Discussion
of Issues
Issue 1:
Should the transfer of Certificate No. 137-S in
Brevard County from Colony Park Development Utilities, LLC to Merritt Island
Utility Company, Inc. be approved?
Recommendation:
Yes. The transfer of the wastewater system and
Certificate No. 137-S is in the
public interest and should be approved effective the date of the Commission
vote. The resultant order should serve as the Buyer’s certificate and should be
retained by the Buyer. 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.). CPDU paid all Regulatory
Assessment Fees (RAFs) through March 2016, and CWS paid RAFs through December
31, 2016. The Buyer should be responsible for paying RAFs after December 31,
2016, and all future years. The Buyer has filed the 2016 Annual Report, and
should be responsible for filing all future annual reports. (Friedrich, M. Watts, Mick)
Staff Analysis:
On January 19, 2017, MIU filed
an application for the transfer of Certificate No. 137-S from CWS to MIU in Brevard County.
The filing also contained an application for transfer of Certificate No. 137-S
from CPDU to CWS. The transfer of Certificate No. 137-S
from CPDU to CWS was not approved at the time that MIU purchased the system;
therefore, staff recommends transferring Certificate No. 137-S from CPDU to
MIU. The application is in compliance with Section 367.071, F.S., and
Commission rules concerning applications for transfer of certificates. The sale
to MIU occurred on December 22, 2016, contingent upon Commission approval,
pursuant to Section 367.071(1), F.S.
Noticing, Territory, and Land
Ownership
MIU provided notice of the application pursuant to
Section 367.071, F.S., and Rule 25-30.030, F.A.C. No objections to the transfer
were filed, and the time for doing so has expired. The application also
contains a description of the wastewater service territory which is appended to
this recommendation as Attachment A. The application contains a copy of a special
warranty deed that was executed on December 22, 2016, as evidence that the
Applicant owns the land upon which the wastewater treatment facilities are
located pursuant to Rule 25-30.037(2)(s), F.A.C.
Purchase Agreement and Financing
Pursuant to Rule 25-30.037(2)(i), and (j), F.A.C., the
application contains 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. There are no customer deposits, guaranteed revenue
contracts, developer agreements, customer advances, leases, or debt of CWS that
must be disposed of with regard to the transfer. According to the purchase
agreement, the total purchase price for the assets is $35,000 with $5,000 paid
prior to closing, and $30,000 paid at closing. According to the Buyer, the sale
took place on December 22, 2016, subject to Commission approval, pursuant to
Section 367.071(1), F.S.
Facility
Description and Compliance
The wastewater
treatment system consists of a 70,000-gallon per day annual average daily flow
wastewater system, consisting of aeration, secondary clarification,
chlorination and aerobic digestion of solids. The effluent is disposed of in
percolation ponds. The collection system consists of four and six inch
polyvinylchloride mains with two lift stations. The last Florida Department of
Environmental Protection (DEP) compliance evaluation inspection was conducted
on February 3, 2016, and there were two deficiencies, which have been
corrected. On March 4, 2016, the DEP deemed the Utility to be in compliance;
therefore, the system appears to be in compliance with the DEP rules.
Technical
and Financial Ability
Pursuant to Rules 25-30.037(2)(l)
and (m), F.A.C., the application contains statements describing the technical
and financial ability of the Buyer to provide service to the proposed service
area. The President and Vice President have over 30 and 38 years, respectively,
of experience operating or owning water and wastewater utilities, including a
number of utilities previously regulated by the Commission. In addition, the
directors are part owners of other systems regulated by the Commission,
including Harbor Waterworks, Inc.,[7] Lakeside
Waterworks, Inc.,[8] LP
Waterworks, Inc.,[9] Raintree
Waterworks, Inc.,[10]
Brendenwood Waterworks, Inc.,[11] Country
Walk Utilities, Inc.,[12] Lake
Idlewild Utility Company,
Black Bear Reserve Water Corporation,[14]
and several of the systems previously owned by Aqua Utilities Florida, Inc.[15] The
application also indicates that both the President and Vice President have
controlled service delivery to more than 850 water and wastewater facilities
within Florida during their careers. Further, the
application indicates that the President has secured the services of U.S. Water
Services Corporation to provide contract operating service, as well as billing
and collection services. Staff also reviewed the personal financial
statements of the owner, who also serves as the president.
Based on the above, staff believes the Buyer 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 evaluated in
2003 and 2008.
In 2013, the rates were subsequently reduced to reflect the expiration of the
amortization of rate case expense approved in 2008. The Utility’s existing
rates and charges are shown on Schedule No. 2, which is attached to this
recommendation. 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 and Annual Reports
Staff has verified
that the Utility is current on the payment of RAFs through December 31, 2016.
The Buyer will be responsible for paying RAFs after December 31, 2016, and all
future years. The Buyer has filed the 2016 Annual Report, and should be
responsible for filing all future annual reports.
Conclusion
Based on the foregoing, staff recommends that the
transfer of the wastewater system and Certificate No. 137-S is in the public
interest and should be approved effective the date of the Commission vote. The
resultant order should serve as the Buyer’s certificate and should be retained
by the Buyer. 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. The Buyer should be responsible for paying RAFs after
December 31, 2016, and all future years. The Buyer should be responsible for
filing all future annual reports.
Issue 2:
What is the appropriate net book value for the Merritt Island
wastewater system for transfer purposes?
Recommendation:
The net book value of the wastewater system for transfer
purposes is $43,969 as of December 22, 2016. Within 90 days of the date of the
final order, MIU 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 MIU’s 2017 Annual Report when filed. (Mick)
Staff Analysis:
Rate base was last established as of September 27,
2012. The
purpose of establishing net book value (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
NBV has been updated to reflect balances as of December 22, 2016. Staff’s
recommended NBV, as described below, is shown on Schedule No. 1. The Seller did
not have general ledgers; therefore, audit staff utilized annual reports.
Utility
Plant in Service (UPIS)
The 2015 Annual Report reflected a wastewater utility
plant in service (UPIS) balance of $138,494. Staff determined that there have
been no new plant additions since the last rate case proceeding. UPIS has been
increased by $28,282 to reflect unrecorded Commission-ordered adjustments per
the last order. Therefore, staff recommends that the UPIS balance as of
December 22, 2016, should be $166,776.
Land
The 2015 Annual Report reflected
a land balance of $30,506. In the last order, the Commission established the
value of the land to be $30,479. There have been no additions to land purchased
since that order was issued. Therefore, staff recommends a land balance of
$30,479, as of December 22, 2016. This represents a reduction of $27 for land.
Accumulated
Depreciation
The 2015 Annual Report reflected an accumulated
depreciation balance of $169,417. Based on the UPIS adjustment discussed
earlier, staff calculated the appropriate accumulated depreciation balance to
be $153,286. As a result, accumulated depreciation should be decreased by
$16,131 to reflect an accumulated depreciation balance of $153,286 as of
December 22, 2016.
Contributions-in-Aid-of-Construction
(CIAC) and Accumulated Amortization of CIAC
The 2015 Annual Report reflected a CIAC balance of $0 and
an accumulated amortization of CIAC balance of $0. The CIAC balance should be
$23,500, and it is fully amortized based on the Commission-approved balances in
the last order. As such, staff increased CIAC and accumulated amortization of
CIAC by $23,500 to reflect the appropriate Commission-approved balances.
Therefore, staff recommends a CIAC balance of $23,500 and an accumulated amortization
of CIAC balance of $23,500 as of December 22, 2016.
Net
Book Value
The 2015 Annual Report reflected a negative NBV of $417.
Based on the adjustments described above, staff recommends that the NBV is
$43,969. Staff’s recommended NBV and the National Association of Regulatory
Utility Commissioners, Uniform System of Accounts (NARUC USOA) balance for UPIS
and accumulated depreciation as of December 22, 2016, are shown on Schedule No.
1.
Conclusion
Based on the above, staff
recommends that the NBV of MIU’s wastewater system for transfer purposes is
$43,969 as of December 22, 2016. A negative acquisition adjustment should be
included in rate base, and is addressed in Issue 3. Within 90 days of the date
of the final order, the Buyer 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 MIU’s 2017 Annual Report when filed.
Issue 3:
Should an acquisition adjustment be recognized for
ratemaking purposes?
Recommendation:
Yes. Pursuant to Rule 25-30.0371(3), F.A.C., a
negative acquisition adjustment of $175 should be recognized for ratemaking
purposes. Beginning with the date of the issuance of the order approving the
transfer, the negative acquisition adjustment should be amortized over a
seven-year period, in accordance with Rule 25-30.0371(4)(b)1, F.A.C. (Mick)
Staff Analysis:
An acquisition adjustment results when the purchase
price differs from the original cost of the assets (net book value) adjusted to
the time of the acquisition. Pursuant to Rule 25-30.0371(3), F.A.C., if the
purchase price is equal to or less than 80 percent of net book value, a
negative acquisition adjustment shall be included in rate base and will be
equal to 80 percent of net book value less the purchase price. Pursuant to Rule
25.30.0371(4)(b)1, F.A.C., if the purchase price is greater than 50 percent of
net book value, the negative acquisition adjustment shall be amortized over a
seven-year period from the date of issuance of the order approving the transfer
of assets. The calculation of the acquisition adjustment is shown below in
Table 3-1.
Table 3-1
Calculation of Negative
Acquisition Adjustment
|
Net book value as of December 22, 2016
|
$43,969
|
|
80
percent of net book value
|
$35,175
|
|
Purchase
price
|
$35,000
|
|
Negative
acquisition adjustment
|
$175
|
Therefore,
staff recommends that, pursuant to Rule 25-30.0371(3), F.A.C., a negative
acquisition adjustment of $175 shall be recognized for ratemaking purposes.
Beginning with the date of issuance of the order approving the transfer, the
negative acquisition adjustment should be amortized over a seven-year period,
in accordance with Rule 25-30.0371(4)(b)1, F.A.C.
Issue 4:
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 issuance
of the order, a consummating order should be issued and the docket should be
closed administratively upon Commission staff’s verification that the revised
tariff sheets have been filed and the Buyer has notified the Commission in
writing that it has adjusted its books in accordance with the Commission’s
decision. (Mapp)
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 issuance
of the order, a consummating order should be issued and the docket should be
closed administratively upon Commission staff’s verification that the revised
tariff sheets have been filed and the Buyer has notified the Commission in
writing that it has adjusted its books in accordance with the Commission’s
decision.
