Discussion
of Issues
Issue 1:
Is the quality of service provided by Four Lakes Golf
Club, Ltd. satisfactory?
Recommendation:
Yes. Staff recommends that the overall quality of
service provided by the Utility be considered satisfactory. (Wooten, Thompson)
Staff Analysis:
Pursuant to Section 367.081(2)(a)1. F.S., in water
and wastewater rate cases, the Commission shall consider the overall quality of
service provided by a utility. Rule 25-30.433(1), Florida Administrative Code
(F.A.C.), provides for the evaluation of three separate components of the
utility’s operations. The components evaluated are: (1) the quality of the utility’s
product; (2) the operating conditions of the utility’s plant and facilities;
and (3) the utility’s attempt to address customer satisfaction. The Rule
further states that sanitary surveys, outstanding citations, violations, and
consent orders on file with the Department of Environmental Protection (DEP)
and the county health department over the preceding three-year period shall be
considered. Additionally, Section 367.0812(1)(c), F.S., requires the Commission
to consider the extent to which the utility provides water service that meets
secondary water quality standards as established by the DEP.
Quality of Utility’s Product
In evaluating Four Lakes’ water quality, staff reviewed
the Utility's compliance with the DEP primary and secondary drinking water standards.
Primary standards protect public health while secondary standards regulate
contaminants that may impact the taste, odor, and color of drinking water.
Staff reviewed the most recent chemical analysis of samples dated July 8, 2015.
All of the contaminants were below the maximum contaminant level set by the
DEP.
Operating Condition of the Utility’s Plant and
Facilities
The
Utility is located in the water use caution area of the Southwest Florida Water
Management District. Staff visited the facility and completed a site inspection
on June 29, 2017. Four Lakes’ water system has two wells, rated at 550 gallons
per minute (gpm) and 460 gpm and has one hydropneumatic water tank totaling
15,000 gallons in capacity. There are 27 fire hydrants present throughout the
service area and the distribution system is comprised of varying sizes of
polyvinyl chloride (PVC) pipes. Staff reviewed the Utility’s last DEP Sanitary
Survey, dated September 14, 2016, and the facility was determined to be in
compliance with the DEP’s rules and regulations.
The
wastewater system is an extended aeration domestic wastewater treatment
facility with a permitted plant capacity of 98,500 gallons per day (gpd) based
on a Three-Month Rolling Average Daily Flow. This facility is operated to
provide secondary treatment with basic disinfection. The DEP’s comprehensive
evaluation of a wastewater facility’s overall compliance status is based on
review of past monitoring data and results from inspections, such as its
compliance evaluation inspection (CEI). On April 5, 2016, the DEP conducted a
CEI designed to verify the Utility’s compliance with applicable requirements
and compliance schedules for chemical and biological self-monitoring programs. During
the inspection, the DEP noted groundwater quality deficiencies with Total
Dissolved Solids (TDS), pH, and nitrate levels. Both the TDS and pH
deficiencies were corrected and DEP stated that the Utility is currently in
compliance in regards to groundwater quality. The increased presence of nitrates
in the groundwater testing was determined to be caused by an outside source
beyond the Utility’s control. In order to prevent any further contamination,
the Utility abandoned and relocated the monitoring location and educated the
residents on proper use of fertilizer, herbicides and pesticides.
The Utility’s Attempt to Address Customer
Satisfaction
On June 29, 2017, a customer meeting was held at the Chain
O’Lakes Complex within Four Lakes’ service territory to receive customer
comments concerning quality of service. There were approximately 15 customers
in attendance, one of whom made comments. The customer stated that he found the
rate increase reasonable and had no complaints about the Utility.
Staff requested copies of complaints
filed against Four Lakes with the DEP for the test year and the prior four
years. The DEP stated that no complaints have been received in the five-year
period. Staff also requested complaints from the Utility for the test year and
the prior four years as well, and the Utility stated that none had been
received during this time period. The Commission’s Consumer Activity Tracking
System recorded one complaint during the past five years, related to improper
billing on October 30, 2014. This issue was resolved in a timely and adequate
manner. There were no other complaints received by either the Commission or
the DEP.
Conclusion
The Utility has taken reasonable actions to comply with
the DEP’s regulations and to address customer concerns. Staff recommends that
the quality of service provided by the Utility be considered satisfactory.
Issue 2:
What are the used and useful percentages (U&U)
of Four Lakes’ water treatment plant (WTP), wastewater treatment plant (WWTP),
and distribution and collection systems?
Recommendation:
Four Lakes’ WTP, water distribution system, WWTP,
and wastewater collection system should all be considered 100 percent U&U. There is no excessive
infiltration and inflow. Staff recommends a 7.2 percent adjustment to purchased
power and chemical expenses be made for excessive unaccounted for water.
(Wooten, Thompson)
Staff Analysis:
Four Lakes’ WTP has two wells rated at a combined
1,010 gpm. There are 27 fire hydrants present throughout the service area. The
distribution system is comprised of varying sizes of PVC pipes. Four Lakes’
WWTP is permitted by the DEP as a 98,500 gpd facility. According to the
Utility, its wastewater collection system is comprised of 28,127 feet of 8 inch
PVC collecting mains and 2,933 feet of force mains. There are 127 manholes
present throughout the service area.
Excessive Unaccounted For Water
Rule 25-30.4325, F.A.C., defines excessive unaccounted for
water (EUW) as "unaccounted for water in excess of 10 percent of the
amount produced." Unaccounted for water is all water produced that is not
sold, metered, or accounted for in the records of the utility. In determining
whether adjustments to plant and operating expenses are necessary in accordance
with Rule 25-30.4325(10), F.A.C., staff considers several factors. These
include (1) the causes of EUW, (2) any corrective action taken, or (3) the
economical feasibility of a proposed solution. EUW is calculated by subtracting
both the gallons sold to customers and the gallons used for other services,
such as flushing, from the total gallons pumped for the test year.
The Monthly Operating Reports that the Utility files with
the DEP indicates that the Utility treated 83,994,001 gallons during the test
year. In response to a staff data request, the Utility indicated that it
purchased no water and used 855,000 gallons for other uses during the test
year. According to the staff audit
report, the Utility sold 68,658,866 gallons of water for the test year. When both the gallons sold and water used for
other uses is subtracted from the total gallons pumped, 14,480,135 gallons are
unaccounted for. The formula for unaccounted for water is given by gallons of
unaccounted for water / (total gallons pumped + gallons purchased). The
resulting unaccounted for water is 17.2 percent and the excessive unaccounted
for water is 7.2 percent or approximately 6,080,735 gallons.
Accordingly, staff recommends a corresponding adjustment
to purchased power and chemical expenses due to EUW. The Utility states that
the current meters are of various ages and many meters are not working or
capturing all of the water usage resulting in this EUW value. As discussed in
Issue 3, the Utility plans to rectify the problem by replacing meters in its
service territory.
Infiltration and Inflow
Rule
25-30.432, F.A.C., provides that in determining the amount of U&U plant,
the Commission will consider infiltration & inflow (I&I). Infiltration
typically results from groundwater entering a wastewater collection system
through broken or defective pipes and joints; whereas inflow results from water
entering a wastewater collection system through manholes or lift stations. The
allowance for infiltration is 500 gpd per inch diameter pipe per mile, and an
additional 10 percent of water sold is allowed for inflow. In addition,
adjustments to operating expenses, such as chemical and electrical costs, are
considered necessary if excessive. Excessive I&I is a calculation that is
based on a comparison of the allowable wastewater treated to the actual amount
of wastewater treated.
Using the pipe lengths of the Utility’s collection system, the
infiltration allowance is calculated to be 5,321,188 gallons per year. Ten
percent of the total gallons sold to customers is allowed for inflow, which
totals 6,865,886 gallons. The total I&I allowance is then calculated as
12,187,074 gallons per year.
The amount
of wastewater expected to be returned from the system is calculated. This figure
is determined by summing 80 percent of water sold to residential users with 90
percent of water sold to non-residential users. The amount calculated for
expected return is 55,043,600 gallons per year. In order to find the total
amount of wastewater allowed, the I&I allowance and the expected return are
summed, yielding 67,230,633 gallons per year. Finally, this total is compared
to the total wastewater actually treated during the test year, which in this
case is 24,779,000 gallons. The actual amount does not exceed the allowable
amount, therefore there is no excessive I&I.
Used and Useful Percentages
This is the Utility’s first staff assisted rate case since
receiving its grandfather certificates in 1999.Therefore, this is the first determination
of used and useful percentages by the Commission.
Water Treatment Plant
Four Lakes’ water service territory covers approximately
670 acres. The WTP is a closed system with two wells rated at 550 and 460 gpm
and permitted capacity at 1,304,000 gpd. There are 27 fire hydrants located
throughout the service area which must meet a minimum of 500 gpm for a
four-hour period of time. The formula for calculating U&U for the WTP is
given by [2 x (Maximum Day Peak Demand – EUW) + Fire Flow + Growth] / Firm
Reliable Capacity. Max Day Peak Demand is 269 gpm. As previously noted, there
is EUW of 6,080,735 gallons which results in a value of 11.6 gpm. Fire Flow is
500 gpm according to Rule 25-30.4325(1)(c), F.A.C. Using the linear regression
formula, there is no estimated growth over the statutory five-year growth
period. Firm Reliable Capacity assumes loss of the largest capacity well (550
gpm) and is therefore 460 gpm. This calculation results in a U&U greater
than 100 percent, as such, staff recommends the WTP be considered 100 percent
U&U.
Water Distribution
The water distribution system is evaluated based on
equivalent residential connections (ERCs) consisting of growth, customer demand,
and system capacity. As noted above, the system has no estimated growth. The
customer demand is 863 ERCs (863 ERCs is the sum of the 813 residential customers
and 13 general service customers which equal 50 ERCs) for the test year. The
system capacity is 873 ERCs, resulting in a U&U percentage of 99 percent
for the distribution system. The system is considered built out and over 95
percent U&U therefore consistent with prior Commission practice, staff
recommends it be considered 100 percent U&U.
Wastewater Treatment Plant
The formula for calculating U&U for the WWTP is given
by (actual flows + growth – excessive I&I) / permitted plant capacity. The
average daily flow for Four Lakes is 87,690 gpd. There is no excessive I&I
and no growth based on a linear regression. The permitted capacity of the plant
is 98,500 gpd. Based on staff’s calculation, the resulting U&U for the WWTP
is 89 percent. As the system is built out, staff recommends a U&U amount of
100 percent for the WWTP.
Wastewater Collection
The wastewater collection system is evaluated based on
ERCs consisting of growth, customer demand, and system capacity. Based upon a
linear regression formula there is no estimated customer growth over the
statutory five-year growth period. The customer demand is 826 ERCs (826 ERCs is
the sum of the 813 residential customers and 6 general service customers equal
to 13 ERCs) for the test year, with a system capacity of 843 ERCs, resulting in
a U&U percentage of 98 percent for the distribution system. As there has
been no customer growth and the system is built out, staff recommends a U&U
amount of 100 percent for the wastewater collection system.
Conclusion
Four Lakes’ WTP, WWTP, water distribution system and
wastewater collection system should all be considered 100
percent U&U. There is no excessive infiltration and inflow and staff
recommends a 7.2 percent adjustment to purchased power and chemical expenses
should be made for excessive unaccounted for water.
Issue 3:
What is the appropriate average test year rate base
for Four Lakes?
Recommendation:
The appropriate average test year rate base for Four
Lakes is $331,883 for water and zero for wastewater. Four Lakes should complete
the pro forma items within 12 months of the issuance of the consummating
order. If the Utility encounters any
unforeseen events that will impede the completion of the pro forma items, the
Utility should immediately notify the Commission in writing. Also, the Utility
should be required to submit a copy of the final invoices and proof of payment
for all pro forma plant items. (Golden, Wilson, Wooten, Thompson)
Staff Analysis:
The appropriate components of the Utility’s rate
base include utility plant in service, land,
contributions-in-aid-of-construction (CIAC), accumulated depreciation,
amortization of CIAC, and working capital. Rate base has never been established
for this Utility. Staff selected the 12-month period ended August 31, 2016, as
the test year for the instant case. Commission audit staff determined that the
Utility’s books and records are in compliance with the National Association of
Regulatory Utility Commissioners’ Uniform System of Accounts (NARUC USOA). A
summary of each component of rate base and the recommended adjustments are
discussed below.
Utility Plant in Service (UPIS)
The Utility recorded UPIS of $704,613 for water and
$1,373,940 for wastewater. Based on audit staff’s review of the Utility’s
existing documentation, UPIS should be decreased by net adjustments of $147,257
for water and $366,532 for wastewater to reflect the supported UPIS test year
balances. The Utility continued to research its records after the audit, and
located an additional $21,086 in supporting documentation for the well pump
replacement for potable well #2 that occurred during the test year. Therefore,
staff decreased UPIS by $126,171 ($147,257 - $21,086) for water and $366,532
for wastewater. In addition, staff decreased the water account by $3,762 to
reflect the retirement of the replaced well pump based upon a review of the
available original cost documentation. Staff notes that the Utility has
retained engineering services from the same professional engineer since the
Utility’s facilities were first constructed. Staff believes the Utility may be more
successful in documenting the unsupported plant through an original cost study
conducted by or in consultation with the professional engineer who is familiar
with the facilities. In the event the Utility decides to conduct an original
cost study, staff recommends that the Commission authorize Four Lakes to record
any costs it incurs for conducting an original cost study in the future to
Account 186 Miscellaneous Deferred Debits pending Commission review in a future
rate proceeding.
Staff is also recommending several adjustments related to
pro forma plant additions. Staff increased water UPIS by $1,200 to reflect a pro
forma chlorinator replacement that occurred after the test year. Staff also
decreased the water account by $161 to reflect the retirement of the replaced
chlorinator based upon a review of the available original cost documentation. In
addition, Four Lakes requested consideration of two pro forma projects in this
rate case to replace a hydropneumatic water tank and all of the Utility’s water
meters. Recently, the Utility also requested consideration of an emergency well
repair for potable well #1.
Four Lakes
plans to replace a hydropneumatic water tank by the end of 2017. The Polk
County Health Department (PCHD), acting on behalf of the DEP, requires the
Utility to have the tank inspected every five years. After the most recent tank
inspection in late 2016, Four Lakes was advised by an independent contractor
that the tank should be rehabilitated or replaced. The tank is the original
tank that was placed into service in 1994 when the Utility was constructed. The
Utility states that it approached several vendors about the tank replacement
project but only received one quote.
The Utility also requested proposals from two more companies regarding
rehabilitation of the tank but did not receive any quotes. The Utility was
ultimately advised by a representative of the Florida Rural Water Association
(FRWA) that due to the age and nature of the tank usage, the tank should be
replaced rather than rehabilitated. Based on staff’s review of the requested
tank replacement, staff recommends it as appropriate and prudent.
According
to the Utility, the current meters are the original meters and many meters are
not working or capturing all of the water usage, which resulted in a
recommended EUW adjustment of 7.2 percent. Therefore, the Utility plans to
replace approximately 827 meters in 2017 in an effort to address unaccounted
for water discussed in Issue 2. As of September 2017, the Utility has replaced
approximately 700 meters and plans to have replaced all of its meters by the
end of October.
The new
meters are remote read meters, allowing automatic direct readings of the
meters. These meters are currently in use at one of the Utility’s other
properties so it already possesses the necessary meter reading equipment. The
replacement cost is $210.54 per residential meter with a higher cost for larger
general service meters. The Utility also plans to replace the meter boxes on an
as needed basis, but estimates replacing 100 meter boxes at a cost of $25.00
per meter box. The Utility obtained one bid from the company that provided the
meter reading equipment to ensure compatibility with the new meters. Comparing
the cost of the meter replacements to industry standards and another similarly
sized water utility, staff recommends the requested meter installation charge
is reasonable. Staff
therefore recommends the meter replacement project as appropriate and prudent.
On October 6, 2017, staff was informed that the 550 gpm
rated well failed which required the replacement of the pump, shaft, and
assembly. This well is run in tandem with the Utility’s second well and is
needed to run at full operational capacity. This failure required an emergency evaluation,
therefore, the Utility requested the repair service from a vendor that has
prior successful experience working on Four Lakes’ wells. The replacement is
expected to be completed by the end of October 2017. Based on staff’s review of
the requested replacement, staff recommends it as appropriate and prudent.
As shown in Table 3-1 below, the net increase to water
UPIS to reflect the pro forma hydropneumatic tank replacement, meter
replacement projects, and well pump replacement is $279,800, which includes the
associated retirements estimated by staff based on the available records. There
are no retirements reflected for the hydropneumatic tank and well pump
replacements because the original costs for those items were already removed in
the unsupported plant adjustment discussed above. Also, the Utility’s existing
records only reflect one well pump, and staff is recommending that it be
retired in association with the test year pump replacement for well #2
discussed above. Further, the retirement for meter replacements is limited to the
balance remaining in Account 334 following the unsupported plant adjustment.
Table 3-1
Pro Forma Plant Items
|
Project
|
Acct. No.
|
Description
|
Amount
|
|
Hydropneumatic Tank Project
|
330
|
Replace hydropneumatic water tank
|
$ 72,864
|
|
Meter Replacement Project
|
334
|
Install new water meters & meter boxes
|
193,499
|
|
|
334
|
Retire replaced meters & boxes
|
(6,740)
|
|
Well Pump Replacement
|
311
|
Replace well pump, shaft and assembly
|
20,177
|
|
Net Increase
|
|
|
$279,800
|
Source: Responses to staff
data requests
Staff
notes that pro forma plant additions are often addressed using a phased
approach. However, staff does not believe a phased approach is necessary in
this case because it is anticipated that all of the projects will be completed
by the end of this year, prior to the effective date of any rates that may be
approved by the Commission in this docket. Further, the Utility has already
begun work on each project and has made significant progress toward completing
the projects. Four Lakes should complete the pro forma projects within 12
months of the issuance of the consummating order. If the Utility encounters any
unforeseen events that will impede the completion of the pro forma items, the
Utility should immediately notify the Commission in writing. Also, the Utility
should be required to submit a copy of the final invoices and proof of payment
for all pro forma plant items.
Finally, staff decreased UPIS by $27,113 for water and $3,633
for wastewater to reflect an averaging adjustment for additions made during the
test year. Consistent with Commission practice, no averaging adjustments are
applied to pro forma additions. Staff’s adjustments to UPIS are a net increase
of $123,794 to water and a decrease of $370,165 to wastewater. Therefore, staff
recommends a UPIS balance of $828,407 for water and $1,003,775 for wastewater.
Land and Land Rights
The Utility recorded land of $38,979 for water and $70,004
for wastewater. Staff determined that no adjustments are necessary. Therefore,
staff recommends a land and land rights balance of $38,979 for water and
$70,004 for wastewater.
Non-Used and Useful Plant
As discussed in Issue 2, Four Lakes’ WTP, water
distribution system, WWTP, and wastewater collection system are considered 100 percent U&U. Therefore, no U&U adjustments
are necessary.
Contribution in Aid of Construction (CIAC)
The Utility recorded test year CIAC of $507,425 for water
and $985,153 for wastewater. The Utility does not have the original supporting
documents for the CIAC collections. However, pursuant to Order No.
PSC-99-1236-PAA-WS that granted grandfather certificates to Four Lakes, the
Commission authorized the Utility to continue collecting its existing combined
water and wastewater plant capacity charge of $1,818 per mobile home connection.
According to the Utility’s annual reports, the last CIAC was collected in 2002.
Further, the total CIAC reported is consistent with the Utility’s approved
tariff and customer base. Therefore, staff recommends that no adjustments are
necessary. Further, because no activity occurred during the test year, no
averaging adjustments are necessary for ratemaking purposes. Staff recommends
CIAC balances of $507,425 for water and $985,153 for wastewater.
Accumulated Depreciation
The Utility recorded test year accumulated depreciation
balances of $445,837 for water and $920,248 for wastewater as of December 31,
2015. In order to reflect the appropriate test year balances as of August 31,
2016, staff calculated accumulated depreciation using the prescribed rates set
forth in Rule 25-30.140, F.A.C. Staff decreased accumulated depreciation by $132,018
for water and $242,997 for wastewater to reflect the appropriate test year
balances following the removal of unsupported plant as discussed above. In
addition, staff decreased the water account by $3,762 to reflect the retirement
of the well pump that was replaced during the test year. Staff increased the
water account by $61 to reflect the pro forma chlorinator replacement, and
decreased the water account by $161 to reflect the associated retirement. Staff
also increased the water account by $2,208 and $10,986 to reflect the pro forma
replacements of the hydropneumatic tank and water meters, respectively. In
addition, staff decreased the water account by $6,740 to reflect the retirement
associated with the meter replacement project. Further, staff increased the
water account by $1,187 to reflect the pro forma replacement of the well pump, shaft
and assembly. Finally, staff decreased accumulated depreciation by $6,650 for
water and $12,597 for wastewater to reflect a test year averaging adjustment.
Staff’s adjustments are net decreases of $134,889 and $255,594 to water and
wastewater, respectively. Therefore, staff recommends accumulated depreciation
balances of $310,948 for water and $664,654 for wastewater.
Accumulated Amortization of CIAC
Four Lakes recorded amortization of CIAC balances of
$300,427 for water and $583,996 for wastewater as of December 31, 2015. Staff calculated
the accumulated amortization of CIAC using the composite rates calculated in
accordance with Rule 25-30.140(9)(b) and (c), F.A.C. In order to reflect the
appropriate test year balances as of August 31, 2016, staff decreased the amortization
of CIAC by $28,482 for water and $24,698 for wastewater. In addition, staff
decreased these accounts by $7,406 for water and $12,281 for wastewater to
reflect an averaging adjustment, resulting in net decreases of $35,888 and $36,979
for water and wastewater, respectively. Therefore, staff recommends accumulated
amortization of CIAC balances of $264,539 for water and $547,017 for wastewater
for the test year.
Working Capital Allowance
Working capital is defined as the short-term investor-supplied
funds that are necessary to meet operating expenses of the Utility. Consistent
with Rule 25-30.433(2), F.A.C., staff used the one-eighth of the operation and
maintenance (O&M) expense formula approach for calculating the working
capital allowance. Staff also removed the unamortized balance of rate case
expense of $1,371 for water and $1,344 for wastewater pursuant to Section
367.081(9), F.S. Applying
this formula, staff recommends a working capital allowance of $18,331 ($146,651/8)
for water, based on the adjusted O&M expense of $146,651 ($148,022 - $1,371
= $146,651). Further, staff recommends a working capital allowance of $22,928
($183,420/8) for wastewater, based on the adjusted O&M expense of $183,420
($184,764 - $1,344 = $183,420).
Rate Base Summary
Applying all of the above adjustments results in a
negative rate base of $6,083 for wastewater. In accordance with Commission
practice, staff has adjusted the rate base to zero for ratemaking purposes.[8] Based on
the forgoing, staff recommends that the appropriate test year average rate base
is $331,883 for water and zero for wastewater. Further, the Utility should
complete the pro forma items within 12 months of the issuance of the
consummating order. If the Utility encounters any unforeseen events that will
impede the completion of the pro forma items, the Utility should immediately
notify the Commission in writing. Also, the Utility should be required to
submit a copy of the final invoices and proof of payment for all pro forma
plant items. Rate base is shown on Schedules No. 1-A and 1-B. The related
adjustments are shown on Schedule No. 1-C.
Issue 4:
What is the appropriate rate of return on equity and
overall rate of return for Four Lakes?
Recommendation:
The appropriate return on equity (ROE) is 9.96
percent with a range of 8.96 percent to 10.96 percent. The appropriate overall
rate of return is 7.31 percent. (Golden, Wilson)
Staff Analysis:
Four Lakes is owned by a partnership comprised of
three individuals and one business (ATA Properties, Inc.), and is managed by
Century Companies (Century), which manages approximately 16 residential
communities, including four other water and wastewater utilities that are
regulated by the Commission; Anglers Cove West, CHC VII, Hidden Cove, and S.V.
Utilities. Four Lakes’ average test year capital structure consists of $4,325
in short-term debt. As discussed in Issue 3, staff is recommending approval of
three pro forma projects to replace a hydropneumatic tank, all of the Utility’s
water meters, and a well pump, shaft, and assembly. The total cost for these
projects is $286,540. A representative of the Utility advised staff that all
three projects are being paid for with existing funds, and that no loans will
be obtained related to these projects. Therefore, staff increased common equity
by $286,540 to reflect the funding for the three pro forma projects. The only
loan directly attributable to Four Lakes is the $4,325 short-term debt related
to the purchase of a mini excavator. In addition, the owners of the Four Lakes
community have a loan that covers both the park operations and utility
operations, but did not allocate a specific amount of the loan to the Utility.
Therefore, staff increased long-term debt by $213,296 to reflect the portion of
the loan that corresponds to the Utility’s test year rate base
The Utility’s capital structure has been reconciled with
staff’s recommended rate base. As discussed in Issue 7, staff is recommending
that the operating ratio methodology be used in this case for the wastewater
system. Although the traditional rate of return does not apply to the
wastewater system in this case due to the negative rate base, staff recommends
that an ROE still be established for this Utility for both the water and
wastewater systems. The appropriate ROE is 9.96 percent based upon the
Commission-approved leverage formula currently in effect.[9]
Staff recommends an ROE of 9.96 percent, with a range of 8.96 percent to 10.96
percent, and an overall rate of return of 7.31 percent. The ROE and overall
rate of return are shown on Schedule No. 2.
Issue 5:
What are the appropriate test year revenues for Four
Lakes?
Recommendation:
The appropriate test year revenues for Four Lakes
are $143,020 for water and $142,313 for wastewater. (Johnson)
Staff Analysis:
Four Lakes recorded
$142,371 of service revenues for water and $142,994 for wastewater. The Utility
did not have any miscellaneous revenues because there are no approved
miscellaneous service charges. The Utility’s current tariff reflects a monthly
base facility charge (BFC) of $26.18 for both water and wastewater service,
which includes an allotted 5,000 gallons a month. Customer usage above 5,000
gallons is billed at $1.05 per thousand gallons. The Utility bills the BFC
monthly and the gallonage charge for usage above 5,000 gallons quarterly, then
allocates the revenues equally between water and wastewater service.
Based on staff’s review of the Utility’s
billing determinants and the rates that were in effect during the test year,
staff recommends the Utility test year water service revenues be increased by
$649 and wastewater service revenues be decreased by $681 to reflect the
appropriate test year revenues. Based on the above, staff recommends that the
appropriate test year revenues are $143,020 ($142,371 + $649) for the water
system and $142,313 ($142,994 - $681) for the wastewater system.
Issue 6:
What is the appropriate amount of operating
expenses?
Recommendation:
The appropriate amount of operating expense for the
Utility is $192,125 for water and $215,815 for wastewater. (Golden, Wilson)
Staff Analysis:
Four Lakes recorded operating expense of $164,667
for water and $205,264 for wastewater for the test year ended August 31, 2016.
The test year O&M expenses have been reviewed, including invoices, canceled
checks, and other supporting documentation. In addition, the Utility filed a
response to Commission staff’s audit report and provided additional
confidential information to clarify and support its test year salary
allocations. Staff has made several adjustments to the Utility's operating
expenses as summarized below.
Operational Information
As noted previously in Issue 4, Four Lakes’ is owned by a partnership
comprised of three individuals and a business (ATA Properties, Inc.), and is
managed by Century, which manages approximately 16 residential communities,
including four other water and wastewater utilities that are regulated by the
Commission; Anglers Cove West, CHC VII (CHC), Hidden Cove, and S.V. Utilities
(SV). Four Lakes receives all of its direct operational, maintenance, administrative,
and managerial services from Century. All of the work is performed by Century
employees with the exception of the contractual water plant operator and
professional engineering services. Century’s technical employees’ are responsible
for: the wastewater plant operation; water and wastewater plant maintenance and
repairs; water and wastewater line repairs; lift station maintenance and repairs;
oversight of the cross-connection control plan required by the PCHD; meter
reading; water meter testing and maintenance; and general facilities
maintenance, such as painting, power washing, mowing, and landscaping.
Century’s employees are also responsible for onsite
customer relations activities within the Four Lakes community including collecting
utility billing payments from customers and assisting with customer or
community concerns, such as water leaks, lift station issues, and meter testing.
In addition, Century’s employees are responsible for all of the administrative
and managerial functions related to Four Lakes’ water and wastewater service
including but not limited to: water and wastewater billing; updating customer
billing records; assisting the community managers with payment collections and
water shut-off notices; documenting the cross-connection control plan for all
the utilities; assisting the technical staff and community managers with daily
operational issues, including utility repairs and improvements, and any
customer concerns. Century’s employees are also responsible for all the
accounting, finance, tax, and payroll work related to Four Lakes’ water and
wastewater operations.
The Commission previously reviewed and approved expenses related to
Century’s management services for CHC and SV. Century allocates any shared common
expenses between the applicable communities and/or utilities based on the
number of lots in each community. In the most recent rate cases for CHC and SV,
the Commission found that allocating the costs based on lots properly allocates
costs to all businesses and is reasonable.
Staff notes that it has also been Commission practice to allocate common costs
based on ERCs. Therefore, staff compared the lot allocation and ERC allocation
percentages for each of the five related utilities to determine if the lot
allocation method still produces an equitable result. Because the communities
served by the five utilities have a similar customer base and few general
service customers, both methods produce similar results. Also, because a
portion of the shared expenses are allocated to the communities, for which an
ERC calculation is not possible, staff believes the lot allocation method
ensures that the costs are allocated properly between the utility and
non-utility businesses. Staff has applied this methodology in the adjustments
recommended below.
Operation and Maintenance (O&M) Expenses
Salaries and Wages – Employees (601/701)
Four Lakes recorded salaries and wages – employees expense of $74,356
for water and $83,921 for wastewater for the test year to reflect Four Lakes’
share of Century’s allocated employee salaries and wages expense. Century’s employees’
time spent on water and wastewater duties versus community-related work for all
16 communities and five utilities ranges from 100 percent to as little as eight
percent. The total water and/or wastewater portion of each employee’s salary is
then allocated to the related utilities depending upon which utilities that
employee works on.
As noted above, the Utility filed a response to the audit report and
provided additional confidential information to clarify its information
provided during the audit and to further support Century’s test year salary
allocations.
Based on a review of the confidential salary information, staff determined that
increases of $15 for water and $281 for wastewater are necessary to reflect the
correct test year balances. Century’s salary allocations reflect the combined
total of gross wages, payroll taxes, and employee benefits. Due to the
confidential classification of the additional salary information, staff is not
specifying the exact split of the costs in this recommendation. However, staff
believes it would be appropriate to reclassify the payroll tax portion of the
allocation to the proper account. Therefore, staff decreased this account by
$6,848 for water and $7,736 for wastewater to reclassify the test year payroll
taxes that were included with these salary allocations to Taxes Other Than
Income.
The test year salary allocations only included the direct salary
allocations related to the operational, technical, administrative, and
managerial functions. No salary allocations related to the indirect functions
of accounting, finance, tax, and payroll work for Four Lakes’ water and
wastewater systems were included in the test year expenses. Century plans to
begin allocating a portion of its annual administrative and general (A&G)
expenses to the five water and wastewater utilities going forward, beginning in
January 2018, and has requested consideration of those expenses as a pro forma
adjustment in the instant case. The allocation is limited to the corporate
expenses that have some association with the water and wastewater utilities.
Century determined that approximately 9 percent of the total utility-related
A&G expense of $1,526,500 is attributable to the water and wastewater
utilities, resulting in a total allocated A&G expense of $137,385 to all
the water and wastewater utilities. Applying the lot allocation methodology,
this results in Four Lakes being allocated approximately 2.57 percent of the applicable
A&G expenses. Based on staff’s review, the requested pro forma A&G
expenses are not duplicative of Four Lakes’ test year expenses and are appropriate
for inclusion in Four Lakes’ revenue requirement. Further, staff determined
that the salary allocation for the accounting, finance, tax, and payroll work
is not duplicative of any work performed by the employees who were already
reflected in the test year salaries and wages expense. Based on the above,
staff increased this account by $11,744 for water and $11,458 for wastewater to
reflect Four Lakes’ pro forma allocated share of indirect salaries expense. Staff’s
recommended adjustment excludes the estimated payroll taxes, which will be
addressed in the Taxes Other Than Income section later in this issue.
As will be discussed further in Issue 9, staff is recommending a change
in the billing frequency from quarterly to monthly. The increase in billing
frequency is expected to require an additional 40 hours of work per month
related to the increased billing, payment processing, and collection work. As
discussed above, the Utility’s test year salaries and wages expense includes
two corporate employees who perform billing related duties. The Utility
anticipates that it will be necessary to hire additional office staff to help
meet the increased work demand at an estimated cost of $728 per month or $8,736
per year to cover the incremental increase in wages and payroll costs. Staff
reviewed the Utility’s current billing process and resulting changes, and
agrees that it would be appropriate to recognize the incremental increase in
salaries and wages expense in this case. Based on the current work assignments
and necessary changes to convert to monthly billing, staff believes it is
reasonable to expect that additional assistance with these duties will be
necessary. Therefore, staff increased this account by $3,954 for water and $3,858
for wastewater to reflect the pro forma allocation of the additional employee
salaries and wages expense resulting from the increased billing frequency. Again,
staff’s recommended adjustment excludes the estimated payroll taxes, which will
be addressed in the Taxes Other Than Income section later in this issue.
Although the change from quarterly to monthly billing will increase the
current meter reading workload, the new remote read meters are expected to
reduce the amount of time that is currently necessary to read meters.
Therefore, the Utility has estimated that it has a sufficient expense
allocation in its test year expenses to cover the increased meter reading
workload following installation of the new remote read meters, and is not requesting
an increase in meter reading related salaries expense. Based on staff’s review
of the Utility’s confidential salary information and work duties, staff
believes the adjusted salaries are reasonable. Further, staff believes Four
Lakes’ customers benefit from the shared resources that allow the Utility to
address any operational issues or customer concerns in a more timely and
efficient manner than may otherwise be available for a utility that is
operating on a stand-alone basis with a more limited workforce. Based on the
above, staff’s adjustments to this account are net increases of $8,865 for
water and $7,861 for wastewater. Therefore, staff recommends salaries and wages
– employees expense of $83,221 for water and $91,782 for wastewater.
Purchased Power (615/715)
Four Lakes recorded purchased power expense of $31,953 for
water and $15,669 for wastewater for the test year. Staff determined that the
purchased power expense was understated. Therefore, staff increased this
account by $1,925 for water and $2,934 for wastewater to reflect the annualized
balances. Also, staff decreased this account by $686 for water and $476 for
wastewater to remove late fees and out-of-period expenses from the test year
balances. In addition, staff decreased this account by $23,282 for water and
$633 for wastewater to remove purchased power expense associated with the Four
Lakes’ golf course and unsupported expenses. As discussed in Issue 2, staff is
recommending an EUW adjustment of 7.2 percent. Therefore, staff decreased the
adjusted water account balance by $714 ($9,911 x .072 = $714) to reflect a 7.2
percent EUW adjustment. Staff’s net adjustment is a decrease of $22,756 to
water and an increase of $1,826 to wastewater. Therefore, staff recommends
purchased power expense of $9,197 for water and $17,495 for wastewater.
Chemicals (618/718)
Four Lakes recorded chemicals expense of $4,942 for water
and $15,626 for wastewater for the test year. Staff decreased this account by
$279 for water and $268 for wastewater to reflect the correct test year
balances. As discussed in Issue 2, staff is recommending an EUW adjustment of
7.2 percent. Therefore, staff decreased the adjusted water account balance by
$336 ($4,663 x .072 = $336) to reflect a 7.2 percent EUW adjustment. Staff’s
total adjustments are decreases of $615 to water and $268 to wastewater. Staff
recommends chemicals expense of $4,327 for water and $15,358 for wastewater.
Materials and Supplies (620/720)
The Utility recorded materials and supplies expense of
$9,673 for water and $4,288 for wastewater for the test year. Staff decreased
the water account by $947 to remove unsupported and out-of-period expenses. In
addition, staff increased the wastewater account by $1,829 to reflect the test
year balance supported by existing invoices. Accordingly, staff recommends
materials and supplies expense of $8,726 for water and $6,117 for wastewater.
Contractual Services - Billing (630/730)
As discussed above, Four Lakes’ test year salaries include
an allocation for Century’s employees’ billing related work. However, Four
Lakes did not record any other billing expense for the test year, such as
postage and billing supplies, because Century incurred the billing expense but
did not allocate those costs to the Utility. Staff believes it would be
appropriate to include an allowance for billing expense, and believes the
proposed billing expense allocation is reasonable. Therefore, staff increased
this account by $1,476 for water and $1,440 for wastewater to reflect the pro
forma allocation of corporate billing expense. As noted above, staff is
recommending that the Utility’s billing frequency be changed from quarterly to
monthly. The additional billing will result in increases in various billing
related costs, such as postage, card stock, printing costs, and office
supplies. Therefore, staff also increased this account by $2,618 for water and
$2,555 for wastewater to reflect the allocated pro forma increase in billing
expense resulting from the change in billing frequency. Although the total
expense is allocated based on the percentage of lots, staff has allocated Four
Lakes’ total share of the billing expense between the water and wastewater
systems based on ERCs to recognize the slight difference in the number of
general service customers between the two systems. Based on the above, staff
recommends contractual services – billing expense of $4,095 for water and $3,995
for wastewater.
Contractual Services - Professional (631/731)
Four Lakes recorded balances of $4,962 for water and
$10,250 for wastewater in this account. This account includes expenses related
to recurring professional engineering services and permitting. Audit staff
determined that no adjustments are necessary to the water account, but a
decrease of $5,930 is necessary to remove unsupported expenses from the
wastewater account. Therefore, staff decreased the wastewater account by $5,930
to reflect the appropriate test year balance, and recommends contractual services
– professional expense of $4,962 for water and $4,320 for wastewater for the
test year.
Contractual Services - Testing (635/735)
The Utility recorded testing expense of $2,806 for water
and $6,651 for wastewater in this account. Staff decreased this account by
$2,488 for water and $250 for wastewater to reclassify contractual equipment
testing services to Account Nos. 636 and 736 – Contractual Services – Other. In
addition, the Utility’s water testing expenses were understated, therefore,
staff increased the water account by $219 to annualize the water testing
expenses. Further, staff decreased the wastewater account by $1,346 to reflect
the appropriate test year wastewater testing expense based on existing
invoices. Staff’s adjustments are a net decrease of $2,268 for water and a
total decrease of $1,596 for wastewater. For informational purposes, staff
notes that the Utility’s wastewater testing expense includes Four Lakes’
portion of a groundwater monitoring project that the Utility is currently
amortizing over a four-year period. Based on the above, staff recommends
contractual services – testing expense for the test year of $538 for water and
$5,055 for wastewater.
Contractual Services - Other (636/736)
The Utility recorded contractual services – other expense
of $10,288 for water and $4,229 for wastewater. As discussed above, Four Lakes’
water plant is operated by a contractual plant operator. The test year
contractual services – other expense for water primarily consists of the monthly
contractual service fees for the water plant operation. In addition, the water
account includes several plant repairs that required assistance from outside
vendors, such as backflow preventer repairs, and assistance with preparation of
regulatory reports, including the Annual Consumer Confidence Report and an
Annual Public Safety Report. The test year contractual services – other expense
for wastewater only includes expenses related to plant repairs or regulatory
reports that required assistance from outside vendors. As discussed above, Century’s
employees are responsible for the wastewater plant operation, therefore, no
contractual service fees were incurred related to the regular operation of the
wastewater plant. Further, staff has determined that there is no duplication of
test year expenses between the salaries and wages expense and contractual
services – other expense related to the operation of Four Lakes’ water and
wastewater treatment plants.
Based on a review of the test year expenses, staff
increased the water account by $275 and decreased the wastewater account by
$2,389 to reflect the appropriate test year balances based on existing
invoices. As noted above, staff increased this account by $2,488 for water and
$250 for wastewater to reclassify contractual equipment testing services from
Account Nos. 635 and 735 – Contractual Services – Testing. Finally, staff
increased the wastewater account by $1,620 to reclassify contractual
percolation pond maintenance expenses from Account No. 775 – Miscellaneous
Expense. Staff’s total adjustment to water contractual services – other expense
is an increase of $2,763, and staff’s adjustment to wastewater contractual
services – other expense is a net decrease of $519. Therefore, staff recommends
contractual services – other expense for the test year of $13,051 for water and
$3,710 for wastewater.
Rent Expense (640/740)
Four Lakes did not record any test year rent expense.
Century has requested consideration of a pro forma allocation of corporate
A&G rent expense. As noted previously, the corporate allocation results in
approximately 2.57 percent of each utility related A&G expense being
allocated to Four Lakes. Therefore, staff increased this account by $3,320 for
water and $3,239 for wastewater to reflect the pro forma allocation of
corporate rent expense. In addition, staff increased this account by $64 for
water and $62 for wastewater to reflect the pro forma allocation of corporate
equipment rental expense. Staff allocated Four Lakes’ total share of the rent
expense between the water and wastewater systems based on ERCs to recognize the
slight difference in the number of general service customers between the two
systems. Staff’s total adjustments to this account are increases of $3,384 for
water and $3,302 for wastewater. Staff recommends rent expense of $3,384 for
water and $3,302 for wastewater.
Transportation Expense (650/750)
The Utility recorded test year transportation expense of
$5,079 for water and $6,800 for wastewater. Staff decreased this account by
$1,043 for water and $3,713 for wastewater to reflect the appropriate test year
balances. Subsequent to the filing of the Staff Report, the Utility requested
consideration of additional transportation expense allocations related to the
recent purchase of a truck and tractor that are used exclusively for utility
work for Four Lakes’ and the four other related utilities. Staff reviewed the
purchase documentation and proposed allocations, and believes it would be
appropriate to include the incremental increases for these items in this case.
Therefore, staff increased this account by $1,359 each for water and wastewater
to reflect Four Lakes’ allocated share of the truck purchase. The truck was
purchased to replace a 2002 utility truck. The Utility indicated that the test
year transportation expense allocation includes sufficient fuel and maintenance
costs for the new truck, therefore, no incremental increases are requested for
that purpose. Staff also increased this account by $1,295 each for water and
wastewater to reflect Four Lakes’ allocated share of the tractor purchase,
fuel, and maintenance expense. Finally, staff increased this account by $607
and $592 for water and wastewater, respectively, to reflect the pro forma
allocation of corporate transportation expense. Staff’s net adjustments are an
increase of $2,219 for water and a decrease $466 for wastewater, respectively.
Staff recommends transportation expense of $7,298 for water and $6,334 for
wastewater.
Insurance Expense (655/755)
The Utility recorded test year insurance expense of $2,144
for water and $2,539 for wastewater. Staff increased water by $665 and
decreased wastewater by $651 to reflect the appropriate test year insurance
expense. Also, staff increased these accounts by $230 and $225 for water and
wastewater, respectively, to reflect the pro forma allocation of corporate
insurance expense. Staff’s total adjustment to water is an increase of $896 and
staff’s adjustment to wastewater is a net decrease of $426. Staff recommends
insurance expense of $3,040 for water and $2,113 for wastewater.
Regulatory Commission Expense (665/765)
The Utility recorded regulatory commission expense of $540
for water and $540 for wastewater for the test year to reflect the total $1,080
in legal expenses incurred by the Utility while preparing the SARC application.
Section 367.0814(3), F.S., states in part that, “...the
commission may not award rate case expenses to recover attorney fees or fees of
other outside consultants who are engaged for the purpose of preparing or filing
the case if a utility receives staff assistance in changing rates and charges
pursuant to this section, unless the Office of Public Counsel or interested
parties have intervened.” This statutory amendment became effective July 1,
2016. Because Four Lakes’ SARC application was filed on July 27, 2016, after
this statutory amendment took effect, these expenses are not eligible for
recovery through rate case expense. Therefore, staff decreased this account by
$540 for water and $540 for wastewater to remove the test year SARC-related
legal fees.
The Utility is required by Rule 25-22.0407, F.A.C., to
provide notices of the customer meeting and notices of final rates in this case
to its customers. Staff is also recommending that the Utility be required to provide
notice of the four-year rate reduction to its customers when the rates are
reduced to remove the amortized rate case expense. For noticing, staff
estimated $1,214 for postage expense, $826 for printing expense, and $124 for
envelopes. This results in $2,164 for the noticing requirement. The Utility
paid a total of $2,000 in rate case filing fees ($1,000 for water and $1,000
for wastewater).
Pursuant to Section 367.0814(3), F.S., “The
commission may award rate case expenses for attorney fees or fees of other
outside consultants if such fees are incurred for the purpose of providing
consulting or legal services to the utility after the initial staff report is
made available to customers and the utility.” The Utility provided
documentation to support $8,018 in additional legal fees incurred to date and
estimated through end of the PAA process. Staff reviewed the documentation and believes
the Utility’s requested legal fees are reasonable. However, $1,413 was incurred
prior to the issuance of the Staff Report, for legal services related to the
Utility’s response to staff’s audit report and the associated request for
confidential treatment of the Utility’s supplemental test year salary
allocation information. Pursuant to Section 367.0814(3), F.S., staff excluded
the $1,413 from consideration, resulting in total allowed legal fees of $6,695.
Based on the above, staff recommends total rate case expense of $10,859 ($2,164
+ $2,000 + $6,695), which amortized over four years is $2,715. Staff has
allocated the annual rate case expense to the water and wastewater systems
based on ERCs, resulting in annual rate case expense of $1,371 for water and
$1,344 for wastewater. Staff’s net adjustments to this account are increases of
$831 for water and $804 for wastewater. Therefore, staff recommends regulatory
commission expense of $1,371 for water and $1,344 for wastewater.
Bad Debt Expense (670/770)
The Utility recorded test year bad debt expense of $26 for
water and $26 for wastewater, resulting in total bad debt expense of $52. A
review of the Utility’s prior annual reports indicates that Four Lakes’
generally has very low bad debt expense with the exception of 2014, in which
the Utility reported a total of $264 in bad debt expense for water and
wastewater combined. Using the historical average of either three or five years
produces an average total bad debt expense between $70 and $214. Both averages
are higher than Four Lakes’ typical bad debt expense due to the effect of the
higher than usual 2014 bad debt expense. Therefore, staff believes it would be
more appropriate to use the test year expense in this case, and therefore, does
not recommend any adjustments to bad debt expense. Staff recommends bad debt
expense of $26 for water and $26 for wastewater for the test year.
Miscellaneous Expense (675/775)
Four Lakes recorded test year miscellaneous expense of
$3,956 for water and $1,782 for wastewater. Staff decreased the water account
by $538 and increased the wastewater account by $777 to reflect the appropriate
test year expense based on existing invoices. Also, staff decreased the
wastewater account by $1,620 to reclassify contractual percolation pond
maintenance expenses to Account No. 736 – Contractual Services – Other. In
addition, staff increased this account by $459 for water and $448 for
wastewater to reflect the pro forma allocation of corporate equipment expense.
Finally, staff increased this account by $910 for water and $888 for wastewater
to reflect the pro forma allocation of corporate miscellaneous expense. The
corporate A&G miscellaneous expenses include bank fees, dues and
subscriptions, filing fees, licenses and permits, telephone, travel, and
training. Staff’s net adjustments are increases of $831 and $493 to water and
wastewater, respectively. Therefore, staff recommends miscellaneous expense of
$4,787 for water and $2,275 for wastewater.
Operation and Maintenance Expense Overview
Based on staff’s recommended O&M expense adjustments
above, Four Lakes’ total O&M expenses result in an annual per ERC cost of slightly
less than $172 for water and $220 for wastewater. Staff compared the total
operation and maintenance expenses per ERC for several small utilities that
have had recent rate increases approved by the Commission, including utilities
that operate with shared resources, as well as utilities that operate on a
stand-alone basis. The compared total O&M expense per ERC ranged from $264
to $363 for water, and $281 to $430. Based on this comparison, staff believes
that Four Lakes is experiencing operational and cost benefits attributable to
economies of scale that are possible through Century’s management of multiple
properties and utility systems. Also, the sharing of employee resources between
the communities and utilities has allowed Century to hire and retain employees
with the necessary utility expertise at a comparably reasonable price. The
ability to retain qualified employees who are familiar with the Utility’s
operations serves to provide consistent operation and maintenance of the
facilities, as well as improved customer relations. Consequently, staff
believes that Four Lakes’ customers benefit from Century’s management of the
Utility using shared resources that would likely not be possible if Four Lakes
were operated on a stand-alone basis.
Operation and Maintenance Expense (O&M
Summary)
Based on the above adjustments, O&M expense should be decreased
by $2,703 for water and increased by $10,903 for wastewater, resulting in total
O&M expense of $148,022 for water and $184,764 for wastewater. Staff’s recommended
adjustments to O&M expense are shown on Schedule Nos. 3-A through 3-E.
Depreciation Expense (Net of Amortization of
CIAC)
The Utility’s records reflect test year water depreciation
expense of $19,472 and CIAC amortization expense of $18,115, resulting in a net
water depreciation expense of $1,357 ($19,472 - $18,115 = $1,357). Also, the
Utility’s records reflect test year wastewater depreciation expense of $49,181
and CIAC amortization expense of $35,170, resulting in a net wastewater
depreciation expense of $14,011 ($49,181 - $35,170 = $14,011). Staff calculated
depreciation expense using the prescribed rates set forth in Rule 25-30.140,
F.A.C., and decreased water
and wastewater depreciation expense by $2,655 and $23,987, respectively, to
reflect the appropriate test year depreciation expense. Staff also decreased
this account by $110 to reflect the retirement of the test year pump
replacement for well #2.
In
addition, staff made several adjustments to water depreciation expense to
reflect pro forma plant additions. Staff increased the water account by $71 to reflect
the depreciation expense associated with a chlorinator replacement and
retirement that occurred after the end of the test year, and decreased the
water account by $10 to reflect the associated retirement. Also, staff
increased this account by $2,208 to reflect the increase in depreciation
expense from the pro forma hydropneumatic tank replacement. Staff also
increased this account by $11,382 to reflect the increase in depreciation
expense from the pro forma meter replacement project and decreased this account
by $396 to remove the depreciation expense associated with the retired meters. Finally,
staff increased the water account by $1,187 to reflect the pro forma well pump,
shaft and assembly replacement.
Based on
the above, staff’s adjustment to water depreciation expense is a net increase
of $11,677, resulting in water depreciation expense of $31,149 ($19,472 + $11,677
= $31,149). Further, staff’s total adjustment to wastewater depreciation
expense is a decrease of $23,987, resulting in wastewater depreciation expense
of $25,194 ($49,181 - $23,987 = $25,194). In addition, staff decreased CIAC
amortization expense by $2,896 for water and $10,519 for wastewater to reflect
the appropriate test year balances, which are $15,219 for water ($18,115 -
$2,896 = $15,219) and $24,651 for wastewater ($35,170 - $10,519 = $24,651). Consequently,
the net depreciation expense for water is $15,930 ($31,149 - $15,219 = $15,930),
and the net depreciation expense for wastewater is $543 ($25,194 - $24,651 = $543).
Therefore, staff recommends net depreciation expense of $15,930 for water and
$543 for wastewater.
Taxes Other Than Income (TOTI)
Four Lakes recorded TOTI of $12,585 for water and $17,392
for wastewater for the test year. The Utility recorded RAFs of $6,391 for water and $6,269 for wastewater for
the test year. Based on staff’s recommended test year revenues of
$143,020 for water and $142,313 for wastewater, the Utility’s RAFs should be
$6,436 and $6,404 for water and wastewater, respectively. Therefore, staff
increased these accounts by $45 for water and $135 for wastewater to reflect
the appropriate test year RAFs. As discussed above, the salary allocations
included the associated payroll taxes. Staff increased this account by $6,848
for water and $7,736 for wastewater to reclassify the test year payroll taxes
to TOTI. Similarly, staff increased this account by $1,513 for water and $1,487
for wastewater to reflect the payroll taxes associated with the pro forma
salary allocations and additional billing salary expense. Finally, staff
increased water utility property taxes by $3,882 to reflect the additional
property taxes associated with the pro forma plant additions. Staff’s total
adjustments are increases of $12,287 to water and $9,358 to wastewater.
In addition, as discussed in Issue 8, revenues have been
increased by $73,366 for water and $83,502 for wastewater to reflect the change
in revenue required to cover expenses and allow an opportunity to recover the
recommended rate of return on water and recommended operating margin on
wastewater. As a result, TOTI should be increased by $3,301 for water and $3,758
for wastewater to reflect RAFs of 4.5 percent of the change in revenues.
Therefore, staff recommends TOTI of $28,174 for water and $30,508 for
wastewater.
Income Taxes
The Utility did not record any income taxes for the test
year. Four Lakes is owned by a partnership comprised of three individuals and a
business. In accordance with Federal Internal Revenue Service (IRS)
regulations, a partnership must file an annual information return to report the
income, deductions, gains, or losses from its operations, but it does not pay
income tax. Instead, the partnership passes through any profits or losses to
its partners. Each partner includes their share of the partnership’s income or
loss on their tax return. Accordingly,
no adjustments are necessary for test year income taxes.
Operating Expenses Summary
The
application of staff’s recommended adjustments to Four Lakes’ test year
operating expenses results in operating expenses of $192,125 for water and $215,815
for wastewater. Operating expenses are shown on Schedules No. 3-A and 3-B. The
adjustments are shown on Schedule No. 3-C.
Issue 7:
Should the Commission utilize the operating ratio
methodology as an alternative method of calculating the wastewater revenue
requirement for Four Lakes and, if so, what is the appropriate margin?
Recommendation:
Yes. The Commission should utilize the operating
ratio methodology for calculating the wastewater revenue requirement for Four
Lakes. The margin should be 5.41 percent of O&M expense. (Golden, Wilson)
Staff Analysis:
Section 367.0814(9), F.S., provides that the Commission may, by rule,
establish standards and procedures for setting rates and charges of small
utilities using criteria other than those set forth in Sections 367.081(1),
(2)(a), and (3), F.S. Rule 25-30.456, F.A.C., provides an alternative to a
staff-assisted rate case as described in Rule 25-30.455, F.A.C. As an alternative,
utilities with total gross annual operating revenue of less than $275,000 per
system may petition the Commission for staff assistance using alternative rate
setting.
Four Lakes did not petition the Commission for alternative
rate setting under the aforementioned rule, but staff believes the Commission
should employ the operating ratio methodology to set wastewater rates in this
case. The operating ratio methodology is an alternative to the traditional
calculation of revenue requirements. Under this methodology, instead of
applying a return on the Utility's rate base, the revenue requirement is based
on Four Lakes’ O&M expenses plus a margin. This methodology has been
applied in cases in which the traditional calculation of the revenue requirement
would not provide sufficient revenue to protect against potential variances in
revenues and expenses.
By Order No. PSC-96-0357-FOF-WU,
the Commission, for the first time, utilized the operating ratio methodology as
an alternative means for setting rates. This order also established criteria to
determine the use of the operating ratio methodology and a guideline margin of
10 percent of O&M expense. This criterion was applied again in Order No.
PSC-97-0130-FOF-SU.
Recently, the Commission approved the operating ratio methodology for setting
rates in Order No. PSC-2017-0383-PAA-SU.
By Order No. PSC-96-0357-FOF-WU, the Commission
established criteria to determine whether to utilize the operating ratio
methodology for those utilities with low or non-existent rate base. The
qualifying criteria established by Order No. PSC-96-0357-FOF-WU and how they
apply to the Utility are discussed below:
1)
Whether
the Utility's O&M expense exceeds rate base. The operating ratio method
substitutes O&M expense for rate base in calculating the amount of return.
A utility generally would not benefit from the operating ratio method if rate
base exceeds O&M expense. In the instant case, rate base is less than the
level of O&M expense. The
Utility's primary risk resides with covering its operating expense. Based on
staff’s recommendation, the adjusted rate base for the test year is negative $6,083,
adjusted to zero for ratesetting purposes, while adjusted O&M expenses are
$184,764.
2) Whether the Utility is expected
to become a Class B utility in the foreseeable future. Pursuant to Section
367.0814(9), F.S., the alternative form of regulation being considered in this
case only applies to small utilities. Four Lakes is a Class C utility. If
approved by the Commission, the recommended wastewater revenue requirement of $225,815
will result in Four Lakes gaining Class B status. According to Order No.
PSC-96-0357-FOF-WU, the concern with Class B status is that allowing the operating ratio method for a utility
on the verge of becoming a Class B might subject the utility to overearnings
action and rate reductions when Class B status is reached. Although the
instant rate proceeding may result in Four Lakes gaining Class B status, the recommended
wastewater revenue requirement is well below the $275,000 threshold for SARC
eligibility. Further, the Utility's last new customer was connected in 2002 and
the service area is built out. Due to the lack of growth, Four Lakes’ revenues
are expected to remain well below the $275,000 SARC eligibility threshold into
the foreseeable future, and the Utility should remain eligible for alternative
form of regulation allowed under Section 367.0814(9), F.S.
3) Quality of service and condition
of plant. As
discussed in Issue 1, the quality of service should be considered satisfactory.
4)
Whether
the Utility is developer-owned.
Four Lakes is currently owned by a partnership comprised of three individuals
and a business. The wastewater facilities were constructed by the developer as
part of the residential community. According to Order No. PSC-96-0357-FOF-WU,
being developer owned shall not disqualify a utility from the operating ratio
method, and eligibility shall be determined on a case by case basis. It may not
be appropriate to use the operating ratio if the development is in the early
stages of growth. Other factors that may be considered when determining
eligibility for the operating ratio method are customer growth, the developer’s
financial condition, the utility’s financial and operational condition,
government mandated improvements and/or other unanticipated expenses. The level
of CIAC collected by the utility may also be considered.
The Utility has been in existence
since 1995 and has never had a rate proceeding or filed for a price index rate
adjustment. As would be expected with a developer owned Utility, Four Lakes’
operations were sustained in the early years of the development through service
revenues, supplemented by owner or managing company funds when needed. Four
Lakes has reported losses in its annual reports each year since it was
certificated in 1998, with most of the losses occurring with the wastewater
system. As noted above, Four Lakes will not be experiencing any new growth
because the last new customer was connected 2002 and the service area is built
out. In addition, Four Lakes collected service availability charges from all
its customers, which served to keep the customers’ rates lower than would have
otherwise been experienced if the Utility had not collected service
availability. Based on the Utility’s test year records, prior to staff’s
recommended adjustments in this case, Four Lakes’ service availability charges were
designed to achieve a 72 percent CIAC level, which is within the guidelines established
by Rule 25-30.580, F.A.C. and near the target 75 percent maximum. Due to the
age of the development, built-out status, and appropriate CIAC level, the
Utility’s current financial condition is not expected to change as a result of
any developer-related activity. Staff notes that the negative rate base is due
to a lack of record support and may be corrected if the Utility pursues an
original cost study. In which case, the Utility may be able to return to the
rate of return methodology in a future rate proceeding. Based on the Utility’s
history and the specific circumstances in this case that required consideration
of the operating ratio methodology, staff believes it would be appropriate to
apply the operating ratio methodology to calculate Four Lakes’ wastewater
revenue requirement.
5) Whether the Utility operates
treatment facilities or is simply a distribution and/or collection system. The issue is whether or not purchased
water and/or wastewater costs should be excluded in the computation of the
operating margin. Four Lakes operates the wastewater treatment plant.
Based on staff’s review of the Utility’s situation
relative to the above criteria, staff recommends that Four Lakes is a viable
candidate for the operating ratio methodology.
By Order Nos. PSC-96-0357-FOF-WS and PSC-97-0130-FOF-WU,
the Commission determined that a margin of 10 percent shall be used unless
unique circumstances justify the use of a greater or lesser margin. The
important question is not what the return percentage should be, but what level
of operating margin will allow the Utility to provide safe and reliable service
and remain a viable entity. The answer to this question requires a great deal
of judgment based upon the particular circumstances of the Utility.
Several factors must be considered in determining the
reasonableness of a margin. First, the margin must provide sufficient revenue
for the Utility to cover its interest expense. Four Lakes’ interest expense is
not a concern in this case.
Second, the operating ratio method recognizes that a major
issue for small utilities is cash flow; therefore, the operating ratio method
focuses more on cash flow than on investment. In the instant case, the
Utility's primary risk resides with covering its operating expense. A
traditional calculation of the revenue requirement may not provide sufficient
revenue to protect against potential variances in revenues and expenses. Under
the rate base methodology, the return to Four Lakes would be zero due to the
Utility’s negative rate base, providing no financial cushion.
Third, if the return on rate base method was applied, Four
Lakes could be left with insufficient funds to cover operating expenses in the event
revenues or expenses vary from staff’s estimates. Therefore, the margin should
provide adequate revenue to protect against potential variability in revenues
and expenses. If the Utility's operating expenses increase or revenues
decrease, Four Lakes may not have the funds required for day-to-day operations.
Using a 10 percent margin in this docket produces an operating margin of $18,476,
which is above the suggested cap of $10,000. As such, staff recommends a 5.41
percent margin in this case, resulting in a $10,000 operating margin.
In
conclusion, staff believes the above factors show that the Utility needs a
higher margin of revenue over operating expenses than the traditional return on
rate base method would allow. Therefore, in order to provide Four Lakes with
adequate cash flow to provide some assurance of safe and reliable service,
staff recommends application of the operating ratio methodology at a margin of 5.41
percent of O&M expense for determining the revenue requirements.
Issue 8:
What is the appropriate revenue requirement?
Recommendation:
The appropriate revenue requirement is $216,386 for
water and $225,815 for wastewater, resulting in an annual increase of $73,366
for water (51.30 percent) and $83,502 for wastewater (58.67 percent). (Golden,
Wilson)
Staff Analysis:
Four
Lakes should be allowed an annual increase of $73,366 for water (51.30 percent)
and $83,502 for wastewater (58.67 percent). This will allow the Utility the
opportunity to recover its expenses, and earn a 7.31 percent return on its water
system investment and a 5.41 percent margin over its wastewater O&M
expenses. The calculations are shown below, in Tables 8-1 and 8-2 for water and
wastewater, respectively:
Table 8-1
Water Revenue Requirement
|
Adjusted Rate Base
|
|
$331,883
|
|
Rate of Return
|
|
x 7.31%
|
|
Return on Rate Base
|
|
$24,261
|
|
Adjusted O&M Expense
|
|
148,022
|
|
Depreciation Expense (Net)
|
|
15,930
|
|
Amortization
|
|
0
|
|
Taxes Other Than Income
|
|
28,174
|
|
Income Taxes
|
|
0
|
|
Revenue Requirement
|
|
$216,386
|
|
Less Adjusted Test Year Revenues
|
|
143,020
|
|
Annual Increase
|
|
$73,366
|
|
Percent Increase
|
|
51.30%
|
Table 8-2
Wastewater Revenue Requirement
|
Adjusted O&M Expense
|
|
$184,764
|
|
Operating Margin Ratio
|
|
x 5.41%
|
|
Operating Margin ($10,000 Cap)
|
|
$10,000
|
|
Adjusted O&M Expense
|
|
184,764
|
|
Depreciation Expense (Net)
|
|
543
|
|
Amortization
|
|
0
|
|
Taxes Other Than Income
|
|
30,508
|
|
Income Taxes
|
|
0
|
|
Revenue Requirement
|
|
$225,815
|
|
Less Adjusted Test Year Revenues
|
|
142,313
|
|
Annual Increase
|
|
$83,502
|
|
Percent Increase
|
|
58.67%
|
Issue 9:
What are the appropriate rate structure and rates
for Four Lakes' water and wastewater systems?
Recommendation:
The recommended rate structures and monthly water
and wastewater rates are shown on Schedule Nos. 4-A and 4-B. 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 sheets provided customers have received
notice 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 noticing within 10 days of rendering its approved notice. (Johnson)
Staff Analysis:
Four Lakes provides water service to approximately
813 residential customers, six general service customers, and seven irrigation
service customers. Four Lakes also provides wastewater service to approximately
813 residential customers and six general service customers. The utility
estimates that its customer base is over 30 percent seasonal. Staff cannot
verify the seasonality of the customer base because the utility bills on a
quarterly basis; therefore, the monthly billing data is not available. The
average residential demand during the test year was approximately 6,805 gallons
per month.
Currently, Four Lakes’ rate structure consists of a single
monthly base facility charge (BFC) of $26.18 for both water and wastewater
service combined. In addition, the BFC includes an allotment of 5,000 gallons a
month. Any water usage above 5,000 gallons is billed at $1.05 per thousand
gallons, $0.53 for water and $0.52 for wastewater. As previously discussed, the
BFC is billed monthly, but usage in excess of 5,000 gallons per month is billed
quarterly. The approved rate for irrigation service is a monthly BFC of $13.09,
which includes an allotment of 5,000 gallons. Any irrigation usage above 5,000
gallons is billed at $0.53 per thousand gallons. These rates and rate structure
have been in effect since the utility was granted grandfather certificates in
1999, following Polk County turning over jurisdiction of privately owned water
and wastewater utilities to the Commission.
The current rate structure is not considered conservation
oriented because the 5,000 gallon allotment does not encourage conservation and
billing on a quarterly basis for usage does not give customers a timely pricing
signal. Therefore, in order to send the appropriate pricing signals to promote
conservation, the allotment should be eliminated and the utility should bill
the BFC and gallonage charge on a monthly basis. Additionally, staff believes
the water and wastewater systems should have separate rates and rate structures
to promote transparency for individual customers.
Water Rates
Staff performed an analysis of the utility’s billing data
in order to evaluate various BFC cost recovery percentages, usage blocks, and
usage block rate factors for the residential water customers. The goal of the
evaluation was to select the rate design parameters that: 1) produce the
recommended revenue requirement; 2) equitably distribute cost recovery among
the utility’s customers; 3) establish the appropriate non-discretionary usage
threshold for restricting repression; and 4) implement, where appropriate,
water conserving rate structures consistent with Commission practice.
In response to staff’s preliminary report, the utility
requested that 55 percent of the water revenues be recovered through the BFC,
estimating that 30 percent of Four Lakes’ customer base is seasonal. Staff
recommends that 50 percent of the water revenues should be generated from the
BFC. This will provide sufficient revenues to design a gallonage charge that
will send a pricing signal to customers using above non-discretionary usage, as
well as provide the utility with revenue stability. The average persons per
household served by the utility is two; therefore, based on the number of
persons per household, 50 gallons per day per person, and the number of days
per month, the non-discretionary usage threshold should be 3,000 gallons per
month. Staff recommends a traditional BFC and gallonage charge rate structure
with an additional gallonage charge for non-discretionary usage for residential
water customers. General service and irrigation customers should be billed a
BFC based on meter size and a uniform gallonage charge.
Based on the customer billing data provided by the
utility, approximately 61 percent of total residential consumption is discretionary
and subject to the effects of repression. Customers will typically reduce their
discretionary consumption in response to price changes, while non-discretionary
consumption remains relatively unresponsive. Based on the recommended revenue
increase of 51.30 percent, the residential discretionary consumption can be
expected to decline by 7,669,000 gallons resulting in anticipated average
residential demand of 6,032 gallons per month. Staff recommends a 11.36 percent
reduction in test year gallons for rate setting purposes and corresponding
reductions of $1,022 for purchased power, $481 for chemicals, and $71 for RAFs
to reflect the anticipated repression. This results in a post repression
revenue requirement of $214,811. Staff’s recommended rate structure and
resulting water rates are shown on Schedule No. 4-A.
Table 9-1 contains staff’s recommended water rate
structure and rates as well as alternative rate structures, which include
varying BFC allocations. Alternative I results in slightly higher pricing
signals to target discretionary usage. Alternative II is the utility’s
requested rate structure and provides the utility with more revenue stability
to mitigate the impact of seasonal customers. The staff recommended rate
structure provides both rate stability and a significant pricing signal that
targets discretionary usage.
Table 9-1
Staff’s Recommended and
Alternative Water Rate Structures and Rates
|
|
UTILITY CURRENT RATES
|
STAFF RECOMMENDED RATES
50% BFC
|
ALTERNATIVE
I
40% BFC
|
ALTERNATIVE
II
55% BFC
|
|
Residential
|
|
|
|
|
|
5/8” x 3/4” Meter Size
|
$13.09
|
$10.21
|
$8.16
|
$11.23
|
|
|
|
|
|
|
|
Charge per 1,000 gallons
|
|
|
|
|
|
0-5,000 gallons
|
$0.00
|
|
|
|
|
Over 5,000 gallons
|
$0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 – 3,000 gallons
|
|
$1.57
|
$1.88
|
$1.41
|
|
Over 3,000 gallons
|
|
$1.89
|
$2.32
|
$1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 Gallons
|
$13.09
|
$14.92
|
$13.80
|
$15.46
|
|
5,000 Gallons
|
$13.09
|
$18.70
|
$18.44
|
$18.84
|
|
8,000 Gallons
|
$14.68
|
$24.37
|
$25.40
|
$23.91
|
Wastewater Rates
Staff performed an analysis of the utility’s billing data
in order to evaluate various BFC cost recovery percentages and gallonage caps
for the residential wastewater customers. The goal of the evaluation was to
select the rate design parameters that: 1) produce the recommended revenue
requirement; 2) equitably distribute cost recovery among the utility’s
customers; and 3) implement a gallonage cap that considers approximately the
amount of water that may return to the wastewater system.
Typically, the Commission’s practice is to allocate at
least 50 percent of the wastewater revenue requirement to the BFC due to the
capital intensive nature of wastewater plants. Therefore, staff recommends that
50 percent of the wastewater revenue requirement be generated from the BFC. It
is Commission practice to set the wastewater cap at approximately 80 percent of
residential water sold. Based on staff’s review of the billing analysis, 83
percent of the gallons are captured at the 8,000 gallon consumption level. The
wastewater gallonage cap recognizes that not all water used by the residential
customers is returned to the wastewater system. For this reason, staff
recommends a residential gallonage cap of 8,000 gallons per month.
In addition, based on the expected reduction in water
demand described above, staff recommends that a repression adjustment also be
made for wastewater. Because
wastewater rates are calculated based on customers’ water demand, if those
customers’ water demand is expected to decline, then the billing determinants
used to calculate wastewater rates should also be adjusted. Based on the
billing analysis for the wastewater system, staff recommends that a repression
adjustment of 3,397,149 gallons to reflect the anticipated reduction in water
demand used to calculate wastewater rates. Staff recommends a 6.07 percent
reduction in total residential consumption and corresponding reductions of $933
for chemicals, $1,062 for purchased power, $1,308 for sludge removal expense,
and $149 for RAFs to reflect the anticipated repression, which results in a
post repression revenue requirement of $222,364.
Staff recommends that 50 percent of the wastewater revenue
requirement be generated from the BFC. For residential wastewater customers,
staff recommends a uniform BFC for all meter sizes and a gallonage charge for
gallons up to the recommended 8,000 gallon cap. General service customers
should be billed a BFC based on meter size and a uniform gallonage charge,
which is 1.2 times greater than the residential gallonage charge consistent
with Commission practice. Staff’s recommended rate structure and rates for the
wastewater system are shown on Schedule No. 4-B
Conclusion
The recommended rate structures and monthly water and
wastewater rates are shown on Schedule Nos. 4-A and 4-B. 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 sheets provided
customers have received notice 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 noticing within 10 days of rendering its
approved notice.
Issue 10:
Should Four Lakes' service availability charge be
discontinued?
Recommendation:
Yes, Four Lakes’ service availability charge should
be discontinued. In the event there is new development in Four Lakes’ service
territory, the utility should file an application for new service availability
charges. (Johnson)
Staff Analysis:
Four Lakes
currently has a service availability charge of $1,818 that is for both water
and wastewater service. A service availability charge is a one time charge
collected by the utility when a property first connects to the utility system
and it allows the utility to recover a portion of its investment as customers
connect to the system. At this time, Four Lakes is completely built out. In
order to serve new customers, the utility would need to install additional
facilities. Therefore, staff recommends Four Lakes’ customer connection charge
should be discontinued. In the event there is new development in Four Lakes’
service territory, the utility should file an application for new service
availability charges.
Issue 11:
What is the appropriate amount by which rates should
be reduced four years after the published effective date to reflect the removal
of the amortized rate case expense?
Recommendation:
The water and wastewater rates should be reduced as
shown on Schedule Nos. 4-A and 4-B, to remove rate case expense grossed-up for
RAFs and 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. The Utility 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 Four Lakes 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. (Johnson, Golden, Wilson) (Final Agency Action)
Staff Analysis:
Four Lakes’ water and wastewater rates should be
reduced immediately following the expiration of the four-year rate case expense
recovery period by the amount of the rate case expense previously included in
the rates. The reduction will reflect the removal of revenues associated with
the amortization of rate case expense and the gross-up for RAFs which is $1,436
and $1,407 for water and wastewater, respectively. Using the Utility's current
revenues, expenses, and customer base, the reduction in revenues will result in
the rate decrease shown on Schedule Nos. 4-A and 4-B.
Four Lakes 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 also should be required
to file a proposed customer notice setting forth the lower rates and the reason
for the reduction. If Four Lakes 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 12:
Should the recommended rates be approved for Four
Lakes on a temporary basis, subject to refund, in the event of a protest filed
by a party other than the Utility?
Recommendation:
Yes. Pursuant to Section 367.0814(7), F.S., the
recommended rates should be approved for the Utility on a temporary basis,
subject to refund, in the event of a protest filed by a party other than the
Utility. 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 temporary
rates should not be implemented until staff has approved the proposed notice,
and the notice has been received by the customers. Prior to implementation of
any temporary rates, the Utility should provide appropriate security. If the
recommended rates are approved on a temporary basis, the rates collected by the
Utility should be subject to the refund provisions discussed below in the staff
analysis. In addition, after the increased rates are in effect, pursuant to
Rule 25-30.360(6), F.A.C., the Utility should file reports with the Commission
Clerk’s office no later than the 20th of every month indicating the monthly and
total amount of money subject to refund at the end of the preceding month. The
report filed should also indicate the status of the security being used to
guarantee repayment of any potential refund. (Golden, Wilson) (Final Agency Action)
Staff Analysis:
This recommendation proposes an increase in rates. A
timely protest might delay what may be a justified rate increase resulting in
an unrecoverable loss of revenue to the Utility. Therefore, pursuant to Section
367.0814(7), F.S., in the event of a protest filed by a party other than the
Utility, staff recommends that the recommended rates be approved as temporary
rates. 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 temporary rates should
not be implemented until staff has approved the proposed notice, and the notice
has been received by the customers. The recommended rates collected by the
Utility should be subject to the refund provisions discussed below.
The Utility should be authorized to collect the temporary
rates upon staff’s approval of an appropriate security for the potential refund
and the proposed customer notice. Security should be in the form of a bond or
letter of credit in the amount of $105,339. Alternatively, the Utility could
establish an escrow agreement with an independent financial institution.
If the
Utility chooses a bond as security, the bond should contain wording to the
effect that it will be terminated only under the following conditions:
1.
The Commission approves the rate increase; or,
2.
If the Commission denies the increase, the Utility
shall refund the amount collected that is attributable to the increase.
If the
Utility chooses a letter of credit as a security, it should contain the
following conditions:
1.
The letter of credit is irrevocable for the period it
is in effect.
2.
The letter of credit will be in effect until a final
Commission order is rendered, either approving or denying the rate increase.
If
security is provided through an escrow agreement, the following conditions
should be part of the agreement:
1.
The Commission Clerk, or his or her designee, must be a
signatory to the escrow agreement.
2.
No monies in the escrow account may be withdrawn by the
Utility without the prior written authorization of the Commission Clerk, or his
or her designee.
3.
The escrow account shall be an interest bearing
account.
4.
If a refund to the customers is required, all interest
earned by the escrow account shall be distributed to the customers.
5.
If a refund to the customers is not required, the
interest earned by the escrow account shall revert to the Utility.
6.
All information on the escrow account shall be
available from the holder of the escrow account to a Commission representative
at all times.
7.
The amount of revenue subject to refund shall be
deposited in the escrow account within seven days of receipt.
8.
This escrow account is established by the direction of
the Florida Public Service Commission for the purpose(s) set forth in its order
requiring such account. Pursuant to Cosentino v. Elson, 263 So. 2d 253 (Fla. 3d
DCA 1972), escrow accounts are not subject to garnishments.
9.
The account must specify by whom and on whose behalf
such monies were paid.
In no instance should the maintenance and administrative
costs associated with the refund be borne by the customers. These costs are the
responsibility of, and should be borne by, the Utility. Irrespective of the
form of security chosen by the Utility, an account of all monies received as a
result of the rate increase should be maintained by the Utility. If a refund is
ultimately required, it should be paid with interest calculated pursuant to
Rule 25-30.360(4), F.A.C.
The Utility should maintain a record of the amount of the
bond, and the amount of revenues that are subject to refund. In addition, after
the increased rates are in effect, pursuant to Rule 25-30.360(6), F.A.C., the
Utility should file reports with the Commission Clerk’s office no later than
the 20th of every month indicating the monthly and total amount of money
subject to refund at the end of the preceding month. The report filed should
also indicate the status of the security being used to guarantee repayment of
any potential refund.
Issue 13:
Should Four Lakes be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision?
Recommendation:
Yes. The Utility should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission's decision. Four Lakes should submit a letter within 90 days of the
final order in this docket, confirming that the adjustments to all the
applicable NARUC USOA primary accounts, as shown on Schedules No. 5-A and 5-B,
have been made to the Utility’s books and records. In the event the Utility needs
additional time to complete the adjustments, notice should be provided no later
than seven days prior to deadline. Upon providing good cause, staff should be
given administrative authority to grant an extension of up to 60 days. (Golden,
Wilson) (Final Agency Action)
Staff Analysis:
The Utility should be required to notify the
Commission, in writing that it has adjusted its books in accordance with the
Commission's decision. Schedules No. 5-A and 5-B reflects the accumulated
plant, depreciation, CIAC, and amortization of CIAC balances as of August 31,
2016. Four Lakes should submit a letter within 90 days of the final order in
this docket, confirming that the adjustments to all the applicable NARUC USOA
primary accounts, as shown on Schedule No. 5-A and 5-B, have been made to the
Utility’s books and records. In the event the Utility needs additional time to
complete the adjustments, notice should be provided no later than seven days
prior to deadline. Upon providing good cause, staff should be given administrative
authority to grant an extension of up to 60 days.
Issue 14:
Should this docket be closed?
Recommendation:
No. If no person whose substantial interests are affected
by the proposed agency action files a protest within 21 days of the issuance of
the order, a consummating order should be issued. The docket should remain open
for staff’s verification that the revised tariff sheets and customer notice
have been filed by the Utility and approved by staff, and that the pro forma
projects have been completed. Once these actions are complete, this docket
should be closed administratively. (Cuello)
Staff Analysis:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the order, a consummating order should be issued. The docket should
remain open for staff’s verification that the revised tariff sheets and
customer notice have been filed by the Utility and approved by staff, and that
the pro forma projects have been completed. Once these actions are complete,
this docket should be closed administratively.
