Discussion
of Issues
Issue 1:
Should the Commission approve the utility's request
for a limited proceeding?
Recommendation:
The Commission should approve the utility's request
for a limited proceeding rate increase as modified by staff. Orchid Springs
should be allowed an annual increase of $7,822 (8.35 percent) for water,
resulting in an adjusted revenue requirement of $101,489. For wastewater, the
utility should be allowed an annual increase of $23,837 (11.73 percent),
resulting in an adjusted revenue requirement of $227,066. The adjusted revenue
requirements are reflected on Schedule Nos. 3-A and 3-B. (Brown, Lewis, Wilson)
Staff Analysis:
Limited
proceedings generally address specific or significant changes that would
adversely affect the normal operating income of the utility and are usually
narrow in scope.
Staff believes that Orchid Springs’ case as filed is sufficiently narrow
in scope to qualify for a limited proceeding. Staff also believes that Orchid
Springs has met all the minimum filing requirements as set forth in Rule
25-30.445, Florida Administrative Code (F.A.C.).
Secondary
Water Quality Standards
Pursuant to Rule 25-30.445(4)(o), F.A.C., utilities are
required to provide a copy of all customer complaints that it received
regarding Florida Department of Environmental Protection (DEP) secondary water
quality standards during the past five years as well as a copy of the utility’s
most recent secondary water quality standards test results. The utility did not
receive any customer complaints regarding DEP secondary water quality standards
during the past five years. Additionally, documentation provided by Orchid
Springs indicates that the utility is currently passing secondary standards.
Staff also reviewed complaints
received by the Commission for the period January 1, 2013 through November 28,
2018. For the stated period, the Commission received three customer complaints.
None of the complaints received by the Commission addressed the quality
of Orchid Springs’ product.
A customer meeting was held June 19,
2018, in Winter Haven, Florida. At the customer meeting, a total of nine
customers spoke. Three of the customers expressed displeasure with the taste or
smell of the water. Other concerns raised at the meeting addressed the
requested rate increase. As of November 28, 2018, four customers filed written
comments in this docket. All four customers expressed concern with the rate
increase. One of the four comments additionally addressed a billing concern as
well as an odor, present during a time when the utility was working in the
area, that lasted less than two hours.
As previously discussed, Orchid Springs
has provided the necessary information to comply with Rule 25-30.445(4)(o), F.A.C. Based on review of
the information provided by the utility, as well as additional information
gathered throughout the course of this docket, staff does not believe any actions
need to be taken with respect to secondary standards. Staff additionally notes,
the overall quality of service for the Orchid Springs’ water system was
considered satisfactory in the utility’s last rate case. Because this review is
part of a limited proceeding, staff would likely recommend initiating a
subsequent proceeding, i.e., a show cause proceeding, if further action was
warranted.
Rate Base
Since its last SARC, the utility made several capital
improvements to its water and wastewater systems and requested that they be
included in rate base as part of this proceeding. The appropriate plant
additions, as well as corresponding adjustments to accumulated depreciation,
depreciation expense, and taxes other than income (TOTI) are reflected below. The
staff-recommended additions to plant are supported by invoices for the
completed work. In addition, as a result of recommended changes to operating
expense, the utility’s working capital allowance should also be updated.
Plant Additions
In its initial filing, Orchid
Springs requested consideration of several capital additions to its water and
wastewater systems. In response to a staff data request, the utility stated
that both the water and wastewater systems are 49 years old and are in need of
repairs and refurbishment. Concerns regarding the age of Orchid Springs’
systems and the need for frequent repairs was recognized by the Commission in
the 2014 SARC. Based on information provided by the utility, the items
requested in this proceeding address equipment that either failed or was in
need of replacement due to age.
In total, the utility is
requesting an increase of $32,531 for water system additions and $16,723 for
wastewater system additions. Staff reviewed Orchid Springs’ filing, utility
responses to data requests, and the 2014 SARC order and
recommends that several adjustments to the utility’s requested capital
additions are necessary. Table 1-1 summarizes the plant additions
requested by the utility and the amount staff recommends be allowed for cost
recovery in this proceeding.
Table 1-1
Summary of Requested and
Recommended Plant Additions
|
Project Name
|
Amount Requested
|
Amount Recommended
|
|
Water:
|
|
|
|
Water Meter Replacement
|
$13,097
|
$8,209
|
|
Flow Meter Replacement
|
3,926
|
3,926
|
|
Fire Hydrant Replacement
|
4,975
|
4,975
|
|
Well Pump Replacement
|
10,533
|
10,533
|
|
Total Water
|
$32,531
|
$27,643
|
|
Wastewater:
|
|
|
|
Lift Station Pump Repair
|
$4,980
|
$4,980
|
|
Manhole Renovation
|
10,843
|
805
|
|
Engineering for Collection System
|
900
|
0
|
|
Total Wastewater
|
$16,723
|
$5,785
|
|
Total Water and Wastewater
|
$49,254
|
$33,428
|
Only the lift station pump repair contains a retirement.
The adjustment for the retirement is reflected in Schedule No. 1-C. Based on
the plant additions described above, staff believes the following corresponding
adjustments should also be made.
Table 1-2
Corresponding Adjustments
|
System
|
Accum. Dep.
|
Dep. Expense
|
TOTI
|
|
Water
|
($1,458)
|
$1,458
|
$498
|
|
Wastewater
|
$3,620
|
$115
|
$37
|
Staff’s adjustments to accumulated depreciation are shown
in Schedule No. 1-C, while adjustments for depreciation expense and TOTI are
reflected in Schedule No. 3-C.
As previously stated, staff’s
review considered the utility’s 2014 SARC. In the 2014 SARC, the utility requested
and was granted recovery of $69,170 for wastewater pro forma plant. Of the
$69,170, approximately $10,000 was for miscellaneous repairs that occurred in
the first five months of 2015. With respect to the miscellaneous repairs,
Commission Order No. PSC-15-0569-PAA-WS, specifically states:
All of the work
included in this category was performed in the first five months of 2015, and
included manhole repairs, parts for lift stations, stump removal and
backfilling, and repairs to wastewater collection lines.
Thus, staff believes that
wastewater costs that were incurred within the first five months of 2015 should
not be recovered in this proceeding. Excluding recovery of these costs prevents
the potential allowance of costs already being recovered by the utility.
Disallowance of these costs is reflected in staff’s recommended amount for the
Engineering for Collection System and the Manhole Renovation projects. For the
remaining items, staff’s recommended amount is based on invoices provided by
the utility. Staff notes that the summation of the actual invoice amounts for
the meter replacements was less than the amount requested by the utility.
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(3), 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 recommended several
adjustments to O&M expense which result in increases to O&M expenses of
$5,235 for water and $21,262 for wastewater. These adjustments are discussed in
the “Operating Expense” section of this recommendation. Staff also removed the
unamortized balance of rate case expense pursuant to Section 367.081(9), F.S.[3] Applying
the formula, staff recommends a working capital allowance of $9,526 ($76,211/8)
for water, based on the adjusted O&M expense of $76,211 ($80,059 - $3,848).
Further, staff recommends a working capital allowance of $23,132 ($185,059/8)
for wastewater, based on the adjusted O&M expense of $185,059 ($188,501 -
$3,442). These amounts represent incremental increases of $173 for water and
$2,227 for wastewater.
Rate Base Summary
Based on the foregoing, staff recommends that the
appropriate rate base is $61,055 for water and $118,837 for wastewater. Rate
base is shown on Schedule Nos. 1-A and 1-B. The related adjustments are shown
on Schedule No. 1-C.
Rate of Return
The capital structure used to determine the cost of
capital in this docket is consistent with the capital structure used in the
utility’s last rate case. Rule 25-30.445(4)(e), F.A.C., requires that the weighted
average cost of capital be calculated based on the most recent 12-month period
and include all of the appropriate capital structure components. Staff used the
equity cost rate of 9.38 percent from the utility’s last rate case as well as
the minimum 2.00 percent cost rate for customer deposits pursuant to Rule
25-30.311(4)(a), F.A.C. Staff notes that the utility’s 2017 Annual Report
reflects negative retained earnings of $492,629. Staff reviewed the conditions
during the utility’s last rate case and identified the existence of negative
retained earnings in that docket. In that docket, staff removed negative
retained earnings from its calculations. Consistent with the utility’s last
rate case, staff has removed that amount for purposes of calculating the
utility’s rate of return. Staff anticipates that in subsequent rate cases, the
appropriateness of including any negative retained earnings and netting this
amount against the utility’s other equity components will be addressed.
The utility’s capital structure has been reconciled with
staff’s recommended rate bases. Staff recommends a return on equity (ROE) of
9.38 percent, with a range of 8.38 percent to 10.38 percent, and an overall
rate of return of 8.03 percent. The ROE and overall rate of return are shown on
Schedule No. 2.
Operating Expense
Orchid Springs requested that the
Commission approve increased operating expenses related to land maintenance, purchased
wastewater treatment, purchased emergency water, and salaries. The utility also
requested recovery of rate case expense. Staff has addressed each of the
utility’s requests below. Staff has also included corresponding adjustments to
depreciation expense and TOTI based on the plant additions recommended in “Rate
Base.” The corresponding adjustments are reflected in Schedule No. 3-C.
Land Maintenance
In its application, Orchid
Springs included a request for the recovery of $6,000 per year ($500 per month)
associated with maintenance of land occupied by the utility’s decommissioned
wastewater plant. The utility currently pays $6,000 per year for 12 months of
land maintenance. The utility is required to maintain the land per county
Ordinance No. 08-047 and Section 223 of the Polk County Land Development Code.
The utility indicated that it is unable to sell the land in its current
condition. In order to sell the land, rehabilitation costs would be incurred.
The utility asserts that those rehabilitation costs would exceed the land’s
potential value.[4]
In response to a staff data
request, the utility provided a bid from Prince & Sons, Inc. to illustrate
the reasonableness of the $6,000 being requested.[5]
The bid reflects yearly maintenance expense of $15,000 ($1,500/month x 10
months). While staff believes it is appropriate for the utility to recover the
costs associated with maintaining this land with its current provider, it does
not agree with the frequency of the maintenance. A review of the utility’s test
year ledger revealed that the utility paid for eleven months of land maintenance
in 2017 and, during the first six months of 2018, paid for five months. In
addition, the Prince & Sons, Inc. bid reflected that land maintenance would
occur only ten times during the year. As such, staff believes that the land
maintenance expense should occur ten times throughout the year. Accordingly,
staff recommends land maintenance expense of $5,000 ($500/month x 10 months),
which is reflected in wastewater Account No. 763 (Repairs and Maintenance).
Purchased Wastewater Treatment Service
The utility purchases wastewater treatment service from
the City of Winter Haven. In the utility’s prior SARC, $117,987 was included
for purchased wastewater expense during the test year. According to the
utility, the City of Winter Haven’s wastewater treatment rates are typically
adjusted in October, but the Commission did not adjust test year expenses for
the 2015 known change. Purchased wastewater treatment costs for 2015 were
$130,975, as reflected in the utility’s annual report. While the utility has
filed its index and pass-through rate adjustments in 2016 and 2017, the utility
asserts the adjustment in bulk rates must be addressed here. Staff notes that
the utility’s annual reports reflect purchased wastewater treatment expense of
$142,226 in 2016 and $141,989 in 2017. As such, the utility argued that it
continues to experience a substantial shortfall on recovery of purchased
wastewater treatment costs and requested additional wastewater treatment
service expense of $17,976. The utility’s calculations are shown in Table 1-3.
Table 1-3
Requested Purchased Wastewater
Treatment Adjustment
|
Approved
in last rate case
|
$117,987
|
|
Add: 2016 Pass-Through
|
$3,648
|
|
2017
Pass-Through
|
$2,378
|
|
Total
|
$124,013
|
|
Expense (2017 Annual Report)
|
$141,989
|
|
Utility's requested adjustment
|
$17,976
|
While
staff believes an adjustment to purchased wastewater treatment service should
be made, staff disagrees with the utility’s calculation. Staff reviewed the
utility’s SARC increases as well as City of Winter Haven billing for 2017.
Staff calculated the utility’s 2017 purchased wastewater treatment expense as
$137,778 using 2017 actual billing. As such, staff believes purchased wastewater treatment expense from
the last rate case should be increased by $13,765 as reflected in Table 1-4
below.
Table 1-4
Recommended Purchased Wastewater
Treatment Adjustment
|
Approved
in last rate case
|
$117,987
|
|
Add: 2016 Pass-Through
|
$3,648
|
|
2017
Pass-Through
|
$2,378
|
|
Total
|
$124,013
|
|
Expense (Actual 2017)
|
$137,778
|
|
Staff's recommended adjustment
|
$13,765
|
Purchased
Emergency Water
The utility operates a water plant with one well and has
an interconnect with the City of Winter Haven to provide backup water supply as
needed. The utility initially requested recovery of purchased water cost when
it became necessary to operate the interconnection during the failure of the
well pump in 2017. The City of Winter Haven, the contract operator of the water
and wastewater systems, was able to order a new pump and ultimately replace it.
According to the utility, the well was out of service during August and
September 2017, during which time approximately 1,602,506 gallons of water was
purchased at a cost of $9,373.
In response to a staff data request, the utility noted two additional events during the first half
of 2018 when the utility was required to purchase water from the City of Winter
Haven through the emergency interconnect for a few days in January and in June.
On January 20, 2018, the well was required to be taken offline to repair a
damaged pressure switch. The switch was repaired and placed back in service on
January 24, 2018. The utility was required to purchase 407,000 gallons of
water, at a cost of $2,463, during this period to allow for the repair. On June
2, 2018, there was an electrical issue which burned up a starter and required
that the well be taken offline. This was repaired and placed back in service on
June 5, 2018. The utility was required to purchase 321,000 gallons of water, at
a cost of $1,937, during this period to allow for the repair. As such, the
utility has requested recovery of purchased water expense of $13,773. The utility
used a 5-year amortization period, resulting in purchased water expense
of $2,755 as shown in Table 1-5.
Table 1-5
Requested Purchased Emergency Water
Adjustment
|
Date
|
Cost
|
|
08/08/17 - 09/06/17
|
$9,373
|
|
01/20/18 - 01/24/18
|
$2,463
|
|
06/02/18 - 06/05/18
|
$1,937
|
|
Total
|
$13,773
|
|
Amortized
Expense ($13,773/5 years)
|
$2,755
|
Source: Document Nos. 02162-2018 and 04990-2018.
As part of the utility’s response to a staff data request
in October, the utility altered its request to amortize purchased emergency
water over five years and opted instead to request that the average expense for
the years 2010 through 2018 be utilized in this case.[6]
The resulting average purchased water expense is $4,063. The utility claims
that using the average “provides a more accurate picture of the expected
average expense in the future for rate setting.”[7]
While staff sees the value of utilizing a multi-year average, the utility did
not appear to make an argument to average purchased water expense in its last
rate case. If it had done so at that time, the average expense for a five-year
period from 2010 through 2014, or some portion of that period, could have been
discussed. Instead, the Commission approved purchased water expense of $1,082,
which reflected recorded purchased water for 2014, less a 5.8 percent excessive
unaccounted for water (EUW) adjustment. Staff believes that the appropriate
period for review in the instant docket is 2015 through 2018.
Based on the discussion above, the utility’s emergency
water purchases were each related to unique events associated with failed
equipment which has since been replaced. Therefore, staff does not believe that
the emergency water purchases during 2017 and 2018 are necessarily indicative
of emergency water purchases going forward. Staff notes that since the last
repair was made in June 2018, the utility has not had any additional purchased
emergency water.[8] As such,
staff believes that emergency purchased water should be recovered and amortized
over a five-year period. As stated previously, the
Commission approved purchased water expense of $1,082 per year in the
utility’s last rate case. Any adjustment here would
need to take into account what the Commission included for purchased water in
the last rate case. In that docket, the Commission also applied an adjustment
of 5.8 percent for excessive unaccounted for water which would also need to be
applied to any additional purchased emergency water recommended here. According
to the prior order, the utility purchases water from the City of Winter Haven
for emergency purposes only. Using the billing data provided by the utility,
staff notes that the purchased water associated with the 2017 outage was
$10,310, not the $9,373 originally proposed by the utility. Staff also verified
the purchased water associated with the 2018 outages and noted no changes.
Actual billing data reflected total purchased water of $10,536 for 2017 and
$4,639 for the first six months of 2018. These amounts include the emergency
purchased water discussed above. Staff’s calculations appear in the table
below.
Table 1-6
Recommended Purchased
Emergency Water Adjustment
|
Description
|
2017
|
2018 (YTD)
|
Total
|
|
Actual Purchased Water
|
$10,536
|
$4,639
|
|
|
Less: Purchased Water from
Last Rate Case
|
(1,082)
|
(1,082)
|
|
|
Appropriate Add’l Purchased
Water
|
$9,454
|
$3,557
|
|
|
Less: EUW (5.8%)
|
(548)
|
(206)
|
|
|
Recommended Add’l Purchased
Water
|
$8,906
|
$3,351
|
$12,257
|
|
|
|
|
|
|
Amortized (5 years)
|
$1,781
|
$670
|
$2,451
|
Source: Staff workpapers,
Order No. PSC-15-0569-PAA-WS, and utility responses to data requests.
Staff recommends purchased
emergency water expense of $12,257 which, amortized over five years, would be
$2,451 per year.
Salaries
In its filing, the utility requested a salary of $40,000 for the manager and $30,000 for the president of Orchid
Springs Development Corporation. The utility argues that while salary was
addressed in its last rate case, the salary approved by the Commission is
insufficient to compensate for work performed managing the day to day operation
of the utility, especially given the age and condition of the systems.
Moreover, the utility alleges that Commission staff is inconsistent in the
methodology it uses to establish salary levels for utility managers and
presidents.
Staff notes that the requested salary increases represent
an increase of 159 percent for the manager and 188 percent for the president
from salaries approved in the last rate case. In the instant docket, the utility
was asked by staff to address what job duties and requirements have changed for
the positions since the last rate case. According to the utility, the following
changes support the increases in salaries:
- Because of the age of the system and as a result of work done in 2016, the manager and president have
spent a great deal of time determining how to keep the
system viable.
- The sewer collection system is beyond the end of
its useful life and will
require a significant investment in capital. In its current
condition and age, it already
requires significantly higher maintenance cost incurred and
overseen by these individuals
daily to keep utility in
compliance with DEP regulations.
- The manager and president are working on putting together a phased capital
improvement plan which will require close collaboration with a civil engineer
to design each phase and provide specifications for each phase in
order to put the jobs out to bid.
- The manager and president also will be required to work with financial institutions
to put financing in place as well as work with choosing a
utility contractor in order
to institute a long-term,
phased rehabilitation plan.[9]
Staff reviewed the position descriptions
provided by the utility in the last rate case and believes that many of the
“new” duties were actually part of the position descriptions reviewed
previously. In addition, staff believes the age and condition of the systems do
not represent new information. In fact, an argument can be made that the age
and condition referenced by the utility are what necessitated the
interconnection for wastewater services with the City of Winter Haven as well
as the $69,170 in pro forma plant approved by the Commission in the last rate
case. Similarly, staff believes that the job descriptions associated with
previously approved salaries already encompass the additional job functions
used to support the salary increase here. Staff notes that the job description
for Officer (president) in the last rate case included the following: determine
operating and capital expenditures, coordinate and implement long range
strategic planning of both water and sewer capital improvements, and acquire
funding for the utility as needed.[10] The description associated
with the Operations Manager in the last rate case included those for a project
manager of renovations (schedule, supervise, and perform testing of sewer
lines; evaluate testing, and meet with civil engineer).[11] It is also important to
note that the City of Winter Haven provides system maintenance and repairs for
the water and wastewater systems, performs all wastewater treatment, and
provides emergency purchased water.
In a letter summarizing the utility’s response to customers,
the utility stated,
The utility has not sought any increases in salaries.
It has requested only that it be allowed to recover the existing costs for the
reasonable salaries of necessary employees. The utility requests recognition of
salaries for a small number of employees whose salaries are directly related to
the work necessary to continue to operate the utility in an efficient manner in
conformance with many state, county and federal standards. The Florida PSC must
review these proposed costs based on customary salaries for similar positions
at other companies in our area.[12]
In the same letter, Orchid Springs also stated, “the utility
cannot reasonably be compared to other utilities as there are significant
differences between utilities including, but not limited to, age of plant and
equipment, the number of customers, and capacity.” While the utility was
addressing a comparison of its rates to those of the City of Winter Haven,
staff believes the same argument can be made for the comparison of salaries
across utilities. In fact, staff believes there is no one size fits all when it
comes to establishing the appropriate level of water and wastewater salaries.
There are numerous factors that need to be addressed, including what job duties
and responsibilities are being fulfilled by utility employees as well as by
others contracted by the utility. It is also important to look at the
operations of each system to determine the level of contractual services used
and whether the utility performs its own treatment services or it if is a
reseller. In Orchid Springs’ case, the utility has interconnected with the City
of Winter Haven for emergency water service and all of its wastewater
treatment. Under this contract, the City of Winter Haven functions as the
contract operator for the water and wastewater systems and performs some system
maintenance and repairs for both systems.
Staff does not follow the utility’s claim that requested
salary adjustment is not an increase. Staff notes that the Commission-authorized
salaries were set in the last rate case only after careful review of the
utility’s operating conditions. In that docket, the Commission reviewed
salaries in light of the duties and responsibilities at that time, as well as
the utility’s change in operations. These considerations were part of the very
analysis performed by the Commission in the utility’s SARC that led to the
salaries currently in place. Staff believes that the conditions that existed
then remain unchanged. Based on the discussion above, staff does not believe
that the utility has provided sufficient justification for increasing salaries
at this time.
Rate Case Expense
Orchid Springs initially submitted $15,000 in rate case expense, with
an annual amortization expense of $3,750.[13]
In response to a staff data request, the utility provided updated rate case
expense showing actual rate case expense and an estimate of expenses through
the completion of the docket.[14] The update reflected
actual expenses of $9,695 for legal and $2,050 for the utility’s rate
consultant through June 2018 with an additional $10,495 in estimated rate case
expense. The breakdown of fees is shown below.
Table 1-7
Actual and Estimated Rate Case Expense
|
Utility
|
Utility
|
Total Actual
|
|
Expense
|
Actual
|
Estimated
|
& Est. RCE
|
|
Legal Services
& Fees (Sundstrom & Mindlin)
|
$9,695
|
$6,675
|
$16,370
|
|
Consulting
Services
|
2,050
|
3,500
|
5,550
|
|
Travel
|
0
|
320
|
320
|
|
Total
|
$11,745
|
$10,495
|
$22,240
|
Pursuant to Section 367.081(7), F.S., the Commission shall determine the reasonableness
of rate case expenses and shall disallow all rate case expenses determined to
be unreasonable. Staff has examined the requested actual expenses, supporting
documentation, and estimated expenses as listed above for the current case.
Based on its review, staff believes some adjustments are necessary to the utility’s
proposed rate case expense.
Legal
Services
The first adjustment relates to the utility’s legal fees.
Orchid Springs included $16,370 in legal fees and costs to complete this limited
proceeding. The utility provided invoices from Sundstrom & Mindlin, LLP
(Sundstrom) through June 2018, showing actual expenses associated with the rate
case totaling $9,695, and estimated an additional $6,675 to complete. These
amounts included 27.7 hours of actual time and an estimate that an additional
17.5 hours would be required to complete the limited proceeding. Staff’s
adjustments to legal fees focus on Sundstrom’s estimate to complete, which
included 3.5 hours to “review the audit report and assist client and consultant
in preparing response to issues raised” and $550 for copying and miscellaneous
costs and fees.[15] Since no
audit was conducted in this docket and no corresponding response would have
been necessary, staff believes that 3.5 hours, or $1,225 (3.5 hrs. x $350/hr.)
should be removed from the estimate to complete. Staff recommends 14 hours
(17.5 hours – 3.5 hours) for the attorney’s estimate to complete. No additional
detail was provided to explain what miscellaneous costs and fees might be
expected through completion of the docket. As such, staff believes $550 in
estimated costs and fees should also be removed for lack of support.
Accordingly, staff believes that the appropriate amount of legal fees is
$14,595, a total reduction of $1,775 ($1,225 + $550).
Consulting Services
The next adjustment relates to the utility’s consulting
fees. The utility requested actual consulting services expense of $2,050 for
services rendered by Gary Morse through June 2018, and requested an additional
$3,500 as part of the consultant’s estimate to complete. In support of its
actual costs, the utility provided four invoices.[16]
Staff notes that the submitted invoices provided the actual hours worked, a
brief description of the activities that took place, and reflected the
resulting amount due. Based on the support provided, staff believes that the
actual expense is reasonable. However, staff believes that adjustments to the estimate
to complete are necessary. The consultant’s estimate to complete includes 35
hours at $100 per hour. Staff believes that the requested number of hours is
excessive, especially since the attorney’s estimate to complete included only
17.5 hours. In addition, the estimate to complete includes time “to review
inquiries from auditors and staff” and for “review of the audit report and
assist in responding to same and preparation of documents for such response.”
As noted above, no staff audit was conducted in this docket and no audit report
was produced. As such, a response from the utility would not be necessary.
While there was an outstanding data request when the estimate to complete was
provided, staff anticipates that the utility and its attorney, not the
consultant, would be responsible for the bulk of any required response. In the
absence of a detailed breakdown by hour and task, staff believes the
consultant’s estimated hours should be limited to the same number of hours
recommended for the attorney above. Staff reduced the utility’s requested
amount for consulting services by 21
hours, or $2,100 (21 hours x $100/hr.). Accordingly, staff believes that the
appropriate amount of consulting fees is $3,450, a reduction of $2,100.
Travel
Staff made no adjustments to the
requested travel expense of $320 as it appears reasonable. The requested travel
expense reflects hotel costs for two people for one night each and meals for
each person to attend the Commission Conference. The utility has estimated
hotel costs of $125 per room per person and $35 for meals per person. Staff
believes the room rate is reasonable and notes that the amount requested for
meals is in line with the allowance provided for State of Florida employees.
Noticing Costs & Filing Fee
Orchid Springs did not reflect the $2,000 filing fee or
the costs associated with copying and mailing the required notices. According
to the docket file, the utility paid the $2,000 filing fee ($1,000 for water
and $1,000 for wastewater) on April 19, 2018.[17]
The utility is required by Rule 25-30.446, F.A.C., to provide notices of the
customer meeting and notices of final rates in this case to its customers.
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 $465 for
postage expense, $248 for printing expense, and $47 for envelopes. This results
in $760 ($465 + $248 + $47) for the noticing requirement.
Rate
Case Summary
In summary, staff believes that
Orchid Springs’ total rate case expense should be decreased by $3,875 for
unsupported and unreasonable rate case expense. Staff also believes that rate
case expense should be increased by $2,000 to reflect the filing fee paid by
the utility and by $760 to reflect the costs associated with noticing
requirements. Given these adjustments, the appropriate total rate case expense
should be $21,125, which amortized over four years would be $5,281 per year.
Staff has allocated the annual rate case expense to the water and wastewater
systems based on the equivalent residential connections, resulting in annual
rate case expense of $2,784 for water and $2,497 for wastewater. A breakdown of
rate case expense is as follows:
Table 1-8
Appropriate Rate Case Expense
|
|
Utility
|
Staff
|
Staff Rec.
|
|
Expense
|
Act. & Est.
|
Adjustment
|
Total RCE
|
|
Legal Services
& Fees (Sundstrom & Mindlin)
|
$16,370
|
($1,775)
|
$14,595
|
|
Consulting
Services
|
5,550
|
(2,100)
|
3,450
|
|
Travel
|
320
|
0
|
320
|
|
Noticing Costs
& Filing Fee
|
0
|
2,760
|
2,760
|
|
Total
|
$22,240
|
($1,115)
|
$21,125
|
Operating Expenses Summary
Staff's recommended adjustments result in operating
expenses of $93,836 for water and $217,523 for wastewater. Operating expenses
are shown on Schedule Nos. 3-A and 3-B. The adjustments are shown on Schedule
No. 3-C.
Operating Margin
In Docket No. 140239-WS, the
Commission found that the application of the operating ratio methodology at a
margin of 10.00 percent of O&M expense was appropriate for determining the
water revenue requirement.[18] Staff
believes the same conditions continue to exist in the current docket. The
utility has a water rate base of $61,055 and net water O&M expenses of
$76,526,[19] and
therefore is a candidate for the operating ratio method of calculating revenue
requirement for water. Orchid Springs is a Class C utility and the recommended
water revenue requirement of $101,489 is substantially below the threshold
level for Class B status ($200,000 per system). The utility is built out and
there is no potential for future growth. Therefore, the utility will not become
a Class B utility in the foreseeable future.
In addition, the overall quality
of service for the Orchid Springs’ water system was considered satisfactory in
the utility’s last rate case. Based on review of the information provided by
the utility, as well as additional information gathered throughout the course
of this docket, staff does not believe any actions need to be taken with
respect to secondary standards. While
the current utility owner is a developer, staff notes that being
developer-owned does not, in itself, disqualify a utility from the operating
ratio method. The system is built out and was originally placed into service in
1972. In the last rate case, the Commission determined that there is no
potential for future growth. Finally, Orchid Springs owns its water treatment
plant, but interconnects with the City of Winter Haven for emergency back-up
service.
Staff calculated the revenue requirement and believes that
the operating ratio method of revenue requirement calculation for the water
system and the return on rate base revenue requirement calculation for the
wastewater system place the utility in the best posture to cover the expenses
necessary to provide reliable, quality service going forward. This methodology
is consistent with the utility’s last rate case.
Revenue Requirement
Staff recommends that the operating ratio method should be
used to calculate the water revenue requirement. Using this methodology, Orchid
Springs will have an operating margin of 10.00 percent, resulting in an annual
increase of $7,822 for water. Staff’s water revenue requirement calculation is
shown in Table 1-9 below:
Table 1-9
Water Revenue
Requirement
|
Adjusted O&M Expense
|
|
$76,526[20]
|
|
Operating Margin (%)
|
|
x 10.00%
|
|
Operating Margin
|
|
$7,653
|
|
O&M Expense
|
|
80,059
|
|
Depreciation Expense
|
|
6,741
|
|
Amortization
|
|
0
|
|
Taxes Other Than Income
|
|
7,036
|
|
Revenue Requirement
|
|
$101,489
|
|
Less Adjusted Test Year Revenues
|
|
93,667
|
|
Annual Increase
|
|
$7,822
|
|
Percent Increase
|
|
8.35%
|
Using the return on rate base methodology, staff believes
an annual increase of $23,837 (11.73 percent) for wastewater is appropriate.
This will allow the utility the opportunity to recover its expenses and earn an 8.03 percent return on
its wastewater investment. Staff’s wastewater revenue requirement calculation
is shown in Table 1-10 below:
Table 1-10
Wastewater Revenue
Requirement
|
Adjusted Rate Base
|
|
$118,837
|
|
Rate of Return
|
|
x 8.03%
|
|
Return on Rate Base
|
|
$9,543
|
|
Adjusted O&M Expense
|
|
188,501
|
|
Depreciation Expense
|
|
3,650
|
|
Amortization
|
|
12,225
|
|
Taxes Other Than Income
|
|
13,146
|
|
Revenue Requirement
|
|
$227,066
|
|
Less Adjusted Test Year Revenues
|
|
203,229
|
|
Annual Increase
|
|
$23,837
|
|
Percent Increase
|
|
11.73%
|
Issue 2:
What are the appropriate water and wastewater rates
for Orchid Springs?
Recommendation:
Staff recommends that the rate increase of 8.35
percent for water and 11.73 percent for wastewater should be applied as an
across-the-board increase monthly to service rates. The rates, as shown on Schedule
Nos. 4-A and 4-B, 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 staff has approved the proposed customer notice and
the notice has been received by the customers. The utility should provide proof
of the date that notice was given within 10 days of the date of the notice.
(Bethea)
Staff Analysis:
In the utility’s last rate
case, the revenue requirement increase was so minimal (.23 percent), the
Commission found it appropriate from a rate stability perspective to maintain
the existing water rate structure and rates until a future proceeding.[21] The existing water rate structure consists of
a base facility charge (BFC) and a uniform gallonage charge. The water BFC
generates approximately 56 percent of the utility’s existing water revenues. It
has been Commission practice to set the BFC allocation no greater than 40
percent for water, unless there is seasonality and a concern for revenue
stability. In addition, BFC allocations are lowered in order to design
gallonage charges that send pricing signals to target discretionary usage. In
order to assess the seasonality and usage patterns of a utility’s customer
base, staff relies on a billing analysis, which is a compilation of the
utility’s test year bills at each consumption level. In a limited proceeding
docket, a billing analysis is not a filing requirement and was not provided.
In the utility’s 1998 SARC, the
approved BFC generated approximately 50 percent of the revenue requirement.
In the 2014 SARC, the rate structure was not changed; however, the resulting
BFC generated approximately 52 percent of the utility’s revenues. In that case,
the billing analysis reflected a seasonal customer base. In this proceeding,
the BFC generates approximately 56 percent of the revenues. There appears to be
an upward trend in the amount of revenues generated from the BFC, which further
indicates a seasonal customer base. As a result, staff believes the existing
BFC allocation is reasonable for water. In addition, the wastewater BFC generates
approximately 49 percent of the revenues and is consistent with Commission
practice. Therefore, in order to maintain revenue stability, staff recommends, remaining
consistent with prior limited proceedings, an across-the-board increase should
be applied to water and wastewater rates to produce additional service revenues
of $7,822 or a 8.35 percent increase for water and $23,837 or a 11.73 percent
increase for wastewater.
Based on the above, staff
recommends that the rate increase of 8.35 percent for water and 11.73 percent
for wastewater should be applied as an across-the-board increase monthly to
service rates. The rates, as shown on Schedule Nos. 4-A and 4-B, 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 staff has approved the proposed customer notice and the
notice has been received by the customers. The utility should provide proof of
the date that 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
published effective date to reflect the removal of the amortized rate case
expense?
Recommendation:
The
water and wastewater rates should be reduced as shown on Schedule Nos. 4-A
and 4-B, to remove rate case
expense grossed-up for regulatory assessment fees (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,
pursuant to Section 367.081(8), F.S. 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 Orchid Springs 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.
(Bethea, Brown, Wilson)
Staff Analysis:
Orchid Springs’ water and wastewater 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 $2,915 for water and $2,615 for wastewater.
Using the utility’s current revenues, expenses, and customer base, the
reduction in revenues will result in the rate decrease shown on Schedule Nos. 4-A
and 4-B. It should be noted that, in the utility’s 2014 SARC, the Commission
approved rate case expense grossed up for RAFS of $1,125 for water and $999 for
wastewater. These amounts are still included in the balance of unamortized rate
case expense in the current docket and are scheduled to be removed in January 2020.
Orchid Springs 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 Orchid Springs 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 Orchid Springs on a temporary basis,
subject to refund, in the event of a protest filed by a substantially affected
person or party?
Recommendation:
Yes. 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 substantially affected person or party. 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. (Brown, Wilson)
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
367.081(2), F.S., which requires the Commission to “fix rates which are just,
reasonable, compensatory, and not unfairly discriminatory,” and consistent with
prior Commission orders,
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
$21,421. 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 5:
Should this docket be closed?
Recommendation:
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. Once
these actions are complete, this docket should be closed administratively. (Murphy,
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. Once
these actions are complete, this docket should be closed administratively.
