Discussion
of Issues
Issue 1:
What is the appropriate revenue requirement for
Phase II?
Recommendation:
The appropriate revenue requirement for Phase II is
$140,321. (P. Buys, Norris)
Staff Analysis:
Per Order No. PSC-15-0329-PAA-WU, the Commission
directed Brevard to work with OPC and the county to explore solutions to
address ongoing rate and unaccounted for water issues. The Commission also ordered that purchased
water expense be reduced by $30,511 due to excessive unaccounted for water
(EUW). Brevard argued at the Commission Conference that an unaccounted for water
adjustment would leave the utility with two options: replace the aging
infrastructure and request rates to recover the prudently incurred costs, or abandon
the utility and let the county take over.
On November
19, 2015, Brevard filed with the Commission a summary of actions taken by the utility
since the Commission’s Order. The summary included:
·
Information about the customer meetings.
·
New purchased water rates.
·
Additional cost incurred after the Order was
issued.
OPC
submitted a response to Brevard’s November 19, 2015 filing on November 30,
2015.
Results of OPC Meeting
with Brevard Customers
Brevard asserts
that the ultimate long-term solution to
the utility’s EUW would be to replace the water distribution system
throughout the service territory. Subsequent to the previously discussed Order,
Brevard contracted U.S. Water Services Corporation (U.S. Water) to prepare an
engineering plan for the replacement of the existing water distribution system
throughout the Oakwood subdivision. The plan includes the replacement of the
water distribution system in four phases. The plan also includes the
replacement of the existing 2-inch and 4-inch water lines with 3-inch and
4-inch Polyvinyl Chloride (PVC) water lines. The new plan differs from what was
first presented in that customers’ service lines will not be moved from the
back of the lot to the front. U.S. Water also prepared bid documents for the
replacement project. Several companies expressed interest in the replacement
project; however, only one company submitted a bid to U.S. Water. Based on the
bid, the total cost of the replacement project was estimated to be
approximately $428,040. This amount is a little more than half of the estimated
price ($835,437) that was presented during the Phase I portion of the rate case.
Brevard provided OPC with a schedule showing the impact on customers’ rates if
the replacement project were approved. The schedule included the cost of the
replacement project, the necessary amortization of loss on retired assets,
depreciation expense, rate of return, and regulatory assessment fees. The
schedule showed the Commission approved Phase I rates would increase by
approximately 31.04 percent.
Three
meetings were conducted between September 8 and October 29, 2015. At the first
two meetings, conducted by OPC, one customer attended. The third customer
meeting, conducted by OPC and Brevard, was held on October 29, 2015. The
schedule showing the estimated 31.04 percent increase over the Commission
approved Phase I rates associated with the replacement project was provided to
the customers prior to the third meeting. At the last customer meeting,
attended by approximately 20 customers, a petition signed by Brevard customer’s
was presented to OPC. Approximately 113 customers signed the Petition with 111
customers residing in the Oakwood subdivision. The cover letter of the Petition
indicated the customers object to a rate increase and to the long-term solution
of replacing the distribution system. Brevard asserts that going forward with
the replacement project is not appropriate at this time due to the overwhelming
customer opposition to the project. Brevard also asserts that if it does go
ahead with the project, it will cause further financial burden to the customers.
OPC did not offer an opinion on whether or not the utility should move forward
with the replacement project. However, OPC asserts that an adjustment for EUW
should still be applied to the Phase II rates.
The customer-signed
petition also expressed that the customers would like Brevard to abandon the
system and have the county take it over. Brevard met with the county in January
2016. The county indicated to Brevard that it had no interest in purchasing or
taking over the system. The county stated that there was no perceived benefit
to the existing customers if the county took over the system.
As noted
in Order No. PSC-15-0329-PAA-WU, Brevard attempted to determine the cause of
EUW by using several different methods. Brevard now intends to utilize
ground-penetrating radar (GPR). GPR has been used and tested by the Florida
Rural Water Association in cooperation with U.S. Water. GPR was used to test
the distribution systems in two different systems managed by U.S. Water. Using
GPR and other methods, Brevard will continue to try to identify and repair the causes
of EUW.
Staff agrees with Brevard that
replacing the existing distribution system in the Oakwood subdivision would
resolve the utility’s EUW issues; however, as discussed, the utility’s
customers object to the replacement project and its potential rate impact. Rule
25-30.4325(10), F.A.C., states that the Commission will consider all relevant
factors when considering whether an adjustment to operating expense for EUW
will be made. The relevant factors include whether the reason for EUW has been
identified, whether a solution has been implemented or whether the proposed
solution is economically feasible. Staff believes that the negative customer
input is an indication that the replacement project may not be economically
feasible. Based on the opposition expressed by Brevard’s customers, staff agrees
with the utility that it should not proceed with the replacement project. Brevard
has complied with the Commission’s Order to provide its customers with the
costs of a reasonable long-term solution to the EUW situation. If customers are
unwilling to pay for a long-term solution, then staff recommends that the
customers pay for all water purchased by Brevard. Because staff is recommending
that the utility not proceed with the replacement project at this time, staff recommends
that the adjustment made in Phase I for EUW ($30,511) is no longer warranted.
Adjustment to Purchased Water
Subsequent
to Order No. PSC-15-0329-PAA-WU, Brevard also worked with the county to
establish new purchased water rates. The county, at its board meeting, approved
the new rates for Brevard. The utility estimated that the new rates, effective November 2015, would reduce the purchased
water expense by approximately $30,000. As previously stated, Brevard’s
purchased water expense was reduced by $30,511 due to EUW. In its November 19,
2015 letter, Brevard argued that since the prospective rates charged by the county
will reduce the purchased water costs approximately equal to the Commission
previously approved reduction, Brevard did not believe it was necessary to
revisit the Commission-approved reduction adjustment in purchased water expense
at this time. Brevard asserts that if the purchased water rate reduction is
passed to the customers then the Commission should revisit the EUW adjustment. It
is Brevard’s position that the net effect is identical.
OPC argues that the customers’ rates
should be automatically reduced due to Brevard’s reduced purchased water rates
pursuant to Section 367.081(4)(b), F.S. OPC reads the statute to say that it
mandates an automatic decrease in rates whenever the reselling utility has a
reduction in its purchased water expense. OPC emphasizes the part of the
statute that reads that the utility’s customer rates “shall be automatically
increased or decreased without hearing, upon verified notice to the Commission
45 days prior to its implementation of the increase or decrease of the rates
charged by the governmental authority…” OPC argues that Brevard’s letter dated
November 19, 2015,
should be considered the “verified notice to the Commission.” In this context,
staff observes that, pursuant to Rule 25-30.425(1), F.A.C., a verified notice
must include the following for there to be a pass through rate adjustment
authorized by Section 367.081(4)(b), F.S.:
(a) A certified copy of the order,
ordinance or other evidence whereby the rates for utility service are increased
or decreased by the governmental agency or by a water or wastewater utility
regulated by the Commission, along with evidence of the utility service rates
of that governmental agency or water or wastewater utility in effect on January
1 of each of the three preceding years.
(b) A statement setting out by month
the charges for utility services purchased from the governmental agency or
regulated utility for the most recent 12-month period.
(c) A statement setting out by month
the gallons of water or wastewater treatment purchased from the governmental
agency or regulated utility for the most recent 12-month period. If wastewater
treatment service is not based on a metered flow, the number of units by which
the service is measured shall be stated.
2. A statement setting out by month
gallons of water and units of wastewater service sold by the utility for the
most recent 12-month period.
(d) A statement setting out by month
the gallons of water or wastewater treatment purchased from any other
government entity or utility company.
(e) A statement setting out by month
the gallons of water pumped or wastewater treated by the utility filing the
verified notice.
(f) If the total water available for
sale is in excess of 110% of the water sold, a statement explaining the
unaccounted for water.
These requirements are simply not addressed
in Brevard’s November 19, 2015, letter and thus, the pass through rate process
has not been triggered. Moreover, Brevard argues that the pass through statute anticipates
an application filed outside a rate case. When a pass through application is
filed with the Commission, the review performed by staff is limited as opposed
to a staff assisted rate case in which staff reviews all relevant information. Staff
agrees with Brevard that the automatic decrease provision of Section 367.081(4)(b),
F.S., (relied upon by OPC) does not logically apply in the context of a rate
case. In addition to there being no “verified notice,” staff observes that Section
367.081(4)(b), F.S., provides that “the provisions of this subsection do not
prevent a utility from seeking a change in rates pursuant to the provisions of subsection
(2).” Section 367.081(2)(a), F.S., is incorporated by reference in the SARC
statute
and represents the Commission’s authority to “fix rates which are just,
reasonable, compensatory and not unfairly discriminatory.”
However, notwithstanding the
inapplicability of the pass through rate process to the instant proceeding,
staff recommends that the lower cost of water from the county must be
considered in setting Phase II rates in the instant rate case.
In Phase I, the utility’s total
purchased water expense of $115,137 was decreased by $30,511 due to an EUW of
26.5 percent. Including the adjustment for EUW, the Commission approved purchased
water expense was $84,626 ($115,137 - $30,511) in Phase I. To calculate the Phase
II revenue requirement, staff removed the EUW adjustment. Staff then made an
adjustment to reflect the lower purchased water rate from Brevard County by annualizing
the expense using the lower rates and the test year determinants. This
calculation results in an annual purchased water expense of $58,629 for Phase
II. As such, staff recommends that the purchased water expense be decreased by
$56,508 ($115,137 - $58,629) in Phase II to reflect the pass through of the lower
rates from Brevard County. The net adjustment to Phase I revenue requirement,
based on removal of the $30,511 EUW adjustment and reduction of purchased water
by $56,508, is a decrease of $25,998 ($30,511 - $56,508). In it’s August 1,
2016 letter, Brevard agreed with staff’s methodology to reflect the most recent
charges.
Additional Cost
As part of its November 19, 2015
filing, Brevard also requested recovery of the additional costs related to
analyzing the replacement project, as well as the cost of the customer meetings
and subsequent Commission Conference. The break down of the costs is as
follows:
Table 1-1
Replacement Project
Costs
|
Event
|
Charge
|
|
Engineering Fees for preparing the
bid
|
$17,790
|
|
Legal Advertisement for the bid
|
444
|
|
Noticing for the customer meetings
|
509
|
|
Travel to the customer meetings and
Commission Conference
|
698
|
|
Total
|
$19,441
|
When the total cost of $19,441 is
amortized over five years, the annual revenue impact is $3,888. Brevard did
provide invoices for the additional costs. Staff also used the same methodology
from Phase I to calculate the cost of additional customer notices. Staff believes
that this amount is reasonable and prudent, and OPC does not object to the
request. Brevard notes that if the replacement project were to move forward,
$18,234 (engineering fees and legal advertisement) of the additional cost above
could be included in the amount for the replacement project.
Staff
recommends approval of the additional cost incurred by Brevard in analyzing the
replacement project. Staff verified the costs with the invoices that were
provided and recommends the costs are prudent. OPC does not object to the
recovery of the additional costs. The costs should be amortized over five years
resulting in an increase of $3,888.
Revenue Requirement
Staff recommends an annual decrease of
$23,306 (14.24 percent). This amount reflects the difference between the net
decrease of $25,998 discussed above and the $3,888 increase associated with the
amortization of the engineering costs. The amounts are not precisely additive
due to taxes other than income. This recommended revenue requirement allows the
utility the opportunity to recover its expenses and earn an 8.29
percent return on its investment. Staff’s Phase II revenue requirement calculation
is shown on Table 1-2 below:
Table 1-2
Phase II Water Revenue Requirement
|
|
Water
|
|
Adjusted Rate Base
|
$78,930
|
|
Rate of Return
|
x 8.29%
|
|
Return on Rate Base
|
$6,543
|
|
Adjusted O&M Expense
|
122,459
|
|
Depreciation Expense
|
4,862
|
|
Amortization Expense
|
(295)
|
|
Taxes Other Than Income
|
6,752
|
|
Phase II Revenue Requirement
|
$140,321
|
|
Less Phase I Revenue Requirement
|
163,627
|
|
Annual Decrease
|
($23,306)
|
|
Percent Decrease
|
(14.24%)
|
Summary
Staff agrees with Brevard that the replacement project
for the Oakwood subdivision is not economically feasible pursuant to Rule
25-30.4325(10), F.A.C. The rule provides that the Commission will consider all
relevant factors. Staff recommends that the negative customer input is an
indication that the replacement project is not economically feasible. The
customers during the last customer meeting expressed that they do not wish
Brevard to replace the distribution system. Taking into account the additional
information about the cost of the replacement project and comments from the
customers opposing the project, staff recommends an adjustment for EUW should
not be included in the Phase II revenue requirement. Staff also recommends that
the lower purchase water rates and the additional costs associated with
analyzing the replacement project be applied to the Phase II rates. The net
effect of staff’s recommendation is a Phase II revenue requirement of $140,321.
This represents a $23,306 (14.24 percent) decrease from the Phase I revenue
requirement.
Issue 2:
What is the appropriate rate structure and rates for
Phase II?
Recommendation:
The Phase II rate decrease of 15 percent for water
should be applied as an across-the-board decrease to the existing Phase I 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 staff has approved the
proposed customer notice and the notice has been received by the customers. The
utility should provide proof of the date that the notice was given within 10
days of the date of the notice. (Hudson)
Staff Analysis:
The recommended Phase II
revenue, less miscellaneous service revenues, would result in a decrease of 15 percent
($23,306) for water over the Phase I revenue requirement ($155,401). The
calculation is as follows:
Table 2-1
Percentage Phase II Rate
Decrease
|
|
|
Water
|
|
|
|
|
|
1.
|
Phase I Revenue Requirement
|
$163,627
|
|
|
|
|
|
2.
|
Less Miscellaneous Service Revenues
|
($8,226)
|
|
|
|
|
|
3.
|
Phase I Service Revenue Requirement
|
$155,401
|
|
|
|
|
|
4.
|
Phase II Revenue Decrease
|
($23,306)
|
|
|
|
|
|
5.
|
% Service Rate Decrease (Line 4/Line 3)
|
(15%)
|
Staff recommends a Phase II rate decrease of 15 percent
for water, applied as an across-the-board decrease to the existing Phase I
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 staff has approved the
proposed customer notice and the notice has been received by the customers. The
utility should provide proof of the date that the notice was given within 10
days of the date of the notice.
Issue 3:
Should this docket be closed?
Recommendation:
No. In the event of a protest, the recommended rates
should be implemented and staff will file a subsequent recommendation to
address the appropriate monies to be held subject to refund, if any. Brevard
should file revised tariffs 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. 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. (Murphy)
Staff Analysis:
I In the event of a protest, the recommended rates
should be implemented and staff will file a subsequent recommendation to
address the appropriate monies to be held subject to refund, if any. Brevard should file revised tariffs 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. 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.
