Discussion
of Issues
Issue 1:
Is the quality of service provided by Heather Hills
satisfactory?
Recommendation:
Staff recommends that the overall quality of service
for Heather Hills should be considered satisfactory. (Knoblauch, 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). In accordance with the
Rule, the most recent chemical analyses, outstanding citations, violations, and
consent orders on file with the 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.
Quality of the Utility’s Product (Water)
Heather Hills does not have its own wells or water
treatment facilities. It provides water to its customers by purchasing bulk
water from Manatee County; therefore, the Utility only maintains its
distribution system. As a reseller of water, Heather Hills is not subject to
the DEP’s secondary water standards which regulate contaminants that may impact
the taste, odor, and color of drinking water. The chemical analyses required
within Heather Hills’ distribution system include microbiological, disinfection
byproducts, asbestos, lead and copper. Staff reviewed the Utility’s most recent
results for the distribution system, and all results were in compliance with
the DEP’s rules and regulations which protect public health.
Staff held a customer meeting on November 5, 2019, to
receive customer comments regarding the quality of service. At the meeting, 13
customers spoke and of those customers, none of the comments concerned the
quality of the water. The concerns voiced at the customer meeting were largely
related to customer service and the rate increase, which are discussed in more
detail below.
Heather Hills has no outstanding citations, violations,
and consent orders on file with the DEP. Additionally, there have been no
complaints regarding the quality of the Utility’s product filed with the
Utility, the Commission, or the DEP, over the last five years.
The Utility’s Attempt to Address Customer
Satisfaction (Water & Wastewater)
Table 1-1 shows a summary of the complaints received at
the customer meeting, as well as complaints received by the Commission’s
complaint tracking system, the DEP, and Heather Hills over the past five years.
Table 1-1
Number of Complaints by Type
and Source
|
Complaint
Type
|
Customer
Meeting
|
Commission
Records
|
DEP Records
|
Utility
Records
|
|
Billing
|
4
|
10
|
0
|
0
|
|
Customer Service
|
6
|
1
|
0
|
0
|
|
Leak
|
0
|
1
|
1
|
0
|
|
Wastewater
|
0
|
0
|
0
|
1
|
|
Rate Case
|
6
|
0
|
0
|
0
|
|
Infrastructure
|
3
|
0
|
0
|
0
|
|
Other*
|
0
|
1
|
0
|
1
|
|
Total**
|
19
|
13
|
1
|
2
|
*Other complaints relate to
a meter and improper disconnect.
**A
single customer complaint may be counted more than once if it fits into multiple
categories.
Customer Meeting
At the customer meeting, six customers voiced
dissatisfaction with Heather Hills’ customer service; specifically, that it is
difficult to reach the Utility by phone or that customers’ calls are not
returned. The customers also voiced concern about the distance of the Utility’s
office from the service territory, resulting in additional travel time for
service problems to be addressed, as well as the excessive use of weed killer
around the meter boxes. The remaining concerns were related to the rate case,
billing issues, and the age of Heather Hills’ infrastructure.
In response to the comments made at the customer meeting,
Heather Hills stated that when Utility employees are unable to answer calls,
customers can leave a voicemail and calls are returned the same day or by the
following business day.
During non-business hours, the Utility employs an answering service; however,
the service is for emergency calls only. In regard to the distance of the
Utility’s office from the service territory, Heather Hills asserted that there
have been no instances of delays due to this distance, and a maintenance
technician visits the system frequently. Additionally, as part of ongoing
maintenance, the Utility stated that weed killer is used to ensure meters can
be read in a timely manner.
The Utility further stated that a full-time position had
been previously approved by the Commission, and this position would help to
address comments about Heather Hills’ customer service. In Order No. PSC-2018-0439-PAA-WU,
the Commission found it appropriate to increase a part-time billing position to
full time.
However, the Utility indicated that the position is vacant and it is currently
seeking applicants.
Complaints
As noted above, there were no complaints on the quality of
the Utility’s product over the last five years; however, 13 non-water quality
and 1 wastewater complaints were found. A review of the Commission’s complaint
tracking system revealed 11 complaints in the previous five-year period. Eight
complaints were related to billing and one complaint was related to an improper
disconnection. The complaints were forwarded to the Utility for resolution, and
each complaint has been closed. The remaining two complaints were recorded as
quality of service complaints in the Commission’s complaint tracking system,
and were regarding a disconnection fee and leak repair work with a billing
issue. For the first complaint, staff found that the disconnect fees being
charged were correct according to Heather Hills’ tariff. The second complaint
was made about a delay in repairing a water leak, unprofessional customer
service, and a late fee. The customer stated that the leak was addressed, and
the late fee concern was resolved. It should be noted that in Table 1-1, both
of these complaints have been recorded as relating to billing, and the second
complaint was also recorded as a leak and a customer service complaint.
Furthermore, of the 11 complaints received by the Commission, only 4 were
received after the system was purchased by the current owner in 2017. All four
of these complaints were regarding billing problems and were resolved.
In response to staff’s first data request, Heather Hills
provided two complaints that were received by the Utility. On July 19, 2018, a
customer indicated that wastewater was backing up into her yard. The customer
was advised to contact a plumber, who found that the problem was not with the
customer’s line, and the issue was resolved by the Utility. On March 28, 2019,
the Utility received a complaint that a customer’s water meter was not
recording usage, and the customer’s meter was replaced. In addition, staff
contacted the DEP requesting complaints regarding Heather Hills for the prior
five years, and one complaint was provided. The complaint was received on
January 3, 2018, and was in regard to a leaking flow meter and that a
precautionary boil water notice was not issued. The complaint was resolved
after it was determined that, due to the location, the customer was responsible
for the repair of the leak.
Conclusion
The Utility’s water quality is in compliance with DEP
rules and regulations and there were no water quality complaints. While there
were some concerns raised about the Utility’s responsiveness to customers, this
does not appear to be a wide-spread issue considering Heather Hills’ total
customer base. The Utility stated that it is attempting to fill the approved
billing position to assist with customer service. Therefore, in consideration
of the information discussed above, staff recommends that the overall quality
of service for Heather Hills should be satisfactory.
Issue 2:
Are the infrastructure and operating conditions of
Heather Hills’ water and wastewater systems in compliance with DEP regulations?
Recommendation:
Yes, Heather Hills’ water and wastewater systems are
currently in compliance with DEP regulations. (M. Watts, Knoblauch)
Staff Analysis:
Rule 25-30.225(2), F.A.C., requires each water and
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 any
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.
Water and Wastewater System Operating Condition
Heather
Hills does not have its own wells, water treatment facilities or wastewater
treatment facilities. It provides water and wastewater service to its customers
by purchasing bulk water and wastewater treatment service from Manatee County;
therefore, the Utility only maintains its distribution and collection systems. Systems
that purchase bulk water and/or wastewater treatment are referred to as
“consecutive” systems. The most recent inspection report from the DEP, dated
July 24, 2018, indicated that the
Utility was substantially compliant with its regulations and requirements with
the exception of on-site operation and maintenance procedures, manuals, and
logs. The Utility provided a response to DEP’s inspection report that addressed
its concerns on September 17, 2018. Additionally, Heather Hills has no
outstanding citations, violations, and consent orders on file with the DEP.
Conclusion
Heather Hills’
water and wastewater systems are currently in compliance with DEP regulations.
Issue 3:
What are the used and useful (U&U) percentages
for the Utility’s water distribution and wastewater collection system?
Recommendation:
Staff recommends that the water distribution system
and the wastewater collection system be considered 100 percent U&U. There
is no excessive unaccounted for water (EUW). Staff is unable to calculate
inflow and infiltration (I&I) due to the nature of the Utility’s provision
of wastewater service. Therefore, no adjustment to operating expenses is recommended.
(M. Watts, Knoblauch)
Staff Analysis:
As discussed in Issue 2, Heather Hills does not have its own wells or
water and wastewater treatment plants. The Utility’s water distribution system
consists of 15,300 feet of three-quarter inch polyvinyl chloride pipe (PVC).
The wastewater collection system is composed of 15,300 feet of six-inch PVC
pipe with 38 manholes.
Water Distribution and Wastewater Collection
System Used and Useful
Heather Hills serves a mobile home park that was built in
1967. The service territory is built
out, with no growth occurring over the past five years and no prospect for
further growth. Therefore, the U&U for the water distribution system and
the wastewater collection system is 100 percent.
Excessive Unaccounted for Water
Rule 25-30.4325(1)(e), F.A.C., defines EUW as unaccounted
for water in excess of 10 percent of the amount produced. The Commission
recognizes that some uses of the water are readily measurable and others are
not. Unaccounted for water is all water that is produced that is not sold,
metered, or accounted for in the records of the utility. The rule provides that
to determine whether adjustments to operating expenses, such as purchased water
in the case of a consecutive system, are necessary the Commission will consider
all relevant factors as to the reason for EUW, solutions implemented to correct
the problem, or whether a proposed solution is economically feasible. The
unaccounted for water is calculated by subtracting both the gallons used for
other purposes, such as flushing, and the gallons sold to customers from the
total gallons purchased for the test year. During the test year, Heather Hills
purchased 7,505,800 gallons of water from Manatee County. The Utility sold
7,119,102 gallons to customers, and did not report any gallons used for other
purposes. Subtracting the gallons sold from the gallons purchased, there are
386,698 gallons unaccounted for, or 5.2 percent of the total purchased. Since
this is less than 10 percent of the amount purchased, there is no excessive
unaccounted for water and no adjustment is recommended.
Infiltration and Inflow
Typically infiltration results from groundwater entering a
wastewater collection system through broken or defective pipes and joints;
whereas, inflow results from water entering a wastewater collection system
through manholes or lift stations. Because the amount of wastewater treated by
Manatee County Utilities on behalf of Heather Hills is not measured separately,
staff is unable to calculate whether there is excessive infiltration and inflow
and thus no adjustment is recommended.
Conclusion
Staff recommends that the water distribution system and
the wastewater collection system be considered 100 percent U&U. There is no
excessive unaccounted for water. Staff is unable to calculate inflow and
infiltration due to the nature of the Utility’s provision of wastewater
service. Therefore, no adjustment to operating expenses is recommended.
Issue 4:
What are the appropriate average test year water and
wastewater rate bases for Heather Hills, LLC?
Recommendation:
The appropriate average test year rate base for
Heather Hills is $46,622 for water and $16,998 for wastewater. (Bennett,
Knoblauch, M. Watts)
Staff Analysis:
Rate base was last established for the Heather Hills
water and wastewater systems on April 7, 2017. The test year ended May 31,
2019, was used for the instant case. A summary of each water and wastewater
rate base component and recommended adjustments are discussed below.
Utility Plant in Service (UPIS)
The Utility recorded a UPIS balance of $89,864 for water
and $73,240 for wastewater. Based on staff’s review of the Utility’s books and
records, UPIS should be decreased by $364 for wastewater to reflect an
averaging adjustment. The Utility is requesting pro forma for a new van, a new
computer, and a trailer. The Utility provided two bids for the van, as well as
estimated costs for the trailer. In Order No. PSC-2019-0503-PAA-SU, the
Commission approved two new maintenance technicians to be allocated to all of
the Florida Utility Services 1’s (FUS1) systems. The Utility indicated that the new van
requested in this docket would be required for one of the new maintenance
technicians and that the lowest bid was selected. Based on Heather Hills’
allocation, this results in an increase of $1,367 for each system. In the same order, the Commission approved the
allocation of a new computer for FUS1. As such, UPIS has been increased by $26
for each system to reflect Heather Hills’ allocation. In regards to the
trailer, Heather Hills stated that because the Utility is a reseller and does
not have a plant, a trailer is needed to store parts and equipment needed for
repairs. The trailer will be used at Heather Hills and Sunny Shores Utilities,
Inc. Allocating the cost of the trailer between the two utilities by customer
count results in an increase of $1,210 for Heather Hills water and wastewater
system. The Utility explored other alternatives, such as renting storage space;
however, it determined that purchasing a used storage trailer would be a more
cost-effective option. As such, staff
recommends an increase of $2,603 ($1,367 + $26 + $1,210) for each system to
reflect pro forma plant additions. Therefore staff recommends a UPIS balance of
$92,467 ($89,864 + $2,603) for water and $75,479 ($73,240 - $364 + $2,603) for
wastewater.
Land & Land Rights
The Utility recorded a land balance of $389 for water and
$389 for wastewater. Based on staff’s
review, no adjustment is necessary. Therefore, staff recommends that the
appropriate balance is $389 for water and $389 for wastewater.
Used and Useful
As discussed in Issue 2, Heather Hill’s water distribution system and
the wastewater collection system are considered 100 percent U&U. Therefore,
no U&U adjustments are necessary.
Accumulated Depreciation
Heather Hills recorded an accumulated depreciation balance
of $55,042 for water and $72,603 for wastewater. Staff increased accumulated
depreciation by $1,038 for water and decreased accumulated depreciation by $6
for wastewater to reflect depreciation pursuant to Rule 25-30.140, F.A.C. In
addition, staff decreased accumulated depreciation by $2,091 for water and $30
for wastewater to reflect an averaging adjustment. Staff also increased
accumulated depreciation by $431 for water and $431 for wastewater to reflect
pro forma plant requests staff is recommending. Staff’s adjustments to
accumulated depreciation result in a net decrease of $622 ($1,038 - $2,091 + $431)
for water and a net increase of $395 (-$6 - $30 + $431) for wastewater. Therefore, staff recommends an accumulated
depreciation balance of $54,420 for water and $72,998 for wastewater.
Contributions in Aid of Construction (CIAC)
The Utility recorded a CIAC balance of $26,625 for water
and $0 for wastewater. Based on staff’s review, no adjustment is necessary.
Therefore, staff recommends that the appropriate balance is $26,625 for water
and $0 for wastewater.
Accumulated Amortization of CIAC
The Utility recorded an accumulated amortization of CIAC
balance of $26,625 for water and $0 for wastewater. Based on staff’s review, no
adjustment is necessary. Therefore, staff recommends that the appropriate
balance is $26,625 for water and $0 for wastewater.
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 has removed the rate case expense balance of $374 for this calculation
resulting in an adjusted O&M expense balance of $65,491 ($65,865 - $374)
for water and $113,019 ($113,393 - $374) for wastewater. Applying this formula
approach to the adjusted O&M expense balance, staff recommends a working
capital allowance of $8,186 ($65,491 / 8) for water and $14,127 ($113,019 / 8)
for wastewater.
Rate Base Summary
Based on the foregoing, staff recommends that the
appropriate test year average rate base is $46,622 for water and $16,998 for
wastewater. Rate base is shown on Schedule Nos. 1-A and 1-B. The related
adjustments are shown on Schedule No. 1-C.
Issue 5:
What is the appropriate return on equity and overall
rate of return for Heather Hills?
Recommendation:
The appropriate return on equity (ROE) is 10.55
percent with a range of 9.55 percent to 11.55 percent. The traditional rate of
return does not apply in this case due to rate base being less than 125 percent
of O&M expenses. (Bennett)
Staff Analysis:
As discussed in Issue 8, staff is recommending the
operating ratio methodology be used in this case. Although the traditional rate
of return does not apply in this case due to rate base being less than 125
percent of O&M expenses, staff recommends that an ROE still be established
for this Utility.
According to staff’s audit, Heather Hills’ test year
capital structure reflects negative equity, a long-term debt balance of
$142,515, and no customer deposits. It is Commission practice to set a negative
equity balance to zero for rate making purposes. The
appropriate ROE for the Utility is 10.55 percent based on the Commission
approved leverage formula currently in effect. As
such, staff recommends an ROE of 10.55 percent, with a range of 9.55 percent to
11.55 percent. The ROE is shown on Schedule No. 2. The traditional rate of
return does not apply in this case due to rate base being less than 125 percent
of O&M expenses.
Issue 6:
What are the appropriate test year revenues for the
water and wastewater systems?
Recommendation:
The appropriate test year revenues for Heather
Hills’ water is $65,206 and wastewater is $117,484. (Bethea)
Staff Analysis:
The Utility recorded total test year revenues of
$63,674 for water and $104,642 for wastewater. The water revenues included
$62,662 of service revenues and $1,012 of miscellaneous revenues. The wastewater
revenues included $104,642 of service revenues and no miscellaneous revenues.
The Utility had a rate increase during the test year as well as subsequent to
the test year as a result of price index and pass through adjustments. Staff
annualized revenues to reflect those changes in rates.
By applying the rates subsequent to the end of the test
year along with the test year billing determinants, staff determined test year
service revenues to be $64,700 for water and $116,978 for wastewater. This
results in an increase of $2,038 ($64,700 - $62,662) for water and $12,336 ($116,978
- $104,642) for wastewater test year service revenues. Staff also made
adjustments to miscellaneous revenues for water and wastewater to equally
allocate the revenues collected as a result of miscellaneous services. This
results in miscellaneous revenues of $506 ($1,012 / 2) for water and $506 for
wastewater. Based on the above, the appropriate test year revenues for Heather
Hills’ water is $65,206 ($64,700 + $506) and $117,484 ($116,978 + $506) for
wastewater.
Issue 7:
What is the appropriate amount of operating expenses
for Heather Hills?
Recommendation:
The appropriate amount of operating expenses for
Heather Hills is $72,522 for water and $118,902 for wastewater. (Bennett,
Knoblauch, M. Watts)
Staff Analysis:
Heather Hills recorded operating expenses of $75,047
for water and $122,162 for wastewater for the test year ended May 31, 2019. The
test year O&M expenses have been reviewed, including invoices, canceled
checks, and other supporting documentation. Staff has made adjustments to the
Utility’s operating expenses as summarized below.
Operating & Maintenance Expense
Salaries and Wages – Employees Expense
(601/701)
Heather Hills recorded salaries
and wages – employees expense of $13,233 for water and $13,233 for wastewater. The
Utility filed a request for two new maintenance technicians on September 18,
2019.
However, the same request had also been filed in Docket No. 20180202-SU for
West Lakeland Wastewater, LLC. The request for the two maintenance technicians
was subsequently approved by Order No. PSC-2019-0503-PAA-SU, stating that the
“two additional maintenance technicians are needed and shall be allocated to
all of the FUS1’s systems, including West Lakeland.”
Therefore, staff allocated the two maintenance technicians to Heather Hills
based on the approval of these positions in Docket No. 20180202-SU. Therefore,
staff recommends an increase of $1,835 each for water and wastewater. As such,
staff recommends salaries and wages – employees expense of $15,068 ($13,233 +
$1,835) for water and $15,068 ($13,233 +
$1,835) for wastewater.
Salaries and Wages – Officers Expense (603/70)
The Utility recorded salaries and wages – officers expense
of $4,015 for water and $4,015 for wastewater in the test year. In Order No.
PSC-2018-0439-PAA-WU, the President was approved a salary of $80,000. As
such, staff annualized the approved salary which results in a salaries and
wages – officers expense of $4,000 ($80,000 x 0.10 / 2) for each system.
Therefore, staff recommends a decrease of $15 ($4,000 - $4,015) for each
system.
Employees Pensions and Benefits Expense
(604/704)
The Utility recorded employee pensions and benefits
expenses of $333 for each system. In Order No. PSC-2019-0503-PAA-SU, FUS1
was granted employees pensions and benefits for the two additional technicians.
The corresponding allocation of employee pensions and benefits expense for
Heather Hills associated with the two new technicians allocated across all
systems results in an increase of $567 for each system. As such, staff
recommends employees pensions and benefits expense of $900 ($333 + $567) for
each system.
Purchased Water and Wastewater Expense
(610/710)
The Utility recorded purchased water expense of $33,638.
The Utility recorded purchased wastewater treatment expense of $84,012. Staff
increased purchased water expense by $40 and decreased purchased wastewater
treatment by $40 to reflect actual amount of invoices for Heather Hills. As
such, staff recommends purchased water expense of $33,678 ($33,638 + $40) and
purchased wastewater treatment expense of $83,972 ($84,012 - $40).
Purchased Power (615/715)
The Utility originally recorded purchased power in the
miscellaneous expense account. Staff increased purchased power expense of $134
for each system based on actual invoices and proper allocation for Heather
Hills. As such, staff recommends purchased power expense of $134 each for water
and wastewater.
Materials and Supplies Expense (620/720)
The Utility recorded materials and supplies expense of
$548 for water and $941 for wastewater in the test year. Staff decreased
materials and supplies expense by $155 for water and $548 for wastewater to
reflect actual amount of invoices and allocation for Heather Hills. As such,
staff recommends a materials and supplies expense of $393 ($548 - $155) for
water and $393 ($941 - $548) for wastewater.
Contractual Services – Professional Expense
(631/731)
Heather Hills recorded contractual services - professional
expense of $389 for water and $389 for wastewater in the test year. Staff increased
contractual services - professional expense by $235 for water and $197 for wastewater
to reflect actual amount of invoices and allocations for Heather Hills. Staff
also increased contractual services – professional by $526 for water and $526
for wastewater to reclassify expenses from regulatory commission expense. The
Utility requested pro forma expense allocations for accounting services to
assist FUS1 in this docket. However, in Docket No. 20180202-SU the Commission
did not approve this specific expense, as it determined the expense was primarily
related to the preparation of the Owner’s personal tax return. Therefore, staff
recommends contractual services – professional expense in the amount of $1,150
($389 + $235 + $526) for water and $1,112 ($389 + $197 + $526) for wastewater.
Contractual Services – Testing Expense
(635/735)
Heather Hills recorded contractual services testing of
$1,786 for water and $108 for wastewater. Staff increased contractual services
testing by $212 for water and decreased this expense by $108 for wastewater to
reflect actual amount of invoices. Therefore, staff recommends contractual
services – testing expense of $1,998 ($1,786 + $212) for water and $0 ($108 -
$108) for wastewater.
Contractual Services – Other Expense (636/736)
The Utility recorded contractual services – other expense
of $573 for water and $65 for wastewater. Staff increased this account by $110
for water and decreased it by $12 for wastewater to reflect actual amount of
invoices and allocations. As such, staff recommends contractual services –
other expense of $683 ($573 + $110) for water and $53 ($65 - $12) for wastewater.
Rent Expense (640/740)
Heather Hills recorded rent expense of $1,894 for water
and $1,895 for wastewater. The rental expense for the test year was overstated by
$519 ($1,894 - $1,375) for water and $520 ($1,895 - $520) for wastewater based
on invoices and proper allocations. The Utility has requested pro forma expense
for an increase in rent, property tax, and insurance associated with its office
lease agreement. FUS1 has a triple net lease
for the office space that is allocated to all the utilities. As such, staff
annualized the rental expense and recommends an increase of $510 for both water
and wastewater. Therefore, staff recommends rent expense of $1,884 ($1,894 - $519
+ $510) for water and $1,884 ($1,895 - $519 + $510) for wastewater. As such,
staff is recommending a decrease in rent expense of $10 ($1,884 - $1,894) for
water and $11 ($1,884 - $1,895) for wastewater.
Transportation Expense (650/750)
Heather Hills recorded transportation expense of $3,044
for water and $3,044 for wastewater. Staff decreased this account by $2,107 for
water and $2,107 for wastewater to reflect the correct allocation amount and to
remove loan payments for FUS1 vehicles allocated to UPIS. Therefore, staff
recommends transportation expense of $937 ($3,044 - $2,107) for water and $937
($3,044 - $2,107) for wastewater.
Insurance Expense (655/755)
Heather Hills recorded insurance
expense of $2,442 for water and $2,442 for wastewater. Staff decreased this
account by $631 for water and $631 for wastewater to reflect actual invoices
and proper allocations. Additionally, the Utility requested pro forma expense
to recover the increased cost of workers compensation insurance. The Utility
provided documentation of the policy increasing to $8,149 and requests a total
increase of $422, based on an allocation of 12.02 percent, with $211 ($422 / 2)
going to each system. Based on Heather Hills’ 10 percent allocation, the
updated policy would total $816 annually, or $408 ($816 / 2) for each system.
The test year expense for workers compensation insurance was $328 for each
system. As such, staff recommends an increase of $80 ($408 - $328) for each
system. Therefore, staff recommends insurance expense of $1,891 ($2,442 - $631
+ $80) for water and $1,891 ($2,442 - $631 + $80) for wastewater.
Regulatory Commission Expense (665/775)
The Utility recorded regulatory commission expense of
$1,054 for water and $1,054 for wastewater in the test year. Staff decreased
this account by $514 for each system to reflect actual invoices and the
amortization of the Utility’s transfer costs. In addition, staff decreased this
account by $526 for each system to reclassify contractual services
professional.
Generally, the regulatory commission expense account
includes expenses incurred by a utility in connection with formal cases before
the regulatory commissions such as noticing costs and filing fees. 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. Staff is
recommending that the Utility also 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 estimated $586 for postage
expense, $355 for printing expense, and $53 for envelopes. This results in $994
($586 + $355 + $53) for the noticing requirements. The Utility paid a total of
$2,000 in rate case filing fees ($1,000 for water and $1,000 for wastewater).
Based on the above, staff recommends total rate case expense of $2,994 ($994 +
$2,000), which should be amortized pursuant to Section 367.081(8), F.S. Staff
recommends that rate case expense be amortized over four years, as the Utility did
not request a different amortization period be used. This represents an annual
increase of $374 ($2,994 / 4 / 2) per system. As such, staff recommends a
decrease to regulatory commission expense of $666 (-$514 - $526 + $374) for
each system, respectively. Therefore staff recommends a regulatory commission
expense amount of $389 ($1,054 - $666) for each system.
Miscellaneous Expense (675/775)
The Utility recorded miscellaneous expense of $5,957 for
water and $5,763 for wastewater. Staff decreased this account by $3,323 for
water and $3,229 for wastewater to properly reflect the amount from provided
invoices, remove purchased power expense, and correct allocations. As such,
staff recommends miscellaneous expense of $2,634 ($5,957 - $3,323) for water
and $2,534 ($5,763 - $3,229) for wastewater.
Operation & Maintenance Expense Summary
Based on the above adjustments, staff recommends that
O&M expense be decreased by $3,167 for water and $4,027 for wastewater,
resulting in total O&M expense of $65,865 for water and $113,393 for
wastewater. Staff’s recommended adjustments to O&M expense are shown on
Schedule No 3-C.
Net Depreciation Expense
Heather Hills recorded depreciation expense of $3,137 for
water and $73 for wastewater during the test year. Staff recalculated
depreciation expense using the prescribed rates set forth in Rule 25-30.140,
F.A.C., and has decreased depreciation expense by $432 for water and $28 for
wastewater. Additionally, staff calculated the net depreciation expense for the
pro forma plant additions and retirements discussed in Issue 3 and increased
depreciation expense by $431 for water and wastewater. Therefore, staff
recommends net depreciation expense of $3,136 ($3,137 - $432 + $431) for water
and $476 ($73 - $28 + $431) for wastewater.
Taxes Other Than Income (TOTI)
Heather Hills recorded a TOTI balance of $2,878 for water
and $4,669 for wastewater. Staff increased TOTI by $140 for water and $140 for
wastewater to reflect the requested pro forma increase of salaries and wages –
employees expense as discussed above. This results in an increase of $140 for
water and $140 for wastewater.
In addition, as discussed in Issue 8, revenues have been increased
by $11,179 for water and $4,948 for wastewater to reflect the change in revenue
required to cover expenses and allow the Commission-approved operating margin.
TOTI should be increased by $503 for water and $223 for wastewater to reflect regulatory
assessment fees (RAFs) of 4.5 percent on the change in revenues. Therefore,
staff recommends TOTI of $3,521 ($2,878 + $140 + $503) for water and $5,032 ($4,669
+ $140 + $223) for wastewater.
Operating Expense Summary
The application of staff’s recommended adjustments to Heather
Hills’ test year operating expenses results in operating expenses of $72,522 for
water and $118,902 for wastewater. Operating expenses are shown on Schedule Nos.
3-A and 3-B. The related adjustments are shown on Schedule Nos. 3-C, 3-D and
3-E.
Issue
8: Does
the Utility meet the criteria for the application of the Operating Ratio
Methodology?
Recommendation:
Yes. The Utility meets the requirement for application of the
operating ratio methodology for calculating the revenue requirement for Heather
Hills. The margin should be 12 percent of O&M expenses. (Bennett)
Staff Analysis:
Rule 25-30.4575(2), F.A.C., provides that, in rate
cases processed under Rule 25-30.455 F.A.C., the Commission will use the
operating ratio methodology to establish the utility’s revenue requirement when
the utility’s rate base is no greater
than 125 percent of O&M expenses and the use of the operating ratio
methodology does not change the utility’s qualification for a SARC. Under the
operating ratio methodology, instead of calculating the utility’s revenue
requirement based on a rate of return on the utility’s rate base, the revenue
requirement is calculated using a margin of 12 percent of O&M expenses, not
to exceed $15,000. Purchased water and wastewater must be removed from O&M
expenses prior to calculating the margin of 12 percent.
As discussed in Issues 4 and 7, staff has recommended a
rate base of $46,622 for water and $16,998 for wastewater and O&M expenses
of $65,865 for water and $113,393 for wastewater. Based on these recommended
amounts, Heather Hills’ water and wastewater rate bases are only 71 percent and
15 percent of its O&M expenses, respectively. Based on a margin of 12
percent, the operating margin for Heather Hills is $3,862 for water and $3,531
for wastewater, which does not exceed $15,000. Furthermore, the application of
the operating ratio methodology does not change the Utility’s qualification for
a SARC. As such, Heather Hills meets the criteria for the operating ratio
methodology established in Rule 25-30.4575(2), F.A.C. Therefore, staff
recommends the application of the operating ratio methodology at a margin of 12
percent of O&M expense for determining the revenue requirement for both the
water and wastewater systems.
Issue 9:
What is the appropriate revenue requirement?
Recommendation:
The appropriate revenue requirement is $76,385 for
water and $122,432 for wastewater resulting in an annual increase of $11,179
for water and $4,788 for wastewater. (Bennett)
Staff Analysis:
Heather Hills should be allowed an annual
increase of $11,179 for water (17.14 percent) and $4,948 for wastewater (4.21
percent). The calculations are shown below in Table 9-1 for water and Table 9-2
for wastewater.
Table 9-1
Water Revenue Requirement
|
Adjusted O&M (Less Purchased Water)
|
$32,187
|
|
Operating Margin (%)
|
x 12.00%
|
|
Operating Margin ($15,000 Cap)
|
$3,862
|
|
Adjusted O&M Expense
|
65,865
|
|
Depreciation Expense (Net)
|
3,136
|
|
Taxes Other Than Income
|
3,521
|
|
Revenue Requirement
|
$76,385
|
|
Less Adjusted Test Year Revenues
|
65,206
|
|
Annual Increase
|
$11,179
|
|
Percent Increase
|
17.14%
|
Table 9-2
Wastewater Revenue
Requirement
|
Adjusted O&M (Less Purchased Wastewater Treatment)
|
$29,421
|
|
Operating Margin (%)
|
x 12.00%
|
|
Operating Margin ($15,000 Cap)
|
$3,531
|
|
Adjusted O&M Expense
|
113,393
|
|
Depreciation Expense (Net)
|
476
|
|
Taxes Other Than Income
|
5,032
|
|
Revenue Requirement
|
$122,432
|
|
Less Adjusted Test Year Revenues
|
117,484
|
|
Annual Increase
|
$4,948
|
|
Percent Increase
|
4.21%
|
Issue 10:
What are the appropriate rate structures and rates
for the water and wastewater systems of Heather Hills Utilities, LLC?
Recommendation:
The recommended rate structures and quarterly water
and wastewater rates are shown on Schedule Nos. 4-A and 4-B. 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 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. (Bethea)
Staff Analysis:
Water Rates
The Utility is located in Manatee County within the Southwest
Florida Water Management District. Heather Hills provides water service to
approximately 354 residential customers and one general service customer. Typically,
staff evaluates the seasonality of Utility customers based on the percentage of
bills at zero gallons, which is 12 percent. However, the Utility bills on a
quarterly basis, so an average was used to determine the approximate monthly usage.
Averaging the quarterly bill on a monthly basis may allocate usage to a month
in the quarter where there could have been no usage. Therefore, staff believes
it is appropriate to evaluate the seasonality based on the percentage of bills
at the 1,000 gallon level, which is 40 percent. As a result, it appears that
the customer base is seasonal, which is consistent with the Utility’s
assessment of the demographics for its customer base. The average residential
water demand is 1,666 gallons per month. The average water demand excluding
zero gallon bills is 1,894 gallons per month. The Utility’s current water
system rate structure for residential and general service customers consists of
a quarterly base facility charge (BFC) based on meter size and uniform gallonage
charge.
Staff performed an analysis of the Utility’s billing data
in order to evaluate the appropriate rate structure for the residential water
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; 3) establish the appropriate
non-discretionary usage threshold for restricting repression; and 4) implement,
where appropriate, water conserving rate structures consistent with Commission
practice.
Due to the customers’ low average monthly consumption and
seasonal customer base, staff recommends that 60 percent of the revenue
requirement be recovered through the BFC in an effort to maintain revenue
stability. Consistent with Commission practice, monthly billing is the
preferred method for conservation efforts because it allows customers to
monitor their water usage in an effort to minimize the impact of their bill.
However, in this instance, due to the usage characteristics of the customer
base, the cost of implementing monthly billing outweighs any benefits because
there are no issues with excessive usage. Therefore, staff recommends a
continuation of the Utility’s existing rate structure, which is a quarterly
base facility charge based on meter size and uniform gallonage charge for both
residential and general service customers. Rates were designed based upon the
recommended revenue requirement excluding miscellaneous service charges.
Wastewater Rates
Heather Hills provides wastewater service to approximately
354 residential customers and 1 general service customer. Currently, the
wastewater rate structure for residential customers consists of a quarterly
uniform BFC for all meter sizes and gallonage charge with no gallonage cap.
General service customers are billed a BFC by meter size and gallonage charge
that is 1.2 times higher than the residential gallonage charge.
Staff performed an analysis of the Utility’s billing data
in order to evaluate various BFC cost recovery percentages and gallonage caps
for the residential wastewater 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, where appropriate, 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. The Utility does not have a gallonage cap for
residential customers because the Utility purchases water and wastewater
treatment from Manatee County and is billed wastewater treatment on all water
gallons purchased. As a result, staff recommends a continuation of no
residential wastewater gallonage cap. In addition, for the same reasons
provided for the water system, staff recommends a continuation of quarterly
billing. Staff recommends a continuation of the existing wastewater rate
structure for residential customers, which consists of a quarterly uniform BFC
for all meter sizes and a gallonage charge with no gallonage cap. General
service customers should continue to be billed a quarterly BFC by meter size
and gallonage charge that is the same as residential. Rates were designed based
upon the recommended revenue requirement excluding miscellaneous service
charges.
Issue
11: What
is the appropriate amount by which the rates should be reduced 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 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. Heather Hills 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. (Bethea,
Bennett) (Procedural Agency Action)
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 $392 for each
system.
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. Heather Hills 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 12:
Should the requested initial customer deposits for
Heather Hills Utilities, LLC. be approved?
Recommendation:
The appropriate initial customer deposits should be
$106 for the single family residential 5/8 inch x 3/4 inch meter size for water
and $172 for the single family residential 5/8 inch x 3/4 inch meter size for
wastewater. The initial customer deposits for all other residential meter sizes
and all general service meter sizes should be two times the average estimated
bill for water and wastewater. The approved initial customer deposits should be
effective for connections made on or after the stamped approval date on the
tariff sheets pursuant to Rule 25-30.475, F.A.C. The Utility should be required
to collect the approved deposits until authorized to change them by the
Commission in a subsequent proceeding. (Bethea)
Staff Analysis:
Rule 25-30.311, F.A.C., provides the criteria for
collecting, administering, and refunding customer deposits. Customer deposits
are designed to minimize the exposure of bad debt expense for the Utility and,
ultimately, the general body of ratepayers. An initial customer deposit ensures
that the cost of providing service is recovered from the cost causer.
Historically, the Commission has set initial customer deposits equal to two
times the average estimated bill.[12] Currently, the Utility’s initial deposit for single
family residential water customers is $78 for the 5/8 inch x 3/4 inch meter
size and two times the average estimated bill for the general service
customers. For wastewater, the Utility’s initial deposit for single family
residential service is $124 for the 5/8 inch x 3/4 inch meter size and two times
the average estimated bill for the general service customers.
Rule 25-30.311(7), F.A.C., authorizes utilities to collect
new or additional deposits from existing customers not to exceed an amount
equal to the average actual charge for water and/or wastewater service for two
billing periods for the 12-month period immediately prior to the date of
notice. The two billing periods reflect the lag time between the customer’s
usage and the Utility’s collection of the revenues associated with that usage.
Commission practice has been to set initial customer deposits equal to two
billing periods based on the average consumption for a 12-month period for each
class of customers.
The Utility’s average monthly residential usage is 1,666 gallons per customer.
Heather Hills bills on a quarterly basis; therefore, an average residential bill for one quarterly billing
period based on staff’s recommended rates is approximately $53 for water and
$86 for wastewater.
Based on the above, the appropriate initial customer deposits
for the residential 5/8 inch x 3/4 inch meter size are $106 for water and $172
for wastewater. The initial customer deposit for all other residential meter
sizes and all general service meter sizes should be two times the average
estimated quarterly bill for water and wastewater. The approved initial
customer deposits should be effective for connections made on or after the
stamped approval date on the tariff sheets pursuant to Rule 25-30.475, F.A.C.
The Utility should be required to collect the approved initial customer
deposits until authorized to change them by the Commission in a subsequent
proceeding.
Issue 13:
Should the recommended rates be approved for Heather
Hills on a temporary basis, subject to refund with interest, 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. Heather Hills 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.
(Bennett) (Procedural Agency Action)
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. Heather Hills 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.
Heather Hills 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 $10,898. 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, and,
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 express approval 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.
Should the
recommended rates be approved by the Commission on a temporary basis, Heather
Hills should maintain a record of the amount of the security, 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’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.
Issue 14: Should the
Utility be required to notify the Commission in writing that it has adjusted
its books in accordance with the Commission's decision?
Recommendation:
Yes. Heather Hills should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Heather Hills 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 and Utility Commissioners Uniform
System of Accounts (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 should be provided within seven days prior to
the deadline. Upon providing good cause, staff should be given administrative
authority to grant an extension of up to 60 days. (Bennett) (Procedural Agency
Action)
Staff Analysis:
Heather Hills should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Heather Hills 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 should be provided within seven days prior to the deadline.
Upon providing good cause, staff should be given administrative authority to
grant an extension of up to 60 days.
Issue 15:
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. (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 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.
