Discussion
of Issues
Issue 1:
Is the quality of service provided by Merritt Island
satisfactory?
Recommendation:
Yes. Merritt Island has been responsive to its
customer complaints; therefore, staff recommends that the quality of service be
considered satisfactory. (Doehling, M. Watts)
Staff Analysis:
Pursuant to Rule 25-30.433(1), Florida
Administrative Code (F.A.C.), the Commission, in every rate case, shall make a
determination of the quality of service provided by the utility by evaluating
the quality of the utility’s product (water) and the utility’s attempt to
address customer satisfaction (water and wastewater). As a wastewater only
utility, this evaluation was limited to the utility’s attempt to address
customer satisfaction. The Rule further states that the most recent chemical
analyses, outstanding citations, violations, and consent orders on file with
the Florida Department of Environmental Protection (DEP) and the county health
department, along with any DEP and county health department officials’
testimony concerning quality of service shall be considered. In addition, any
customer testimony, comments, or complaints shall also be considered.
The Utility’s Attempt to
Address Customer Satisfaction
On November 4, 2019, a customer meeting was held at the
Merritt Island Public Library to receive customer comments concerning quality
of service. No customers attended the meeting. A review of the Commission’s
complaint tracking system revealed two customer complaints against the Utility
during the previous five-year period. Both complaints were filed by the same
customer, and both concerned the condition of a road and issues with the
collection system. The Utility has not received any customer complaints aside
from the two previously discussed. No complaints were received by the DEP.
In response to the first complaint dated June 6, 2017, the
Utility had an employee evaluate the situation, apply a patch to the road, and
explain to the customer what further repairs may be needed. The customer raised
the same concern approximately 11 months after the initial complaint. The
Utility responded to the customer, and explained that it is continuing to
evaluate a long-term solution to the issue. Merritt Island did note that it
examined the patch and determined it to be stable. Merritt Island is aware that
under this road, along with a few other streets, the wastewater collection
mains will eventually need to be replaced. However, the Utility does not plan
to begin construction at this time.
Conclusion
Merritt Island has been responsive to its customer
complaints; therefore, staff recommends that the quality of service be
considered satisfactory.
Issue 2:
Are the infrastructure and operating conditions of
Merritt Island's wastewater system in compliance with DEP regulations?
Recommendation:
Merritt Island's wastewater system is not currently
in compliance with the DEP, but the Utility is working to address the issues
noted by the DEP. (M. Watts)
Staff Analysis:
Rule 25-30.225(2), F.A.C., requires each wastewater
utility to maintain and operate its plant and facilities by employing qualified
operators in accordance with the rules of the DEP. Rule 25-30.433(2), F.A.C.,
requires consideration of whether the infrastructure and operating conditions
of the plant and facilities are in compliance with Rule 25-30.225, F.A.C. ln
making this determination, the Commission must consider testimony of the DEP
and county health department officials, compliance evaluation inspections,
citations, violations, and consent orders issued to the utility, customer
testimony, comments, and complaints, and utility testimony and responses to the
aforementioned items.
Wastewater System Operating Condition
Merritt Island's wastewater treatment plant (WWTP) is a
0.070 million gallon per day (MGD) annual average daily flow (AADF) extended
aeration domestic WWTP consisting of aeration, secondary clarification,
chlorination, and aerobic digestion of biosolids. Since acquiring the
wastewater treatment system, the Utility has made several improvements to bring
the system into compliance with the DEP requirements. In response to a November
14, 2019 warning letter issued by the DEP, Merritt Island is working to address
vegetation growth in the three rapid infiltration basins (RIB). Merritt Island met with DEP personnel on January
9, 2020, to address the matter. The Utility discussed the improvements to the
WWTP that it has made, the improvements currently underway, and the planned
improvements to the plant. To date, the Utility has:
1.
Removed four truckloads of grit, sand, old piping, and
debris from aeration bays.
2.
Installed all new fine bubble diffusers.
3.
Installed a new bar screen and headworks piping.
4.
Installed two new blowers and air header.
5.
Installed a new panel box, controls, conduit and outlet
plugs.
6.
Cleaned out two of the three RIBs.
The third RIB is still drying out from the area’s rainy
season. When dry, the vegetation and sludge will be removed. During its meeting
with the DEP, the Utility discussed entering into a Consent Order in which the
Utility would propose additional improvements to the plant in lieu of a direct
fine. The Utility is otherwise in compliance with the DEP requirements.
Conclusion
Merritt Island's wastewater system is not currently in
compliance with the DEP, but the Utility is working to address the issues noted
by the DEP.
Issue 3:
What are the used and useful (U&U) percentages
for the Utility’s wastewater treatment plant (WWTP) and collection system?
Recommendation:
Staff recommends that the WWTP and collection system
be considered 100 percent U&U. Also, staff recommends that a 5 percent
adjustment to purchased power and chemical expenses be made for excessive
infiltration and inflow (I&I). (M. Watts)
Staff Analysis:
Pursuant to Rule 25-30.432, F.A.C., the U&U
percentage of a WWTP is based on the plant flows, growth allowance, I&I and
the plant permitted capacity. Other factors, such as whether the service area
is built out and whether the plant flows have decreased due to conservation may
also be considered. The DEP permitted capacity is currently at 70,000 gallons
per day (gpd) based on the annual average daily flow. The collection system is
composed of clay and polyvinyl chloride pipes, and two lift stations.
WWTP and Collection System U&U
The Utility indicated in its application that it has 141
mobile home connections in its service area, with no vacant lots. The Utility
has one bulk customer that serves 120 equivalent residential connections. During
the previous SARC, staff conducted a field inspection and confirmed that the
service area is built out. In
that same rate case, the Commission found the WWTP and collection system to be
100 percent U&U. Since that time there have been no changes to the
collection system and there are no plans for expansion. Because the service
area is built out and there are no plans for expansion, staff recommends that
the WWTP and collection system should be considered 100 percent U&U.
Infiltration and Inflow
Rule 25-30.432, F.A.C., provides that in determining the
amount of U&U plant, the Commission will consider I&I. Staff calculates
the allowable infiltration based on system parameters, and calculates the
allowable inflow based on water sold to customers. The sum of these amounts is
the allowable I&I. Staff next calculates the estimated amount of wastewater
returned from customers. The estimated return is determined by summing 80
percent of the water sold to residential customers with 90 percent of the water
sold to non-residential customers. Adding the estimated return to the allowable
I&I yields the maximum amount of wastewater that should be treated by the
wastewater system without incurring adjustments to operating expenses. If this
amount exceeds the actual amount treated, no adjustment is made. If it is less
than the gallons treated, then the difference is the excessive amount of
I&I.
For the first seven months of the test year, the amount of
wastewater was not accurately measured because of an inoperable flow meter. The
situation was rectified by November 1, 2018, leaving staff with five months,
November 2018 through March 2019, of valid wastewater treatment data.
Therefore, staff chose the period November 2018 through October 2019 to perform
its I&I evaluation. To do this, staff obtained water sold data from the
audit work papers for the period November 2018 through March 2019, and from the
City of Cocoa for the period April 2019 through October 2019. Staff obtained
the amount of wastewater treated for the same period from the Discharge
Monitoring Reports submitted to the DEP by the Utility.
Using the pipe lengths of the Utility’s collection system,
the infiltration allowance is calculated to be 2,314,847 gallons per year. Ten percent of the total gallons
sold to customers is allowed for inflow, which totals 1,245,600 gallons. The
sum of these amounts is the total allowable I&I which is 3,359,487 gallons per year. The amount calculated for estimated
return is 10,446,400 gallons
per year. The estimated I&I is
calculated by subtracting the total allowable I&I from the amount of
wastewater actually treated during the 12-month period being evaluated, which
is 4,321,500 gallons. The actual
amount exceeds the allowable amount with an excess I&I of 962,013 gallons
and, therefore, there is 5 percent excessive I&I. As such, staff recommends
that a 5 percent adjustment to purchased power and chemical expenses be made
for excessive I&I.
Conclusion
Staff recommends that Merritt Island’s WWTP and collection
system should be considered 100 percent U&U. Also, staff recommends that a 5
percent adjustment to purchased power and chemical expenses be made for
excessive I&I.
Issue 4:
Should the Commission approve a year-end rate base
for Merritt Island Utility Company, Inc., and if so, what is the appropriate
year-end wastewater test year rate base?
Recommendation:
Yes. The Commission should approve a year-end rate
base for Merritt Island. The appropriate year-end test year rate base is $150,423.
(Wilson, T. Brown, Doehling, M. Watts)
Staff Analysis:
The appropriate components of a Utility’s rate base
include utility plant in service, contributions-in-aid-of-construction (CIAC),
accumulated depreciation, amortization of CIAC, and working capital. The
Utility's rates and charges were approved in a 2008 SARC.
The rates were subsequently amended through two price index increases. This
utility has historically operated at a loss. The Utility requested the test
year ended March 31, 2019, for the instant case. Commission audit staff
determined that the Utility’s books and records are in compliance with the
National Association of Regulatory Utility Commissioners’ Uniform System of
Accounts (NARUC USOA). A summary of each component of rate base and staff’s
recommended adjustments are discussed below.
Year-End Rate Base
In its application, the Utility requested a year-end rate base for
its wastewater system in order to have an opportunity to recover its allowed
rate of return on the significant capital improvements that were made after the
acquisition. These improvements represent a significant portion of the
wastewater plant in service. In the transfer order, the Commission approved a
net book value for wastewater plant in service of $166,766.
During the requested test year, Merritt Island made more than $95,000 of plant
investments. If an average rate base is used, the Utility will not be afforded
the opportunity to recover its allowed rate of return on the new investment and
will be put in the position of needing to request a subsequent SARC at a later
date.
The Commission has the authority to apply a year-end rate
base, but should only apply a year-end rate base in extraordinary circumstances. Staff believes extraordinary circumstances
exist in the instant case. Subsequent to the acquisition, the Utility made
significant improvements to the wastewater system, which were required by the
DEP. The year-end rate base will provide the Utility with an opportunity to
recover the investment made to improve service quality and to provide for
compensatory rates for this Utility in this rate case. The Commission has
previously authorized the use of a year-end rate base in other cases involving
significant test year improvements. Therefore, staff recommends that the Commission
approve a year-end rate base for Merritt Island.
Utility Plant in Service (UPIS)
The Utility recorded a test year UPIS balance of $266,370.
In addition to numerous plant additions that have been made by the Utility
since the transfer, Merritt Island also requested pro forma consideration of an
emergency pump replacement and the installation of piping to divert effluent
between its rapid infiltration basins (RIB). Based on support documentation,
the pump replacement was included as part of test year plant. As such, staff
did not include the pump replacement in its pro forma plant calculations to
avoid inclusion of duplicative costs.
As discussed in Issue 2, the Utility is currently working
with the DEP to address vegetation growth in its three rapid RIBs. Two of the
three RIBs have been cleared of vegetation. The third RIB has dense growth that
needs to be cleared.
Prior to bringing in the heavy equipment required to clear the vegetation, the
soil in the RIB must first be dried out. Therefore, new piping was installed to
divert flows from this RIB to the other two, and is included in the Utility’s
pro forma request. As this work is being done pursuant to a warning letter issued
by the DEP, staff believes this pro forma request is prudent. As such, staff
increased UPIS by $5,813 to reflect the pro forma piping. There were no
retirements associated with the piping since it did not previously exist at the
ponds. Staff also made corresponding adjustments to accumulated depreciation (discussed
below), while depreciation expense and taxes other than income adjustments for taxes related to pro forma
plant are discussed in Issue 7. Consistent with Commission practice, no
averaging adjustments are applied to pro forma additions. Therefore, staff
recommends that the appropriate UPIS balance is $272,183 ($266,370 + $5,813).
Land
& Land Rights
The Utility recorded a test year land balance of $30,479.
The Commission approved a land balance of $30,479 in the Utility's 2017
transfer docket. There
have been no additions to land since the transfer; therefore, no adjustments
are necessary. Staff recommends a land and land rights balance of $30,479.
Used
& Useful
As discussed in Issue 3, Merritt Island’s WWTP and
collection system are considered 100 percent U&U. Therefore, no U&U
adjustments are necessary.
Accumulated Depreciation
Merritt Island recorded a test year accumulated
depreciation balance of $161,473. Staff decreased accumulated depreciation by
$460 to reflect appropriate test year depreciation balances pursuant to Rule
25-30.140, F.A.C. In addition, staff recommends an adjustment associated with
the pro forma plant project discussed above. Staff’s adjustment to accumulated
depreciation for pro forma plant results in an increase of $182. Staff’s
adjustments to this account result in a decrease of $278 ($460 - $182).
Therefore, staff recommends an accumulated depreciation balance of $161,195
($161,473 - $278).
Contributions in Aid of Construction (CIAC)
The Utility recorded a test year CIAC balance of $23,500.
Based on staff’s review, no adjustment is necessary. Based on Order No.
PSC-2017-0366-PAA-SU, CIAC is fully amortized. Therefore, staff recommends that
the appropriate balance is $23,500.
Accumulated Amortization of CIAC
The Utility recorded a test year accumulated amortization
of CIAC balance of $23,500. Based on staff’s review, no adjustment is necessary
since CIAC is fully amortized. Therefore, staff recommends that the appropriate
balance is $23,500.
Acquisition
Adjustment and Accumulated Amortization of Acquisition Adjustment
The Utility recorded test year balances of $175 and $40 for an
acquisition adjustment and the associated accumulated amortization,
respectively. An acquisition adjustment results when the purchase price
differs from the original cost of the assets (net book value) adjusted to the
time of the acquisition. Pursuant to Rule 25-30.0371(3), F.A.C., the Commission
determined in Docket No. 20170018-SU that a negative acquisition adjustment of
$175 shall be recognized for ratemaking purposes.
Based on the Commission’s decision in that docket, the negative acquisition
adjustment shall be amortized over a seven-year period from the date of
issuance of the Commission order approving the transfer of assets. Therefore,
staff recommends appropriate balances of $175 and $40 for an acquisition
adjustment and the associated accumulated amortization, respectively.
Working Capital Allowance
Working capital is defined as the short-term
investor-supplied funds that are necessary to meet operating expenses.
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. Section 367.081(9), F.S., prohibits a utility
from earning a return on the unamortized balance of rate case expense. As such,
staff removed the rate case expense balance of $512 for this calculation,
resulting in an adjusted O&M expense balance of $72,729 ($73,241 - $512).
Applying this formula approach to the adjusted O&M expense balance, staff
recommends a working capital allowance of $9,091 ($72,729 ÷ 8).
Rate Base Summary
Based on the forgoing, staff recommends that the
appropriate year-end test year rate base is $150,423. Rate base is shown on
Schedule No. 1-A. The related adjustments are shown on Schedule No. 1-B.
Issue 5:
What is the appropriate rate of return on equity and
overall rate of return for Merritt Island?
Recommendation:
The appropriate return on equity (ROE) is 7.85
percent with a range of 6.85 percent to 8.85 percent. The appropriate overall
rate of return is 7.85 percent. (Wilson, T. Brown)
Staff Analysis:
Merritt Island’s capital structure consists of
$150,000 in common equity. The Utility has no customer deposits. Audit staff
determined that no test year adjustments were necessary. The Utility’s capital
structure has been reconciled with staff’s recommended rate base. The
appropriate ROE is 7.85 percent based upon the Commission-approved leverage
formula currently in effect.
Staff recommends an ROE of 7.85 percent, with a range of 6.85 percent to 8.85
percent, and an overall rate of return of 7.85 percent. The ROE and overall
rate of return are shown on Schedule No. 2
Issue 6:
What are the appropriate test year revenues for
Merritt Island?
Recommendation: The appropriate test year
revenues are $65,658.
(Sibley)
Staff Analysis:
Merritt
Island recorded in its general ledger $66,595 in test year revenues, which
consists of $66,595 in service revenues and no miscellaneous revenues. The City
of Cocoa provides the billing and collection of the monthly wastewater charges
for Merritt Island. The City of Cocoa submits the monthly collections to
Merritt Island no later than the 15th of the following month.
The Utility had a rate increase subsequent to the test
year as a result of a price index adjustment.
In order to determine the appropriate test year service revenues, staff
applied the number of billing determinants by the rates in effect as of June 9,
2019. As a result, staff determined that
service revenues should be $65,658, which is a $937 ($66,595-$65,658) decrease
to test year service revenues. This adjustment to service revenues is due to a
timing difference between the billing register provided by the City of Cocoa
and the general ledger maintained by Merritt Island. Staff has no adjustment to
miscellaneous revenues. Staff recommends that the appropriate test year
revenues are $65,658.
Issue 7:
What is the appropriate amount of operating expenses
for Merritt Island?
Recommendation:
The appropriate amount of operating expense for
Merritt Island is $87,417. (Wilson, T. Brown, Doehling, M. Watts)
Staff Analysis:
Merritt Island recorded operating expense of
$80,736 for the test year ended March 31, 2019. The test year operation &
maintenance (O&M) expenses have been reviewed, including invoices, canceled
checks, and other supporting documentation. Staff has made a few adjustments to
the Utility's operating expenses as summarized below.
Operation & Maintenance Expense
Salaries and Wages – Officers (703)
The Utility recorded salaries and wages – officers expense
of $5,000 in the test year to reflect the president's monthly salary of $417.
According to the Utility's 2018 Annual Report, Merritt Island's officers also
include an accounting manager who does not receive a salary included in this
amount. In addition, the Utility indicated in audit work papers that the
president only receives compensation through distribution of retained earnings
if there are any net operating profits from operations that are not used for
continuing operations or capital improvements. As such, staff recommends
salaries and wages - officers expense for the test year of $5,000.
Sludge
Removal Expense (711)
The Utility recorded sludge removal expense of $4,000 in
the test year. Supporting documentation confirming the sludge removal expense was
provided. Staff made no adjustments to sludge removal expense. Therefore, staff
recommends sludge removal expense for the test year of $4,000.
Purchased Power (715)
The Utility recorded purchased power expense of $5,764 in
the test year. Supporting documentation confirming the purchased power expense was
provided. As discussed in Issue 3, staff recommends an I&I adjustment
of 5 percent. Therefore, we decreased this account by $288 ($5,764 x .05 = $288)
to reflect a 5 percent excessive I&I adjustment. Therefore, staff recommends purchased power expense for the
test year of $5,476 ($5,764 - $288).
Chemicals Expense (718)
The Utility recorded chemicals expense of $2,425 in the
test year. Supporting
documentation confirming the chemicals expense was provided. As
discussed in Issue 3, staff recommends an I&I adjustment of 5 percent.
Therefore, we decreased this account by $121 ($2,425 x .05 = $121) to reflect a
5 percent excessive I&I adjustment. Therefore, staff recommends chemicals expense for the test year of $2,304 ($2,425 - $121).
Contractual
Services – Engineering (731)
The Utility recorded contractual services – engineering expense of
$1,200. Supporting documentation confirming the expense was related to
engineering work associated with the permit transfer was provided. As such,
staff believes that the one-time expense should be amortized over five years,
or $240 ($1,200 ÷ 5 years) per year. Staff removed $960 ($240 x 4) from this account
to reflect the expense being amortized over a five-year period, and included
only one year’s amortization in the test year.
The Utility incurred two non-recurring expense items
during the test year that were not included in O&M expenses. The first
expense was a non-recurring expense of $6,221 for engineering work on service
territory maps and legal description for the Utility’s new service area, which
were required as part of the Utility’s certificate amendment in Docket No.
20170142-SU.
The expense was incurred in July 2018. Staff believes the expense should be
included in O&M and amortized over five years, or $1,244 ($6,221 ÷ 5) per year. The second expense, for DEP
required pond clearing, is discussed in “Miscellaneous Expense” below. Therefore, staff recommends contractual
services - engineering
expense for the test year
of $1,484 ($1,200 - $960 + $1,244).
Contractual
Services – Accounting (732)
The Utility recorded contractual services – accounting expense of
$400. Supporting documentation confirming the accounting expense was used for
preparing and filing the corporate tax preparation was provided. Staff made no
adjustments to accounting expense. Therefore, staff recommends contractual
services - accounting expense for the test year of $400.
Contractual Services – Legal (733)
The Utility recorded contractual services – legal expense
of $366 in the test year. Supporting documentation confirming the legal
expense was provided. Staff made no adjustments to this account. As
such, staff recommends contractual services – legal expense for the test year
of $366.
Contractual Services - Other
Expense (736)
During the
test year, the Utility recorded contractual services - other expense of
$46,123. Merritt Island receives all of its operational and administrative
services under a contract with an affiliated company, U.S. Water Services
Corporation (USWSC or U.S. Water). Pursuant to the contract, Merritt Island
employed the services of USWSC to perform various functions: administrative
management, operations, maintenance, and billing/collection for the Utility.
These include management and financial oversight, wastewater system operations,
and maintenance. The USWSC contract dated October 1, 2017, was originally in
the amount of $45,277. According to the Utility, this contract amount has
increased to $47,211 as a result of annual index increases over time.[18] This represents a known and
measurable increase of $1,088 ($47,211 - $46,123) over the amount included in
the test year.
On August 9, 2019, Merritt Island
submitted documentation containing additional information related to its
outside contractual services agreement with USWSC.[19]
According to Merritt Island,
USWSC currently operates in 60 of Florida’s 67 counties, providing service to
over 1,000 utility systems, and services to over 1,000,000 customers daily.
USWSC’s president and majority shareholder has been in the water and wastewater
utility management and operations industry for over 30 years. Merritt
Island contracts with
USWSC for the following services:
- Wastewater Operations
- System Maintenance and Repairs
- Regulatory Affairs
- Testing
- Accounting
- Personnel
- Office Space and Equipment
According to Merritt Island, each of
the service contracts that USWSC enters into with a utility “are different and
are priced differently depending on numerous factors.”[20]
These factors include the number of employees needed and the number of hours
required per system for successful operation. Additional considerations include
whether USWSC provides sludge hauling, chemicals, power, offices, vehicles,
etc., or if these items are provided by the utility.
Staff notes that similar relationships
currently exist for three other regulated utilities in Marion County;
Tradewinds Utilities, Inc. (Tradewinds), C.F.A.T. H2O, Inc. (CFAT), and BFF
Corp. (BFF). All have contractual service agreements with MIRA International,
Inc. (MIRA). Their respective agreements cover similar services to those
included in the agreement between Merritt Island and USWSC. In addition to a
relationship established by their contractual service agreements, the same
individuals own the three utilities listed above and MIRA. As such, the relationship
is similar to that of Merritt Island and USWSC.
As detailed in Table 7-1 below, based
on the three most recent Annual Reports, BFF had average operation and
maintenance (O&M) expense of $617.86 per Equivalent Residential Connection
(ERC), CFAT had average O&M expense of $426.77 per ERC, and Tradewinds had
average O&M expense of $501.24 per ERC.
Table 7-1
Comparable Wastewater O&M Expense Per ERC
|
Annual Report
Year
|
BFF
(112 ERCs)
|
CFAT
(227 ERCs)
|
Tradewinds[21]
(368 ERCs)
|
|
2016
|
$533.13
|
$404.88
|
$479.71
|
|
2017
|
$694.34
|
$401.54
|
$512.87
|
|
2018
|
$626.09
|
$473.89
|
$511.14
|
|
3-Year
Average
|
$617.86
|
$426.77
|
$501.24
|
Source: BFF, CFAT, and Tradewinds 2016-2018
Annual Reports; and staff calculations.
Under staff’s proposed revenue
requirement, Merritt Island’s O&M expense is $280.62 per ERC. This proposed
expense is 54.58 percent less than BFF, 34.25 percent less than CFAT, and 44.01
percent less than Tradewinds.
Additional support offered by Merritt
Island included the “2016 American Water Works Association Benchmarking
Performance Indicators for Water and Wastewater” (AWWA Benchmark) and an
independent third-party contract and benchmarking review commissioned by the
Florida Governmental Utility Authority (FGUA), which was issued in 2013.
According to the AWWA Benchmark, the median O&M expense per account of the
8 wastewater companies surveyed is $367.91, including customer service costs. This
figure is 31.11 percent higher than the O&M expense per ERC ($280.62) staff
is recommending for Merritt Island.
The contract and
benchmarking review commissioned
by FGUA was undertaken to review charges by USWSC
in comparison to similar water and wastewater utilities throughout the United States. The FGUA study
concluded that the USWSC costs on a per account basis
fell within the
top quartile
(lower cost) of other utilities.[22] While the Utility has represented that there was a
flaw in the data presented in the 2013 study, staff’s greater concern is the
age of some of the underlying data, which can be tied to AWWA’s 2011 Benchmarking Performance Indicators. As such, staff believes that the 2016
Benchmarking Performance Indicators are a more appropriate reference point.
In its filing, Merritt Island asserted
that if it was required to establish a stand-alone utility with personnel for
maintenance, customer service, accounting, regulatory compliance, etc., then
the cost would exceed that of the current USWSC contract. As the Utility noted
in its supplemental filing, O&M expenses would be incurred regardless of
the size of the customer base. In regard to the appropriateness of utility
contracts with affiliated companies, the Utility cited GTE v. Deason, 642 So. 2d 545 (Fla. 1994), in which the Florida
Supreme Court stated:
The mere fact that a utility is doing business
with an affiliate does not mean that unfair or excess profits are being
generated, without more. Charles F. Phillips, Jr. The Regulation of Public Utilities 254-255 (1988). We believe the
standard must be whether the transactions exceed the going market rate or otherwise
inherently unfair . . . [i]f the answer is “no,” then the PSC may not reject
the utility’s position.
Staff compared Merritt Island to three
“sister” wastewater utilities that had rate cases approved in the last five
years by calculating a three-year average O&M expense per ERC using
information contained in each utility’s 2016, 2017, and 2018 Annual Reports.
Staff then compared Merritt Island to five non-U.S. Water affiliated wastewater
utilities using the same criteria.[23]
Based on that criteria, the average O&M expense per ERC of the sister
utilities was $359.45. The average O&M expense per ERC for the non-U.S.
Water wastewater utilities was $314.15. Merritt Island’s O&M expense is $280.62
per ERC under staff’s recommended revenue requirement. Table 7-2 reflects the
average O&M expense per ERC for Merritt Island, and the average O&M
expense per ERC for the U.S. Water sister utilities and non-U.S. Water
utilities.
Table 7-2
Wastewater O&M Expense Per ERC
|
Utility
|
O&M Exp./ERC
|
|
U.S. Water Sister Utilities (3-Yr. Avg.)
|
$359.45
|
|
Non-U.S. Water Utilities
(3-Yr. Avg.)
|
$314.15
|
|
Merritt Island (Staff Recommended)
|
$280.62
|
Source: 2016-2018 Annual Reports and staff
calculations.
Based on staff’s review, Merritt Island’s
proposed expense is 21.93 percent less than that of the sister utilities, and 10.67
percent less than that of the non-U.S. Water utilities.
Staff notes that the Commission has
previously approved similar USWSC agreements and related costs in prior cases
involving nine of Merritt Island’s
sister utilities during eleven rate case proceedings.[24]
Two sister utilities, LP Waterworks, Inc. and Lakeside Waterworks, Inc., each
had two SARCs in which this Commission reviewed and approved expenses related
to USWSC management services contracts. In addition to this SARC, two
additional sister utilities with similar contracts have SARCs pending at this
time,[25] and a third has a file and
suspend rate case pending.[26]
Staff also believes that USWSC and its
employees bring considerable management and operational experience and
expertise at a comparably reasonable cost. As a result, staff believes that Merritt
Island’s customers are
realizing operational and cost benefits that might not be realized if the
Utility operated on a stand-alone basis. Staff notes that the Utility, through
its contract with USWSC, has made significant plant improvements that should
result in improved quality of service.
Based on the discussion above, staff believes
Merritt
Island’s contractual
services agreement with USWSC appears reasonable when compared to other
utilities with similar agreements. The agreement also appears reasonable when
compared to O&M expenses of industry peers as reflected in the AWWA Benchmark.
Staff believes that Merritt Island’s
USWSC contract is appropriate, the adjusted cost is reasonable, and should be
included in the Utility’s
proposed rates because it is known, measurable, and already in effect.
Therefore, staff’s recommendation for contractual services - other expense for
the test year is $47,211.
Insurance
Expense (755)
The Utility recorded insurance expense of $1,528 in the test year. Staff
decreased this amount by $204 based on supporting documentation provided by
Merritt Island. Therefore, staff recommends insurance expense for the test year
of $1,324 ($1,528 - $204).
Regulatory Commission Expense (765)
The Utility did not record any regulatory commission
expense in this account. Rule 25-30.433(9), F.A.C., requires that non-recurring
expenses be amortized over a five-year period unless a shorter or longer period
of time can be justified. Accordingly, staff increased this account by $150
($750 ÷ 5) to reflect the five-year amortization of the 2017 certificate
transfer application filing fee.
Regarding the instant case, the Utility is required by Rule
25-22.0407, F.A.C., to provide notices of the customer meeting and notices of
final rates in this case to its customers. For noticing, staff estimated $312
for postage expense, $142 for printing expense, and $28 for envelopes. This
results in $482 ($312 + $142 + $28) for the noticing requirement. The Utility paid
a $1,000 rate case filing fee. The Utility requested travel and lodging expense
of $250 to attend the customer meeting and $250 to attend the Commission
Conference. Staff increased the Utility’s customer meeting travel
expense by $183 to reflect mileage and actual lodging cost for two Utility
employees to attend. This results in travel expense of $433 ($250 + $183) for
the customer meeting. Staff also reduced the cost of travel to attend the
Commission Conference in order to reflect the actual cost of lodging for one
employee and appropriate mileage.
Staff believes that the travel for the Commission Conference should be shared
with Gator Waterworks, Inc. and The Woods Utility Company. The utilities are
sister utilities of Merritt Island which have SARCs scheduled for the same
Commission Conference. As such, staff believes it is appropriate to split
travel costs to the Commission Conference equally between the three utilities,
or $130 ($389 ÷ 3) per utility. This results in a reduction of $120 ($130 -
$250) for Merritt Island’s travel expense to the Commission Conference. As
such, staff recommends travel expense of $563 ($433 + $130). Staff notes that
the Commission previously approved rate case related travel expenses ranging
from $413 to $1,570 in the nine most recent dockets for Merritt Island’s sister
utilities. Based on staff’s review, the requested travel expense appears
reasonable.
Based on the discussion above, staff recommends total rate case
expense of $2,046 ($482 + $1,000 + $563), which amortized over four years is $512.
Staff's total adjustment to this account is an increase of $662 ($150 + $512).
As such, staff's recommendation for regulatory commission expense is $662.
Miscellaneous
Expense (775)
The Utility recorded miscellaneous expense of $3,595. This
account consists of billing fees, services performed on road repairs, transfer
and permit fees, and Annual Report fees. Staff increased this account by
$46, to correct City of Cocoa billing charges which were originally recorded
incorrectly. The Utility also requested that staff consider an increase in the
monthly charges that Merritt Island incurs for the billing and collection of
account receivables by City of Cocoa. According to support documentation, the
1.79 percent increase went into effect on October 1, 2019.
Staff believes it is appropriate to include the increase, which equates to $88
on a yearly basis, in the current proceeding because it is known, measurable,
and already in effect.
The road repairs were related to pothole repairs resulting from a
cracked sewer line on LaFitte Court. The repair totaled $943, and was a
one-time occurrence. The appropriate annual amortization amount and adjustment
is shown in Table 7-3.
In addition, staff believes that several adjustments need to be
made to several other transfer related expenses. The $562 expense related to
the legal ad for the certificate transfer, as well as a $100 expense for a DEP
fee related to the wastewater permit transfer, should be amortized over a
five-year period because they are one-time occurrences. The appropriate annual
amortization amounts and adjustments are shown in Table 7-3.
A second non-recurring expense item was incurred during
the test year that was not included in O&M expenses. This $7,800 expense
was incurred in February 2019 for DEP-required pond cleaning for two of the
Utility’s three RIBs. The Utility classified the expense as Amortization
Expense – Other, but staff believes the amount should be included in
O&M expense and amortized over five years. The Utility also indicated
that an additional $5,050 will be needed to remove vegetation from the
remaining RIB. The RIB
clearing is a DEP requirement as well. The amount should be amortized over five
years. The appropriate annual amortization amounts for pond cleaning are shown
in Table 7-3.
|
Table
7-3
|
|
Amortization
of Misc. Expenses
|
|
|
Invoiced
|
Annual
|
Staff
|
|
Description
|
Amount
|
Amortization*
|
Adjustment
|
|
Included in TY Misc. Expense:
|
|
|
|
|
Pothole Repair
|
$943
|
$189
|
($754)
|
|
Cert. Transfer Legal
Ad
|
562
|
112
|
(450)
|
|
DEP Permit Transfer
Fee
|
100
|
20
|
(80)
|
|
Total
|
$1,605
|
$321
|
($1,284)
|
|
|
|
|
|
|
New Misc. Expense:
|
|
|
|
|
Completed RIB Clearing
|
$7,800
|
$1,560
|
$1,560
|
|
Pro Forma RIB Clearing
|
5,050
|
1,010
|
1,010
|
|
Total
|
$12,850
|
$2,570
|
$2,570
|
|
|
|
|
|
|
*Per Rule 25-30.433(9), F.A.C.
|
|
|
|
|
Source: Audit Report, Utility filings, and
staff calculations.
|
|
Based on the information above, staff is recommending an increase
of $1,420 ($46 + $88 - $1,284 + $2,570) to miscellaneous expense. As such,
staff recommends miscellaneous expense of $5,015 ($3,595 + $1,420).
Operation & Maintenance Expense Summary
Based on the above adjustments, staff recommends that
O&M expense be increased by $2,840, resulting in total O&M expense of
$73,241. Staff’s recommended adjustments to O&M expense are shown on
Schedule No. 3-C.
Depreciation Expense (Net of Amortization of
CIAC)
Merritt
Island recorded depreciation expense of $6,274 during the test year. Staff
calculated depreciation expense using the prescribed rates set forth in Rule
25-30.140, F.A.C., and determined test year depreciation expense to be $7,000,
resulting in an increase to this account of $722. Staff also increased this
account by $182 to reflect the incremental increase in depreciation expense for
the pro forma plant item previously discussed in Issue 4. Staff’s total adjustment to
depreciation expense is an increase of $904 ($722 + $182). In addition, staff notes that CIAC
is fully amortized and there is no amortization of CIAC. Therefore, staff
recommends depreciation expense of $7,178 ($6,274 + $904).
Amortization Expense – Other
The Utility recorded test year amortization expense –
other of $1,064 which included expenses for engineering services related to
service territory maps and DEP-required pond cleaning during the test year.
Staff believes that both items should be included in the Utility’s O&M
expense based on Commission practice. The engineering expense should be
reclassified to contractual services – engineering (Account No. 731) and the pond
clearing reclassified to miscellaneous expense (Account No. 775). Both expenses
should be amortized over a five-year period. These adjustments were discussed
in O&M expenses elsewhere in this issue. As such, staff decreased this
account by $1,089.
The Utility recorded amortization of an acquisition adjustment of negative
$25. In Docket No. 20170018-SU, the Commission determined that a negative
acquisition adjustment of $175 shall be recognized for ratemaking purposes.
Based on the Commission’s decision in that docket, the negative acquisition
adjustment shall be amortized over a seven-year period from the date of
issuance of the Commission order approving the transfer of assets. As such, the annual
amortization of the negative acquisition adjustment is correctly reflected as
negative $25 ($1,064 - $1,089).
Taxes Other Than Income (TOTI)
Merritt Island recorded a TOTI balance of $2,997 during
the test year. Staff decreased the Regulatory Assessment Fees (RAFs) by $106 to
reflect the adjusted test year revenues. Staff increased this account by $75 to
reflect the incremental increase in property taxes associated with the pro
forma project discussed in Issue 4. The Utility also requested consideration of
pro forma taxes of $2,652.
Prior to this year, Merritt Island had no property taxes due. Staff increased
tax expense by $2,546 to reflect the appropriate amount of property tax going
forward, based on the on the Utility’s current Brevard County tax notice less a
four percent discount for early payment.
This results in a net increase of $2,515 (-$106 + $75 + $2,546).
In addition, as discussed in Issue 8, revenues have been
increased by $33,567 to reflect the change in revenue required to cover expenses
and allow the recommended operating margin. As a result, TOTI should be
increased by $1,511 to reflect RAFs of 4.5 percent on the change in revenues.
Therefore, staff recommends TOTI of $7,023.
Income
Tax
The Utility is a Subchapter S Corporation and therefore
did not record any income tax expense for the test year. Staff recommends no
adjustment to income tax expense.
Operating
Expenses Summary
The application of staff=s
recommended adjustments to Merritt Island’s test year operating expenses
results in operating expenses of $87,417. Operating expenses are shown on
Schedule No. 3-A. The related adjustments are shown on Schedule No. 3-B
Issue 8:
What is the appropriate revenue requirement for
Merritt Island?
Recommendation:
The appropriate revenue requirement is $99,225
resulting in an annual increase of $33,567 (51.12 percent). (Wilson, T. Brown)
Staff Analysis:
Merritt
Island should be allowed an annual increase of $33,567 (51.12 percent). This
should allow the Utility the opportunity to recover its expenses and earn an
7.85 percent return on its investment. The calculations are shown in Table 8-1:
Table 8-1
Revenue Requirement
|
Adjusted Rate Base
|
|
$150,423
|
|
Rate of Return (%)
|
|
x 7.85%
|
|
Return on Rate Base
|
|
$11,808
|
|
Adjusted O&M Expense
|
|
73,241
|
|
Depreciation Expense (Net)
|
|
7,153
|
|
Taxes Other Than Income
|
|
7,023
|
|
Revenue Requirement
|
|
$99,225
|
|
Less Adjusted Test Year Revenues
|
|
65,658
|
|
Annual Increase
|
|
$33,567
|
|
Percent Increase
|
|
51.12%
|
Issue 9:
What are the appropriate rate structure and rates
for Merritt Island's wastewater system?
Recommendation:
The recommended rate structure and monthly wastewater
rates are shown on Schedule No. 4. 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 this notice. (Sibley)
Staff Analysis:
Merritt Island is located in Brevard County. The Utility
provides wastewater service to approximately 141 residential customers and one
general service bulk customer. The general service customer is a mobile home
park classified as a bulk customer. Currently, the residential wastewater rate
structure consists of a uniform base facility charge (BFC) for all meter sizes
and a gallonage charge with a 6,000 gallon cap per month. General service
customers are billed a BFC by meter size and a gallonage charge that is 1.2
times higher than the residential gallonage charge. The bulk service customer
is billed a BFC based on the number of ERCs behind the meter and a gallonage
charge with a 6,000 gallon cap per connection.
Staff performed an analysis of the Utility’s billing data
to evaluate various BFC cost recovery percentages and gallonage caps for the
residential customers. The goal of the evaluation was to select the rate design
parameters that: (1) produce the recommended revenue requirement; (2) equitably
distribute cost recovery among the Utility’s customers; and (3) implement a
gallonage cap that considers approximately the amount of water that may return
to the wastewater system.
Consistent with Commission practice, staff allocated 50
percent of the wastewater revenue to the BFC due to the capital intensive nature
of wastewater plants. In addition, it is also Commission practice to set the
wastewater cap at approximately 80 percent of residential water gallons sold. The
wastewater gallonage cap recognizes that not all water is returned to the
wastewater system. Based on staff’s review of the billing analysis, 87 percent
of the gallons are captured at the 6,000 gallon consumption level. For this
reason, staff recommends that the gallonage cap for residential customers
remain at 6,000 gallons. Staff also recommends that the general service
gallonage charge be 1.2 times greater than the residential gallonage charge,
which is consistent with Commission practice. The bulk service customer’s rate
structure should remain a BFC based on the number of ERCs behind the meter and
a gallonage charge with a 6,000 gallon cap per ERC.
Based on the above, the recommended monthly wastewater
rates, as shown on Schedule No. 4, are reasonable and should be approved. 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. The approved rates should not be
implemented until staff has approved the proposed customer notice and the
notice has been received by customers. The Utility should provide proof of the
date notice was given within 10 days of the date of the notice.
Issue 10:
What is the appropriate amount by which rates should
be reduced four years after the published effective date to reflect the removal
of the amortized rate case expense?
Recommendation:
The rates should be reduced as shown on Schedule No.
4, to remove rate case expense grossed-up for RAFs and amortized over a
four-year period. The decrease in rates should become effective immediately
following the expiration of the rate case expense recovery period, pursuant to
Section 367.081(8), F.S. Merritt Island 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. (Procedural
Agency Action) (Sibley, Wilson, T. Brown)
Staff Analysis:
Section 367.081(8), F.S., requires that the rates be
reduced immediately following the expiration of the recovery 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. The total reduction is $536.
Staff recommends that the rates should be reduced as shown
on Schedule No. 4, to remove rate case expense grossed-up for RAFs and
amortized over a four-year period. The decrease in rates should become
effective immediately following the expiration of the rate case expense
recovery period, pursuant to Section 367.081(8), F.S. Merritt Island 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 published effective date to reflect the removal of the amortized rate
case expense.
Issue 11:
Should the recommended rates be approved for Merritt
Island on a temporary basis, subject to refund, in the event of a protest filed
by a party other than the Utility?
Recommendation:
Yes. Pursuant to Section 367.0814(7), F.S., the
recommended rates should be approved for the Utility on a temporary basis,
subject to refund with interest, in the event of a protest filed by a party
other than the Utility. Merritt Island 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’s Office of Commission Clerk no later than the 20th of each
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. (Procedural
Agency Action) (Wilson)
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 $22,619. 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 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.
Issue 12:
Should Merritt Island be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission's decision?
Recommendation:
Yes. Merritt Island should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Merritt Island should submit a letter within 90 days of
the final order in this docket, confirming that the adjustments to all
applicable National Association of Regulatory Commissioners (NARUC) Uniform
System of Accounts (USOA) primary accounts have been made to the Utility’s
books and records. In the event the Utility needs additional time to complete
the adjustments, notice providing good cause should be filed not less than
seven days prior to the deadline. Staff should be given administrative
authority to grant such an extension for up to 60 days. (Procedural Agency
Action) (Wilson)
Staff Analysis:
Merritt Island should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Merritt Island should submit a letter within 90 days of
the final order in this docket, confirming that the adjustments to all the
applicable NARUC USOA primary accounts have been made to the Utility’s books
and records. In the event the Utility needs additional time to complete the
adjustments, notice providing good cause should be filed not less than seven
days prior to the deadline. Staff should be given administrative authority to
grant such an extension for up to 60 days.
Issue 13:
Should this docket be closed?
Recommendation:
No. If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the proposed agency action 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. (Dziechciarz)
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 proposed agency action 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.
