Discussion
of Issues
Issue 1:
Which index should be used to determine price level
adjustments?
Recommendation:
The Gross Domestic Product Implicit Price Deflator
Index is recommended for use in calculating price level adjustments. Staff
recommends calculating the 2021 Price Index by using a fiscal year, four
quarter comparison of the Implicit Price Deflator Index ending with the third
quarter of 2020. (Blocker)
Staff Analysis:
In 1993, the Gross Domestic Product Implicit Price Deflator
Index (GDP) was established as the appropriate measure for determining the
water and wastewater price index. At the same time, the convention of using a
four quarter fiscal year comparison was also established and this practice has
been used every year since then. The GDP is prepared by the U.S. Department
of Commerce. Prior to that time, the Gross National Product Implicit Price
Deflator Index (GNP) was used as the indexing factor for water and wastewater
utilities. The Department of Commerce switched its emphasis from the GNP to the
GDP as the primary measure of U.S. production.
Pursuant to Section 367.081(4)(a), F.S., the Commission,
by order, shall establish a price increase or decrease index for major
categories of operating costs incurred by utilities subject to its jurisdiction
reflecting the percentage of increase or decrease in such costs from the most
recent 12-month historical data available. Since 1995, the price index adjustment
has been determined by comparing the change in the average GDP for the year
ending September 30, instead of the original December 31, in order to more
easily meet the statutory deadline.
In Order No. PSC-2019-0525-PAA-WS, issued December 17,
2019, in Docket No. 20190005-WS, the Commission, in keeping with the practice
started in 1993, reiterated the alternatives which could be used to calculate
the indexing of utility revenues. Past concerns expressed by utilities, as
summarized from utility input in previous hearings, are:
1) Inflation
should be a major factor in determining the index;
2) Nationally
published indices should be vital to this determination;
3) Major
categories of expenses are labor, chemicals, materials and supplies,
maintenance, transportation, and treatment expense;
4) An area
wage survey, Dodge Building Cost Index, Consumer Price Index, and the GDP
should be considered;
5) A broad
measure index should be used; and
6) The index
procedure should be easy to administer.
Based upon these concerns, the Commission has previously
explored the following alternatives:
1) Survey of
Regulated Water and Wastewater Utilities;
2) Consumer
Price Index;
3) Florida
Price Level Index;
4) Producer
Price Index – previously the Wholesale Price Index; and
5) GDP
(replacing the GNP).
Over the years, the Commission found that the Survey of
Regulated Water and Wastewater Utilities should be rejected because using the
results of a survey would allow utilities to pass on to customers all cost
increases, thereby reducing the incentives of promoting efficiency and
productivity. The Commission has also found that the Consumer Price Index and
the Florida Price Level Index should be rejected because of their limited
degree of applicability to the water and wastewater industry. Both of these
price indices are based upon comparing the advance in prices of a limited
number of general goods and, therefore, appear to have limited application to
water and wastewater utilities.
The Commission further found that the Producer Price Index
(PPI) is a family of indices that measure the average change over time in
selling prices received by domestic producers of goods and services. PPI
measures price change from the perspective of the seller, not the purchaser, and
therefore should be rejected. The bases for these indices have not changed, and
staff believes that the conclusions reached in Order No. PSC-2019-0525-PAA-WS
should continue to apply in this case. Since 1993, the Commission has found
that the GDP has a greater degree of applicability to the water and wastewater
industry. Therefore, staff recommends that the Commission continue to use the
GDP to calculate water and wastewater price level adjustments. Staff recommends
calculating the 2021 Price Index by using a fiscal year, four quarter
comparison of the Implicit Price Deflator Index ending with the third quarter
of 2020.
The following information provides a historical
perspective of the annual price index:
Table 1-1
Historical Analysis of the
Annual Price Index for Water and Wastewater Utilities
|
Year
|
Commission
Approved
Index
|
Year
|
Commission
Approved
Index
|
|
2009
|
2.55%
|
2015
|
1.57%
|
|
2010
|
0.56%
|
2016
|
1.29%
|
|
2011
|
1.18%
|
2017
|
1.51%
|
|
*2012
|
2.41%
|
2018
|
1.76%
|
|
2013
|
1.63%
|
2019
|
2.36%
|
|
2014
|
1.41%
|
2020
|
1.79%
|
The table below shows the historical participation in the
Index and/or Pass-Through programs:
Table 1-2
Percentage of Jurisdictional
Water and Wastewater Utilities Filing for Indexes and
Pass-Throughs
|
Year
|
Percentage
|
Year
|
Percentage
|
|
2009
|
53%
|
2015
|
49%
|
|
2010
|
29%
|
2016
|
38%
|
|
2011
|
43%
|
2017
|
37%
|
|
2012
|
30%
|
2018
|
42%
|
|
2013
|
41%
|
2019
|
60%
|
|
2014
|
39%
|
2020
|
43%
|
Issue 2:
What rate should be used by water and wastewater utilities
for the 2021 Price Index?
Recommendation:
The 2021 Price Index for water and wastewater
utilities should be 1.17 percent. (Blocker)
Staff Analysis:
The U.S. Department of Commerce, Bureau of Economic
Analysis, released the most recent third quarter 2020 figures on October 29,
2020. Consistent with the Commission’s establishment of the 2020 Price Index
last year, staff is using the third quarter 2020 amounts to calculate staff’s
recommended 2021 Price Index. Using the third quarter amounts allows time for a
hearing if there is a protest, in order for the Commission to establish the
2021 Price Index by March 31, 2021, in accordance with Section 367.081(4)(a),
F.S. The percentage change in the GDP using the fiscal year comparison ending
with the third quarter is 1.17 percent. This number was calculated as follows.
|
GDP Index for the fiscal year ended 9/30/20
|
113.849
|
|
GDP Index for the fiscal year ended 9/30/19
|
112.531
|
|
Difference
|
1.318
|
|
Divided by 9/30/19 GDP Index
|
112.531
|
|
2021 Price Index
|
1.17%
|
Issue 3:
How should the utilities be informed of the indexing
requirements?
Recommendation:
Pursuant to Rule 25-30.420(1), F.A.C., the Office of
Commission Clerk, after the expiration of the Proposed Agency Action (PAA)
protest period, should mail each regulated water and wastewater utility a copy
of the PAA order establishing the index containing the information presented in
Attachment 1. A cover letter from the Director of the Division of Accounting
and Finance should be included with the mailing of the order (Attachment 2).
The entire package should also be made available on the Commission’s website.
(Blocker)
Staff Analysis:
Staff recommends that the package presented in
Attachment 1 be mailed to every regulated water and wastewater utility after
the expiration of the PAA protest period, along with a copy of the PAA order
once final. The entire package should also be made available on the
Commission’s website.
In an effort to increase the number of water and
wastewater utilities taking advantage of the annual price index and
pass-through programs, staff is recommending that the attached cover letter
(Attachment 2) from the Director of the Division of Accounting and Finance be
included with the mailing of the PAA Order in order to explain the purpose of
the index and pass-through applications and to communicate that Commission
staff is available to assist them.
Commissioners:
Gary
F. Clark, Chairman
Art
graham
Julie
i. brown
Donald
J. Polmann
Andrew
Giles Fay
|
State of Florida
|
Division
of
Accounting
and Finance
Andrew
L. Maurey
Director
(850) 413-6900
|
|
Public Service Commission
|
Month Day, 2021
All Florida Public Service
Commission
Regulated Water & Wastewater Utilities
Re: Docket No. 20200005-WS - 2021 Price Index
Dear Utility Owner:
Since March 31, 1981, pursuant to
the guidelines established by Section 367.081(4)(a), Florida Statutes (F.S.),
and Rule 25-30.420, Florida Administrative Code (F.A.C.), the Commission has
established a price index increase or decrease for major categories of
operating costs. This process allows water and wastewater utilities to
adjust rates based on current specific expenses without applying for a rate
case. The intent of this rule is to insure that
inflationary pressures are not detrimental to utility owners, and that any
possible deflationary pressures are not adverse to rate payers. By keeping up
with index and pass-through adjustments, utility operations can be maintained
at a level sufficient to insure quality of service for the rate payers.
Pursuant
to Rule 25-30.420(1)(a), F.A.C., all operation and maintenance expenses shall
be indexed with the exception of:
a) Pass-through items pursuant to Section 367.081(4)(b), F.S.;
b) Any amortization of rate case expense; and
c) Disallowances or adjustments made in an applicant's most
recent rate proceeding.
Please
note that all sludge removal expense should now be removed from operation and
maintenance expenses for the purpose of indexing. Incremental increases in this
category of expense may now be recovered using a pass-through request.
All Florida Public Service Commission
Regulated Water & Wastewater Utilities
Page 2
Month Day, 2021
Upon the filing of a request for
an index and/or pass-through increase, staff will review the application and
modify existing rates accordingly. If for no other reason than to keep up with
escalating costs, utilities throughout Florida should file for this rate relief
on an annual basis. Utilities may apply for a 2021 Price Index anytime between
April 1, 2021, through March 31, 2022 by mail or by emailing
Applications@psc.state.fl.us. The attached package will answer questions
regarding what the index and pass-through rate adjustments are, how to apply
for an adjustment, and what needs to be filed in order to meet the filing
requirements. While this increase for any given year may be minor, (see chart
below), the long-run effect of keeping current with rising costs can be
substantial.
|
Year
|
Annual
Commission
Approved Index
|
Year
|
Annual
Commission
Approved Index
|
|
1996
|
2.49%
|
2009
|
2.55%
|
|
1997
|
2.13%
|
2010
|
0.56%
|
|
1998
|
2.10%
|
2011
|
1.18%
|
|
1999
|
1.21%
|
2012
|
2.41%
|
|
2000
|
1.36%
|
2013
|
1.63%
|
|
2001
|
2.50%
|
2014
|
1.41%
|
|
2002
|
2.33%
|
2015
|
1.57%
|
|
2003
|
1.31%
|
2016
|
1.29%
|
|
2004
|
1.60%
|
2017
|
1.51%
|
|
2005
|
2.17%
|
2018
|
1.76%
|
|
2006
|
2.74%
|
2019
|
2.36%
|
|
2007
|
3.09%
|
2020
|
1.79%
|
|
2008
|
2.39%
|
2021
|
1.17%
|
Please be aware that pursuant to Section 837.06, F.S., whoever
knowingly makes a false statement in writing with the intent to mislead a
public servant in the performance of his or her official duty shall be guilty
of a misdemeanor of the second degree. Our staff is available at (850) 413-6900
should you need assistance with your filing. If you have any questions, please
do not hesitate to call.
Moreover, additional rate relief mechanisms are available
to water and wastewater utilities as alternatives to full rate cases. Water and
wastewater utilities whose total gross annual operating revenues are $300,000
or less for water service or $300,000 or less for wastewater service, or
$600,000 or less on a combined basis, may petition the Commission for staff
assistance in alternative rate setting. Please refer to Rule 25-30.456, F.A.C.,
for additional details. Furthermore, water utilities whose total gross annual
operating revenues are $300,000 or less for water service and wastewater
utilities whose total gross annual operating revenues are $300,000 or less for
wastewater service may file an application for a limited alternative rate
increase of up to 20 percent applied to metered or flat recurring rates of all
classes of service. Please refer to Rule 25-30.457, F.A.C., for additional
details.
In addition, the Commisson reminds water and wastewater
utilities that the Utility Reserve Fund exists to help address concerns over
deferred maintenance of critical infrastructure and delays in necessary
repairs. The availability of the reserve funds may allow a utility to avoid or
defer the need for a future rate case, the expenses of which are ultimately
borne by ratepayers. Please refer to Rule 25-30.444, F.A.C., for additional
details.
Sincerely,
Andrew L. Maurey
Director
Enclosures
