Case Background
Ni Florida, LLC
(Ni Florida or utility) is a Class A utility providing service to approximately
745 water connections in Lee County and 2,757 wastewater connections in Pasco
County. The utility reported in its 2017 annual report operating revenues in
the amount of $292,211 for water and $2,282,516 for wastewater. The utility did
not collect any contributions in aid of construction (CIAC) for 2017.
On
April 17, 2018, the utility filed an application for approval of a tariff to
allow for gross-up of CIAC. As discussed in Issue 1 below, the utility
indicated that the change in tax law may cause it to risk the loss of its
opportunity to earn a reasonable return on its used and useful property if it
is not allowed to collect the tax impact on receipt of CIAC. This
recommendation addresses the utility's request for approval of gross-up tariffs
related to 2018 changes in the federal tax code. Any potential refund related
to the change in the federal tax rate currently embedded in the utility’s rates
is outside of this recommendation and will be addressed in the generic Docket
No. 20180013-PU. The Commission has jurisdiction pursuant
to Sections 367.081 and 367.091, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should Ni Florida’s request for approval of a tariff
to allow the gross-up of CIAC be approved?
Recommendation:
Yes, the tariffs filed on April 17, 2018 should be
approved. The utility should provide notice to all persons in the service areas
included in the application who have filed a written request for service or who
have been provided a written estimate for service within the 12 calendar months
prior to the month the application was filed.
The approved gross-up
charges should be effective for connections made on or after the stamped approval
date on the tariff sheets. The utility should
provide proof of noticing within 10
days of rendering its approved notice. (Bethea, Hudson, Cicchetti)
Staff Analysis:
Effective January
1, 2018, the Federal Tax
Cuts
and Jobs Act amended
Section 118 of the Internal
Revenue Code. Prior to the amendments, CIAC was exempt from
taxable gross income for water and wastewater utilities. As a result of the amendments, both cash and property CIAC are now taxable gross income
for
water
and
wastewater
utilities. In recognition of this
change in the tax law, the Commission has opened Docket
No. 20180013-PU, In re: Petition to establish a generic docket to investigate and adjust rates for 2018 tax savings by Office of Public
Counsel to address
the potential rate impacts on regulated electric, gas, water, and wastewater
utilities.
A similar law, the Tax Reform Act of 1986, became effective in 1987. In Docket No.
19860184-PU, the Commission found
that it was appropriate to allow water
and wastewater utilities
to recover the tax on CIAC from the
contributor, including the tax
associated with the additional tax that
would also become
taxable income. For those utilities
that were approved
to collect the gross-up on CIAC, the gross-up amounts collected were held subject to refund and were evaluated on a case-by-case basis as to whether any refunds were subsequently required.
On April 17, the utility filed
a tariff (Attachment A) to gross-up cash service availability charges and
property contributions to recover the federal and state corporate income taxes
associated with those contributions. According to the utility, Ni Florida could
risk loss of its opportunity to earn a reasonable return on its property used
and useful in the public service if it is not allowed to collect the tax impact
on receipt of CIAC.
The tariff recognizes that,
for depreciable property, depreciation expense is tax deductible and the utility’s
tax liability will be reduced by depreciation claimed for tax purposes. The
proposed tariff is mathematically the same, regarding the gross-up for taxes,
as the tariff approved by the Commission following the hearing in Docket No.
19860184-PU. Because
the proposed tariff accurately depicts the utility’s expected tax expense
associated with CIAC, staff believes no further Commission action would be
required once the gross-up formula has been approved. Staff notes that in Order
No. 23541 in Docket No. 19860184-PU, the Commission required a reconciliation
of CIAC tax collected to taxes paid. Staff does not believe a reconciliation of
tax collected on CIAC to taxes paid should be required for two reasons. First,
the proposed formula more appropriately tracks the potential tax liability
associated with the collection of CIAC. Second, expenses approved in base rates
are not typically subject to reconciliation. For example, the utility’s revenue
requirement is grossed-up for expected taxes and expected tax expense is
included in rates but there is no after-the-fact proceeding to reconcile taxes
actually paid with tax expense allowed in case the utility experienced a loss
and paid no taxes. Consequently, staff believes no after-the-fact proceeding is
warranted to compare allowed tax expense for CIAC to actual tax expense and,
therefore, no corporate undertaking is necessary.
Based on the above, staff
recommends that the tariffs should be approved. The approved gross-up charges
should be effective for connections made on or after the stamped approval date
on the tariff sheets. The utility should provide notice to all persons in the
service areas included in the application who have filed a written request for
service or who have been provided a written estimate for service within the 12
calendar months prior to the month the application was filed. The utility
should provide proof of noticing within 10 days of rendering its approved
notice.
Issue 2:
Should this docket be closed?
Recommendation:
If a protest is filed by a substantially
affected person within 21 days of issuance of the order, the tariffs should
remain in effect, with any revenues held subject to refund, pending resolution
of the protest. If no timely protest is filed, the order should become
final upon the issuance of a consummating order. However, the docket
should remain open to allow staff to verify that the appropriate notice has
been filed by the utility and approved by staff. Once the utility has provided
proof of noticing, the docket should be closed administratively. (Crawford)
Staff Analysis:
If a protest is filed by a substantially
affected person within 21 days of issuance of the order, the tariffs should
remain in effect, with any revenues held subject to refund, pending resolution
of the protest. If no timely protest is filed, the order should become
final upon the issuance of a consummating order. However, the docket
should remain open to allow staff to verify that the appropriate notice has
been filed by the utility and approved by staff. Once the utility has provided
proof of noticing, the docket should be closed administratively.
