Discussion
of Issues
Issue 1:
What is the appropriate Phase II revenue requirement,
return on equity, and overall rate for Little Gasparilla?
Recommendation:
The appropriate revenue requirement is $413,652,
resulting in an annual increase of $69,252 for water (20.11 percent). The
appropriate return on equity (ROE) is 11.16 percent with a range of 10.16
percent to 12.16 percent. The
appropriate overall rate of return is 6.55 percent. (Golden, P. Buys, Galloway)
Staff Analysis:
By Order No. PSC-14-0626-PAA-WU, issued October 29, 2014, the
Commission approved the following four pro forma projects in the instant
docket: (1) a subaqueous pipeline and county interconnection to replace the
Utility’s aging reverse osmosis water treatment plant (WTP) and begin
purchasing bulk water from Charlotte County Utilities (CCU); (2) an extension
of the Utility’s service lines to the north end of the island to provide water
service to 67 additional lots; (3) construction of a new utility building on
the site of the retired reverse osmosis treatment plant, to serve as a workshop,
storage facility, and utility office; and (4) a meter replacement program to
replace the Utility’s aging water meters with remote-read meters.
The subaqueous pipeline and county interconnection, and the north line
extension were scheduled to be completed prior to the effective date of the
Phase I rates, and, therefore, were included in the Phase I revenue
requirement. The building construction and meter replacement program were
scheduled to begin in 2015 after completion of the first two projects, and,
therefore, were approved for consideration in a Phase II revenue requirement.
By Order No. PSC-14-0626-PAA-WU, the Commission found each of the requested
pro forma projects to be prudent. The reverse osmosis WTP was nearing the end
of its useful life and was no longer adequately removing chlorides from the
source water. The Commission found the interconnection with CCU to be prudent
because: (1) the costs are reasonable when compared to the costs to repair the
existing WTP, (2) the quality of the water will improve, and (3) because
reverse osmosis plants are more expensive to operate and maintain than other
types of WTP, the Utility is expected to realize long-term cost benefits.
The project included the construction of an 8-inch subaqueous pipeline that
would deliver water from CCU on the mainland to the island. Little Gasparilla’s
responsibility for the entire pipeline would begin at the master meter located
on the mainland. Also, the north line extension was necessary at that time to
provide water service to 10 residents on the north end of the island who are
located in the Utility’s certificated service territory and who had already
requested service, and would also enable the Utility to provide service to the
remaining lots on the north end of the island that were not yet connected to
the Utility’s distribution system.
The Commission also found that the construction of the new building is
prudent, reasonable, and allows the Utility to serve its customers better.
The Florida Department of Environmental Protection (DEP) had noted in two
Sanitary Survey Reports that the WTP building was deteriorating and that it
would be beneficial to address the issue as part of the overall maintenance
plan for the facility. Because of the poor condition of the building, the
Utility proposed to demolish it and build a new structure on the site. The new
building would serve as a workshop, storage facility for repair parts and other
equipment, house meter testing equipment, serve as a Utility office, and also
include restroom facilities, which did not previously exist at the WTP. At that
time, the Utility rented office space on the mainland, which meant that any
customers who wanted to visit the Utility office in person would have to do so
on the mainland instead of on the island. The Utility indicated that no
customers ever visited the mainland office, further illustrating the
inconvenience of the mainland location for the customers. Also, the only
restrooms available to Utility personnel and others visiting the Utility
premises, such as regulatory agency employees, were the public restrooms
located at the Hide A Way Beach pool area. The Commission determined that
having equipment storage and testing equipment on the island could reduce
repair time because the Utility would not have to transport equipment and
repair parts to the island. Also, the new building was proposed to be
constructed on top of the concrete water tank that would be retired upon
completion of the subaqueous pipeline and county interconnection, thereby
utilizing the existing land that the Utility currently owns.
In 2013, the Utility’s water meters were already approximately 27 years old
and in need of replacement. Little Gasparilla proposed to switch to remote-read
meters for better meter accuracy, leak detection, and abnormal usage detection.
The Utility noted that it sometimes had to estimate a meter reading because the
meter was under water, and that this issue would be resolved by using remote
read meters. Little Gasparilla proposed to replace 100 existing meters per year
for four years. The Commission found Little Gasparilla’s proposed four-year
meter replacement program prudent and reasonable, and that it would reduce the
amount of excessive unaccounted for water (EUW) for the Utility. It
was anticipated that the new building construction and the first year of the
meter replacement program would be completed at the same time. Consequently,
the Commission determined that it would be appropriate to only include the
first year of the meter replacement program in order to avoid any unnecessary
delays in the Utility’s implementation of the Phase II rate increase, which is
primarily needed to recover the cost of the new building.
At the September 22, 2014 Agenda Conference, the Commission approved Phase I
rates that included estimated pro forma plant additions of $679,775 for the
subaqueous pipeline and county interconnection and $86,200 for the north line
extension, for a combined total of $765,975. Staff also recommended a Phase II
revenue requirement that included $403,500 for the utility building
construction and $29,915 for the first year of the meter replacement program,
for a total of $433,415. However, due to concerns raised about the cost of the
new building, the Commission approved the projects, but determined that a final
decision on the amount of the Phase II revenue requirement and rates would be
made after the Utility completed the Phase II pro forma projects and the costs were
evaluated. In addition, the Commission ordered that if the approved Simplified
Employee Pension (SEP) Plan was not implemented, the Phase II rates would be
reduced by the expense established for that purpose. The Commission requested
and Little Gasparilla’s owner agreed to continue to work with the architects
and bidders to try to reduce the cost of the building.
Phase I Documentation
On December 16, 2014, the Utility advised staff that it had encountered a
minor set back with the directional bore for the subaqueous pipeline. The drill
head had to be replaced, which caused a total of six days delay in December. The
entire directional bore was 3,750 feet across the bay and 90 feet deep. The
drilling was already at 2,000 feet when the decision was made to pull the pipe because
the drill would not steer. The drilling delay then triggered another delay in
December when the work was put on hold for two weeks because the barge would
not deliver during the holiday season. The drilling delays also caused delays
in the testing and clearance from the county and the DEP. The Utility also
experienced another unexpected change related to the directional drill work.
The contractor for the project advised that per the plan the project fell short
of the length needed to not impact the mangrove area, and that an additional
100 feet of drilled pipe had to be added at the contract price of $135 per foot
per the sub-contractor for that part of the project, for an additional cost of
$13,500. The contractor also issued a change order to include those costs, as
well as additional work that became necessary during the subaqueous pipeline
and north line extension projects, which increased the initial cost estimates.
The change order also included items such as the cost of construction water
that was necessary to test and flush the pipeline, professional services
associated with onsite monitoring of the directional drill project, and land
clearing.
On February 19, 2015, Little Gasparilla advised Commission staff that the
subaqueous pipeline and county interconnection were completed on February 14,
2015. The Utility also advised staff that the north line extension could not
reach completion because one land owner would not let the Utility cross his
property. This prevented the Utility from completing the last 300 feet of the
main line and one fire hydrant. The Utility was also unable to complete the
additional service lines that would be needed to connect customers to the main
line. At that time, the Utility still had six homes requesting service that it
was unable to serve without completing the line extension. As a result, the
Utility found it necessary to start the eminent domain process to obtain the
necessary easement to cross that parcel of land. The attorney representing the
Utility in the eminent domain proceeding provided an estimated cost of at least
$27,250, which included the land appraisal cost, attorneys’ fees, court filing
fees, and the newspaper publication of the law suit. The attorney advised that
the estimate did not include the amount of possible compensation to the
property owner for the taking of the easement or other fees. Further, the
attorney advised that under Florida eminent domain law, the taking agency must
pay the land owner’s attorney fees and costs to defend the eminent domain suit,
and they were unable to determine those costs at that time. The Utility later
advised staff on November 13, 2015, that the Utility had proceeded successfully
with the eminent domain in order to install service lines to some customers
requesting service. A detailed discussion on the eminent domain is included
later in this recommendation.
Based on staff’s review of the Utility’s supporting documentation for the
Phase I work that was completed as of February 19, 2015, staff determined that
the Utility had completed $774,977 of the plant additions related to the pro
forma projects. Staff excluded $677 for non-utility costs and $125 for an
unrelated main repair from the Phase I totals for rate implementation purposes.
The adjusted total for completed Phase I work is $774,175, which surpassed the
Commission’s approved Phase I pro forma plant additions of $765,975 by $8,200
or 1.07 percent, which was deemed sufficient to implement the Phase I rates.
Upon 100 percent completion of the subaqueous pipeline and county
interconnection project, the Utility’s actual project cost exceeded the
original estimates by approximately five percent or $33,000. Also, at that
time, the Utility had incurred approximately $61,000 of the original estimated
$86,200 north line extension project cost, representing approximately 71
percent completion of the project. Because the majority of the Phase I pro
forma project costs are related to the subaqueous pipeline project, the
remaining $25,000 that was not spent on the north line extension during Phase I
only represents approximately 3.3 percent of the total Phase I pro forma costs.
Although the Utility was not able to complete the north line extension project
at that time, the Utility was allowed to implement the Phase I rates upon
completion of the subaqueous pipeline and county interconnection because the
total expenditures on that project plus the completed portion of the north line
extension exceeded the total pro forma project costs approved by the Commission
for Phase I.
It is not uncommon for the final costs and timing of pro forma projects to
differ from the original bids and estimates. Based on Commission practice, such
differences are typically handled in one of two ways. First, a utility may be
permitted to implement the approved rates once it has expended the necessary
total funds, provided that the Utility supplies the necessary supporting
documentation for the costs incurred and payments made, all costs are verified
to be related to an approved project, and the Utility has provided sufficient
justification for any variances from the original estimates. Second, in those
instances where the final project costs differ materially from the Commission
approved costs, staff may file a recommendation requesting that the Commission
either increase or decrease the originally approved revenue requirement. In the
instant case, the 1.07 percent in additional expenditures above the Commission
approved pro forma costs for Phase I was not deemed sufficient to warrant a
recalculation of the Phase I revenue requirement at that time, especially in
light of the fact that staff would be returning to the Commission with another
recommendation after the Phase II pro forma projects were completed. Further,
delaying the implementation of the Phase I rate increase until the north line
extension could be completed would have had a detrimental impact on the
Utility’s ability to begin making payments on the loans that it secured for the
construction of the subaqueous pipeline and county interconnection.
As he agreed at the September 22, 2014 Agenda Conference, Little
Gasparilla’s owner worked to reduce the cost of the utility building. The
additional time spent by the Utility on the redesign efforts contributed to
some delays in the Utility’s loan application process. The Utility also
experienced some delays related to zoning and construction permitting. However,
the most significant delays in the Utility’s completion of the Phase II
projects for the utility building construction and meter replacement program
were due to the uncertainty of Charlotte County’s decision on its mandatory
water connection ordinance and the impact on Little Gasparilla’s ability to
obtain funding for the projects. The Charlotte County ordinance required that
residents connect to a centralized water system within one year of
availability, which would result in residents of Little Gasparilla Island being
required to connect to the Utility’s water system. A number of island residents
receive water through other means, such as cisterns, and are opposed to being
required to connect to the Utility’s water system. Charlotte County decided not
to repeal the mandatory water connection ordinance, but added a five-year grace
period for residents who applied for the exception to the mandatory connection.
The exception to the mandatory connection requirement expires on January 1,
2021.
According to the Charlotte County ordinance, the existing residents who did
not apply or were not approved for the exception to the mandatory connection
requirement are expected to connect to the Utility’s water system. The
additional connections would pay Little Gasparilla’s approved service
availability charges, which would potentially increase the financial ability of
the Utility to pay its existing and any additional loans. However, due to the
length of time it took Charlotte County to make its decision, the Utility was
required to revise projections that had been previously submitted, as loans are
approved based on projections and the Small Business Administration’s (SBA)
guaranty. The funding for the meter replacement project was tied to the
building construction loan, preventing the Utility from moving forward on the meter
replacement project as well. The Utility was unable to proceed with the Phase
II projects until the funding was approved. The Utility kept staff informed of
the progress throughout this process. As discussed in the case background, Little
Gasparilla also requested, and was granted, several extensions on the time to
complete the Phase II projects.
Phase II Documentation
On April 28, 2017, Little Gasparilla provided supporting documentation
showing completion of the utility building construction and a portion of the
meter replacement project, as well as additional work completed on the north
line extension. On
August 14, 2017, the Office of Public Counsel (OPC) filed a letter listing its
concerns with the Utility’s Phase II documentation. On
September 18, 2017, the Utility provided additional documentation and
clarification in response to Staff’s Sixth Data Request, which also included
information to address OPC’s concerns. In
its response, the Utility provided documentation supporting $428,223 in project
related costs, and confirmation of the Utility’s $18,637 investment in the SEP
Plan that was approved in Phase I. Staff believes the Utility has provided
sufficient documentation to support that it established and has maintained the
SEP Plan, therefore, no further action is required for the SEP Plan in this
docket. OPC also indicated in its August 14, 2017 letter that it believes the
Utility has met its burden to prove that the accounts were opened and the
Utility was paying contributions into the accounts, and that no further action
needs to be taken.
OPC subsequently filed a letter on November 8, 2017, in which it expressed
continued concern about the Utility’s request for recovery of costs related to
obtaining easements for the pro forma projects, and requested that the
Commission exclude these costs unless it can be determined that the costs were
prudently incurred.
In addition, OPC has objected to the inclusion of any other costs related to
the north line extension in the Phase II revenue requirement. Staff believes
OPC’s concern is due in part to a misunderstanding between the parties about
the amount of work that remained to be done on the north line extension
following implementation of the Phase I rates. As discussed above, the Utility
was allowed to implement the Phase I rates upon completion of the subaqueous
pipeline and county interconnection because the total expenditures on that
project and the completed portion of the north line extension exceeded the
total pro forma project costs approved by the Commission for Phase I, and the
implementation of the rate increase was necessary to enable the Utility to
begin making payments on the loans secured to pay for the pipeline
construction. Consequently, the construction costs incurred on the north line
extension project during Phase II are not new costs, but rather a continuation
of the original project that could not be completed during Phase I due to the
easement issues. Therefore, staff believes it would be appropriate to include
the north line extension project costs that were completed during Phase II.
Further, staff believes the Commission has the discretion to consider both cost
increases or decreases that occur during the completion of an approved pro
forma project. Even in cases where the Phase II revenue requirement is approved
at the same time as the Phase I revenue requirement, staff would have the
ability to file an additional recommendation requesting the Commission’s
approval of an increase or decrease in the previously approved revenue requirement
if it was determined that the final project costs were materially different
than the projected costs.
Staff agrees with OPC that the costs associated with the eminent domain were
not anticipated when the Phase I revenue requirement was approved by the
Commission, but believes it would also be appropriate to include the prudently
incurred easement costs related to the pro forma projects. Staff asked the
Utility what steps it took to obtain the easement prior to initiating the
eminent domain proceedings and why other options, such as re-routing the line,
were not possible. In its September 18, 2017 data response, Little Gasparilla
responded that it had pleaded with the property owner for years to allow the
Utility to cross his property. Also, the property owner owns the land from the
beach to the bay, therefore, the Utility has no other option except going
through his property. After the Utility retained an attorney and incurred the
associated costs, the property owner agreed to grant the easement if the
Utility would pay his attorney fees as well.
Staff has reviewed the property records available on the Charlotte County
Property Appraiser’s Web site and verified that the property owner does own a
continuous piece of land that runs the entire width of the island from the gulf
beach side to the opposite side of the island on the bay. Staff agrees that it
would be impossible for the Utility to extend service to the rest of the north
end of the island without an easement through that piece of property. Staff
notes that it is common for utilities to obtain land easements to facilitate
the construction of facilities and provision of service to customers. Staff
believes the Utility took steps to minimize the costs associated with obtaining
the easements that were necessary for the completion of the pro forma projects,
and only resorted to using the eminent domain proceeding when it became obvious
that the project could not proceed without it. Several of the other easements
were obtained at no cost other than the recording and deed fees.
Further, Section 367.111(1), Florida Statutes (F.S.), requires that each
utility shall provide service to the area described in its certificate of
authorization within a reasonable time. Therefore, staff believes the Utility
acted prudently in taking the necessary actions to obtain the easements
required for completion of its pro forma projects and remain in compliance with
Section 367.111, F.S. For these reasons,
staff believes it would be appropriate to allow the Utility’s requested
easement costs to be included in the Phase II revenue requirement with the
exception of some minor recommended adjustments discussed below. In addition,
addressing the additional pro forma costs in a single case saves additional
rate case expense to the customers because the Utility will not need to file
another rate case or limited proceeding to seek recovery of these items.
Staff’s recommended adjustments to the Phase II rate base are discussed below.
Utility Plant in Service (UPIS)
The Utility requested recovery of $26,064 in costs related to obtaining
easements for the pro forma projects, comprised of $21,175 for the eminent
domain proceedings and $4,889 for several other easements. As discussed above,
staff verified that the north line extension could not be completed without the
easement that was obtained through the eminent domain proceedings because the
land owner owns the entire parcel of land stretching the width of the island
from the beach to the bay. The eminent domain costs include $7,000 in court
ordered payments, $11,675 in attorneys’ fees, and $2,500 in land appraisal
fees. The attorneys’ fees cover legal work related to the eminent domain
proceeding from February 2015 through August 2015. The Utility’s final payment
related to the proceedings was completed almost two years ago in December 2015.
Also, staff notes that the $21,175 related to the eminent domain is lower than
the attorney’s initial estimate of at least $27,250 provided in 2015,
demonstrating the Utility’s efforts to minimize the costs related to this
easement.
The remaining $4,889 in easement costs includes four other easements related
to the north line extension, one easement related to the county
interconnection, one easement to provide service to a new customer, and some
easement clearing work related to the new utility building construction. Staff
removed $500 for the new customer easement because this service was not related
to one of the pro forma projects. Also, staff removed $2,500 for an easement
related to the north line extension because the easement has not been executed
yet. In addition, staff believes it would be appropriate to include the $1,200
for the easement clearing work related to the new building construction, but it
would be more appropriate to identify this cost as part of the building costs
rather than easement costs. Based on these adjustments, staff recommends that
it would be appropriate to include a total of $21,864 ($26,064 - $500 - $2,500
- $1,200 = $21,864) in easement costs related to the approved pro forma
projects in the Phase II revenue requirement. Therefore, staff increased UPIS
by $54 to reflect the addition of easement costs related to the subaqueous
pipeline and county interconnection project to Account 309, and by $21,810 to
reflect the addition of easement costs related to the north line extension
project to Account 331, representing a total of $21,864 in pro forma project
related easement costs. In addition, staff increased UPIS by $1,200 to reflect
the addition of easement clearing costs that are related to the new utility
building construction to Account 304.
Staff notes that the Commission received consumer correspondence from one
island resident on November 27, 2017, asserting that the Utility had illegally
crossed 100 feet of their property with a 2-inch line without permission, an
easement, or court ruling.
The resident stated that they had been in a legal battle with the Utility over
this issue for nearly two years. The resident also requested that the
Commission not allow legal fees related to this issue. Staff has verified that
the Utility did not request recovery of any costs related to any possible land
issues with this resident. A representative of the Utility advised staff that
this resident is not currently a customer of the Utility and that Little
Gasparilla has not incurred any legal costs related to this resident.
Therefore, no adjustments are necessary to the Phase II costs related to this
concern.
As discussed above, the Utility incurred approximately $61,000 of the original
estimated $86,200 north line extension project costs, representing
approximately 71 percent completion of the project during Phase I. In order to
accurately reflect the portion of the work that was completed during Phase I
and the additional work that was completed during Phase II, several adjustments
are necessary. Staff decreased Account 331 by $25,023 to remove the portion of
the project costs that were included in the Phase I revenue requirement, but
were not completed during Phase I. In addition, staff decreased UPIS by $125 to
remove an unrelated water main repair from the Phase I costs reflected in
Account 331. As of September 2017, the Utility indicated that all 6-inch lines
and all fire hydrants have been installed, which includes 300 linear feet of
line running north to south and an additional 200 linear feet of laterals
representing a total of 500 linear feet of line added during Phase II.
Therefore, staff increased Account 331 by $9,426 to reflect the work that was
completed on the north line extension during Phase II after the easements were
obtained.
The Utility advised in its data response that an additional 150 linear feet
of 2-inch pipe will still need to be run to connect a new home that is under
construction and four other homes on the north end of the island. However, the
four homes received exemptions from Charlotte County’s mandatory water
connections until 2021. Little Gasparilla has a five-year permit from DEP for
the north line extension project, and anticipates that the remaining 150 linear
feet of line will be completed in 2018.
The Utility will need to request recovery of any additional costs that are
incurred to complete the remaining 150 linear feet of the north line extension
in a future rate proceeding. Little Gasparilla has now completed $70,478 of the
original proposed cost of $86,200. Adding the associated easement cost
increases the north line extension project cost to $92,288, which is $6,089
over the previously approved project cost of $86,200. However, staff believes
the increase is warranted because the easements were critical to the completion
of this project and the Utility’s ability to provide service to all the lots on
the north end of the island when it becomes mandatory.
Similarly, additional adjustments are necessary to accurately reflect the
final cost of the subaqueous pipeline and county interconnection project that
was completed in Phase I. As discussed above, the Utility encountered some
unexpected issues in the construction of the subaqueous pipeline that resulted
in delays and increased costs. Staff believes it would be appropriate to allow
recovery of the additional costs because the additional work was necessary to
the completion of the project. Accordingly, staff increased UPIS by $33,102 to
reflect the additional costs that were incurred above the previously estimated
and approved project costs to Account 309. In addition, the contractor
established an account with the CCU for the purpose of purchasing construction
water to test the subaqueous pipeline prior to placing the pipeline into
service. A Utility representative advised staff that the $1,500 deposit that
was paid by the contractor to CCU was refunded to the contractor after the
project was completed. Therefore, staff
decreased UPIS by $1,500 to remove the refunded deposit from Account 309. In
addition, staff decreased UPIS by $677 to remove non-utility costs from Account
309.
Staff made the following adjustments to Account 304 to reflect the final
cost of the new utility building. Specifically, staff increased UPIS by
$355,218 to reflect the addition for the new utility building. The Utility
incurred additional legal fees for work to resolve issues related to the impact
of Charlotte County’s mandatory water connection ordinance on Little Gasparilla’s
financing for the pro forma utility building construction project. Staff
believes it would be appropriate to allow recovery of these legal fees as part
of the project costs because the legal assistance was necessary to finalize the
Utility’s financing for the pro forma projects. Therefore, staff increased UPIS
by $3,645. The Utility’s documentation also included $216 in legal fees that
are related to rate case expense rather then the project costs, and will be
discussed further in the operation and maintenance expense section below. In
addition, staff decreased UPIS by $250 to remove a non-related cost.
Based upon a review of the Utility’s federal income tax information provided
in Phase I, staff determined that UPIS should be decreased by $52,151 to reflect
the retirement of the original cost of the utility building. The final cost of
the new building includes $29,179 for the demolition and removal of the water
treatment plant building and contents. At the September 22, 2014 Agenda
Conference, OPC expressed concern about the accounting treatment of the
demolition and removal costs. Staff agreed with OPC that it would be
appropriate to record the demolition and removal costs in accumulated
depreciation. Accordingly, staff has decreased UPIS by $29,179 to reclassify
the building demolition and removal costs to accumulated depreciation.
At the September 22, 2014 Agenda Conference, OPC also expressed concern that
some of the engineering costs related to the building had been included in both
Phase I and II, resulting in an overstatement of the estimated cost of the new
utility building. Staff agreed that some of the costs had been inadvertently
included in both phases and should be adjusted. A single engineering firm
provided the engineering and design services for the subaqueous pipeline and
county interconnection project, the north line extension project, and the new
utility building project. In order to avoid any possible duplication of
engineering costs between the phases, the actual engineering costs that were
incurred have been included in either Phase I or II based on the paid invoices
and completion dates.
As discussed above, Little Gasparilla’s owner agreed at the September 22,
2014 Agenda Conference to continue to work with the architects and bidders to
try to reduce the cost of the building. In order to reduce costs, Little
Gasparilla redesigned the building eliminating the second floor, which was
initially included to store records. The completed construction includes
dormers for aesthetic purposes to blend in with the surrounding properties, but
the completed building only includes one floor. The Utility also eliminated the
proposed restroom facilities, which avoided the cost of installing a septic
system. Also, the original cost projections were based on other new
construction taking place on the island. Little Gasparilla changed the plans
from conventional framed construction to a prefabricated construction that
could better serve all possible needs for the next 30 years.
For comparison purposes, the new utility building was initially projected to
cost $403,500 based on the lowest bid provided, prior to application of any of
the adjustments proposed at the September 22, 2014 Agenda Conference. The
actual cost of the building is $359,813. Reclassifying the $29,179 in
demolition and removal costs to accumulated depreciation, as discussed above,
results in a final cost of $330,364 for ratesetting purposes. Staff notes that
the Utility incurred an additional $10,300 in engineering costs related to a change
order that was necessary to address concerns about how the building structure
would be attached to the existing concrete water tank foundation, which offset
some of the savings realized with the design changes.
As discussed above, the Commission approved a meter replacement project for
Phase II. In its September 18, 2017 data response, the Utility reported that it
had completed 75 meter replacements as of September 1, 2017.
The Utility also indicated that it was planning to work on the meter replacements
during the off season months of September through December, and hoped to
complete a total of 225 remote read meter replacements by the end of this year.
Further, the Utility is working toward having all of the meter replacements
completed within a year. In November
2017, staff informally requested an update on the status of the meter
replacement project. Little Gasparilla indicated that it had completed 131
meter replacements as of November 14, 2017. The Utility initially proposed to
replace 100 meters per year for four years at a total project cost of $104,915,
including $84,915 in equipment costs and $20,000 in labor costs. Further, the
total cost was anticipated to be split over four years based on $29,915 for the
first year and $25,000 each for the remaining three years.
The first year’s cost included the additional equipment and software needed
to read the meters, as well as training. The original estimate included the
purchase of all the meters and equipment from one vendor. The Utility
subsequently found another vendor to provide the meter bases at a lower cost.
In addition, the Utility determined that the plastic meter bases work better in
the island’s corrosive environment. The remote read registers, equipment,
software, and training were still purchased from the original vendor. Also, the
Utility began ordering replacement and new installation meters two years ago
that would adapt to the new meter replacement program allowing the Utility to
save replacing 100 of the meter bases once the remote read meter replacements
began. Specifically, the Utility continued to install traditional registers for
new customer meter installations pending finalization of the project funding,
but used the new plastic meter bases with the traditional registers so that the
register will be the only part that needs to be replaced to convert those
meters to the remote read system. The Utility reported that this saves
approximately $24.50 per meter base, for a total projected savings of $2,450.
Little Gasparilla provided documentation including orders totaling $60,476
for meter replacement equipment from the two vendors, and completed payments of
$56,094. Little Gasparilla has added additional customers since the original
estimates were prepared, making it necessary to purchase more meter replacement
equipment than was included in the original estimates. The Utility’s actual
purchase includes an additional 50 remote read registers and 50 less meter
bases than were used in the original bid. For cost comparison purposes, staff has
revised the Utility’s actual cost to only reflect the 400 meter replacements
that were included in the original estimate, resulting in a total equipment
cost of $55,535. Compared to the original bid of $84,915, the Utility’s
modifications to its meter replacement program have resulted in a savings of
$29,380 in equipment costs over the original bid. As noted above, the Utility
has completed 131 meter replacements. Therefore, staff increased Account 334 by
$56,094 to reflect the meter installation project costs that have been paid for
through September 2017. Also, based on a pro-rated share of the Phase I test
year meter account balance and number of test year meters, staff decreased UPIS
by $6,826 to reflect retirement of the 131 replaced meters. Although the
Utility has reduced the overall cost of the meter replacement program by
$29,380 compared to the original estimate to replace 400 meters, the Utility
has completed more than one years’ worth of equipment purchases and meter
installations resulting in a higher cost during Phase II than the one year of
expense that was initially planned. Specifically, the Utility has already
completed payments for $56,094 of equipment and labor, which is $26,179 higher
than the first year cost of $29,915. However, staff believes it is appropriate
to recognize the portion of the project that has been completed to date,
particularly in consideration of the Utility’s accelerated schedule to complete
the meter replacements and the Utility’s commitment to the program by securing
a loan that would enable the Utility to complete the project more quickly.
By Order No. PSC-14-0626-PAA-WU, the Commission approved a Phase I UPIS
balance of $1,655,176. Based on the above, the net increase to plant for these
projects following the application of applicable retirements is $364,816,
resulting in a UPIS balance of $2,019,992.
Both the OPC and some customers have expressed concern that the Utility’s
Phase II documentation includes costs that are not related to the pro forma
projects or that appear to be non-utility expenditures. Staff believes it will
be beneficial to provide additional clarification about how the documentation
provided by the Utility was used in this case.
It is not uncommon for utilities to purchase items for multiple projects
at the same time for efficiency or to occasionally purchase a personal item,
such as a bottle of water or snack. Typically, Commission staff will review the
documentation provided by a utility in a rate proceeding and remove any
non-utility items that were not already excluded by the utility. Little
Gasparilla’s Phase II documentation includes a number of invoices that include
a combination of pro forma project costs, other utility costs, and some
non-utility expenditures. At first glance it may appear that the Utility is
requesting to recover the full amount on each invoice. However, a closer look
reveals that the Phase II documentation filed by the Utility includes
handwritten notes on the combined invoices to identify the portion of each
invoice that relates to one of the pro forma projects. For example, the
documentation includes 14 invoices for the Utility’s services and items
purchased from Eldred’s Marina located on the island. The total for the
invoices equals $3,502. However, the Utility has identified the specific
charges on each invoice that relate to pro forma projects and is only
requesting that $960 of the total $3,502 be included in the pro forma project
costs. Based on staff’s review, the non-utility items of concern were not
included in the pro forma project costs requested by the Utility, and
therefore, no further adjustment is necessary.
In addition, concerns were raised that some of the work on the pro forma
projects was performed by affiliated companies. Utilities are not prohibited from
hiring affiliated companies to perform utility work. However, it is important
that the work performed by the affiliated company be provided at a comparable
cost to work performed by a non-affiliated company, and that the work performed
is not already included in the salaries or wages of utility employees. In its
data response, the Utility provided additional bids and information that
demonstrate that the affiliated companies are performing the work at a lower
cost than would be performed by the non-affiliated company. In one example, the
Utility hired an affiliated company to perform the meter replacement work. In
response to staff’s request, the Utility obtained a recent quote from a
non-affiliated company that shows an estimated cost for replacing the meters
that is $25 higher per meter, resulting in an additional cost of $11,250 over
the affiliated company’s bid for replacing 450 meters. Based on staff’s review,
it appears that the Utility has taken steps to reduce the costs of these
projects and that the work performed by the affiliated company is not included
in any of the employees’ work duties that were previously identified in the
first phase of this rate proceeding.
Accumulated Depreciation
By Order No. PSC-14-0626-PAA-WU, the Commission approved an accumulated
depreciation balance of $697,656 for Phase I. Staff increased this account by
$15,061 to reflect the accumulated depreciation for the pro forma additions and
retirements. Also, staff decreased this account by $52,151 to reflect the retirement
of the replaced utility building. As noted above, staff reclassified the
building demolition and removal costs to accumulated depreciation per staff’s
prior agreement with OPC’s requested accounting treatment. Consequently, staff
decreased this account by $29,179 to reflect the building demolition and
removal costs. Finally, staff decreased this account by $6,826 to reflect the
retirement of the 131 replaced meters. Staff’s adjustment is a net decrease of
$73,095, resulting in a recommended accumulated depreciation balance of
$624,561 for Phase II.
Working Capital
Working capital is defined as the short-term investor-supplied funds that
are necessary to meet operating expenses of the Utility. By Order No.
PSC-14-0626-PAA-WU, the Commission approved a Phase I working capital allowance
of $26,205. 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 for Phase II. Applying this formula,
staff recommends an incremental working capital allowance of $3,473
($27,786/8), resulting in a total working capital allowance of $29,678 for
Phase II.
Rate Base Summary
By Order No. PSC-14-0626-PAA-WU, the Commission approved a rate base of
$538,123 for Phase I. Based on the above, staff’s total adjustment to rate base
is an increase of $441,384. Therefore, staff recommends a rate base of $979,508
for Phase II.
Capital Structure
The Utility previously arranged financing for several of the pro forma projects
and those adjustments were incorporated into the Phase I capital structure.
Based on that information, the Utility’s Phase I capital structure reflected
equity of $82,000 and total debt of $1,422,738. Some of the pro forma projects
were financed through a combination of bank loans, SBA loans, and Utility
equity. Staff increased equity by $120,884 to reflect the Utility’s equity
investment in all of the projects. Staff also decreased long-term debt by
$54,460 to remove a test year bank loan that has been paid off by the Utility.
In addition, staff increased long-term debt by $46,025 and $1,600 to reflect
the actual final amount of the bank and SBA loans that were previously added to
the Phase I capital structure to reflect the proposed financing for the
subaqueous pipeline construction and north line extension projects. During the
construction of the subaqueous pipeline, the Utility also secured an additional
loan for $45,000. However, that loan has since been paid off and replaced with
a smaller loan of $25,150. Therefore, staff increased long-term debt by
$25,150.
The Utility financed the construction of the new utility building with a
combination of a bank loan, SBA loan, and Utility equity investment similar to
the Phase I financing. Staff increased long-term debt by $138,358 and $109,000
to reflect the addition of those loans to the Utility’s capital structure. In
order to facilitate a faster schedule for the meter replacement project, the
Utility secured an additional loan for $62,400 to pay for a portion of the
project. Staff increased long-term debt by $62,400 to reflect the addition of
this loan to the Utility’s capital structure. In addition, staff increased
short-term debt by $49,000 to reflect a promissory note that the Utility
secured to pay for additional project related costs. Staff’s adjustments
reflect a $120,884 increase to equity and a $377,073 net increase to debt, for
a total increase of $497,957. The resulting capital structure reflects equity
of $202,884 and total debt of $1,799,810. The $109,000 SBA loan required a
separate payment of approximately $4,756 in loan closing costs. Amortizing the
loan closing costs over the 11.5 year term of the associated debt account
increases the effective interest rate of this loan from 4.75 percent to 5.64
percent. Staff notes that the 11.5 year term was applied because this loan is
scheduled to be combined with the $138,358 bank loan in January 2018, which has
an 11.5 year term. In addition, the $62,400 bank loan resulted in separately
paid closing costs of approximately $2,264. Amortizing the loan closing costs
over the 7 year term of the associated debt account increases the effective
interest rate from 5.50 percent to 5.94 percent.
The Utility’s capital structure has been reconciled with staff’s recommended
rate base for Phase II. The appropriate ROE is 11.16 percent based upon the
Commission-approved leverage formula currently in effect.[15]
Staff recommends an ROE of 11.16 percent, with a range of 10.16 percent to
12.16 percent, and an overall rate of return of 6.55 percent. The ROE and
overall rate of return are shown on Schedule No. 2.
Operation and Maintenance (O&M) Expense
Staff’s recommended adjustments
to the O&M expense accounts that are affected by the completion of the pro
forma projects are discussed below.
Excessive
Unaccounted for Water Expense Adjustments
In Order No.
PSC-14-0626-PAA-WU, the Commission found that Little Gasparilla had unaccounted
water of 17 percent for the test year ended September 30, 2013. This resulted
in a 7 percent excessive unaccounted for water (EUW) adjustment to purchased
water, purchased power, and chemical expenses for the test year. The Commission
noted in its order that, based on the Utility’s assertion, the EUW could be the
result of flushing that was not recorded and old meters that were not
registering properly.
As discussed
above, the Commission approved a meter replacement project for Phase II, and
Little Gasparilla completed 131 of the meter replacements as of November 14,
2017. In response to a staff data request, Little Gasparilla provided data on
its purchased water, gallons sold, and water used for other uses (such as
flushing) for the year 2016 and January to August of 2017.
Based on this data, unaccounted for water has decreased to 4 percent for 2016
and 4.8 percent for part of 2017. Staff commends the Utility for keeping
records of the estimated amount of water used for flushing and attributed to
leaks.
Therefore,
staff recommends removing the previously approved 7 percent EUW expense
adjustments as it appears Little Gasparilla has taken the steps necessary to
correct the problem. Based on Commission practice, the previously approved EUW
adjustments would continue to be applied to the Utility’s future price index
and pass through rate adjustments until the Utility has another rate proceeding
that includes a comprehensive unaccounted for water review. Therefore, staff
believes it is important to recognize the Utility’s correction of the EUW in
this proceeding to prevent the continuation of future EUW adjustments that are
no longer necessary. Accordingly, staff increased the following accounts to
reverse the 7 percent EUW adjustments previously approved by Order No.
PSC-14-0626-PAA-WU: (1) increased Account No. 610 - Purchased Water by $3,803;
(2) increased Account No. 615 - Purchased Power by $280; and (3) increased
Account No. 618 - Chemicals by $38.
Rent
Expense (640)
With the completion of the new
utility building, the Utility has moved its office from the mainland to the new
building on the island. Consequently, staff decreased rent expense by $3,510 to
remove office rent for the Utility’s mainland office space that was included in
the Phase I revenue requirement.
Insurance
Expense (655)
The Utility was required to
obtain additional insurance on the new office building, including wind and
flood insurance, as a condition of its building loans. Because the actual
insurance premiums on the completed building are notably higher than the 2014
estimates, staff believes it will be beneficial to discuss the reason for the
increase. In 2014, it was estimated that the total insurance expense for the
new utility building would increase to $7,000, resulting in an increase of
$3,272 over the Utility’s 2013 test year insurance expense of $3,728. However,
the Utility’s insurance provider advised that for the 2017/2018 term the
premiums have increased and the insurance carrier will no longer include the
wind coverage in the package policy, requiring a separate wind policy. The most
significant premium increase is for the flood policy which increased from a
premium of $2,297 for the 2015/2016 term to a premium of $7,879 for the
2017/2018 term. The Utility was not required to carry the separate flood
insurance policy during the 2016/2017 term while the building construction was
covered under a separate builder’s insurance policy that was discontinued when
the construction was completed. The insurance provider advised that the new
building is no longer eligible for grandfathering and that actuarial rates must
be used for rating, contributing to the significant increase in the flood
insurance premium. The current policy includes a $50,000 deductible.
Based on these changes, the total
insurance expense for the new utility building is $14,672, resulting an in
increase of $10,944 over the 2013 test year expense of $3,728. However, the
insurance provider advised that if the SBA does not accept the $50,000 deductible,
the $7,879 flood insurance premium will increase to either $12,641 with a
$10,000 deductible, or $16,054 with a $1,250 deductible. Efforts are still
underway to request the SBA’s approval of the $50,000 deductible. Therefore,
based on the current premiums as of November 2017, staff has increased the
insurance expense by $10,944 to reflect the increase in insurance on the new
building going forward.
Regulatory
Commission Expense (665)
Traditionally, when the Commission approves a rate
increase using a phased approach, all of the rate case expense is included in
the Phase I revenue requirement. This process is more efficient and also
eliminates the need for a second four-year rate reduction in the same rate
proceeding. Accordingly, the rate case expense that the Commission approved in
Phase I included the cost of the future Phase II customer notice and a small
amount of legal fees related to tariff and noticing work. However, due to the
unique circumstances in the instant case, the Utility incurred additional rate
case expense following implementation of the Phase I rate increase.
In its November 8, 2017 letter, OPC proposed that a notice
should be provided to the customers before the recommendation for Phase II
rates is filed to allow customer comments to be incorporated into staff’s
recommendation. OPC also stated that a customer meeting on quality of service
issues should be held given it has been three years since the Phase I rates
were approved. Consistent with current Commission practice in rate proceedings
that use a phased approach, staff does not believe a second customer meeting is
necessary. The customers were previously noticed about the proposed pro forma
projects and proposed rate increases for both Phase I and Phase II in the Staff
Report and staff’s PAA recommendation that were issued previously in this
docket. Although the type of notice proposed by OPC is not required by Rule
25-22.0407, F.A.C., Little Gasparilla voluntarily agreed to provide a notice
advising its customers that a recommendation for the Phase II rate increase
would be presented at the Commission’s December 12, 2017 Agenda. The Utility
provided a notice to the customers on November 16, 2017. As of November 30, 2017, the Commission had
received comments from two customers who objected to the rate increase, but did
not express any concerns about the quality of service. Staff believes it would
be appropriate to include the cost of this additional notice in the Utility’s
rate case expense.
Also, the cost of the future Phase II rate increase notice
that was included in the Phase I rate case expense was calculated based on 372
customers in the 2013 test year. Since that time, Little Gasparilla has added
approximately 84 new customers, which will result in an additional $62 in noticing
costs. Staff believes it would be appropriate to include this incremental
increase in the noticing cost since the notice is required by Rule 25-22.0407,
F.A.C., and must be provided to all customers who are receiving service when
the notice is sent. 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 $488 for postage expense, $199 for printing expense, and $50 for
envelopes. This results in $737 for the Phase II noticing requirements. It
should be noted that the noticing cost is the only recommended expense in this
recommendation that was updated based on the current number of customers.
In addition, the Utility has incurred an additional $3,100
in rate case related legal fees for additional legal services provided during
Phase II. Some concern has been expressed about allowing recovery for services
such as requesting an extension of time to complete the pro forma projects. In
a typical case where the Phase II rate increase is approved at the same time as
the Phase I increase, such additional legal fees would likely be recovered as
part of a utility’s recurring contractual services – legal expense. However,
Little Gasparilla’s Phase I increase did not include an allowance for any
recurring legal expenses. Consequently, the Utility will be unable to recover
the rate case related legal expenses that it incurred to complete the second
phase of this case unless a specific adjustment is included. Staff has reviewed
the additional rate case expense to ensure that there is no duplication of any
legal fees previously included in the Phase I rate case expense or any other
legal expenses related directly to the pro forma projects. Staff believes the
requested legal fees are reasonable and should be approved.
By Order No. PSC-14-0626-PAA-WU, the Commission approved
annual regulatory commission expense of $3,546 for Phase I, which included $200
to reflect the five-year amortization of the Utility’s grandfather certificate
filing fee, and $3,346 to reflect the four-year amortization of the Phase I
rate case expense. The grandfather certificate filing will not be fully
amortized until February 2020, and the Phase I rate case expense will not be
fully amortized until February 2019. If the Commission approves a Phase II rate
increase and includes additional rate case expense, the incremental Phase II
rate case expense will be amortized separately from the Phase I rate case
expense, and will be fully amortized in early 2021. As will be discussed in
Issue 3, staff is recommending that an additional four-year rate reduction be
approved in this case to remove the incremental Phase II rate case expense at
the end of the four-year amortization period. Based on the above, staff
recommends an incremental increase in rate case expense of $3,837 ($737 +
$3,100 = $3,837), which amortized over four years is $959.
Post
Phase I Price Index and Pass Through Rate Adjustments
Since the
Phase I rates were implemented, Little Gasparilla also received approval of
four price index and three pass through rate adjustments for 2014 through 2017.
The pass through rate adjustments were necessary to reflect the increase in
Little Gasparilla’s purchased water expense due to increases in CCU’s water
rates. Little Gasparilla’s revenues were increased by a total of $14,848 for
the price index and pass through adjustments. Because staff’s recommended
revenue requirement for Phase II is built upon the previously approved Phase I
revenue requirement, an additional adjustment is necessary to reflect the
increase in expenses associated with the approved price index and pass through
rate adjustments. Consistent with Commission practice, the price index and pass
through adjustment included the Commission’s previously approved 7 percent EUW
adjustment. As discussed above, staff is recommending that the EUW adjustment
be eliminated because the Utility has corrected the issue. Therefore, staff
believes the $424 in total EUW reductions that were applied to Little
Gasparilla’s 2014 through 2017 price index and pass through rate adjustments
should also be removed to reflect the appropriate expenses going forward. Consequently,
staff has increased the Utility’s 2013 test year approved operating expenses by
a total of $15,272 ($14,848 + $424 = $15,272) to reflect the operating expense
increases that were associated with the price index and pass through
adjustments approved from 2014 through 2017, and reversal of the EUW
adjustments. Staff recommends that an increase of $15,272 be reflected in the
Utility’s O&M expenses to retain the price index and pass through rate
adjustments that Little Gasparilla has received since the Phase I rate increase
went into effect.
Operation
and Maintenance Expense (O&M Summary)
By Order No. PSC-14-0626-PAA-WU, the Commission approved
O&M expense of $209,637 for Phase I. Based on the above adjustments,
O&M expense should be increased by $27,786 for Phase II, resulting in total
O&M expense of $237,423 for Phase II. Staff’s recommended adjustments to
O&M expense are shown on Schedule Nos. 3-A through 3-C.
Other
Operating Expenses and Operating Expense Summary
Staff has adjusted depreciation
expense to reflect the pro forma additions and retirements, resulting in an
increase of $15,061. Also, staff has increased taxes other than income (TOTI)
by $5,928 to reflect the increase in utility property taxes associated with the
net plant additions, and by $3,116 to reflect RAFs of 4.5 percent on the change
in revenues, for a total TOTI increase of $9,044. Staff’s total adjustment to operating
expenses, including additional RAFS, is $51,891, resulting in total operating
expenses of $349,494.
Conclusion
The Utility’s Phase II revenue
requirement should be $413,652, resulting in an annual increase of $69,252 or
20.11 percent over the recommended Phase I revenue requirement, annualized to
reflect the Utility’s current rates based on the price index and pass through
adjustments that have been approved since the Utility’s Phase I rates were
implemented. The appropriate return on equity (ROE) is 11.16 percent with a
range of 10.16 percent to 12.16 percent. The appropriate overall rate of return
is 6.55 percent. Phase II rate base is shown on Schedule Nos. 1-A and 1-B. The capital structure for Phase II is shown
on Schedule No. 2. The revenue requirement is shown on Schedule Nos. 3-A and
3-B. The resulting rates are shown on Schedule No. 4.
Issue 2:
What are the appropriate water rates for Phase II?
Recommendation:
The Phase II rate increase
of 20.16 percent for water should be applied to the existing rates as shown on
Schedule No. 4. 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 pursuant to Rule 25-30.475(1), F.A.C. In addition, the
approved rates should not be implemented until staff has approved the proposed
customer notice and the notice has been received by the customers. The utility
should provide proof of the date notice was given within 10 days of the date of
the notice. (Bruce)
Staff Analysis:
Since the implementation of
Phase I rates, the utility has had four price index and three pass through rate
adjustments for 2014 through 2017. In order to determine the appropriate
percentage price increase to the existing rates, staff annualized revenues
using the existing rates, which became effective October 1, 2017, and the
billing determinants as of 2014, used to set Phase I rates. This would
result in an increase of 20.16 percent for water over the existing rates.
The calculation is shown below.
Table 2-1
Determination of Percentage Service
Rate Increase
|
|
Water
|
|
Annualized
Revenues
|
$344,400
|
|
Less:
Miscellaneous Revenues
|
$980
|
|
Annualized Service Revenue Requirement
|
$343,460
|
|
Phase II Revenue
Increase
|
$69,252
|
|
% Service
Rate Increase (Line 4/Line 3)
|
20.16%
|
Staff
recommends that the Phase II rate increase of 20.16 percent for water should
be applied to the existing rates as shown on Schedule No. 4. 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 pursuant to
Rule 25-30.475(1), F.A.C. In addition, the approved rates should not be
implemented until staff has approved the proposed customer notice and the
notice has been received by the customers. The utility should provide proof of
the date notice was given within 10 days of the date of the notice.
Issue 3:
What is the appropriate amount by which rates should
be reduced four years after the established effective date to reflect the
removal of the amortized rate case expense as required by Section 367.0816?
Recommendation:
The water rates should be reduced as shown on
Schedule No. 4, 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 Little Gasparilla 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. (Bruce, Golden) (Final Agency Action)
Staff Analysis:
Little Gasparilla’s water 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, the associated return on working
capital, and the gross-up for RAFs which is $1,012.
Using the Utility's current revenues, expenses, and customer base, the
reduction in revenues will result in the rate decrease shown on Schedule No. 4.
As discussed in Issue 1, the rate case expense approved by the Commission in
Phase I will be fully amortized in February 2019. If approved by the
Commission, the incremental increase in rate case expense for Phase II will be
fully amortized in early 2021, requiring a second four-year rate reduction for
this docket.
Little Gasparilla 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 Little Gasparilla 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 4:
Should the recommended rates 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?
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) (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 $46,168. 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 5:
Should this docket be closed?
Recommendation:
No. If no person whose substantial interests are
affected by the proposed agency action files a protest within twenty-one days
of the issuance of the order, a consummating order will be issued. The docket
should remain open for staff’s verification that the revised tariff sheets and
the customer notice have been filed by the utility and approved by staff. When
the tariff and notice actions are complete, this docket may be closed
administratively. (Murphy, Bruce)
Staff Analysis:
No. If no person whose substantial interests are
affected by the proposed agency action files a protest within twenty-one days
of the issuance of the order, a consummating order will be issued. The docket
should remain open for staff’s verification that the revised tariff sheets and
the customer notice have been filed by the utility and approved by staff. When
the tariff and notice actions are complete, this docket may be closed
administratively.
