Discussion
of Issues
Issue 1:
Should the Commission approve the transfer of
County-Wide Utility Co., Inc.’s water system and Certificate No. 390-W to
Southwest Ocala Utility, Inc.?
Recommendation:
Yes. The transfer of County-Wide’s water system and
the transfer of Certificate No. 390-W to SOU is in the public interest and
should be approved effective the date of the Commission’s vote. The resultant
order should serve as SOU’s certificate and should be retained by the Utility. The
existing rates and charges should remain in effect until a change is authorized
by the Commission in a subsequent proceeding. The tariffs reflecting the
transfer should be effective for services rendered or connections made on or
after the stamped approval date on the tariffs pursuant to Rule 25-30.475, Florida
Administrative Code (F.A.C.). SOU should be responsible
for filing the Utility’s 2015 and 2016 annual reports and all future annual
reports. Regulatory assessment fees (RAFs) have been paid through December 31, 2016.
SOU should be responsible for all future RAFs. (M. Watts, Frank,
Johnson)
Staff Analysis:
On January 2, 2015, County-Wide filed an application
for approval of the transfer of its water system and Certificate No. 390-W to SOU.
The application is in compliance with the governing Statute, Section 367.071,
F.S., and Administrative Rules concerning applications for transfer of
certificates.
Noticing, Territory, and
Land Ownership
The application contains proof of compliance with the
noticing provisions set forth in Section 367.071, F.S., and Rule 25-30.030,
F.A.C. No objections to the transfer were filed with the Commission and the
time for doing so has expired. The application contains a description of the
Utility’s water service territory, which is appended to this recommendation as
Attachment A. As the Utility is a reseller of bulk water purchased from the
City of Ocala, it has no water treatment facilities. Therefore, no proof of
land ownership pursuant to Rule 25-30.037(2)(s), F.A.C., is required.
Purchase Agreement and
Financing
Pursuant to Rules 25-30.037(2)(i)
and (j), F.A.C., the application must contain a statement regarding financing
and a copy of the Purchase Agreement, which includes the purchase price, terms
of payment, and a list of the assets purchased. According to the application, Dirk
and Donna Leeward own 100 percent of Brick City Management, LLC (BCM) which
manages and owns 100 percent of Southwest Ocala Utility, Inc. (SOU). According to the application and subsequently
filed support documents, on July 19, 2012, Mr. Leeward purchased, at a
discount, an outstanding note from BBVA Compass Bank (Compass Bank) that County-Wide
owed to Compass Bank. The note was comprised of principal, accrued interest,
costs, and fees totaling $1,067,747. The amount Mr. Leeward paid for the note
is unknown. After purchasing the note, Mr. Leeward foreclosed on County-Wide on
March 4, 2013. On April 8, 2013, Mr. Leeward acquired the Utility assets at a
public foreclosure auction for a total of $301, which was comprised of the
winning bid amount and associated documentary stamps. On January 1, 2014, the
assets were transferred to SOU.
Staff believes that the amount paid
to Compass Bank by Mr. Leeward on July 19, 2012, for the outstanding note
should be included in determining the purchase price of the Utility. Staff made
several attempts to obtain the purchase price of the note, including stating
that the information could be filed under a confidential request, but the Buyer
did not provide the requested information.
On November 19, 2015, the Buyer
submitted a letter stating that the Buyer is unable to provide information
regarding the amount paid to acquire the mortgage note from the bank because
there is a non-disclosure and confidentiality agreement attached to the
transaction between the Buyer and Compass Bank. The Buyer contends that the
purchase price cannot be provided without violating the non-disclosure
agreement with the bank. On May 17, 2017, the Buyer provided a signed affidavit
stating that the mortgage and note on the assets were acquired for a dollar
amount in excess of 80 percent of the net book value, $79,051, as of January 1,
2014. Staff believes due to the circumstances of the confidentiality agreement
with Compass Bank, the signed affidavit is sufficient for the purpose of
determining whether an acquisition adjustment should apply at this juncture.
According to the application, there
are no customer deposits, guaranteed revenue contracts, developer agreements,
customer advances, or leases of County-Wide that must be disposed of with
regard to the transfer.
Facility Description and Compliance
SOU’s water system is a consecutive
system composed of water mains, as listed in Table 1-1 below, and nine fire
hydrants. A consecutive system provides treated water purchased from another
entity. Therefore, the City of Ocala is responsible for ensuring the water
meets primary and secondary water quality standards. On June 15, 2016, the
Florida Department of Environmental Protection (DEP) conducted a Sanitary
Survey. During DEP’s inspection, it found that the Utility had neither a
cross-connection control program in place, nor a cross-connection control plan
on file. The Utility corrected these deficiencies on July 13, 2016. The report
issued on July 26, 2016, stated that the Utility was in compliance with its
rules and regulations.
|
Table 1-1
|
|
Southwest Ocala Utility,
Inc. Water Mains
|
|
Material
|
Diameter Pipe (inches)
|
Length (linear feet)
|
|
PVC
|
1
|
100
|
|
PVC
|
2
|
5,630
|
|
PVC
|
2 1/2
|
4,300
|
|
PVC
|
4
|
4,360
|
|
PVC
|
6
|
750
|
|
PVC
|
8
|
750
|
|
PVC
|
12
|
100
|
|
Source: County-Wide Utility Co., Inc. 2014 Annual Report
|
Technical and Financial Ability
Pursuant to Rules 25-30.037(1)(l) and (m), F.A.C.,
the application contains statements describing the technical and financial
ability of the applicant to provide service to the proposed service area. According to the application, Mr. Leeward has been the general
manager of County-Wide since 1986 and has extensive knowledge of the operations
and management of the system. As referenced in the transfer application,
SOU will fulfill the commitments, obligations and representations of the Seller
with regards to utility matters.
Staff reviewed the financial
statements of BCM, the sole manager and owner of SOU. According to the
application, BCM has provided working capital funding to the Utility and will
ensure the availability of any necessary funds for future capital needs. Based
on the above, SOU has demonstrated the technical and financial ability to
provide service to the existing service territory.
Rates and Charges
The Utility’s rates and charges
were last approved in 2007 pursuant to its 2005 SARC.[4]
The rates were subsequently amended to reflect a four-year rate reduction
required by Section 367.0816, F.S., in 2011, and numerous price indexes. The
Utility’s existing rates are shown on Schedule No. 1. Rule 25-9.044(1), F.A.C.,
provides that, in the case of a change of ownership or control of a utility,
the rates, classifications, and regulations of the former owner must continue
unless authorized to change by this Commission. Therefore, staff recommends
that the Utility’s existing rates and charges remain in effect until a change
is authorized by this Commission in a subsequent proceeding.
Regulatory
Assessment Fees (RAFs) and Annual Reports
Staff has verified
that the annual reports have been filed through December 31, 2014, and RAFs have
been paid through December 31, 2016. The 2015 and 2016 Annual Reports have not
been filed. SOU will be responsible for filing the Utility’s annual reports and
paying RAFs for all future years.
Conclusion
The transfer of County-Wide’s water system and the
transfer of Certificate No. 390-W to SOU is in the public interest and should
be approved effective the date of the Commission’s vote. The resultant order
should serve as SOU’s certificate and should be retained by the Utility. The
existing rates and charges should remain in effect until a change is authorized
by the Commission in a subsequent proceeding. The tariffs reflecting the
transfer should be effective for services rendered or connections made on or
after the stamped approval date on the tariffs pursuant to Rule 25-30.475,
F.A.C. SOU should be responsible for filing the Utility’s
2015 and 2016 annual reports and all future annual reports. RAFs have been paid
through December 31, 2016. SOU should be responsible for all future RAFs.
Issue 2:
What is the appropriate net book value (NBV) for the
SOU water system for transfer purposes?
Recommendation:
The net book value of the water system for transfer
purposes is $79,051, as of January 1, 2014. Within 90 days of the date of the
final order, SOU should be required to notify the Commission in writing, that
it has adjusted its books in accordance with the Commission’s decision. The
adjustments should be reflected in SOU’s 2015 Annual Report when filed.
Specifically, the Utility should confirm that the adjustments to all applicable
National Association of Regulatory Utility Commissioners, Uniform System of Accounts
(NARUC USOA) primary accounts as shown on Schedule No. 2, Page 3 of 3, have
been made to SOU’s books and records. In the event the Utility needs additional
time to complete the adjustments, notice should be provided within seven days
prior to the deadline. Upon providing good cause, staff should be given
administrative authority to grant an extension of up to 60 days. (Frank, M. Watts)
Staff Analysis:
Rate
base was last established for the Utility as of December 31, 2005, in its 2005
SARC.
The purpose of establishing NBV for transfers is to determine whether an
acquisition adjustment should be approved. The NBV does not include
normal ratemaking adjustments for used and useful plant or working capital. The
Utility’s NBV has been updated to reflect balances as of January
1, 2014.
Staff’s recommended NBV, as described below, is shown on Schedule No. 2.
Utility
Plant in Service (UPIS)
The Utility’s general ledger reflected a UPIS balance of
$219,537, as of January 1, 2014. Staff reviewed UPIS additions since the last
rate case and as a result has increased UPIS by $7,177. The Utility had retired
its wells and water treatment plant, and interconnected to the City of Ocala on
October 29, 2005, which was prior to the date it filed its 2005 SARC (November
10, 2005).
After extensive investigation, the Commission found that the retired system
would have been sufficient to continue to serve the existing customers, and the
reason the Utility interconnected with the City of Ocala was to be able to
serve anticipated development. Therefore, the interconnection with the City of
Ocala was disallowed from rate base during the Utility’s last rate case as
imprudent since it was not deemed necessary to serve the Utility’s current (at
the time) customers. Staff believes that it is appropriate in the instant
docket to continue to exclude the interconnection from rate base, consistent
with Order No. PSC-07-0604-PAA-WU.
However, since the interconnection is now the only source of water to supply
all current customers, it should be considered in future rate proceedings. As
discussed above, staff recommends UPIS should be increased by $7,177 to reflect
a UPIS balance of $226,714 as of January 1, 2014.
Land
The Utility’s general ledger reflected a land balance of
$2,815, as of January 1, 2014. By Order No. PSC-07-0604-PAA-WU, the
Commission established the value of the land to be $2,815. There have been no additions
to land purchased since that order was issued. Therefore, staff recommends land of $2,815, as of January 1,
2014.
Accumulated
Depreciation
The Utility’s general ledger reflected an accumulated
depreciation balance of $93,858, as of January 1, 2014.
Staff calculated the appropriate accumulated depreciation balance to be
$93,655. As a result, accumulated depreciation should be decreased by $203.
CIAC
As of January 1, 2014, the Utility’s general ledger
reflected a CIAC balance of $87,008; and an accumulated amortization of CIAC
balance of $40,982. Staff increased CIAC by
$10,839 based on audited receipts since the Commission approved beginning
balances from its last rate case. Using a composite rate, staff also calculated
and increased accumulated amortization of CIAC by $42. Therefore,
staff recommends a CIAC balance of $97,847 and
an accumulated amortization of CIAC balance of $41,024, as of January 1, 2014.
Net
Book Value
The Utility’s
general ledger reflected an NBV of $82,468. Based on the adjustments described
above, staff recommends that the NBV for the Utility’s water system, as of
January 1, 2014, is $79,051 ($82,468 - $3,417). Staff’s recommended NBV is
shown on Schedule No. 2, Page 1 of 3, and the NARUC USOA balances for UPIS and
accumulated depreciation as of January 1, 2014, are shown on Schedule No. 2, Page 3 of 3.
Acquisition
Adjustment
An
acquisition adjustment results when the purchase price differs from the NBV of
the assets at the time of the acquisition. According to the signed affidavit
discussed in Issue 1, the Utility and its assets were purchased for a
dollar amount in excess of 80 percent of the net book value. Pursuant to
Rule 25-30.0371, F.A.C., a positive acquisition adjustment may be appropriate
when the purchase price is greater than the NBV, and a negative acquisition
adjustment may be appropriate when the purchase price is less than 80 percent
of NBV. Because SOU is not requesting
a positive acquisition adjustment and the affidavit discussed in Issue 1
attests that the purchase price was greater than 80 percent of the net book
value of $79,051, staff recommends that neither a positive nor negative acquisition
adjustment is warranted at this time.
Conclusion
Based on the above, staff recommends that the NBV of the
water system for transfer purposes is $79,051, as of January 1, 2014. SOU
should be required to notify the Commission in writing that it has adjusted its
books in accordance with the Commission’s decision. Specifically the Utility
should submit a letter within 90 days of the final order in this docket,
confirming that the adjustments to all applicable NARUC USOA primary accounts
as shown on Schedule No. 2, Page 3 of 3, have been made to SOU’s books and
records. In the event the Utility needs additional time to complete the
adjustments, notice should be provided within seven days prior to the deadline.
Upon providing good cause, staff should be given administrative authority to
grant an extension of up to 60 days. The adjustments should be reflected in
SOU’s 2015 and 2016 Annual Reports when filed.
Issue 3:
Should this docket be closed?
Recommendation:
If no protest to
the proposed agency action is filed by a substantially affected person within
21 days of the date of the order, a consummating order should be issued and the
docket should be closed administratively after SOU has provided proof that its
general ledgers have been updated to reflect the Commission-approved balances
as of January 1, 2014. (Janjic)
Staff Analysis:
If no protest to the
proposed agency action is filed by a substantially affected person within 21
days of the date of the order, a consummating order should be issued and the
docket should be closed administratively after SOU has provided proof that its
general ledgers have been updated to reflect the Commission-approved balances
as of January 1, 2014.
