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State of Florida
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Public Service Commission
Capital Circle Office Center ● 2540 Shumard
Oak Boulevard
Tallahassee, Florida 32399-0850
-M-E-M-O-R-A-N-D-U-M-
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DATE:
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August 20, 2020
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TO:
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Office of Commission Clerk (Teitzman)
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FROM:
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Division of Accounting and Finance (Norris,
Blocker, D. Buys, Thurmond)
Division of Economics
(Bethea, Bruce, Hudson, Sibley)
Division of Engineering
(Doehling, Ellis, Johnson, King, Kistner, Knoblauch, Ramos, Thompson)
Office of the General
Counsel (Trierweiler, Crawford)
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RE:
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Docket No. 20200139-WS – Application for
increase in water and wastewater rates in Charlotte, Highlands, Lake, Lee,
Marion, Orange, Pasco, Pinellas, Polk, and Seminole Counties, by Utilities,
Inc. of Florida.
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AGENDA:
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09/01/20 – Regular Agenda – Decision on Suspension of Rates and
Interim Rates – Participation is at the Discretion of the Commission
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COMMISSIONERS ASSIGNED:
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All Commissioners
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PREHEARING OFFICER:
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Fay
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CRITICAL DATES:
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09/11/20 (60-Day Suspension Date)
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SPECIAL INSTRUCTIONS:
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None
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Case Background
Utilities, Inc.
of Florida (UIF or Utility) is a Class A utility providing water and wastewater
service to 27 systems in the following counties: Charlotte, Highlands, Lake,
Lee, Marion, Orange, Pasco, Pinellas, Polk, and Seminole. UIF is a wholly-owned
subsidiary of Utilities, Inc. (UI). The Utility’s last rate proceeding,
processed in Docket No. 20160101-WS, utilized a historic December 31, 2015,
test year. That proceeding culminated in Order No.
PSC-2017-0361-FOF-WS, issued September 25, 2017, approving a single
consolidated rate structure, as amended by Order No. PSC-2017-0361A-FOF-WS,
issued October 4, 2017. On remand from the First District Court of Appeal,
Order No. PSC-2019-0363-PAA-WS was issued on August 27, 2019.
In 2019, the
Utility recorded total company operating revenues of $16,396,327 and
$20,840,529 for water and wastewater, respectively. UIF reported net operating
income for 2019 of $3,726,366 for water and $5,185,175 for wastewater. In 2019,
UIF had 33,736 and 23,885 respective water and wastewater customers for its
combined systems.
On July 13, 2020,
UIF filed an application for approval of interim and final water and wastewater
rate increases. By letter dated August 5, 2020, staff advised the Utility that
its Minimum Filing Requirements (MFRs) had deficiencies. The deadline to
correct those deficiencies is September 4, 2020. To date, the official date of
filing has not been established for noticing purposes.
The Utility's
application for increased interim and final water and wastewater rates is based
on the historical 13-month average period ended December 31, 2019. The
requested final rates include adjustments for pro forma projects.
UIF requested
interim rates designed to generate revenues of $17,217,167 for water operations
and $20,988,143 for wastewater operations. This represents a revenue increase
of $624,643, or 3.76 percent, for water and $689,957, or 3.40 percent, for
wastewater. UIF requested final rates designed to generate additional revenues
of $2,823,848, or 17.01 percent, for water operations and $6,529,383, or 32.17
percent, for wastewater operations.
Upon its
request, the Office of Public Counsel (OPC) was added as an interested person
to this docket on April 20, 2020. The intervention of the OPC was acknowledged
by Order No. PSC-2020-0259-PCO-WS, issued on July 24, 2020.
On April 21,
2020, UIF filed a Petition for Variance or Waiver of a specific provision from
Rule 25-30.437(3), Florida Administrative Code (F.A.C.). The portion of the
rule from which the Utility requested waiver addresses the requirement to
provide additional detailed billing analyses for each rate change period in the
test year. By Order No. PSC-2020-0211-PAA-WS, issued June 26, 2020, the
Commission approved the Utility’s petition.
The 60-day
statutory deadline for the Commission to suspend the Utility’s requested final
rates and address its interim rate request is September 11, 2020. This
recommendation addresses the suspension of the Utility’s requested final rates
and requested interim rates. The Commission has jurisdiction pursuant to
Sections 367.081 and 367.082, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Utility's proposed final water and
wastewater rates be suspended?
Recommendation:
Yes. The Utility’s proposed final water and
wastewater rates should be suspended. (Thurmond)
Staff Analysis:
Section 367.081(6), F.S., provides that the rates
proposed by a utility shall become effective within sixty days after filing
unless the Commission votes to withhold consent of implementation of the
requested rates. Further, the above referenced statute permits the proposed
final rates to go into effect, under bond, escrow, or corporate undertaking
eight months after filing unless final action has been taken by the Commission.
Staff has reviewed the filing and the proposed rates, the
revenues thereby generated, and the information filed in support of the rate
application. Staff believes that it is reasonable and necessary to require
further amplification and explanation regarding this data, and to require production
of additional and/or corroborative data. This further examination will include a
review by staff accountants and engineers. To date, staff has initiated an
audit of UIF’s books and records, as well as an audit of UI, the Utility’s
parent, to examine allocated investment and operating expenses. This combined
audit is tentatively due on October 21, 2020. Staff believes additional
discovery requests will be necessary. Therefore, staff recommends suspension of
the Utility’s proposed rate increase to allow staff and any intervenors
sufficient time to adequately and thoroughly examine the appropriateness of the
Utility’s request for final rate relief.
Issue 2:
Should any interim revenue increase be approved?
Recommendation:
Yes. UIF should be authorized to collect annual
revenues as indicated below:
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Adjusted
Test
Year
Revenues
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$
Increase
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Revenue
Requirement
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%
Increase
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Water
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$16,298,944
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$918,223
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$17,217,167
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5.63%
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Wastewater
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$19,936,921
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$1,051,222
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$20,988,143
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5.27%
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(Blocker, Thurmond, Norris, Thompson, Hudson)
Staff Analysis:
On July 13, 2020, UIF filed its rate base, cost of
capital, and operating statements to support its requested interim increase in
rates. Pursuant to Section 367.082(1), F.S., in order to establish a prima
facie entitlement for interim relief, the Utility shall demonstrate that it is
earning outside the range of reasonableness on its rate of return. Pursuant to
Section 367.081(2)(a), F.S., in a proceeding for an interim increase in rates,
the Commission shall authorize, within 60 days of the filing for such relief,
the collection of rates sufficient to earn the minimum of the range of rate of
return. Based on the Utility’s filing and the recommended adjustments below,
staff believes that the Utility has demonstrated a prima facie entitlement in
accordance with Section 367.082(1), F.S.
Pursuant to Section 367.082(5)(b)1, F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the Utility’s most recent rate proceeding
and annualizing any rate changes. Staff reviewed UIF's interim request, as well
as Orders from the Utility’s most recent rate proceedings, and believes
adjustments are necessary as discussed below. Staff has attached accounting
Schedules to illustrate staff's recommended rate base, capital structure, and
test year operating income amounts. Rate base is labeled as Schedule Nos. 1-A
and 1-B, with the adjustments shown on Schedule No. 1-C. Capital structure is
labeled as Schedule No. 2. Operating income is labeled as Schedule Nos. 3-A and
3-B, with the adjustments shown on Schedule No. 3-C.
Rate Base
Staff reviewed the Utility's interim used and useful
(U&U) calculations on a per system basis. The review is based upon previous
Commission decisions and available usage and capacity data contained in UIF’s
MFR schedules. Consistent with Commission practices, staff recommends no
adjustments for all water treatment, storage, and distribution and collection
systems that have been determined to be 100 percent U&U by the prior rate
case order.[2]
Except for four wastewater treatment plants (WWTP), staff
recommends no adjustments to the WWTP U&U values contained in UIF’s interim
rate base. The Labrador, LUSI Lake Groves, Marion, and Mid-County WWTP U&U
values approved in the prior rate case orders[3]
were 79.94 percent, 53.54 percent, 68.65 percent, and 93.67 percent,
respectively. Based on current system conditions, and using the methodology
approved in the prior rate case order, staff recommends that the Labrador and
Mid-County WWTPs be considered 100 percent U&U, and the LUSI Lake Groves
and Marion WWTPs be considered 64.76 percent and 78.43 percent U&U,
respectively.
U&U values have not been previously established by the
Commission for the LUSI Barrington wastewater system as the transfer of this
system to UIF was approved by the Commission in 2019.[4]
However, for interim purposes, staff recommends that the LUSI Barrington WWTP
and collection system be considered 100 percent U&U.
Pursuant to Rule 25-30.433(3), F.A.C., the working capital
allowance for Class A utilities shall be calculated using the balance sheet
method. In Order No. PSC-2017-0361-FOF-WS, the Commission determined that
deferred rate case expense from systems with surcharges should not be included
in working capital, as the surcharge already includes the associated return
from inclusion in working capital. As such, staff recommends a reduction to
water and wastewater working capital of $20,473 and $16,008, respectively, to
remove unamortized prior rate case expense currently recovered through
surcharges. Staff also recommends decreasing water and wastewater working
capital by $33 and $4,162, respectively, to correct unamortized balances of its
Project Phoenix. Project Phoenix is the system for managing accounting,
customer service, customer billing, and financial and regulatory reporting
functions used by UI and its subsidiaries. In total, staff recommends
reductions of $20,506 and $20,170 to water and wastewater working capital,
respectively.
Cost of Capital
Pursuant to the provisions of the interim statute, an
interim increase should be calculated using the minimum ROE limit authorized in
the Utility’s last rate case. Based on an analysis of the MFRs, Order No.
PSC-2017-0361-FOF-WS, and adjustments to rate base discussed above,
staff recommends that the overall rate of return be 6.61 percent.
Net Operating Income
In order to attain the appropriate amount of interim test
year operating revenues, staff removed the Utility's requested interim revenue
increase of $624,643 from water and $689,957 from wastewater. Staff also
reduced water and wastewater regulatory assessment fees (RAFs) by $28,109 and
$31,048 respectively, to reflect the removal of the Utility’s requested interim
revenue increases. In addition, the utility annualized the test year
revenues using rates in effect subsequent to the test year. For purposes of
determining interim rates, the appropriate rates for annualizing test year
revenues are the rates in effect at the end of the test year. Staff annualized
test year revenues using the rates in effect on December 31, 2019, which
results in a decrease to test year revenues of $293,580 for water and $361,265
for wastewater. Based on the above, staff recommends that the appropriate
interim test year revenue, before any increase, is $16,298,944 and 19,936,921
for water and wastewater, respectively.
On interim MFR Schedules B-1 and B-2, the Utility reflected
operation and maintenance (O&M) expense of $8,583,750 and $10,465,127 for
water and wastewater, respectively. Additional adjustments should be made
consistent with the treatment from UIF’s last rate case. A 3-year average
should be reflected for Eagle Ridge’s materials and supplies expense, as well
as health insurance reimbursements in pensions and benefits expense. Although
not reflected in the Utility’s filing, as both expenses are subaccounts within
UIF’s total O&M expense, the Utility did provide the expense detail in its
2020 Price Index application. Based on that filing, staff increased O&M
expense by $89,281 for water and $84,200 for wastewater.
Excessive Unaccounted Water
In the prior
rate case order,[5] the
Commission determined that the LUSI and Sanlando water systems had no excessive
unaccounted for water (EUW). Based on current system conditions, and using the
methodology approved in the prior rate case order, staff recommends EUW
adjustments for the LUSI Four Lakes and Sanlando water systems of 1.95 percent
and 2.08 percent, respectively, to the 2019 water treatment expense for each
system.
In the prior
rate case order,[6] the
Commission determined that the Labrador,
Pasco Orangewood, Pinellas Lake Tarpon, Seminole Oakland Shores, Seminole
Phillips, and Seminole Weathersfield water systems had EUW percentages of 4.6
percent, 7.66 percent, 10.2 percent, 2.23 percent, 1.56 percent, and 1.31
percent, respectively. Based on current system conditions, and using the
methodology approved in the prior rate case order, staff recommends that these
systems have no EUW, and recommends adjustments to the 2019 water treatment
expense to reflect this for each of these systems.
In the prior rate case order,[7]
the Commission determined that the Lake Placid, Marion, and Seminole Little
Wekiva water systems had EUW percentages of 3.06 percent, 1.35 percent, and
4.81 percent, respectively. Based on current system conditions, and using the
methodology approved in the prior rate case order, staff recommends EUW
adjustments for the Lake Placid, Marion, and Seminole Little Wekiva water
systems of 9.96 percent, 8.79 percent, and 5.54 percent, respectively, to the
2019 water treatment expense for each of these systems. Based on the above,
staff recommends an adjustment to decrease water O&M expense by $9,281 to
account for staff’s adjustments to EUW.
Infiltration & Inflow
In the prior
rate case order,[8] the
Commission determined that the Pasco Wis-Bar and Seminole Lincoln Heights
wastewater systems had excessive infiltration and inflow (I&I) percentages
of 17.22 percent and 32.9 percent, respectively. Based on current system
conditions, and using the methodology approved in the prior rate case order,
staff recommends excessive I&I adjustments for the Pasco Wis-Bar and
Seminole Lincoln Heights wastewater systems of 5.72 percent and 11.25 percent,
respectively, to the 2019 wastewater treatment expense for each system.
In the prior rate case order,[9]
the Commission determined that the Sandalhaven Englewood Water District wastewater
system had excessive I&I of 8.37 percent. Based on current system
conditions, and using the methodology approved in the prior rate case order,
staff recommends that this system has no excessive I&I, and recommends
adjustments to the 2019 wastewater treatment expense to reflect this. Overall,
staff recommends an adjustment to increase wastewater O&M expense by
$73,725 to account for staff’s adjustments to excessive I&I.
Amortization Expense
On interim MFR Schedules B-1 and B-2, the Utility
reflected adjusted amortization balances of $50,263 and $105,166 for water and
wastewater, respectively. As reflected on interim MFR Schedule B-3, the Utility
made a test year adjustment to decrease depreciation expense and increase
amortization expense by $46,704 and $101,889 for water and wastewater,
respectively, in order to reclassify amortization expense associated with early
plant retirements. Based on staff’s review of Order No. PSC-2017-0361-FOF-WS,
the amortization expense associated with early retirements should be $46,750
for the Summertree water system, $193,294 for the Longwood wastewater system,
and $30,511 for the Sandalhaven wastewater system. As a result of its review, staff
recommends increasing amortization expense by $46 and $121,916 for water and wastewater,
respectively.
Revenue Requirement
In its filing, the Utility requested interim revenue
requirements to generate annual revenue of $17,217,167 for water and
$20,988,143 for wastewater. Consistent with staff’s recommended rate base, cost of capital,
and operating income, the resulting interim revenue requirements are $17,265,238
for water and $21,313,226 for wastewater. However, it is Commission practice to
limit the revenue requirement to the total amount sought in a utility’s
petition.
Therefore, staff recommends that the appropriate interim revenue requirements
should be $17,217,167 for water and $20,988,143 for wastewater. The schedule
for operating income is attached as Schedule Nos. 3-A and 3-B, and the
adjustments are shown on Schedule No. 3-C. Although staff is recommending to
limit the interim revenue requirement, the percentage increase is greater than
what the Utility reflected in its initial filing. This is due to staff’s
previously discussed adjustment to reduce test year revenues.
Issue 3:
What are the appropriate interim water and
wastewater rates?
Recommendation:
The recommended interim rate increase of 5.76
percent for water and 5.46 percent for wastewater should be applied as an across-the-board
increase to the service rates in effect as of December 31, 2019. The rates, as
shown on Schedule Nos. 4-A and 4-B, should be effective for service rendered on
or after the stamped approval date on the tariff sheets pursuant to Rule
25-30.475(1), F.A.C. The Utility should file revised tariff sheets and a
proposed customer notice to reflect the Commission-approved rates. In addition,
the approved rates should not be implemented until the required security has
been filed, staff has approved the proposed customer notice, and the notice has
been received by the customers. The Utility should provide proof of the date
notice was given within 10 days of the date of the notice. (Bruce, Bethea,
Sibley)
Staff Analysis:
Staff recommends that interim service rates for UIF
be designed to allow the Utility the opportunity to generate annual operating
revenues of $17,217,167 for water and $20,988,143 for wastewater. Before
removal of miscellaneous and reuse revenues, this would result in an increase
of $918,223 (5.63 percent) for water and $1,051,222 (5.27 percent) for
wastewater. To determine the appropriate increase to apply to the service
rates, miscellaneous revenues should be removed from the water and wastewater
test year revenues. In addition, reuse revenues should be removed from the
wastewater test year revenues. The calculations are as follows:
Table 3-1
Percentage Service Rate Increase
- Water
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Water
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1
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Total Test Year Revenues
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$16,298,944
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2
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Less: Miscellaneous
Revenues
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$360,497
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3
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Test Year Revenues from Service Rates
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$15,938,447
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4
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Revenue Increase
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$918,223
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5
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Percentage Service Rate Increase (Line 4/Line 3)
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5.76%
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Source: Staff’s Recommended Revenue Requirement and
MFRs
Table 3-2
Percentage Service Rate Increase
- Wastewater
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Wastewater
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1
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Total Test Year Revenues
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$19,936,921
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2
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Less: Miscellaneous
Revenues
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$330,906
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3
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Less: Reuse
Revenues
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$342,097
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4
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Test Year Revenues from Service Rates
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$19,263,918
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5
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Revenue Increase
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$1,051,222
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6
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Percentage Service Rate Increase (Line 5/Line 4)
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5.46%
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Staff recommends that the recommended interim rate
increase of 5.76 percent for water and 5.46 percent for wastewater should be
applied as an across-the-board increase to the service rates in effect as of
December 31, 2019.
The rates, as shown on Schedule Nos. 4-A and 4-B, should be effective for
service rendered on or after the stamped approval date on the tariff sheets
pursuant to Rule 25-30.475(1), F.A.C. The Utility should file revised tariff
sheets and a proposed customer notice to reflect the Commission-approved rates.
In addition, the approved rates should not be implemented until the required
security has been filed, staff has approved the proposed customer notice, and
the notice has been received by the customers. The Utility should provide proof
of the date notice was given within 10 days of the date of the notice.
Issue 4:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
A cumulative corporate undertaking is acceptable
contingent upon receipt of the written guarantee of the parent company,
Utilities, Inc. (UI or Company), and written confirmation that the cumulative outstanding
guarantees on behalf of UI-owned utilities in other states will not exceed $4.6
million (inclusive of all Florida utilities). UI should be required to file a
corporate undertaking on behalf of its subsidiaries to guarantee any potential
refunds of revenues collected under interim conditions. UI’s guaranteed
amount subject to refund should be $1,810,655. Pursuant to Rule 25-30.360(6),
F.A.C., the Utility should provide a report by the 20th of each month
indicating the monthly and total revenue collected subject to refund. Should a
refund be required, the refund should be with interest and in accordance with
Rule 25-30.360, F.A.C. (D. Buys, Thurmond)
Staff Analysis:
Pursuant to Section 367.082, F.S., revenues
collected under interim rates shall be placed under bond, escrow, letter of
credit, or corporate undertaking subject to refund with interest at a rate
ordered by the Commission. As recommended in Issue 2, the total interim
increase is $1,974,310. In accordance with Rule 25-30.360, F.A.C., staff
calculated the potential refund of revenues and interest collected under
interim conditions to be $1,810,655. This amount is based on an estimated 11
months of revenue being collected from staff’s recommended interim rates over
the Utility’s current authorized rates shown on Schedule No. 4.
Utilities, Inc. of Florida (UIF) is a wholly-owned
subsidiary of Utilities, Inc. (UI) which provides all investor capital to its
subsidiaries. UIF requested to use a corporate undertaking to guarantee the
amount subject to refund of $1,810,655 collected during the 11-month period
when interim rates are in effect.
The criteria for a corporate undertaking include
sufficient liquidity, equity ownership, profitability, and interest coverage to
guarantee any potential refund. Staff reviewed UI’s 2019, 2018, and 2017
financial statements to determine if the Company can support a corporate
undertaking on behalf of its subsidiary. In all three of its most recent
financial statements, UI reported an insufficient working capital amount and
current ratio due to current liabilities exceeding current assets. However, the
interest coverage ratio is more than twice the required level. In addition, UI
reported more than adequate ownership equity and achieved adequate
profitability in each of the three most recent years. The preferred limit for a
corporate undertaking is $4.6 million.
Based on staff’s review of the financial statements made
available by UI, staff believes UI has adequate resources to support a
corporate undertaking in the amount requested. Based on this analysis, staff
recommends that a corporate undertaking of $1,810,655 is acceptable contingent
upon receipt of the written guarantee of UI and written confirmation that the
cumulative outstanding guarantees on behalf of UI-owned utilities in other
states will not exceed $4.6 million (inclusive of all Florida utilities). The
brief financial analysis above is only appropriate for deciding if UI can
support a corporate undertaking in the amount requested and should not be considered
a finding regarding staff’s position on other issues in this proceeding.
Pursuant to Rule 25-30.360(6), F.A.C., the Utility should
provide a report by the 20th day of each month indicating the monthly and total
revenue collected subject to refund. Should a refund be required, the refund
should be with interest and undertaken in accordance with Rule 25-30.360,
F.A.C.
In no instance should maintenance and administrative costs
associated with any refund be borne by the customers. Such costs are the responsibility
of, and should be borne by, the Utility.
Issue 5:
Should this docket be closed?
Recommendation:
The docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase.
(Trierweiler, Thurmond)
Staff Analysis:
The docket should remain open pending the
Commission’s final action on the Utility’s requested rate increase.