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. CHC should be
allowed an annual increase of $23,368 (20.82 percent) for water. The adjusted
revenue requirement is reflected on Schedule No. 1. (Doehling, Knoblauch, D.
Brown, T. Brown)
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 CHC’s case as
filed is sufficiently narrow in scope to qualify for a limited proceeding.
Staff also believes that CHC 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 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 asserted it did not receive any customer
complaints regarding DEP secondary water quality standards during the past five
years. Also, test results provided by CHC indicated that the utility is
currently passing secondary standards.
A customer
meeting was held September 11, 2019, in Haines City, Florida. One customer
spoke and had no concerns with the quality of CHC’s product. Staff also
reviewed complaints received by the Commission and DEP for the previous five
years. In August 2019, the Commission received two complaints addressing
concerns of foul odor. The utility responded to both complaints and was able to
resolve one of the complaints by visiting the customer in person and flushing
her lines of stagnant water. The other customer was not receptive and denied
further assistance from the utility. The Commission received one additional consumer
correspondence filed in the docket addressing concerns of four odor and gray
water. Staff responded to the consumer correspondence and provided information
on the Commission’s practice and rate case process.
DEP received
one complaint on September 14, 2014, for foul odor and black particles. DEP
investigated and found that there was no chlorine residual at the customer’s
house and chlorine was low at the treatment plant. The operator made a repair
to the chlorine injection pumps and the system was flushed to restore residual
and help with any sediment in the mains. DEP conducted a sanitary survey on
August 14, 2018, and determined the system to be substantially in compliance
with DEP’s rules and regulations.
As previously
discussed, CHC 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 supplemental information gathered throughout the course of this
docket, staff does not believe any actions need to be taken with respect to
secondary standards. In addition, staff further notes the overall quality of
service for CHC’s water system was considered satisfactory in the utility’s
last rate case in 2014.
Incremental Rate Base
The utility
requested that costs related to replacing water meters across its system be
included in rate base as part of this proceeding. CHC requested a rate base increase of
$232,600 to recover the cost associated with the plant additions. The
appropriate plant additions and retirements, as well as corresponding adjustments
to accumulated depreciation, depreciation expense, and taxes other than income
(TOTI) are discussed below. Staff’s 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 and Retirements
In its
application, CHC stated that the existing meters are original to the system,
which was constructed in the 1980s, and are likely not capturing all water
usage. The utility stated that it planned to replace all of the existing meters
with automatic meter reading (AMR) meters. The utility affirmed that AMR meters
have been installed at Four Lakes Golf Club, Ltd. and S.V. Utilities, Ltd.,
which are under the same ownership as CHC.[2]
In order to utilize existing meter reading equipment, the utility sought to
purchase the same meters for the CHC system that were installed at the other
two systems. The utility was unable to locate multiple vendors in the area that
offered the same meters; therefore, only one quote was obtained for the
project.
A quote for
894 AMR meters at a cost of $185 per residential meter with a higher cost for
larger general service meters was provided. The total cost for all AMR meters
was $209,131, which also included the costs for installation and replacement
parts. As of October 17, 2019, 700 meters have been installed, and all meters
are expected to be installed by the end of October. The utility proposed $16,535 in retirements related to the meters and
meter installations based on the cost reflected in the utility’s books. Staff
verified the amount in the utility’s 2018 Annual Report and agrees with the
adjustment.
The utility
provided an invoice for the existing meter reading equipment that will be
utilized for all of the systems under the same ownership as CHC that use AMR
meters. The total cost of the meter reading equipment was allocated to each
system based on the total number of lots being read by the equipment. For CHC,
an amount of $8,341 or 36 percent was allocated to the system. There were no retirements associated with the
meter reading equipment system since those are new additions to the system and
not replacements.
Additionally,
the utility provided a quote for 225 shut-off valves totaling $18,429, which
will be installed on an as needed basis. Therefore, the total cost for the
meter replacement project is $235,901. This includes the costs of the meters,
meter installations, allocation of the meter reading equipment, and shut-off
valves. There were no retirements
related to the curb stops (shut-off valves) were made because the Commission
previously disallowed the inclusion of the cost due to lack of support. Therefore,
costs associated with the curb stops are not reflected in the utility’s books.
Based on
Commission approval of a similar meter replacement project for Four Lakes Golf
Club, Ltd., staff believes the costs presented by CHC are reasonable and
recommends approval of the utility’s meter replacement project. Staff’s
recommended plant additions and retirements are summarized in Table 1-1.
Table 1-1
Summary of Requested
Plant Additions
|
Project
|
Plant Additions
|
Retirements
|
|
Water Meter Replacement
|
$209,131
|
($16,535)
|
|
Meter Reading Equipment
|
8,341
|
0
|
|
Shut-Off Valves
|
18,429
|
0
|
|
Total
|
$235,901
|
($16,535)
|
Source:
Utility’s Filing and staff calculations.
Based on the
plant additions described above, staff believes corresponding adjustments
should also be made to accumulated depreciation, depreciation expense, and
TOTI. These adjustments are discussed elsewhere in this issue.
Accumulated
Depreciation
CHC requested
accumulated depreciation of $12,882 for plant additions. Staff calculated
accumulated depreciation using the prescribed rates set forth in Rule
25-30.140, F.A.C. As a result, staff increased accumulated depreciation by
$2,677 to account for the plant additions and retirements recommended above.
Accordingly, staff recommends an increase to accumulated depreciation of
$15,559 ($12,882 + $2,677).
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 is recommending an adjustment to O&M expense resulting
in a decrease to O&M expenses of $6,624. This adjustment is 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
this formula, staff recommends a decrease to the working capital allowance of
$828.
Rate Base Summary
Based on the
foregoing, staff recommends a rate base increase of $234,097. Staff’s rate base
calculations are shown on Schedule No. 1.
Rate of
Return
CHC consists
of two mobile home parks, a golf course, and the utility. The utility does not
have a separate capital structure. 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. In its filing, CHC provided a weighted average cost of capital
(rate of return) of 4.18 percent, based on a capital structure consisting of
100 percent debt using the most recent 12-month period ended December 31, 2018.
CHC’s capital
structure consists of long-term debt of $41,562,940 and negative common equity
of $15,443,740. The utility does not have customer deposits. Consistent with
prior Commission orders and the utility’s last rate case, staff set the common
equity balance at zero.[4] Staff used
the Commission-approved 11.16 percent return on equity from the utility’s last
rate case, with a range of 10.16 percent to 12.16 percent.[5]
Based on a capital structure of 100 percent debt, the appropriate overall rate
of return is 4.18 percent.
Operating
Expenses
In its
petition, CHC requested an increase to operating expenses of $17,632. The components
for the operating expenses were Depreciation Expense, Regulatory Commission
Expense, Meter Reading Expense, and Regulatory Assessment Fees (RAF). While
TOTI was not part of the utility’s calculation, staff has included a TOTI
adjustment in its calculation of operating expenses to reflect the increase in
property taxes based on staff’s recommended plant additions.
Depreciation Expense
In its
filing, the utility requested an increase in Depreciation Expense of $13,640,
which impacted three accounts (331, 334, and 340). The utility originally
listed the meter reading equipment in Account 340 – Office Furniture and
Equipment, but staff believes it is more appropriate to include it in Account
334 – Meters and Meter Installations. This results in a change in the
depreciation rate from 16.67 percent to 5.88 percent. Staff calculated
depreciation expense using the prescribed rates set forth in Rule 25-30.140,
F.A.C. Based on staff’s recommended increase in rate base, staff recommends
depreciation expense of $12,305. This results in a reduction of $1,335 ($13,640
- $12,305).
Regulatory Commission Expense
In its
filing, the utility initially requested $37,750 in rate case expense, with an
annual amortization expense of $9,438.[6]
This included $35,200 for legal fees and costs associated with legal services,
$1,000 for the filing fee, $800 for noticing, and $750 for travel. 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 completion of the
docket.[7] The update
reflected actual expenses of $4,128 for legal fees, associated costs, and
filing fees through August 15, 2019, with an additional $12,068 in estimated
rate case expense.
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 several adjustments to the utility’s
proposed rate case expense are necessary.
The first
adjustment relates to the utility’s legal fees. CHC included $14,408 in legal
fees and associated costs to complete this limited proceeding. The utility
provided invoices from Dean Mead Attorneys at Law (Dean Mead) through August
15, 2019, showing actual expenses associated with the rate case totaling
$4,128, and estimated an additional $10,260 to complete the case. These amounts
included 6.2 hours of actual time and 27 hours of time to complete the limited
proceeding.
Staff reduced
actual expense by $152 (0.4 hrs. x $380/hr.) to remove the attorney’s time
related to work on a deficiency, per Commission practice. Staff made no
additional adjustments to actual expense. Staff notes the actual amount
included the appropriate $1,750 filing fee.[8]
Staff also made an adjustment to Dean Mead’s estimate to complete the case,
which included 7 hours to “Travel to and from Haines City for Customer Meeting
and meet with staff, and with client.” Staff notes that the Dean Mead offices
are located in downtown Orlando and the customer meeting was held in Haines
City, approximately 40 miles away. In addition, the customer meeting only
lasted 20 minutes. As such, staff believes that 3.5 hours is appropriate for
the customer meeting. This represents an hour of travel time each way, half an
hour for the customer meeting, and an hour to meet with the client.
Accordingly, staff believes that 3.5 hours, or $1,330 (3.5 hrs. x $380/hr.)
should be removed from the estimate to complete the case. As such, staff
recommends 23.5 hours (27 hours – 3.5 hours) total for the attorney’s estimate
to complete the case. Accordingly, staff believes that the appropriate amount
of legal fees is $12,926, for a total reduction of $1,482 ($152 + $1,330).
The next
adjustment relates to the utility’s noticing costs. The utility requested $800
for costs associated with copying and mailing the required notices. 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 calculated $1,470 for postage
expense, $624 for printing expense, and $134 for envelopes. This results in
$2,228 ($1,470 + $624 + $134) for the noticing requirement.
Staff’s final
adjustment relates to travel expense. The utility requested $750 for travel
expense for one utility employee to attend the customer meeting and the
Commission Conference. This amount included $200 for hotel, $400 for auto
related expense, and $150 for meals. In response to a staff data request,
travel expense was estimated at $658, but no supporting documentation was
provided. Absent support documentation, staff estimated hotel cost of $125 for
one night for one utility representative to attend the Commission Conference.
Staff estimated auto expense of $306 based on the IRS 2019 standard mileage
rate and the Florida Department of Transportation’s mileage calculator for
travel from the utility’s offices in Lakeland to Haines City to attend the
customer meeting, and from the utility’s offices in Lakeland to Tallahassee to
attend the Commission Conference.[9] For utility
travel to the Commission Conference, staff used the $36 per day meal allowance that
State of Florida employees receive when traveling. As such, staff believes that
$72 ($36/day x 2 days) for meals is appropriate. Consistent with the discussion
above, staff recommends travel expense of $503 ($125 + $306 + $72).
Based on the
above, staff recommends that the total rate case expense is $15,657, which
amortized over four years results in regulatory commission expense of $3,914
($15,657 ÷ 4) for water. These costs and
staff's adjustments are summarized below in Table 1-2.
Table 1-2
Appropriate Rate Case Expense
|
|
Utility
|
|
Staff Rec.
|
|
Expense
|
(As filed)
|
Adjustments
|
RCE
|
|
Legal Services
& Fees (Dean Mead)
|
$36,200
|
($23,274)
|
$12,926
|
|
Noticing Costs
|
800
|
1,428
|
2,228
|
|
Travel
|
750
|
(247)
|
503
|
|
Total
|
$37,750
|
($22,093)
|
$15,657
|
|
|
|
|
|
|
Four-year
amortization of Rate Case Expense:
|
$9,438
|
($5,524)
|
$3,914
|
Source: Utility’s filing and response to
staff data request, and staff calculations.
Meter Reading Expense
In its
filing, the utility reflected a reduction in Salary Expense of $6,624. This is
a result of the elimination of the meter reader position previously used by the utility. The
calculation of this amount is shown below in Table 1-3.
Table 1-3
Reduction to Meter Reading Expense
|
Hours reading meters annualized (42 hrs. per month)
|
480
|
|
Employee cost per hour (gross pay plus payroll
taxes, benefits, fees)
|
$13.80
|
|
Total salary & benefits for meter reading
|
$6,624
|
Source: Document No. 04606-2019.
Taxes Other
Than Income
Staff
calculated the increase in property taxes based on the recommended plant
additions. Because the 2019 millage rates for Polk County have not been
finalized at this time, staff used the 2018 millage rate. Consistent with
Commission practice, staff used the four percent discount that is available to
the utility for early payment of its property taxes. Staff recommends an
increase in property taxes of $2,981.
Based on
staff's recommendations above, staff is recommending an increase to expenses
before RAFs of $12,576. These calculations are shown below in Table 1-4.
Table 1-4
Expenses Before RAFs
|
|
Per
Utility
|
Adjustments
|
Staff Recommended
|
|
Depreciation Expense
|
$13,640
|
($1,335)
|
$12,305
|
|
Rate Case Expense
|
9,438
|
(5,524)
|
3,914
|
|
Meter Reading Expense
|
(6,624)
|
0
|
(6,624)
|
|
TOTI
|
0
|
2,981
|
2,981
|
|
Total Increase in Operating Expense
|
$16,454
|
($3,878)
|
$12,576
|
Source: Utility’s application, staff
calculations.
Regulatory Assessment Fees
Based on the
above, staff is recommending a revenue increase before RAFs of $22,361.
Therefore, staff recommends that RAFs should be increased by $1,006 ($22,361 x
4.5 percent).
Operating Expenses Summary
Based on the
above, staff is recommending an incremental increase to Operating Expenses of
$13,582 ($12,576 + $1,006). Staff's calculations are shown on Schedule No. 1.
Conclusion
Based on the above, staff recommends a revenue requirement
increase of $23,368. This represents an increase of 20.82 percent. The utility
requested a revenue requirement increase of $27,355, or 24.37 percent. Staff's
revenue requirement calculations are shown on Schedule No. 1.
Issue 2:
What are the appropriate water rates for CHC?
Recommendation:
The recommended monthly water rates are shown on
Schedule No. 2. The recommended rates should be designed to produce additional
revenues of $23,368 (20.82 percent increase). The percent increase should be
applied as an across-the-board increase to the existing 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 sheets pursuant to
Rule 25-30.475(1), F.A.C. 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 notice was given within 10 days of the date of the notice. (Ramos)
Staff Analysis:
Staff recommends that service rates for CHC be
designed to allow the utility the opportunity to generate annual service
revenues of $135,631 for water. The annualized service revenues before the rate
increase are $112,263. This results in a 20.82 percent increase for the
utility’s water service revenues. The corresponding percentage increase should
be applied as an across-the-board increase to the existing water rates.
Based on the above, the recommended monthly water rates
are shown on Schedule No. 2. The recommended rates should be designed to
produce additional revenues of $23,368 (20.82 percent increase). The percent
increase should be applied as an across-the-board increase to the existing
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 sheets pursuant to Rule 25-30.475(1), F.A.C. 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 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 in four years after the published effective date to reflect the
removal of the amortized rate case expense as required by Section 367.081(8),
F.S.?
Recommendation:
The water rates should be reduced, as shown on
Schedule No. 2, to remove rate case expense grossed-up for RAFs and amortized
over a 4-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. CHC 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 the utility 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. (D. Brown, T.
Brown, Ramos)
Staff Analysis:
Section 367.081(8), F.S., requires that the rates be
reduced immediately following the expiration of the 4-year period by the amount
of the rate case expense previously included in rates. The reduction will
reflect the removal of revenue associated with the amortization of rate case
expense and the gross-up for RAFs. This results in a reduction of $4,099.
The water rates should be reduced, as shown on Schedule
No. 2, to remove rate case expense grossed-up for RAFs and amortized over a
4-year period. The decrease in rates should become effective immediately
following the expiration of the 4-year rate case expense recovery period,
pursuant to Section 367.081(8), F.S. CHC 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 the utility 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 CHC 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. (D. Brown, T. Brown)
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
367.0814(7), F.S., 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
$15,797. 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)
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.
