Discussion
of Issues
Issue 1:
Should the Utility’s proposed final water rates be
suspended?
Recommendation:
Yes. HC’s proposed final water rates should be
suspended. (Lewis, Johnson, Knoblauch, Bethea)
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
reviews, is needed. Staff initiated an audit of HC’s books and records. The
audit is tentatively due on January 20, 2020. In addition, staff sent its first
data request to the Utility on November 21, 2019. The Utility’s response to the
data request is due on December 20, 2019. Based on the foregoing, staff
recommends HC’s proposed final water rates be suspended.
Issue 2:
Should any interim revenue increase be approved?
Recommendation:
Yes. HC should be authorized to collect annual
revenues as indicated below:
|
|
Adjusted
Test
Year
Revenues
|
$
Increase
|
Revenue
Requirement
|
%
Increase
|
|
Water
|
$569,711
|
$66,364
|
$636,075
|
11.65%
|
(Thurmond, Lewis, Johnson, Knoblauch)
Staff Analysis:
On October 15, 2019, HC filed its rate base, cost of
capital, and operating statements to support its requested interim increase in
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 and the recommended adjustments below,
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 reviewed HC's interim request, as well
as the order from the Utility’s most recent rate proceeding, and believes
adjustments are necessary as discussed below. Staff has attached accounting schedules
to illustrate staff's recommended rate base, capital structure, and test year
operating income amounts. Rate base is labeled as Schedule No. 1-A, with the
adjustments shown on Schedule No. 1-B. Capital structure is labeled as Schedule
No. 2. Operating income is labeled as Schedule No. 3-A, with the adjustments
shown on Schedule No. 3-B.
Rate Base
Pursuant to Section 367.082, F.S., the method used to
calculate Used and Useful (U&U) in HC’s last rate case must be used for
interim purposes. In Order No. PSC-2015-0282-PAA-WS, the Commission found that
HC’s system of water treatment plants, on a consolidated basis, was 89.9
percent U&U.
Additionally, the Commission found HC’s storage to be 100 percent U&U, and
the consolidated water distribution systems were found to be 95.3 percent
U&U. Based on a review of the prior order and the Utility’s filing in this
case, staff recommends that the water treatment plant be considered 89.9
percent U&U, its storage be considered 100 percent U&U, and its water
distribution system be considered 95.3 percent U&U.
In its filing, the Utility made a non-U&U adjustment
of $166,262 to reduce plant in service and a $54,927 reduction to accumulated
depreciation, for a net reduction of $111,335 to rate base. Staff recommends an
adjustment to further increase the non-U&U adjustment to rate base by
$82,185. In addition, staff recommends a corresponding adjustment to further
decrease depreciation expense and property tax expense by $4,480 and $1,564,
respectively.
Pursuant to Rule 25-30.433(5), Florida Administrative Code
(F.A.C.), the averaging method used by the Commission to calculate rate base
and cost of capital in a rate case proceeding shall be the beginning and
end-of-year average for Class B utilities. The Utility’s interim filing
reflected the accumulated depreciation balance from the beginning of the test
year. Staff recommends an increase of $83,822 to accumulated depreciation to
reflect the average balance. Additionally, corresponding MFR Schedule A-9,
reflected an accumulated depreciation balance of $7,640 for transportation
equipment. However, the corresponding plant account had a zero balance. The
same plant account also reflected depreciation expense of $1,389 in the test
year. Upon further review of the Final Order from HC’s last rate case, this
account was brought to a zero balance to remove negative depreciation. Since
there have been no plant additions since that case, staff recommends a decrease
in accumulated depreciation of $7,640 and a corresponding decrease to
depreciation expense of $1,389. In total, staff recommends a net increase to
accumulated depreciation of $76,182 ($83,822 - $7,640).
On interim MFR Schedule G-2, the Utility reflected a
contribution in aid of construction (CIAC) balance of $904,320. Upon review of
corresponding MFR Schedule A-12, staff found this balance does not include
$11,395 of CIAC associated with main extension charges. Therefore, staff
recommends an increase of $11,395 to CIAC to reflect the main extension charge
CIAC incorrectly excluded.
Pursuant to Rule 25-30.433(3), F.A.C., the working capital
allowance for Class B utilities shall be calculated using the formula method
(one-eighth of operation and maintenance expenses). As a result of the adjustments
staff is recommending to operation and maintenance (O&M) a corresponding
decrease of working capital by $1,754. This results in a working capital
allowance of $46,545 ($372,364/8). Based on the above, staff recommends that
HC’s interim rate base should be $2,415,696.
Cost of Capital
Pursuant to Section 367.082(2)(a), F.A.C., in a proceeding
for an interim increase in rates, the Commission shall authorize, within 60
days of the filing of such relief, the collection of rates sufficient to earn
the minimum of the range of return calculated in accordance with subparagraph
(5)(b)2. Based on the above, staff recommends an interim return on equity for
HC be lowered from 9.67 percent to 8.52 percent, consistent with Order No. PSC-2015-0282-PAA-WS.
Pursuant to Rule 25-30.433(5), F.A.C., the averaging
method used by the Commission to calculate rate base and cost of capital in a
rate case proceeding shall be the beginning and end-of-year average for Class B
utilities. In its filing, the Utility used a 13-month average to calculate
customer deposits. As a result, staff decreased customer deposits by $4,316 to
reflect the beginning and end-of-year average.
Based on the above, staff recommends that the overall cost
of capital be reduced from 7.39 percent to 6.83 percent.
Net Operating Income
In order to attain the appropriate amount of interim test
year operation revenues, staff removed the Utility's requested interim revenue
increase of $137,384. Staff also reduced regulatory assessment fees (RAFs) by
$15,547 to reflect the removal of the Utility’s requested revenue increase. Based
on the above, staff recommends that the appropriate test year operating income,
before any revenue increase is $101,608.
On interim MFR Schedule G-4, the Utility reflected an O&M
expense in the amount of $386,388. Upon review of corresponding MFR Schedules
B-1 and B-3, staff determined that the total included adjustments to the test
year amount. Staff reviewed these adjustments and recommends removing the pro
forma adjustments made to increase chemical expense by $3,473 and purchased
power expense by $7,262, as interim does not allow for pro forma adjustments.
Additionally, staff recommends removing $1,486 of rate case expense
corresponding to the current rate case. Therefore, staff recommends a total
decrease to O&M of $12,221 ($3,473 + $7,262 + $1,486).
Rule 25-30.4325(1)(e), F.A.C., describes excessive
unaccounted water as unaccounted for water in excess of 10 percent of the
amount produced. Based on its MFRs, HC listed that in the test year 53,224,000
gallons were pumped, 33,693,000 gallons were sold, and 12,944,919 gallons were
used for other uses, on a consolidated basis. The Utility calculated that
6,586,081 gallons or 12.4 percent of the water was unaccounted for, resulting
in 2.4 percent of excessive unaccounted water. Applying staff’s recommended EUW
percentage results in a decrease to purchased power expense of $959 (2.4
percent x $39,975) and a decrease to chemical expense of $844 (2.4 percent x
$35,152). This results in a total EUW O&M expense reduction of $1,803.
On interim MFR Schedule G-4, the Utility reflected
depreciation expense of $134,552. Upon review of corresponding MFR Schedule
B-13, staff determined that the total amount included $11,449 of depreciation
expense associated with pro forma items. As a result, staff recommends a
decrease to depreciation expense of $11,449.
Revenue Requirement
Based on the above
adjustments, staff recommends a revenue requirement of $636,075. This represents an
interim increase in annual revenues of $66,364 (or 11.65 percent). This
increase will allow the Utility the opportunity to recover its operating
expenses and earn 6.83 percent return on its rate base.
Issue 3:
What are the appropriate interim water rates?
Recommendation:
The recommended interim rate increase of 11.86
percent for water 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 to customers within
10 days of the date of the notice. (Bethea)
Staff Analysis:
Staff recommends that interim service rates for HC
Waterworks be designed to allow the Utility the opportunity to generate annual
operating revenues of $636,075 for water. Before removal of miscellaneous
revenues, this would result in an increase of $66,364 (11.65 percent). To
determine the appropriate increase to apply to the service rates, miscellaneous
revenues should be removed from the test year revenues. The calculation is as
follows:
Table 3
Percentage Service Rate
Increase
|
|
|
Water
|
|
|
|
|
|
1
|
Total Test Year Revenues
|
$569,711
|
|
|
|
|
|
2
|
Less: Miscellaneous
Revenues
|
$10,237
|
|
|
|
|
|
3
|
Test Year Revenues from Service Rates
|
$559,474
|
|
|
|
|
|
4
|
Revenue Increase
|
$66,364
|
|
|
|
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
11.86%
|
Source: Staff’s
Recommended Revenue Requirement and MFRs
Staff recommends that the interim rate increase of 11.86
percent for water 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 to customers within 10 days of the date of the
notice.
Issue 4:
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. (Thurmond)
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 recommended total
annual interim revenue increase is $66,364. Staff calculated the potential
refund of revenues and interest collected under interim conditions in accordance with Rule 25-30.360, F.A.C., and determined the amount to
be $44,511. This amount is based on an estimated eleven months of revenue being
collected from staff's recommended interim rates over the Utility's current
authorized rates.
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.
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 provided a personal
guarantee in the amount of $44,511, in this docket.
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. Under no
circumstances 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 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. (Schrader)
Staff Analysis:
The docket should remain open pending the Commission’s PAA decision on
the Utility’s requested rate increase.
