Discussion
of Issues
Issue 1:
Is the quality of service provided by Pine Harbour
satisfactory?
Recommendation:
Yes. Pine Harbour is in compliance with the Department
of Environmental Protection (DEP) rules and regulations. Additionally, the
Utility appears to be responding adequately to the water quality concerns of
its customers. Therefore, staff recommends that the overall quality of service
provided by Pine Harbour be considered satisfactory. (Salvador)
Staff Analysis:
Pursuant to Section 367.081(2)(a)1., F.S., in water and wastewater rate
cases, the Commission shall consider the overall quality of service provided by
a utility. Rule 25-30.433(1), Florida Administrative Code (F.A.C.), provides
for the consideration of three separate components of the utility’s operations.[4] The
components are: (1) the quality of the utility’s product; (2) the utility’s
attempt to address customer satisfaction; and (3) the operating conditions of
the utility’s plant and facilities. The Rule further states that sanitary
surveys, outstanding citations, violations, and consent orders on file with DEP
and the county health department over the preceding three-year period shall be
considered. Additionally, Section 367.0812(1), F.S., requires the Commission to
consider the extent to which the utility provides water service that meets
secondary water quality standards as established by DEP.
Quality of the Utility’s
Product
In the evaluation of Pine Harbour’s product quality, staff
reviewed the Utility’s compliance with the DEP’s primary and secondary drinking
water standards. Primary standards protect public health, while secondary
standards regulate contaminants that may impact the taste, odor, and color of
drinking water. In January 2018, the Utility tested its water for compliance
with primary and secondary water standards. The results of the test indicate
that all contaminants (primary and secondary) and disinfectants were below the
DEP established maximum contaminant levels. Therefore, staff recommends that
the quality of Pine Harbour’s product is satisfactory.
The Utility’s Attempt to Address Customer
Satisfaction
Staff reviewed the Commission’s customer complaint records
dating back to January 1, 2013, and no complaints were found. The DEP found no
complaints in their database record for the test year and four years prior.
A customer meeting was held on July 26, 2018, at the
American Legion Building in Eustis, Florida. Two persons attended the customer
meeting, neither of whom chose to speak. As of September 20, 2018, no written
comments have been filed in the docket.
In response to a staff data request, the Utility provided
its record of customer communications including service complaints, during the
test year and four years prior to the test year. Staff reviewed those
communications and it appears the majority of the service complaints were
related to four specific events: Hurricane Irma, a loss of water due to a power
failure, a malfunction in the air compressor at the water plant, and low water
pressure/water quality issues related to hydrant flushing. Staff also notes that
many of those communications were from the same customers. For example, two
customers contacted the Utility eight times each; with several of those
contacts being informational. It appears that the Utility responded to
customers’ concerns in a timely manner and to the satisfaction of its
customers. Therefore, staff believes the Utility is adequately attempting to
address customer satisfaction. Table 1-1 below summarizes customer complaints
by source and subject.
Table 1-1
Number of Complaints by
Source and Subject
|
Subject of Complaint
|
PSC Records
|
DEP Records
|
Utility Records
|
|
Color / smell / taste
|
-
|
-
|
13
|
|
Low water pressure
|
-
|
-
|
6
|
|
Excessive gallonage / Leak /
Billing Errors
|
-
|
-
|
8
|
|
Others
|
-
|
-
|
5
|
|
Total*
|
-
|
-
|
32
|
*A single customer complaint
may be counted multiple times if it meets multiple categories.
Operating Condition of the Utility’s Plant and
Facilities
The Utility’s water treatment plant is served by a single
well, where raw water is pumped from a well rated at 600 gallons per minute.
The Utility’s water system has an aeration concrete tank and a steel
hydropneumatic tank. Staff reviewed the most recent DEP sanitary survey report conducted
on September 16, 2015. The sanitary survey stated that there were no
significant deficiencies at the Utility’s facilities; however, one minor
deficiency was identified. The deficiency, which was related to the calibration
of the water plant distribution flow meter, was corrected on October 6, 2015.
The next sanitary survey report is due to be completed by the end of 2018.
Based on the Utility’s compliance with DEP, staff recommends the operating
condition of Pine Harbour’s plant and facilities is satisfactory.
Conclusion
Pine Harbour is currently in compliance with DEP rules and
regulations. Additionally the Utility appears to be responding adequately to
the concerns of its customers. Therefore, staff recommends the overall quality
of service provided by Pine Harbour be considered satisfactory.
Issue 2:
What is the used and useful (U&U) percentage of
Pine Harbour’s water treatment plant, storage, and distribution system?
Recommendation:
Pine Harbour’s water treatment plant, storage and
water distribution system should be considered 100 percent U&U. Staff
recommends that a 10.1 percent adjustment to operating expenses for chemicals
and purchased power should be made for excessive unaccounted for water (EUW).
(Salvador)
Staff Analysis:
The Utility’s water treatment plant is served by a
single well, where raw water is pumped from a well rated at 600 gallons per
minute. The Utility’s water system has one 10,000 gallon concrete ground
storage tank and one 6,000 gallon steel hydropneumatic tank. Pine Harbour’s distribution
system is composed of 2,170 linear feet of 6-inch polyvinyl chloride (PVC)
pipe, 200 linear feet of 4-inch PVC pipe and 930 linear feet of 2-inch PVC
pipe.
Water Treatment Plant Used and Useful
Pursuant to Rule 25-30.4325, F.A.C., a water treatment
system is considered 100 percent U&U if the service territory the system is
designed to serve is built out and there is no apparent potential for expansion
of the service territory, or the system is served by a single well. As stated
earlier, a single well serves the Utility, therefore, the water treatment
system should be considered 100 percent U&U.
Excessive Unaccounted for Water
Rule 25-30.4325, F.A.C., additionally provides factors to
be considered in determining whether adjustments to operating expenses are
necessary for EUW. EUW is defined as “unaccounted for water in excess of 10
percent of the amount produced.” Unaccounted for water is all water that is
produced that is not sold, metered or accounted for in the records of the
Utility. Unaccounted for water is calculated by subtracting both the gallons
used for other purposes, such as flushing, and the gallons sold to customers
from the total gallons pumped for the test year.
Based on the Utility’s monthly operation reports, Pine
Harbour treated 5,238,641 gallons of water from January 1, 2017, to December
31, 2017, the test year. In response to a staff data request, the Utility
stated that 42,000 gallons were used for flushing during the test year, 100,000
gallons were lost in December 2017 due to a water line leak and 4,641,000
gallons of finished water were sold throughout the test year.
On May 23, 2018, the drinking-water flow meter was tested
by the Florida Rural Water Association and it was revealed that the meter was
under-registering by approximately 14.3 percent. Considering the inaccuracy of
the meter, staff believes that the amount of produced water should be adjusted
to 5,987,767 gallons (5,238,641 x 1.143). The Utility replaced the
drinking-water flow meter on September 4, 2018.
Based on the values discussed above, the unaccounted for
water for Pine Harbour is calculated to be 20.1 percent [(5,987,767 – 100,000 –
4,641,000 – 42,000) / 5,987,767], which yields an EUW amount of 10.1 percent.
Therefore, staff believes that a corresponding adjustment to operating expenses
for chemicals and purchased power should be made.
Water Storage Used and Useful
Pursuant to Rule 25-30.4325(8), F.A.C., the used and
useful calculation of storage is made by dividing the peak demand by the usable
storage of the storage tank. Usable storage capacity less than or equal to the
peak day demand shall be considered 100 percent U&U. Pursuant to Rule
25-30.4325(1)(d), F.A.C., peak demand for storage includes the utility’s
maximum day demand, excluding excessive unaccounted for water, plus a growth
allowance based on the requirements of Rule 25-30.431, F.A.C., and, where
provided, a minimum of either the fire flow required by the local governmental
authority or two hours at 500 gallons per minute.
The maximum day demand is the single maximum day in the
test year where there is no unusual occurrence. Based on information provided
to staff, the maximum day demand (24,000 gallons) occurred on April 28, 2017.
The ground storage tank capacity is 10,000 gallons. The EUW amount is 2,424
gallons (24,000 x 10.1%). The Utility indicated in its SARC application that
Lake County requires 500 gallons per minute for fire flow. Consequently the
fire flow requirement is 60,000 gallons (500 x 60 x 2). The maximum usable
storage capacity of 10,000 gallons is less than the peak demand of 81,576
gallons (24,000 – 2,424 + 60,000). Therefore, the storage should be considered
100 percent U&U.
Water Distribution System Used and Useful
In past Commission decisions regarding distribution system
U&U, consideration has been given to potential future growth and whether or
not the distribution system is built-out. Based on a review of Pine Harbour’s
service territory map as well as staff’s observation during a site visit, the
Utility’s service territory appears to be built-out. Therefore, the water
distribution system should be considered 100 percent U&U.
Conclusion
Staff recommends that Pine Harbour’s water treatment
plant, storage and water distribution system should be considered 100 percent
U&U. Staff recommends that a 10.1 percent adjustment to operating expenses
for chemicals and purchased power should be made for EUW.
Issue 3:
What is the appropriate average test year rate base
for Pine Harbour?
Recommendation:
The appropriate average test year rate base for Pine
Harbour is $36,616. (Golden, Wilson, Salvador)
Staff Analysis:
The
appropriate components of the Utility’s rate base include utility plant in
service, land, contributions-in-aid-of-construction (CIAC), accumulated
depreciation, amortization of CIAC, and working capital. The Utility has never
had a rate case and rate base has never been established. Pine Harbour’s net
book value for transfer purposes was last determined by Order No.
PSC-17-0043-PAA-WU in the 2016 certificate transfer docket.[5]
Staff selected the test year ended December 31, 2017 for the instant case. Commission
audit staff determined that the Utility’s books and records are in compliance
with the National Association of Regulatory Utility Commissioners’ Uniform
System of Accounts (NARUC USOA). A summary of each component of rate base and
staff’s recommended adjustments are discussed below.
Utility Plant in Service (UPIS)
The Utility
recorded $93,021 in UPIS. During 2016, the Utility installed a new water line
and meter for a new customer connection. The Utility correctly recorded the
CIAC received from the new customer, but did not record the associated plant
additions. Therefore, staff increased UPIS by $5,475 and $82 to reflect the new
water line installation and new meter installation, respectively. During the
test year, the Utility experienced hurricane damage to a shed roof. Staff
increased Account No. 304 by $1,077 and decreased Account No. 320 by $1,077 to
reclassify the shed roof repair to the appropriate account. The
reclassification has no effect on the UPIS balance, but is necessary to
depreciate the repair at the correct depreciation rate. Subsequent to the test
year, the Utility replaced 44 residential water meters due to age. Staff
increased UPIS by $1,930 to reflect the pro forma meter replacements and
decreased UPIS by $1,448 to reflect the associated retirement of the replaced
meters.
In addition,
Pine Harbour requested consideration of one pro forma project in this rate case
to replace the water plant distribution flow meter (flow meter). Based on
communications with the Florida Rural Water Association (FRWA), an error within
five percent is considered acceptable for flow meters. Pine Harbour’s flow
meter was tested on May 23, 2018, by the FRWA, and it was found to be running
erratically with an accuracy of 85.7 percent. Giving consideration to the test
results discussed above, staff considers the meter replacement appropriate.
Based on an
estimate received from the Utility, the cost to replace the flow meter is
$2,370, which includes $2,023 for the meter and $347 for labor. The Utility
also provided a second proposal that quoted a cost of $2,779 for the new flow meter.
Estimating the same labor cost of $347 results in a cost of $3,126.
Accordingly, staff increased UPIS by $2,370 to reflect the pro forma flow meter
replacement and decreased UPIS by $1,778 to reflect the associated retirement
of the replaced flow meter.
At the customer meeting, a customer provided comments
after the conclusion of the meeting concerning the exterior lighting at the water
treatment plant (WTP). The next day both Utility representatives and Commission
staff conducted an onsite review of the WTP. At that time, it was discovered
that although the WTP had existing exterior lighting and a timer, they were
inoperable. The Utility replaced the lighting and timer in early August.
Staff believes that lighting improves security and safety. Also, if Utility
employees needed to make any necessary repairs at night, lights would assist in
the repair work. The exterior lights and timer were inspected and
repaired/replaced by U.S. Water Services Corporation whom the Utility has an
existing agreement with. For the reasons above, staff believes that the
exterior lighting and timer replacement is appropriate. Staff increased UPIS by
$927 to reflect the pro forma lighting and timer replacements and decreased
UPIS by $695 to reflect the associated retirement of the replaced lighting and
timer.
The Utility
also requested recovery to replace the fence at the WTP. The existing fence is
in disrepair and is in need of replacement for security reasons. The Utility
indicated to staff that the existing fence needs to be replaced with a six foot
security fence as soon as possible. Pine Harbour provided two quotes, one from
Fritz Fence for $5,200, and another from Hercules Fence Company for $3,200.
Staff believes that the fence replacement is appropriate and recommends pro
forma cost of $3,200. Given the current state of the fence, staff anticipates
that this repair will take place as soon as possible. Staff increased UPIS by
$3,200 to reflect the pro forma fence replacement and decreased UPIS by $2,400
to reflect the associated retirement of the replaced fence.
Finally,
staff decreased UPIS by $3,230 to reflect an averaging adjustment for additions
made during the test year. Consistent with Commission practice, no averaging
adjustments are applied to pro forma additions. Staff’s adjustments to UPIS
reflect a net increase of $4,434. Therefore, staff recommends a UPIS balance of
$97,455.
Land and Land Rights
The
Commission approved a land balance of $5,000 in the Utility’s 2016 transfer
docket. Audit staff determined that there have been no additions to land since
the transfer; therefore, no adjustments are necessary. Staff recommends a land
and land rights balance of $5,000.
Non-Used and Useful Plant
As discussed
in Issue 2, Pine Harbour’s WTP, storage and water distribution system should be
considered 100 percent U&U. Therefore, a U&U adjustment is not
necessary.
Contribution in Aid of Construction
The Utility
recorded test year CIAC of $62,440. Audit staff determined that no adjustments
are necessary. Staff recommends a CIAC balance of $62,440.
Accumulated Depreciation
The Utility
recorded $70,927 in accumulated depreciation. In order to reflect the
appropriate test year balance as of December 31, 2017, staff calculated
accumulated depreciation using the prescribed rates set forth in Rule
25-30.140, F.A.C. Staff increased accumulated depreciation by $135 to reflect
the appropriate test year balance. In addition, staff recommends adjustments
associated with the pro forma plant projects discussed above. Staff increased
this account by $28 to reflect the incremental increase in accumulated
depreciation associated with the new residential water meters, and decreased
this account by $1,448 to remove the accumulated depreciation associated with
the retired meters. Staff also increased this account by $19 to reflect the
increase in accumulated depreciation associated with the new flow meter, and
decreased this account by $1,778 to remove the accumulated depreciation
associated with the replaced flow meter. Staff increased this account by $9 to
reflect the incremental increase in accumulated depreciation associated with
the new exterior lighting and timer, and decreased this account by $695 to
remove the accumulated depreciation associated with the retired exterior
lighting and timer. Staff increased this account by $30 to reflect the
incremental increase in accumulated depreciation associated with the new WTP
fence and decreased this account by $2,400 to remove the accumulated
depreciation associated with the retired fence. Finally, staff decreased the
test year total accumulated depreciation by $1,102 to reflect an averaging
adjustment. Staff’s adjustments to this account result in a net decrease of
$7,202. Therefore, staff recommends an accumulated depreciation balance of $63,725.
Accumulated Amortization of CIAC
Pine Harbour
recorded an amortization of CIAC balance of $57,037. Staff increased this
account by $7 to reflect the appropriate amortization of CIAC. Staff also
decreased this account by $74 to reflect an averaging adjustment for the test
year. Staff’s adjustment is a net decrease of $67. Therefore, staff recommends
an accumulated amortization of CIAC balance of $56,970.
Working Capital Allowance
Working
capital is defined as the short-term investor-supplied funds that are necessary
to meet operating expenses of the Utility. Consistent with Rule 25-30.433(2),
F.A.C., staff used the one-eighth of the operation and maintenance (O&M)
expense formula approach for calculating the working capital allowance. Staff
also removed the unamortized balance of rate case expense of $269 pursuant to
Section 367.081(9), F.S.
Applying this formula, staff recommends a working capital allowance of $3,355
($26,844/8), based on the adjusted O&M expense of $26,844 ($27,113 - $269).
Rate Base Summary
Based on the foregoing, staff recommends that the
appropriate average test year rate base is $36,616. Rate base is shown on
Schedule No. 1-A. The related adjustments are shown on Schedule No. 1-B.
Issue 4:
What is the appropriate rate of return on equity and
overall rate of return for Pine Harbour?
Recommendation:
The appropriate return on equity (ROE) is 8.11
percent with a range of 7.11 percent to 9.11 percent. The appropriate overall
rate of return is 8.10 percent. (Golden, Wilson)
Staff Analysis:
Pine
Harbour’s capital structure consists of $33,018 in common equity and $56 in
customer deposits. Audit staff verified that the Utility has no debt, and that
no adjustments are necessary.
The Utility’s capital structure has been reconciled with
staff’s recommended rate base. The appropriate ROE is 8.11 percent based upon
the Commission-approved leverage formula currently in effect.[10] Staff
recommends an ROE of 8.11 percent, with a range of 7.11 percent to 9.11 percent,
and an overall rate of return of 8.10 percent. The ROE and overall rate of
return are shown on Schedule No. 2.
Issue 5:
What are the appropriate test year revenues for Pine
Harbour?
Recommendation:
The appropriate test year revenues for Pine Harbour
are $23,887. (Friedrich)
Staff Analysis:
Pine Harbour recorded total test year revenues of $23,286.
The Utility’s test year revenues included $22,418 of service revenues and $868
of miscellaneous revenues. Based on staff’s review of the Utility’s billing
determinants and the service rates that were in effect during the test year,
staff determined test year service revenues should be $23,019. This results in
an increase of $601 ($23,019 - $22,418) to service revenues. This adjustment to
service revenues is due to a timing difference between the billing register and
the general ledger. Based on staff’s review of the number of miscellaneous
service occurrences during the test year and the Utility’s approved
miscellaneous service charges, staff agrees with the Utility’s recorded
miscellaneous revenues of $868. Based on the above, the appropriate test year
revenues for Pine Harbour are $23,887 ($23,019 + $868).
Issue 6:
What is the appropriate amount of operating expense?
Recommendation:
The appropriate amount of operating expense for the
Utility is $31,327. (Golden, Wilson)
Staff Analysis:
Pine
Harbour recorded operating expense of $26,383 for the test year ended December
31, 2017. The test year O&M expenses have been reviewed, including
invoices, canceled checks, and other supporting documentation. Staff has made
several adjustments to the Utility's operating expenses as summarized below.
Operation and Maintenance Expenses
Salaries and
Wages - Officers (603)
The Utility recorded $3,200 in this account for the test year to
reflect the president's monthly salary of $267. According to the Utility's 2017
Annual Report, Pine Harbour's officers also include a vice-president who does
not receive a salary. In addition, the Utility indicated in audit work papers
that the president only receives compensation through distribution of retained
earnings if there are any net operating profits from operations that are not
used for continuing operations or capital improvements. While staff compared
the amount to Pine Harbour’s sister utilities and found it to be below the average,
staff believes it is appropriate to reduce salaries by $200.
Sister utility Country Walk Utilities, Inc. (Country Walk), which serves
70 residential customers and one general service water customer and has a more
complicated system, reflected salaries of $3,000. Pine Harbour serves 62
residential and 2 general service water customers. As such, staff recommends
salaries and wages - officers expense for the test year of $3,000.
Purchased Power (615)
The Utility recorded purchased power expense of $939. As
discussed in Issue 2, staff recommended an EUW adjustment of 10.1 percent.
Therefore, staff decreased this account by $95 ($939 x .101 = $95) to reflect a
10.1 percent EUW adjustment. Staff recommends purchased power expense of
$844 ($939 - $95).
Chemicals
(618)
The Utility recorded chemicals expense of $540. As
discussed in Issue 2, staff recommended an EUW adjustment of 10.1 percent.
Therefore, staff decreased this account by $55 ($540 x .101 = $55) to reflect a
10.1 percent EUW adjustment. Staff recommends chemicals expense for the
test year of $485 ($540 - $55).
Contractual Services – Professional
(631)
The Utility recorded contractual
services – professional expense of $1,395, which was comprised of $350 for
accounting and $1,045 for various legal fees. Supporting documentation
confirming the accounting expense was used for corporate tax preparation was
provided. Staff made no adjustments to accounting expense. The Utility also
provided support documentation related to legal expenses which reflected $300
for an annual corporate maintenance fee, $230 related to the annual report
filing and associated fees, and $515 for work related to shareholder
agreements. Staff believes that a portion of
the test year legal fees related to shareholder activities represents
non-recurring expenses that should be amortized. This reflects a similar
adjustment which was made in a sister utility rate case in 2017.
As such, staff decreased this account by $412 ($515 - $103) to reflect the
five-year amortization of the non-recurring legal fees. Staff recommends contractual
services – professional expense for the test year of $983 ($1,395 - $412).
Contractual
Services - Other (636)
The Utility recorded $15,367 in this account. Pine Harbour
receives all of its operational and administrative services under a contract
with an affiliated company, U.S. Water Services Corporation (USWSC). In its
filing, the Utility advised staff of changes to the USWSC contract effective
October 1, 2017, that increased the costs charged to the Utility. The revised
USWSC contract takes into consideration similar USWSC agreements approved in
prior cases involving seven of Pine Harbour’s “sister” utilities during nine
rate case proceedings.[13] Two sister utilities, LP Waterworks, Inc. and Lakeside Waterworks,
Inc., have each had two SARCs in which the Commission reviewed and approved
expenses related to the USWSC management services contract. The
Utility’s test year expenses include nine months at the prior fee and three
months at the revised fee. Staff believes it is appropriate to reflect the
current contract fees in the revenue requirement. Therefore, staff increased
this account by $4,356 to annualize this expense to reflect the current monthly
service fee. Staff recommends contractual services – other expense for the test
year of $19,723.
Staff notes that there are
significant changes between the current USWSC contract, and the contract as revised
on October 1, 2013. The 2017-revised contract removes the addition of 1,000
potential equivalent residential connections (ERC) that were included in the
2013 contract for a growth allowance that is no longer expected to occur.
Actual costs for fuel and maintenance utilized in 2016 are included in the
management and administrative portion of the 2017-revised contract. Also
included in the 2017-revised contract are the allocated costs for in-house
customer service and billing as well as necessary operator and maintenance
technician positions previously excluded from the 2013 contract. According to
USWSC, the 2013 contract did not reflect the full actual cost for other
services incurred such as inspections required by DEP or calibrating the water
well meter. The 2017 contract adjusted these costs to reflect the actual costs
incurred by the Utility.
In order to analyze the
reasonableness of the USWSC service contract, staff compared the total O&M
costs recommended in the instant case with the Commission-approved O&M
amounts for the similarly sized sister utilities, Lake Idlewild and Charlie
Creek.[14] Staff
indexed the amounts from those cases using the Commission-approved index
factors.[15] This
analysis resulted in O&M per ERC of $418 for Lake Idlewild and $454 for
Charlie Creek. With staff’s recommended
adjustment to contractual services – other, O&M expense in the
instant case equates to $427 per ERC. Based on this analysis, staff believes
the revised USWSC service contract amount is reasonable.
Insurance
Expense (655)
The Utility recorded $1,112 in this account for test year
insurance expense. Pine Harbour’s actual test year insurance expense was
$1,112, therefore, no adjustments are necessary. The Utility provided
documentation supporting this amount.
As such, staff recommends insurance expense for the test year of $1,112.
Regulatory Commission Expense (665)
The Utility
did not record any regulatory commission expense in this account. Rule
25-30.433(8), F.A.C., requires that non-recurring expenses be amortized over a five-year
period unless a shorter or longer period of time can be justified. Accordingly,
staff increased this account
by $150 ($750/5) to reflect the five-year amortization of the 2016 certificate
transfer application filing fee. The remaining unamortized portion of the
filing fee should be recorded in Account No. 186 – Miscellaneous Deferred
Debits.
Regarding
the instant case, the Utility is required by Rule 25-22.0407, F.A.C., to
provide notices of the customer meeting and notices of final rates in this case
to its customers. For noticing, staff estimated $96 for postage expense, $57
for printing expense, and $10 for envelopes. This results in $163 for the
noticing requirement. The Utility also paid a $500 rate case filing fee.
The Utility requested travel and
lodging expense of $250 to attend the customer meeting and $250 to attend the Commission
conference. Staff adjusted those amounts based on actual mileage and hotel
receipts. Staff further adjusted these amounts in order to share them with
Country Walk. Country Walk is a sister utility of Pine Harbour that had its
customer meeting the day before Pine Harbour’s, and is scheduled to be on the
same Commission Conference. Based on these adjustments, staff is recommending
$238 to attend the customer meeting and $175 to attend the Commission Conference.
As such, staff recommends travel expense of $413 ($238 + $175). Staff notes
that the Commission previously approved rate case related travel expenses
ranging from $450 to $1,570 in the seven most recent dockets for Pine Harbour’s
sister utilities. Based on staff’s review, the requested travel expense appears
reasonable.
Based on the information above, staff recommends total
rate case expense of $1,077 ($163 + $500 + $413), which amortized over four
years is $269. Staff’s total adjustment to this account is an increase of $419
($150 + $269). Therefore, staff recommends regulatory commission expense of
$419.
Bad Debt Expense
(670)
The Utility recorded $217 in this account for test year bad debt
expense, which equals 0.91 percent of the test year revenues or 0.63 percent of
staff's recommended revenue requirement.
While current Commission practice is to calculate bad debt expense using
a three-year average, three years of records are not yet available for the
current owners. Generally, the basis for determining bad debt expense has been
whether the amount is representative of the bad debt expense to be incurred by
the Utility. As such, staff believes the Utility's recorded bad debt expense is
reasonable and is likely to be representative of the Utility's expected bad
debt expense going forward. Therefore, staff recommends bad debt expense for
the test year of $217.
Miscellaneous
Expense (675)
The Utility recorded $116 for miscellaneous expense. In response
to a staff data request, the Utility provided documentation related to
non-recurring ground storage tank repairs that took place in May 2018.
Staff believes that these repairs were necessary to ensure the quality of the
water the Utility provides to its customers is maintained. Rule
25-30.433(9), F.A.C., requires that non-recurring expenses be amortized over a
five-year period unless a shorter or longer period of time can be justified.
Accordingly, staff increased
this account by $213 ($1,065/5) to reflect the five-year amortization of the ground
storage tank repair expense.
As such, staff recommends miscellaneous expense of $329 ($116 +
$213) for the test year.
Operation and Maintenance Expense (O&M Summary)
Based on the
above adjustments, O&M expense should be increased by $4,227, resulting in
total O&M expense of $27,113. Staff’s recommended adjustments to O&M
expense are shown on Schedule Nos. 3-A, 3-B, and 3-C.
Depreciation Expense (Net of Amortization of CIAC)
The
Utility’s records reflect test year depreciation of $2,113 and CIAC
amortization of $133, for a net depreciation expense of $1,980 ($2,113 - $133).
Staff calculated depreciation expense using the prescribed rates set forth in
Rule 25-30.140, F.A.C., and
determined test year depreciation expense to be $2,237, resulting in an
increase to this account of $124. Staff also increased this account by $340 to
reflect the incremental increases in depreciation expense related to
several pro forma projects, and
decreased this account by $256 to reflect the associated retirements. These
projects were previously discussed in Issue 3 and the related adjustments to
depreciation expense are summarized in Table 6-1 below.
Pro Forma Depreciation
Expense
Table 6-1
|
Pro Forma Project
|
Depreciation Expense
(Addition)
|
Depreciation Expense
(Retirement)
|
|
Meter Replacement
|
$114
|
($85)
|
|
Well Meter
|
74
|
(56)
|
|
Exterior Lighting/Timer
|
34
|
(26)
|
|
WTP Fence
|
118
|
(89)
|
|
Total
|
$340
|
($256)
|
Staff’s total adjustment to
depreciation expense is a net increase of $208 ($124 + $340 - $256). In
addition, staff calculated test year CIAC amortization expense of $149.
Accordingly, staff decreased this account by $16 ($133 - $149). This
results in a net depreciation expense of $2,173 ($1,980 + $208 - $16).
Therefore, staff recommends net depreciation expense of $2,173.
Taxes Other Than Income (TOTI)
Pine Harbour
recorded TOTI of $1,517 for the test year. The Utility recorded $1,048 for regulatory assessment fees (RAFs). Based
on staff’s recommended test year revenues of $23,887, the Utility’s RAFs should
be $1,075. Therefore, staff increased this account by $27 to reflect the
appropriate RAFs. Also, the Utility recorded property tax accruals of $469 during
the test year. Staff increased this account by $29 to reflect the incremental
increase in property taxes associated with the pro forma projects discussed in
Issue 3. Therefore, staff’s total adjustment to test year TOTI is an increase
of $56 ($27 + $29).
In addition,
as discussed in Issue 7, revenues have been increased by $10,405 to reflect the
change in revenue required to cover expenses and allow the opportunity to earn the
recommended rate of return. As a result, TOTI should be increased by $468 to reflect
RAFs of 4.5 percent of the change in revenues. Therefore, staff recommends TOTI
of $2,041.
Operating Expenses Summary
The application of staff’s recommended adjustments to Pine
Harbour’s test year operating expenses result in operating expenses of $31,327.
Operating expenses are shown on Schedule No. 3-A. The adjustments are shown on
Schedule No. 3-B.
Issue 7:
What is the appropriate revenue requirement?
Recommendation:
The appropriate revenue requirement is $34,292,
resulting in an annual increase of $10,405 (43.56 percent). (Golden, Wilson)
Staff Analysis:
Pine Harbour should be
allowed an annual increase of $10,405 (43.56 percent). This will allow the
Utility the opportunity to recover its expenses and earn an 8.10 percent return
on its investment. The calculations are as follows in Table 7-1 below:
Table 7-1
Water Revenue
Requirement
|
Adjusted Rate Base
|
|
$36,616
|
|
Rate of Return
|
|
x 8.10%
|
|
Return on Rate Base
|
|
$2,966
|
|
Adjusted O&M Expense
|
|
27,113
|
|
Depreciation Expense (Net)
|
|
2,173
|
|
Taxes Other Than Income
|
|
2,041
|
|
Income Taxes
|
|
0
|
|
Revenue Requirement
|
|
$34,292
|
|
Less Adjusted Test Year Revenues
|
|
23,887
|
|
Annual Increase
|
|
$10,405
|
|
Percent Increase
|
|
43.56%
|
Issue 8:
What are the appropriate rate structure and rates
for Pine Harbour?
Recommendation:
The recommended rate structure and monthly water
rates are 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. (Friedrich)
Staff Analysis:
Pine
Harbour is located in Lake County within the SJRWMD and provides water service
to approximately 62 residential and 2 general service customers. Approximately 5.23
percent of the residential monthly customer bills during the test year had zero
gallons indicating a non-seasonal customer base. The average residential water
demand is 5,608 gallons per month. The Utility’s current water system rate
structure for residential customers consists of a base facility charge (BFC)
based on meter size and a gallonage charge of $2.17 per 1,000 gallons. The Utility
currently does not have any general service rates and has been charging its two
general service customers its Commission-approved rates for residential
service.
Staff performed an analysis of
the Utility’s billing data in order to evaluate the appropriate rate structure
for the residential water customers. The goal of the evaluation was to select
the rate design parameters that: (1) produce the recommended revenue
requirement; (2) equitably distribute cost recovery among the Utility’s
customers; (3) establish the appropriate non-discretionary usage threshold for
restricting repression; and (4) implement, where appropriate, water conserving
rate structures consistent with Commission practice.
In order to design gallonage
charges that will send the appropriate pricing signals to target
non-discretionary usage, staff believes 43 percent of the revenue requirement
should be recovered through the BFC to reflect the non-seasonal customer base
and avoid a reduction to the current BFC. The average number of people per
household served by the water system is 2.5; therefore, based on the number of
persons per household, 50 gallons per day per person, and the number of days
per month, the non-discretionary usage threshold should be 4,000 gallons per
month. Staff recommends a BFC and a two-tier gallonage charge rate structure
for residential customers. The rate tiers should be: (1) 0-4,000 gallons and
(2) all usage in excess of 4,000 gallons per month. Staff believes that
transitioning the Utility from a uniform gallonage charge to a two-tier
gallonage rate structure for residential customers will encourage water
conservation and mitigate the impact of the recommended revenue requirement
increase for customers using 4,000 gallons of water or less per month. Further,
staff recommends a BFC and uniform gallonage charge rate structure for general
service customers as shown in Schedule No. 4.
Based on the recommended revenue
increase of approximately 43.56 percent, the residential consumption can be
expected to decline by 681,000 gallons resulting in anticipated average
residential demand of 4,717 gallons per month. Staff recommends a 15.9 percent
reduction in total test year residential gallons for rate setting purposes and
corresponding reductions of $133 for purchased power, $77 for chemicals, and
$10 for RAFs to reflect anticipated repression. These adjustments result in a
post repression revenue requirement of $33,204. As
shown in Table 8-1, in comparison to staff’s recommended rate structure and
rates, Alternative I decreases the Utility’s current BFC, reducing the Utility’s
fixed revenues generated from rates, but does not reflect the appropriate
non-discretionary threshold. Alternative II sends less of a pricing signal for
targeting discretionary usage.
Table 8-1
Staff’s Recommended and
Alternative Water Rate Structures and Rates
|
|
|
STAFF
|
|
|
|
RATES AT
|
RECOMMENDED
|
ALTERNATIVE
|
ALTERNATIVE
|
|
TIME OF
|
RATES
|
I
|
II
|
|
|
FILING
|
(43% BFC)
|
(40% BFC)
|
(50% BFC)
|
|
Residential
|
|
5/8” x
3/4” Meter Size
|
$17.28
|
$17.78
|
$16.54
|
$20.70
|
|
|
|
|
|
|
|
Charge per
1,000 gallons
|
$2.17
|
|
|
|
|
|
|
|
|
|
|
0-4,000 gallons
|
|
$4.42
|
|
$3.88
|
|
Over 4,000 gallons
|
|
$6.40
|
|
$5.26
|
|
|
|
|
|
|
|
0-5,000 gallons
|
|
|
$4.65
|
|
|
Over 5,000 gallons
|
|
|
$7.21
|
|
|
|
|
|
|
|
|
Typical
Residential 5/8" x 3/4" Meter Bill Comparison
|
|
4,000 Gallons
|
$25.96
|
$35.46
|
$35.14
|
$36.22
|
|
6,000 Gallons
|
$30.30
|
$48.26
|
$47.00
|
$46.74
|
|
8,000 Gallons
|
$34.64
|
$61.06
|
$61.42
|
$57.26
|
Based on the above, the recommended rate structure and
monthly water rates are 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 9:
What are the appropriate initial customer deposits
for Pine Harbour?
Recommendation:
The appropriate initial customer deposit is $80 for the residential 5/8” x 3/4" meter size. The
initial customer deposit for all other residential meter sizes and all general service
meter sizes should be two times the average estimated bill. The approved
initial customer deposits should be effective for service rendered or connections
made on or after the stamped approval date on the tariff sheets pursuant to
Rule 25-30.475, F.A.C. The Utility should be required to collect the approved
initial customer deposits until authorized to change them by the Commission in
a subsequent proceeding. (Friedrich)
Staff Analysis:
Rule 25-30.311, F.A.C., provides
the criteria for collecting, administering, and refunding customer deposits.
Customer deposits are designed to minimize the exposure of bad debt expense for
the utility and, ultimately, the general body of ratepayers. An initial
customer deposit ensures that the cost of providing service is recovered from
the cost causer. Historically, the Commission has set initial customer deposits
equal to two times the average estimated bill.
Currently, the Utility has an initial customer deposit of $56. However, this
amount does not cover two months’ average bills based on staff’s recommended
rates. The post-repression average monthly residential usage is approximately
4,703 gallons per customer. Therefore, the average residential monthly bill
based on staff’s recommended rates is approximately $40.25.
Staff recommends the appropriate initial customer deposits
should be $80 for the residential 5/8 inch x 3/4 inch meter size. The initial
customer deposits for all other residential meter sizes and all general service
meter sizes should be two times the average estimated monthly bill. The
approved initial customer deposits should be effective for service rendered or connections
made on or after the stamped approval date on the tariff sheets pursuant to
Rule 25-30.475, F.A.C. The Utility should be required to collect the approved
deposits until authorized to change them by the Commission in a subsequent
proceeding.
Issue 10:
What is the appropriate amount by which rates should
be reduced four years after the published effective date to reflect the removal
of the amortized rate case expense?
Recommendation:
The water 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 Pine Harbour 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. (Friedrich, Golden, Wilson)
(Final Agency Action)
Staff Analysis:
Pine Harbour’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, pursuant to Section 367.081(8), F.S. The reduction will reflect the
removal of revenues associated with the amortization of rate case expense and
the gross-up for RAFs which is $282 for water. 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.
Pine Harbour 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 Pine Harbour 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 11:
Should the recommended rates be approved for Pine
Harbour 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 Office of
Commission Clerk no later than the 20th of every month indicating the monthly
and total amount of money subject to refund at the end of the preceding month.
The report filed should also indicate the status of the security being used to
guarantee repayment of any potential refund. (Golden, Wilson) (Final Agency
Action)
Staff Analysis:
This recommendation proposes an increase in rates. A
timely protest might delay what may be a justified rate increase resulting in
an unrecoverable loss of revenue to the Utility. Therefore, pursuant to Section
367.0814(7), F.S., in the event of a protest filed by a party other than the
Utility, staff recommends that the recommended rates be approved as temporary
rates. The Utility should file revised tariff sheets and a proposed customer
notice to reflect the Commission-approved rates. The approved rates should be
effective for service rendered on or after the stamped approval date on the
tariff sheet, pursuant to Rule 25-30.475(1), F.A.C. In addition, the temporary
rates should not be implemented until staff has approved the proposed notice,
and the notice has been received by the customers. The recommended rates
collected by the Utility should be subject to the refund provisions discussed
below.
The Utility should be authorized to collect the temporary
rates upon staff’s approval of an appropriate security for the potential refund
and the proposed customer notice. Security should be in the form of a bond or
letter of credit in the amount of $7,028. 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 Office of Commission Clerk 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 12:
Should Pine Harbour be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision?
Recommendation:
Yes. The Utility should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission's decision. Pine Harbour should submit a letter within 90 days of
the final order in this docket, confirming that the adjustments to all the
applicable National Association of Regulatory Commissioners (NARUC) Uniform
System of Accounts (USOA) primary accounts as shown on Schedule No. 5 have been
made to the Utility’s books and records. In the event the Utility needs
additional time to complete the adjustments, notice should be provided within
seven days prior to the deadline. Upon providing good cause, staff should be
given administrative authority to grant an extension of up to 60 days. (Golden,
Wilson) (Final Agency Action)
Staff Analysis:
The Utility should be required to notify the
Commission, in writing that it has adjusted its books in accordance with the
Commission's decision. Schedule No. 5 reflects the accumulated plant,
depreciation, CIAC, and amortization of CIAC balances as of December 31, 2017.
Pine Harbour should submit a letter within 90 days of the final order in this
docket, confirming that the adjustments to all the applicable NARUC USOA
primary accounts, as shown on Schedule No. 5, have been made to the Utility’s
books and records. In the event the Utility needs additional time to complete
the adjustments, notice should be provided within seven days prior to the
deadline. Upon providing good cause, staff should be given administrative
authority to grant an extension of up to 60 days.
Issue 13:
Should this docket be closed?
Recommendation:
No. If no person whose substantial
interests are affected by the proposed agency action files a protest within 21
days of the issuance of the order, a consummating order should be issued. The
docket should remain open for staff’s verification that the revised tariff
sheets and customer notice have been filed by the Utility and approved by
staff, and the Utility has submitted a letter to staff confirming that the
adjustments to all the applicable NARUC USOA primary accounts as shown on
Schedule No. 5 have been made to the Utility’s books and records.
Once these actions are complete, this docket should be closed administratively.
(DuVal)
Staff Analysis:
If no person whose substantial interests
are affected by the proposed agency action files a protest within 21 days of
the issuance of the order, a consummating order should be issued. The docket
should remain open for staff’s verification that the revised tariff sheets and
customer notice have been filed by the Utility and approved by staff, and the Utility
has submitted a letter to staff confirming that the adjustments to all
the applicable NARUC USOA primary accounts as shown on Schedule No. 5 have been
made to the Utility’s books and records. Once these actions are complete,
this docket should be closed administratively.
