Discussion
of Issues
Issue 1:
Should the Utility’s proposed final water rates be
suspended?
Recommendation:
Yes. Bocilla’s proposed final water rates should be
suspended. (Hill)
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(10), 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 (1) if the Commission has not
acted upon the requested rate increase or (2) if the Commission's Proposed
Agency Action is protested by a party other than the Utility.
Staff has reviewed the filing and has considered the
information filed in support of the rate application and the proposed final
rates. Staff recommends that further investigation of this information,
including on-site investigation by Commission staff, is necessary. To date,
staff has initiated an audit of Bocilla’s books and records. The audit report
is due on August 23, 2016. In addition, staff sent a data request to Bocilla on
July 28, 2016, and the response is due August 29, 2016. Further, staff believes
additional requests will be necessary to process this case. Based on the
foregoing, staff recommends that the Utility's proposed final water rates be
suspended.
Issue 2:
Should any interim revenue increases be
approved?
Recommendation:
Yes. Bocilla should be authorized to collect annual
revenues as indicated below: (Frank)
Annual Revenues
|
|
Adjusted
Test
Year
Revenues
|
$
Increase
|
Revenue
Requirement
|
%
Increase
|
|
Water
|
$398,963
|
$65,159
|
$464,122
|
16.33%
|
Staff Analysis:
On May 24, 2016, Bocilla filed its rate base, cost
of capital, and operating statements to support its requested interim increase
in 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 367.082(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. This is the Utility’s first rate proceeding
since receiving a grandfather certificate in Order No. PSC-13-0228-PAA-WU. Therefore,
adjustments from a prior case were not necessary. However, staff has reviewed
Bocilla’s interim request, and believes adjustments are necessary as discussed
below. Staff has attached accounting schedules to illustrate staff's
recommended rate base, capital structure, and test year operating income
amounts. Rate base is labeled as Schedule No. 1-A, with the adjustments shown
on Schedule No. 1-B. Capital structure is labeled as Schedule No. 2. Operating
income is labeled as Schedule No. 3-A, with the adjustments shown on Schedule
No. 3-B.
Rate Base
As mentioned above, this is the Utility’s first rate
proceeding since receiving its grandfather certificate, therefore, there are no
adjustments necessary to comply with prior orders. However, based on staff’s
review, the following adjustments are necessary for interim purposes.
Pursuant to Rule 25-30.433(4), Florida Administrative Code
(F.A.C.), the averaging method used by the Commission to calculate rate base
and cost of capital in a rate case proceeding shall be the beginning and
end-of-year average for Class B utilities. In its filing, the Utility used a
13-month average to calculate rate base and cost of capital. As a result, staff
made the following adjustments to reflect the beginning and end-of-year
averages. Staff decreased plant in service by $23,143, decreased
contributions-in-aid-of-construction (CIAC) by $346, and increased amortization
of CIAC by $96. Additionally, staff removed $44,000 attributed to land that was
accounted for twice in the calculation of rate base.
Pursuant to Rule 25-30.110(2), F.A.C., the Utility’s
filings shall be consistent and reconcilable with the Utility’s Annual Report.
As such, staff decreased construction-work-in-progress by $42 in order to be
consistent with the Utility’s 2015 Annual Report.
Pursuant to Rule 25-30.433(2), F.A.C., working capital for
Class B utilities shall be calculated using the formula method (one-eighth of
operation and maintenance expenses). In its filing, the Utility used the
balance sheet approach to calculate interim working capital. Using the correct
methodology yields a working capital allowance of $45,466 ($363,729/8). As a
result, staff decreased working capital by $72,197 ($45,466 - $117,663) to
reflect one-eighth of operation and maintenance expenses. Based on the above,
staff recommends that Bocilla’s interim rate base should be $646,070.
Cost of Capital
Based on an analysis of the MFRs, staff believes
adjustments are necessary to the Utility's capital structure. In its interim request,
the Utility used a return on equity (ROE) of 10.50 percent. Pursuant to Section
367.082(5)(b)3., F.S., if a rate of return on equity has not yet been
established by the Commission, the Utility shall use the approved leverage
formula ROE which results
in an ROE of 11.16 percent. However, pursuant to Section 367.082(2)(b), F.S.,
interim rate relief is calculated using the minimum of the range of its ROE
which is 10.16 percent. As mentioned above, the Utility used a 13-month average
to calculate cost of capital. As a result, staff decreased long-term debt by
$95 and increased common equity by $13,074 to reflect the appropriate beginning
and end-of-year averages. Based on the above, staff recommends an interim
weighted average cost of capital for Bocilla of 5.85 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 $82,200. Staff also reduced regulatory assessment fees (RAFs) by
$3,341 to reflect the removal of the Utility’s requested revenue increase.
Based on staff’s annualized revenue calculations, revenues should be increased
by $7,946. Based on the above, staff recommends that the appropriate test year
operating income, before any revenue increase, is a $24,405 loss.
Revenue Requirement
Based on the above adjustments, staff recommends a revenue
requirement of $464,122. This represents an interim increase in annual revenues
of $65,159 (or 16.33 percent). This increase will allow the Utility the
opportunity to recover its operating expenses and earn a 5.85 percent return on
its rate base.
Issue 3: What are the
appropriate interim water rates?
Recommendation:
The recommended rate increase of 16.42 percent for
Bocilla should be applied as an across-the-board increase to the Utility’s
existing service rates. The rates, as shown on Schedule No. 4, 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. (Johnson)
Staff Analysis:
Staff recommends that
interim service rates for Bocilla be designed to allow the Utility the
opportunity to generate annual operating revenues of $464,122. Before removal
of miscellaneous revenues, this would result in an increase of $65,159 (16.33
percent). 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 1
Percentage Service Rate
Increase
|
|
|
Water
|
|
|
|
|
|
1
|
Total Test Year Revenues
|
$398,963
|
|
|
|
|
|
2
|
Less: Miscellaneous Revenues
|
$2,168
|
|
|
|
|
|
3
|
Test Year Revenues from Service Rates
|
$396,795
|
|
|
|
|
|
4
|
Revenue Increase
|
$65,159
|
|
|
|
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
16.42%
|
Source:
Staff’s Recommended Revenue Requirement and MFRs
Staff recommends that the interim rate increase of 16.42
percent for Bocilla should be applied as an across-the-board increase to the
existing service rates. The rates, as shown on Schedule No. 4, 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 $43,638. Otherwise, the Utility should deposit $5,430 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. (Frank)
Staff Analysis:
Pursuant to Section 367.082(2)(a), 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 $65,159. 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 $43,638. This amount is based on an estimated eight months of
revenue being collected from staff’s recommended interim rates over the Utility’s
current authorized rates shown on Schedule No. 4.
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 an escrow account as security for 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 Bocilla
be required to secure a letter of credit, or alternately an escrow account or
surety bond, to guarantee any potential refund of water 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 $43,638. 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 $5,430 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.
