Case Background
Merritt Island
Utility Company, Inc. (Merritt Island or Utility) is a Class C wastewater
system serving approximately 141 residential and 1 general service bulk
customer. Water service is provided by the City of Cocoa. According to the
Utility’s 2018 Annual Report, total gross revenues were $65,442 and total
operating expenses were $73,250, resulting in a net operating loss of $7,808.
The original
owner, Mobile Home Investors, Inc., was initially granted a certificate to
operate a wastewater system in existence in 1974.[1] The wastewater system was subsequently
transferred several times.[2] The most recent transfer to Merritt Island
was approved in 2017.
Rate base was
last established for the Utility in a 2008 staff-assisted rate case (SARC).[4] In addition, net book value for transfer
purposes was updated to reflect balances as of December 22, 2016, when the
system was transferred to Merritt Island. The Utility’s test year rates became
effective on June 13, 2018, following approval of a 2018 price index rate
adjustment.
On May 16, 2019,
Merritt Island filed its application for a SARC. In its application, the
Utility requested a test year ended March 31, 2019, for interim and final rate
purposes.
This
recommendation addresses the Utility’s interim rates. The Commission has
jurisdiction pursuant to Sections 367.082 and 367.0814(4), Florida Statutes
(F.S.).
Discussion
of Issues
Issue 1:
Should an interim revenue increase be approved?
Recommendation:
Yes, Merritt Island should be authorized to collect interim
revenues as indicated below:
|
|
Test Year Revenues
|
$ Increase
|
Revenue
Requirement
|
% Increase
|
|
Wastewater
|
$66,595
|
$3,584
|
$70,179
|
5.38%
|
(Wilson,
Golden)
Staff Analysis:
On May
16, 2019, Merritt Island filed an application requesting an interim increase in
its wastewater rates. Section 367.0814(4), F.S., details interim rate increases
for staff-assisted rate cases.
Section
367.0814(4), F.S., states:
(4) The
commission may, upon its own motion, or upon petition from the regulated
utility, authorize the collection of interim rates until the effective date of
the final order. Such interim rates may be based upon a test period different
from the test period used in the request for permanent rate relief. To
establish interim relief, there must be a demonstration that the operation and
maintenance expenses exceed the revenues of the regulated utility, and interim rates
shall not exceed the level necessary to cover operation and maintenance
expenses as defined by the Uniform System of Accounts for Class C Water and
Wastewater Utilities (1996) of the National Association of Regulatory Utility
Commissioners.
Staff has reviewed the Utility’s
filed operation and maintenance (O&M) expenses in relation to its revenues.
Based on the Utility’s filing, staff recommends that Merritt Island has
demonstrated a prima facie
entitlement to an interim rate increase in accordance with Section 367.0814(4),
F.S.
Revenue Increase
In order to establish interim
rate relief as prescribed by Section 367.0814(4), F.S., staff used the Utility’s
revenues reflected in its filing for the test year ended March 31, 2019. The
test year revenues equal $66,595 from wastewater service rates. There were no
miscellaneous service revenues reported for the test year. The test year
O&M expenses equal $70,018. The difference between the Utility’s test year
revenues and O&M expenses is $3,423.
In addition, the interim wastewater
increase should be grossed up to include regulatory assessment fees (RAFs). The
Commission has previously determined that it would be inappropriate to approve
an increase in a utility’s rates to cover its operating expenses and deny that
same utility the funds to pay RAFs.[5]
Furthermore, by approving an interim rate increase that allows for the payment
of RAFs, the utility should be able to fully cover its O&M expenses. The
RAFs associated with the interim increase equal $161.
In total, Merritt Island should
be allowed an interim revenue increase of $3,584 ($3,423 + $161) to produce
revenues sufficient to cover O&M expenses and additional RAFs. Thus, staff
recommends the appropriate interim revenue requirement should be $70,179. This
is a 5.38 percent increase above the Utility’s test year revenues. Table 1-1
illustrates staff’s interim increase calculation.
Table 1-1
Determination of Interim
Increase
|
Water
|
|
1. Utility Adjusted
Test Year O&M Expenses
|
$70,018
|
|
2. Less: Utility Test Year Revenues
|
$66,595
|
|
3. Revenues to
Cover O&M Expenses
|
$3,423
|
|
4. Interim Revenue
Increase
|
$3,423
|
|
5. RAFs on Interim
Rate Increase
|
$161
|
|
6. Total Interim
Revenue Increase ($)
|
$3,584
|
|
7. Total Interim
Revenue Increase (%)
|
5.38%
|
Issue 2:
What are the appropriate interim water rates?
Recommendation:
The interim rate increase of 5.38 percent should be
applied as an across-the-board increase to the service rates in effect as of March
31, 2019. The rates, as shown on Schedule No. 1, should be effective for
service rendered on or after the stamped approval date on the tariff sheets
pursuant to Rule 25-30.475(1), Florida Administrative Code (F.A.C.). The Utility
should file revised tariff sheets and a proposed customer notice to reflect the
Commission-approved rates. In addition, the approved rates should not be
implemented until the required security has been filed, staff has approved the
proposed customer notice, and the notice has been received by the customers.
The Utility should provide proof of the date notice was given within 10 days of
the date of the notice. (Sibley)
Staff Analysis:
Staff recommends that
interim service rates for Merritt Island be designed to allow the Utility the
opportunity to generate annual operating revenues of $70,179. Since there were
no miscellaneous service revenues reported by the Utility for the test year,
this would result in an increase of $3,584 (5.38 percent) to service rates.
Staff recommends that the interim
rate increase of 5.38 percent should be applied as an across-the-board increase
to the service rates in effect as of March 31, 2019.[6]
The rates, as shown on Schedule No. 1, should be effective for service rendered
on or after the stamped approval date on the tariff sheets pursuant to Rule
25-30.475(1), F.A.C. The Utility should file revised tariff sheets and a
proposed customer notice to reflect the Commission-approved rates. In addition,
the approved rates should not be implemented until the required security has
been filed, staff has approved the proposed customer notice, and the notice has
been received by the customers. The Utility should provide proof of the date
notice was given within 10 days of the date of the notice.
Issue 3:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
The appropriate security to guarantee the funds
collected subject to refund is a corporate undertaking. (Hightower, Wilson,
Golden)
Staff Analysis:
Pursuant to Section 367.082, F.S., revenues
collected under interim rates shall be placed under bond, escrow, letter of
credit, or corporate undertaking subject to refund with interest at a rate
ordered by the Commission. As recommended in Issue 1, the total annual interim
increase is $3,584. In accordance with Rule 25-30.360, F.A.C., staff calculated
the potential refund of revenues and interest collected under interim
conditions to be $2,428. This amount is based on an estimated eight months of
revenue being collected from staff’s recommended interim rates over the
Utility’s current authorized rates shown on Schedule No. 1.
The
owner/president provided the most recent three years of his personal financial
net worth. Staff reviewed the confidential personal financial information
provided by the owner/president.[7] Staff
believes that in this circumstance the owner/president has demonstrated the
financial ability and wherewithal to guarantee the interim refund in this rate
increase, if necessary. Further, the owner/president has provided a personal
guarantee in the amount of $2,428, in this docket.[8]
Pursuant to
Rule 25-30.360(6), F.A.C., the Utility should provide a report by the 20th day
of each month indicating the monthly and total revenue collected subject to
refund. Should a refund be required, the refund should be with interest and
undertaken in accordance with Rule 25-30.360, F.A.C. In no instance should
maintenance and administrative costs associated with any refund be borne by the
customers. Such costs are the responsibility of, and should be borne by, the
Utility.
Accordingly,
the appropriate security to guarantee the funds collected subject to refund is
a corporate undertaking.
Issue 4:
Should this docket be closed?
Recommendation:
No. The docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase.
(Dziechciarz)
Staff Analysis:
The docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase.
