Case Background
On October 23, 2017, Florida City Gas (FCG
or Company) filed a petition seeking Commission approval of a rate increase,
depreciation study, and a request for interim rate relief. FCG is a natural gas
local distribution company providing sales and transportation of natural gas,
and is a public utility subject to the Commission’s regulatory jurisdiction
under Chapter 366.02, Florida Statutes (F.S.). As a subsidiary of Southern
Company, FCG currently serves approximately 108,000 residential, commercial,
and industrial natural gas customers in Miami-Dade, Brevard, St. Lucie, Palm
Beach, Hendry, Broward, and Indian River counties. FCG requested an increase of
$19.3 million in additional annual revenues. Of that amount, $3.5 million is
associated with moving the Company’s current investment in a
Commission-approved backyard mains and service relocation program, which is
being recovered through a separate surcharge on customers’ bills, into rate
base. The remaining $15.8 million, according to FCG, is necessary for the utility
to earn a fair return on their investment and a requested return on equity of
11.25 percent. The Company based its request on a 13-month average rate base of
$299.3 million for the projected test year ending December 31, 2018. The
requested overall rate of return is 6.32 percent based on an 11.25 percent
return on equity.
The Company
requested in its original MFRs an interim increase of $4,871,932. FCG
calculated the interim increase based on a 13-month average rate base of $209,312,678
at 5.84 percent cost of capital using a 10.25 percent return on equity. The
interim test year is the period ended December 31, 2016.
On November 17,
2017, FCG filed a revised MFR Schedule F-10 to correct certain errors. On
November 27, 2017, FCG filed an amended MFR Schedule F to reflect a corrected
interim increase request of $4,893,061 based on a cost of capital of 5.85
percent. This is staff’s recommendation to suspend the proposed final rates and
charges and to address the requested interim rate relief as revised on November
17, 2017 and on November 27, 2017.
FCG’s last rate
case was in 2003. Pursuant to Section 366.06(4), F.S., FCG requested
to proceed in 2003 under the rules governing Proposed Agency Action (PAA). The
Commission approved a jurisdictional rate base of $119,897,447 and an annual
operating revenue increase of $6,699,655 for the projected test year ended September
30, 2004. The allowed rate of return was found to be 7.36 percent for the test
year using an 11.25 percent return on equity.
Pursuant
to Sections 366.06(2) and (3), F.S., FCG requested to proceed this rate case using
the Commission’s hearing process. Accordingly, in compliance with Section
366.06(2), F.S., an administrative hearing has been scheduled for this matter from
March 26 - 30, 2018. The Commission has jurisdiction over this request under
Sections 366.06 and 366.071, F.S.
Discussion
of Issues
Issue 1:
Should the request for a permanent increase in rates
and charges be suspended for FCG?
Recommendation:
Yes. Staff recommends that the requested permanent
increase in rates and charges be suspended for FCG. (Draper, Doherty, Guffey)
Staff Analysis:
Staff recommends that the requested permanent
increase in rates and charges be suspended for FCG to allow staff time to
complete its review of the Company’s MFRs.
Pursuant to Section 366.06(3), F.S., the Commission may
withhold consent to the operation of all or any portion of a new rate schedule,
delivering to the utility requesting such a change, a reason, or written
statement of a good cause for doing so with 60 days. Staff believes that the
reason stated above is a good cause consistent with the requirement of Section
366.06(3), F.S.
Issue 2:
Is FCG's proposed interim rate base of $209,312,678
appropriate?
Recommendation:
Yes. The appropriate interim rate base for FCG is
$209,312,678. (Mouring)
Staff Analysis:
In its filing, the Company proposed an interim test
year 13-month average rate base of $209,312,678 for the period ended December
31, 2016. Staff has reviewed the rate
base adjustments made in the current interim filing for consistency with the
Commission-approved adjustments in the Company’s last rate case proceeding as
well as other applicable dockets. Based on staff’s review, it appears that FCG
has made the applicable and appropriate adjustments that are consistent with
prior Commission Orders. Staff’s recommendation of whether FCG is entitled to
the proposed interim increase is discussed in Issue 6. If it is determined that
interim relief should be granted to FCG in this case, staff agrees that
$209,312,678 is the appropriate amount of
rate base for the for the historical base year ended December 31, 2016.
The calculation is shown on Attachment A to the recommendation.
Issue 3:
Is FCG’s proposed interim return on equity of 10.25
percent and overall cost of capital of 5.85 percent reasonable for the purpose
of determining interim rates?
Recommendation:
Yes. FCG’s proposed return on equity of 10.25
percent and overall cost of capital of 5.85 percent are reasonable for purposes
of determining interim rates. (Mouring)
Staff Analysis:
For purposes of its corrected interim rate request, FCG
used an overall cost of capital of 5.85 percent based on a return on equity
(ROE) of 10.25 percent and the capital structure for the historical base year
ended December 31, 2016. Pursuant to Section 366.071(2)(a), F.S., the
appropriate ROE for purposes of determining an interim rate increase is the
minimum of the Company’s currently authorized ROE range. Staff believes that
both the ROE and the adjustments recognized in the capital structure are
consistent with Company’s last rate case proceeding as well as other applicable
dockets.
Staff agrees that the capital structure for the historical
base year ended December 31, 2016, and an ROE of 10.25 percent results in an
overall cost of capital of 5.85 percent. Attachment B details the calculation
of the Company’s overall cost of capital.
Issue 4:
Is FCG's proposed interim test year net operating
income of $9,221,584 appropriate?
Recommendation:
Yes. The appropriate historical base year ended
December 31, 2016 net operating income for FCG is $9,221,584. (Mouring)
Staff Analysis:
The proposed historical base year net operating
income of $9,221,584 is the twelve month amount for the historical base year
ended December 31, 2016. Staff has reviewed the net operating income
adjustments made in the current interim filing for consistency with the
Commission approved adjustments in the Company’s last rate case proceeding as
well as other applicable dockets.
Based on staff’s review, it appears that FCG has made the applicable and
appropriate adjustments that are consistent with the prior Commission Orders. Staff’s
recommendation of whether FCG is entitled to the proposed interim increase is
discussed in Issue 6. If it is
determined that interim relief should be granted to FCG in this case, staff
agrees that $9,221,584 is the appropriate amount of net operating income for
the historical base year ended December 31, 2016. The calculation is shown on Attachment A.
Issue 5:
Is FCG's proposed interim net operating income
multiplier of 1.6185 appropriate?
Recommendation:
Yes. FCG’s proposed interim net operating income
multiplier of 1.6185 is appropriate. (Mouring)
Staff Analysis:
On revised MFR Schedule F-6, the Company calculated
an interim net operating income multiplier of 1.6185 using a 34 percent federal
income tax rate and a 5.5 percent state income tax rate. Additionally, the
Company applied a 0.500 percent factor for regulatory assessment fees and a
0.4382 percent factor for bad debt expense. Staff has reviewed the Company’s calculation
of the interim net operating income multiplier and is not proposing any
adjustments. Therefore, staff recommends that 1.6185 is the appropriate interim
net operating income multiplier. The
calculation is shown below.
Table 5-1
Florida
City Gas - Interim Net Operating Income Multiplier
|
|
|
|
|
|
Description
|
|
|
|
|
|
Revenue Requirement
|
|
100.0000%
|
|
|
|
|
|
|
|
|
|
Regulatory Assessment Fee
|
|
-0.5000%
|
|
|
|
|
|
|
|
|
|
Bad Debt Rate
|
|
-0.4382%
|
|
|
|
|
|
|
|
|
|
Net Before Income Tax
|
|
99.0618%
|
|
|
|
|
|
|
|
|
|
State Income Tax @ 5.5%
|
|
-5.4484%
|
|
|
|
|
|
|
|
|
|
Federal Income Tax @ 34%
|
|
-31.8286%
|
|
|
|
|
|
|
|
|
|
Revenue Expansion Factor
|
|
61.7848%
|
|
|
|
|
|
|
|
|
|
NOI Multiplier (100/61.7848)
|
|
1.6185
|
|
|
|
|
|
|
|
Source:
Revised MFR Schedule F-6
Issue 6:
Should FCG's requested interim revenue increase of $4,893,061
be granted?
Recommendation:
Yes. FCG’s requested interim revenue increase of $4,893,061
should be granted. (Mouring)
Staff Analysis:
FCG requested a revised interim rate relief of $4,893,061
for the historical base period ended December 31, 2016. This would allow the
Company an opportunity to earn an overall rate of return of 5.85 percent and
the minimum of the range of return on equity of 10.25 percent. After a determination of the permanent rate
increase has been made, the interim rate increase will be reviewed to determine
if any portion should be refunded to the ratepayers.
The calculation of the $4,893,061 of interim rate relief
is shown below.
Table 6-1
Florida
City Gas - Interim Revenue Increase
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
Jurisdictional Adjusted Rate
Base
|
|
$
209,312,678
|
|
|
|
|
|
|
|
|
|
Overall Rate of Return Requested
|
|
5.85%
|
|
|
|
|
|
|
|
|
|
Jurisdictional Net Operating
Income Requested
|
|
$
12,244,792
|
|
|
|
|
|
|
|
|
|
Jurisdictional Adjusted Net
Operating Income
|
|
$
9,221,584
|
|
|
|
|
|
|
|
|
|
Revenue Deficiency
|
|
$
3,023,208
|
|
|
|
|
|
|
|
|
|
Net Operating Income Multiplier
|
|
1.6185
|
|
|
|
|
|
|
|
|
|
Interim Revenue Increase
|
|
$
4,893,061
|
|
|
|
|
|
|
|
Source:
Revised MFR Schedule F-7
Issue 7:
How should the interim revenue increase for FCG be
distributed among the rate classes?
Recommendation:
Any interim revenue increase authorized should be
applied evenly across the board to all rate classes based on their base rate
revenues, as required by Rule 25-7.040, Florida Administrative Code, (F.A.C.),
and should be collected on a cents-per-therm basis. The interim rates should be
made effective for all meter readings made on or after thirty days from the
date of the Commission vote and decision herein. The Company should provide
pursuant to Rule 25-22.0406(8), F.A.C., notice to customers of the revised
rates with the first bill containing the new rates. The Company should file
tariff sheets reflecting the Commission approved interim rates. (Draper, Doherty,
Guffey)
Staff Analysis:
Attachment C to the recommendation shows the
allocation of the $4,893,061 interim increase and the resulting cents-per-therm
increases to be applied to the rate classes. The increases were calculated
using the methodology contained in Rule 25-7.040, F.A.C., which requires that
any increase be applied evenly across the board to all rate classes based on
their base rate revenues. Attachment D shows the resulting interim per therm
distribution charges for all rate classes.
FCG included revenues from its approved safety, access,
and facility enhancement program (SAFE) program to calculate the base rate
revenues for each rate class. The SAFE program was approved in Order No.
PSC-16-0517-TRF-GU as a surcharge.
Rule 25-7.040, F.A.C., specifically states that revenues from the cost of gas
should be excluded in the calculation of the interim increase for each rate
class, but is silent on surcharges such as the SAFE surcharge. Staff notes that
including or excluding the SAFE revenues does not affected the total interim
increase, however, it has a minimal impact on the dollar increase and resulting
interim rates for each rate class. Since FCG proposed to move the current
investment in the SAFE program into rate base, staff agrees with FCG that
including the SAFE revenues in the interim calculation is appropriate in this
instance.
The interim rates should be made effective for all meter
readings made on or after thirty days from the date of the Commission vote and
decision herein. The Company should provide pursuant to Rule 25-22.0406(8),
F.A.C., notice to customers of the revised rates with the first bill containing
the new rates and a copy of the customer notice should be submitted to
Commission staff for approval prior to its use. The Company should file tariff
sheets reflecting the Commission approved interim rates.
Issue 8:
What is the appropriate security to guarantee the
amount subject to refund?
Recommendation:
The appropriate security to guarantee the funds
collected subject to refund is a corporate undertaking. (D. Buys, Mouring)
Staff Analysis:
FCG has requested that all funds collected subject
to refund be secured by a corporate undertaking. The criteria for a corporate
undertaking include sufficient liquidity, ownership equity, profitability, and
interest coverage to guarantee any potential refund. Staff reviewed FCG’s 2014,
2015 and 2016 financial statements filed with the Company’s Application for
Authority to Issue Debt Security in 2016 and 2017 filed with the Commission to
determine if FCG can support a corporate undertaking for its potential refund
obligation. Based on an estimated six-month collection period of interim rates
for FCG, staff has determined the maximum amount of revenues that may need to
be protected is $2,452,256. Staff’s analysis shows FCG has negative working
capital and an unfavorable current ratio. However, FCG’s ownership equity,
profitability (net income), and interest coverage are sufficient to guarantee
any potential refund of the requested interim revenue increase. For all three
years, FCG’s working capital has been negative and the current ratio has been
less than one. However, FCG’s equity ratio was 48 percent in 2014 and 2015, and
49 percent in 2016, indicating adequate equity ownership. The Company’s
interest coverage ratio has declined from 7.83 in 2014 to 4.53 in 2016, indicating
that its earnings before interest and tax expense is currently 4.5 times
greater than its interest expense. FCG’s net income has been on average
fourteen times greater than the requested corporate undertaking amount,
indicating good profitability. In addition, FCG participates in Southern
Company Gas’s Utility Money Pool and is authorized by the Commission to make short-term
borrowings not to exceed $250 million.
Staff believes FCG has adequate financial resources to
support a corporate undertaking in the amount requested. Based on this
analysis, staff recommends that a corporate undertaking in the amount of $2,452,256
is acceptable. The preferred limit of the corporate undertaking amount is
$8,751,917. This brief financial analysis is only appropriate for deciding if the
Company can support a corporate undertaking in the amount requested and should
not be considered a finding regarding staff's position on other issues in this
proceeding.
Issue 9:
Should this docket be closed?
Recommendation:
No. This docket should remain open to process the
revenue increase request of the Company. (Trierweiler)
Staff Analysis:
This docket should remain
open pending the Commission’s final resolution of the Company’s requested rate
increase.
