Discussion
of Issues
Issue 1:
Should the Commission approve the transfer of
County-Wide Utility Co., Inc.’s water system and Certificate No. 390-W to
Southwest Ocala Utility, Inc.?
Recommendation:
Yes. The transfer of County-Wide’s water system and
the transfer of Certificate No. 390-W to SOU is in the public interest and
should be approved effective the date of the Commission’s vote. The resultant
order should serve as SOU’s certificate and should be retained by the Utility. The
existing rates and charges should remain in effect until a change is authorized
by the Commission in a subsequent proceeding. The tariffs reflecting the
transfer should be effective for services rendered or connections made on or
after the stamped approval date on the tariffs pursuant to Rule 25-30.475, Florida
Administrative Code (F.A.C.). SOU should be responsible
for filing the Utility’s annual reports and paying regulatory assessment fees
for 2015 and all future years. (M. Watts, Frank, Johnson)
Staff Analysis:
On January 2, 2015, County-Wide filed an application
for approval of the transfer of its water system and Certificate No. 390-W to SOU.
The application is in compliance with the governing Statute, Section 367.071,
F.S., and Administrative Rules concerning applications for transfer of
certificates. However, as discussed below, there is disagreement between staff
and the Utility over the appropriate purchase price.
Noticing, Territory, and
Land Ownership
The application contains proof of compliance with the
noticing provisions set forth in Section 367.071, F.S., and Rule 25-30.030,
F.A.C. No objections to the transfer were filed with the Commission and the
time for doing so has expired. The application contains a description of the
Utility’s water service territory, which is appended to this recommendation as
Attachment A. As the Utility is a reseller of bulk water purchased from the
City of Ocala, it has no water treatment facilities. Therefore, no proof of
land ownership pursuant to Rule 25-30.037(2)(s), F.A.C., is required.
Purchase Agreement and
Financing
Pursuant to Rules 25-30.037(2)(i)
and (j), F.A.C., the application must contain a statement regarding financing
and a copy of the Purchase Agreement, which includes the purchase price, terms
of payment, and a list of the assets purchased. According to the application, Dirk
and Donna Leeward own 100 percent of Brick City Management, LLC (BCM) which
manages and owns 100 percent of Southwest Ocala Utility, Inc. (SOU). According to the application and subsequently
filed support documents, on July 19, 2012, Mr. Leeward purchased, at a
discount, an outstanding note from BBVA Compass Bank (Compass Bank) that County-Wide
owed to Compass Bank. The note was comprised of principal, accrued interest,
costs, and fees totaling $1,067,747. The amount Mr. Leeward paid for the note
is unknown. After purchasing the note, Mr. Leeward foreclosed on County-Wide on
March 4, 2013. On April 8, 2013, Mr. Leeward acquired the Utility assets at a
public foreclosure auction for a total of $301, which was comprised of the
winning bid amount and associated documentary stamps. On January 1, 2014, the
assets were transferred to SOU.
Staff believes that the amount paid
to Compass Bank by Mr. Leeward for the outstanding note should be included in
determining the purchase price of the Utility. Staff made several attempts to
obtain the purchase price of the note, including stating that the information
could be filed under a confidential request, but the Buyer did not provide the
requested information.
On November 19, 2015, the Buyer
submitted a letter outlining its concerns with staff’s position on the purchase
price, net book value (NBV), and application of an acquisition adjustment. In
the letter, it states that the Buyer is unable to provide information regarding
the amount paid to acquire the mortgage note from the bank because there is a
non-disclosure and confidentiality agreement attached to the transaction
between the Buyer and Compass Bank. Furthermore, the Buyer believes that the
discounted amount paid for the mortgage note is irrelevant to the purchase
price. Instead, the Buyer argues that staff should consider the full amount of
the outstanding note as the purchase price based upon a ruling by a Marion
County Circuit Court that established that a note, valued at approximately
$1,007,000, was relinquished for County-Wide’s assets in the Summary Final
Judgment of Foreclosure. As a result, the Buyer claims that this value
established by the Court equates to the purchase price and that the Commission cannot
or should not disregard the Court Order. However, the assets were not acquired
when Mr. Leeward foreclosed on County-Wide. As stated above, the assets were
acquired at the foreclosure auction. As a result, staff believes the
foreclosure auction is the final transaction which led to the acquisition of the
assets and that the amount of the final judgment is irrelevant.
Staff recognizes that in addition
to the bid amount and associated fees, Mr. Leeward paid an undisclosed amount
for the note which was necessary in order to obtain the assets. Staff believes
that for this specific case it is appropriate to consider all compensation paid
to acquire the assets, which would include the amount actually paid for the
mortgage note. In addition, staff does not believe that it is appropriate to
consider the entire amount of the $1,007,000 mortgage note because it does not
reflect the actual amount paid to acquire the assets. If staff were to consider
the entire amount of the note for the purchase price,
the Buyer would be earning a return on an amount greater than what was truly
invested
in the assets. Because staff is unable to determine any amount paid for
the mortgage note as additional compensation paid to acquire the assets, only
the money paid as a result of the foreclosure auction can be considered as the
purchase price. Staff notes that the primary purpose of an acquisition adjustment
is to preserve the integrity of NBV by discouraging deliberately high purchase
prices during transfers which would ultimately inflate the value of the assets.
Staff addresses the impact of the Buyer’s non-disclosure of this information on
the purchase price and resulting acquisition adjustment in Issue 3.
In light of the above, staff has
calculated the resulting purchase price to be $227, which is the bid amount of
$101, and documentary stamps of $200 less the value of the unregulated
wastewater system that was included in the auctioned property. Staff has
allocated $74 to the unregulated wastewater system based on the Utility’s
suggested allocation of the regulated and unregulated assets that was provided
in response to deficiencies to its transfer application.
According to the application, there
are no customer deposits, guaranteed revenue contracts, developer agreements,
customer advances, or leases of County-Wide that must be disposed of with
regard to the transfer.
Facility Description and
Compliance
SOU’s water system is a consecutive
system composed of water mains, as listed in Table 1-1 below, and nine fire
hydrants. A consecutive system provides treated water purchased from another
entity. Therefore, the City of Ocala is responsible for ensuring the water
meets primary and secondary water quality standards. On November 13, 2013, the
Florida Department of Environmental Protection (DEP) conducted a Sanitary
Survey and found the Utility to be in compliance with its rules and
regulations.
|
Table 1-1
|
|
Southwest Ocala Utility,
Inc. Water Mains
|
|
Material
|
Diameter Pipe (inches)
|
Length (linear feet)
|
|
PVC
|
1
|
100
|
|
PVC
|
2
|
5,630
|
|
PVC
|
2 1/2
|
4,300
|
|
PVC
|
4
|
4,360
|
|
PVC
|
6
|
750
|
|
PVC
|
8
|
750
|
|
PVC
|
12
|
100
|
|
Source: County-Wide Utility Co., Inc. 2014 Annual Report
|
Technical and Financial Ability
Pursuant to Rules 25-30.037(1)(l) and (m), F.A.C.,
the application contains statements describing the technical and financial
ability of the applicant to provide service to the proposed service area. According to the application, Mr. Leeward has been the general
manager of County-Wide since 1986 and has extensive knowledge of the operations
and management of the system. As referenced in the transfer application,
SOU will fulfill the commitments, obligations and representations of the Seller
with regards to utility matters.
Staff reviewed the financial
statements of BCM, the sole manager and owner of SOU. According to the
application, BCM has provided working capital funding to the Utility and will
ensure the availability of any necessary funds for future capital needs. Based
on the above, SOU has demonstrated the technical and financial ability to
provide service to the existing service territory.
Rates and Charges
The Utility’s rates and charges
were last approved in a staff-assisted rate case in 2007.[4]
The rates were subsequently amended to reflect a 4-year rate reduction required
by Section 367.0816, F.S., in 2011, and numerous price indexes. The Utility’s
existing rates are shown on Schedule No. 1. Rule 25-9.044(1), F.A.C., provides
that, in the case of a change of ownership or control of a utility, the rates,
classifications, and regulations of the former owner must continue unless
authorized to change by this Commission. Therefore, staff recommends that the
Utility’s existing rates and charges remain in effect until a change is
authorized by this Commission in a subsequent proceeding.
Regulatory
Assessment Fees (RAFs) and Annual Reports
Staff has verified
that the Utility has filed annual reports and RAFs through December 31, 2014.
However, while 2015 RAFs have been paid, the 2015 Annual Report has not been
filed. SOU will be responsible for filing the Utility’s annual reports and
paying RAFs for all future years.
Conclusion
The transfer of County-Wide’s water system and the
transfer of Certificate No. 390-W to SOU is in the public interest and should
be approved effective the date of the Commission’s vote. The resultant order
should serve as SOU’s certificate and should be retained by the Utility. The
existing rates and charges should remain in effect until a change is authorized
by the Commission in a subsequent proceeding. The tariffs reflecting the
transfer should be effective for services rendered or connections made on or
after the stamped approval date on the tariffs pursuant to Rule 25-30.475, F.A.C.
SOU should be responsible for filing the Utility’s annual reports and paying
RAFs for 2015 and all future years.
Issue 2:
What is the appropriate net book value for the SOU
water system for transfer purposes?
Recommendation:
The net book value of the water system for transfer
purposes is $79,051, as of January 1, 2014. Within 90 days of the date of the
final order, SOU should be required to notify the Commission, in writing, that
it has adjusted its books in accordance with the Commission’s decision. The
adjustments should be reflected in SOU’s 2015 Annual Report when filed.
Specifically, the Utility should confirm that the adjustments to all applicable
National Association of Regulatory Utility Commissioners, Uniform System of
Accounts (NARUC USOA) primary accounts as shown on Schedule No. 2, Page 3 of 3,
have been made to SOU’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. (Frank, M. Watts)
Staff Analysis:
Rate base
was last established for the Utility as of December 31, 2005, in its 2005 SARC.
The purpose of establishing NBV for transfers is to determine whether an
acquisition adjustment should be approved. The NBV does not include
normal ratemaking adjustments for used and useful plant or working capital. The
Utility’s NBV has been updated to reflect balances as of January
1, 2014.
Staff’s recommended NBV, as described below, is shown on Schedule No. 2.
Utility
Plant in Service (UPIS)
The Utility’s general ledger reflected a UPIS balance of
$219,537, as of January 1, 2014. Staff reviewed UPIS additions since the last
rate case and as a result has increased UPIS by $7,177.
The Utility had retired its wells
and water treatment plant, and interconnected to the City of Ocala on October
29, 2005, which was prior to the date it filed its 2005 SARC (November 10,
2005.)
After extensive investigation, the Commission found that the retired system
would have been sufficient to continue to serve the existing customers, and the
reason the Utility interconnected with the City of Ocala was to be able to
serve anticipated development. Therefore, the interconnection with the City of
Ocala was disallowed from rate base during the Utility’s last rate case as
imprudent since it was not deemed necessary to serve the Utility’s current (at
the time) customers. Staff believes that it is appropriate in the instant
docket to continue to exclude the interconnection from rate base, consistent
with Order No. PSC-07-0604-PAA-WU.
However, since the interconnection is now the only source of water to supply
all current customers, it should be considered in future rate proceedings.
Staff recommends UPIS should be increased by $7,177 to
reflect a UPIS balance of $226,714 as of January 1,
2014.
Land
The Utility’s general ledger reflected a land balance of
$2,815, as of January 1, 2014. In Order No. PSC-07-0604-PAA-WU the Commission
established the value of the land to be $2,815. There have been no additions to
land purchased since that order was issued. Therefore, staff recommends land of $2,815, as of January 1,
2014.
Accumulated
Depreciation
The Utility’s general ledger reflected an accumulated
depreciation balance of $93,858, as of January 1,
2014. Staff calculated the appropriate accumulated depreciation balance
to be $93,655. As a result, accumulated depreciation should be decreased by
$203.
CIAC
As of January 1, 2014, the Utility’s general ledger
reflected a CIAC balance of $87,008; and an accumulated amortization of CIAC
balance of $40,982. Staff increased CIAC by
$10,839 based on audited receipts since the Commission approved beginning
balances from its last rate case. Using a composite rate, staff also calculated
and increased accumulated amortization of CIAC by $42. Therefore,
staff recommends a CIAC balance of $97,847 and
an accumulated amortization of CIAC balance of $41,024, as of January 1, 2014.
Net
Book Value
The Utility’s
general ledger reflected a NBV of $82,468. Based on the adjustments described
above, staff recommends that the NBV for the Utility’s water system, as of
January 1, 2014, is $79,051 ($82,468 - $3,417). Staff’s recommended NBV and the
NARUC USOA balances for UPIS and accumulated depreciation as of January 1, 2014, are shown
on Schedule No. 2, page 3 of 3.
Conclusion
Based on the above, staff recommends that the NBV of the
water system for transfer purposes is $79,051, as of January 1, 2014. SOU
should be required to notify the Commission in writing, that it has adjusted
its books in accordance with the Commission’s decision. Specifically the
Utility should submit a letter within 90 days of the final order in this
docket, confirming that the adjustments to all applicable NARUC USOA primary
accounts as shown on Schedule No. 2, Page 3 of 3, have been made to SOU’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. The adjustments should be reflected in
SOU’s 2015 Annual Report when filed.
Issue 3:
Should an acquisition adjustment be recognized for
rate-making purposes?
Recommendation:
Yes. Pursuant to Rule 25-30.0371, F.A.C., a negative
acquisition adjustment of $63,014 should be recognized for rate-making
purposes. Beginning with the date of the issuance of the order approving the transfer,
50 percent of the negative acquisition, which is $31,507, should be amortized
over a 7-year period and the remaining 50 percent should be amortized over the
remaining 33-year life of the assets. (Frank)
Staff Analysis:
An
acquisition adjustment results when the purchase price differs from the original cost of the assets (net book value) adjusted to
the time of the acquisition. Pursuant to Rule 25-30.0371(3), F.A.C., if the
purchase price is equal to or less than 80 percent of net book value, a negative
acquisition adjustment shall be included in rate base and will be equal to 80
percent of net book value less the purchase price. Pursuant to Rule
25-30.0371(4)(b)2., F.A.C., in setting
the amortization period for an acquisition adjustment, if the purchase price is
equal to or less than 50 percent of the net book value, then 50 percent of the
negative acquisition adjustment is amortized over a 7-year period and 50
percent amortized over the remaining life of the assets, beginning with the
date of the issuance of the order approving the transfer of assets. Staff
calculated the remaining life of the applicable water assets to be 33 years.
The calculation of the acquisition adjustment is shown below in table 3-1.
Table 3-1
Calculation of Negative
Acquisition Adjustment
|
Net
Book Value as of January 1, 2014
|
$79,051
|
|
80%
of Net Book value
|
$63,241
|
|
Purchase
Price
|
$227
|
|
Negative
Acquisition Adjustment
|
$63,014
|
Staff recommends that, pursuant to Rule 25-30.0371,
F.A.C., a negative acquisition adjustment of $63,014 be recognized for
rate-making purposes. Beginning with the date of the issuance of the order
approving the transfer, 50 percent of the negative acquisition adjustment,
which is $31,507 shall be amortized over a 7-year period and the remaining 50
percent shall be amortized over the 33-year remaining life of the assets. If
the interconnection is placed into rate base during a future rate case, the
appropriateness of an acquisition adjustment should be addressed at that time.
Issue 4:
Should this docket be closed?
Recommendation:
Yes. If no protest to the proposed agency action is
filed by a substantially affected person within 21 days of the date of the
order, a consummating order should be issued and the docket should be closed
administratively after SOU has provided proof that its general ledgers have
been updated to reflect the Commission-approved balances as of January 1, 2014.
(Janjic)
Staff Analysis:
If no protest to the proposed agency action is filed
by a substantially affected person within 21 days of the date of the order, a
consummating order should be issued and the docket should be closed
administratively after SOU has provided proof that its general ledgers have
been updated to reflect the Commission-approved balances as of January 1, 2014.
