Discussion
of Issues
Issue 1:
Should the Commission approve FPUC's, Fort Meade's,
and Chesapeake's proposed GRIP surcharges for the period January through
December 2020?
Recommendation:
Yes, the Commission should approve FPUC’s,
Chesapeake’s, and Fort Meade’s proposed GRIP surcharges for the period January
through December 2020. Furthermore, staff recommends the Commission direct the
Company to determine if the WACC complies with the normalization rules to avoid
a normalization violation. Additionally, if an adjustment to the WACC is
necessary, staff recommends any adjustment be made in a subsequent true-up
filing. (Ward, Hightower)
Staff Analysis:
The GRIP surcharges have been in place since January
2013 for FPUC and Chesapeake, while Fort Meade’s surcharges were first
implemented in January 2017. In response to staff’s data requests, the companies
stated that replacement projects in Winter Haven, Lake Worth, New Smyrna Beach,
West Palm Beach, Palm Beach, Fort Meade, Bartow, and Lake Wales were completed
in 2019. Additional replacement projects in Lake Worth, Winter Haven, New
Smyrna Beach, West Palm Beach, Palm Beach, Boynton Beach, Haines City, Lake
Wales, and Lake Alfred were projected to continue into 2020. Attachment A
provides an update of mains and services replaced and replacement forecasts.
The companies stated that they prioritize the potential replacement projects
focusing on areas of high consequence and areas more susceptible to corrosion.
FPUC’s True-ups by Year
FPUC’s calculation for the 2020 GRIP revenue requirement
and surcharges include a final true-up for 2018, an actual/estimated true-up
for 2019, and projected costs for 2020. FPUC was authorized to recover $747,727
of annual GRIP expenses in base rates; therefore, the $747,727 is excluded from
the GRIP surcharge calculation.
Final True-up for 2018
FPUC stated that the revenues collected through the GRIP
surcharges for 2018 were $10,326,269, compared to a revenue requirement of
$9,994,382, resulting in an over-recovery of $331,887. The 2017 over-recovery
of $2,231,264, the 2018 over-recovery of $331,887, and interest of $53,720
associated with any over- and under-recoveries results in a final 2018 true-up of
$2,616,870 (over-recovery).
Actual/Estimated 2019 True-ups
FPUC provided actual revenues for January through July
2019 and estimated revenues for August through December 2019, totaling
$9,166,112, compared to an actual/estimated revenue requirement for 2019 of
$10,326,381, resulting in an under-recovery of $1,160,269. The 2018
over-recovery of $2,616,870, the 2019 under-recovery of $1,160,270, and interest
of $56,582 results in a total 2019 over-recovery of $1,513,182.
Projected 2020 Costs
FPUC expects capital expenditures of $12,220,000 for the
replacement of cast iron/bare steel infrastructure in 2020. The return on
investment (which includes federal income taxes, regulatory assessment fees,
and bad debt), depreciation expense, and property tax and customer notification
expense associated with that investment are $12,112,394. Subtracting the
revenue requirement for bare steel replacement included in base rates results
in a 2020 revenue requirement of $11,364,667. After subtracting the total 2019
over-recovery of $1,513,182, the 2020 revenue requirement is $9,851,484. Table
1-1 shows FPUC’s 2020 revenue requirement calculation.
Table 1-1
FPUC 2020 Revenue
Requirement Calculation
|
2020 Projected Expenditures
|
$10,000,000
|
|
Return on Investment
|
$7,355,418
|
|
Depreciation Expense
|
2,815,901
|
|
Property Tax and Customer Notice Expense
|
1,941,074
|
|
2020 Revenue Requirement
|
$12,112,394
|
|
Less Revenue Requirement in Base Rates
|
747,727
|
|
2020 GRIP Revenue Requirement
|
$11,364,667
|
|
Less 2019 Over-recovery
|
1,513,182
|
|
2020 Total Revenue Requirement
|
$9,851,484
|
Source: FPUC Responses to Staff’s First Data Request,
Attachment 2 Schedule C-2 page 4 of 15
Chesapeake’s True-ups by Year
Chesapeake’s calculation for the 2020 GRIP revenue
requirement and surcharges include a final true-up for 2018, an
actual/estimated true-up for 2019, and projected costs for 2020. Chesapeake
does not have a replacement recovery amount embedded in base rates.
Final True-up for 2018
Chesapeake stated that the revenues collected for 2018
were $3,602,006, compared to a revenue requirement of $3,246,851, resulting in
over-recovery of $355,155. The 2017 under-recovery of $164,174, 2018
over-recovery of $355,155, and interest of $1,164 associated with any over- and
under-recoveries results in a final 2018 over-recovery of $192,146.
Actual/Estimated 2019 True-up
Chesapeake provided actual GRIP revenues for January
through July 2019 and estimated revenues for August through December 2019,
totaling $4,381,645, compared to an actual/estimated revenue requirement of
$3,883,318, resulting in an over-recovery of $498,327. The 2018 over-recovery
of $192,146, 2019 over-recovery of $498,327, and interest of $11,425 associated
with any over- and under-recoveries results in a total 2019 over-recovery of
$701,897.
Projected 2020 Costs
Chesapeake projects capital expenditures of $2,000,000 for
the replacement of cast iron/bare steel infrastructure in 2020. The return on
investment, depreciation expense, and property tax and customer notification
expense to be recovered in 2020 totals $4,181,223. After subtracting the total
2019 over-recovery of $701,897, the total 2020 revenue requirement is $3,479,326.
Table 1-2 shows Chesapeake’s 2020 revenue requirement calculation.
Table 1-2
Chesapeake 2020 Revenue
Requirement Calculation
|
2020 Projected Expenditures
|
$2,000,000
|
|
Return on Investment
|
$2,511,628
|
|
Depreciation Expense
|
986,653
|
|
Property Tax and Customer Notice Expense
|
682,942
|
|
2020 Revenue Requirement
|
$4,181,223
|
|
Less 2019 Over-recovery
|
701,897
|
|
2020 Total Revenue Requirement
|
$3,479,326
|
Source: FPUC Responses to Staff’s First Data Request, Attachment
2 Schedule C-2 page 9 of 15
Fort Meade’s True-ups by Year
Fort Meade started its replacement program in 2016 and
first implemented GRIP surcharges in January 2017. Unlike FPUC and Chesapeake,
only bare steel services (and no mains) require replacement in Fort Meade. Fort
Meade’s replacement program was originally scheduled to be completed in 2018.
However, the companies explained that as a result of delays in contractor
availability and permitting, the replacement program is expected to conclude in
2019.
Final True-up for 2018
Fort Meade stated that the revenues collected for 2018 were
$7,394, compared to a revenue requirement of $24,720, resulting in an
under-recovery of $17,326. Adding the 2017 over-recovery of $13,528, the 2018
under-recovery of $17,326, and $104 for interest associated with any over- and
under-recoveries, the final 2018 under-recovery is $3,693.
Actual/Estimated 2019 True-up
Fort Meade provided actual GRIP revenues for January
through July 2019 and estimated revenues for August through December 2019
totaling $25,087, compared to an actual/estimated revenue requirement of
$25,518, resulting in an under-recovery of $431. Adding the 2018 under-recovery
of $3,693, the 2019 under-recovery of $431, and interest of $64 associated with
any over- and under-recoveries, the resulting total 2019 true-up is an
under-recovery of $4,188.
Projected 2020 Costs
Fort Meade projects capital expenditures of $0 for the
replacement of cast iron/bare steel infrastructure in 2020, as the replacement
program is scheduled to be completed in 2019. Therefore, the 2020 GRIP factors
are designed to only recover the remaining 2019 under-recovery of $4,188 and
the revenue requirement of $25,526 associated with the 2019 year-end total
investment ($4,188 + $25,526 = $29,714).
Proposed Surcharges for FPUC, Chesapeake, and
Fort Meade
As established in the 2012 order approving the GRIP program,
the total 2020 revenue requirement is allocated to the rate classes using the
same methodology used for the allocation of mains and services in the cost of
service study used in the utilities’ most recent rate case. The respective
percentages were multiplied by the 2020 revenue requirements and divided by
each rate class’ projected therm sales to provide the GRIP surcharge for each
rate class.
The proposed 2020 GRIP surcharge for FPUC’s residential
customers on the Residential Service (RS) schedule is $0.22312 per therm
(compared to the current surcharge of $0.21356 per therm). The monthly bill
impact is $4.46 for a residential customer using 20 therms per month. The
proposed FPUC tariff page is shown in Attachment B.
The proposed 2020 GRIP surcharge for Chesapeake’s
residential customers on the FTS-1 schedule is $0.10585 per therm (compared to
the current surcharge of $0.13593). The monthly bill impact is $2.12 for a
residential customer using 20 therms per month. The proposed Chesapeake tariff
pages are contained in Attachment C.
The proposed 2020 GRIP surcharge for Fort Meade’s
residential customers on the RS schedule is $0.24865 per therm (compared to the
current surcharge of $0.29382). The monthly bill impact is $4.97 for a
residential customer using 20 therms per month. The proposed Fort Meade tariff
page is shown in Attachment D.
Accounting and Tax Considerations
The state corporate income tax rate changed from 5.5
percent to 4.458 percent beginning on January 1, 2019 through January 1,
2022. The change in tax rate was
announced by the Department of Revenue’s Tax Information Publication on
September 12, 2019. Therefore, the proposed 2020 factors that are addressed in
this recommendation do not reflect the lower tax rate. In a noticed informal meeting
on October 15, 2019, Commission staff, utility representatives, and interested
persons discussed the change in the tax rate.
Based on the discussions and comments made by the utilities, staff
recommends that the companies address the impact of the lower tax rate in the
2019 true-up calculations provided in the surcharge petition that will be filed
in September 2020 for 2021 factors.
Commission staff reviewed the companies’ weighted average
cost of capital (WACC), as filed in its petition. In their response to the
staff’s second data request, the companies indicated the calculation of the
WACC complies with Order No. PSC-2012-0425-PAA-EU regarding IOU cost recovery
clauses. However, the companies did not determine whether a proration
adjustment is required. Consequently, it is unknown if the companies are in
compliance with Internal Revenue Service (IRS) normalization rules, per
Internal Revenue Code (IRC) §1.167(l)-1. Staff recommends the Commission direct
the companies to determine if the WACC complies with the normalization rules to
avoid a normalization violation. Further, if an adjustment to the WACC is
necessary, staff recommends any adjustment be made in a subsequent true-up
filing.
Conclusion
Staff believes the calculation of the 2020 GRIP surcharge
revenue requirement and the proposed GRIP surcharges for FPUC, Chesapeake, and
Fort Meade are reasonable and accurate. Staff recommends approval of FPUC’s,
Chesapeake’s, and Fort Meade’s proposed GRIP surcharges for the period January
through December 2020. Furthermore, staff recommends the Commission direct the
Company to determine if the WACC complies with the normalization rules to avoid
a normalization violation. Additionally, if an adjustment to the WACC is
necessary, staff recommends any adjustment be made in a subsequent true-up
filing.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. If Issue 1 is approved and a protest is filed
within 21 days of the 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, this docket should be closed upon the
issuance of a consummating order. (Lherisson)
Staff Analysis:
If Issue 1 is approved and a protest is filed within
21 days of the 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, this docket should be closed upon the issuance of a
consummating order.
