Discussion
of Issues
Issue 1:
Should the utility's proposed final water rates be
suspended?
Recommendation:
Yes. Placid Lakes’ proposed final water rates should
be suspended. (Ramos)
Staff Analysis:
Section 367.081(6), F.S., provides that the
Commission may, for good cause, withhold consent to the implementation of
requested rates within 60 days after the date the rate request is filed.
Further, Section 367.081(10), F.S., permits the proposed rates to go into
effect (secured and subject to refund) at the expiration of five months from
the official date of filing if: (1) the Commission has not acted upon the
requested rate increase; or (2) the Commission’s action is protested by a party
other than the utility.
Staff reviewed the filing and considered the information
filed in support of the rate application and the proposed final rates. Staff believes
that further investigation of this information, including on-site inspections,
is needed. Staff initiated an audit of Placid Lakes’ books and records. The
audit is tentatively due on August 13, 2019. In addition, staff sent its first
data request to the utility on June 21, 2019. The utility’s response to the
data request is due on July 22, 2019. Based on the foregoing, staff recommends
Placid Lakes’ proposed final water rates be suspended.
Issue 2:
Should any interim revenue increase be approved?
Recommendation:
Yes, Placid Lakes should be authorized to collect
annual water revenues as indicated below:
|
|
Adjusted Test Year
Revenues
|
$ Increase
|
Revenue Requirement
|
% Increase
|
|
Water
|
$685,384
|
$30,646
|
$716,030
|
4.47%
|
(Smith, Salvador,
Ramos)
Staff Analysis:
On May 13, 2019, Placid Lakes filed its rate base,
cost of capital, and operating statements to support its requested interim
increase in water rates. Pursuant to Section 367.082(1), F.S., in order to
establish a prima facie entitlement for interim relief, the utility shall
demonstrate that it is earning outside the range of reasonableness on its rate
of return. Pursuant to Section 367.082(2)(a), F.S., in a proceeding for an
interim increase in rates, the Commission shall authorize, within 60 days of
the filing for such relief, the collection of rates sufficient to earn the
minimum of the range of rate of return. Based on the utility’s filing, staff
believes that the utility has demonstrated a prima facie entitlement in
accordance with Section 367.082(1), F.S.
Pursuant to Section 367.082(5)(b)1, F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the utility’s most recent rate proceeding
and annualizing any rate changes. Staff has reviewed Placid Lakes’ interim
request, as well as Order No. PSC-13-0646-PAA-WU (Order), in which the
Commission last established rate base, and determined that an adjustment of
$16,845 should be made to test year revenues.
Staff attached accounting schedules to illustrate the
recommended interim rate base, capital structure, and test year operating
income amounts. The rate base schedule is labeled as Schedule No. 1, capital
structure is labeled as Schedule No. 2, the operating income schedule is
labeled as Schedule No. 3-A, and adjustments to operating income schedule is
labeled as Schedule No. 3-B.
Rate Base
Pursuant to Section 367.082(5)(b)1, F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the utility’s most recent rate proceeding.
Also, pursuant to Section 367.082, F.S., the method used to calculate Used and
Useful (U&U) in Placid Lakes’ last rate case must be used for interim
purposes. In the Order, the Commission found that Placid Lakes’ water treatment
plant and storage are 100 percent U&U and the water distribution system is
79.09 percent U&U. Based on review of the prior Order and the utility’s
filing in this case, staff recommends that the water treatment plant and
storage be considered 100 percent U&U and the water distribution system be
considered 79.09 percent U&U. Based on staff’s review, no adjustments are
necessary to the utility’s rate base as filed. Therefore, staff recommends the
Placid Lakes’ interim rate base should be $520,365.
Cost of Capital
Based on an analysis of the MFRs and staff’s review of the
Order, staff believes that no adjustments are necessary to the utility’s
capital structure as filed. In its interim request, Placid Lakes used the
minimum of the range of its last authorized return on equity of 9.33 percent.
The appropriate interim weighted cost of capital for Placid Lakes is 6.57
percent.
Net Operating Income
In its MFRs, the utility made an adjustment of $16,485 to
test year revenues to account for adjusted customer bills as a result of
complaints. However, staff believes that no adjustments other than rate changes
should be made to annualize test year data to calculate the interim revenue
requirement because any adjustment aside from rate changes are not relevant to
the determination of the achieved rate of return. As a result, staff increased
the interim test year operating revenues by $16,485. Therefore, staff
recommends that the appropriate test year operating income, before any revenue
increase, should be $12,337.
Revenue Requirement
Based on the above analysis, staff recommends an interim
revenue requirement of $716,030. This represents an interim increase in annual
revenues of $30,646 (or 4.47 percent). This increase will allow the utility the
opportunity to recover its operating expenses and earn a 6.57 percent return on
its rate base.
Issue 3:
What are the appropriate interim water rates?
Recommendation:
Staff recommends an interim rate increase of 4.52
percent should be applied as an across-the-board increase to the existing
service rates. The rates, as shown on Schedule No. 4, 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. (Ramos)
Staff Analysis:
Staff recommends that interim service rates for
Placid Lakes be designed to allow the utility the opportunity to generate
annual operating revenues of $716,030. Before removal of miscellaneous
revenues, this would result in an increase of $30,646 (4.47 percent), as
discussed in Issue 2. To determine the appropriate increase to apply to the
service rates, miscellaneous revenues should be removed from the test year
revenues. Staff’s calculation of the appropriate percent increase to Placid
Lakes’ existing rates is shown in Table 3-1.
Table 3-1
Percentage Service Rate
Increase
|
|
|
|
|
1.
|
Total Adjusted Test Year Revenues
|
$685,384
|
|
|
|
|
|
2.
|
Less: Miscellaneous Revenues
|
$7,817
|
|
|
|
|
|
3.
|
Test Year Revenues from Service Rates
|
$677,567
|
|
|
|
|
|
4.
|
Revenue Increase
|
$30,646
|
|
|
|
|
|
5.
|
Percentage Service Rate Increase (Line 4/Line 3)
|
4.52%
|
Source: Staff’s
Recommended Revenue Requirement and utility’s MFRs
Based on the above, staff recommends an interim rate
increase of 4.52 percent should be applied as an across-the-board increase to
the existing service rates. The rates, as shown on Schedule No. 4, 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 4:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
A corporate undertaking of $20,594 is acceptable,
contingent upon receipt of the written guarantee of the parent company, Lake
Placid Holding Company, (LPHC or Company). LPHC should be required to file a
corporate undertaking on behalf of Placid Lakes Utilities, Inc. to guarantee
any potential refund of revenues collected under interim conditions. Pursuant
to Rule 25-30.360(6), F.A.C., the utility should provide a report by the 20th
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 in
accordance with Rule 25-30.360, F.A.C. (Smith)
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 2, the total annual interim increase
should be $30,646. 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 $20,594. 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. 4.
The criteria for a corporate undertaking include
sufficient liquidity, ownership equity, profitability, and interest coverage to
guarantee any potential refund. Staff reviewed LPHC’s 2016, 2017, and 2018
financial statements to determine if the Company can support a corporate
undertaking on behalf of its subsidiary. LPHC reported insufficient net income
in 2016, 2017, and 2018, as well as insufficient return on equity in 2018.
However, LPHC reported a sufficient working capital amount, current ratio, and
Interest Coverage Ratio in 2016, 2017, and 2018. LPHC also reported adequate
ownership equity and equity ratios over the three-year review period.
Based on staff’s review of the financial reports submitted
by LPHC, staff believes LPHC has adequate resources to support a corporate
undertaking in the amount requested. Therefore, staff recommends that a
corporate undertaking of $20,594 is acceptable, contingent upon receipt of the
written guarantee of LPHC.
The brief financial analysis above is only appropriate for
deciding if LPHC can support a corporate undertaking in the amount proposed and
should not be considered a finding regarding staff’s position on other issues
in this proceeding.
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. The costs are the
responsibility of, and should be borne by, the utility.
Issue 5:
Should this docket be closed?
Recommendation:
The docket should remain open pending the
Commission’s PAA decision on the utility’s requested rate increase. (Simmons)
Staff Analysis:
The docket should remain open pending the
Commission’s PAA decision on the utility’s requested rate increase.
