Case Background
Aquarina
Utilities, Inc. (Aquarina or utility) is a Class B utility providing water and wastewater
services in Brevard County to approximately 301 water, 123 non-potable, and 335
wastewater customers. The utility reported in its 2017 annual report operating
revenues in the amount of $437,201 for water and $176,053 for wastewater. The
utility did not collect contributions in aid of construction (CIAC) for water
or wastewater in 2017.
On November 15,
2018, the utility filed an application for approval of tariffs to allow for
gross-up of CIAC. As indicated in the utility’s application, the recent change
in tax law may cause it to risk the loss of its opportunity to earn a reasonable
return on its used and useful property if it is not allowed to collect the tax
impact on receipt of CIAC. This recommendation addresses the utility’s request
for approval of gross-up tariffs related to changes in the federal tax code
effective in 2018. Any potential refund related to the change in the federal
tax rate currently embedded in the utility’s rates is outside of this
recommendation and will be addressed in the generic Docket No. 20180013-PU. The Commission has jurisdiction pursuant
to Sections 367.081 and 367.091, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should Aquarina's request for approval of tariffs to
allow the gross-up of CIAC be approved?
Recommendation:
Yes. The tariffs filed on November 15, 2018, should
be approved. The utility should provide notice to all persons in the service
areas included in the application who have filed a written request for service
or who have been provided a written estimate for service within the 12 calendar
months prior to the month the application was filed. The approved gross-up
charges should be effective for connections made on or after the stamped approval
date on the tariff sheets. The utility should
provide proof of noticing within 10
days of rendering its approved notice. (Bruce, Crawford)
Staff Analysis:
Effective January
1, 2018, the Federal Tax
Cuts
and Jobs Act amended
Section 118 of the Internal
Revenue Code. Prior to the amendments, CIAC was exempt from
taxable gross income for water and wastewater utilities. As a result of the amendments, both cash and property CIAC are now taxable gross income
for
water
and
wastewater
utilities. In recognition of this
change in the tax law, the Commission has opened Docket
No. 20180013-PU, In re: Petition to establish a generic docket to investigate and adjust rates for 2018 tax savings by Office of Public
Counsel to address
the potential rate impacts on regulated electric, gas, water, and wastewater
utilities.
A similar law, the Tax Reform Act of 1986, became effective in 1987. In Docket No.
19860184-PU, the Commission found
that it was appropriate to allow water
and wastewater utilities
to recover the tax on CIAC from the
contributor, including the tax
associated with the gross-up tax on CIAC that would also become
taxable income. For those utilities
that were approved
to collect the gross-up on CIAC, the gross-up amounts collected were held subject to refund and were evaluated on a case-by-case basis as to whether any refunds were subsequently required.
On November 15, 2018, the
utility filed tariffs (Attachment A) to gross-up cash service availability
charges and property contributions to recover the federal and state corporate
income taxes associated with those contributions for water. However, for
wastewater, Aquarina filed a tariff to gross-up only contributed wastewater property
since it is not authorized to collect cash CIAC for wastewater service. According
to the utility, Aquarina could risk loss of its opportunity to earn a
reasonable return on its property used and useful in the public service if it
is not allowed to collect the tax impact on receipt of CIAC.
The tariffs recognize that,
for depreciable property, depreciation expense is tax deductible and the utility’s
tax liability will be reduced by depreciation claimed for tax purposes. The
proposed tariffs are mathematically the same, regarding the gross-up for taxes,
as the tariff approved by the Commission following the hearing in Docket No.
19860184-PU. Because
the proposed tariffs accurately depict the utility’s expected tax expense
associated with CIAC, staff believes no further Commission action would be
required once the gross-up formula has been approved. The proposed tariffs are
the same as those approved in Order No. PSC-2018-0330-TRF-WS in Docket No.
20180042-WS, Order No. PSC-2018-0331-TRF-WS in Docket No. 20180059-WS, and Order
No. PSC-2018-0269-TRF-WS in Docket No. 20180100-WS.
Based on the above, staff recommends that the tariffs be
approved. The approved gross-up charges should be effective for connections
made on or after the stamped approval date on the tariff sheets. The utility
should provide notice to all persons in the service areas included in the
application who have filed a written request for service or who have been
provided a written estimate for service within the 12 calendar months prior to
the month the application was filed. The utility should provide proof of
noticing within 10 days of rendering its approved notice.
Issue 2:
Should this docket be closed?
Recommendation:
If a protest is filed by a substantially affected
person within 21 days of issuance of the order, the tariffs should remain in
effect, with any revenues held subject to refund, pending resolution of the protest.
If no timely protest is filed, the order should become final upon the issuance
of a consummating order. However, the docket should remain open to allow staff
to verify that the appropriate notice has been filed by the utility and
approved by staff. Once the utility has provided proof of noticing, the docket
should be closed administratively. (Crawford)
Staff Analysis:
If a protest is filed by a substantially affected
person within 21 days of issuance of the order, the tariffs should remain in effect,
with any revenues held subject to refund, pending resolution of the protest. If
no timely protest is filed, the order should become final upon the issuance of
a consummating order. However, the docket should remain open to allow staff to
verify that the appropriate notice has been filed by the utility and approved
by staff. Once the utility has provided proof of noticing, the docket should be
closed administratively.
