Discussion
of Issues
Issue 1:
Should the Utility's proposed final wastewater rates
and charges be suspended?
Recommendation:
Yes. KWRU’s proposed final wastewater rates and
charges should be suspended. (D. Andrews)
Staff Analysis:
Section 367.081(6), F.S., provides that the rates
proposed by the Utility shall become effective within sixty days after filing
unless the Commission votes to withhold consent of implementation of the
requested rates. Further, the above referenced statute permits the proposed
final rates to go into effect, under bond, escrow, or corporate undertaking
eight months after filing unless final action has been taken by the Commission.
Staff has reviewed the filing and has considered the
proposed rates and charges, the revenues thereby generated, and the information
filed in support of the rate application. Staff believes that it is reasonable
and necessary to require further amplification and explanation regarding this
data, and to require production of additional and/or corroborative data. To
date, staff has initiated an audit of KWRU’s books and records. The audit
report is tentatively due on January 29, 2018. In addition, staff sent its
first set of discovery on December 18, 2017, and responses were received on December
28, 2017. Further, staff believes additional requests will be necessary to
process this case. Based on the foregoing, staff recommends that the Utility’s
proposed final rates and charges be suspended.
Issue 2:
Should interim rates be established using year-end
rate base and cost of capital determinations?
Recommendation:
Yes. (Sewards)
Staff Analysis:
The Utility has asked the Commission to establish
interim rates using year-end rate base and cost of capital measurements. Pursuant
to Section 367.082(5)(a), F.S., in setting interim rates or setting revenues
subject to refund, the Commission shall determine the revenue deficiency or excess
by calculating the difference between the achieved rate of return of a utility
or regulated company and its required rate of return applied to an average
investment rate base or an end-of-period investment rate base.
Based on Commission
practice, use of a year-end basis for purposes of setting interim rates should
be preceded by a showing of extraordinary circumstances.
In response to a staff interrogatory, the Utility stated that the construction
of a new wastewater treatment plant and the replacement of a vacuum tank during
the test year demonstrated extraordinary circumstances existed during the test
year. KWRU also stated that if a year-end rate base is not used, interim rates
would not reflect the full amount of investments made during the test year. Accordingly,
staff recommends approval of the Utility's use of a year-end basis for interim purposes
in accordance with Section 367.082(5)(a), F.S.
Issue 3:
Should any interim revenue increase be approved?
Recommendation:
Yes, the Utility should be authorized to collect
annual wastewater revenues as indicated below.
|
|
Adjusted
Test
Year
Revenues
|
$
Increase
|
Revenue
Requirement
|
%
Increase
|
|
Wastewater
|
$2,340,275
|
$85,629
|
$2,425,904
|
3.66%
|
(Sewards)
Staff Analysis:
Pursuant to Section 367.082(1), F.S., the Commission
may authorize the collection of interim rates during any proceeding for a
change of rates upon petition from any party or on its own motion; and, in
order to establish a prima facie entitlement for interim relief, the utility
shall demonstrate that it is earning outside the range of reasonableness on its
rate of return. Pursuant to Section 367.082(2)(a), F.S., in a proceeding for an
interim increase in rates, the Commission shall authorize, within 60 days of
the filing for such relief, the collection of rates sufficient to earn the
minimum of the range of return on equity.
On November 21, 2017, KWRU filed rate base, cost of
capital, and operating income schedules using year-end balances to support its
requested interim wastewater increase. Pursuant to Section 367.082(5)(b)1.,
F.S., the achieved rate of return for interim purposes must be calculated by
applying adjustments consistent with those used in the utility’s most recent
rate proceeding and annualizing any rate changes. Staff reviewed KWRU's interim
request, as well as Order No. PSC-2017-0091-FOF-SU, the Order setting KWRU’s
current rates. Staff has attached accounting schedules to illustrate staff's
recommended rate base, capital structure, and test year operating income
amounts. The rate base schedules are labeled as Schedule Nos. 1-A and 1-B. The
capital structure schedule is labeled Schedule No. 2. The operating income
schedules are labeled as Schedule Nos. 3-A and 3-B. Staff’s recommended
adjustments are discussed below
Interim Rate Base
In its filing, the Utility made adjustments to plant in
service, accumulated depreciation, and depreciation expense to recognize
reclassifications of plant accounts and retirements. Staff believes these
adjustments are appropriate for interim purposes. However, staff believes
additional adjustments to rate base are necessary for interim purposes.
Used & Useful
Pursuant to Section 367.082, F.S., the method used to
calculate Used and Useful (U&U) in KWRU’s last rate case must be used for
interim purposes. In Order No. PSC-2017-0091-FOF-SU, the Commission found that KWRU’s
wastewater collection system is 100 percent U&U and the wastewater
treatment plant is 71.5 percent U&U. Based on its review, staff recommends
that the wastewater collection system be considered 100 percent U&U and the
wastewater treatment plant be considered 71.5 percent U&U.
In its filing, the Utility made a net non-U&U adjustment
of $1,960,672 to reduce plant in service and a $73,908 net reduction to
depreciation expense. Staff recommends an adjustment to decrease U&U by
$86,356 to recognize non-U&U of contributions in aid of construction (CIAC)
and accumulated amortization of CIAC. In addition, staff recommends a
corresponding adjustment to decrease net depreciation expense by $12,315.
Working Capital Allowance
Pursuant to Rule 25-30.433(2), Florida Administrative Code
(F.A.C.), Working Capital for the Utility was correctly calculated using the
balance sheet approach. KWRU reflected a balance of $438,721 in deferred rate
case expense and included an adjustment to reduce the balance by $107,707. This
adjustment represents the removal of one year of approved prior rate case expense.
The July 1, 2016 implementation of Section 376.081(9), F.S., prohibits a
utility from earning a return on the unamortized balance of rate case expense. However,
the current statute does not apply to rate case expense previously authorized
by the Commission prior to the 2016 implementation of Section 367.081(9), F.S.
Thus, consistent with former Commission practice, one-half of the Utility’s
total rate case expense associated with its prior case should be included in
working capital.[3] Staff
reduced the interim working capital by an additional $107,707 to reflect
one-half of the prior rate case expense. In addition, staff made an adjustment
to remove $7,893 of rate case expense incurred for the instant docket.
During the previous rate case, an escrow agreement was
signed between the Commission and the Utility.[4]
Pursuant to Section 367.081(10), F.S., if a PAA Order is protested by a party
other than the utility, the utility is authorized to place its requested rates
in effect under bond, escrow, or corporate undertaking subject to refund. The
escrow account was created to ensure a refund to customers could be made with
interest if necessary, and is reflected in the test year with an ending balance
of $155,616. In the last rate case, the Commission determined that a PAA rate
refund was necessary.[5] The order
from the last rate case states that upon Commission staff’s verification that
the required refunds have been made; any remaining funds shall be released to
the Utility. On August 28, 2017, KWRU was authorized to close the escrow
account as refunds had been verified by staff.[6]
Based on the Commission’s required refund and subsequent
closing of this account, staff believes an adjustment is necessary to remove
the account for interim rate setting purposes. Thus, staff recommends
decreasing working capital by $155,616. As such, staff recommends the working
capital allowance be reduced by $271,216 ($107,707+$7,893+$155,616).
Based on the above, staff recommends that KWRU’s interim
rate base should be $4,153,288.
Interim Cost of Capital
Based on an analysis of the MFRs, Order No. PSC-2017-0091-FOF-SU
and adjustments to rate base discussed above, staff recommends that the overall
rate of return be reduced from 7.15 percent to 7.14 percent.
Interim Net Operating Income
To calculate the appropriate amount of interim test year
operating revenues, staff removed the Utility’s requested interim revenue
increase of $146,041 and increased operating revenues by $7,748 to reflect
annualized revenues. Staff also reduced regulatory assessment fees by $6,223 to
reflect the removal of the Utility’s requested revenue increase. Pursuant to
Section 367.082(5)(b)1., F.S., the achieved rate of return for interim purposes
must be calculated by applying adjustments consistent with adjustments made in
the utility’s most recent rate proceeding and annualizing any rate
changes.
O&M Expenses
Based on staff’s review, adjustments to operation and
maintenance (O&M) expenses are necessary for interim purposes. KWRU proposed
an adjustment of $18,879 to Salaries and Wages to reflect allowable employee
expenses per the last rate case. The Utility also proposed corresponding
adjustments to Employee Pensions and Benefits and Insurance – Workman’s Comp.,
for $4,531 and $831, respectively. In the last rate case, all adjustments to
salaries and wages were made on a pro forma basis and no methodology for
increasing these expenses was established. As such, staff recommends an
adjustment to remove $24,241 ($18,879 + $4,531 + $831) from O&M Expenses.
Based on the above, staff recommends that the appropriate
test year operating income, before any revenue increase, is $214,665.
Interim Revenue Requirement
Based on the above adjustments, staff recommends a revenue
requirement of $2,425,904. This represents an interim increase in annual
revenues of $85,629 or 3.66 percent.
Issue 4:
What are the appropriate interim wastewater rates
for KWRU?
Recommendation:
The service rates for KWRU should be increased by 3.78
percent to generate the recommended revenue increase for the interim period.
The rates, as shown on Schedule No. 4, 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. The Utility should file revised tariff sheets and a
proposed customer notice to reflect the Commission-approved rates. In addition, the approved rates should not be
implemented until the required security has been filed, 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. (Friedrich)
Staff Analysis:
Staff recommends that interim service rates for KWRU
be designed to allow the Utility the opportunity to generate annual operating
revenues of $2,425,904. The test year revenues were adjusted to annualize the
rate in effect at the end of the test year. Before removal of miscellaneous
revenues, the resulting revenue increase is $85,629 (3.66 percent). To
determine the appropriate increase to apply to the service rates, miscellaneous
revenues should be removed from the test year revenues. The calculation is as
follows:
Table 4-1
Percentage Service Rate
Increase
|
|
|
Wastewater
|
|
|
|
|
|
1
|
Total Test Year Revenues
|
$2,340,275
|
|
|
|
|
|
2
|
Less: Miscellaneous Revenues
|
$77,500
|
|
|
|
|
|
3
|
Test Year Revenues from Service Rates
|
$2,262,775
|
|
|
|
|
|
4
|
Revenue Increase
|
$85,629
|
|
|
|
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
3.78%
|
Source:
Staff’s Recommended Revenue Requirement and the Utility’s MFRs
Consistent with Commission practice for interim rates, the
above percentage increase should be applied as an across-the-board increase to
the service rates in effect at the end of the Utility’s test year. The rates
shown on Schedule No. 4 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. The Utility should file revised tariff sheets and a proposed customer
notice to reflect the Commission-approved rates. In addition, the approved
rates should not be implemented until the required security has been filed,
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 5:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
The Utility should be required to secure a letter of
credit, or alternately an escrow account or surety bond, to guarantee any
potential refund of revenues collected under interim conditions. If the
security provided is a letter of credit or surety bond, it should be in the
amount of $78,925. Otherwise, the Utility should deposit 3.78 percent of
service revenues collected into the escrow account each month. Pursuant to Rule
25-30.360(6), F.A.C., the Utility should provide a report by the 20th of each
month indicating the monthly and total revenue collected subject to refund.
Should a refund be required, the refund should be with interest and in
accordance with Rule 25-30.360, F.A.C. (Sewards)
Staff Analysis:
Pursuant to Section 367.082, F.S., revenues
collected under interim rates shall be placed under bond, escrow, letter of
credit, or corporate undertaking subject to refund with interest at a rate
ordered by the Commission. As recommended in Issue 2, the total interim
increase is $85,629. In accordance with Rule 25-30.360, F.A.C., staff
calculated the potential refund of revenues and interest collected under
interim conditions to be $78,925. This amount is based on an estimated eleven
months of revenue being collected from staff’s recommended interim rates over
the Utility’s current authorized rates shown on Schedule No. 4.
The criteria for a corporate undertaking include
sufficient liquidity, ownership equity, profitability, and interest coverage to
guarantee any potential refund. The Utility has indicated to staff that it intends
to utilize an escrow account as security for potential refund of interim
rates granted. As such, staff did not perform an analysis regarding the
Utility’s financial capability to support a corporate undertaking. Staff
recommends KWRU be required to secure a letter of credit, or alternately an
escrow account or surety bond, to guarantee any potential refund of water and
wastewater revenues. The requirements associated with each are discussed below.
If the security provided is a surety bond or a letter of
credit, said instrument should be in the amount of $78,925. If the Utility
chooses a surety bond as security, the surety bond should state that it will be
released or terminated only upon subsequent order of the Commission. If the
Utility chooses to provide a letter of credit as security, the letter of credit
should state that it is irrevocable for the period it is in effect and that it
will be in effect until a final Commission order is rendered releasing the
funds to the Utility or requiring a refund.
If the security provided is an escrow account, said
account should be established between the Utility and an independent financial
institution or the Division of Treasury for the Florida Department of Financial
Services pursuant to a written escrow agreement. The Commission should be a
party to the written escrow agreement and a signatory to the escrow account. The written escrow agreement
should state the following: the account is established at the direction of the
Commission for the purpose set forth above; no monies in the escrow account may be withdrawn by the Utility without
prior written authorization of the Commission Clerk, or his or her designee; the
account shall be interest bearing; all information
on the escrow account shall be available from the holder of the escrow account
to a commission representative at all times; the amount of revenue subject to
refund shall be deposited in the escrow account within seven days of receipt; 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; and, the account must specify by whom
and on whose behalf such monies were paid.
If the security provided is an escrow account, the Utility
should deposit 3.78 percent of service revenues collected into the escrow
account each month. The escrow agreement should also state that “if a refund to
the customers is required, all interest earned on the escrow account shall be
distributed to the customers, and if a refund to the customers is not required,
the interest earned on the escrow account shall revert to the Utility.”
Pursuant to Rule 25-30.360(6), F.A.C., the Utility should
provide a report by the 20th day of each month indicating the monthly and total
revenue collected subject to refund. Should a refund be required, the refund
should be with interest and undertaken in accordance with Rule 25-30.360,
F.A.C.
In no instance should maintenance and administrative costs
associated with any refund be borne by the customers. Such costs are the
responsibility of, and should be borne by, the Utility.
Issue 6:
What is the appropriate amount and mechanism by
which the Utility should recover over-refunded interest from the previous rate
case, Docket No. 20150071-SU?
Recommendation:
The over-refunded interest of $9,625 should be
recovered through a one-time surcharge for one billing cycle. The appropriate
surcharges are shown on Schedule No. 4. The Utility should file a proposed
customer notice to reflect the Commission-approved surcharge. In addition, the
approved surcharge should not be implemented until staff has approved the
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. (Friedrich, Sewards)
Staff Analysis:
On July 26, 2017, KWRU filed its final refund report
pursuant to Order No. PSC-2017-0091-FOF-SU and Rule 25-30.360(7), F.A.C.,
following the 2015 rate case. Subsequently, the Utility filed a second revised
refund report on August 17, 2017, to correct the application of the commercial
paper rates it previously used to calculate the appropriate interest for the
refunds. Due to the calculation error, KWRU over-refunded interest in the
amount of $9,625. Based on the anticipated timing of an interim rate increase,
KWRU elected to address the recovery of the over-refunded revenues in the
instant docket. Therefore, staff recommends a one-time surcharge for one billing
period in order to remedy this differential. Staff’s recommended surcharges are
based on the customer’s respective ERCs and are shown on Schedule No. 4.
Based on the above, the over-refunded interest of $9,625
should be recovered through a one-time surcharge for one billing cycle. The
appropriate surcharges are shown on Schedule No. 4. The Utility should file a
proposed customer notice to reflect the Commission-approved surcharge. In
addition, the approved surcharge should not be implemented until staff has
approved the 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 7:
Should KWRU's request to implement interim Allowance
for Funds Prudently Invested (AFPI) charges be approved, and if so, what are
the appropriate charges?
Recommendation:
No. Section 367.082, F.S., has historically applied
to afford interim relief to service rates, and has not been applied to charges
such as AFPI. KWRU’s request to
implement interim relief to its requested AFPI charge has not been adequately
supported, and should be denied. (J.
Crawford)
Staff Analysis:
An AFPI charge is a mechanism designed to allow a
Utility the opportunity to earn a fair rate of return on prudently constructed
plant held for future use from the customers that will be served by that plant.
The charge is calculated based on the costs associated with the non-used and
useful plant. This one-time charge is assessed based on the date the future
customer connects to the Utility, and is generally applicable to all future
customers who have not already prepaid connection fees,
contributions-in-aid-of-construction or customer advances. KWRU currently does not have any Commission
approved AFPI charges, but has requested interim as well as final AFPI charges.
A utility may seek Commission approval of AFPI charges
through two primary mechanisms – either in the course of a comprehensive rate
proceeding pursuant to Section 367.081, F.S., or as a separate tariff filing
pursuant to Section 367.091, F.S. In
either case, the rate request may be suspended pursuant to Section 367.081(6),
F.S. In a file-and-suspend (direct to hearing) comprehensive earnings review
(such as the instant docket), an AFPI charge would be approved prospectively
upon the post-hearing vote of the Commission.
In a tariff docket, the AFPI charge would also be approved by vote of
the Commission, but would be subject to protest by a substantially affected
person, in which case the matter would be set for a Section 120.57, F.S.,
administrative hearing. The timing of
requesting an AFPI charge, as well as the procedure by which it is requested
(thus affecting the timing in which Commission approval is granted), is a
matter left to the utility’s discretion.
The purpose of Section 367.082, F.S., is to protect
utilities from the “regulatory lag” associated with full blown rate proceedings
by providing interim rate relief, subject to refund. The Commission may authorize an interim rate
increase if the MFRs indicate that the utility is earning less than its last
authorized rate of return on investment, subject to refund at the conclusion of
the case. Section 367.082(1), F.S.,
provides:
The commission may, during any proceeding for a change
of rates, upon its own motion, upon petition from any party, or by a tariff
filing of a utility or a regulated company, authorize the collection of interim
rates until the effective date of the final order. Such interim rates may be
based upon a test period different from the test period used in the request for
permanent rate relief. Upon application by a utility, the commission may use
the projected test-year rate base when determining the interim rates or
revenues subject to refund. To establish a prima facie entitlement for interim
relief, the commission, the petitioning party, the utility, or the regulated
company shall demonstrate that the utility or the regulated company is earning
outside the range of reasonableness on rate of return calculated in accordance
with subsection (5).
In Commission Staff’s First Set of Interrogatories, No.
1(B), staff requested that KWRU explain and provide the legal support for its
request for interim recovery of its requested AFPI charges. In response, KWRU provided:
An AFPI charge is a mechanism which allows a utility
the opportunity to earn a fair rate of return on prudently constructed plant
held for future use from the future customers to be served by that plant in the
form of a charge paid by those customers. Section 367.082, Florida Statutes,
authorizes the Commission to grant interim rates during the pendency of a rate
case. There is no exclusion for AFPI charges. The purpose of interim rates is
to reduce regulatory lag, and is equally applicable to AFPI. If AFPI is not
allowed then the amounts not collected as new connections are made will be
forever lost which impairs KWRU’s opportunity to earn a fair return on its
investment.
In essence, KWRU contends that Section 367.082, F.S., does
not specifically exclude AFPI charges from interim recovery, and that exclusion
of AFPI from interim would impair KWRU’s ability to earn a fair return. KWRU did not specifically request interim
treatment for its requested AFPI charges in its petition, or provide any
support for what appears to be a case of first impression for the Commission.
KWRU did not provide any case law that supports applying interim recovery to
charges such as AFPI pursuant to Section 367.082, F.S. The Utility did not
provide an AFPI tariff with its application for either interim or final relief,
but did provide schedules showing the calculation of AFPI carrying costs for
each ERC, for both interim and final rate purposes, in its E-10 schedules.
The interim statute has historically been applied only
with respect to a utility’s service rates, and has not been applied to expedite
recovery of charges, such as AFPI or service availability charges. Section 367.082, F.S., provides a very
prescriptive methodology by which interim rates are calculated, and does not
provide a methodology for granting interim relief for charges such as AFPI.
Finally, staff notes that by Order No. PSC-93-0136-FOF-SU,[7] the
Commission denied South Broward Utility, Inc.’s (SBU) request for interim AFPI
charges pursuant to Section 367.082, F.S., electing instead to suspend the
tariff pursuant to Section 367.091, F.S.
The Commission stated:
In its application, SBU requests that this Commission
enter an order “pursuant to Section 367.082 and Section 367.101, Florida
Statutes (1991), authorizing the Company to charge and collect interim
wastewater AFPI charges . . . .”
We note that §367.082, Florida Statutes, is designed
for allowing interim rates only in conjunction with comprehensive earnings
reviews. The information at hand in this case is insufficient for such a
review. Further, although AFPI charges are paid for by future customers like
service availability charges, we do not believe that AFPI charges are service
availability charges as contemplated in §367.101, Florida Statutes.
Section 367.091(5),[8]
Florida Statutes, gives this Commission authority to withhold consent, upon
justification, to all or portions of new rate schedules other than service
availability and monthly service rate schedules. Above, we have suspended SBU’s
AFPI tariffs because we cannot at this time conclude that the utility’s
supporting calculations are correct, and, therefore, we cannot allow the
tariffs to become effective.
In consideration of the above, SBU’s request for
interim rates is denied.
Staff notes that unlike the SBU docket, KWRU’s request for
interim AFPI has been made in conjunction with a comprehensive earnings
review. However, it appears that the
Commission has historically interpreted Section 367.082, F.S., as applying to interim
rate relief for service rates, and not charges such as AFPI or service
availability charges. Further, KWRU has
not provided adequate support for why the Commission should depart from this
practice. Therefore, staff recommends that KWRU’s request for interim treatment
of its requested AFPI charge should be denied
Issue 8:
Should this docket be closed?
Recommendation:
This docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase. (Mapp)
Staff Analysis:
This docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase.
