood and Sanlando. (Slemkewicz, Mtenga)
Staff Analysis:
In its petition, UIF requested a Marion County water
rate increase of $52,725 (or 33.83 percent) for the replacement of galvanized
service lines. In Seminole County, the Utility requested a water rate increase
of $20,693 (or 2.11 percent) for an interconnection project.
Rate Base
In its
filing, the Utility requested
a rate base increase of $310,779 for Marion County and $97,132 for Seminole
County. The rate base components were Utility Plant in Service, Accumulated
Depreciation, and Cash Working Capital.
Utility Plant in Service
In Marion County, the Utility replaced galvanized iron
pipes, which were in place since the 1970s, and associated meter boxes because
of ongoing pipe failures that caused significant water loss. The project was
completed in April 2015 and cost $313,978. The Utility had implemented a
practice of replacing each water service line as it failed but decided to
replace all of the 125 water service lines to take advantage of economies of
scale. UIF estimated that continuing the process of replacing the pipes as
needed could be up to one and a half times more costly. In response to staff’s
data request, the Utility provided the three bids it received and notes that it
chose the lowest cost option. Staff believes that, given the age and condition
of the water service lines and economies of scale associated with replacing the
125 water service lines at once, the project is reasonable, and UIF should be
allowed to recover these costs.
In Seminole County, the Utility requested approval for
costs associated with interconnecting its Ravenna Park and Crystal Lake water
systems including upgrades to the Ravenna Park water treatment plant storage
facilities which were completed in July 2015. UIF stated that the project was
initiated after excess infiltration of sand into the well pump of the sole
water supply well, built in the 1950s, at Crystal Lake water system. The Utility
proposed an interconnection after exploring two alternatives for the well
failure. First, it explored downsizing the pump assembly and motor but found
this option would not meet system demands and would lead to more pump
replacements in the future. Second, it considered drilling a new well but found
that the existing property’s footprint was too small to allow for a new well.
The cost for this interconnection project is $98,033 which includes the
engineering evaluation, design, geotechnical services, bid documentation, permitting,
and well abandonment costs. In response to staff’s data request, UIF provided
the four bids submitted for the interconnection and the lowest cost option was
selected. Based on staff’s review, the cost to complete the interconnection is
reasonable and will meet customer demand.
Accumulated Depreciation
UIF included accumulated depreciation of $3,651 and $1,400
for Marion and Seminole Counties, respectively. Staff has reviewed the
calculation of the depreciation expense and the accumulated depreciation and recommends
they are appropriate in accordance with Rule 25-30.140, Florida Administrative
Code (F.A.C.).
Working Capital Allowance
In its filing, UIF included a working capital allowance of
$452 for Marion County and $499 for Seminole County. These amounts represent 1/8th
of the rate case expense. However, staff has reduced the amount included in the
working capital allowance based on the reductions made to the recommended amount
of the total rate case expense. As a result, staff recommends that the
appropriate amount of working capital is $211 and $242 for Marion and Seminole
Counties, respectively.
After reviewing UIF’s requested rate base increase, staff
recommends that the adjusted amounts for rate base are $310,538 for Marion and
$96,875 for Seminole as shown in Schedule Nos. 1 and 2.
Rate of Return
Per Schedule No. 11 of its filing for both Marion and
Seminole Counties, UIF calculated an 8.03 percent rate of return (ROR). This
ROR was based on a capital structure ended December 31, 2014, that only
included long-term debt with a cost rate of 6.65 percent and common equity with
a return on equity of 9.38 percent. That capital structure is not consistent
with the capital structure used in the Utility’s last rate case for Marion and
Seminole Counties. In
addition, Rule 25-30.445(4)(e), F.A.C., requires that the weighted average cost
of capital shall be calculated based on the most recent 12-month period using
the mid-point of the range of the last authorized rate of return on equity and
all of the appropriate capital structure components. In this instance, the most
recent period available is the 12 months ended December 31, 2015. UIF
calculated a December 2015 ROR of 7.85 percent on Schedule F-5 of its 2015
Annual Report. However, UIF did not use the mid-point equity cost rate of 10.38
percent or the minimum 2.00 percent cost rate for customer deposits pursuant to
Rule 25-30.311(4)(a), F.A.C. Based on the foregoing, staff recalculated a
December 2015 ROR of 7.68 percent as shown on Schedule No. 3.
Operating Expenses
In its
filing, UIF requested operating expense increases, excluding income taxes, of
$16,091 and $9,062 for Marion and Seminole Counties, respectively. These
increases are related to depreciation and property taxes for the additional
plant, as well as rate case expense.
Depreciation Expense
UIF included increased depreciation expense of $7,302 for
Marion and $2,801 for Seminole related to the additional plant that was added.
Staff reviewed the additional plant amounts and associated depreciation rates
used in the calculation of the increased depreciation expense. In accordance
with Rule 25-30.140, F.A.C., staff recommends that the requested depreciation expense
increase is appropriate.
Rate Case Expense
In its filing, UIF estimated that the total rate case
expense would be $46,779 for Marion, Pasco and Seminole Counties. Per Schedule
No. 12 of its filing, UIF requested total rate case expenses of $14,474 and
$15,967 for Marion and Seminole Counties, respectively. The resulting 4-year amortization
amounts were $3,619 for Marion and $3,992 for Seminole. In response to a staff
data request, UIF submitted an updated total rate case expense of $28,779 on
June 10, 2016. Staff
reviewed the details of the updated rate case expense and determined that
$6,349 of the expense was related directly to Pasco County. While UIF’s request
for Pasco County has been bifurcated from this proceeding, staff believes rate
case expense should still be allocated across all three counties. As a result,
the remaining balance to be allocated among the three counties is $22,430
($28,779 - $6,349), of which $17,959 of the $22,430 rate case expense should be
allocated equally among the three counties. The remaining $4,471 of rate case
expense related to customer notices postage and stock should be allocated on a
16.9 percent for Marion, 39.3 percent for Seminole, and 43.9 percent for Pasco
basis. The resulting annual rate case expense amortization is $1,684 ($6,737
divided by four years) for Marion County and $1,936 ($7,743 divided by four
years) for Seminole County as shown on Schedule No. 4. The 4-year rate
reduction for rate case expense is $1,760 and $2,023 for Marion and Seminole
Counties, respectively. The recovery of any rate case expense related to Pasco
County will be determined in the bifurcated portion of the limited proceeding.
Taxes Other Than Income
The Utility included increased Taxes Other Than Income
(TOTI) of $5,170 and $2,269 for Marion and Seminole Counties, respectively. The
increases were mainly related to the property taxes on the additional plant
that was added. Staff has reviewed the property tax calculations of $5,170 for Marion
and $1,495 for Seminole and recommends that they are reasonable. In Seminole
County, however, UIF incorrectly included an additional $775 for regulatory
assessment fees related to its calculation of annualized revenue. Staff has
excluded this amount from its calculation resulting in increased TOTI of $5,170
and $1,495 for Marion and Seminole Counties, respectively.
Based on staff’s review, the appropriate operating expense
increases, excluding income taxes, are $14,156 for Marion County and $6,232 for
Seminole County.
Calculation of Water Rate Increases
UIF calculated water rate increases of $52,725 (or 33.83
percent) for Marion County and $20,693 (or 2.11 percent) for Seminole County.
Staff would note one error that the Utility made in its calculation of the income
subject to state and federal income taxes. In calculating the taxable income
amount, UIF multiplied the increased rate base amount by the total overall ROR
of 8.03 percent. The proper calculation would be to multiply the increased rate
base amount by only the common equity weighted cost component of the ROR. In
its calculation, staff used a common equity weighted cost component of 4.87
percent rather than the total overall ROR of 7.68 percent. Based on its
adjustments, staff has calculated water rate increases of $45,663 (or 28.85 percent)
for Marion County and $16,142 (or 1.61 percent) for Seminole County, excluding Longwood
and Sanlando, as shown in Schedule Nos. 1 and 2.
Issue 2:
What are the appropriate rates?
Recommendation:
The recommended rate increase of 29.30 percent for Marion
County and 1.65 percent for Seminole County, excluding Longwood and Sanlando,
should be applied as an across-the-board increase to their respective existing
service rates. The rates, as shown on Schedule Nos. 5 and 6, 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 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. The rates
should be reduced as shown on Schedule Nos. 5 and 6, to remove rate case
expense grossed up for regulatory assessment fees and amortized over a four-year
period. The decrease in rates should become effective immediately following the
expiration of the four-year rate case expense recovery period, pursuant to
Section 367.0816, F.S. (Johnson)
Staff Analysis:
Staff recommends that service rates for Utilities,
Inc. of Florida be designed to allow the utility the opportunity to generate
annual operating revenues of $203,940 and $1,017,618 for Marion County and
Seminole County, excluding Longwood and Sanlando, respectively. Before removal
of miscellaneous revenues, this would result in an increase of $45,663 (or 28.85
percent) for Marion County and $16,142 (or 1.61 percent) for Seminole County.
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 2-1
Percentage Service Rate Increase
|
|
|
Marion
|
Seminole
|
|
|
|
|
|
|
1
|
Total Test Year Revenues
|
$158,277
|
$1,001,476
|
|
|
|
|
|
|
2
|
Less: Miscellaneous Revenues
|
$2,446
|
$21,103
|
|
|
|
|
|
|
3
|
Test Year Revenues from Service Rates
|
$155,831
|
$980,373
|
|
|
|
|
|
|
4
|
Revenue Increase
|
$45,663
|
$16,142
|
|
|
|
|
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
29.30%
|
1.65%
|
|
|
|
|
|
Source: Staff’s Recommended Revenue Requirement and MFRs
Staff recommends that the rate increase of 29.30 percent
for Marion County and 1.65 percent for Seminole County, excluding Longwood and Sanlando,
should be applied as an across-the-board increase to the existing service
rates. The rates, as shown on Schedule Nos. 5 and 6, 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 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. The rates should be reduced as shown on Schedule Nos. 5
& 6, to remove rate case expense grossed up for regulatory assessment fees
and amortized over a four-year period. The decrease in rates should become
effective immediately following the expiration of the four-year rate case
expense recovery period, pursuant to Section 367.0816, F.S.
Issue 3:
Should the recommended rates be approved for the
utility on a temporary basis, subject to refund with interest, in the event of
a protest filed by a party other than the utility?
Recommendation:
Yes. 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. UIF 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 temporary rates should only be implemented after the Utility has
provided written guarantee of its corporate undertaking in a cumulative amount
of $41,308. If the recommended rates are approved on a temporary basis, the
rates collected by the Utility should be subject to the refund provisions
discussed 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 each month
indicating the monthly and total amount of money subject to refund at the end
of the preceding month. (Mouring, Slemkewicz, D. Buys, Mapp)
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. As a result, staff recommends
that the recommended rates be approved as temporary rates.
Section 367.0822(1), F.S., provides
Upon petition or by its own motion, the commission may
conduct limited proceedings to consider, and action upon, any matter within its
jurisdiction, including any matter the resolution of which requires a utility
to adjust its rates. The commission shall determine the issues to be considered
during such a proceeding and may grant or deny any request to expand the scope
of the proceeding to include other related matters. However, unless the issue
of rate of return is specifically address in the limited proceeding, the
commission shall not adjust rates if the effect of the adjustment would be to change
the last authorized rate of return.
While Section 367.0822(1), F.S. does not expressly provide
for the granting of temporary rates, it is well settled Commission precedent
that temporary rates in the event of a protest may be approved on a case-by-case
basis.
Further, Section 367.081(2), F.S., provides that this
Commission must fix rates that are just, reasonable, compensatory, and not
unfairly discriminatory. Pursuant to its authority to grant just and reasonable
rates, the Commission has granted emergency and temporary rates in limited
proceedings where a timely protest might delay what may be a justified rate
increase resulting in an unrecoverable loss of revenue to the Utility.
Similarly, in the instant case, staff believes that the granting of temporary
rates is warranted because a timely protest of the PAA Order may delay a
justified rate increase for several months while the matter is adjudicated at
hearing. Moreover, staff believes that the ratepayers are adequately protected
because all rates collected by the Utility will be subject to the corporate
undertaking as discussed below.
For the foregoing reasons, staff believes that the
recommended rates should be approved for the Utility on a temporary basis,
subject to the corporate undertaking discussed below. In order to ensure that
the Utility may not unfairly benefit from the issuance of temporary rates and
in order to comport with the granting of temporary rates in proceedings filed
pursuant to Sections 367.081 and 367.0814, F.S., staff further recommends that
temporary rates should only be allowed in the event of a protest filed by an
entity or individual other than the Utility
Corporate Undertaking Memorandum
Utilities, Inc. of Florida is a wholly-owned subsidiary of
UI, which provides all investor capital to its subsidiaries. Based on the
amount subject to refund for Marion and Seminole Counties the incremental
increase in UI’s corporate undertaking is $30,519 and $10,789, respectively.
There are no other current corporate undertaking amounts outstanding for other
UI systems in Florida, so therefore, the total cumulative outstanding guarantee
is $41,308.
The criteria for a corporate undertaking include
sufficient liquidity, ownership equity, profitability, and interest coverage to
guarantee any potential refund. Staff reviewed UI’s 2013, 2014, and 2015
financial statements to determine if the company can support a corporate
undertaking on behalf of its subsidiary. In its 2013 financial statements, UI
reported an insufficient working capital amount and an inadequate current ratio
and interest coverage ratio. In 2014, UI reported insufficient working capital and
an inadequate current ratio; however, the interest coverage ratio improved to
adequate. In 2015, UI had sufficient working capital, and both the current
ratio and interest coverage ratio were adequate. In addition, UI achieved
sufficient profitability and reported adequate ownership equity over the entire
3-year review period.
Based on staff’s review of the financial reports submitted
by UI, staff believes UI has adequate resources to support a corporate
undertaking in the amount requested. Based on this analysis, staff recommends
that a cumulative corporate undertaking of $41,308 is acceptable contingent
upon receipt of the written guarantee of UI and written confirmation that the
cumulative outstanding guarantees on behalf of UI-owned utilities in other
states will not exceed $1.2 million (inclusive of all Florida utilities).
The brief financial analysis above is only appropriate for
deciding if UI can support a corporate undertaking in the amount proposed and
should not be considered a finding regarding staff’s position on other issues
in this proceeding.
The Utility should maintain a record of the amount of the
corporate undertaking memorandum, 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 each month indicating the monthly and
total amount of money subject to refund at the end of the preceding month.
Further, 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.
Conclusion
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. UIF 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
temporary rates should only be implemented after the Utility has provided
written guarantee of its corporate undertaking in a cumulative amount of $41,308.
If the recommended rates are approved on a temporary basis, the rates collected
by the Utility should be subject to the refund provisions discussed in staff’s
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 each month indicating the monthly and
total amount of money subject to refund at the end of the preceding month.
Issue 4:
Should this docket be closed?
Recommendation:
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 remain open pending the
Commission’s decision on the Utility’s requested rate increase in Pasco County.
(Mapp)
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 remain open pending the
Commission’s decision on the Utility’s requested rate increase in Pasco County.
