Discussion
of Issues
Issue 1:
DROPPED.
Issue 2:
Is a two-phased revenue requirement calculation
appropriate in this docket?
Recommendation:
No, a two-phased revenue requirement is not
appropriate. (Norris, Graves)
Position of the Parties
KWRU:
The wastewater treatment plant expansion will be
completed by the time the rates approved in this docket will be effective and
thus there should be a single revenue requirement implemented without phasing.
OPC:
Yes. A two-phased approach recognizes proper
matching of revenues and expenses before and after the plant expansion is
in-service. Phase I is appropriate for calculating a refund of PAA Phase I
rates and Phase II is appropriate for establishing final rates. Including the
requested growth-related increases, without the related corresponding
growth-related offsets, will overstate the revenues and earnings received by
the Utility, violate the test year matching principle, and result in unfair and
unjust rates.
County:
Yes. To ensure that customers pay fair, just, and
reasonable rates, the Commission must determine revenue requirements for the
period of time during which the PAA Rates will be in effect before the new
permanent rates become effective, and also determine the revenue requirements
for the period starting when the new permanent Phase II Rates become effective.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
In its brief, KWRU asserted that the wastewater treatment
plant improvements are scheduled to be substantially complete by early March
2017, and that the vacuum tank was projected to be on-line by the end of 2016.
(KWRU BR 2-3) The Utility stated that the timing of the PAA Order, issued March
23, 2016, justified a two-phased rate increase because it was 11 months before
the plant was expected to be in service. (KWRU BR 2) Due to the protest and
timing of the final order, KWRU concluded that this justification no longer
exists. (KWRU BR 2) KWRU witness Swain testified that by the time the
Commission makes it decision, the level of construction work in progress (CWIP)
will be high enough to eliminate the possibility of a refund. (KWRU BR 3)
OPC
OPC argued that a two-phased rate increase is appropriate
for this rate case as the Commission recognized in its PAA Order. (OPC BR 4-5)
OPC asserted that the Commission should establish a final Phase I rate increase
to recognize the revenue requirement from the date the PAA Phase I rates were
implemented until the plant expansion is placed into service. (OPC BR 4-5) OPC
stated that, if the post-PAA protest revenue requirement is lower than the PAA
Phase I revenue requirement, then refunds with interest to the customers can be
determined. (OPC BR 5)
OPC also argued that a Phase II revenue requirement should
be determined to set rates on a prospective basis after the new plant expansion
is in service. (OPC BR 4-5) OPC elaborated that a two-phased approach correctly
recognizes a proper matching of revenues and expenses for the time periods
rates will be in place. (OPC BR 4-5) OPC contended that, if only one
(single-phase) revenue requirement were to be implemented, the inclusion of pro
forma plant and higher projected expenses would not match the historical
timeframe before the plant becomes operational and used and useful to KWRU’s
customers. (OPC BR 4)
County
The County expressed that KWRU has been collecting rates
(Phase I Rates or the PAA Rates) since approximately April 15, 2016 and argued
that the new permanent rates should become effective when new assets are
actually serving customers, which is expected to be in March or April 2017.
(County BR 8-9) The County contended that it is critical to setting fair, just,
and reasonable rates and that the Utility’s authorized revenue requirement
recover only the costs incurred to provide service when that service is
provided. (County BR 8-9)
The County further argued that, because the PAA Rates
will be in effect for approximately one year before the new permanent rates
become effective and the new wastewater treatment plant (WWTP) will not be
providing service to customers before March or April 2017, it is necessary to
have a two-phased revenue requirement for KWRU in this docket. (County BR 8-9)
The County elaborated that the revenue requirement for the period before the
new WWTP comes into service and the revenue requirement for the period starting
when the new WWTP is actually serving customers, should be determined
separately. (County BR 8-9) Otherwise, the County argued, the rates collected
for the current Phase I period, will not be fair, just, and reasonable, and
customers will likely wind up paying more than the cost to actually serve them.
(County BR 8-9) The County further asserted that the new permanent Phase II
Rates must also accurately reflect the costs incurred to serve customers after
the new assets are serving customers. (County BR 8-9)
Harbor Shores
In its brief, Harbor Shores
agreed with OPC. (Harbor Shores BR 2)
ANALYSIS
In the PAA Order, the
Commission approved a two-phased revenue requirement based on three reasons: 1)
the majority of the pro forma plant expansion was not complete at the time and
was projected to take another year; 2) the potential for additional proceedings
related to the Florida Department of Environmental Protection’s (DEP) Final
Order regarding KWRU’s permit challenge; and 3) the concern regarding the
Utility’s contribution level, as it related to additional documentation of contribution
in aid of construction (CIAC) collected subsequent to the test year.
OPC witness Merchant testified that OPC’s revenue
requirement used the same two-phase methodology the Commission approved in the
PAA order, because the methodology recognized the uniqueness of the case and
the need to establish two separate revenue requirement calculations due to the
length of time between the historical test year and the projected date that the
pro forma plant would be placed in service. (TR 390) Witness Merchant’s
testimony did not directly address why she followed the PAA methodology or why
two phases are appropriate. The only arguments tenuously related to the
appropriateness of a test year are OPC witness Merchant’s assertions that 2014
is appropriate to measure the reasonableness of the implemented, Phase I rates,
and to determine potential refunds. (TR 384; TR 390) In response to OPC’s recommendation
of a two-phased revenue requirement, KWRU witness Swain testified that it was
not appropriate to apply the final rates in a phased approach due to the near
completion of the Utility’s pro forma plant projects. (TR 765-766)
Just as OPC witness Merchant recognized the need to
establish two separate revenue requirements in the PAA Order, it is important
to reevaluate the concerns, as previously outlined, from the PAA Order to
determine the appropriateness of a two-phased revenue requirement. As discussed
in subsequent issues, the concerns are no longer outstanding and have been
resolved due to the additional time frame of the hearing process. As KWRU
witness Johnson explained, the pro forma plant expansion is scheduled to be
done by the first part of March 2017. (TR 603) This estimated completion date
coincides with the time frame that rates go into effect. The Final Order, Last Stand v. KW Resort Utilities, Corp. et
al., State of Florida Div, of Admin. Hearings, DOAH Case No. 14-5302, was
issued February 24, 2015, and no further legal expenditures were associated
with an appeal. (EXH 51, BSP 81; EXH 52, BSP 116; EXH 56, BSP 1563-1564)
Additionally, the collection of CIAC since the test year was further examined
for the purpose of matching the investment associated with the pro forma WWTP
expansion.
Additionally, staff believes that the methodology
discussed in Issue 39 adequately addresses the refund calculation, as it necessitates
calculating a revised revenue requirement that removes adjustments that do not
relate to the period that PAA rates were in effect. As such, staff recommends
that a two-phased revenue requirement for final rates is not required.
CONCLUSION
Based on the above, a two-phased revenue requirement for
final rates is not necessary.
Issue 3:
What is the appropriate test year for establishing
rates for KWRU?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
Staff recommends that adjusting the Utility’s 2014
test year based on known and measurable information is reasonable and
appropriate to determine a revenue requirement and rates that are
representative of KWRU’s current operations.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris, Graves)
Position of the Parties
KWRU:
The appropriate
test year is December 31, 2014 adjusted for known and measurable changes.
A. For Phase I, if applicable
OPC:
The appropriate test year for Phase I rates is
the historical year ending December 31, 2014, with appropriate adjustments to
recognize the level of expenses needed to implement advanced wastewater
treatment (AWT).
County:
The most
appropriate test year for establishing the Phase I revenue requirements is the
12-month period beginning on the date on which the PAA Rates became effective,
which is on or about April 15, 2016.
Harbor Shores:
Agrees with OPC.
B. For Phase II, if applicable
OPC:
Consistent with prior practice, a pro forma test
year ending December 31, 2016, with proper adjustments is appropriate and is
much more representative than using an historic 2014 test year with “cherry
picking” adjustments that only increase the expense items and rates. A
projected 2017 test year is the most representative for setting Phase II rates.
County:
The appropriate
test year for establishing Phase II Rates for KWRU is the 12-month period
beginning on the date that the Utility’s new WWTP achieves commercial operation
and begins providing service to KWRU’s customers.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
The Commission approved KWRU’s request for a historic 2014
test year on March 13, 2015. As set forth in Rule 25-30.430(1), Florida
Administrative Code (F.A.C.), test year approval must be challenged within 30
days of approval of the test year. (KWRU BR 4) As such, KWRU argued that any
challenge related to the test year was required by rule to be submitted on or
before April 12, 2015. (KWRU BR 4) The Utility added that the intervenors first
raised the issue of test year appropriateness in testimony, after KWRU had
filed its minimum filing requirements (MFRs) and its direct testimony in this
matter, and outside the 30-day challenge period. (KWRU BR 4) The Utility cited
Rule 25-30.430(1), F.A.C., which provides that an interested person may request
a review of the Chairman’s test year by the full Commission. KWRU noted that none
of the intervenors or interested persons in this docket requested that the full
Commission review the appropriateness of the Chairman’s decision. (KWRU BR 4)
To this point, the Utility concluded that the Commission is therefore without
authority to review the Chairman’s test year decision under the Rule at this
juncture. (KWRU BR 4) KWRU asserted that an untimely challenge of the
Commission-approved test year would constitute a violation of Rule 25-30.430,
F.A.C., and a violation of the Utility’s due process rights, imposing undue
costs and burdens upon the applicant utility. (KWRU BR 5)
KWRU also stressed that Rule 25-30.430, F.A.C., does not
provide a mechanism for anyone other than the applicant to request a projected
test year. (KWRU BR 5) The Utility continued that 2015 has not been audited,
nor has KWRU provided to the Commission any justification as to why a projected
test year “is more representative of the utility’s operations than a historical
period.” The Utility followed that this explanation is necessary if an
applicant requests a projected period pursuant to Rule 25-30.430(2)(d), F.A.C.
(KWRU BR 5) KWRU asserted that it followed the language of the rule that
indicates the preference for historic test years. (KWRU BR 7) The Utility
continued that the rule does not provide that any other party can provide the
explanation as to why a projected test year is more representative after the
test year is approved, a prerequisite for projected test year approval. (KWRU
BR 7)
KWRU also refuted the intervenor’s arguments regarding the
“matching principle.” KWRU argued that no statute or rule governing the actions
of the Commission contains reference to a “matching principle.” (KWRU BR 7)
KWRU also noted that witness Deason admitted that historically the Commission’s
policy is to use historical test years for water and wastewater cases. (KWRU BR
7)
Lastly, the Utility again noted that in its last rate
case, where growth was even higher, the Commission found a historic test year
was appropriate. (KWRU BR 7) KWRU concluded that if the Commission were
to suddenly change from that policy in the middle of this case and approve a
projected test year based not on projections made at time of filing but
testimony brought forth in the middle of the case, it would be in violation of
the Florida Administrative Code, and the Administrative Procedure Act, Ch. 120,
Florida Statutes. To this point, the Utility cited Palm Coast Utility
Corporation v. State of Florida, Florida Public Service Commission,
743 So. 2d 482 (Fla. 1st DCA 1999). Specifically, KWRU cited the following:
The Commission acknowledges that the lot count methodology
represented a departure from the methodology previously employed…[W]e reverse
and remand with directions that the Commission provide an explanation, with
record support, for the change in methodology in determining the used and
useful portion…
(KWRU BR 7)
OPC
OPC argued that the appropriate test year for Phase I
rates is the historical year ended December 31, 2014, with appropriate
adjustments to recognize the level of expenses needed to implement advanced
wastewater treatment (AWT). (OPC BR 6) For Phase II rates, OPC contended that a pro forma test year ended December 31, 2016, with
proper adjustments, should be utilized because it is more representative than
applying a historic 2014 test year that only makes adjustments to items that
increase the revenue requirement and rates. (OPC BR 6)
OPC asserted that a
projected 2017 test year may be the best representation of the first year after
KWRU’s pro forma plant expansion goes into service. (OPC BR 6) However, OPC expressed that the Utility chose not
to provide the Commission or intervenors, in discovery, the level of detail
necessary to create a 2017 projected test year. (OPC BR 6) OPC argued that the Commission in other cases,
similar to this case, required a historical test year to be updated and
projected forward when the utility was growing at an exceptionally high rate
per year. (OPC BR 6)
OPC argued that the
historical year ended December 31, 2014, is not the appropriate test year for
setting post-protest Phase II or final rates in this proceeding. (OPC BR
6) OPC conveyed that consistent with Section
367.081, F. S., and as testified to by County witness Deason, the appropriate
test year should provide a reasonable match between a utility’s investment in
used and useful plant in service, capital costs, operating revenues, operating
expenses, and customer billing determinants so that the rates established are
fair, just, compensatory, and not unduly discriminatory when the new rates are
placed into service. (OPC BR 6) OPC
noted that KWRU’s 2014 test year with adjustments failed to include any
offsetting entries that would correspond to and match its projected increases.
(OPC BR 6-7) OPC concluded that an adjusted
2016 test year should be applied by the Commission in setting Phase II rates in
this proceeding. (OPC BR 7)
County
The County argued that the most appropriate test year for
establishing the Phase I revenue requirement is the 12-month period beginning
on the date on which the PAA rates became effective, which is on or about April
15, 2016. (County BR 10) The County asserted that it is not necessary to set
rates for the Phase I period, as long as the refund is properly calculated and
made based on the excess of revenues collected over what the Commission
determines the correct revenue requirement should have been for that period.
(County BR 10)
As described by the County, Phase II rates for KWRU are
the permanent rates that will be in effect from their effective date until new
rates are approved in a future rate case. (County BR 10) The County continued
that these Phase II rates will enable KWRU to recover the costs of its new
WWTP, operation and maintenance (O&M) costs associated with the new WWTP,
and the new air vacuum tank. (County BR 10)
The County contended that because the new WWTP will not be
serving KWRU’s customers until at least March 2017, the appropriate test year
is the twelve-month period beginning when that plant goes into commercial
operation and begins serving customers. (County BR 11) The County additionally
opined that it would be reasonable to use calendar year 2017 as a
representative test year, although that would likely understate sales
considering KWRU’s continuing growth. (County BR 11)
Harbor Shores
In its brief, Harbor Shores
agreed with OPC’s position. (Harbor Shores BR 2)
ANALYSIS
KWRU witness Swain presented testimony and exhibits
supporting a revenue requirement based on a 2014 test year with pro forma
adjustments for plant in-service and O&M expenses. Witness Swain testified
that the Utility updated pro forma plant and O&M expenses as information
became known and measurable. (TR 214) KWRU did not make adjustments to the 2014
test year as it relates to CIAC, revenues, and customer billing determinants.
OPC argued that the historical year ended December 31,
2014 is not the appropriate test year for setting post-protest Phase II or
final rates in this proceeding. (OPC BR 6) OPC conveyed that consistent with
Section 367.081, F.S., and as testified to by County witness Deason, the
appropriate test year should provide a reasonable match between a utility’s
investment in used and useful plant in service, capital costs, operating
revenues, operating expenses, and customer billing determinants so that the
rates established are fair, just, compensatory and not unduly discriminatory
when the new rates are placed into service. (OPC BR 6; TR 531) Witness Merchant
testified that including growth-related plant and expense pro forma adjustments
without including corresponding adjustments for CIAC, additional customer
bills, and wastewater treatment consumption, will overstate the revenues and
earnings received by the Utility when the new rates are implemented. (TR 305)
County witness Deason additionally asserted that if rates are not based upon
the most appropriate test year information, a utility could quickly experience
either underearnings or overearnings soon after the new rates are implemented.
(TR 529)
OPC witness Merchant stated that the best representative
test year would have been a 2017 projected test year, after the pro forma plant
expansion goes into service. (TR 308) However, she testified that the Utility
had not provided the necessary information to properly establish a 2017 test
year. (TR 308-309) Witness Merchant testified that the Commission, in cases
similar to this case, required a historical test year to be updated and
projected forward when the utility had significant growth. (OPC TR 310) OPC
cited the rate cases for Martin Downs Utilities, Inc.
(Martin Downs) and Burkim Enterprises, Inc.
(Burkim) to support its argument. (OPC TR 309-311) In the Burkim rate case, the Commission found
that it was appropriate to use a projected test year when the Utility was
growing at an exceptionally high rate per year. (TR 309) The Commission also
found that it was appropriate to use a projected test year in the Martin Downs
rate case based on the rapid growth that Martin Downs was experiencing. (TR
310) OPC concluded that an adjusted 2016 test year should be applied by the
Commission in setting Phase II rates in this proceeding. (TR 311) As such,
witness Merchant testified that an alternative 2016 projected balance with
proper adjustments can be utilized. (TR 309)
KWRU witness Swain used OPC’s premise to alternatively
conclude that if the expected growth is not found to be “exceptionally high” or
“significant,” then the conclusion must be that a historical test year is
correct. (TR 761) To this point, witness Swain testified that in its last rate
case, KWRU presented a growth calculation that exceeded the growth calculation
presented in this docket. (KWRU TR 762) Witness Swain additionally asserted
that the test year used by the Utility in that case was the historic test year
and the Commission and OPC accepted the historic test year without comment. (TR
762) Witness Swain concluded that there is no basis for the use of a projected
test year in this instance seeing that the growth rate in this case is less
than the previous case. (KWRU BR 5)
Witness Swain testified that the Burkim and Martin Downs
rate cases cited by OPC witness Merchant are inapplicable to the circumstances
of this case. (TR 761-762) Witness Swain asserted that the Burkim rate case was
a staff-assisted rate case, and is not subject to the rigor of a contested rate
case. (TR 761) KWRU witness Swain conveyed that the Commission has a mechanism
in place to address overearnings, the concern in the Burkim rate case, while
there is no mechanism for KWRU to address potential underearning other than a
rate increase application. (TR 761-762)
As explained by witness Swain, the Commission based its
use of a projected test year on the fact that the utility was anticipated to
“continue to experience a rapid growth of demand for its services.” (TR 762)
KWRU asserted that a growth rate over 10 percent, which is higher than what is
projected in this case, was not found to warrant the use of a projected test
year in KWRU’s last rate case. (TR 762) Regarding the Martin Downs Case, the
Utility concluded that the precedence of that case is stale given its age and
the fact that there has been a more recent proceeding involving KWRU in which a
growth rate higher than projected in this docket was not found to warrant the
use of a projected test year. (TR 762)
Rule 25-30.430(1), F.A.C. states in part “a utility shall
submit to the Commission a written request for approval of a test year . . .
[w]ithin 30 days of the Chairman’s approval or disapproval of a test year, upon
request of any interested person the full Commission may review the Chairman’s
test year decision.” KWRU noted that none of the intervenors or interested
persons in this docket requested that the full Commission review the
appropriateness of the Chairman’s decision within the 30 days immediately
following the Chairman’s approval. (KWRU BR 4)
KWRU argued that Rule 25-30.430, F.A.C. does not allow anyone other than
the Utility to propose a projected test year. (KWRU BR 4) KWRU further argued
that because a challenge to the Chairman’s decision was not made within 30
days, OPC’s introduction of a projected test year within its testimony was untimely
and that“[t]he Commission is thus without authority to review the Chairman’s
test year decision under the [r]ule at this juncture.” (KWRU BR 4) Staff
disagrees with KWRU’s interpretation of the rule and the authority of the
Commission to review the appropriateness of the test year approved by the
Chairman.
It has been established in previous Commission orders that
the Chairman’s approval of a utility’s test year is an interim decision only,
subject to the Commission’s final decision approving or disapproving the use of
a particular test year during the ratemaking proceeding.
The Commission stated in Order No. PSC-92-0197-FOF-WS, that any party to a proceeding has “the
opportunity to explore its allegations and the appropriateness of the test
years through discovery, testimony, and cross-examination during the hearing
process.” Parties also have the ability
to propose alternative test years to the one initially approved by the
Chairman. The Commission has stated that
a party to a proceeding, being afforded all rights under Commission rules, has
the ability to raise all relevant issues and present all relevant information
through the hearing process; “[t]his includes the right to raise the issue of
what test year is appropriate.” “We find that parties whose substantial
interests may be affected by the selection of a particular test year will have
ample opportunity to challenge the appropriateness of the test year at the rate
case hearing before that final decision is made . . .”
The Utility’s 2014 test year in this case would have ended
more than two years prior to the conclusion of the case. Witness Swain
testified that such a delay can be an advantage as updates can be made as
actual information is obtained. (TR 213) On January 1, 2016, the Utility
implemented changes in operations to meet AWT standards, which is the basis of
its pro forma O&M expense request. (TR 308) The record evidence includes
actual data for the 2014 test year, 2015, and for the first 8 months of 2016.
Using the actual data for 2015 and 2016, staff believes reasonable adjustments
to the 2014 test year can be made to establish an updated test year that is
representative of the Utility’s current operations. Staff also believes that
adjustments beyond those made by KWRU are necessary to be consistent in the use
of known information. As an example, to make O&M adjustments based on
actual data without giving consideration to the actual amount of wastewater
treated during that same time period would be inconsistent.
In summary, both KWRU
and OPC support making adjustments to the 2014 test year. The point of
deviation lies in what information should be updated. Staff concludes that
making consistent adjustments to the 2014 test year, based on known and
measurable information, is the most appropriate approach to determining just
and fair rates. Staff’s recommended approach is similar, though not identical,
to the approach taken by OPC. The specific adjustments made by OPC and KWRU, as
well as staff’s recommended adjustments, are discussed in the relevant issues
that follow.
A test year is used by ratemaking bodies to measure the
adequacy and reasonableness of a utility's rates.
The primary ratemaking goal is to establish fair and reasonable rates for the
ratepayer that provide the utility with an opportunity to earn a fair rate of
return.
Ratemaking is prospective in nature, and it is the Commission’s practice to recognize
known and measurable changes.
Thus, if necessary, adjustments are made for known and measurable changes to
test year amounts. Therefore, staff recommends that adjusting the Utility’s 2014
test year based on known and measurable information is a reasonable approach to
establish a revenue requirement and rates that are representative of KWRU’s
current operations.
As noted above, toth KWRU and OPC support making
adjustments to the 2014 test year. The point of deviation lies in what
information should be updated. Staff agrees with County witness Deason, if
rates are not based upon the most appropriate test year information, a utility
could quickly experience either underearnings or overearnings soon after the
new rates are implemented. (TR 529) Although underearnings or overearnings may
occur after final rates are set, staff believes that making consistent
adjustments, based on known and measurable information, to the 2014 test year
is the most appropriate approach to determining just and fair rates. Staff’s
recommended approach is similar, though not identical, to the approach
recommended by OPC. The specific adjustments made by OPC and KWRU, as well as
additional adjustments supported by the record, are discussed in the relevant
issues that follow.
CONCLUSION
Based on the above, staff believes that adjusting the
Utility’s 2014 test year based on known and measurable information is reasonable
and appropriate to determine a revenue requirement and rates that are
representative of KWRU’s current operations.
Issue 4:
Is the quality of service provided by KWRU
satisfactory?
Recommendation:
Yes. Staff recommends that the quality of KWRU’s
product and the condition of the wastewater treatment facilities is
satisfactory. It appears that the Utility has attempted to address customers’
concerns. Therefore, staff recommends that the overall quality of service for
the KWRU wastewater system in Monroe County is satisfactory. (Hill)
Position of the Parties
KWRU:
Yes.
OPC:
No. The Commission should find the quality of
service to be marginal if not unsatisfactory since KWRU ceased treating its
wastewater to AWT standards, from 2010 to 2015. As such, KWRU pocketed the AWT
money and the customers did not get what they paid for.
County:
No. KWRU’s quality of service is not satisfactory
because KWRU failed to treat wastewater to AWT standards for approximately five
years (from 2010-15) even though KWRU asked for and received pro forma plant
and O&M expenses to treat to AWT standards in its 2007 rate case and even
though KWRU was contractually obligated to the County to do so.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
KWRU raised five arguments to support that its quality of
service should be satisfactory: 1) that no quality of service complaints were
presented during the service hearing in the instant case, 2) that the odor
complaint was without basis per the results of a DEP inspection, 3) that it has
been prompt and proper in responding to DEP compliance issues, 4) that KWRU was
relieved of the requirement to continue treating to AWT standards after the
previous rate case, and 5) that it did not collect undue amounts of revenue
designated for AWT treatment to the detriment of customers. Thus, KWRU
recommended the Commission find the quality of service it provides to be
satisfactory.
KWRU presented arguments (1) and (3) as uncontested. KWRU
supported arguments (2) and (5) with the testimony of witness Johnson. (KWRU BR
7)
KWRU supported argument (4) by stating that “[t]here is no
DEP or regulation [sic] or State Statute
which required KWRU to treat to AWT standards until January 1, 2016.” (KWRU BR
8) KWRU states that its agreement with Monroe County did not require KWRU to
operate at AWT, only to “convert” its plant to AWT. In addition, they argued
that “[i]f Monroe County had a real issue, it would have and should have raised
the alleged breach in a timely fashion, such as during the complaint filed by
KWRU against Monroe County for failure to pay funds associated with the AWT
conversion. (KWRU BR 8)
KWRU supported argument (5) with testimony of witness
Johnson that KWRU “did not operate at AWT... to, at least in part, save
ratepayers the cost of treatment not required by law.” (KWRU BR 8) KWRU argued
that its rates since 2010 did not include “the requisite costs to operate at
AWT,” stating in part that “[c]hemical expenses... additional employee expenses
or power, and sludge-hauling expenses were reduced to historical levels” and
that “[t]he only chemicals, sludge hauling, testing, and employment awarded was
related to non-AWT current operations.” (KWRU BR 8) KWRU further stated that
“any argument that the utility “pocketed money” has no support in the record”
and that “KWRU has not had an operating profit to date, meaning it underearned and
most likely should have requested a rate case sooner.” (KWRU BR 8)
OPC
OPC raised three arguments that the quality of service
should be marginal if not unsatisfactory: (1) its belief that customers have
been paying for AWT treatment since 2009 yet not benefitting from such payment
since 2010, (2) that KWRU ceased treatment to AWT standards in order to enhance
its bottom line, and (3) that KWRU is in violation of an agreement with Monroe
County to treat to AWT standards. (OPC BR 7)
OPC supported argument (1) by citing the order in the
previous rate case and OPC’s cross examination of witness Johnson, during which
time the witness answered to the affirmative the question “Do you agree that
the Commission enacted an ordinance, No. 595-2002, that made that authorization
for the company to recover its costs?” (TR 118)
OPC supported argument (2) by citing witness Johnson’s
testimony that “The money that wasn’t spent on chemicals would remain within
the utility.” (TR 125) OPC also stated that “[i]t is irrelevant that... KWRU
[was] given an extension to January 1, 2016 to treat to AWT when the Commission
expressly authorized the necessary plant and O&M expenses in rates for KWRU
to treat to AWT.” (OPC BR 7)
OPC supported argument (3) by citing OPC’s cross examination
of witness Johnson, during which time the witness was asked to read from the
prior rate case order, which states “... Monroe County secured an agreement
from the utility to convert its wastewater treatment to AWT by January 1, 2007,
providing that the utility is allowed to recapture costs of its conversion to
AWT and the increased operating costs by a resolution of the Monroe County
Commission.” (TR 117) OPC also supported this argument by citing the prior rate
case order, stating that it “expressly authorized the necessary plant and
O&M expenses in rates for KWRU to treat to AWT.” (OPC BR 7)
OPC also presented a summary of customer testimony
presented at the service hearing. OPC presented comments made by Monroe County
Commissioner Danny Kolhage, County Mayor Heather Carruthers, Judge Richard
Payne, and seven customers that the rate increase would be unaffordable for
Stock Island residents. Three additional customer comments described two
billing method concerns and one concern that “the proposed reuse rate was so
low especially since the Key West Golf Course (an affiliate) is one of the
largest reuse customers. (OPC BR 9)
County
Monroe County raised two arguments that the quality of
service should be marginal if not unsatisfactory: (1) that KWRU’s failure to
treat wastewater to AWT standards adversely impacted the quality of the product
and the satisfaction of the customers, and (2) that not treating to AWT
standards was in violation of the 2002 CRI contract with Monroe County.
Monroe County supported argument (1) by stating that “KWRU
failed to treat wastewater to AWT standards for approximately five years. This
failure to meet AWT standards adversely impacted both the quality of KWRU’s
product and the satisfaction of its customers with that product.” (County BR
13)
Monroe County supported argument (2) by citing witness
Wilson’s direct testimony, which states “... the 2002 CRI Contract also
provides that KWRU agreed to convert its system to AWT standards by January 1,
2007 if requested, and if it did so, the cost of conversion would be paid by
allowing KWRU to keep $600 out of each CRF that it collected.” (County BR 13)
Harbor Shores
In its
brief, Harbor Shores agreed with OPC. (Harbor Shores BR 2)
ANALYSIS
Pursuant to Rule 25-30.433(1), F.A.C., in wastewater rate
cases, the Commission shall determine the overall quality of service provided
by a utility. This is derived from an evaluation of three separate components
of the utility operations. These components are the quality of the utility’s
product, the operational conditions of the utility’s plant and facilities, and
the utility’s attempt to address customer satisfaction. In the instant case,
KWRU has argued that customer comments in the record of this proceeding suggest
that the Utility’s attempts to address customer satisfaction are satisfactory.
OPC and Monroe County have argued that the quality of KWRU’s product has been
marginal or unsatisfactory because KWRU has not treated to AWT standards. No
parties presented arguments that the operational conditions of the Utility’s
plant and facilities were less than satisfactory.
Quality of Utility’s Product
In a previous decision the Commission has recognized that
the primary concern of a wastewater utility is the quality of the effluent
discharged from the plant.
Staff reviewed DEP inspection reports and KWRU’s effluent disposal was rated in
compliance with DEP standards. (EXH 7; EXH 10) Additionally, the DEP determined
that residuals were being disposed of in accordance with the facility’s permit.
(EXH 7, EXH 10)
Staff also requested complaints filed with the Utility and
DEP during the four year period prior to the test year, as well as the test
year. One complaint, filed with DEP and the Utility, regarding the quality of
KWRU’s product was identified. (EXH 109) Witness Johnson testified that the
complaint was a result of a petition by Safe Harbor Marina. Witness Johnson
asserted that the DEP determined that no odors were emanating outside of the
Utility boundaries. (TR 706-707)
In reviewing the quality of KWRU’s product, staff also
considered KWRU’s obligations under the 2002 CRI contract with Monroe County as
well as DEP regulations. The 2002 CRI contract states that “... the 2002 CRI
Contract also provides that KWRU agreed to convert its system to AWT standards
by January 1, 2007.” (TR 452) No evidence in the record suggests that the
Utility failed to convert its system to AWT operation by January 1, 2007.
Witness Johnson testified that the Utility stopped treating to AWT standards
during the 2009 timeframe to save money. (TR 123-124) Witness Johnson
additionally testified that he did not believe that the Utility made a profit
during the 2009 through 2013 timeframe. (TR 175) If the Utility continued
operation to AWT standards, KWRU may have sought a rate increase prior to the
current rate case. As such, staff believes that the Utility’s decision to stop
treating to AWT standards was reasonable. Based on the discussion above, staff
believes that the quality of KWRU’s product is satisfactory.
Condition of Facilities
KWRU’s service area is located in Monroe County. The
wastewater treatment plant (WWTP) uses extended aeration to treat wastewater.
Effluent is passed through a sand filter and disinfection is provided by
chlorine gas. Effluent is disposed of through reuse service or shallow
injection wells when reuse demand is not sufficient for reuse. (EXH 7)
KWRU provided DEP inspection reports dated September 2014
and March 2016. KWRU’s WWTP facility was determined to be in compliance with
DEP rules and regulations in both reports. (EXH 7; EXH 10) Additionally, based
on Utility responses to staff discovery (dated October 2016) the Utility has no
outstanding citations, violations, or consent orders on file with the DEP or
the Monroe County Health Department. (EXH 51) Therefore, the condition of
KWRU’s facilities should be considered satisfactory.
The Utility’s Attempt to Address Customer
Satisfaction
A service hearing was held in Key West, Florida, on November
7, 2016. Fourteen customers provided testimony at the service hearing. The
subject of the testimony provided by customers included disconnection costs,
changes to contract terms, and opposition to the rate increase. Customer testimony
in the record of this proceeding does not indicate a failure to address customer
satisfaction. (S-TR 14-55)
In addition to receiving customer testimony at the service
hearing, staff requested complaints filed with the Utility as well as
complaints filed with DEP for the period January 1, 2010 through October 1,
2016. (EXH 109) One complaint, regarding odor, is discussed under the Quality
of Utility’s Product section. Based on the limited number of complaints in the
record staff believes that the Utility’s attempts to address customer
satisfaction should be considered satisfactory.
CONCLUSION
Staff recommends that the quality of KWRU’s product and
the condition of the wastewater treatment facilities is satisfactory. It
appears that the Utility has attempted to address customers’ concerns.
Therefore, staff recommends that the overall quality of service for the KWRU
wastewater system in Monroe County is satisfactory.
Issue 5:
What adjustments, if any, should be made to account
for the audit adjustments to rate base in each of Staff’s Audit Findings 1
through 7? (Partially stipulated)
Recommendation:
The Utility’s updated filing reflects the audit adjustments to
rate base included in staff’s Audit Findings 1
through 7. Therefore, no further adjustments are necessary. (Norris)
Position of the Parties
KWRU:
Stipulation as to all but Audit Finding 6. Agree
with Audit Finding 6 adjustments as contained in PAA Order.
OPC:
No allowance should be made for deferred
accounting fees as these costs should be disallowed. Also, any component of the
deferred litigation fees should be added to CWIP in Phase I rates and should be
capitalized to plant in service for Phase II.
County:
Agree with OPC and with the adjustments addressed in
the stipulations on rate base items agreed to by the Parties.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, KWRU cited the stipulation of Audit Findings 1-5 and 7. (KWRU BR 9) KWRU
also stated that the adjustments, including Audit Finding 6, from the PAA order
were appropriate. (KWRU BR 9) KWRU maintained that the deferred accounting
expense associated with restating its 2007-2012 Annual Reports was properly
incurred. (KWRU BR 9) KWRU witness Swain testified that the restated annual
reports were not filed because the Utility was waiting the pending outcome of
the current rate case in order to include any potential corrections that
resulted. (TR 772) Witness Swain also testified that the appropriate accounting
treatment of the litigation fees associated with the legal challenge to the
Utility’s permits is to amortize the expense, not capitalize it. (TR 771)
OPC
In its brief, OPC cited the stipulation of Audit Findings
1-5 and 7. (OPC BR 10) Audit Finding 6 was addressed by OPC witness Merchant’s
testimony which reflected
adjustments to disallow all deferred accounting expense associated with
restating the Utility’s 2007-2012 Annual Reports and to capitalize deferred
litigation fees associated with the legal challenge to KWRU’s DEP permits. (TR
340-342; TR 338-339) Witness Merchant also testified that working
capital should not include a corresponding allowance for either deferred accounting expense. (TR 340-342; TR
338-339)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC. (County BR 14; Harbor Shores BR 2).
ANALYSIS
Approved Stipulations 1, 2, 3, 4, 5, and 8
incorporate staff Audit Findings 1, 2, 3, 4, 5, and 7. These stipulated adjustments
to rate base are set forth in the following table.
Table 5-1
Stipulated Adjustments to Rate Base
|
Stip.
|
Plant
|
Land
|
Accum. Depr.
|
CIAC
|
Accum. Amort. of CIAC
|
CWIP
|
Working Capital
|
Total
|
|
1
|
($817,240)
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
($817,240)
|
|
2
|
0
|
0
|
0
|
0
|
0
|
303,099
|
0
|
303,099
|
|
3
|
0
|
(923)
|
0
|
0
|
0
|
0
|
738
|
(185)
|
|
4
|
0
|
0
|
0
|
297,120
|
(81,153)
|
0
|
0
|
215,967
|
|
5
|
0
|
0
|
(2,040)
|
0
|
0
|
0
|
0
|
(2,040)
|
|
8
|
0
|
0
|
0
|
0
|
0
|
0
|
26,645
|
26,645
|
|
Total
|
($817,240)
|
($923)
|
($2,040)
|
$297,120
|
($81,153)
|
$303,099
|
$27,383
|
($273,754)
|
KWRU witness Swain’s testimony reflected these
stipulations as adjustments made to the Utility’s updated filing, along with an
adjustment to reflect staff Audit Finding 6. (EXH 17, P 3) As testified by
staff witness Piedra, Audit Finding 6 was a corresponding adjustment to
miscellaneous deferred debits that reflected adjustments to the total costs
associated with the restatement of KWRU’s 2007-2012 Annual Reports and the Last
Stand permit challenge.
(TR 554-555) The reasonableness of both expenses is discussed in Issues
27 and 28, respectively, and any corresponding adjustments to miscellaneous
deferred debits are addressed in Issue 12. Therefore, staff recommends no
further rate base adjustments to account for staff Audit Findings 1 through 7.
CONCLUSION
The Utility’s updated filing reflects the
audit adjustments to rate base included in staff Audit
Findings 1 through 7. Therefore, no further adjustments are necessary.
Issue 6:
What is the appropriate amount of plant in service
to be used in setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate test year balance of plant in service is $16,011,903. Accordingly, plant in service should be decreased by $381,738.
A. As
addressed in Issue 2, Phase I is not applicable.
B. As addressed in Issue 2, Phase II is not applicable. (Graves,
Norris)
Position of the Parties
KWRU:
$16,592,505.
A. For Phase I, if
applicable
OPC:
Phase I Plant should be $11,108,464. This
includes adjustments to reflect stipulated reductions of $817,240 and to remove
pro forma plant of $3,574,468, for a total decrease of $4,391,708. Neither pro
forma growth-related plant expansion nor the vacuum tank replacement are not
(sic) appropriate for Phase I, since both additions will provide service to
future customers more than two years beyond the 2014 historical test year.
County:
Agree with OPC that Phase I plant in service should
be $11,108,464.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC: Phase II plant should be $15,182,830. In addition
to stipulated adjustments, 2014 plant should be increased by $88,027 to reflect
the year-end balances, the treatment plant expansion should be increased by
$1,202,968 to reflect the $4.3 million contracted cost, $477,436 should be
added to capitalize the construction permit litigation fees, and the vacuum
tank addition of $474,552 (less retirement of $355,914) should be added.
County: Agree with OPC that Phase
II plant in service should be $15,182,830.
Harbor Shores: Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU argued that it made adjustments to plant in service
as expansion and AWT costs were fully realized. (KWRU BR 9) The Utility further
asserted that no party testified that its expenditures are either unreasonable
or do not qualify for treatment as plant in service. (KWRU BR 9)
OPC
OPC argued that plant for Phase I rates should be
$11,108,464, which was the amount approved in the PAA Order, and includes
adjustments made by the Commission to reflect agreed-upon audit reductions of
$817,240 from Audit Finding 1 and removes the Utility’s requested pro forma
plant of $3,574,468, for a total decrease to plant of $4,391,708. (OPC BR
11) OPC asserted that it is inappropriate to include any pro forma plant in
Phase I rates that will provide service to future customers more than two years
beyond the historical test year. (OPC BR 11)
OPC argued that the appropriate amount of plant in service
for Phase II rates is $15,182,830. (OPC BR 11) OPC included adjustments to
reflect the stipulated reductions of $817,240 from Audit Finding 1. (OPC BR 11)
OPC asserted that the average balance of adjusted 2014 plant included in rate
base should be increased by $88,027 to reflect the year-end balance approved by
the Commission in its PAA Order to bring forward the plant to a pro forma 2016
test year. (OPC BR 11) OPC witness Woodcock testified that the cost of the
wastewater treatment plant expansion should reflect the contracted cost of $4.3
million, which is an increase of $1,202,968 to pro forma plant. (OPC BR 11)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC for Phase I and II. (County BR 14; Harbor Shores BR 2)
ANALYSIS
In the PAA Order, the Commission approved a Phase I plant
in service amount of $11,108,456. The Commission-approved plant in service
included the agreed upon audit adjustments for plant and land which are discussed
in Issue 5. The Commission-approved plant in service amount did not include pro
forma plant.
Based on staff’s review of OPC witness Merchant’s
testimony and exhibits, the record indicates an error was made in the
calculation of OPC’s recommended Phase II plant in service amount. Witness
Merchant’s recommended adjustments to Phase II rate base, were based on the
Utility’s original PAA request. However, in her calculation of rate base, the
adjustments to plant and land were applied to the Phase II balances approved by
the Commission in the PAA Order. (EXH 25, P 2) Therefore, the agreed upon audit
adjustments to plant and land were counted twice and the pro forma plant
expansion was understated. Correcting these errors increases OPC’s recommended
plant in service amount by $909,735 and land by $923, with a net increase of
$910,658 to OPC’s Phase II rate base.
As a point
of reference, Table 6-1 below summarizes the plant in service recommended by
the Utility, OPC, and staff. Staff notes that the recommended
amount for OPC reflects the amount with the identified errors corrected.
Table 6-1
Summary of Recommended Plant
in Service
|
Description
|
KWRU
|
OPC
|
Staff
|
|
PAA Order Phase I
|
$11,108,464
|
$11,108,464
|
$11,108,464
|
|
Pro Forma Plant Adjustment
|
5,067,525
|
4,300,000
|
4,413,680
|
|
Vacuum Tank Replacement
|
431,801
|
474,552
|
407,771
|
|
Vacuum Tank Retirement
|
(390,285)
|
(355,914)
|
(390,285)
|
|
Increase Year End Balance
|
0
|
88,027
|
0
|
|
Legal Fees
|
0
|
477,436
|
0
|
|
Known and Measurable Changes
|
0
|
0
|
97,273
|
|
Total Plant in
Service (less Land)
|
$16,217,505
|
$16,092,565
|
$15,636,903
|
|
Land
|
375,000
|
375,000
|
375,000
|
|
Total Plant In
Service
|
$16,592,505
|
$16,467,565
|
$16,011,903
|
Sources (EXH 79, P 3; EXH 25, P 2)
As illustrated in Table 6-1 above, both KWRU and OPC are
in agreement with the amount of land that should be included in plant in
service amount. (TR 318; EXH 24, P 1; EXH 25, P 1) The land and land rights
amount of $375,000 was included in the PAA Order and was not contested or
refuted by any party in this proceeding. Staff recommends that $375,000 for
land and land rights should be included in plant in service.
Both KWRU and OPC made adjustments for an expansion of the
Utility’s wastewater treatment plant as well as an adjustment for a new vacuum
tank. (EXH 17, P 4; EXH 25, P 2) The prudence of pursuing these projects was protested
but not contested in this proceeding. Therefore, staff’s analysis addresses the
costs for each project which are at contention in this proceeding.
With respect to the pro forma plant expansion, KWRU
witness Swain included $4.3 million for the expansion project. (EXH 17, P 4)
The Utility’s estimate of $4.3 million was supported by a signed construction
contract with Wharton Smith. (EXH 8) OPC witness Woodcock testified that the
cost of $4.3 million does not appear to be unreasonable given the location
(Florida Keys) of the project and the crowded conditions at the WWTP site. (TR
280-281) Witness Woodcock further testified that it appears that KWRU was
prudent in receiving three bids for the project prior to its award. (TR 281)
KWRU witness Johnson, in his rebuttal testimony, testified
that the total estimated cost for the expansion project increased from $4.3
million to approximately $5.2 million. (TR 603) Information provided by KWRU
witness Johnson supporting the increase only contained costs with minimal
explanation of why the additional expenditures were necessary. (TR 648)
Furthermore, KWRU witness Johnson acknowledged, during cross examination, that
some of the additional costs presented in his rebuttal testimony were also
included in the Wharton Smith contract. (TR 648) Witness Johnson additionally
acknowledged that costs associated with the vacuum tank replacement, were
included in the additional costs. (TR 641) Given the lack of supporting
evidence as well as the uncertainties highlighted during the hearing, it is
staff’s position that the updated costs should not be included in plant in
service. (TR 648)
Staff does believe an exception for additional engineering
costs should be made. Unlike the other additional costs presented by witness
Johnson, the estimates for additional engineering costs were supported by KWRU witness
Castle who is the engineer of record for the pro forma plant expansion. (TR
577) Witness Castle provided estimates for hours and tasks that would be
performed for the time period October 2016 through March 2017. (EXH 73)
Therefore, staff recommends that the $113,680 for additional engineering be
included in plant in service.
Regarding the vacuum tank, the Utility provided direct
testimony that supported an estimated cost of $610,177 for the vacuum tank
replacement project. (EXH 4, P 3) OPC witness Merchant recommended $474,552 for
the vacuum tank, based on the testimony of OPC witness Woodcock. (TR 316-317) In
his rebuttal testimony, KWRU witness Johnson provided an updated estimate for
the total cost of vacuum tank replacement
project. The updated cost of $407,771 was supported by a signed contract with
Wharton Smith who is also performing the pro forma plant expansion. (TR
603; EXH 75) However, the updated revenue requirement calculated by KWRU
witness Swain reflects $431,801, as she double counted an invoice for
additional engineering services. Based on the
testimony of KWRU and OPC, as well as the supporting documentation provided by
the Utility, staff believes that a pro forma adjustment of $202,406 should be made to decrease plant in service to reflect
the updated cost of the vacuum tank. ($610,177 - $407,771)
Related to the vacuum tank replacement project, OPC witness
Merchant testified that a retirement adjustment is necessary as the existing
vacuum tank is being retired and replaced and will not remain in service.
Witness Merchant based her retirement entry on 75 percent ($355,914) of the
plant addition cost which is a common method of determining the amount to
retire for water and wastewater utilities in Florida. (TR 316) The direct
testimony and exhibits of KWRU did not include a retirement amount associated
with the vacuum tank replacement. In her rebuttal testimony, KWRU witness Swain
testified that she agreed with witness Merchant regarding the need to make an
adjustment for the retirement of the original vacuum tank. (TR 766) Witness
Swain’s adjustment for the retirement of the original vacuum tank was based on
the original cost ($390,285) of the vacuum tank. (TR 767) Staff agrees with the
parties that a retirement adjustment for the vacuum tank should be made. Staff
recommends that the amount should be based on the original cost of the vacuum
tank. Thus, pro forma plant should be reduced by $390,285 to reflect the
retirement of the vacuum tank.
OPC’s recommended Phase II plant in service amount included
two additional adjustments not made by KWRU. The first was the inclusion of
$477,436, for legal fees. As discussed in Issue 28, staff believes that legal
fees should not be included in plant in service. The second additional
adjustment was an increase of $88,027. Witness Merchant testified that the
average balance of adjusted 2014 plant included in rate base should be brought
forward to the year-end balance approved by the Commission in its PAA order. (TR
315)
As discussed in Issue 3, staff believes that the 2014 test
year should be updated for known and measurable changes. Therefore, to remain
consistent with this methodology, the test year plant should reflect an average
balance with an adjustment to include routine plant additions as pro forma plant.
Staff reviewed plant additions for 2015 and 2016 (through September) that were
provided by the Utility in response to staff discovery. The Utility also
provided its general ledger for the same time period. (EXH 4) Based on the
information provided by KWRU, staff believes that plant in service should be
increased by $97,273 to reflect known plant additions in 2015 and 2016. (EXH 4)
CONCLUSION
Based on the discussion above, the appropriate test year
balance of plant in service is $15,636,903, not including land. Accordingly,
plant should be decreased by $381,738. ($113,680 - $202,406 -$390,285 +
$97,273)
Issue 7:
What is the appropriate amount of accumulated
depreciation to be used in setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate balance of accumulated depreciation
to be used in setting rates is $6,620,259. Accordingly, accumulated
depreciation should be increased by $548,574.
A. As
addressed in Issue 2, Phase I, is not applicable.
B. As addressed in Issue 2, Phase II is not applicable. (Norris)
Position of the Parties
KWRU:
$5,738,008
A.
For
Phase I, if applicable
OPC:
Phase I accumulated depreciation (AD) should be
$5,830,802. In addition to stipulated adjustments, the Utility’s plant
expansion accumulated depreciation adjustment of $196,281 should be removed.
The vacuum tank replacement shouldn’t be allowed in Phase I as it is not in
service. Further, the Utility’s $4,384 adjustment to annualize 2014
depreciation violates the test year matching concept and the statutory
requirement of not including depreciation expense on contributed plant; thus,
these should be disallowed.
County:
Agree with OPC that accumulated depreciation (“AD”)
for Phase I should be $5,830,802.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II accumulated depreciation (“AD”) should
be $6,876,849. In addition to stipulated adjustments, AD should be updated to
2016 levels, a more representative and closer period when the plant expansion
will be in-service. Thus, a 2014 year-end adjustment of $183,207, and increases
for the 2015 and 2016 additions of $924,677 to AD are appropriate. Lastly, AD
should be increased by $67,026 and $26,385, respectively, for the plant
expansion and vacuum tank addition (including the retirement).
County:
Agree with OPC that Phase II AD should be
$6,876,849.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
Based on a single phase revenue requirement, KWRU’s
position on Issue 2, the proper amount of accumulated depreciation is
$5,738,008. (KWRU BR 10) This amount is reflective of the updated cost of the
pro forma plant expansion. (EXH 79, P 1; KWRU BR 10) The Utility also noted in
its brief that all book adjustments were made as ordered in the previous rate
case
and in the time period required. (TR 768; KWRU BR 10)
OPC
In its brief, OPC asserted that for Phase I, accumulated
depreciation should be $5,830,802 reflecting a decrease of $198,625. (TR 321,
318-319; EXH 24; OPC BR 13) OPC stated that in addition to stipulated
adjustments, and as testified to by witness Merchant, the Utility’s $196,281
pro forma adjustment to accumulated depreciation for the plant expansion should
be removed and the vacuum tank replacement should not be allowed in Phase I.
(TR 318-319; TR 314-315; OPC BR 14) OPC stated that the Utility’s $4,384
adjustment to annualize 2014 depreciation expense should be disallowed because
allowing the Utility to make a one-sided adjustment to accumulated depreciation
and depreciation expense ignores the impact of the annualization of
amortization of CIAC. (OPC BR 14) OPC witness Merchant also testified that this
adjustment effectively converted the average balance into a year end balance,
while CIAC, amortization of CIAC, and billing determinants are averaged. (TR
320)
For Phase II, OPC indicated that accumulated depreciation
should be $6,876,849. (EXH 25; OPC BR 14) OPC stated that in addition to
stipulated adjustments, witness Merchant asserted that accumulated depreciation
should be increased to be consistent with a 2016 test year. (TR 321-323; OPC BR
14) OPC indicated that a 2016 test year is a more representative period for the
Commission to consider in setting final rates, and is consistent with and
closer to the timeframe of when the treatment plant expansion will be placed
into service. (OPC BR 14) OPC specified that the “average to year-end”
adjustment to accumulated depreciation should be increased by $183,207, which
is net of the Company’s adjustment to reflect year-end accumulated depreciation
for the 2014 test year plant additions. (OPC BR 14) OPC stated that using the
2014 year-end depreciation expense of $462,339 as a starting point and to be
consistent with a 2016 test year, accumulated depreciation should be increased
by $924,677 to reflect the 2015 and 2016 additions. (TR 322-323; OPC BR 14) OPC
asserted that accumulated depreciation should also be increased by $67,026 and
$26,385, respectively, related to the pro forma cost of the wastewater
treatment plant expansion costs and the vacuum tank addition, along with the
corresponding retirements. (OPC BR 14) OPC stated that the total adjustments to
accumulated depreciation for Phase II rates should be an increase of $847,422.
(EXH 25; OPC BR 14)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II accumulated depreciation. (County BR 15; Harbor Shores BR
2)
ANALYSIS
In KWRU’s updated filing, the Utility reflected test year
accumulated depreciation of $5,828,761 along with adjustments to increase
accumulated depreciation by $4,383 for annualizing depreciation expense in the
test year and by $236,500 as a corresponding adjustment to its updated pro
forma plant request. (EXH 17, P 2-3) As discussed in Issue 5, KWRU also
included Stipulation 5 to decrease accumulated depreciation by $2,040. (EXH 17, P 3)
In regard to the Utility’s test year adjustment to
annualize depreciation expense, OPC witness Merchant testified that this
adjustment effectively converted the average balance into a year end balance,
while CIAC, amortization of CIAC, and billing determinants are averaged. (TR
320) As addressed in Issue 29, staff believes KWRU’s adjustment to annualize
depreciation expense is appropriate as it matches the full year of CIAC
amortization expense KWRU included in its filing. However, in regard to OPC’s
position that the adjustment to annualize depreciation expense converted the
average balance of accumulated depreciation into year-end, adding the $4,383
adjustment to the average balance of test year accumulated depreciation,
$5,828,761, results in $5,833,144, which is less than the year-end balance of
$6,055,721. (EXH 16, P 12; EXH 17, P 2) Therefore, the adjustment to annualize
depreciation does not reverse the averaging adjustment.
Additionally, the appropriate corresponding adjustments to
accumulated depreciation for the pro forma plant discussed in Issue 6 is a
decrease of $383,138 to reflect the pro forma plant projects, along with an
associated retirement and an increase of $9,525 to reflect the 2015 and 2016
routine plant additions.
Based on staff’s recommendation in Issue 3 to include
known and measurable changes to the 2014 test year, staff believes it is also
appropriate for the accumulated depreciation balance to reflect two additional
years of depreciation. Consistent with staff’s pro forma treatment of 2015 and
2016 routine plant, staff believes it is appropriate to reflect this additional
accumulated depreciation as a year-end amount. Based on staff’s recommended
test year plant balances, which do not include any pro forma plant, the
indicated increase is $922,187.
CONCLUSION
Based on staff’s recommended adjustments, the appropriate balance
of accumulated depreciation to be used in setting rates should be $6,620,259,
which reflects an increase of $548,574 (-$383,138 + $9,525 + $922,187).
Issue 8:
What is the appropriate amount of CIAC to be used in
determining the rate base that is used for setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amount of
contributions-in-aid-of-construction (CIAC) to be used in setting rates is
$10,021,909. Accordingly, CIAC should be increased by $372,032.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$9,649,877.
A. For Phase I, if
applicable
OPC:
CIAC for Phase I should be $9,649,877, which
includes the stipulated adjustments of $297,120 recommended by Audit Finding 4.
No further updates to CIAC to reflect the amount of CIAC collected after
December 31, 2014, should be made for Phase I.
County:
Agree with OPC and with the adjustments addressed in
the stipulations agreed to by the Parties.
Harbor Shores:
Agrees with OPC.
B. For Phase II, if
applicable
OPC:
Phase II CIAC should be $10,717,289. In addition
to stipulations, before future expansion plant is allowed, CIAC should be
updated to 2016 levels, a more representative period when the expansion will be
in-service. A 2014 year-end increase of $136,012 and actual increases for
2015-May 2016 additions of $489,469 are appropriate. Additional 2016 CIAC
projections of $441,931 should be added for collections expected in the first
year after the plant expansion is completed and in-service.
County:
The appropriate amount of CIAC for Phase II is
approximately $11,264,125, although the amount could be significantly greater. Accordingly,
the Commission should require KWRU to report to the Commission regarding any
significant additions to CIAC, such as may occur if the contemplated
acquisition of the FKAA wastewater accounts in Key Haven is consummated.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, the Utility asserted that CIAC should
reflect the historical test year and that additional CIAC from future periods
should not be included. (KWRU BR 10) KWRU witness Swain testified that pursuant
to Section 367.081(2)(a)1, F.S., the Commission shall not impute prospective
future CIAC against the utility’s investment in property used and useful in the
public service, and that the statute clearly states that the Commission should
not impute future CIAC, as proposed by OPC witness Merchant. (TR 770)
OPC
In its brief, OPC asserted that CIAC for Phase I should be
$9,649,877, including the stipulated decrease of $297,120 to CIAC from Audit
Finding 4. (EXH 24; OPC BR 15) OPC witness Merchant testified that no further
updates to CIAC to reflect the amount of CIAC collected after December 31,
2014, should be made for the Phase I revenue requirement. (TR 324-325)
OPC witness Merchant testified that the appropriate amount
of CIAC for Phase II rates is $10,717,289. (EXH 25) OPC stated that after
making the stipulated audit adjustment, it is appropriate to update the test
year CIAC to 2016 levels, which is more representative of the time period that
the treatment plant will be placed in-service. (TR 329; OPC BR 15) Witness
Merchant testified that, consistent with its adjustments to plant and
accumulated depreciation, the 2014 average balance of CIAC from the PAA Order
should be increased by $136,012 to reflect the year-end balance. (TR 327) OPC
asserted that before any future plant expansion or pro forma plant is allowed,
it is critical and correct to include the $489,469 in CIAC actually collected
by KWRU through May 2016. (TR 327; EXH 26; EXH 28; OPC BR 15) OPC stated that
KWRU also collected additional CIAC in August 2016. (TR 327; OPC BR 15) OPC
asserted that if the Commission sets new rates without taking into account the
CIAC collected in 2015 and 2016, as well as the expected customer growth for
2016 as calculated by witness Woodcock for his used and useful analysis, then
the rates established will immediately provide excess earnings to the Utility
at a substantial cost to the existing and future customers, and it will violate
the matching principle. (TR 329; OPC BR 15)
OPC acknowledged that KWRU witness Johnson testified that
CIAC may be subject to refund when Monroe County reopens its tax rolls and
allows customers who have already prepaid CIAC to receive refunds and to
finance CIAC payments over time on their property taxes. (TR 607; OPC BR 17)
However, OPC pointed out that KWRU witnesses Johnson and Swain both
acknowledged that no refund had actually occurred. (OPC BR 15)
County
In its brief, the County agreed with OPC on Phase I.
(County BR 16) In regards to Phase II CIAC, the County asserted that the plant
investment, which includes pro forma plant projects going into service in 2017,
should be reduced by additional CIAC collected in 2016 and 2017 from customers
in order for the Utility’s Phase II rates to reflect the Utility’s costs to
serve during the time rates are in effect. (County BR 16-17) The County stated
that OPC witness Merchant’s adjustment to include CIAC for 2016 does not
capture all necessary adjustments to include additional CIAC. (County BR 17)
Instead, the County proposed an adjustment to increase CIAC by escalating witness
Merchant’s 2016 CIAC value by 7.06 percent, the Utility’s own best estimate of
its growth. (County BR 17-18) This would produce a result of $11,473,930 for
Phase II CIAC. (County BR 21) The County noted that this was particularly
important based on KWRU’s own growth estimate of 7.06 percent per year in
additional gallons. (TR 657; EXH 106; County BR 17)
Additionally, the County discussed KWRU witness Johnson’s
admission that the Utility has made an offer to the Florida Keys Aqueduct
Authority (“FKAA”) to acquire approximately 400 existing wastewater customers
that FKAA presently serves in Key Haven and requested that the Commission
require KWRU to report on the status of any discussions or acquisitions
involving Key Haven customers in order to adjust rates as necessary. (TR 658; County
BR 20-21)
Harbor Shores
In its brief, Harbor Shores
agreed with OPC on Phase I and II. (Harbor Shores BR 2)
ANALYSIS
In KWRU’s updated filing, the Utility reflected test year
CIAC of $9,946,997. (EXH 17, P 1) As discussed in Issue 5, KWRU also included
Stipulation 4 to decrease CIAC by $297,120. (EXH 17, P 3) KWRU, OPC, and the
County all testified to two points of contention regarding adjustments to CIAC
that were both prospective, 1) potential refunds of CIAC payments and 2)
potential new CIAC collections.
KWRU witness Johnson argued that $556,628 of CIAC may be
subject to refund when Monroe County reopens its tax rolls and allows customers
who have already prepaid CIAC to receive refunds and to finance CIAC payments
over time on their property taxes. (TR 607) However, witness Johnson later
testified that no actual refunds have been made to date and that KWRU cannot
force a customer to be placed on the County’s tax roll. (TR 645) In addition,
witness Johnson testified on cross-examination that the Utility did in fact
collect these amounts, and that no refunds have been made to date. (TR 645)
KWRU witness Swain testified that because the test year is historical, it is
inappropriate to adjust CIAC to another period. However, she later testified
that if any future CIAC is added, CIAC payments that have been refunded should
reduce any addition. (TR 769-770) In addition, witness Swain acknowledged that
no CIAC had been refunded to date. (TR 753-754, 786-787, 800, 814, 826-827,
841-842)
County witness Wilson testified that if a customer has
already paid their system development fee to the Utility, the agreement between
the County and KWRU provides that the Utility would pay that money to the
County and if a customer has already paid their system development fee to the County,
no additional CIAC is required from the customer. (TR 483-484) Additionally,
OPC witness Merchant argued that additional CIAC, beyond the amounts actually
collected in 2015 and 2016, should be included in rate base in order to provide
a proper matching of plant investment and customer contribution. (TR 330-331)
County witnesses Santamaria and Wilson identified an estimated 351 new
connections which result in the additional collection of CIAC by the middle of
2017 to support the inclusion of prospective CIAC. (TR 66, 463, 470, 497,
502-506)
Staff believes that both of these prospective adjustments
to CIAC should not be included in rate base for the same reason. The conflicting
testimony provided by the parties is too speculative to support adjustments
because it is based on potential events that may or may not occur. In so
recommending, staff notes that "it is the [Commission's] prerogative to
evaluate the testimony of competing experts and accord whatever weight to the
conflicting opinions it deems necessary.”
KWRU witness Swain testified that OPC witness Merchant’s
adjustment to impute future CIAC violates Section 367.081(2)(a)1, F.S., which
states that, “...nor shall the commission impute prospective future
contributions-in-aid-of-construction against the utility’s investment in
property used and useful in the public service.” (TR 770) Staff believes that
the inclusion of collected, non-prepaid CIAC does not violate Section
367.091(2)(a)1., F.S. Documented CIAC collected by customers actively receiving
service in a future period beyond the test year is clearly demonstrated and not
prospective. However, staff agrees that potential CIAC should not be imputed.
Based on staff’s position on Issue 3 to include known and
measurable changes to the 2014 test year, staff believes it is appropriate to
include actual collections of CIAC from 2015 and 2016. Staff reviewed the
information about CIAC collected in 2015 and 2016 (through August) that was
provided by the Utility in response to staff discovery, along with the general
ledger for the same time period. (EXH 49, BSP 33; EXH 51, BSP 65; EXH 55, BSP
188; EXH 62, BSP 1615) Consistent with staff’s pro forma treatment of 2015 and
2016 routine plant additions, staff believes it is appropriate to reflect this
additional CIAC as a year-end amount. Accordingly, based on the information
provided by KWRU, staff recommends that CIAC be increased by $372,032 to
reflect CIAC collected in 2015 and 2016.
CONCLUSION
The appropriate amount of CIAC to be used in setting rates
is $10,021,909. Accordingly, CIAC should be increased by $372,032.
Issue 9:
What is the appropriate amount of accumulated
amortization of CIAC to be used for setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amount of accumulated amortization
of CIAC to be used in setting rates is $3,748,595. Accordingly, accumulated
amortization of CIAC should be increased by $733,654.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$3,014,941
A.
For Phase I, if applicable
OPC:
Phase I Accumulated Amortization of CIAC
(AA-CIAC) should be $3,014,941, with a stipulated decrease of $81,153. Since it
is not appropriate to update CIAC for collections after December 31, 2014, no
additional adjustments to Accumulated Amortization of CIAC are appropriate for
Phase I rates.
County:
Agree with OPC that Phase I Accumulated Amortization
of CIAC (“AA-CIAC”) should be $3,014,941.
Harbor Shores:
Agrees with OPC.
B. For Phase II, if
applicable
OPC:
Phase II AA-CIAC should be $3,945,225. After
making the stipulated adjustments, AA-CIAC should be increased by: 1) $204,033
to reflect the 2014 year-end balance; 2) $682,928 to add 2 years of
amortization for 2015-2016; 3) $27,903 for amortization of actual CIAC additions
for 2015- May 2016; and 4) $15,421 for amortization on projected 2016 CIAC
additions. For each adjustment, a 3.49% amortization rate is used per the PAA
Order.
County:
Agree with OPC that Phase II AA-CIAC should be
$3,945,225.
Harbor Shores:
Agrees with OPC
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU stated that the accumulated amortization of CIAC is
properly calculated based on the CIAC balance set forth in its position to
Issue 8. (KWRU BR 10)
OPC
OPC witness Merchant testified that Phase I accumulated
amortization of CIAC should be $3,014,941 after including stipulated
adjustments resulting in a decrease of $81,153 related to Audit Finding 4. (TR
325; EXH 24; OPC BR 17) OPC explained that since it is not appropriate to
update CIAC for collections after December 31, 2014, no additional adjustments
to accumulated amortization of CIAC are appropriate for Phase I. (TR 325-326)
In its brief, OPC asserted that Phase II accumulated
amortization of CIAC should be $3,945,225 based on its additional adjustments
using an amortization rate of 3.49 percent, pursuant to the PAA Order in this
docket. (EXH 25; OPC BR 18) OPC also explained that after making the stipulated
adjustments, consistent with updating the 2016 pro forma test year, accumulated
amortization of CIAC should be increased by $204,033 to reflect the 2014
year-end balance, two years of CIAC amortization expense of $682,928 for 2015
and 2016 should be added, and amortization of $15,421 on projected additions to
2016 CIAC for the pro forma test year should be added. (TR 331-332; OPC BR 18)
County and Harbor Shores
In their briefs, the County and
Harbor Shores agreed with OPC on Phase I and II. (County BR 22; Harbor Shores
BR 2)
ANALYSIS
In KWRU’s updated filing, the Utility reflected test year accumulated
amortization of CIAC in the amount of $3,096,094. (EXH 17, P 1) As discussed in
Issue 5, KWRU’s updated filing recognized Stipulation 4 which resulted in a
decrease to accumulated amortization of CIAC of $297,120. (EXH 17, P 3)
To remain consistent with staff’s recommended pro forma
adjustments in other issues to reflect known and measurable changes to the 2014
test year, it is appropriate for the balance of accumulated amortization of
CIAC to reflect an adjustment to include two additional years of CIAC
amortization expense. Consistent with staff’s pro forma treatment of 2015 and
2016 CIAC collections, it is appropriate to reflect this additional accumulated
amortization of CIAC as a year-end amount. Based on staff’s recommended test
year CIAC balances, an increase of $703,061 to reflect pro forma 2015 and 2016
accumulated amortization of CIAC is appropriate. Additionally, a corresponding
adjustment is necessary to increase accumulated amortization of CIAC by $30,593
to reflect the pro forma 2015 and 2016 CIAC recommended in Issue 8. In total,
staff’s recommended pro forma adjustment to CIAC is an increase of $733,654
($703,061 + $30,593).
CONCLUSION
Based on the above, the appropriate amount of accumulated
amortization of CIAC to be used in setting rates is $3,748,595. Accordingly,
accumulated amortization of CIAC should be increased by $733,654.
Issue 10:
What is the appropriate amount of construction work
in progress (CWIP) to be used for setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
Consistent with previously recommended plant adjustments,
the appropriate amount of CWIP to be used for setting rates is $0, as the plant
improvements are included in staff’s recommended plant in service total.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$0 since the plant expansion will be on-line when
the rates go into effect. If there is not a single increase then the amount is
subject to a Stipulation.
A.
For Phase I, if applicable
OPC:
Phase I CWIP should be $780,571. Stipulation 2
increases CWIP related to construction costs for the wastewater plant expansion
project of $158,151 in 2014, and $144,984 in 2015, for a total of $303,135. Also,
the 2015 balance of the Last Stand Legal Fees should be recorded in CWIP until
the new wastewater treatment plant is placed into service. CWIP should be
increased by $477,436, until the WWTP expansion is placed into service.
County:
Agree with OPC that CWIP for Phase I should be
$780,571.
Harbor Shores:
Agrees with OPC.
B. For Phase II, if
applicable
OPC:
The appropriate amount of Phase II CWIP should be
zero to reflect that the construction costs should be capitalized to plant.
County:
Agree with OPC that CWIP for Phase II should be 0 because
the construction costs should be capitalized to plant.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, the Utility asserted that there is no
justification for a two-phased calculation due to the substantial amount which
will have been expended for capital projects by the time rates become
effective. (KWRU BR 11) KWRU witness Johnson testified that the plant
improvements are expected to be substantially complete by early March 2017. (TR
602-603) This is reflected in KWRU witness Swain’s testimony that CWIP should
be removed in the Utility’s calculation of a single revenue requirement. (EXH
17, P 3) However, KWRU also stated in its brief that if a two-phased rate is
approved, the first phase should include the CWIP on the Utility’s books as of
December 31, 2016, the period the Phase 1 rates are in effect, in the amount of
$620,619. (EXH 28, P 50; KWRU BR 11)
OPC
OPC witness Merchant testified that Phase I CWIP should be
$780,571. (TR 332; EXH 24; OPC BR 18) In addition to the stipulated adjustments
from Audit Finding 2, OPC witness Merchant testified that the 2015 balance of
the Last Stand Legal Fees of $477,436 should be recorded in CWIP until the new
wastewater treatment plant is placed into service based on its recommended
accounting treatment of the fees. (TR 332; EXH 24, P 2)
In its brief, OPC stated that the appropriate amount of
CWIP for Phase II rates should be zero to reflect that the construction costs
have been capitalized into plant. (TR 332; EXH 25, P 1; OPC BR 19)
County and Harbor Shores
In their
briefs, the County and Harbor Shores agreed with OPC on Phase I and II. (County
BR 22; Harbor Shores BR 2)
ANALYSIS
As addressed in Issue 2, a two-phased rate increase is not
necessary in this instance. As such, consistent with staff’s previously
recommended plant adjustments, the appropriate amount of CWIP to be used for
setting rates is $0, as the plant improvements are included in staff’s
recommended plant in service total.
Issue 11:
What is the used and useful (U&U) percentage of
the Utility’s wastewater treatment plant after the treatment plant expansion is
placed into service?
Recommendation:
The wastewater treatment plant should be considered
71.5 percent used and useful based upon a projected demand of 0.606 million
gallons per day (MGD) in 2021. To reflect the appropriate U&U percentage,
staff recommends that the appropriate non-used and useful reduction to rate
base is $1,440,804. Corresponding adjustments should be made to decrease net
depreciation expense and property taxes by $117,138 and $10,526, respectively.
(Hill, Norris)
Position of the Parties
KWRU:
The wastewater treatment
plant is 100% used and useful after the treatment plant expansion is placed in
service.
OPC:
After projecting the increased gallons for 2016
consumption, the appropriate non-used and useful percentage is 25%. This should
be applied to the recommended balance of plant, accumulated depreciation,
depreciation expense and property tax expense as shown on Exhibit PWM-3,
Schedule 1-D. The appropriate reduction to rate base is $1,632,646 (plant in
service of $2,429,995 less accumulated depreciation of $797,349). Reductions to
depreciation expense ($130,954) and property taxes of ($16,177) are
appropriate.
County:
Agree with OPC that the appropriate non-used and
useful percentage should be 25%.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU raised three arguments to support its position that
its wastewater treatment plant is 100 percent used and useful: (1) the
expansion is for environmental compliance purposes and that DEP rules require a
planning period of at least 10 years, (2) that the additional plant will be
necessary in maintaining AWT treatment levels during maintenance which takes
portions of the existing plant offline, and (3) that growth beyond the strict
percentage calculated should be considered. (KWRU BR 11)
KWRU supported argument (1) by citing Section
367.081(2)(a)2.c., F.S., which states that “the commission shall approve rates
for service which allow a utility to recover from customers the full amount of
environmental compliance costs.” (KWRU BR 11) It then argued that Rule
62-600.405(1), F.A.C. requires sizing any permitted work for a planning period
of “ten years or longer.” (BR 12) KWRU further argues that the Recommended
Standards for Wastewater Facilities referenced by Rule 62-600.300, F.A.C.
requires such plans “shall be based on a 20 year planning period.” (TR 596) KWRU
witness Seidman also stated that, in the Last Stand litigation, DEP accepted
the hearing officer’s findings of fact that the KWRU system would be built out
between 2018 and 2020. (KWRU BR 12)
KWRU supported argument (2) with witness Castle’s direct
testimony that “treatment unit processes must have redundancy to allow
maintenance personnel to take plants off line [for maintenance].” (TR 603)
KWRU supported argument (3) by stating that Rule
25-30.432, F.A.C., “states that the extent to which the area served is
built-out should be considered, implying that projected growth based on factors
other than a strict percentage should reasonably be allowed,” and further
stating that “[v]acant, unconnected land within KWRU’s tariff area is projected
to be fully built-out between 2018 and 2020.” (KWRU BR 13)
KWRU stated that, should a 100 percent U&U not be
approved, then the average growth should properly be 7.06 percent, which would
yield a U&U percentage of 76.42 percent (KWRU BR 14).
OPC
OPC provided a U&U calculation sponsored by witness
Woodcock which relied on four arguments: (1) that growth should be measured
based upon 2014 and the previous 4 years, (2) that actual flows from 2015 and
2016 are not typical given the suppression in growth during that time and thus
should not be used, (3) that flows should be projected to 2016, which should be
used as the start of the growth period, and (4) a 5-year growth allowance from
2016 to 2021 is appropriate. (OPC BR 19)
OPC supported argument (3) by stating that it is
consistent with the methodology utilized by the Commission in the 2001 Burkim
Enterprises PAA Order. (OPC BR 19) OPC witness Woodcock stated that
“adjustments I have made in my analysis ... mitigate the unique conditions associated
... at this time. Therefore, projecting a growth rate above the 5 percent not
to exceed provision of Rule 25-30.431, F.A.C. is not warranted.” (TR 279)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC’s position on Phase I and II of this issue. (County BR 23; Harbor Shores BR
2)
ANALYSIS
KWRU witness
Seidman provided testimony and exhibits supporting a U&U of 100 percent.
(TR 192) Witness Seidman supported his argument by testifying that in the last
Stand litigation one of the principal issues was the needed capacity of the
plant expansion. Witness Seidman elaborated that based upon testimony presented
(in the last Stand litigation), the DEP accepted the hearing Officer’s findings
of fact that the KWRU system will be built out between 2018 and 2020. (TR 190)
OPC witness
Woodcock testified that KWRU’s WWTP expansion should be 75 percent U&U. (TR
278) Witness Woodcock testified that he evaluated the U&U of the WWTP post
expansion based on a pro forma test year of 2016, when the expansion was
initially expected to be constructed and placed into service. (TR 277)
Secondly, witness Woodcock limited the growth for KWRU’s system to 5 percent as
provided for in Rule 25-30.431(2)(a) F.A.C. (TR 277) Witness Woodcock testified
that his U&U approach is consistent with the U&U methodology used by
the Commission in the 2001 Burkim Enterprises PAA Order which involved a
utility experiencing rapid growth. (TR 277) Witness Woodcock further testified
that certain adjustments should be made to mitigate the unique conditions KWRU
faces due to the suppressed growth. Witness Woodcock stated that “[u]sing
actual 2015 and 2016 flows overlooks the fact that due to limitations in the
WWTP capacity there has been essentially no growth in the system.” (TR 278)
KWRU witness
Castle testified that witness Woodcock’s U&U calculation failed to consider
DEP rules. Specifically witness Castle cited Rule 62-600.405(1), F.A.C., which
requires evaluation of current and future flows and requires flow projections
based on local growth and usage rates for at least 10 years. Witness Castle
concluded that the expanded plant is a direct result of these environmental
mandates and is therefore and environmental compliance cost. (TR 570)
Staff does
not agree with witness Castle that Rule 62-600.405, F.A.C., requires sizing any
permitted work for a planning period of 10 years or longer. Rule 62-600.405(6),
F.A.C., states, in part,
The initial capacity analysis report or an update of the capacity
analysis report shall evaluate the capacity of the treatment plant and reuse or
disposal systems and contain data showing the permitted and design capacities;
monthly average daily flows, three-month average daily flows, and annual
average daily flows for the past 10 years or for the length of time the
facility has been in operation, whichever is less; seasonal variations in flow;
flow projections based on local population growth rates and water usage rates for
at least the next 10 years
The Rule
referenced by witness Castle is silent on whether this requires any system to
be designed to serve flows within 10 years. The following Rule 62-600.405(8)
F.A.C., states, in part (emphasis added):
(8) Documentation of timely
planning, design, and construction of needed expansions shall be submitted
according to the following schedule:
(a) If the initial capacity analysis report or an
update of the capacity analysis report documents that the permitted capacity
will be equaled or exceeded within the next five years, within the next five years,
Witness
Castle additionally testified that the Recommended Standards for Wastewater
Facilities referenced by Rule 62-600.300, F.A.C. requires such plans “shall be
based on a 20 year planning period.” (EX 63, TR 597) Staff believes that this
Rule and the referenced standards do not require utilities to design all
expansions to serve projected demand based on this 20 year planning period.
Rule 62-600.300, F.A.C. referenced by witness Castle states, in Section 3 that:
(3) In cases where standards and criteria contained in the
publications listed in subsection 62-600.300(4), F.A.C., conflict with other
rules of the Department, the other rules shall apply.
KWRU cited
Chapter 10, Section 11.23 of the Recommended Standards for Wastewater
Facilities reference. (EXH 63) Staff notes that this section also includes the
parameter that “[p]hased construction of wastewater facilities should be
considered in rapid growth areas,” and so this reference does not require that
any construction must be designed for the full 20 year planning period.
Staff
recommends that U&U be calculated as required by Rule 25-30.431, F.A.C., by
using a linear regression model and projecting flows out five years. Staff
additionally recommends the following: (1) growth should be measured based upon
the test year, the previous 4 years, and known and measurable changes through
2015, (2) flows for 2016 should be projected because 2016 flows do not appear
to be typical and (3) a 5-year growth allowance from 2016 to 2021 is
appropriate. The timeframe over which staff is projecting is the same as the
timeframe used by witness Woodcock. (EXH 20) Like KWRU and OPC, staff does not
believe an adjustment for inflow and infiltration (I&I) is necessary in
this case. (TR 278)
The linear
regression analysis performed by staff results in an addition of 364.9 equivalent
residential connections (ERCs) from the test year to 2016 and an addition of
916.6 ERCs for the growth period of 2016 to 2021. The Utility had an average of
4,039 ERCs for the test year, resulting in 114 gpd/ERC (461,323 gpd / 4,039
ERCs). Thus a growth allowance of 146,091 gpd is also considered ((364.9 +
916.6) x 114 gpd per ERC). Based on the annual average daily flow during the
test year of 461,323 gpd, the DEP permitted plant capacity of 849,000 gpd, the
growth allowance of 146,091 gpd, the excessive I&I of 0 gpd, staff
recommends that the WWTP be considered 71.5 percent U&U [(461,323 gpd – 0
gpd + 146,091 gpd) / 849,000 gpd].
CONCLUSION
The wastewater treatment plant should be considered 71.5
percent used and useful based upon a projected demand of 0.606 MGD in 2021. To
reflect the appropriate U&U percentage, staff recommends that the
appropriate reduction to rate base is $1,440,804. Corresponding adjustments
should be made to decrease net depreciation expense and property taxes by
$117,138 and $10,526, respectively.
Issue 12:
What is the appropriate working capital allowance?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate working capital allowance is
$923,671. Accordingly, working capital should be decreased by $534,599.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$1,458,270 based upon pro-forma test year balance
sheet plus cost associated with permit litigation.
A.
For Phase I, if applicable
OPC:
Phase I working capital should be $328,976.
Adjustments, in addition to stipulations, are necessary to reduce cash by
$615,687 for unused and inappropriate balances; remove deferred debits for
accounting fees incurred by KWRU to correct its books; remove deferred debits
related to construction permit litigation fees for the plant expansion, as
these are in CWIP for Phase I and capitalized into plant for Phase II; and
include 1/2 of the allowed rate case expense.
County:
Agree with OPC that the working capital allowance
for Phase I should be $328,976.
Harbor Shores:
Agrees with OPC.
B. For Phase II, if
applicable
OPC:
The appropriate amount of working capital for
Phase II rates should be $328,976.
County:
Agree with OPC that the working capital allowance
for Phase II should be $328,976.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
The Utility stated that working capital should be in the
amount of $1,458,270, which properly accounts for all expenses and pro forma
adjustments (TR 203; KWRU BR 14) KWRU contended that the working capital has
been depleted below levels needed due to the Last Stand challenge, the rate
proceeding, and AWT compliance. (TR 204; KWRU BR 14) The Utility attributed the
increase in cash during the test year directly to collection of CIAC, and
claimed the funds were utilized for defense in the Last Stand challenge. (KWRU
BR 15) KWRU also contended that CIAC collected is available for any need, and
was used to finance projects and to cover operating expenses during this rate
case. (TR 771; KWRU BR 15)
OPC
OPC’s position is Phase I Working Capital should be
$328,976. (OPC BR 20) OPC witness Merchant testified that $615,687 in cash
should be removed. (TR 334; OPC BR 20) This amount is associated with four
adjustments: 1) removal of $126,930 associated with
an escrow account for the vacuum expansion project closed in March 2015; 2)
removal of $141,828 for an escrow account
related to customer deposits; 3) removal of an unused capital operating account with a
balance of $375,840; and 4) removal of the 13-month
average balance of $115,643 in a cash capital operating account related to an
account funded by a single transfer in May 2014. (TR 333; OPC BR 20) Witness
Merchant also testified that deferred debits associated with accounting fees
and legal fees related to the Last Stand litigation should be removed. (TR
336,339; OPC BR 20) OPC stated that $76,011 of the unamortized rate case
expense should be allowed. (TR 342; OPC BR 21) OPC contends KWRU's assertions that the high working capital
balance is necessary for AWT operational expenses, the Last Stand litigation, and other regulatory environment
existing in
the Florida Keys Area of Critical Concern
are without merit
and should be disregarded as costs required to operate AWT are included as part of O&M and not working
capital. (TR 344; OPC BR 21) In regards to
Phase II, OPC’s position is the working capital balance should remain at
$328,976. (OPC BR 21)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II. (County BR 23-24; Harbor Shores BR 2)
ANALYSIS
Rule 25-30.433(2), F.A.C., requires that Class A utilities
use the balance sheet method to calculate the working capital allowance. In its
updated filing, the Utility reflected a working capital allowance of
$1,458,270. (EXH 17, P 1) As discussed in Issue 5, KWRU’s filing recognized
Stipulation 8 to increase accounts receivable-other by $40,067 and to decrease miscellaneous
current and accrued assets by $13,422. (EXH 17, P 3) The Utility also
recognized staff Audit Finding 6 and increased miscellaneous
deferred debits by $24,217. (EXH 17, P 3)
Cash
In its filing, KWRU's working capital allowance included
cash of $877,289. OPC witness Merchant testified that the requested test year
cash balance was excessive and represented an anomaly for the Utility. (TR 335)
She specifically cited comparisons to the cash balance approved in KWRU’s last
rate case, which was $666,869 lower, and the cash balance reflected in its 2015
Annual Report, which was $515,752 lower. (TR 335) Witness Merchant asserted
that building a major plant expansion did not support the need for such a large
balance of cash. (TR 335) The 13-month average cash balance based on available
data from 2016 during the time frame of activity on the pro forma plant
expansion is $317,978. (EXH 52, BSP 103; EXH 55, BSP 166, 189-190; EXH 56, BSP
1563; EXH 62, BSP 1615) Staff believes this balance is more reflective of
ongoing Utility operations and recommends that cash be decreased by $559,311.
Deferred Rate Case Expense
In its revised MFRs, KWRU reflected deferred rate case
expense of $197,325 in its working capital calculation. As discussed in Issue
26, staff has recommended total rate case expense of $430,828. It is Commission
practice to include one-half of the approved amount of rate case expense in the
instant docket in working capital under the balance sheet method. Consistent
with Commission practice, the amount of deferred rate case expense to include
in working capital is $215,414. As such, staff recommends that working capital
be increased by $18,089.
Miscellaneous Deferred Debits
In its updated filing, the Utility included a working
capital adjustment from the PAA Order that reflected the fees associated with
Last Stand litigation as a deferred debit in the amount of $397,093. (EXH 17, P
3) However, the balance incorrectly reflected an additional year of
amortization, as it was figured into the Utility’s initial adjustment. As
discussed in Issue 28, staff has recommended further adjustments to the annual
amortization of the deferred legal fees. The total effect of both adjustments
is an increase of $63,373 to miscellaneous deferred debits. As discussed in
Issue 27, staff has also recommended the removal of accounting fees associated
with restating previous annual reports. Therefore, miscellaneous deferred
debits should be decreased by $56,750. The net effect is an increase to
miscellaneous deferred debits of $6,623 ($63,373 - $56,750).
CONCLUSION
Based on the above, the
appropriate working capital allowance is $923,671. Accordingly, working capital
should be decreased by $534,599 (-$559,311 + $18,089 + $6,623).
Issue 13:
What is the appropriate rate base? (Fall-out)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
Consistent with other recommended adjustments, the
appropriate rate base is $2,601,197.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
This is a fall-out calculation.
A. For Phase I, if
applicable
OPC:
The appropriate rate base for Phase I should be
$127,273.
County:
Agree with OPC that the appropriate Phase I rate
base is $127,273.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
The appropriate Phase II rate base should be
$604,323.
County:
Phase II rate base should be approximately $57,487, which
is OPC’s recommended rate base value of $604,323 for 2016 less additional CIAC
for 2017 of $546,836. See Issue 8.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
Based on staff’s recommended adjustments, the
appropriate rate base to be used in setting rates is $2,601,197. The schedule
for rate base is attached as Schedule No. 1-A, and the adjustments are shown on
Schedule No. 1-B.
Issue 14:
What is the appropriate capital structure to be used
in setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amounts of long-term debt, equity,
and customer deposits to include in the capital structure are $3,500,000,
$1,765,366, and $162,972, respectively.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
For the single phase, the
pro forma plant will be 100% equity financed, and the BB&T Debt has
increased to 4.25%
Long Term
Debt - $1,063,865, 18.74% ratio, 4.25% cost rate
Common Equity
- $4,450,994, 78.369% ratio, 9.18% cost rate
Customer Deposits - $162,972, 2.87% ratio, 2%
cost rate
A. For Phase I, if
applicable
OPC:
The 2014 capital structure consisted of $395,434
of 4% debt to BB&T; $852,903 of 6% affiliate debt; $162,972 in 2% customer
deposits; negative equity of $276,537, with a $3.5 million pro forma increase
to equity to fund the WWTP expansion. For Phase I, the debt for the affiliate
debt should be equal to the arms-length BB&T debt, the negative equity
balance should be zero, and the pro forma equity adjustment should be
disallowed.
County:
Agree with OPC that the capital structure for Phase
I should consist of $395,434 of debt to BB&T at 4%.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
For Phase II, the capital structure should be updated
to reflect the most current level of financing for 2016. The $2,041,903 in
equity infusions in 2016 should offset the August 2016 negative equity balance
($1,051,663) for a net equity balance of $989,240. Pro forma debt should be
$3,000,000 for BB&T loans at 4%, and customer deposits of $162,972 at 2%
are appropriate.
County:
Agree with OPC that for Phase II, the capital
structure should be updated to reflect the most current level of financing for
2016: an equity balance of $989,240, pro forma debt of $3,000,000 for BB&T
loans at 4% and customer deposits of $162,972 at 2%.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, KWRU stated that this issue is a fall-out
calculation based on its proposed 100 percent equity financing of pro forma
plant additions. (EXH 79, P 10; KWRU BR 16) The Utility asserted that it has
proven that it has used equity to finance the pro forma plant expansion through
equity infusions and the reclassification of affiliate debt to equity. (EXH 81)
OPC
OPC witness Merchant testified that KWRU’s actual 2014
capital structure consisted of $395,434 of debt to BB&T at 4 percent
(variable rate of prime plus 0.75 percent); $852,903 debt at 6 percent (fixed)
to WS Utilities, an affiliate of the Utility; $162,972 in customer deposits at
2 percent; a negative equity balance of $276,537 with a $3.5 million pro forma
increase to equity to fund the WWTP expansion. (TR 346; OPC BR 22) OPC asserted
that for Phase I, the affiliate debt cost should be equal to the arms-length
debt cost with BB&T, the negative equity balance should be zero, and the
pro forma equity adjustment should be disallowed to correspond with the removal
of pro forma plant. (TR 348; EXH 24; OPC BR 22)
For the Phase II capital structure, OPC witness Merchant
testified that, in addition to the Phase I adjustments, the Utility’s pro forma
adjustment to equity should be considered debt until the Utility can
demonstrate that all of the pro forma adjustments will be infused as equity. (TR
348-349; OPC BR 23) OPC asserted that the Utility’s equity infusions made in
May, June, and August, 2016, should be allowed only to the extent that those
infusions offset the actual negative equity balance on KWRU’s books. (OPC BR
23) OPC explained that as of August 2016, the Utility’s negative equity balance
was $1,051,663 and its reported equity infusions (shareholder contributions)
totaled $2,041,903. (TR 349; EXH 62, P 1615; OPC BR 23-24)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II. (County BR 24-25; Harbor Shores BR 2)
ANALYSIS
In its updated filing, the Utility reflected long-term
debt of $1,248,337, negative equity of $276,537, and customer deposits of
$162,972 in the 2014 test year. (EXH 17, P 11) The Utility also included a pro
forma adjustment to increase equity by $4,910,177 to reflect an equity infusion
that would pay for the pro forma plant expansion. (EXH 17, P 11) Pursuant to
Rule 25-30.311, F.A.C., KWRU included a cost rate of 2.00 percent for customer
deposits. (EXH 17, P 11) Consistent with staff’s position in Issue 3, several
adjustments are appropriate in order to reflect known and measurable changes in
the composition of the Utility’s capital structure.
As testified by OPC witness Merchant, KWRU’s long-term
debt in the test-year consisted of $395,434 of debt to BB&T at an interest
rate of prime plus 0.75 percent, which equated to 4.00 percent in the test
year, and affiliate debt from W.S. Utilities of $852,903 with an interest rate
of 6.00 percent. (EXH 346) However, in June 2016, the Utility stopped making
regular payments of interest on the WS Utilities debt and reclassified it as
equity. (EXH 81) KWRU also refinanced the BB&T debt in July 2016 which paid
off the balance of the original note with a new note in the amount of
$1,000,000. (EXH 83) Accordingly, long-term debt should be adjusted to reflect
these two documented changes in capital structure. A corresponding adjustment
should be made to increase long-term debt to reflect the refinanced $1,000,000
BB&T note. Using the Utility’s general ledger as of August 30, 2016, staff
verified that the proceeds of the refinanced note were made available and used
by KWRU in the capital operating account that is used for pro forma plant
expansion expenditures. (EXH 62, P 1615) This treatment is contrary to KWRU
witness Swain’s understanding of the note as a line of credit. (TR 819)
In September 2016, KWRU obtained another note through
BB&T in the amount of $2,500,000. (EXH 83) This note was also characterized
by witness Swain as a line of credit that the Utility did not necessarily plan
to use and that funds available from new lines of credit should not be included
as there has been no use of those funds. (TR 819) However, the loan documents
provided by KWRU indicate an initial loan disbursement of $741,000 with
$686,424 being wired directly to the Borrower. (EXH 83) Given the timing of
this new debt issuance, staff was not able to verify any further details with
the most recent general ledger as the record closed before any additional
general ledgers were made available. The Loan Agreement included in the
Utility’s documentation of the additional note specifies that the purpose of
the term loan is for the expansion of wastewater treatment plant and reflects a
repayment schedule of five years for the loan payment. (EXH 83) KWRU witness
Swain agreed that a debt-to-equity conversion is considered a known and
measurable change and admitted that the two new promissory notes were lines of
credit fully available for the Utility to use at any time it deemed necessary. (TR
817) Staff believes the loan documentation provided by KWRU supports the
inclusion of the entire amount of the additional note, especially in light of
the conflicting Utility testimony regarding the use of additional debt. As
such, staff recommends that long-term debt should also be increased by
$2,500,000 for a total $3,500,000 of long-term debt.
Due to the conversion of affiliate debt to equity, equity
should also be increased by $852,903. Documentation of additional equity
infusions of $659,000 in May 2016 and $530,000 in August 2016 should also be
included as pro forma adjustments to equity. (EXH 81) KWRU witness Swain
testified that the Utility made another capital contribution of equity of
$1,100,000 in October 2016. (TR 851) Beyond witness Swain’s assertion, there is
no other documentation to support making this further adjustment to equity.
Witness Swain testified that she did not think that the Commission has discretion
to do something different than what the management is indicating their
intention is in regard to financing plant. (TR 820) However, the intentions of
KWRU’s management are contradicted by support documentation provided by the
Utility which makes it somewhat problematic to identify known and measurable
changes. Based on documented transactions, staff recommends a net increase to
equity of $2,041,903 which results in $1,765,366 of equity for rate setting.
CONCLUSION
Based on staff’s adjustments to capital structure, the
appropriate amounts of long-term debt, equity, and customer deposits to include
in the capital structure are $3,500,000, $1,765,366, and $162,972,
respectively.
Issue 15:
What is the appropriate return on equity? (Partially
stipulated)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
Based on the Commission leverage formula currently
in effect and an equity ratio of 33.53 percent, the appropriate return on
equity (ROE) is 11.16 percent. Staff recommends an allowed range of plus or
minus 100 basis points be recognized for ratemaking purposes.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
The appropriate return on equity is 9.18% based upon
the capital structure (see Issue 14) as determined pursuant to PSC Order No.
PSC-16-0254-PAA-WS (leverage formula).
A. For Phase I, if
applicable
OPC:
Because the negative balance of equity has been
set to zero, the ROE for Phase I rates should be 11.16%, with an allowed range
of plus or minus 100 basis points.
County:
Agree with OPC that the appropriate return on equity
for Phase I sales should be 11.16% with an allowable range of plus or minus 100
basis points.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Using the equity ratio after the pro forma
adjustment to infuse equity and recognize the new debt issuances, the resulting
equity ratio is 20%. Accordingly, the ROE for Phase II should be 11.16%, with
an allowed range of plus or minus 100 basis points. If the Commission approves
an equity ratio higher than 40%, the leverage formula will generate a corresponding
lower cost of equity.
County:
Agree with OPC that the appropriate return on equity
for Phase II sales should be 11.16% with an allowable range of plus or minus
100 basis points.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
Based on the capital structure, the appropriate return on
equity is calculated according to the leverage formula, as set forth in Order
No. PSC-16-0254-PAA-WS. (KWRU BR 17)
OPC
OPC stated that the ROE for Phase I and II rates should be
11.16 percent, with an allowed range of plus or minus 100 basis points, based
on its position on capital structure adjustments in Issue 14 and consistent
with Stipulation 15. (OPC BR 24)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II. (County BR 25; Harbor Shores BR 2)
ANALYSIS
The ROE requested in the Utility’s updated rate increase
request is 9.17 percent. (EXH 17, P 10) This return was based on the
application of the Commission’s leverage formula approved in Order No.
PSC-16-0254-PAA-WS
and an equity ratio of 76.28 percent. (EXH 17, P 10)
Staff believes the Utility’s proposed return on equity of
9.17 percent should be updated to reflect the leverage formula in effect when
the Commission makes its final decision, as approved in Stipulation 15.
Including adjustments discussed in Issue 13, the recommended amount of debt and
equity yield an equity ratio of 33.53 percent. Based on the approved
methodology and an equity ratio of 33.53 percent, staff recommends an ROE of
11.16 percent. Staff recommends an allowed range of plus or minus 100 basis points
be recognized for ratemaking purposes.
CONCLUSION
Based on the Commission leverage formula currently in
effect and an equity ratio of 33.53 percent, the appropriate ROE is 11.16
percent. Staff recommends an allowed range of plus or minus 100 basis points be
recognized for ratemaking purposes.
Issue 16:
What is the appropriate cost of long-term debt?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate cost rate for long-term debt is 4.00
percent.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
4.25%.
A. For Phase I, if
applicable
OPC:
The appropriate cost of debt for Phase I should
be 4% for both the BB&T and the WS Utilities debt. No pro forma adjustments
are appropriate for Phase I.
County:
Agree with OPC that the appropriate cost of
long-term debt for Phase I is 4%.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
The appropriate cost of debt for Phase II should
be 4% for both BB&T promissory notes. The WS Utilities debt has been
converted to equity and should be removed from the capital structure.
County:
Agree with OPC that the appropriate cost of
long-term debt for Phase II is 4%.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, KWRU stated that a 4.25 percent cost is
appropriate based on current loan rates provided by BB&T that reflect an
interest rate of 0.75 percent over prime. (TR 775; KWRU BR 17)
OPC
OPC witness Merchant testified that the 2014 test year
debt cost for the BB&T loan was prime plus 0.75 percent. (TR 299, 346) In
its brief, OPC stated that, because the prime rate was 3.25 percent in 2014, a
4.00 percent cost rate is appropriate to use for both the BB&T and the WS
Utilities debt for Phase I. (OPC BR 25)
Witness Merchant used a 4.25 percent cost rate for Phase
II which at that time was the BB&T debt from the historical test year. (TR
299, 348-349; OPC BR 25) OPC contended that, subsequent to witness Merchant’s
testimony, KWRU obtained $3.5 million in new debt issuances that were not
included in the Utility’s rebuttal testimony. (TR 396-397; OPC BR 25) OPC
stated that the appropriate cost of debt for Phase II should be 4.00 percent
(prime rate plus 0.50 percent) for the two new BB&T promissory notes for
$1,000,000 and $2,500,000 issued in July and September 2016, respectively. (EXH
83; OPC BR 25) OPC asserted that the Utility refinanced and retired the
BB&T note for $302,053 when it obtained a new BB&T note in July. (EXH
83; OPC BR 25) OPC stated that the affiliate debt from WS Utilities should be removed
from the capital structure. (EXH 29; OPC BR 25) OPC asserted that these are
known and measurable events by KWRU that occurred in 2016 that will be used to
fund the plant expansion costs and that the current prime rate of interest is
3.50 percent. (EXH 29; OPC BR 25)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II. (County BR 25; Harbor Shores BR 2)
ANALYSIS
Based on staff’s adjustments to capital structure in Issue
14, long-term debt is comprised of the two new BB&T promissory notes issued
in July and September 2016. As such, staff believes the corresponding cost of
long-term debt should reflect the cost rates associated with the two notes,
which is prime rate plus 0.50 percent. (EXH 83) KWRU witness Swain testified
that current loan rates provided by BB&T reflect an interest rate of 0.75
percent over prime. (TR 775) However, witness Swain’s testimony did not reflect
the additional debt issuances. Thus, her testimony does not reflect “current”
loan rates. Using the prime rate of interest of 3.50 percent, as supported in
OPC’s testimony and testified by KWRU witness Swain, staff recommends that the
cost rate of long-term debt should be 4.00 percent. (TR 775; EXH 29)
CONCLUSION
Based on the above, the appropriate cost rate for
long-term debt is 4.00 percent.
Issue 17:
What is the appropriate weighted average cost of
capital based on the proper components, amounts, and cost rates associated with
the capital structure for the test year period? (Fall-out)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
Based on the resolution of the previous issues, the
appropriate weighted average cost of capital, including the proper components,
amounts, and cost rates associated with the capital structure, is 6.12 percent.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
8.06%.
A. For
Phase I, if applicable
OPC:
The appropriate overall rate of return for Phase I
rates should be 3.39%.
County:
Agree with OPC that the appropriate overall rate of
return for Phase I rates should be 3.39%.
Harbor Shores:
Agrees with OPC.
B. For
Phase II, if applicable
OPC:
The appropriate overall rate of return for Phase II
rates should be 3.53%.
County:
Agree with OPC that the appropriate overall rate of
return for Phase II rates should be [3.53%].
Harbor Shores:
Agrees with OPC.
Staff Analysis:
This is a fall-out issue. In its updated filing, KWRU
originally proposed an overall cost of capital of 8.06 percent for the test
year. (EXH 79, P 10) The Utility acknowledged that its proposed weighted
average cost of capital is a fall-out calculation of its proposed pro forma
adjustment that reflects 100 percent equity financing of pro forma plant
additions, as well as the capital structure set forth in preceding issues.
(KWRU BR 18) Based on the resolution of the preceding issues, the recommended
capital structure yields an overall cost of capital of 6.12 percent. Schedule
No. 2 contains staff’s recommended capital structure.
Issue 18:
Should the members of Harbor Shores Condominium Unit
Owners Association, Inc. (Harbor Shores) be classified as Residential customers
or a General Service customer?
Recommendation:
Staff recommends that Harbor Shores be classified as
a general service customer, but should continue to be billed a base facility
charge (BFC) based on 69 equivalent residential connections (ERCs) and a
gallonage charge with a 10,000 gallon cap per ERC.. (Johnson)
Position of the Parties
KWRU:
Based on each residential unit having an FKAA
residential water meter, Harbor Shores residential units should be classified
as residential customers.
OPC:
The Commission must decide whether a homeowners’
association (HOA) like Harbor Shores, which is contractually required to pay
the wastewater bills on behalf of all HOA members, should be classified as a
general service customer. Harbor Shores has master meters and sub-meters. The
wastewater bills have been paid by Harbor Shores, and not by the individual
customers. Further, KWRU does not have any utility easement to enter private
HOA property to shut-off customers for non-payment.
County:
No position.
Harbor Shores:
Harbor Shores is
a General Service Customer because the HOA has been responsible for paying
charges for all 69 units since 2007 per our Agreement with KWRU. The President
of KWRU, Chris Johnson, stated during the Hearing on 11/8/16 that the whole
Park will be shut down if the HOA does not pay for one single Unit, and that
solidifies our position that we are "One General Service Customer” since
the Rate Case in 2009.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU
asserted that the Harbor Shores residents should be considered residential
customers because each individual home has a separate FKAA water meter. In
addition, the Utility argued that, per the developer agreement, the Harbor
Shores Association is billed all regular residential charges of the unit
owners. KWRU claimed that the Utility has the authority to discontinue service
to an individual resident of Harbor Shores pursuant to the Rule
25-30.320(2)(f), F.A.C. and the Utility’s tariff. KWRU stressed these factors as
evidence that Harbor Shores’ residents should be considered residential
customers of the Utility. However, KWRU concluded that the appropriate
adjustments should be made to the billing determinants for the determination of
final rates if Harbor Shores is classified as a general service customer. (KWRU
BR 18)
OPC
OPC argued
that Harbor Shores is responsible for payment of all wastewater bills on the
behalf of Harbor Shores’ residents. OPC asserted that KWRU has no easements
within Harbor Shores and states that the property rights for KWRU were
intentionally omitted from the agreement between Harbor Shores and the Utility.
OPC added that other customers within KWRU’s service area that are in similar
situations, such as Sunset Marina, Meridian West, and Flagler Village, are
classified as general service customers. OPC concluded that if Harbor Shores is
classified as a general service customer, the Commission should consider the
impact reclassification would have on billing determinants and rate design. (OPC BR 26)
County
No position.
Harbor Shores
Harbor
Shores contended that instead of being considered 69 residential customers,
Harbor Shores should be designated one general service customer and lists
several reasons defending their position. First, Harbor Shores has been paying
the monthly charges for all 69 units since 2009. (EXH 103, BSP 4) Harbor Shores
has two master meters from which FKAA reads and deducts the 69 individual
sub-meter readings. (EXH 89) Harbor Shores argued that KWRU only has the right
to shut off the master meter and does not have rights to shut off individual
residents from wastewater service. (TR 697-701) Harbor Shores submitted that
the HOA meets the definition of a customer as set forth in the Utility’s tariff
and Rule 25-30.210, F.A.C. Harbor Shores also added that precedent has been set
by similar associations with condominiums, modular, manufactured, or mobile
homes on Stock Island that have been classified general service customers. (TR
625-626) Harbor Shores concluded that all the aforementioned factors make it
abundantly clear that Harbor Shores should be one general service customer
instead of 69 residential customers. (Harbor Shores BR 2-5)
ANALYSIS
As outlined
above in the Parties’ arguments, KWRU believes that Harbor Shores should be
billed based on individual residential meters. Harbor Shores believes the HOA
is the customer and should be billed based on its two FKAA master meters rather
than 69 individual residents living within the Harbor Shores community.
Pursuant to Rule 25-30.210(1), F.A.C., a customer shall mean any person, firm,
association, corporation, governmental agency, or similar organization who has
an agreement to receive service from the utility. KWRU’s tariff defines a
customer as “any person, firm or corporation who has entered into an agreement
to receive service from the company and who is liable for the payment of the
service.” (TR 703-704)
The
agreement between KWRU and Harbor Shores provides that Harbor Shores will pay
the applicable fees, rates, and charges as set forth in the Utility’s tariff
for the monthly service. (EXH 103) In addition, KWRU holds Harbor Shores as the
guarantor for payment of the bills instead of the 69 individual residents of
Harbor Shores. (TR 699-700) Staff believes that Harbor Shores is the customer
of record because Harbor Shores holds the agreement for service and is held
liable for the payment of that service. Staff does not agree with KWRU that
Rule 25-30.320(2)(f), F.A.C. and the Utility’s tariff give KWRU the right to
discontinue service to the individual customers. Both the rule and the tariff
refer to the “customer,” and in this instance Harbor Shores is the customer,
not the individual residents of Harbor Shores.
Harbor
Shores has two FKAA master meters that measure all water flows to the Harbor
Shores community and its residents. (EXH 89) Harbor Shores believes the HOA
should be billed a lower rate based on the meter equivalents for its two FKAA
master meters, which is 16 ERCs, much less than the 69 ERCs for the total
individual units. (EXH 89) In the past, the Commission has analyzed the demand
behind a master meter to determine if it is equitable, based on demand and
demographics, to be billed based on the meter size for communities such as
Harbor Shores. As testified to by witness Johnson, Harbor
Shores is a unique situation unlike Sunset Marina, Meridian West, and Flagler
Village, because the residences within Harbor Shores are individually metered
by the FKAA. (TR 166-167; TR 626-627)
KWRU’s
agreement with Harbor Shores specifies that each unit owner was responsible for
paying the Utility’s approved tariff charge of $2,700 per ERC for a total of 69
ERCs of capacity reservation. (EXH 103) Staff believes that Harbor Shores
should be billed as a general service customer based on 69 ERCs to reflect the
capacity Harbor Shores reserved when the system capacity charges were paid.
Staff believes that if billing is allowed based on the size of the two FKAA
meters, then the Utility would not be adequately compensated for the demand
Harbor Shores’ residents are placing on the system. Therefore, Staff recommends
that Harbor Shores’ rate structure should consist of a BFC based on 69 ERCs and
a gallonage charge with a 10,000 gallon cap per ERC as shown on Schedule No. 4.
Billing Harbor Shores a rate based on 69 ERCs should ultimately result in no
overall change to Harbor Shores’ bill.
CONCLUSION
Based on the above, staff
recommends that Harbor Shores should be classified as a general service
customer, but should continue to be billed a BFC based on 69 ERCs and a
gallonage charge with a 10,000 gallon cap per ERC.
Issue 19:
What are the appropriate bills and gallons to use to
establish test year revenues and rates? (Partially stipulated)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate bills and gallons to use to establish test year revenue
and rates are reflected in Stipulation 9, which addresses test year revenues.
A. As addressed in Issue 2,
Phase I is not applicable.
B.
As addressed in Issue 2, Phase II
is not applicable. (Friedrich)
Position of the Parties
KWRU:
As stated in the PAA Order.
A. For Phase I, if
applicable
OPC:
For Phase I, it is appropriate to use the billing
determinants approved in the PAA Order. Although it is evident that the 2015
and 2016 revenues and billing determinants were higher than those in the 2014
test year, OPC’s revenue requirement calculations based on the PAA Order
billing determinants are reasonable for setting Phase I rates.
County:
Agree with OPC that the number of bills and gallons
used to set Phase I rates in the PAA Order are reasonable, although understated
because they do not accurately reflect growth in bills and gallons consistent
with KWRU’s projected growth rate of 7.06 percent per year.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Consistent with OPC’s adjustments to Phase II
revenues and to comply with the matching principle, 2016 billing determinants
should be increased to reflect projected customers and consumption that will be
online for the first year of operation of the WWTP expansion. The actual
increase in 2015 revenues should be used to estimate bills and gallons by
customer class and the 2015 levels should be escalated by 5%, consistent with
OPC’s used and useful projection.
County:
The appropriate numbers of bills and gallons to be
used in establishing Phase II revenue requirements and setting KWRU’s new
permanent Phase II Rates are, consistent with the principle that rates must be
based on costs and sales during the time when rates are to be in effect, as
follows:
Bills: 22,523
Gallons: 246,405,390 (246,405 kgal)
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU stated that the appropriate bills and gallons to use to establish
test year revenue and rates are stated in the PAA Order and reflected in
Stipulation 9. (TR 778)
OPC
In its brief, OPC contended that the appropriate bills and gallons to
use to establish test year revenue and rates for Phase I are the billing
determinants that were approved in the PAA Order. (OPC BR 27) OPC noted that the
revenues and billing determinants of 2015 and 2016 are higher than in the 2014
test year. (TR 353) OPC argued that for Phase II, the test year revenue
adjustments are consistent with the matching principle and the bills and
gallons used to calculate Phase II rates should be increased to accurately
depict the projected level of customers that will be connected during the
initial operation year of the wastewater treatment expansion. (TR 380) OPC
recognized that the Utility’s 2015 Annual Report depicted an increase in
revenues since 2014 of 12 percent. (EXH 65; EXH 28) OPC argued that the
increase in 2015 revenues should be used to estimate the number of bills and
gallons by customer class. This will reestablish the number of 2015 bills and
gallons to maintain consistency with the method used by the Commission in the
PAA Order. (TR 380) To determine the appropriate 2016 billing determinants, OPC
stated the 2015 levels should be increased by five percent, consistent with OPC
witness Woodcock’s used and useful projection. (TR 380; EXH 20) Exhibit PWM-3,
Schedule 4-B illustrates OPC’s calculations for 2016 bills and gallons. (TR
351-354; EXH 25; EXH 28) OPC asserted the escalated 2016 bills and gallons are
appropriate for setting Phase II rates for the Utility.
County
The County agreed with OPC on the number of bills and gallons used to
set Phase I rates consistent with Stipulation 9. (County BR 26) In addition,
the County asserted 22,523 bills and 246,405,000 gallons are appropriate in
setting Phase II rates as stated in OPC witness Merchant’s testimony. (EXH 25;
EXH 28) Additional gallonage values were identified by County witness Santamaria
of 87,810 gpd and Utility witness Castle of 82,250 gpd which equates to
30,000,000 to 32,000,000 per year. (TR 467) If these additional gallons were
added to witness Merchant’s test year gallons of 213,338,000 on PMW-2 page 9 of
9, the total would be close to the annual projected gallonage value for 2017 of
246,405,390. (County BR 28) The County alternatively advised for the growth
estimate of 7.06 percent provided by KWRU witness Johnson to be utilized
instead of the five percent witness Merchant used to project the bills and
gallons for setting Phase II rates. (County BR 28-29)
Harbor Shores
In their brief, Harbor Shores agreed with OPC’s position on this issue.
(Harbor Shores BR 2)
ANALYSIS
The
appropriate bills and gallons to use in establishing test year revenue and
rates are reflected in Stipulation 9, which addresses Phase I test year
revenues. As discussed in Issue 2, staff does not believe it is necessary for
the Commission to approve Phase II test year bills and gallons as advocated by
OPC and the County.
Issue 20:
What is the appropriate amount of miscellaneous
revenues to be included in test year revenues and rates? (Partially stipulated)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate
amount of miscellaneous revenues to be included in test year revenue and rates
is $72,619, as reflected in Stipulation 9 which addresses test year revenues.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As
addressed in Issue 2, Phase II is not applicable. (Friedrich)
Position of the Parties
KWRU:
As stated in the PAA Order, increased for the
increase in miscellaneous rates.
A. For Phase I, if
applicable
OPC:
See Stipulation 9.
County:
Agree with OPC and with the adjustments addressed in
the stipulations agreed to by the Parties.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II projected 2016 miscellaneous revenues
should be $86,421. Starting with the actual 2015 miscellaneous revenues of
$104,651, removing the $19,500 received for reuse testing from MCDC, reducing
the MCDC Lift Station cleaning income by $2,081 to match the PAA tariff rate,
then escalating the remaining miscellaneous revenue by 5%, an increase of
$3,276, results in an increase to adjusted miscellaneous revenues of $13,802.
Additionally, 2016 reuse revenues, at a minimum, should be $61,098.
County:
The appropriate amount of miscellaneous revenues for
Phase II is at least $86,421, as supported by OPC Witness Merchant. A better
estimate is Witness Merchant’s value escalated by 7.06 percent, KWRU’s best
estimate of growth, which value is $92,522.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
KWRU stated the
appropriate miscellaneous revenues to be included in test year revenues and
rates are in the PAA Order, but should be increased to reflect the incremental
increase in its proposed miscellaneous service charges. The proposed miscellaneous
service charges include a portion of benefits and insurance in each charge
applicable to the appropriate employee. (EXH 95; TR 252-53) The Utility argued
this methodology ensures that the proportion of benefits and insurance
attributable to directly-billable labor is not subsidized by customers who do
not receive the services. (TR 254)
OPC
In their brief, OPC explained the
appropriate amount of miscellaneous revenues to be included in test year
revenues and Phase I rates are reflected in stipulation 9. (OPC BR 28) OPC
asserted that adjustments should be made to the Utility’s 2015 general ledger
miscellaneous revenues of $104,651. (OPC BR 28) In determining the appropriate
miscellaneous revenues for Phase II rates, OPC witness Merchant adjusted
aspects of the Utility’s miscellaneous revenue such as Monroe County Detention
Center (MCDC) Income, water testing, and reuse revenue. In addition, to
calculate the remaining components, miscellaneous revenues were increased for
Phase II rates by a growth factor of five percent. (TR 357-359; EXH 25) Witness
Merchant utilized this same growth factor in OPC’s pro forma 2016 Phase II rate
projections. (TR 358; EXH 25) Therefore, OPC contended the appropriate
miscellaneous revenues to be included in test year revenues is $86,421. (EXH
25; OPC BR 28)
County
In their brief, the County agreed with OPC’s position on this issue.
(County BR 29-30) In addition, the County conceded the appropriate
amount of miscellaneous revenues to be included for test year revenues for
Phase II rates is at least $86,421 as also supported by witness Merchant. (TR
357-358)
According to the County, it is more appropriate to use
KWRU’s estimation growth of 7.06 percent per year along with witness Merchant’s
projected miscellaneous revenues of $86,421 which results in $92,522 of
miscellaneous revenues to be included in test year revenues for Phase II. (EXH
25)
Harbor Shores
In their brief,
Harbor Shores agreed with OPC’s position on this issue. (Harbor Shores BR 2)
ANALYSIS
The appropriate amount of miscellaneous revenues to be
included in Phase I test year revenue and rates is $72,619, as reflected in
Stipulation 9 which addresses test year revenues. As discussed in Issue II,
staff does not believe it is necessary for the Commission to approve Phase II
miscellaneous revenues as advocated by OPC and the County. However, in Issue
32, staff recommends the appropriate miscellaneous revenues to remove prior to
designing service rates.
Issue 21:
What is the appropriate amount of test year revenues
for KWRU’s wastewater system? (Fall-out) (Partially stipulated)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate
amount of test year revenues are $1,534,799, as reflected in Stipulation 9. Accordingly,
KWRU’s reflected test year revenues of $1,554,861 should be reduced by $20,062.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As
addressed in Issue 2, Phase II is not applicable. (Friedrich)
Position of the Parties
KWRU:
Stipulation.
A.
For Phase I, if applicable
OPC:
The test year revenues for Phase I before any
revenue increase should be $1,534,799.
County:
Agree with OPC that the appropriate Phase I test
year revenues should be $1,534,799.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II test year revenues for before any
revenue increase should be $1,701,630.
County:
The appropriate Phase II test year revenues should
be at least $1,786,711, which is 5 percent greater than the amount recommended
by OPC based on a 2016 test year, in order to reflect the fact that KWRU’s
sales are likely to be 5 to 7 percent greater in 2017, when the new rates will
be in effect, than in 2016.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU agreed with Stipulation 9, which stated test year revenues are
$1,534,799 (KWRU BR 19)
OPC
OPC stated the appropriate amount of test year revenues for Phase I rates
for KWRU’s wastewater system are $1,534,799, as set forth in Stipulation 9.
(OPC BR 29) The appropriate amount of test year revenues for Phase 2 rates are
$1,701,630. (EXH 68; OPC BR 29)
County
The County believes the appropriate Phase I test year revenues should
be $1,534,799. (County BR 30) However, the County argued the appropriate
amount of test year revenues for KWRU’s wastewater system for Phase II should
be at least $1,786,711, which is five percent greater than the recommended
amount by OPC based on a 2016 test year. The County argued that KWRU’s sales
are anticipated to be five to seven percent greater in 2017 when the new rates
will be going into effect. The County believed that Phase II rates should not
go into effect until the new key assets are serving customers. (County BR 31)
Harbor Shores
In its brief, Harbor Shores agreed with OPC’s position on this issue. (Harbor
Shores BR 2)
ANALYSIS
In its updated filing, KWRU reflected
test year revenues of $1,554,861. The appropriate amount of Phase I test year
revenues are $1,534,799, as reflected in Stipulation 9.
Accordingly, staff recommends that test year revenues be reduced by $20,062. As
discussed in Issue 2, staff does not believe it is necessary for the Commission
to approve Phase II miscellaneous revenues as advocated by OPC and the County.
Issue 22:
What adjustments, if any, should be made to account
for the audit adjustments in each of Staff’s Audit Findings 3, 4, 5, 10, and 11
to operating expenses? (Stipulations 3, 4, 5, and 10) (Norris)
Approved Stipulations:
O&M expenses
(contractual services-other) should be increased by $1,200 for survey fees
based on the Staff Audit Finding 3. Test year amortization of CIAC should be
decreased by $14,003 based on Staff Audit Finding 4. Depreciation expense
should be decreased by $5,489, based on Staff Audit Finding 5. O&M expenses
should be decreased by $4,512, based on Staff Audit Finding 10 and $6,276,
based on Staff Audit Finding 11. The stipulated adjustments to operating
expenses are set forth in Table 22 below.
Table 22-1
Stipulated Adjustments to
Operating Expense
|
Stip.
|
Audit Finding
|
O&M Expense
|
Depreciation Expense
|
CIAC Amortization Expense
|
Total
|
|
3
|
3
|
$1,200
|
$0
|
$0
|
$1,200
|
|
4
|
4
|
0
|
0
|
14,003
|
14,003
|
|
5
|
5
|
0
|
(5,489)
|
0
|
(5,489)
|
|
10
|
10
|
(4,512)
|
0
|
0
|
(4,512)
|
|
10
|
11
|
(6,276)
|
0
|
0
|
(6,276)
|
|
|
Total
|
($9,588)
|
($5,489)
|
$14,003
|
($1,074)
|
Issue 23:
What are the appropriate annual levels of O&M
expenses for implementing advanced wastewater treatment (AWT)?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate level of O&M expenses to reflect
the implementation of AWT operations is $1,647,853. Accordingly, pro forma
O&M expense should be decreased by $341,471.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Hill, Graves, Norris)
Position of the Parties
KWRU:
For a single
phase, $2,220,932, plus amortization of additional actual rate case
expense.
A. For Phase I, if applicable
OPC:
Since KWRU did not implement AWT until January
2016, Phase I O&M should be no greater than the actual/annualized expense
levels for 2016. January-April 2016
expense accounts should be annualized for a full year, and treatment-related
expenses should be multiplied by 3.25 to recognize increased year-end flows.
Adjustments should reduce O&M by $89,371 (e.g., stipulations, affiliate
management fees, accounting/engineering fees, insurance, and rate case
expense). Total Phase I O&M should be decreased by $301,461.
County:
Agree with OPC that total Phase I O&M should be
decreased by $301,461.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II O&M expenses should be $1,809,082.
Adjustments are appropriate for Stipulations 3 & 10, and Issues 24-28.
Further reductions of $10,028 and $29,223 made in the PAA Order to reduce
expenses to reflect OPC-adjusted consumption levels for the year the plant
expansion is placed in-service are appropriate. Lastly, KWRU’s pro forma
expense increases of $245,501 added in witness Swain’s direct testimony should
be disallowed as excessive and unsupported.
County:
Agree with OPC that Phase II O&M expenses are
$1,809,082.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU argued
that the estimates for O&M expenses contained within the revised MFRs
accurately depict the O&M costs associated with operating the Utility once
the expanded plant is in service. (KWRU BR 20) KWRU asserted that the expanded
plant will necessitate additional costs regardless of flow levels and
regardless of the causes of those flow levels. (KWRU BR 20) KWRU contended that
simply calculating a cost per gallon, does not take into account the fixed
costs associated with operating the expanded plant, including minimum chemical
inputs and power. (TR 605-606; KWRU BR 20) KWRU witness Castle testified that
once the expanded wastewater treatment plant is in operation, costs for these categories
do not decrease proportionately with flows. (TR 576, 593; KWRU BR 20) KWRU
elaborated that sludge hauling must be undertaken for three plants, rather than
two, regardless of flow levels. (TR 576; KWRU BR 20) KWRU further argued that
the operation of the plant requires the same amount of power, other than
pumping power, and aeration and chemical feed rates do not decrease
proportionately with flows. (TR 576; KWRU BR 20)
OPC
OPC argued that the PAA Phase I revenue requirement not
only allowed a full level of pro forma O&M expenses to implement AWT for
the existing plant, but also an increment for an additional amount of expenses
to be incurred after the new plant expansion is placed into service. (TR
363-365; OPC BR 30) OPC asserted that because KWRU did not implement AWT on its
existing plant until January 1, 2016, the historical test year does not include
sufficient actual levels of costs to implement AWT on the existing plant. (OPC
BR 30) OPC contended that Phase I O&M expenses for AWT implementation
should be no more than the actual annualized levels incurred for 2016. (TR
363-365; OPC BR 30)
Lastly, OPC argued that Phase II O&M expenses should
be $1,809,082. (OPC BR 31) OPC asserted that Phase II O&M expense
adjustments should reflect Stipulations 3 and 10, counting/engineering fees
(Issue 24), management fees (Issue 25), rate case expense (Issue 26),
amortization of accounting fees to correct the Utility’s books and records for
2007-2011 (Issue 27), and the amortization of legal fees for the permit
litigation fees incurred which should properly be capitalized (Issue 28; OPC BR
32).
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC on Phase I and II. (County BR 32; Harbor Shores BR 2)
ANALYSIS
KWRU requested pro forma expenses associated with
upgrading its operations to meet AWT Standards required by Section 403.087(10),
F.S., with a deadline of January 1, 2016. (TR 80-81) Section 367.081 (2)(a)2.c.,
F.S., provides that the Commission shall approve rates for service which allow
a utility to recover the full amount of environmental compliance costs.
Recognizing that the requested expenses are needed for compliance with the
Utility’s DEP Permit, staff believes that KWRU should be permitted recovery of
reasonable and prudent expenses associated with the AWT upgrade.
In its updated filing, the Utility requested a total of
$840,950 of pro forma O&M expense for estimated increases in the following
expenses: salaries and wages, employee pension and benefits, general liability
insurance, workmen’s compensation insurance, sludge disposal, purchased power,
chemicals, materials and supplies, contractual services-engineer, contractual
services-testing, contractual services-other, and miscellaneous. (EXH 17, P 8)
However, the Utility subsequently decreased its request by $43,323 in its rebuttal
testimony to correct an error in estimating the increase in general liability
insurance (TR 777; EXH 79, P 6) Staff’s recommended adjustments are discussed
below.
Annualized AWT O&M Expense
As affirmed
by KWRU witness Swain, the Utility’s test year letter clarified that the AWT
O&M expenses in its request were not growth related. (TR 806) KWRU
operations were required to meet AWT Standards on January 1, 2016. (TR 80) Actual
expense data for January 2016 through September 2016 was provided in response
to discovery. (EXH 52, BSP 103; EXH 56, BSP 1563; EXH 62, BSP 1615) Therefore,
the actual data through September 2016 can reasonably and adequately gauge
O&M expenses associated with AWT operation.
OPC witness
Merchant testified that it is appropriate to make pro forma adjustments for the
implementation of AWT operation on the existing plant. (TR 365) Witness
Merchant provided an estimate based on the actual data from January to April
2016. (TR 365) Witness Merchant multiplied the majority of the expense accounts
by 3 to reflect a full year of expenses. (TR 365) For chemicals, purchased
power and sludge hauling expenses, witness Merchant multiplied the first four
months by 3.25 instead of 3 to recognize that the flows generally increase in
the last quarter of the year. (TR 365)
In response
to OPC’s Phase I O&M expense adjustments, KWRU witness Swain testified that
given the nature of pro forma expenses being estimated, the passage of time
makes additional data available to rely on for evaluating original projections.
(TR 775) Witness Swain further stated that it is appropriate to consider this
new information in projections, as OPC witness Merchant did in her Phase I
O&M adjustments. (TR 775) However, witness Swain ultimately asserted that
the revised pro forma AWT O&M expenses in her rebuttal testimony were the
appropriate level. (TR 775-777)
For Phase II
O&M expenses, witness Merchant adjusted pro forma expenses provided by the
Utility using another method. (TR 369) However, staff believes that witness
Merchant’s methodology for determining Phase I O&M expenses, which relies
on known information for 2016, is adequate to evaluate the Utility’s pro forma
O&M expense request, as characterized in its test year letter. Similar to
OPC, staff annualized the actual costs in order to determine a full year of
costs. However, staff had the benefit of additional 2016 data.
Additionally,
witness Merchant applied her Phase I methodology to all O&M expense
accounts. (TR 365-366) Staff believes it is reasonable to evaluate the level of
all O&M expenses in order to best reflect the total effect of upgraded AWT
operations. Therefore, in addition to the expenses included in KWRU’s pro forma
request, staff also annualized expenses for contractual services-accounting,
contractual services-legal, and transportation in its analysis.
However, for reasons addressed subsequently, staff does not believe this
methodology is appropriate to evaluate the Utility’s pro forma expense request
for salaries and wages, pensions and benefits, and workman’s compensation
insurance.
For general
liability insurance, contractual services-engineer, contractual
services-accounting, contractual services-legal, contractual services-testing,
contractual services-other, transportation, and miscellaneous expenses, staff
performed a straight line annualized calculation. In other words, staff made no
adjustments to these costs based on flows. This is consistent with the approach
taken by witness Merchant and is supported by record evidence which identified
costs that can be correlated to flows. (EXH 63, BSP 1642-1643)
For sludge
disposal, purchased power, chemicals, materials and supplies, the annualized
calculation was based on historic consumption patterns in order reasonably
capture months of higher flows. Based on this review, flows for 2016 do not
appear representative of a typical year. Therefore, staff increased costs to
reflect flows based on historic growth rates. As with the previously discussed
O&M accounts, staff’s approach is consistent with the approach taken by
witness Merchant and is supported by record evidence which identifies costs
that can be correlated to flows. (EXH 63, BSP 1642-1643)
For the
specific expenses discussed, the Utility’s updated filing reflected a total pro
forma increase of $591,188 for AWT operations. (EXH 17, P 8) Staff believes the
appropriate level of additional O&M expenses necessary to reflect AWT
operations is the incremental difference between the annualized 2016 data and the
2014 adjusted test year amount for each expense. Staff compared this
calculation to the Utility’s pro forma request and recommends that pro forma
O&M expenses should be decreased by $337,708.
Table 23-1
Adjustments to Annualized
Pro Forma O&M Expenses
|
Expense Description
|
Annualized 2016 Total
|
Change over Adjusted Test Year
|
Utility Requested
|
Recommended
Adjustment
|
|
Sludge Disposal
|
$77,177
|
$37,783
|
$109,334
|
($71,551)
|
|
Purchased Power
|
173,548
|
26,837
|
81,164
|
(54,327)
|
|
Chemicals
|
184,229
|
151,899
|
257,071
|
(105,172)
|
|
Materials & Supplies
|
31,119
|
(12,549)
|
31,562
|
(44,111)
|
|
Contractual Services-Engr.
|
18,650
|
12,033
|
4,730
|
7,303
|
|
Contractual Services-Acct.
|
30,967
|
7,739
|
$0
|
7,739
|
|
Contractual Services-Legal
|
6,018
|
4,519
|
$0
|
4,519
|
|
Contractual Services-Testing
|
18,243
|
1,268
|
20,673
|
(19,405)
|
|
Contractual Services-Other
|
45,054
|
7,252
|
28,557
|
(21,305)
|
|
Transportation
|
24,092
|
1,064
|
$0
|
1,064
|
|
Insurance-General Liability
|
41,444
|
5,496
|
50,023
|
(44,527)
|
|
Advertising Expense*
|
1,075
|
(1,439)
|
(1,564)
|
125
|
|
Miscellaneous Expense
|
44,684
|
11,577
|
9,638
|
1,939
|
|
Total
|
$697,400
|
$253,480
|
$591,188
|
($337,708)
|
*The Utility’s pro
forma request reflects an adjustment to correct an error in the test year.
Source: EXH 52, BSP 103; EXH 56, BSP 1563; EXH 62, BSP 1615
Pro Forma Salaries
The Utility requested a pro forma increase of $194,000 to
salaries and wages expense for four additional field positions — an
administrative assistant, a licensed operator, a system technician/mechanic,
and a helper to assist with sludge removal. (EXH 9, P 97-98; EXH 17, P 8; EXH
49, BSP 15) Staff believes the inclusion of the new field positions are
reasonable based on the additional labor requirements necessary to meet AWT
standards. (EXH 9) The new administrative position is also reasonable given the
additional administrative needs that will arise as a direct result of increased
operations. (EXH 9)
As testified by KWRU witness Johnson, the Utility has lost
numerous employees in the past few years to competitors. (TR 75) The Utility
also provided a status update of the AWT positions, which included all other
positions for the past two years that reflected employee turnover in 2016. (EXH
49, BSP 25) The Utility requested the additional AWT-related full-time positions
based on the employment level in the 2014 test year. OPC annualized this
expense, along with all others, in its Phase I revenue requirement calculation
based on the premise that total Phase I O&M expense should not exceed the
levels incurred in 2016 because it represented the increase in O&M expenses
for the existing plant associated with operating at AWT standards. However, in
its Phase II revenue requirement calculation, which reflects the inclusion of
the pro forma plant expansion, OPC included salaries and wages expense
associated with all four positions. As
addressed in Issue 2, staff does not believe that two-phased rates are
necessary in light of the estimated completion date of the pro forma plant
expansion. Although useful to evaluate and adjust other AWT-related expenses,
an annualized calculation of 2016 salaries and wages expense does not
accurately reflect the expense associated with the total employment level
requested by KWRU and agreed upon by OPC in its Phase II revenue requirement. Therefore,
staff believes it is not appropriate to adjust the Utility’s pro forma request
based on annualized 2016 salaries and wages expense.
Instead, staff evaluated the individual salaries that
comprised KWRU’s total pro forma salaries and wages expense. The Utility
provided salary and wage comparisons to support the salaries for the positions
it requested due to the needs of upgraded AWT operations. (EXH 49, BSP 23-24)
The comparisons are adequate to support the requested salaries and are from
local sources. KWRU witness Swain testified that the administrative assistant
and the helper to assist with sludge removal had both been hired at $46,000,
which the Utility provided documentation to support. (TR 775-776; EXH 49, BSP
97; EXH 62, P 1615) Staff recommends an adjustment of $4,000 to decrease the
recommended salary of the administrative assistant to reflect the actual salary
for the position. In addition, the salary of the sludge removal helper should
be increased by $2,000 to reflect the maximum of the range provided by the
Utility. This results is a total decrease of $2,000 to salaries and wages
expense.
The Utility also included pro forma increases of $47,135
to employee pension and benefits and $8,627 to workman’s compensation
insurance. (EXH 17, P 8) KWRU explained that both adjustments directly
corresponded to the additional salaries requested in its pro forma O&M
expense. (EXH 27, P 1) As such, it is
also inappropriate to use the annualized 2016 level of each expense to adjust
the Utility’s pro forma request because both expenses are directly dependent on
staffing levels. The Utility’s requested pro forma pensions and benefits
expense is 24.0 percent of its requested salaries and wages expense and pro
forma workman’s compensation insurance is 4.4 percent, as compared to the
historic test year percentages of 15.7 percent and 3.5 percent, respectively. Using
2016 levels of each expense results in a ratio of 20.4 percent and 3.4 percent
for pension and benefits and workman’s comp insurance, respectively. (EXH 52,
BSP 103) Based on this comparative analysis, staff believes the percentage of
the Utility’s requested workman’s compensation insurance expense is reasonable.
Additionally, KWRU witness Johnson justified the need for
increased pensions and benefits, specifically in light of the turnover due to
competitors. (TR 74-76) As such, staff believes that the ratios reflected in
the Utility’s pro forma request should be used to make corresponding
adjustments to the decrease in salaries. Based on staff’s recommended pro forma
salaries and wages expense, the corresponding adjustment to employee pensions
and benefits and workman’s comp insurance expenses should be a decrease of
$1,055 and $708, respectively.
CONCLUSION
Based on staff’s recommended adjustments to pro forma AWT
O&M expenses, the appropriate level of O&M expenses to reflect the
implementation of AWT operations should be $1,647,853. This total does not
reflect the additional O&M expenses addressed in Issues 25-28. Accordingly,
pro forma O&M expense should be decreased by $341,471 (-$337,708 - $2,000 -
$1,055 - $708).
Issue 24:
What adjustments, if any, should be made to pro
forma contractual services accounting and engineering fees?
Recommendation:
Contractual services-accounting expense should be
decreased by $12,350. No adjustment is necessary for contractual
services-engineering expense. (Hill, Sewards, Norris)
Position of the Parties
KWRU:
None.
OPC:
The $12,350 pro forma increase for accounting
services should be disallowed. The
additional work performed in the test year did not warrant an increase on a
going-forward basis and the Utility indicated that the increase in wastewater
treated would not increase the prospective amount of accounting transactions
relative to the amount of flows received.
Engineering expense should also be decreased by $653 to correct expenses
for an invoice that was capitalized.
County:
Agree with OPC that KWRU’s proposed $12,350 pro
forma increase for accounting services should be disallowed and an additional
disallowance of $653 should be made to correct expenses for a capitalized
invoice.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
The Utility
stated that no adjustment should be made for contractual accounting and
engineering fees. (KWRU BR 20) In its brief, KWRU cited the large number of
documents requested during staffs audit as well as KWRU’s limited staff
available for in-house accounting services as justifiable reasons for the
increase in contractual services accounting. (EXH 9, P 4, 96; KWRU BR 22) The
Utility also stated that the in-house staff does not possess the skills and
experience necessary to provide the functions of a Certified Public Accountant
(CPA). As a result, the increased cost in contractual services accounting are
necessary. (EXH 51, BSP 60; KWRU BR 22)
OPC
OPC argued
that the additional accounting services should be disallowed. (BR 32) The
additional work performed did not warrant an adjustment to accounting fees on a
going-forward basis. (OPC BR 32) Additionally, KWRU indicated that the amount
of accounting transactions would not increase with the amount of wastewater
treated. (TR 360)
County and Harbor Shores
In their
briefs, the County and Harbor Shores agreed with OPC’s position (County BR 32;
Harbor Shores BR 2)
ANALYSIS
Staff addressed KWRU’s pro forma request for contractual
services-engineering expense in Issue 23, as it was related to upgrading
operations to meet AWT Standards. Therefore, no further adjustments are
necessary.
In its MFRs, KWRU reflected an expense of $25,762 for
contractual services-accounting in the test year. (EXH 17, P 6) This amount
included a test year adjustment to increase the expense by $12,350 for
additional accounting services. (EXH 17, P 6) In response to a staff data
request, the Utility stated that the $12,350 increase was based on an
additional hour of bookkeeping for 49.5 weeks at an hourly rate of $250 an
hour. (EXH 9, P 2) Therefore, staff treated this as a pro forma request.
As discussed in Issue 23, the expense for contractual
services-accounting was included in staff adjustments to reflect the total
effect of AWT operations on O&M expenses. Staff believes that the pro forma
adjustment made in Issue 23 adequately reflects the need for additional
contractual accounting services on an ongoing basis. As such, the additional
pro forma request is not necessary and contractual services-accounting expense
should be decreased by $12,350.
CONCLUSION
No adjustment is necessary for
contractual services-engineering expense. Based on the above, contractual
services-accounting expense should be decreased by $12,350.
Issue 25:
What adjustment, if any, should be made to KWRU’s
test year expenses for management fees charged by Green Fairways?
Recommendation:
Contractual services-management expense should be
reduced by $60,000, as it is duplicative in nature. (Sewards, Norris)
Position of the Parties
KWRU:
None.
OPC:
Management fees should be decreased by $60,000
for an affiliate transaction that is not necessary for the provision of regulated
utility service. The majority of the management duties provided by Green
Fairways is duplicative of the in-house officers and management KWRU has hired
since its last rate case. The services
provided by the affiliate primarily benefit the Utility’s shareholder and the
affiliate does not provide true, independent third party oversight over the
Utility.
County:
Agree with OPC that KWRU’s proposed management fees
should be decreased by $60,000.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
KWRU argued that no adjustments should be made to the
management fees charged by Green Fairways. (KWRU BR 22) The Utility contended
that Mr. William Smith, an officer and shareholder of Green Fairways, gives his
personal guarantee to secure loans for KWRU and without his guarantee, the
Utility would not be able to obtain these loans. KWRU also contended that the
$60,000 management fee is well below the market rate of 3 percent for
management fees. (EXH 49, BSP 26-30; KWRU BR 22) The Utility stated that
without proper compensation for providing this guarantee, there is no incentive
to utilize debt, thus, incentivizing the Utility to instead eliminate liability
and ultimately raising revenue requirements and costs for customers. (KWRU BR 23)
Green Fairways also oversees legal services and manages the Utility’s
President. (TR 608)
OPC
OPC testified that management fees should be decreased by
$60,000. (OPC BR 33) OPC believes that the Commission properly found that these
services primarily benefit Mr. Smith as a shareholder in the PAA proceeding.
(TR 362; OPC BR 33) OPC stated that the majority of management duties are
duplicative of the in-house management duties. (TR 362; OPC BR 33) OPC also
believes that since Mr. Smith owns both companies, they are related parties and
the costs are unreasonable. (EXH 9, P 102; OPC BR 34)
County and Harbor Shores
In their briefs, the County and
Harbor Shores agreed with OPC’s position. (County BR 32; Harbor Shores BR 2)
ANALYSIS
The Utility included contractual services-management
expense of $60,000 in the test year for management services provided by Green
Fairways, Inc. (EXH 17, P 6) Mr. William Smith owns the controlling interest in
Green Fairways. (TR 712) Mr. William Smith also owns the controlling interest
in WS Utilities, the parent company of KWRU. (TR 712)
Staff believes that related party transactions require
close scrutiny. However, the fact that the transaction is between related
parties does not mean the transaction is per se unreasonable. It is the
utility's burden to prove that its costs are reasonable.
The burden is even greater when the transaction is between related parties. The
standard to use in evaluating affiliate transactions is whether those
transactions exceed the going market rate or are otherwise inherently unfair.
The Utility confirmed that the day-to-day operations were
switched to full-time employees as opposed to solely contractual services. (EXH
9, P 6) A breakdown of each position was also provided. (EXH 9, P 86) In the
listing of Mr. Johnson’s responsibilities provided, it cited responsibilities
including budgeting, capital planning, financial planning and reporting, review
of bid packages, and financing. (EXH 9, P 89) Mr. Johnson also provides
operational and personnel management. (EXH 9, P 89) KWRU stated that the
president, Mr. Johnson, spends an “average 45 hours a week” handling day-to-day
operations. (EXH 9, P 100) Further, the Utility asserted that Mr. Johnson performs
other matters for KWRU outside of regular business hours, such as PSC hearings,
wastewater workshops, Board of County Commissioners Meetings, and required
continuing education training (WWTP Operator License). (EXH 9, P 100)
KWRU also provided responsibilities of Green Fairways in
response to a data request. (EXH 9, P 102) In addition to Mr. Smith providing
personal guarantee for loans, the Utility stated that Green Fairways supervises
Mr. Johnson, provides property and financial management, conducts financial
reports, and provides accounting services related to financing and equity for
KWRU. (EXH 9, P 102)
Staff believes that the majority of responsibilities
attributed to Green Fairways are duplicative of in-house management duties. As
such, contractual services-management expense should be reduced by $60,000.
CONCLUSION
Based on the above, staff recommends that contractual
services-management expense should be reduced by $60,000 as it is duplicative
in nature.
Issue 26:
What is the appropriate amount of rate case expense?
Recommendation:
The appropriate amount of rate case expense is $430,828.
This expense should be amortized over four years for an annual expense of $107,707.
Based on the Utility’s updated filing, the annual amortization of rate case
expense should be increased by $9,045. (Frank, Norris)
Position of the Parties
KWRU:
Actual rate case expense excluding the cost to
respond to deficiencies through completion of the case. The amount expended
through October 24, 2016 was $396,994 with additional rate case expense of
$86,782 for a total rate case expense of $483,776.
OPC:
The final amount of rate case expense should be fully
supported and reasonable. Duplicative and excessive costs should be removed for
correcting MFR deficiencies. Duplicative, unsupported, and other costs not
related to rate case expense should be removed. Only reasonable costs for
customer notices, printing and shipping, and rate case travel expenses should
be allowed.
County:
Agrees with OPC.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, the Utility stated that actual rate case
expense as of October 24, 2016, supported with documentation, was $396,994.
(EXH 52, BSP 14; KWRU BR 23) Based on the most recent actual and projected rate
case expense submitted as evidence, the total rate case expense evidenced at
trial would be $461,126. (EXH 52, BSP 14; KWRU BR 23)
KWRU stated that although intervenors contend that certain
legal expenses of Friedman & Friedman, P.A. and Smith Oropeza Hawks, P.L.
are duplicative and not reasonable, the two firms have had a distinct
separation of duties, and took measures to minimize legal expenses. (KWRU BR
24) The Utility detailed that Smith Oropeza Hawks served as primary litigation
counsel, with Friedman & Friedman providing input and advisement; as such,
the two firms have not overlapped on work performed, other than brief communications
to divide work between the two firms. (KWRU BR 24) The Utility also stated Mr.
Smith and Mr. Friedman attended Commission conference calls and participated in
the conferences to ensure that no miscommunications existed and that work is
not duplicated. (KWRU BR 25) Smith Oropeza Hawks has handled the discovery load
using its lowest cost attorney to coordinate efforts of witnesses and draft
discovery documents. (KWRU BR 25)
OPC
In its calculation of Phase I and II rates, OPC included
$38,005 to reflect the amortization of the Commission approved rate case
expense in the PAA Order. (TR 369; OPC BR 34) OPC witness Merchant testified
that the final amount of rate case expense should be fully supported and
reasonable, and should not be duplicative. (TR 367; OPC BR 34) OPC explained
that adjustments should be made to remove duplicative and excessive legal fees,
filing fees, and costs incurred to submit and address deficiencies in the MFRs,
and to allow a reasonable estimate to complete the case. (TR 367; OPC BR
34)
OPC stated that it is not appropriate for KWRU to seek
reimbursement from its ratepayers to have two attorneys reviewing the same work
product and attending the same meetings. (TR 367, OPC BR 35) OPC asserted that
it is the Utility’s burden to demonstrate that the legal fees incurred are not
duplicative and customers should not pay double (or any additional) rate case
expense to have two attorneys review a data request, a discovery response,
attend a conference call with staff, attend the prehearing conference, or pay
for hours associated with “researching” different Commission functions such as
the PAA process. (TR 367; OPC BR 35) OPC explained that at the November 7-8
hearing, OPC and Monroe County each had one attorney actively litigating their
clients’ case; whereas, KWRU had two. (OPC BR 35) OPC stated that when making
adjustments to KWRU’s “estimate to complete,” the Commission should allow rate
case expense for the participation of only one attorney, and disallow costs for
the second as being unnecessary and unreasonable. (OPC BR 35)
Witness Merchant testified that accounting fees should be
reduced to remove duplicate filing costs to correct MFR deficiencies, to remove
duplicative, unsupported, and other accounting invoices not related to rate
case expense, and to reflect a reasonable level of estimated hours to complete
the case. (TR 367; OPC BR 35) OPC asserted that the Commission should
scrutinize the accounting rate case expense invoices to determine whether the
Utility’s inadequate record keeping has increased the amount of accounting work
performed to prepare the MFRs, address audit findings and respond to discovery,
and whether any claimed rate case expense related to bringing the Utility’s
books into compliance included in rate case expense should be disallowed. (OPC
BR 35) Witness Merchant also testified that adjustments are appropriate to
reflect a reasonable cost for customer notices, printing and shipping, and rate
case travel expenses. (TR 367; OPC BR 35)
County
The County
stated the final amount of rate case expense should be fully supported by
record evidence, not duplicative, and reasonable. (TR 364-369; County BR 33) The
County contended it is unreasonable for two attorneys to duplicate work. (TR
367; County BR 33)
Harbor Shores
In its brief, Harbor Shores agreed with OPC’s position.
(Harbor Shores BR 2)
ANALYSIS
In its
updated filing, the Utility requested $394,648 for current rate case expense. (EXH
17, P 8) Staff made two requests for an update of the actual rate case expense
incurred, with supporting documentation, as well as estimated amount to
completion. On October 27, 2016, the Utility submitted its last revised update
of actual and estimate rate case expense, through completion of the hearing process,
which totaled $532,146. (EXH 18; EXH 52, BSP 112) A breakdown of the Utility’s
requested rate case expense is as follows:
Table 26-1
KWRU’s
Revised Rate Case Expense Request
|
|
Actual
|
Additional
Estimated
|
Revised
Total
|
|
Friedman & Friedman, PA
|
$55,678
|
$37,401
|
$93,079
|
|
Smith, Oropeza, & Hawks, PL
|
169,508
|
44,100
|
213,608
|
|
Milian, Swain, & Associates
|
134,521
|
21,350
|
155,871
|
|
Jeffery Allen,
|
10,275
|
3,000
|
13,275
|
|
M&R Consultants
|
12,833
|
26,500
|
39,333
|
|
Weiler Engineering Corp.
|
5,804
|
0
|
5,804
|
|
Filing Fee
|
0
|
0
|
0
|
|
Customer Notices, Printing, and Shipping
|
4,707
|
293
|
5,000
|
|
Travel
|
2,465
|
2,804
|
5,269
|
|
BB&T Escrow Fee
|
1,200
|
0
|
1,200
|
|
Total
|
$396,991
|
$135,448
|
$532,439
|
Source: EXH 18; EXH
52, BSP 112
Pursuant
to Section 367.081(7), F.S., the Commission shall determine the reasonableness
of rate case expense and shall disallow all rate case expense determined to be
unreasonable. Staff has examined the requested actual expenses, supporting
documentation, and estimated expenses as listed above for the current rate
case.
Smith, Oropeza, Hawks PL
(SOH)
KWRU witness Johnson provided documentation detailing rate
case expense for the law firm Smith, Oropeza, Hawks, P.L. (SOH) totaling
$169,508. (EXH 52, BSP 112) During the PAA process, the firm of Friedman and
Friedman (F&F) was retained as the primary counsel for KWRU before the
Commission. (EXH 9, P 7) However, the Utility also retained the services of SOH
to assist with the rate case during this time. Staff reviewed SOH’s invoices
and believes SOH’s hours associated with data requests related to the Last
Stand Litigation are reasonable since the firm has represented the Utility for
over five years and has in-depth familiarity with the on-going operations and
legal issues pertaining to the Last Stand litigation. In addition, staff
believes given the location of the Utility, it would have been more costly for
F&F to coordinate with the County to address its concerns with the rate
increase. As such, staff believes SOH’s hours related to discussions and
meetings with the County regarding the rate case are reasonable.
Once the PAA Order had been protested by OPC and the
County, SOH assumed the role of primary counsel, with F&F assisting only on
items related to unique PSC regulatory matters. (EXH 51, BSP 75) OPC witness
Merchant testified it is the Utility’s burden to show that legal fees incurred
are not duplicative, however, she also testified that the Utility deserves
equal representation as OPC and the County. (TR 367, 405) Given the complexity
of the hearing process compared to the PAA process, and KWRU’s effort to retain
adequate representation, staff believes it was reasonable for KWRU to retain
two legal counsels.
Staff reviewed itemized invoices from both law firms in an
effort to remove any duplicative legal fees. As such, staff made adjustments
for specific work performed by SOH that appear duplicative to F&F. Upon
reviewing invoices between the two firms, staff believes that $14,473 in fees
and $570 in costs for SOH are duplicative of F&F and should be removed.
SOH’s last estimate to complete the rate case was dated as
of August 31, 2016. (EXH 49, BSP 4) The estimate included fees for 126 hours at
$350/hr. totaling $44,100. (EXH 49, BSP 4) Subsequent to the last updated
estimate, KWRU provided invoices detailing actual SOH legal fees incurred. (EXH
52, BSP 112) Therefore, staff reduced the estimate to complete by the amount of
actual expense provided subsequent to the last updated estimate. This results
in a reduction of $35,000 (100 hrs. x $350)
In
summary, staff recommends reducing SOH rate case expense by $50,043 ($14,473+
$570 + $35,000).
Friedman
& Friedman, P.A. (F&F)
KWRU witness Johnson provided documentation detailing rate
case expense for the law firm Friedman & Friedman, P.A. (F&F). (EXH 52,
BSP 112) As mentioned above, F&F was retained as the primary counsel for
KWRU before the Commission during the PAA process. (EXH 9, P 7) However, during
the hearing process, SOH assumed the role of primary counsel, with F&F
assisting only on items related to unique PSC regulatory matters. (EXH 51, BSP
75) Detailed invoices were provided through October 3, 2016. The actual fees
and costs totaled $47,988 with an estimated $52,848 to complete the rate case,
totaling $100,836 ($47,988 + $52,848). (EXH 52, BSP 112)
F&F’s actual expenses included the $4,500 filing fee.
(EXH 52, BSP 112) KWRU is responsible for the payment of the filing fee;
therefore, staff removed the $4,500 from legal costs and included it under a
filing fee line item.
According to invoices, the law firm of F&F identified
and billed the Utility $1,188 related to the correction of MFR deficiencies.
(EXH 52, BSP 112) The Commission has previously disallowed rate case expense
associated with correcting MFR deficiencies because of duplicate filing costs.[24] Consequently,
staff recommends an adjustment to reduce F&F’s actual legal fees by $1,188.
F&F’s last estimate to complete the rate case was
submitted as of October 22, 2016. The estimate included fees for 82 hours at
$360/hr. and additional costs for photocopies and attending the Agenda
Conference, totaling $3,957. (EXH 49, BSP 4) Based on previously provided
estimates for travel time to Tallahassee and Key West, staff reduced hours for
travel resulting in a reduction of $9,900 ($360 x 27.5 hrs.). Further, staff decreased
estimated travel costs $2,134 for to remove hotel reservations paid for by KWRU
and to reflect previously documented travel costs for similar trips. (EXH 52,
BSP 112) Accordingly, staff recommends that F&F legal fees should be
reduced by $17,722 ($4,500 + $1,188 + $9,900 + $2,134).
Milian, Swain & Associates (MS&A)
The Utility provided documentation detailing rate case
expense for accounting services performed by Milian, Swain, & Associates
(MS&A). The actual fees and costs totaled $134,521 with an estimated
$46,000 to complete the rate case, totaling $180,521 ($134,521 + $46,000). (EXH
18, P 75; EXH 52, BSP 112)
In regard to MS&A’s actual expenses, staff reviewed
the supporting documentation and identified 49.25 hours related to correcting deficiencies.
(EXH 18, P 75) As stated previously, the Commission has previously disallowed
rate case expense associated with correcting MFR deficiencies because of
duplicate filing costs. As such, staff recommends that $8,813 be removed from MS&A’s
accounting consultant fees.
MS&A’s last estimate to complete the rate case was
submitted as of September 30, 2016. (EXH 52, BSP 112) The estimate included
fees related to discovery and preparation for the hearing totaling $20,850 and
travel costs totaling $500. (EXH 18, P 75) Staff believes MS&A’s estimate
to complete is reasonable and therefore recommends no adjustment.
In summary, staff
recommends reducing MS&A rate case expense by $8,813.
Jeffery
Allen, PA
KWRU witness Johnson provided documentation detailing rate
case expense for accounting services performed by Jeffery Allen, P.A. The
actual fees and costs for Mr. Allen’s services totaled $10,275 with an additional
$3,000 estimated to complete the rate case. (EXH 52, BSP 112)
Descriptions of work performed on his invoices were vague
in relation to the rate case, and staff requested further clarification. (EXH 9,
P 7) According to the Utility’s response to staff’s third data request, Mr.
Allen’s work performed in the months of February, March, and July was
associated with the restatement of prior year’s annual reports. (EXH 9, P 7) As
such, staff believes that 15 hours at $250 an hour, for a total of $3,750 should
be removed as expense unrelated to the rate case.
Jeffery Allen’s last estimate to complete the rate case
was submitted as of July 1, 2016. (EXH 18, P 67) The estimate included $3,000
to complete the rate case through the hearing. (EXH 18, P 67) Subsequent to the
last updated estimate, KWRU provided invoices detailing actual accounting fees
for Jeffery Allen incurred. Therefore, staff reduced the estimate to complete
by the amount of actual expense provided subsequent to the last updated
estimate. This results in a reduction of $3,000 for estimate to complete.
In total, staff recommends reducing Jeffery Allen’s’ rate
case expense by $6,750 ($3,750 + $3,000).
M&R Consultants
KWRU
witness Johnson provided documentation detailing rate case expense for M&R Consultants
through October 21, 2016. (EXH 52, BSP 112) The invoices included consulting
services for engineering-related schedules, responses to staff’s data requests,
review staff recommendations, responses to discovery, and prepare and assist
testimony. The actual fees and costs totaled $12,175. Staff reduced this
expense by $188 to remove fees associated with deficiencies. (EXH 52, BSP 112)
M&R’s
last estimate to complete the rate case was submitted as of September 1, 2016.
(EXH 18, P 94) The estimate included fees for 166 hours at $150/hr. (EXH 18, P
94) Based on previously provided estimates for hearing preparation and travel
time to Key West, staff reduced hours for travel and preparation for the
hearing by $19,688. In total, staff recommends reducing M&R rate case
expense by $19,875 ($188 + $19,688).
Weiler Engineering Corp.
KWRU witness Johnson provided documentation detailing rate
case expense for Weiler Engineering Corp. The actual fees and costs totaled
$5,096 for work associated with MFRs and the first data request. (EXH 52, BSP
112) Staff reviewed the invoices provided and believes this expense is
reasonable. There was no estimate to complete provided in the record.
Therefore, staff made no adjustments.
Filing Fee
The Utility included $4,500 in its MFR Schedule B-10 for
the filing fee. (EXH 16, P 34) As mentioned above, the filing fee was also
included in F&F’s legal costs. Staff removed the filing fee from F&F’s
legal costs and included the $4,500 as part of filing fee expense.
Customer
Notices, Printing, and Shipping
KWRU witness Johnson provided documentation detailing rate
case expense for printing, shipping and customer notices, totaling $4,707. (EXH
52, BSP 112) Staff reviewed invoices from FedEx, Office Max, U.S. Postmaster,
and pay pal and believes these costs are reasonable. However, staff removed
$877 for a FedEx expense that was unsupported. Staff also increased this
expense by $20 to reflect incorrectly recorded invoice. (EXH 52, BSP 112) In
total, actual rate case expense was decreased by $857 (-$877 + $20)
Based on KWRU’S original filing, the remaining estimate to
complete would be $293 for final notices, based on the actual documentation
provided. (EXH 16) However, the Utility provided the support documentation
needed to verify the actual costs associated with two notices. (EXH 52, BSP 112) According to the invoices, costs for the
initial notice and customer meeting notice totaled $1,476. Based on the total cost for the first two
notices, staff believes a reasonable estimate for the final notice is $738
($1,476 / 2). Therefore the Utility’s estimate for final notices should be
increased by $446. In total, staff
recommends, reducing customer notice, printing, and shipping expense by $411
(-$857 + $446).
Travel
KWRU provided documentation detailing rate case expense
for travel totaling $2,465. (EXH 52, BSP 112) The expenses supported were
related to KWRU witness Johnson’s attendance at the PAA Agenda Conference. In
addition, KWRU provided estimated hotel costs for three consultants to attend
the hearing totaling $2,804. (EXH 52, BSP 112) The documentation provided for
the hotel reservations reflected an additional night for each consultant, two
day prior to the technical hearing. Staff believes that this additional expense
falls outside the timeframe of the technical hearing and should be removed from
rate case expense. As such, travel expense should be decreased by $1,297.
BB&T
Escrow Fee
KWRU provided documentation for a
BB&T escrow fee, in the amount of $1,200, that was incurred when the
Utility chose to implement the rates set forth in the PAA Order, subject to
refund. (EXH 52, BSP 112) Pursuant to Rule 25-30.360, F.A.C., in no instance
should maintenance and administrative costs associated with any refund be borne
by the customers. The costs are the responsibility of, and should be borne by
the Utility. As such, staff recommends removing the $1,200 escrow fee.
CONCLUSION
Based upon the adjustments discussed above, staff
recommends that KWRU’s revised rate case expense of $532,146 be decreased by
$101,318 to reflect staff’s adjustments, for a total of $430,828. A breakdown
of staff’s recommended rate case expense is as follows:
Table
26-2
Staff Recommended Rate Case Expense
|
Description
|
Utility Revised
Act. & Est.
|
Staff
Adjustment
|
Recom.
Total
|
|
Legal Fees
|
$306,687
|
($67,765)
|
$238,922
|
|
Accounting Consultant Fees
|
169,146
|
(15,563)
|
153,583
|
|
Engineering Consultant Fees
|
45,137
|
(19,875)
|
25,262
|
|
Filing Fee
|
0
|
4,500
|
4,500
|
|
Customer Notices,
Printing, and Shipping
|
5,000
|
(411)
|
4,589
|
|
Travel
|
5,269
|
(1,297)
|
3,972
|
|
BB&T Escrow Fee
|
1,200
|
(1,200)
|
0
|
|
Total
|
$532,439
|
($101,610)
|
$430,828
|
Source: (EXH 9, P 7; EXH 51,
BSP 75; EXH 52, BSP 112)
The
recommended total rate case expense of $430,828 should be amortized over four
years, pursuant to Section 367.0816, F.S. This
represents an annual expense of $107,707. As stated previously, in its updated
filing, the Utility requested $394,648 for current rate case expense, with an
annual amortization amount of $98,662. (EXH 17, P 8) Based on the Utility’s updated
filing, the annual amortization of rate case expense should be increased by
$9,045 ($107,707 - $98,662).
Issue 27:
What is the appropriate amount and accounting
treatment of accounting fees incurred by the utility to restate its 2007 to
2012 Annual Reports?
Recommendation:
The Utility’s requested 5-year amortization of
$63,055 for restatement of the 2007 to 2012 Annual Reports should be
disallowed. Staff’s adjustments to reflect annualized 2016 levels in Issue 23
effectively negated all test year adjustments; therefore, no further adjustment
is necessary. (Sewards)
Position of the Parties
KWRU:
$63,055.00 deferred and amortized over 5 years, per Audit
Finding 6.
OPC:
Amortization of $11,678 for accounting costs to
restate KWRU’s books after the last rate case decision is unreasonable and
should be disallowed. No restatement occurred, nor did the Utility make Commission-ordered
adjustments from the last rate case. The ratepayers should not be required to
pay in future rates for
historical costs which should have been incurred annually to repair KWRU’s
records since the last rate case.
County:
Agree with OPC that KWRU’s proposed amortization of
$11,678 for accounting costs should be disallowed.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’ ARGUMENTS
KWRU
KWRU stated that the expenditures for restatement of the
2007 to 2012 Annual Reports were necessary and have long-term benefits for the
Utility and its rate payers. (TR 772; KWRU BR 25) The Utility asserted that
amortization of the costs over a 5-year period are appropriate considering the
amount of work that was put into preparing the books for staff auditors and to have proper recording of all records. (TR 772;
KWRU BR 25)
OPC
OPC contended that KWRU failed to explain how this
restatement provided any future benefit to ratepayers. (TR 341; OPC BR 36) OPC
also stated the Utility failed to make Commission-ordered adjustments from the
last rate case. (OPC BR 36) OPC asserted that ratepayers should not have to pay for the Utility failure to correctly maintain its
books. (TR 341; OPC BR 36)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC’s position. (County BR 33; Harbor Shores BR 2)
ANALYSIS
In its MFRs, the Utility proposed a test year adjustment
of $11,678 to other deferred expenses to recognize an amortization of $58,390
over a 5-year period for restatement of the annual reports from 2007 to 2012.
(EXH 17, P 6) KWRU stated that “Milian, Swain & Associates, Inc., (MSA) was
engaged to review the Utility’s Annual Reports filed subsequent to the prior
case. . . After review, MSA recommended adjustments to the Utility's General Ledger,
and prepared revised Annual Reports to reflect the adjustments.” (EXH 9, P 2)
The Utility expanded on this explanation further by specifically citing plant
improvements subsequent to the last rate case that were not properly
capitalized. (EXH 51, BSP 58) KWRU witness Swain testified that correcting the
books is an appropriate cost of the Utility. (TR 772)
Staff auditors reclassified $4,668 from O&M Expense to
the unamortized balance of deferred accounting fees, as accounting fees for the
cost incurred to restate the 2007-2012 Annual Reports bringing the total amount
deferred to $63,055. (EXH 48, P 24)
Staff believes that it was
appropriate for the Utility to correct its books. However, staff also believes
that ratepayers should not have to pay for the correction of Utility’s books
that were not properly kept from 2007 to 2012. Thus, staff recommends that the
Utility’s requested 5-year amortization of $63,055 for restatement of the 2007
to 2012 Annual Reports should be disallowed.
CONCLUSION
Based on the above, the Utility’s requested 5-year
amortization of $63,055 for restatement of the 2007 to 2012 Annual Reports
should be disallowed. Staff’s adjustments to reflect annualized 2016 levels in
Issue 23 effectively negated all test year adjustments; therefore no further
adjustment is necessary.
Issue 28:
What is the appropriate amount and accounting
treatment of fees associated with the legal challenge of KWRU’s FDEP Permit
Numbers FLA014951-012-DWIP, 18490-020, and 18490-021 for rate-setting purposes?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amount of fees associated with the
legal challenge of KWRU’s DEP permits is $496,973, and it should be amortized
over five years. The five-year amortization results in test year expense of
$99,395, which increases the requested amortization amount by $3,908.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$487,564.07 deferred and amortized over 5 years, per
PAA.
A.
For Phase I, if applicable
OPC:
The litigation fees of $477,436 were incurred to obtain
a permit for its plant expansion and new injection wells. Per the USOA, legal
fees associated with construction should be capitalized with the plant
construction costs and recovered over the life of the plant. These costs are
not non-recurring expenses for renewing an operating permit. The adjusted
balance should be recorded in CWIP, removed from working capital and O&M
Expenses.
County:
Agrees with OPC.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II plant should be increased by $477,436 to
capitalize the legal fees incurred to litigate the construction permit for the
treatment plant expansion and the two new injection wells. The Utility’s
requested deferred debit balance of $467,625 for the litigation fees should be
removed from Working Capital and test year O&M Expenses should be reduced
by $103,917 in amortization.
County:
Agrees with OPC.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU argued that the Last Stand permit challenge was not
only directed to the expansion of the plant, but to the operation of the plant.
(KWRU BR 26) KWRU further asserted that Intent to Issue Permit issued by
Department of Environmental Protection (DEP), and challenged by Last Stand, was
both an expansion and an operation permit, providing not only for the
construction of new infrastructure but for operation of the existing plant.
(KWRU BR 26) KWRU elaborated that the Intent to Issue Permit provided that
“[t]he existing WWTP and the proposed 0.350 MGD treatment train has and will be
modified to meet the advanced wastewater treatment (AWT) standards of Section
403.085(10), F.S.” (KWRU BR 26) KWRU further cited Rule 62-528.630, F.A.C.,
which provides that “[a]ll class V Group 3 wells designed to inject domestic
wastewater in Monroe County shall be required as part of the operation
application to provide reasonable assurance that operation of the well will not
cause or contribute to a violation of surface water standards…” (KWRU BR 26)
KWRU furthered its argument stating that the challenge was to the operation of
the injection wells as a whole, not just to new installations. (KWRU BR 26)
KWRU argued that it is appropriate to amortize legal
expenditures related to the referenced legal challenge because the challenge
was not only to the expansion of the wastewater treatment plant, but
significantly focused on the current operations of the plant. (TR 227; TR 576;
KWRU BR 26) KWRU contended that these expenditures are properly amortized over
a 5-year period. (KWRU BR 26-27)
OPC
OPC argued that the balance of the total litigation fees
should be $477,436. (OPC BR 37) OPC additionally asserted that these costs were
incurred directly by KWRU to obtain permission from DEP to build KWRU's
treatment plant expansion. (OPC BR 37) OPC explained that while the title of
the permit was labeled as an operating and construction permit, the permit for
the existing plant had two more years before it expired. (OPC BR 37)
OPC elaborated that this permit, along with the two permits
to build two additional shallow injection wells, were necessary only for the
fact that KWRU wanted and needed to expand its capacity. (OPC BR 37) Therefore,
OPC concluded that these legal fees to defend the plant expansion permit should
be included with the capital costs associated with the plant expansion and
should be recovered over the life of the plant, as required by the NARUC
Uniform System of Accounts (USOA). (OPC BR 37)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC. (County BR 33; Harbor Shores BR 2)
ANALYSIS
Last Stand Permit Challenge
On April 15, 2014, KWRU filed an application with DEP for
authorization to substantially modify the operation of its wastewater treatment
plant by increasing wastewater flows from 0.499 million gallons per day (MGP)
to 0.849 MGP. (TR 564) The existing permit was issued on February 20, 2012,
with an expiration date of February 19, 2017. (TR 564) DEP issued the “Notice
of Intent” to issue the modified permit on June 23, 2014. (TR 564) DEP’s action
was appealed by third-party respondents on August 5, 2014 and litigation
ensued. (TR 564) The case went before an Administrative Law Judge in the summer
of 2015, and the Final Order, Last Stand
v. KW Resort Utilities, Corp. et al., State of Florida Div, of Admin.
Hearings, DOAH Case No. 14-5302, was issued February 24, 2015. (EXH 51, BSP 81;
EXH 52, BSP 116) No further legal expenditures were associated with an appeal.
(EXH 56, BSP 1563-1564)
KWRU asserted that if the Last Stand was successful in its
challenge to the issuance of the proposed permit, the Utility would have
incurred significant additional expenditures. (EXH 49, BSP 5) KWRU witness
Castle estimated that the total cost for design, permitting, and construction
of the deep well would be in excess of $10,000,000, based on current costs for
deep well installation in the Florida Keys and the acquisition cost of land
adjacent to KWRU’s property. (EXH 49, BSP 5) Staff believes that the legal fees
incurred by the Utility were justified given the potential rate impact of
constructing a deep injection well. Staff does not believe that there was
negligence on behalf of the Utility that precipitated the ensuing
administrative hearing. Therefore, KWRU should be allowed recovery of all fees
associated with defending the permit challenge.
Accounting Treatment
The Utility requested to defer and amortize $477,433 of litigation
fees over the 5-year life of the permit and included the associated amortization
of $95,487 ($477,433/5) in miscellaneous expense. Staff witness Piedra
testified to the verification of support documentation for this amount. (TR
564) The Utility has provided appropriate documentation for an additional
$19,540, along with a description of all services provided. (EXH 55, P 168-169;
EXH 56, P 1564) As such, staff recommends an increase to the total litigation fees
in the amount of $19,540.
OPC witness Merchant argued that because the Last Stand
litigation directly related to the litigation regarding the construction
permit, and not existing operations, the fees should be capitalized to the
plant expansion project and recovered over the life of the plant. (TR 338) In
support of her position, witness Merchant cited the National Association of
Regulatory Utility Commissioners (NARUC) Uniform System of Accounts’ (USOA)
accounting instructions for the components of construction costs. (TR 338)
Witness Merchant specifically cited:
Accounting
Instruction 19. Utility Plant – Components of Construction Cost
The cost of
construction properly includible in the utility plant accounts shall include,
where applicable, the direct and overhead costs as listed and defined
hereunder:
(15) “Legal Expenditures” includes the
general legal expenditures incurred in connection with construction and the
court and legal costs directly relate thereto, other than legal expenses
included in protection, item 7, and in injuries and damages, item 8. (TR
338-339)
During OPC’s
cross-examination, KWRU witness Swain agreed that in addition to standard costs
such as labor and materials, the component costs outlined in the USOA included,
but were not limited to, privileges, permits, and legal expenditures. (TR
224-225) However, she qualified her response with the caveat that she agreed to
those items, only to the extent they relate directly to the construction and
serve no other purpose. (TR 225, 231) Witness Swain testified that given the
complexity of the litigation, the decision to capitalize the costs should not
be solely based on the fact that the Utility obtained a construction permit in
the process, as such treatment would ignore that the litigation was also
against the operation of the Utility. (TR 231)
Staff believes the
complexity of the litigation, as evidenced by the Recommended Order, indicates
that the costs expended to defend the permit modification challenge were not
simply “general legal expenditures incurred with construction”, as referenced
in NARUC Accounting Instructions 19. (EXH 69, BSP 1766) The Utility’s
description of the various fees, which range from legal to engineering,
showcase the detailed work involved to defend the construction of the shallow
injection wells. (EXH 55, BSP 169) As such, staff recommends the amortization
of the litigation fees pursuant to Rule 25-30.433(8), F.A.C., which states that
non-recurring expenses shall be amortized over a 5-year period. Based on
staff’s adjustment to the total litigation fees, the associated amortization
should be $99,395.
CONCLUSION
The appropriate amount of fees associated with the legal
challenge of KWRU’s DEP permits is $496,973, and this amount should be
amortized over five years. The 5-year amortization results in test year expense
of $99,395, which increases the requested amortization amount by $3,908.
Issue 29:
What is the appropriate amount of depreciation
expense to be used in setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amount of depreciation expense
should be $222,726. Accordingly, depreciation expense should be decreased by
$156,229.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$473,323.
A.
For Phase I, if applicable
OPC:
Net depreciation expense (DE) should be $104,511
for Phase I. Adjustments are appropriate to increase CIAC amortization by
$14,003 (Stipulation 4) and decrease depreciation expense by $5,489
(Stipulation 5). Pro forma DE for the treatment plant expansion should be
reduced by $196,281 and the adjustment to annualize DE should be removed, a
reduction of $4,384.
County:
Agrees with OPC.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Phase II net DE is $224,316 (decrease of
$72,346). Adjustments without stipulations: increase 2014 DE $13,718 to year-end
balance; increase DE $67,026 for expansion projected costs with capitalized
litigation fees; increase DE $6,956 for vacuum tank and retirement; non-used
and useful DE reduction $130,954; increase CIAC amortization $4,746 for 2014
year-end balance, $17,079 for the 2015-2016 actual CIAC additions, and $15,421
for projected 2016 CIAC additions to be collected when WWTP expansion begins
operations.
County:
Agrees with OPC.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, KWRU stated that the proper level of
depreciation expense includes adjustments to Test Year depreciation that
include additional depreciation expense on proforma plant net of proforma
retirements, reductions for audit adjustments (Audit Finding 4 and Audit Finding
5), and additional costs to annualize depreciation expense. (KWRU BR 27-28; EXH
79, BSP 79) Additionally, the Utility testified that this treatment has been
accepted by the Commission in other cases that KWRU witness Swain specifically
cited. (TR 769; KWRU BR 28)
OPC
OPC stated in its brief that net depreciation expense
should be $104,511 for Phase I rates. OPC explained that adjustments are
appropriate to increase amortization of CIAC by $14,003 (Audit Finding 4) and to
decrease depreciation expense by $5,489 (Audit Finding 5). (OPC BR 39) OPC specifically
indicated that the pro forma depreciation expense for the wastewater treatment
plant expansion should be reduced by $196,281 and the Utility’s adjustment to
reflect the year-end annualization of depreciation expense should be removed, a
reduction of $4,384. (OPC BR 39)
OPC asserted that OPC witness Merchant testified that
Phase II net depreciation expense is $224,316, a net decrease of $72,346. OPC
detailed that in addition to Stipulations 4 and 5, several adjustments are
appropriate to be consistent with Ms. Merchant’s adjustments to plant,
accumulated depreciation and CIAC. (OPC BR 39) First, 2014 depreciation expense
should be increased by $13,718 to reflect the year-end balance. (OPC BR 39) Second,
depreciation expense should be increased by $67,026 to reflect the additional
WWTP expansion projected costs including the capitalized permit litigation
fees. Third, the vacuum tank addition and related retirement should increase
depreciation expense by $26,385 and decrease depreciation expense by $19,789,
respectively. (OPC BR 39) Depreciation expense should be reduced by $130,954
based on OPC witness Woodcock’s 25 percent non-used and useful percentage. OPC
asserted that witness Merchant testified that consistent with OPC’s adjustments
to CIAC, test year amortization of CIAC should be increased by $4,746 to
reflect a year-end balance, by $17,079 for the 2015 and 2016 actual CIAC
additions, and by $15,421 for the additional 2016 CIAC projected to be
collected during the first year of operation of the WWTP expansion. (TR
372-373; OPC BR 39-40)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC. (County BR 34; Harbor Shores BR 2)
ANALYSIS
In KWRU’s updated MFRs, the Utility reflected test year
depreciation expense of $1,861,540 along with adjustments to increase
accumulated depreciation by $4,384 for annualizing depreciation expense in the
test year and by $270,061 as a corresponding adjustment to its requested pro
forma plant expansion. (EXH 17) As discussed in Issue 5, KWRU also included
Stipulation 4 to decrease CIAC amortization expense by $14,003 and Stipulation
5 to decrease depreciation expense by $5,489. (EXH 17, P 3-4)
In regard to the Utility’s test year adjustment to
annualize depreciation expense, OPC witness Merchant testified that this type
of adjustment recognizes certain increases without recognizing corresponding
decreases and that blending year-end items with average items is an “obvious”
violation of the matching principal. (TR 320) She further testified that
including this adjustment violates the statutory requirement that CIAC,
accumulated amortization of CIAC, and test year amortization of CIAC are
properly included in the revenue requirement pursuant to 367.081(2)(a)1., F.S.
(TR 320) Based on staff’s analysis of the test year, KWRU included a full year
of CIAC amortization expense associated with 2014 collections of CIAC. As such,
there is no violation of 367.081(2)(a)1., F.S. Witness Merchant’s position,
specifically as it pertains to accumulated depreciation, is further addressed
in Issue 7.
To reflect rate base adjustments previously recommended,
the appropriate corresponding adjustments to depreciation expense for the pro
forma plant discussed in Issue 6 is a net decrease of $26,414 to reflect the
pro forma plant expansion and the vacuum tank, and an increase of $8,008 to
reflect the 2015 and 2016 routine plant additions. Further, a corresponding
decrease of $20,685 should be made to reflect amortization expense for 2015 and
2016 CIAC collections included in rate base. The total adjustment is a net
decrease to depreciation expense of $156,229.
CONCLUSION
Based on staff’s previous recommended adjustments, the
appropriate amount of net depreciation expense is $222,726. Accordingly, net
depreciation expense should be decreased by $156,229.
Issue 30:
What is the appropriate amount of taxes other than
income to be used in setting rates?
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The appropriate amount of taxes other than income
(TOTI) should be $199,457. Accordingly, TOTI should be decreased by $50,884.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$288,613
A. For Phase I, if
applicable
OPC:
Phase I adjusted 2014 taxes other than income should
be $153,029, a decrease of $92,878. Payroll taxes should be increased $5,682 to
reflect the annualization of payroll taxes consistent with the Phase I salaries
for AWT and property taxes should be reduced $35,696 related to pro forma
plant.
County:
Agree with OPC that taxes other than income (“TOTI”)
should be $153,029.
Harbor Shores:
Agrees with OPC
B. For Phase II,
if applicable
OPC:
Phase II 2016 pro forma test year taxes other than
income should be $189,605, a decrease of $56,302. Payroll taxes should be
reduced $1,875, to reflect the PAA Order salaries level and property taxes
increased by $13,355 to reflect the adjusted pro forma plant. Property taxes
should be reduced $16,177 related to non-used and useful plant.
County:
Agree with OPC that Phase II 2016 pro forma test
year TOTI should be $189,605.
Harbor Shores:
Agrees with OPC
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU stated that TOTI should be $288,613. (KWRU BR 28)
This amount represents the Utility’s calculation of payroll taxes, property
taxes on test year and pro forma plant, as well as regulatory assessment fees
(RAFs) on final revenues. (KWRU BR 28)
OPC
OPC witness Merchant testified that OPC’s Phase I adjustments
to TOTI included decreasing RAFs by $62,863 based on OPC’s calculated test year
revenue adjustment, decreasing payroll taxes by $5,682 to reflect OPC’s
adjustment to Phase I salaries for AWT, and lastly, decreasing property taxes
by $35,696 to reflect OPC’s removal of KWRU’s pro forma plant in Phase I. (TR
374) In its brief, OPC stated that TOTI should be $153,029, resulting in a net
decrease of $92,878 to the Utility’s requested balance. (TR 374; OPC BR 40)
For Phase II, OPC stated in its brief that TOTI should be $189,605,
reflecting a decrease of $56,302. (TR 374-375; OPC BR 40) OPC witness Merchant
testified that OPC’s Phase II adjustments to TOTI included decreasing payroll
taxes by $1,875 to reflect OPC’s adjustment to Phase II salaries for AWT, increasing
property taxes by $13,355 to reflect the Phase II pro forma plant, and decreasing
property taxes related to non-used and useful plant by $16,177. (TR 374-375)
County and Harbor Shores
In their briefs, the County and Harbor Shores agreed with
OPC. (County BR 34; Harbor Shores BR 2)
ANALYSIS
This is a fallout issue.
Based on staff’s adjustments to test year revenues and to remove the
Utility’s requested increase, RAFs should be reduced by $81,475. To reflect
staff’s recommended adjustments to pro forma plant, property taxes should be
increased by $754. To reflect staff’s recommended adjustment to pro forma
salaries, payroll taxes should be decreased by $210. To reflect staff’s
recommended non-used and useful adjustment, property taxes should be decreased
by $10,526. Lastly, to reflect staff’s recommended revenue increase, RAFs
should be increased by $40,573. In total, TOTI should be decreased by $50,844
(-$81,475 + $754 - $210 - $10,526 + $40,573) for an adjusted total of $199,457.
CONCLUSION
Based on staff’s recommended adjustments, TOTI should be
decreased by $50,884. The appropriate amount of taxes other than income (TOTI)
is $199,457.
Issue 31:
What is the appropriate revenue requirement?
(Fall-out)
A. For
Phase I, if applicable
B. For Phase II, if applicable
Recommendation:
The revenue requirement should be $2,436,418.
A. As addressed in Issue 2, Phase I is not
applicable.
B. As addressed in Issue 2, Phase II is not
applicable. (Norris)
Position of the Parties
KWRU:
$3,440,501
A. For Phase I, if
applicable
OPC:
Based on OPC’s adjustments to the rate base, cost of
capital and operating expenses, the Phase I revenue requirement should be
$1,821,639. This represents an increase of $286,840, or 18.69%, to adjusted
2014 test year revenues.
County:
The appropriate Phase I revenue requirement is
$1,821,639.
Harbor Shores:
Agrees with OPC.
B. For Phase II,
if applicable
OPC:
Based on OPC’s adjustments to the rate base, cost of
capital and operating expenses, the Phase II revenue requirement should be
$2,269,893, representing an increase of $568,263, or 33.40%, to adjusted 2016
pro forma test year revenues. Consistent with long-standing Commission
practice, KWRU’s revenue increase should be limited to the amount requested in
its initial MFRs.
County:
The Phase II revenue requirement recommended by OPC
of $2,269,893 is reasonable.
Harbor Shores:
Agrees with OPC.
ANALYSIS
This is a fall-out issue. In its filing, KWRU requested a
revenue requirement to generate annual revenue of $3,345,357, representing a
revenue increase of $1,866,050, or approximately 126 percent. Consistent with
staff’s recommendations concerning rate base, cost of capital, and operating
income issues, the appropriate revenue requirement is $2,436,418. Staff’s
recommended revenue requirement is $901,618 greater than the stipulated test
year revenues of $1,534,799, or an increase of 58.75 percent. Staff’s
recommended revenue requirement will allow the Utility the opportunity to
recover its expenses and earn a 6.12 percent return on its investment in rate
base. The schedule reflecting net operating income is attached as Schedule No.
3-A, and the adjustments are shown on Schedule No. 3-B.
Issue 32:
What are the appropriate rate structures and rates
for KWRU’s wastewater system?
Recommendation:
The recommended rate structures and monthly
wastewater rates are shown on Schedule No. 4. (Johnson)
Position of the Parties
KWRU:
Rate structure: per PAA Order. Rates: fall-out using
staff formula (used in PAA Order).
OPC:
The PAA BFC/gallonage allocation of 40/60 and the
corrected billing determinants for 2014 Phase I are reasonable. Phase II
billing determinants should be escalated to project expected revenues from new
customers added since 2014 and expected after the plant expansion is in-service.
An investigation is appropriate to determine whether KWRU has correctly
implemented changes made to bill customers by appropriate class and meter size
and refunds for customers who were improperly billed.
County:
The appropriate rate structures are a Base
Facilities Charge and Gallonage Charges developed using the 40/60 split adopted
in the PAA Order, and the appropriate rates are those calculated using billing
determinants for 2017, because that is the time period in which the Phase II
Rates will be in effect.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU asserted that the December 31, 2014 billing
determinants as set forth in the PAA Order should be used to determine rates. (KWRU
BR 19) KWRU witness Swain acknowledged an accounting principle of matching but
testified that the she had not seen the matching principle employed in a PSC
rate case. (TR 212) However, she further testified that if the billing
determinants increased it would result in lower rates. (TR 220-221) KWRU agreed
with the rate structure set forth in the PAA Order and added that final rates
should be a fall out calculation of the billing determinants used in the PAA
Order. (KWRU BR 29)
OPC
OPC testified that the 40/60 base facility charge to
gallonage charge allocation is reasonable in designing Phase I rates. (OPC BR
42) OPC also argued that the bills and gallons used to calculate Phase II rates
should be increased to reflect the projected level of customers that will be
online for the first year of operation of the wastewater treatment expansion.
OPC claimed that not adjusting for customer growth while making pro forma
adjustments to revenues would be violating the matching principle. OPC
submitted that the appropriate 2016 billing determinants for Phase II rates can
be determined by applying a five percent increase to the 2014 test year billing
determinants and the subsequent 2015 billing determinants. (TR 380) OPC added
that KWRU’s Annual Report states that its 2015 revenues increased over its 2014
revenues by 12 percent and that it achieved a 16.19 percent rate of return. OPC
further asserted that the actual increase in KWRU’s 2015 revenues should be
used to estimate the number of bills and gallons by customer class. OPC
emphasized that the five percent projected growth rate per year is supported by
OPC witness Woodcock’s used and useful projection. (OPC BR 27; EXH 20)
OPC contended that a full investigation should be made to
determine if KWRU has correctly billed its customers by customer class and
meter size and whether any refunds are warranted based on improper bills. OPC
concluded in support of OPC witness Merchant’s calculated rates reflected on
schedules 4-A in exhibits PWM-2 and PWM-3. (EXH 24; EXH 25; OPC BR 42)
County
The County submitted that the bills and gallons used in
establishing Phase II rates should be those that are reasonably projected to be
billed by KWRU in the 12 month period after the new wastewater treatment plant
comes online. The County asserted that it is necessary to match the Utility’s
costs with its sales to ensure that the rates paid by KWRU’s customers will
properly recover the costs incurred to serve them in that time period. (TR 531)
The County believes following the matching principle in this way is necessary
to ensure that the rates charged by KWRU are fair, just, and reasonable.(County
BR 27)
The County recognized witness Merchant’s recommendation
for 2016 billing determinants but adds that witness Merchant’s billing
determinants should be further escalated to include growth in 2017. (County BR
27) The County subsequently used OPC’s projected growth rate of five percent
with OPC’s projected 2016 bills and gallons to establish 2017 billing
determinants. (County BR 28) The County concluded in agreement with the 40/60 rate
structure set forth in the PAA order and adds that specific rates should be a
fall-out of the County’s projected billing determinants. (County BR 35)
Harbor Shores
Harbor Shores agrees with OPC’s position on this issue.
(Harbor Shores BR 2)
ANALYSIS
KWRU believes 2014 billing determinants are representative
of the test year and should be used to calculate rates. (TR 213) County witness
Deason testified on the matching principle, which he defined as a requirement
“that the utility’s rates be set using the utility’s costs, investments,
revenues, and sales units from the same time period, and that they be
representative of the time period in which the new rates will be in effect.”
(TR 531) However, witness Deason agreed that the Commission has traditionally relied
on historical test years for ratemaking purposes in the water and wastewater
utility industry. (TR 546) OPC and the County both emphasized the importance of
the matching principle in their briefs, while witness Merchant acknowledged
“there’s an accounting principle of matching, but not necessarily in utility
rate-making.” (OPC BR 27; County BR 27; TR 212)
Staff believes that the principle of matching costs and
expenses with sales is at the center of the argument for establishing correct
billing determinants. Staff recognizes the need to match identifiable customer
growth and sales with known and measurable growth in the utility’s investment
and expenses. Considering the impacts that any growth or decline in sales would
have on revenues, staff believes that the matching principle is an important
concept to observe in the rate-making process.
In response to interrogatories, KWRU projected
approximately 220 ERCs of growth through 2018. (EXH 49, BSP 33) Although
unquantified, witness Merchant also testified to implied customer and sales
growth for KWRU based on 2014 and 2015 annual reports. (TR 353; EXH 28, P 22)
Staff analyzed a schedule provided by the Utility showing
revenues by month, customer class, and meter size from January 2016 through
September 2016; however, staff was unable to calculate actual billing
determinants due to KWRU’s change in rate structure during 2016 when the PAA
rates were implemented. (EXH 51, BSP 96)
OPC proposed an across the board increase to the PAA 2014
billing determinants for Phase II rates using OPC witness Woodcock’s used and
useful projection. (OPC BR 27; TR 380; EXH 20) Therefore, staff recommends that
the 2014 billing determinants should be increased to reflect known and
measurable growth, consistent with OPC’s methodology. However, staff recommends
using staff’s used and useful growth projection for 2015 and 2016 as discussed
in Issue 11. The resulting billing determinants include 29,159 factored ERCs
and 232,666,423 gallons.
All parties agreed with a 40 percent revenue allocation to
the BFC. (KWRU BR 29; OPC BR 42; County BR 35) Subsequently, the rates are a
result of the chosen billing determinants and revenue requirement. Staff
annualized the Utility’s 2016 miscellaneous revenues from Monroe County
Detention Center income, miscellaneous income, and rental income. (EXH 52,
Attachment 22) To calculate revenues from miscellaneous service charges, staff
calculated the number of annualized occurrences for each charge in 2016 and
multiplied it by the recommended charge as described in Issues 34 and 36. (EXH
51, BSP 94) Staff calculated the appropriate reuse revenue by annualizing the
2016 reclaimed gallons sold and multiplying it by the proposed reuse rate in Issue
33. (EXH 51, BSP 93) Below are the annualized miscellaneous revenues to be
subtracted from the revenue requirement. Staff notes that any changes to the
recommended charges in Issues 33, 34, and 36 will affect the total
miscellaneous revenues included in the revenue requirement.
Table 32-1
Miscellaneous Revenues
|
Description
|
Staff Recommended
|
|
MCDC Income
|
$18,679
|
|
Miscellaneous Income
|
$15,491
|
|
Rents
|
$1,200
|
|
Miscellaneous Service Charges
|
$25,296
|
|
Reuse Revenue
|
$60,583
|
|
Total Miscellaneous Revenues
|
$121,249
|
Source: Staff Analysis (EXH 25, P 7)
Further, staff recommends that all residential customers
should be billed a BFC regardless of meter size and a gallonage charge based on
water demand with a 10,000 gallon cap. All general service customers should be
billed based on meter size with a gallonage charge based on water demand. The
general service gallonage charge should be 20 percent higher than the
residential gallonage charge to reflect that not all residential water demand
is returned to the wastewater system. In addition, the tariff for private lift
station owners should be revised to reflect a BFC based on meter size that is
20 percent less than the applicable general service BFC consistent with the
discount previously approved for KWRU customers with customer-owned and
maintained lift stations. If a
customer has multiple water meters, the Utility should charge the approved BFC
for each meter. In addition, as discussed in Issue 18, Harbor Shores should be
billed a BFC based on 69 ERCs and a gallonage charge with a 10,000 gallon cap
per ERC.
CONCLUSION
The recommended rate structures and monthly wastewater
rates are shown on Schedule No. 4.
Issue 33:
What is the appropriate rate for KWRU’s reuse
service?
Recommendation:
The appropriate rate for KWRU’s reuse service
is $1.34 per 1,000 gallons. The Utility 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
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. (Friedrich)
Position of the Parties
KWRU:
$.93 per PAA Order.
OPC:
The $1.34 reuse rate is market-based, provides
incentives for reuse, and is more reasonable than the $0.93 PAA Order rate. The
potable-water rate in KWRU’s territory ranges from $5.84-$11.70/kgal. The only
other provider in Monroe County lowest-level reuse rate is $2.92/kgal. Compared
to the other provider’s reuse rate and the potable water rate, $1.34 is
reasonable. No additional charge for testing should be allowed.
County:
The appropriate rate for KWRU’s reuse service is at
least $1.34 per thousand gallons, and the Commission should consider setting
the rate significantly higher in order to provide better price signals for this
market-based service and to thereby reduce the rate impacts on KWRU’s regular
service customers.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU believed the appropriate
reuse rate is $0.93 per 1,000 gallons. (TR 675; TR 778-79) The Utility
originally proposed a rate of $1.35 per 1,000 gallons in its MFRs. (EXH 16, BSP
44) In response to an interrogatory, the Utility indicated that the proposed
rate was a proportionate increase based on the overall requested revenue
increase. (EXH 49; TR 778-79) However, in rebuttal testimony, Utility witnesses
Johnson and Swain testified that KWRU supports a reuse rate of $0.93 per 1,000
gallons. (TR 675; TR 778-79)
KWRU Witness Swain testified that
the reuse rate should not be increased disproportionately more than the overall
revenue increase; reuse rates are generally market-based. (TR 778-79) FKAA’s
charges for reuse are based on 50 percent of each potable water rate block, the
lowest of which is $5.84 per 1,000 gallons. (TR 381-382; EXH 30) KWRU argued
that a reuse rate of $0.93 will strike a balance to create demand for reuse
while still maintaining an additional revenue stream. (KWRU BR 29)
OPC
OPC’s witness Merchant believes
the appropriate reuse rate is $1.34 per 1,000 gallons based on the $1.35 per
1,000 gallons originally proposed by the Utility. (TR 381-82) OPC witness
Merchant also testified that no additional charge for testing should be
implemented. (TR 357-58; TR 382; EXH 25) OPC argued that the reuse rate of
$1.34 per 1,000 gallons reduces the burden on the residential and general
service customers to achieve the approved revenue requirement, compared to a
lower reuse rate which has the opposite effect. (TR 382)
County
The County argued the appropriate
rate for KWRU’s reuse service is $1.34 per 1,000 gallons and the Commission
should consider setting the rate significantly higher in order to provide better
price signals and to reduce the rate impacts on KWRU’s regular service
customers. The County agreed that reuse service is a market-based service
product and should be priced closer to the cost of market alternatives such as
FKAA. (County BR 36-37)
Harbor Shores
In their brief,
Harbor Shores agreed with OPC’s position on this issue. (Harbor Shores BR 2)
ANALYSIS
When
assessing the appropriate reuse rate, it is Commission practice to base the
reuse rate on the market rather than cost, which provides an incentive for
customers to use reuse.[27]
The only other provider of reuse in the area, charges $2.92 to $5.85 per 1,000
gallons depending on the relative rate block for potable water usage. (EXH 30)
Since revenues from reuse rates are used to help reduce the cost of wastewater
service, a higher reuse rate would alleviate the impact of the rate increase to
wastewater customers for KWRU.
KWRU’s primary method of disposal
of treated wastewater is through reuse, but reuse that is not sold is disposed
through Class V injection wells. (EXH 53) The Utility currently provides reuse
service to two customers, Monroe County which receives a contracted amount of
reuse water, and the affiliated Key West Golf Club. (EXH 51; TR 608-609) KWRU’s
test year reuse rate for these customers was $0.68 per 1,000 gallons. In
addition, the Utility also charged for reuse testing consistent with operating
revenues in Audit Finding 9. (EXH 48; TR 357; EXH 25)
Witness Johnson is concerned that there will be a reduction in
reuse demand if the reuse rate is priced too high since the advanced treatment
of wastewater decreases the nutrients in the reuse water. He argues there is no
benefit to purchasing the Utility’s reuse water over potable water. (TR 608-09)
However, staff does not agree with witness Johnson’s concern since the
Utility’s two reuse customers consist of the County, which receives a
contracted amount of reuse water per day, and a golf course which is affiliated
with KWRU. (TR 608-09; TR 381-82)
The Utility charged for reuse testing in addition to the reuse rate
of $0.68 per 1,000 gallons during the test year, a reuse rate of $1.34 would
encompass all costs and would negate the need for an additional charge for
testing therefore, staff agrees with OPC that no additional charge for testing
is necessary. (TR 357; TR 382; EXH 25) Staff believes $1.34 is an appropriate
market-based reuse rate that will mitigate the rate impact to the general body
of rate payers.
CONCLUSION
Based
on the above, staff recommends that the appropriate rate for reuse service is
$1.34 per 1,000 gallons. The Utility should be required to file revised tariff
sheets and a proposed customer notice to reflect the approved rates. The
approved rates shall 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 approved rates shall 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.
Issue 34:
What are the appropriate miscellaneous service
charges to be charged by KWRU?
Recommendation:
Staff recommends the miscellaneous service charges
shown below in Table 34-7 should be approved for KWRU. The Utility should be
required to file a proposed customer notice and tariff to reflect the
Commission-approved charges. The approved charges should be effective on or
after the stamped approval date on the tariff sheets pursuant to Rule
25-30.475(1), F.A.C. In addition, the approved charges should not be
implemented until staff has approved the proposed customer notice. KWRU should
provide proof of the date notice was given no less than 10 days after the date
of the notice. (Friedrich)
Position of the Parties
KWRU:
No position.
OPC:
The initial connection charge and normal
reconnection charge should remain at $15 and the premises visit charge should
be $20 for normal hours and $45 for after hours, as approved by the Commission
in its PAA Order. Should the Commission approve higher levels of miscellaneous
service charges, higher miscellaneous revenues should be used when calculating
the amount of revenues to be collected from service rates.
County:
No position.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
The Utility’s existing and proposed miscellaneous service charges are
shown below in Table 34-6. (EXH 50; EXH 95) Utility
witness Swain stated that the original miscellaneous service charges filed by
the Utility in its MFRs were incorrect and the accurate request for the
Utility’s miscellaneous service charges is contained in a response to a
production of documents. (EXH 50; TR 256-57)
In addition to labor,
transportation, and supplies, the Utility included postage in the cost
justification for all miscellaneous service charges except the violation
reconnection charge. (EXH 95) Witness Swain testified that the cost of postage
in the Utility’s cost justification is only incorporated into the charges that
require direct postage. Witness Swain stated that miscellaneous service charges
are designed to place the cost burden on the individual who caused the cost to be
incurred. (TR 252; KWRU BR 30)
OPC
OPC Witness Merchant testified that $15 is the appropriate amount for
the initial and normal reconnection charges and the Utility’s premises visit
charge should be $20 for normal hours and $45 for after hours, consistent with
the PAA Order. (TR 383) Witness Merchant identified the possibility of the
Commission approving higher miscellaneous service charges. As a result, witness
Merchant believes, if higher charges are indeed approved, the incremental
increase should be taken into consideration by Commission staff when
calculating the amount of revenues to be collected from service rates. (TR
401-02; TR 433-34)
County
The County takes no position on this issue. (County BR 37)
Harbor Shores
In their brief, Harbor Shores
agreed with OPC’s position on this issue. (Harbor Shores BR 2)
ANALYSIS
Miscellaneous
service charges are defined as initial connection, normal reconnection,
violation reconnection, and premises visit charges according to Rule 25-30.460,
F.A.C. The Commission is authorized to establish, increase, or change a rate or
charge other than monthly rates or service availability charges pursuant to
Section 367.091, F.S. Witness Swain defended the incorporation of overhead,
such as benefits and insurance, in miscellaneous service charges; otherwise, the
overhead would be included in the Utility’s expenses and recovered from the
general body of rate payers. (TR 253-54) Staff agrees with witness Swain that miscellaneous
service charges are designed to place the cost on the cost causer. (TR
252) KWRU provided the cost
justification required by Section 367.091, F.S. and is reflected below in
Tables 34-1, 34-2, and 34-3.
Table 34-1
Initial Connection and
Normal Reconnection Cost Justification
|
Activity
|
Normal
Hours Cost
|
Activity
|
After
Hours Cost
|
|
Labor (Administrative)
($22.50/hr x1hr)
|
$22.50
|
Labor (Administrative)
($22.50/hr x1hr)
|
$22.50
|
|
Labor (Field)
($22.50/hr x3/4hr)
|
$16.88
|
Labor (Field)
($33.75/hr x2hr)
|
$67.50
|
|
Labor (Supervision)
($68.00/hr x Ľhr)
|
$17.00
|
Labor (Supervision)
($68.00/hr x 1/4hr)
|
$17.00
|
|
Benefits & Insurance (23%)
|
$12.97
|
Benefits & Insurance (23%)
|
$24.61
|
|
Transportation
($.56/mile x 3 miles)
|
$1.68
|
Transportation
($.56/mile x 6 miles)
|
$3.36
|
|
Supplies
|
$0.80
|
Supplies
|
$0.80
|
|
Postage
|
$0.49
|
Postage
|
$0.49
|
|
Total
|
$72.32
|
Total
|
$136.26
|
Source: Exhibit 50
Table 34-2
Violation Reconnection Cost
Justification
|
Activity
|
Normal
Hours Cost
|
Activity
|
After
Hours Cost
|
|
Labor (Administrative)
($22.50/hr x1hr)
|
$22.50
|
Labor (Administrative)
($22.50/hr x1hr)
|
$22.50
|
|
Labor (Field)
($22.50/hr x 5/2hr)
|
$56.25
|
Labor
($33.75/hr x4hr)
|
$135.00
|
|
Labor (Supervision)
($68.00/hr x 1/2hr)
|
$34.00
|
Labor (Supervision)
($68.00/hr x 1/2hr)
|
$34.00
|
|
Benefits & Insurance (23%)
|
$25.93
|
Benefits & Insurance (23%)
|
$44.05
|
|
Transportation
($.56/mile x 6 miles)
|
$3.36
|
Transportation
($.56/mile x 6 miles)
|
$3.36
|
|
Supplies
|
$0.30
|
Supplies
|
$0.80
|
|
Total
|
$142.34
|
Total
|
$239.71
|
Source: Exhibit 50
Table 34-3
Premises Visit Cost
Justification
|
Activity
|
Normal Hours Cost
|
Activity
|
After
Hours Cost
|
|
Labor (Administrative)
($22.50/hr x1/2hr)
|
$11.25
|
Labor (Administrative)
($22.50/hr x1/2hr)
|
$11.25
|
|
Labor (Field)
($22.50/hr x1hr)
|
$22.50
|
Labor (Field)
($33.75/hr x2hr)
|
$67.50
|
|
Labor (Supervision)
($68.00/hr x 1/4hr)
|
$17.00
|
Labor (Supervision)
($68.00/hr x 1/4hr)
|
$17.00
|
|
Benefits & Insurance (23%)
|
$11.67
|
Benefits & Insurance (23%)
|
$22.02
|
|
Transportation
($.56/mile x 3 miles)
|
$1.68
|
Transportation
($.56/mile x 6 miles)
|
$3.36
|
|
Supplies
|
$0.30
|
Supplies
|
$0.80
|
|
Postage
|
$0.49
|
Postage
|
$0.49
|
|
Total
|
$64.89
|
Total
|
$122.42
|
Source: Exhibit 50
Staff analyzed the
Utility’s cost justification for its requested miscellaneous service charges. (EXH
50) KWRU stated that the field labor involved in
normal connections and disconnections, if necessary, consists of completing a
work order administered by the Operations Manager. (EXH 49) Staff believes that
one-third of an hour is a more appropriate time allotment to calculate field
labor compared to the Utility's request of one hour. As indicated by the
Utility, field labor is only administered as necessary, which indicates that
field labor time is not always required. (EXH 49) Therefore, staff believes
one-third of an hour is more appropriate to use to calculate field labor in the
Utility's miscellaneous service charges because it will balance occurrences of
visits that do not necessitate any field labor at all and the occurrences that
may require additional time.
In addition, staff
does not believe it is appropriate to recover postage costs because these activities
do not warrant a need for direct postage or noticing. The Utility witness agreed that the cost of
postage is only needed for activities that require direct postage.
The Utility
requested a violation reconnection charge of $150 for normal hours and $225 for
after hours. (EXH 50) However, staff believes this charge should be the
Utility’s actual cost to administer and process the charge pursuant to Rule
25-30.460(1)(c), F.A.C. Calculations for staff’s recommended miscellaneous
service charges are shown below in Tables 34-4,
34-5, and 34-6. Staff rounded its calculated miscellaneous service
charges up to the nearest tenth.
Table 34-4
Initial Connection Charge
Calculation
|
Activity
|
Normal Hours Cost
|
Activity
|
After Hours Cost
|
|
Labor (Administrative)
($22.50/hr x 1 hr)
|
$22.50
|
Labor (Administrative)
($22.50/hr x 1 hr)
|
$22.50
|
|
Labor (Field)
($22.50/hr x 1/3 hr)
|
$7.50
|
Labor (Field)
($33.75/hr x1/3hr)
|
$11.25
|
|
Labor (Supervisor)
($68.00/hr x Ľ hr)
|
$17.00
|
Labor (Supervisor)
($68.00/hr x Ľ hr)
|
$17.00
|
|
Benefits & Insurance (23%)
|
$10.81
|
Benefits & Insurance (23%)
|
$11.67
|
|
Transportation
($.56/mile x 3 miles-to/from)
|
$3.36
|
Transportation
($.56/mile x 6 miles-to/from)
|
$6.72
|
|
Total
|
$61.17
|
Total
|
$69.14
|
Source: Exhibit 50
Table 34-5
Normal Reconnection Charge
Calculation
|
Activity
|
Normal
Hours Cost
|
Activity
|
After
Hours Cost
|
|
Labor (Administrative)
($22.50/hr x 1 hr)
|
$22.50
|
Labor (Administrative)
($22.50/hr x 1 hr)
|
$22.50
|
|
Labor (Field)
($22.50/hr x (1/4 hr x 2))
|
$11.25
|
Labor (Field)
($33.75/hr x (1/4 hr x 2))
|
$16.88
|
|
Labor (Supervisor)
($68.00/hr x 1/4 hr)
|
$17.00
|
Labor (Supervisor)
($68.00/hr x 1/4 hr)
|
$17.00
|
|
Benefits & Insurance (23%)
|
$11.67
|
Benefits & Insurance (23%)
|
$12.97
|
|
Transportation
($.56/mile x 3 miles-to/from) x 2
|
$3.36
|
Transportation
($.56/mile x 6 miles-to/from) x 2
|
$6.72
|
|
Total
|
$65.78
|
Total
|
$76.07
|
Source: Exhibit 50
Table 34-6
Premises Visit Charge
Calculation
|
Activity
|
Normal Hours Cost
|
Activity
|
After Hours Cost
|
|
Labor (Administrative)
($22.50/hr x 1/2 hr)
|
$11.25
|
Labor (Administrative)
($22.50/hr x 1/2 hr)
|
$11.25
|
|
Labor (Field)
($22.50/hr x 1/3 hr)
|
$7.50
|
Labor (Field)
($33.75/hr x1/3hr)
|
$11.25
|
|
Labor (Supervisor)
($68.00/hr x 1/4hr)
|
$17.00
|
Labor (Supervisor)
($68.00/hr x 1/4 hr)
|
$17.00
|
|
Benefits & Insurance (23%)
|
$8.22
|
Benefits & Insurance (23%)
|
$9.09
|
|
Transportation
($.56/mile x 3 miles-to/from)
|
$3.36
|
Transportation
($.56/mile x 6 miles-to/from)
|
$6.72
|
|
Total
|
$47.33
|
Total
|
$ 55.31
|
CONCLUSION
Based on the above, staff recommends the miscellaneous service charges shown
below in Table 34-7 should be approved for KWRU. The Utility should be required
to file a proposed customer notice and tariff to reflect the
Commission-approved charges. The approved charges should be effective on or after
the stamped approval date on the tariff sheets pursuant to Rule 25-30.475(1),
F.A.C. In addition, the approved charges should not be implemented until staff
has approved the proposed customer notice. KWRU should provide proof of the
date notice was given no less than 10 days after the date of the notice.
Table 34-7
Miscellaneous Service
Charges
|
Charge
|
Utility’s Existing Charges
|
Utility’s Proposed Charges
|
Staff’s Recommended Charges
|
|
|
Normal Hours
|
After Hours
|
Normal
Hours
|
After Hours
|
Normal Hours
|
After
Hours
|
|
Initial Connection
|
$15.00
|
N/A
|
$75.00
|
$125.00
|
$61.20
|
$69.20
|
|
Normal Reconnection
|
$15.00
|
N/A
|
$75.00
|
$125.00
|
$65.80
|
$76.10
|
|
Violation Reconnection
|
Actual Cost
|
N/A
|
$150.00
|
$225.00
|
Actual Cost
|
|
Premises Visit
|
$20.00
|
$45.00
|
$65.00
|
$125.00
|
$47.40
|
$55.40
|
|
|
|
|
|
|
|
|
Issue 35:
Should KWRU be authorized to collect Non-Sufficient
Funds (NSF) charges? (Stipulation 11) (Friedrich)
Approved Stipulation:
As currently set forth in Section 68.065(2), F.S.,
the following NSF charges may be assessed:
a. $25, if the face value
does not exceed $50,
b. $30, if the face value
exceeds $50 but does not exceed $300,
c. $40, if the face value
exceeds $300,
d. Or five percent of the face
amount of the check, whichever is greater.
Issue 36:
Should KWRU request to implement a late payment
charge be approved?
Recommendation:
The Utility’s request to implement a late payment
charge of $9.50 should be approved. The Utility should be required to file a
proposed customer notice and tariff to reflect the Commission-approved charge.
The approved charge should be effective on or after the stamped approval date
on the tariff sheet pursuant to Rule 25-30.475(1), F.A.C. In addition, the
approved charge should not be implemented until staff has approved the proposed
customer notice. The Utility should provide proof of the date notice was given
no less than 10 days after the date of the notice. (Friedrich)
Position of the Parties
KWRU:
Yes, $9.50.
OPC:
No position was provided in the post-hearing brief.
County:
Yes. Monroe
County agrees with the Parties’ Stipulation on this issue.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In rebuttal
testimony, the Utility requested a late payment charge of $9.50, although in
its MFRs, the Utility requested a late payment charge of $5.00. (TR 256-257;
EXH 50; EXH 16) Utility witness Swain testified that schedule E-4 of the
Utility’s MFRs is inaccurate. (TR 256-257; EXH 16) In response to an interrogatory, the Utility
provided the necessary cost justification pursuant to Section 367.091(6), F.S.,
for the Utility’s request to increase its late payment charge to $9.50. (EXH
50)
The
Utility’s cost justification contained a cost break-down of labor, printing,
and postage for a late payment charge. (EXH 9; EXH 50) KWRU also explained it
spends eight hours per month processing notices for 30 accounts or 16 minutes
per account. (EXH 9; EXH 49) The Utility included the hourly salary of $33.75
for the employee who processes late payments, including overhead. (EXH 9; EXH
50) Utility witness Swain testified the overhead percentage includes Utility
incurred expenses such as paid holidays or insurance of the employee processing
the late payment and should be used to develop a late payment charge. (TR 259)
The Utility also provided an hourly salary of $22.76 for the employee
processing late payment charges, excluding overhead. (EXH 49)
OPC
OPC witness Merchant testified that the late payment charge of $6.50
approved in the PAA order is more reasonable than the Utility’s request for a
late payment charge of $9.50. (TR 421) Witness Merchant did not provide any
additional information in her testimony with the exception that she agrees with
the PAA Order’s justification of the recommended late payment charge of $6.50.
(TR 383; TR 421)
County
In its brief, the County agreed with the parties’ stipulation on this
issue. However, this issue was not stipulated by all parties. (County BR 38)
Harbor Shores
In its brief, Harbor Shores agreed with OPC’s position on this issue.
(Harbor Shores BR 2)
ANALYSIS
In response
to an interrogatory, the Utility revised its requested late payment charge from
$5.00 to $9.50 and provided cost justification in support of its request
required by Section 367.091, F.S. (EXH 16; EXH 9; EXH 50; TR 256-257) The
purpose of this charge is not only to provide an incentive for customers to
make timely payment, thereby reducing the number of delinquent accounts, but
also to place the cost burden of processing delinquent accounts solely upon
those who are cost causers. KWRU’s requested late payment charge includes
labor, printing, and postage costs. (EXH 9; EXH 50)
KRWU’s labor
component of $9.00 was calculated by using an hourly salary of $33.75 which
includes overhead for holidays and insurance. (EXH 50) Witness Merchant
testified that the PAA Order late payment charge of $6.50, which included a
labor component of $6.00, was more reasonable. (TR 383) In addition to the
labor component, the Utility included the cost for printing of $0.02 and
postage of $0.49. (EXH 50)
Table 36-1
Late Payment Charge Cost
Justification
|
Activity
|
Utility Proposed
|
|
Labor
|
$9.00
|
|
Printing
|
$0.02
|
|
Postage
|
$0.49
|
|
Total
|
$9.51
|
Source: Exhibit 50
Staff agrees with Utility witness Swain that overhead
should be included in the labor calculations for this charge in order to allow
the Utility to recover all expenses associated with the employee processing the
late payment charges. (TR 259) Staff agrees with KWRU’s cost justification for
its requested late payment charge. (EXH 50)
CONCLUSION
Based on the above, the Utility’s request to implement a
late payment charge of $9.50 should be approved. The Utility should be required
to file a proposed customer notice and tariff to reflect the
Commission-approved charge. The approved charge should be effective on or after
the stamped approval date on the tariff sheet pursuant to Rule 25-30.475(1),
F.A.C. In addition, the approved charge should not be implemented until staff
has approved the proposed customer notice. The Utility should provide proof of the
date notice was given no less than 10 days after the date of the notice.
Issue 37:
Should KWRU’s be authorized to collect a Lift
Station Cleaning charge? (Stipulation 12) (Friedrich)
Approved Stipulation:
KWRU should be authorized to collect a monthly lift
station cleaning charge of $1,462 from the Monroe County Detention Center.
Issue 38:
If the Commission approves a rate increase for KWRU,
when and under what circumstances should it be implemented?
Recommendation:
The utility 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
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 (Johnson, Norris)
Position of the Parties
KWRU:
Immediately
upon issuance of Final Order.
OPC:
It depends upon how much time there is between
the issuance of the Final Order in this case and the in-service date for the
0.350 MGD plant expansion. If not
in-service, the Commission should determine the difference between post-protest
Phase I and Phase II rates, and institute a credit against Phase II rates for
the difference until KWRU demonstrates the project is in-service. If in-service, post-protest Phase II rates
are appropriate.
County:
Any permanent or Phase II rate increase should be
implemented on the first day of the first month (or the first day of the first
billing period) following commercial operation of the new WWTP, but not less
than 30 days from the date of the Commission’s vote.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU asserted that it is not necessary to wait for the
entirety of the Utility’s capital improvements to be in service before
implementing the approved rates. KWRU contended that significant sums have already
been expended in order to bring its plant into compliance and to be able to
accommodate the changing service area. KWRU added that the PAA Order in this
case did not include any recovery for pro forma plant and subsequently did not
truly allow a return on investment during the rate case. KWRU stressed that the
Utility began operating at AWT as of January 1, 2016 but the interim rates did
not go in effect until April 2016, which means that KWRU will never recover the
first four months of AWT operations. KWRU stated that it is appropriate for
KWRU to begin recovering these expenses as soon as the Commission has approved
the rates. (KWRU BR 31)
OPC
In its brief, OPC explained that no further Phase I rate
implementation is necessary and the Phase I revenue requirement should be used
to determine whether any refunds are owed to customers. (OPC BR 44) OPC stated
that Phase II rates should be implemented no sooner than 30 days after the new
plant is approved by DEP, placed into service and becomes used and useful. (OPC
BR 44) OPC explained that once verified by Commission staff, the Phase II 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. (OPC BR 44) OPC also
indicated that if the Utility encounters any unforeseen events that will impede
the completion of the Phase II plant items, then KWRU should immediately notify
the Commission and all parties to this proceeding in advance of the deadline to
allow ample time to review whether an extension is appropriate. (OPC BR 44)
County
The County explained that no further Phase I rate
implementation is necessary and the Phase I revenue requirement should be used
to determine whether any refunds are owed to KWRU’s customers. The County
stressed that rates should be implemented on the first day of the first billing
period following the date on which the new WWTP begins serving the Utility’s
customers. The County added that rates should go into effect no earlier than 30
days following the date of the Commission’s vote. The County submitted that the
Commission staff should verify that the new WWTP is actually serving customers
and that the rates charged in the tariff are the approved rates. The County
concluded that safeguards should be put into place to allow the parties an
avenue to participate further in the rate implementation process if there are
any delays in completing the Phase II plant items by KWRU. (County BR 38-39)
Harbor Shores
In its brief, Harbor Shores agreed with OPC. (Harbor
Shores BR 2)
ANALYSIS
As
addressed in Issue 2, staff believes a two-phased revenue requirement is not
appropriate. The Utility 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
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.
Issue 39:
Should any portion of the implemented PAA rates be
refunded? If so, how should the refund be calculated, and what is the amount of
the refund?
Recommendation:
Yes. The proper refund amount should be calculated
by using the same data used to establish final rates, excluding adjustments
that do not relate to the period that PAA rates are in effect. The revised
revenue requirement for this collection period should be compared to the amount
of PAA revenue requirement implemented. This results in a PAA refund of 7.43 percent.
The refund should be made with interest in accordance with Rule 25-30.360(4),
F.A.C. The Utility should be required to submit proper refund reports pursuant
to Rule 25-30.360(7), F.A.C. The Utility should treat any unclaimed refunds as
CIAC pursuant to Rule 25-30.360(8), F.A.C. (Norris)
Position of the Parties
KWRU:
No portion of the PAA Order rates should be
refunded.
OPC:
Yes, the Commission-approved Phase I PAA rates
that were implemented by the Utility were excessive based on OPC’s Phase I revenue
requirement calculation. The refund should be applied consistent with the
Commission’s refund rule and should be credited to customer bills over the same
amount of time that the increased rates were collected to offset the initial
impact of the Phase II rate increase.
County:
Yes. The amount to be refunded should be the
difference between (a) the amounts collected by KWRU from the effective date of
the PAA Rates (on or about April 15, 2016) until the effective date of the new,
permanent Phase II Rates minus (b) the revenue requirements as determined by
the Commission that should have been collected during the same time period. Any
refund should be calculated and made pursuant to Commission Rule 25-30.360,
F.A.C.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
In its brief, KWRU stated that this is a fall-out issue
based upon arguments in previous issues, and that, as such, revenue requirement
determined in the final order would be in excess of rates set forth in the PAA
Order. (KWRU BR 31) KWRU witness Swain testified that it would be correct to
compare the final rates, including the pro forma plant expansion, and the PAA
rates to determine if a refund was necessary. (TR 793-794) Witness Swain
further testified that she agreed that the Commission has the discretion to
calculate a Phase I revenue requirement for purposes of a refund, although she
did not believe that was a correct method (TR 794)
OPC
Based on the testimony of OPC witness Merchant, the
Commission-approved Phase I PAA rates that were implemented by the Utility were
excessive based on OPC’s Phase I revenue requirement calculation. (OPC BR 44)
OPC stated that a refund is appropriate in this case and should be applied
consistent with the Commission’s refund rule and should be credited to customer
bills over the same amount of time that the increased rates were collected to
offset the initial impact of the Phase II rate increase. (TR 385; OPC BR 44)
County
In its brief, the County stated that the Utility should be
required to refund to customers the difference between the amounts collected
pursuant to the Phase I Rates (PAA Rates) and the Commission-determined
appropriate revenue requirement for the time that the Phase I Rates continue in
effect. (County BR 40) Further, the County elaborated that any required refund
should actually be refunded to customers, in lieu of a credit to future bills,
given the socioeconomic conditions of Stock Island, which is the lowest income
area of Monroe County. (TR 449-450; County BR 40-41) Additionally, the County
asserted that any refund should be calculated and made pursuant to Rule
25-30.360, F.A.C. (County BR 41)
Harbor Shores
In its brief, Harbor Shores agreed with OPC. (Harbor
Shores BR 2)
ANALYSIS
By Order No. PSC-16-0123-PAA-WU, issued March 23, 2016,
the Commission approved the implementation of PAA wastewater rates subject to
refund, pursuant to Section 367.081(8), F.S. Consistent with Section 367.082(4),
F.S., any refund must be calculated to reduce the rate of return of the Utility
during the pendency of the proceeding to the same level within the range of the
newly authorized rate of return. Adjustments made in this period to do not
relate to the period that PAA rates are in effect should be removed. These
adjustments include removing incremental rate expense not embedded in PAA
rates, pro forma plant, and thus, the non-used and useful adjustment to rate
base. To establish the proper refund amount, staff calculated a revised revenue
requirement for this period using the same data used to establish final rates.
Using the principles discussed above, the $2,238,046 Phase I revenue
requirement granted in the PAA Order for the test year is greater than the
revised revenue requirement for the PAA rate collection period of $2,071,790.
This results in a PAA refund of 7.43 percent.
The prescriptive methodology of calculating a potential
refund of the PAA rates implemented during the pendency of this proceeding make
a separate Phase I revenue requirement unnecessary. As described above, the
method isolates a comparison of circumstances that are applicable in the period
the PAA rates are in effect. Staff would note that this methodology is
consistent with the methodology approved in the 2011 rate case for Water
Management Services, Inc. to determine whether a refund was appropriate for the
implemented PAA rates in that case.
Moreover, contrary to the County’s position that any
refunds should be in the form of an actual refund and not a bill credit, staff
recommends that refunds should be distributed in the form of a credit to the
customers’ bills and a refund check should be issued only in the event that the
customer is no longer on the system in accordance with Rule 25-30.360(5),
F.A.C.
CONCLUSION
The proper refund amount should be calculated by using the
same data used to establish final rates, excluding adjustments that do not
relate to the period that PAA rates are in effect. The revised revenue
requirement for this collection period should be compared to the amount of PAA
revenue requirement implemented. This results in a PAA refund of 7.43 percent.
The refund should be made with interest in accordance with Rule 25-30.360(4),
F.A.C. The Utility should be required to submit proper refund reports pursuant
to Rule 25-30.360(7), F.A.C. The Utility should treat any unclaimed refunds as
CIAC pursuant to Rule 25-30.360(8), F.A.C.
Issue 40:
Should the Utility’s approved service availability
policy and charges be revised? (Stipulation 14) (Johnson)
Approved Stipulation:
The appropriate plant capacity charge should remain
unchanged at $2,700 per ERC.
Issue 41:
DROPPED.
Issue 42:
Did KWRU bill and collect revenues in accordance
with its approved tariffs? If not, what
is the appropriate remedy?
Recommendation:
Staff recommends that a new docket be opened,
and a full audit and investigation be conducted in regards to KWRU’s billing
practices in order to determine if any orders, rules, or statutes were violated
by the Utility. Further, the Utility should be put on notice that failure to
comply with Commission orders, rules, or statutes will subject the Utility to
show cause proceedings and fines of up to $5,000 per day per violation for each
day the violation continues or revocation of its certificate as set forth in
Section 367.161, F.S. (Friedrich)
Position of the Parties
KWRU:
All bills and collections were in accordance with
the intent of the approved tariffs.
OPC:
No. The PAA Order stated KWRU’s billing practices
for several general service customers is inconsistent with its approved tariff,
and that Staff would address whether the Utility should be ordered to ‘show
cause’ for charging rates that are inconsistent with its tariff. KWRU’s
response to Commission Staff’s letter and the issues are very complex. The
Commission should initiate a full audit/investigation to determine the
Utility’s compliance with its tariffs and what actions should be taken.
County:
No. The Commission should initiate a full
investigation to determine the extent to which the Utility has not billed and
collected in accordance with its applicable tariffs and take appropriate action
based on the results of that investigation.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU stated that it billed and collected revenues in accordance with the
intent of its approved tariff. (KWRU BR 32) The Utility argued that its billing
practices are due to the mixed-usage of certain properties, property
redevelopment, and the mischaracterization of customer class when all
residential accounts were established using the FKAA water meter data and
customer information. (KWRU BR 32-33; EXH 84; TR 620-21; TR 623-24; TR 628-29)
The Utility addressed several billing practices identified by staff with regard
to KWRU billing inconsistent with its tariff in a letter dated March 21, 2016. Safe
Harbor Marina was billed a negotiated rate instead of the tariff-approved bulk
flat rate, Sunset Marina was billed a base facility charge (BFC) for an 8” and
2” meter and additional BFCs for each of the 64 units behind the meters, and
Meridian West and Flagler Village, were billed based on individual, non-FKAA
meters, instead of the FKAA master meters. (EXH 84; KWRU BR 32-33) In addition,
at the service hearing, a customer of KWRU testified that the Utility billed
based on an effluent meter instead of the FKAA meter. (SH TR 24-29; SH TR
43-44) Utility witness Johnson testified that several master-metered customers
were misclassified and overbilled. He further testified that these customers
should receive refunds with interest. (EXH 84; TR 628-29)
OPC
OPC witness Merchant argued that KWRU incorrectly billed customers in her
direct testimony by referencing the PAA Order. (OPC BR 45; TR 355-57) In
addition, witness Merchant contended all customers billed in error are
deserving of applicable refunds. (OPC BR 45-6; EXH 84)
OPC disputed the complexity of KWRU’s billing practices. Witness Merchant testified that the most
efficient way to rectify this situation is for the Commission to initiate a
full audit and investigation in order to accurately determine if and how much
of KWRU’s revenues were based on unapproved and improper billing practices.
(OPC BR 47; TR 357; TR 379) In addition, witness Merchant also argued that a
full audit and investigation to show cause would potentially reveal other
improperly billed customers who may be owed refunds as well. (OPC BR 47; TR 357)
County
The County agreed with OPC that
KWRU did not bill in accordance with its approved tariff. (County BR 41) In
addition, the County agreed with KWRU, that Meridian West and Flagler Village
are owed refunds, but also believe that there are additional customers who may
be owed refunds as well. (County BR 41)
The County agreed with OPC that this situation should be addressed with a
full investigation and audit by the Commission to determine whether and to what
degree KWRU billed and collected revenues inconsistent with its tariff. (County
BR 42) After an investigation has commenced, the County argued the Commission should
determine if any additional refunds are necessary and if any additional actions
are necessary to prevent inconsistent billing in the future. (County BR 42)
Harbor Shores
In its brief, Harbor Shores agreed with OPC’s position on this issue.
(Harbor Shores BR 2)
ANALYSIS
KWRU’s
current rate structure and rates have been developed as a result of a prior
complaint docket,[29] several
requests for a new class of service,[30]
and as established in its last rate case.[31] Staff has analyzed each circumstance brought
forth by all parties and all customers who participated in the service hearing,
as well as the Utility’s responses.
The
Commission has previously addressed incorrect billing practices of the Utility.
Order No. PSC-02-1165-PAA-SU, issued August 26, 2002, determined that KWRU was
billing discriminatory rates to Safe Harbor Marina. The Commission determined
that it did not approve the monthly flat rate KWRU was billing to this general
service customer. Subsequently, in the Utility’s last rate case a new flat rate
was approved. KWRU admitted on March 21, 2015, it billed a negotiated flat rate
of $1,650.67 per month, instead of the approved bulk rate of $947, to Safe
Harbor Marina, despite being recognized by the Commission for incorrect billing
practices. (EXH
84; TR 620-21) Witness Johnson argued that the Utility notified the Commission
of the Utility’s agreement with Safe Harbor Marina but received no further
response from the Commission. However, witness Johnson testified that he is
aware that it requires Commission approval to change a tariff. (KWRU BR 32; TR
621) The Commission also recognized that it became aware that KWRU utilized
wastewater charges in its revenue calculations that were not approved by the
Commission during the review of a price index application in Order No.
PSC-02-1711-TRF-SU, issued December 9, 2002. The Commission found that the
Utility thoroughly understood the requirements of Sections 367.091(4) and
367.091(5), F.S., and would not initiate a new class of service without
notifying the Commission in a timely matter.
During the
current rate case, staff identified additional billing practices that appear to
be inconsistent with the Utility’s approved tariff. Based on documentation
provided in prior Commission Orders, the Utility’s admission of a negotiated
rate, and the Utility’s admission that refunds with interest are due to at
least two customers, staff believes a full audit and investigation is the most
effective solution. This will allow the Commission to determine if any of
KWRU’s revenues were based on unapproved and improper billing practices. A full
audit and investigation will also determine if there are any additional
customers who may be owed refunds as well. (EXH 84)
CONCLUSION
Staff
recommends that a new docket be opened, and a full audit and investigation be
conducted in regard to KWRU’s billing practices in order to determine if any
orders, rules, or statutes were violated by the Utility. Further, the Utility
should be put on notice that failure to comply with Commission orders, rules,
or statutes will subject the Utility to show cause proceedings and fines of up
to $5,000 per day per violation for each day the violation continues or
revocation of its certificate as set forth in Section 367.161, F.S.
Issue 43:
What is the appropriate amount by which rates should
be reduced four years after the established effective date to reflect the
removal of the amortized rate case expense as required by Section 367.0816,
Florida Statutes?
Recommendation:
KWRU’s wastewater rates should be reduced as shown
on Schedule No. 4 to remove $112,782 of wastewater rate case expense,
grossed-up for RAFs, which is being 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. KWRU should be required to file revised tariffs and a proposed
customer notice setting forth the lower rates and the reason for the reduction
no later than one month prior to the actual date of the required rate
reduction. If KWRU files this reduction in conjunction with a price index or
pass-through rate adjustment, separate data should be filed for the price index
and/or pass-through increase or decrease and the reduction in the rates due to
the amortized rate case expense.
(Friedrich, Frank)
Position of the Parties
KWRU:
This is a fallout issue depending upon the allowed
rate case expense.
OPC:
No position was stated in the post-hearing brief.
County:
Agree with OPC that this is a fallout issue.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU contends that this is a fallout issue depending upon allowed rate
case expense. (KWRU BR 34)
OPC
No position
was stated in the post-hearing brief.
County
The County
agrees with OPC that this is a fallout issue. (County BR 42)
Harbor Shores
In its brief, Harbor Shores agreed with OPC’s position on this issue.
(Harbor Shores BR 2)
ANALYSIS
Section 367.0816, F.S., was repealed pursuant to Ch.
2016-226, Laws of Florida, effective July 1, 2016. However, the statute was in
effect when KWRU’s application was filed, and therefore shall remain applicable
in this case.
Section 367.0816, F.S., was repealed pursuant to Ch.
2016-226, Laws of Florida, effective July 1, 2016. However, the statute was in
effect when KWRU’s application was filed, and therefore shall remain applicable
in this case.
Section 367.0816, F.S., requires that rates be reduced
immediately following the expiration of the four-year amortization period by
the amount of the rate case expense previously included in rates. The reduction
will reflect the removal of $112,782 of revenue associated with the
amortization of rate case expense, the associated return on deferred rate case
expense included in working capital, and the gross up for RAFs. Using KWRU’s
current revenues, expenses, capital structure and customer base, the reduction
in revenues will result in the rate decreases as shown on Schedule No. 4.
KWRU should be required to file revised tariff sheets no
later than one month prior to the actual date of the required rate reduction.
The Utility should also be required to file a proposed customer notice setting
forth the lower rates and the reason for the reduction. If KWRU files this
reduction in conjunction with a price index or pass-through rate adjustment,
separate data should be filed for the price index and/or pass-through increase
or decrease, and the reduction in the rates due to the amortized rate case
expense.
Issue 44:
Should the Utility be required to notify, within 90
days of an effective order finalizing this docket, that it has adjusted its
books for all the applicable National Association of Regulatory Utility
Commissioners (NARUC) Uniform System of Accounts (USOA) associated with the
Commission approved adjustments? (Stipulation 16) (Norris)
Approved Stipulation:
KWRU shall notify the Commission, within 90 days of
the order finalizing this docket, that it has adjusted its books for all the
applicable National Association of Regulatory Utility Commissioners Uniform
System of Accounts associated with the Commission-approved adjustments.
Issue 45:
Should this docket be closed?
Recommendation:
No. This docket should remain open for staff’s
verification that the Utility has completed the recommended refunds, the
revised tariff sheets and customer notice have been filed by the Utility and
approved by staff, and that KWRU has notified the Commission in writing that
the adjustments for all applicable NARUC USOA primary accounts have been made.
Once these actions are complete, this docket should be closed administratively.
(Mapp)
Position of the Parties
KWRU:
Yes, upon verification of post Final Order
requirements.
OPC:
No. This docket should be kept open until the Commission
fully resolves Issue 42 and any other issues.
County:
No. The County agrees with OPC that the docket
should remain open until the Commission resolves all issues.
Harbor Shores:
Agrees with OPC.
Staff Analysis:
PARTIES’
ARGUMENTS
KWRU
KWRU argued that there is no justification for this docket
remaining open after verification of post Final Order requirements.
OPC
OPC argued that this docket should remain open until the
Commission fully resolves Issue 42 and any other issues.
County
County agreed with OPC that this docket should remain open
pending Commission resolution of all issues.
Harbor Shores
Harbor Shores agreed with OPC.
ANALYSIS
This docket should remain open for staff’s verification
that the Utility has completed the recommended refunds, the revised tariff
sheets and customer notice have been filed by the Utility and approved by
staff, and that KWRU has notified the Commission in writing that the
adjustments for all applicable NARUC USOA primary accounts have been made. Once
these actions are complete, this docket should be closed administratively.
