Case Background
McLeod Gardens
Utilities, LLC (McLeod or Utility) is a Class C utility serving approximately
96 residential water customers in Polk County. The Utility was transferred to
the present operator in 2016. McLeod’s rates and charges were approved
in its last staff-assisted rate case in 2002 when the Utility was known as
McLeod Gardens Water Company. Subsequent to the Utility’s last rate
case, its rates have been amended through five price index increases. According
to McLeod’s 2019 Annual Report, total gross revenue was $33,563 and total operating
expense was $41,418.
On
June 19, 2020, McLeod filed an application for a staff-assisted rate case. A
test year ended December 31, 2019, has been established for the purposes of interim
and final rates.
This
recommendation addresses the Utility’s request for interim rates. The
Commission has jurisdiction pursuant to Sections 367.082 and 367.0814(4),
Florida Statutes (F.S).
Discussion
of Issues
Issue 1:
Should an interim revenue increase be approved?
Recommendation:
Yes. McLeod should be authorized to collect interim
revenues as indicated below:
|
|
Test Year
Revenues
|
$ Increase
|
Revenue
Requirement
|
% Increase
|
|
Water
|
$33,563
|
$2,608
|
$36,171
|
7.77%
|
(Richards, D. Brown)
Staff Analysis:
On June 19, 2020, McLeod filed an application
requesting an interim revenue increase in its water rates. Section 367.0814(4),
F.S., details the criteria for evaluating a request for an interim rate
increase for staff-assisted rate cases.
Section 367.0814(4), F.S., states:
The Commission may, upon its own motion, or upon
petition from the regulated utility, authorized the collection of interim rates
until the effective date of the final order. Such interim rates may be based
upon a test period different from the test period used in the request for
permanent rate relief. To establish interim relief, there must be a
demonstration that the operation and maintenance expenses exceed the revenues
of the regulated utility, and interim rates shall not exceed the level
necessary to cover operation and maintenance expenses as defined by the Uniform
System of Accounts for Class C Water and Wastewater Utilities (1996) of the
National Association of Regulatory Utility Commissioners.
Staff has reviewed the Utility’s operation and maintenance
(O&M) expenses in relation to its revenues. Based on the Utility’s filing,
staff recommends that McLeod has demonstrated a prima facie entitlement to an interim rate increase in accordance
with Section 367.0814(4), F.S.
Revenue Increase
In order to establish interim rate relief as prescribed by
Section 367.0814(4), F.S., staff used the Utility’s revenues reflected in its
2019 Annual Report for the test year ended December 31, 2019. The test year
revenues are $33,563, which includes $31,790 from water service rates and
$1,773 from miscellaneous service revenues. The test year O&M expenses are
$36,054. The difference between the Utility’s reported revenues and O&M
expenses is $2,491.
In addition, the interim water increase should be grossed
up to include regulatory assessment fees (RAFs). The Commission has previously
determined that it would be inappropriate to approve an increase in a utility’s
rates to cover its operating expenses and deny that same utility the funds to
pay RAFs.
Furthermore, by approving an interim rate increase that allows for the payment
of RAFs, the Utility should be able to fully cover its O&M expenses. The
RAFs associated with the interim increase equal $117.
In total, McLeod should be allowed an interim water
revenue increase of $2,608 ($2,491 + $117) to produce revenues sufficient to
cover O&M expenses and additional RAFs. Thus, staff recommends the
appropriate interim revenue requirement should be $36,171. This is a 7.77
percent increase above the Utility’s test year revenues. Table 1-1 illustrates
staff’s interim increase calculation.
Table 1-1
Determination of Interim
Increase
|
|
Water
|
|
1. Utility Test Year O&M Expenses
|
$36,054
|
|
2. Less: Utility Test Year Revenues
|
$33,563
|
|
3. Revenues to Cover O&M Expenses
|
$2,491
|
|
4. Interim Revenue Increase
|
$2,491
|
|
5. RAFs on Interim Rate Increase
|
$117
|
|
6. Total Interim Revenue Increase ($)
|
$2,608
|
|
7. Total Interim Revenue Increase (%)
|
7.77%
|
Source: Utility’s 2019 Annual Report and staff’s
calculations.
Issue 2:
What are the appropriate interim water rates?
Recommendation:
The recommended interim rate increase of 8.20 percent
for water 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 No. 1,
should be effective for service rendered on or after the stamped approval date
on the tariff sheets pursuant to Rule 25-30.475(1), Florida Administrative Code
(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. (Bethea)
Staff Analysis:
Staff recommends that interim service rates for
McLeod be designed to allow the Utility the opportunity to generate annual
operating revenues of $36,171 for water. Before removal of miscellaneous
revenues, this would result in an increase of $2,608 (7.77 percent). To
determine the appropriate increase to apply to the service rates, miscellaneous
revenues should be removed from the test year revenues. The calculation is as
follows:
Table 2-1
Percentage Service Rate Increase
|
|
|
Water
|
|
1
|
Total Test Year Revenues
|
$33,563
|
|
2
|
Less: Miscellaneous
Revenues
|
$1,773
|
|
3
|
Test Year Revenues from Service Rates
|
$31,790
|
|
4
|
Revenue Increase
|
$2,608
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
8.20%
|
Source: Staff’s
Interim Recommended Revenue Requirement
Staff recommends that the interim rate increase of 8.20
percent for water 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 No. 1 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 3:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
The Utility should be required to open an escrow
account or secure a surety bond or letter of credit to guarantee any potential
refund of revenues collected under interim conditions. If the security provided
is an escrow account, the Utility should deposit $217 into the escrow account
each month. Otherwise, the surety bond or letter of credit should be in the
amount of $1,736. 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.
(Richards, D. Brown)
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 1, the interim increase for water is $2,608. 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 $1,736. This amount is based
on an estimated eight months of revenue being collected under the recommended
interim rates shown on Schedule No. 1.
The
criteria for a corporate undertaking include sufficient liquidity, ownership
equity, profitability, and interest coverage to guarantee any potential refund.
Staff reviewed McLeod’s financial condition. Because the Utility has no
meaningful liquidity, has negative interest coverage, has reported significant
net losses year over year, and has negative ownership equity, staff does not
believe the Utility has the financial capability to support a corporate
undertaking in the amount requested at this time. Instead, staff recommends
that the Utility be required to secure a surety bond, letter of credit, or
escrow agreement to guarantee any potential refund.
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.
If the security provided is a surety bond or a letter of
credit, said instrument should be in the amount of $1,736. If the Utility
chooses a surety bond as security, the surety bond should state that it will be
released or terminated only upon subsequent order of the Commission. If the
Utility chooses to provide a letter of credit as security, the letter of credit
should state that it is irrevocable for the period it is in effect and that it
will be in effect until a final Commission order is rendered releasing the
funds to the Utility or requiring a refund.
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.
Issue 4:
Should this docket be closed?
Recommendation:
No. Staff recommends
that this docket should remain open to address the merits of McLeod’s staff-assisted
rate case. (Dziechciarz)
Staff Analysis:
Staff recommends
that this docket should remain open to address the merits of McLeod’s staff-assisted
rate case.
|
MCLEOD
GARDENS UTILITIES, LLC.
|
|
|
SCHEDULE NO. 1
|
|
TEST YEAR
ENDED DECEMBER 31, 2019
|
|
DOCKET NO. 20200168-WU
|
|
MONTHLY
WATER RATES
|
|
|
|
|
|
|
|
|
|
|
RATES IN
|
|
STAFF
|
|
|
EFFECT AS OF
|
CURRENT
|
RECOMMENDED
|
|
|
12/31/2019 (1)
|
RATES (2)
|
INTERIM RATES
|
|
|
|
|
|
|
Residential and General
Service
|
|
|
|
|
Base Facility Charge by
Meter Size
|
|
|
|
|
5/8"X3/4"
|
$11.65
|
$11.88
|
$12.61
|
|
3/4"
|
$17.48
|
$17.82
|
$18.92
|
|
1"
|
$29.13
|
$29.70
|
$31.53
|
|
1-1/2"
|
$58.25
|
$59.40
|
$63.05
|
|
2"
|
$93.20
|
$95.04
|
$100.88
|
|
3"
|
$186.40
|
$190.08
|
$201.76
|
|
4"
|
$291.25
|
$297.00
|
$315.25
|
|
6"
|
$582.50
|
$594.03
|
$630.50
|
|
|
|
|
|
|
Gallonage
Charge
|
|
|
|
|
Charge per
1,000 gallons - Residential and General Service
|
$2.91
|
$2.97
|
$3.15
|
|
|
|
|
|
|
Typical
Residential 5/8" x 3/4" Meter Bill Comparison
|
|
|
|
2,000 Gallons
|
$17.47
|
$17.82
|
$18.91
|
|
4,000 Gallons
|
$23.29
|
$23.76
|
$25.21
|
|
6,000 Gallons
|
$29.11
|
$29.70
|
$31.51
|
|
|
|
|
|
|
(1) The interim
rate increase was applied to the rates in effect as of 12/31/2019.
|
|
|
(2) The current
rates became effective June 5, 2020 as a result of a price index.
|
|
|
|
|
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