Discussion
of Issues
Issue 1:
Should any adjustments be made to WMSI’s revenue
requirement based on the true-up of costs associated with the pro forma plant
project previously authorized by the Commission?
Recommendation:
Yes. Adjustments should be made to reflect the
true-up costs for the pro forma plant project previously authorized by the
Commission. Land and plant should be decreased collectively by $6,006.
Corresponding adjustments should be made to increase accumulated depreciation
and depreciation expense both by $5,969. This results in a true-up revenue
increase of $5,547 or 0.29 percent. Due to the low percentage increase, the
rates should remain unchanged. In addition, service availability charges should
remain unchanged. Further, the Utility should notify the Commission of any
future sale, transfer, or reassignment of the 12 remaining lots to any person
or entity within 60 days of such a transaction. At the time that it notifies
the Commission, the Utility should also submit all documentation regarding the
transaction, including, but not limited to, the market value of the land and
calculation of any gain on sale. Finally, the escrow account should be closed
and any remaining funds in the escrow account should be released to the
Utility. (Graves, Galloway, Hudson)
Staff Analysis:
Pursuant
to Order No. PSC-12-0435-PAA-WU, dated August 22, 2012, the Commission
determined that several of the Utility’s pro forma plant items were reasonable,
prudent, and in the best interest of the Utility and its customers. The revenue
requirement approved in that Order was calculated using estimated costs
totaling $3,490,617 for the pro forma plant and land items. The pro forma plant
project items approved by the Commission included a new ground storage tank,
the relocation and elevation of high service pumps on the Island, a building to
house new facilities next to the new ground storage tank, and the upgrade of
the distribution system. The Order additionally provided that WMSI should
complete the pro forma plant within 18 months of issuance of the Consummation
Order.
After
unforeseen delays and a motion filed by the Utility for an extension of time, by
Order No. PSC-15-0191-PCO-WU, issued May 8, 2015, the Commission encouraged the
Utility to move expeditiously with its plan to accelerate construction. WMSI
was further ordered to provide support documentation for its pro forma plant
project to the Commission within 60 days of the issuance of the letter of
clearance from the Florida Department of Environmental Protection (DEP). Documentation
was to be provided so that the Commission staff could analyze the actual costs
of the project and determine whether a true-up adjustment should be made.
Pro Forma Plant
On April 5, 2016, the Utility
submitted a letter of clearance from DEP which was dated March 31, 2016. By
letter dated April 13, 2016, WMSI provided documentation of actual costs for
the system improvements that it completed, as required. The Utility’s
documentation included invoices and checks for a construction contract (dated
January 15, 2014), engineering services, system evaluation, and additional
system costs such as permitting. The cost of these items totaled $3,085,115. Staff
believes the total cost of these items is reasonable when compared to the
amount approved by the Commission. The Utility’s letter also included
documentation of five change orders totaling $705,418. Including the 5 change
orders, the total cost of pro forma plant provided by the Utility is $3,790,533.
Based on review of the documentation
provided by WMSI, as well as the Utility’s responses to data requests, staff
recommends that the Commission exclude $495,922 of the cost associated with the
five change orders for purposes of calculating the true-up for this proceeding.
The resulting total pro forma plant recommended by staff equals $3,294,611. For
comparison purposes, Table 1 summarizes the total pro forma plant amount
previously approved by the Commission, the pro forma plant amounts provided by
the Utility, and the pro forma plant amounts recommended by staff. Staff’s
recommendation and analysis of the Utility’s five change orders are discussed
in greater detail below.
Table 1
Summary of Pro Forma Plant
|
Account Name
|
Pro Forma Plant
Approved
Amounts
|
Pro Forma Plant
Utility
Amounts
|
Pro Forma Plant
Staff
Amounts
|
|
Structures and Improvements
|
336,085
|
751,652
|
577,991
|
|
Supply Mains
|
164,690
|
329,277
|
258,927
|
|
Power Generation Equipment
|
141,951
|
169,935
|
137,835
|
|
Pumping Equipment
|
655,150
|
554,714
|
554,714
|
|
Water Treatment Plant
|
63,261
|
50,541
|
50,541
|
|
Distribution Reservoirs and Standing pipes
|
831,246
|
833,780
|
833,780
|
|
Transmission and Distribution Mains
|
811,282
|
1,024,987
|
826,237
|
|
Communication Equipment
|
43,520
|
75,647
|
54,586
|
|
Total Pro Forma Plant
|
$3,047,185
|
$3,790,533
|
$3,294,611
|
In response
to a staff data request, the Utility provided an explanation of the changes
that were included in Change Order Requests 1 and 2, dated March 2015 and
October 2015, respectively. After the January 2014 contract was signed, Federal
Emergency Management Agency (FEMA) increased the minimum flood elevation
requirements for St. George Island from 9 feet to 11 feet. Change Order Request
1 included costs to increase the elevation of the ground storage tank to comply
with FEMA’s increased minimum flood elevation requirements. The change in the
increased minimum flood elevation required a more substantial foundation to
support the higher tank elevation. Also, after the original contract for the
tank was signed, DEP and Franklin County required the construction of a
retention pond and security fence at the tank site. The total cost to comply
with the discussed requirements was $127,938.
The Utility
also provided documentation that it incurred an additional cost of $73,905 in
order to increase a water main by 1,232 linear feet to provide better
fire-flow. The Utility explained that engineering analysis showed that water
pressure at certain locations on the Island would have been below the state
mandated minimum.
Staff
believes that the activities taken to comply with governmental standards and
requirements are beyond the Utility’s control and should be included for
purposes of calculating the true-up for this proceeding. In addition staff
believes that many of the Utility’s additional costs have been adequately
supported by the Utility. Several of the additional costs reflect changes in
planned conditions differing from actual conditions. As an example, pipe
measurements and/or material were changed to address wet areas that were not
shown on the maps used to originally estimate costs. Similarly, many reductions
in costs were associated with modifications to pipe measurements. The cost of
the high service pumps were also less than originally planned. However, as
discussed below, some of the additional costs were incurred at the discretion
of the Utility and go beyond what was previously determined to be reasonable,
prudent, and in the best interest of the Utility and its customers.
Structure Improvements and Power
Generation Equipment
The Commission approved pro forma
plant associated with a new building to house the basic pumping and treatment
functions of the Utility, including four pumps, a chlorination system, and a
generator. In response to a staff data request, WMSI stated that the building
was redesigned several times after the Minimum Filing Requirements (MFRs) were
filed and that it decided it would be prudent and cost effective to increase
the size of the building. The Utility further stated that the described
modification includes the space planned at the time its MFRs were filed as well
as additional space necessary to accommodate its Island personnel, billing and
administrative operations, and space for storage.
Staff
believes the modification described above is beyond what was previously
determined to be reasonable, prudent, and in the best interest of the Utility
and its customers. Therefore, staff is recommending that the Commission exclude
costs associated with the building modification from its consideration of the
Utility’s true-up.
Staff’s
exclusions include structural changes to the building necessary to accommodate
office operations ($7,981), additional air-conditioning ($27,649), and amenity
additions such as cabinetry and appliances ($13,553). Staff also recommends
excluding costs ($32,100) for a generator larger than previously planned. Based
on a response from the Utility, the larger generator was needed after the size
of the building was increased.
The cost of
the building was also increased to comply with FEMA’s minimum flood elevation
requirements. The cost to increase the elevation of the building was $287,800.
Because this increase includes costs associated with the previously discussed
building modification, staff recommends that the Commission exclude a portion
of these costs from pro forma plant. Staff recommends that the allowable cost
be reduced by $124,478, which reflects a proration of the cost based on the
increased square footage of the building.
In total,
staff’s recommended exclusions, for activities associated with the building
modification, total $205,761. Of the $205,761 total, $173,661 should be
excluded from the Utility’s Structures and Improvements account. The cost for
the larger generator should be excluded from the Utility’s Power Generation
Equipment account.
Transmission and Distribution Mains
Change Order Request 3 included
an additional $198,750 for a new water line in the state park on St. George
Island. In response to a staff data request the Utility indicated that the
State requested that WMSI build a new line in September 2005. WMSI further
stated that after it saved $260,000 on the price of the building site, and
after it closed on a $6,000,000 loan, the Utility decided it would be prudent
to build the new water line in the state park as requested by the state 10
years earlier.
Similar to
the building modification discussed earlier, staff believes the new water line
in the state park is beyond the scope of what the Commission previously
determined was reasonable, prudent, and in the best interest of the Utility’s
customers. Therefore, staff is recommending that the Commission exclude the
$198,750 of additional costs associated with the new water line from its
consideration of the Utility’s pro forma plant. These costs should be excluded
from the Utility’s Transmission and Distribution Mains account.
Supply Mains
Change Order
Request 4 was dated January 19, 2016. The change order included $70,350
associated with an increase in road bores, from 5 to 15. In a subsequent
letter, the Utility stated that several of the additional road bores had been
completed prior to the signing of Change Order Request 4. The Utility did not
however, provide a statement or documentation confirming that the additional
road bores were finished prior to the December 31, 2015, completion date
ordered by the Commission. Therefore, staff recommends that the $70,350 for the
10 additional road bores should be excluded from the Utility’s Supply Mains
account.
Communication Equipment
The pro forma items considered by
the Commission in the PAA Order included a supervisory control data acquisition
(SCADA) system for wells, high service pumps, ground storage tank level, and
distribution system pressure. Change Order Request 5 covered 4 new well meters
to allow the SCADA system to operate as well as a security system which is tied
in with the SCADA system. By letter dated November 4, 2016, the Utility
indicated that this item was completed, certified, and placed in service as of
April 1, 2016. Because the completion date occurred after December 31, 2015,
staff recommends that the associated costs totaling $21,061 be excluded from
the Utility’s Communication Equipment account.
Land
In
addition to evaluating the pro forma plant project, staff also analyzed the
land value to be included in rate base. In order to construct the
Commission-approved pro forma plant project, WMSI had to acquire land. WMSI originally
proposed a land purchase that was valued at $425,000. In its Motion to Allow
Withdrawals from Escrow, dated September, 21, 2012, WMSI stated its customers
expressed concern regarding the proposed $425,000 cost of the land upon which
the water storage tank was to be constructed. In response to this concern, WMSI
located 24 bank-owned lots which were obtained through foreclosure. The
purchase price for these 24 bank-owned lots was $190,000. According to the
Utility, it would only need 12 of the 24 lots. In the filing, the Utility
stated, “in addition to an initial savings from the original lots, WMSI will
sell the twelve (12) lots not needed for the pro forma project, further
reducing the cost to WMSI and to its customers.”
On October 11, 2012, a Purchase and Sale Agreement was
executed between the Utility and Centennial Bank. The closing date of the
agreement was November 8, 2012. In response to staff’s data requests, WMSI
provided the Appraisal Report dated March 25, 2013, performed by
Cureton-Johnson & Associates, LLC Real Estate Services. The date of the
report is April 5, 2013, and the date of the value is March 25, 2013. According
to the appraisal, “after market and physical characteristic adjustments, the
comparables price per lot figures ranged from a low of $22,866 per lot to a
high of $43,167 per lot. After market conditions adjustments, the range of
average gross adjustments was 0% to -30% for each sale.” The appraisal
determined a total value of $544,500 for the 24 lots.
According to the appraisal, some of the lots are
considered “upland” and the other lots are considered “wetland.” Further, the
value of each lot is affected by its designation. The appraisal determined
that, of the 24 lots, 14 are upland lots and 10 are wetland lots. According to
the appraisal, the reconciled value per lot would be $33,000 for the upland
lots. The appraisal stated the wetland lots would be valued at 25 percent of
the value of the upland lots, resulting in a price per lot of either $33,000
for upland lots or $8,250 ($33,000 x 0.25) for wetland lots.
Only 8 lots (Lots 12-19, Unit 1, Block 3 West) of the 24
lots were actually used by the Utility for its storage tank construction
project. On February 11, 2016, in its response to a staff data request, the
Utility stated that the remaining 16 lots not used by the Utility were sold to
Brown Management Group, Inc. (BMG) on October 28, 2013, for $30,000. Further,
the Utility contended the remaining 8 lots that have been used for the pro
forma project should be valued at $160,000. On May 5, 2016, in its response to
staff’s data request, the Utility argued that,
WMSI had to make a bulk purchase of all 24 lots for
$190,000 in order to get the eight lots needed for the improvements. The lots
were bank-owned, and the bank would not sell only the eight lots WMSI needed,
even though it would have been financially reasonable for WMSI to pay $160,000
for those eight lots, if they could have been purchased without the additional
16 lots. WMSI valued those 8 lots at $20,000 each. The remaining 16 lots, which
are mostly unbuildable, have a total value of $30,000. Even though they are no
longer owned by WMSI, they are included in the mortgage which WMSI gave the
bank to secure the loan to build the new plant.
According to the staff audit, the Utility recorded the
purchase of the lots in the general ledger based on the land value found in tax
records. The tax records assessed each of the lots at $20,000 for tax purposes.
WMSI used this assessed value to determine the amount for 8 lots (lots 12-19)
needed for the storage tank construction project at $160,000 ($20,000 x 8). According
to the Utility, the remaining 16 lots were sold to Brown Management Group, Inc.
(BMG) on October 28, 2013, for $30,000.
In its response to an audit request, the Utility stated
that BMG sold 4 of the 16 lots back to WMSI for $10,000 on May 10, 2016 to be
used for pipe storage. These lots consisted of 2 wetland lots (Lots 4 and 5)
and 2 upland lots (Lots 6 and 7). On August 17, 2016, the Utility notified the
Commission that the remaining 12 lots that were sold to BMG have now been sold
back to WMSI. Therefore, all of the 24 lots are now owned by the Utility. The
Utility demonstrated that the lots were sold back to WMSI at the same amount as
they were sold to BMG.
In considering the valuation of the land, staff recognizes
the Utility’s cost-saving efforts based on the original proposed amount of
$425,000. Staff also recognizes the fact that the land purchased for $190,000 had an appraised value
as of March 25, 2013 of $544,500. At this point in time, all of the 24 lots are
owned by the Utility. Therefore, given the fact that, in order to get the 8
lots needed for the storage tank project, the Utility had to make a bulk
purchase of all 24 lots, staff believes the purchase price of $190,000 should
be included in the true-up calculation. Staff further believes that this amount
reflects a savings of $235,000 ($425,000 -$190,000) for the customers.
Further, staff believes there is a real possibility for
future gain on the sale of any lots that are not being used by the Utility.
Thus, staff recommends that the Utility should notify the Commission of any
future sale, transfer, or reassignment of the remaining 12 lots to any person
or entity within 60 days of such a transaction. At the time that it notifies
the Commission, the Utility should also submit all documentation regarding the
transaction, including, but not limited to, the market value of the land and
calculation of any gain on sale.
Rates
Due to the
low percentage increase, staff recommends the rates remain unchanged. In
addition, staff recommends service availability charges remain unchanged. Staff
compared the recommended adjustments to the accounts used to develop the
service availability charge with the costs used to develop the Utility’s
current main extension and plant capacity charges. The change in the average
cost per equivalent residential connection to connect to the water system is de
minimus (0.46 percent increase for the main extensions and 0.48 percent decrease
for the treatment facilities). The existing service availability charges are
within the guidelines pursuant to Rule 25-30.580, Florida Administrative Code.
Therefore, staff recommends the service availability charges remain
unchanged.
In
addition to the above discussion regarding any adjustments to the revenue
requirement based on the true-up of costs associated with the pro forma plant
project previously authorized by the Commission, staff recommends that the
escrow account associated with this docket be closed. Pursuant to Order No.
PSC-12-0641-PCO-WU, issued December 4, 2012, the Commission granted staff
administrative authority to authorize all payments from an established escrow
account for the Florida Department of Environmental Protection loan, as they
became due. By closing the docket, the escrow account should be closed
resulting in no need for the Commission to be an agent for the escrow account. In
accordance with the Order, staff believes that any remaining funds in the
escrow account should be released to the Utility. Further, while the escrow
account will be closed, and the Commission will no longer be an agent for the
collection and disbursement of these funds, the Utility remains responsible for
making payments to DEP and Ameris Bank.
Conclusion
Based on the above, staff recommends a true-up adjustment
to decrease land and plant by $6,006. Accordingly, staff recommends corresponding
adjustments to increase accumulated depreciation and depreciation expense both
by $5,969. The resulting revenue requirement based on the true-up adjustments
is a revenue increase of $5,547 or 0.29 percent.
Staff also recommends that the Utility should notify the
Commission of any future sale, transfer, or reassignment of the remaining 12
lots to any person or entity within 60 days of such a transaction. At the time
that it notifies the Commission, the Utility should also submit all
documentation regarding the transaction, including, but not limited to, the
market value of the land and its calculation of any gain on sale. The Utility
should also submit its proposal as to how this transaction should be treated
for ratemaking purposes. Due to the low percentage increase, staff recommends
the rates remain unchanged. In addition, staff recommends service availability
charges remain unchanged. Finally, by closing the docket, the escrow account
should be closed resulting in no need for the Commission to be an agent for the
escrow account. Staff believes that any remaining funds in the escrow account
should be released to the Utility. The true-up analysis is reflected on the
attached Schedule 1.
Issue 2:
Is WMSI in substantial compliance with Order No.
PSC-12-0641-PCO-WU; and, if not, should WMSI be ordered to show cause why it is
not in substantial compliance with Order No. PSC-12-0641-PCO-WU?
Recommendation:
Yes, WMSI is in substantial compliance with Order
No. PSC-12-0641-PCO-WU, and should not be ordered to show cause. (Leathers)
Staff Analysis:
On December 4, 2012, the Commission issued Order No.
PSC-12-0641-PCO-WU (Order), which granted in part and denied in part WMSI’s
Motion to Allow Withdrawals from Escrow. In the Order, the Commission addressed
WMSI’s proposal to sell 12 of 24 bank-owned lots it purchased for its water
storage tank and related improvements. Specifically, the Commission ordered
“that if or when the remaining unused lots are sold, the proceeds from the sale
shall be deposited in the Proposed Agency Action escrow account for final
disposition by [the Commission].”
Based on information WMSI filed on February 11, 2016 and
May 5, 2016, in response to staff’s data requests, it appeared that WMSI did
not deposit the proceeds of the October 28, 2013 sale of 16 of the 24
aforementioned lots into the Proposed Agency Action escrow account for final
disposition by the Commission as ordered. However, information filed by WMSI on
June 13, 2016, in response to staff’s data request, indicated that the
transaction had essentially been reversed.
On August 16, 2016, by letter, staff notified WMSI that it
may have acted in violation of the Order and requested that WMSI provide any
mitigating information or circumstances related to the apparent violation. WMSI
filed its response on August 17, 2016, stating that the intent of the Order was
to ensure that the proceeds of the sale of the unused lots would be used to
replenish the account because the escrow funds were used to purchase the 24
aforementioned lots. WMSI maintained that no sale, within the meaning and
intent of the Order, of the pertinent lots had occurred on October 28, 2013,
because the 16 lots were conveyed to BMG, a wholly-owned, non-regulated
subsidiary. As such, WMSI submitted that it has remained in compliance with the
purpose and intent of the Order as the lots remained within the control of
WMSI. However, due to staff’s inquiries, WMSI opted to have the lots reconveyed
by BMG to WMSI.
Based on the above, staff believes that WMSI made a
substantial effort to comply with the Order by having its subsidiary reconvey
the lots to WMSI. As such, staff believes WMSI is in substantial compliance
with the Order and should not be ordered to show cause for non-compliance.
Issue 3:
Should this docket be closed?
Recommendation:
If a protest is filed within 21 days of the issuance
date of the Order, the docket should remain open pending resolution of the
protest. If no timely protest is filed, a consummating order should be issued
and the docket should be closed. (Leathers)
Staff Analysis:
If a protest is filed within 21 days of the issuance
date of the Order, the docket should remain open pending resolution of the
protest. If no timely protest is filed, a consummating order should be issued
and the docket should be closed.
