Recommendation

State of Florida		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-
DATE:	February 18, 2021
TO:	Office of Commission Clerk (Teitzman)
FROM:	Division of Engineering (Lewis, Ramos) Division of Accounting and Finance (Cicchetti, Richards, D. Brown) Division of Economics (Bethea) Office of the General Counsel (Passidomo)
RE:	Docket No. 20200168-WU – Application for staff-assisted rate case in Polk County, and request for interim rate increase, by McLeod Gardens Utilities, LLC.
AGENDA:	03/02/21 – Regular Agenda – Proposed Agency Action Except for Issue Nos. 12, 13, 14 - Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Brown
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None

Table of Contents

Case Background. 1

Issue 1 Quality of Service. 2

Issue 2 Infrastucture and Operating Conditions. 4

Issue 3 Used and Useful 5

Issue 4 Average Test Year Rate Base. 7

Issue 5 Rate of Return. 11

Issue 6 Allowance for Funds Used During Construction. 12

Issue 7 Test Year Revenues. 13

Issue 8 Operating Expenses. 14

Issue 9 Operating Ratio Methodology. 18

Issue 10 Appropriate Revenue Requirement 19

Issue 11 Appropriate Rate Structure. 20

Issue 12 Four-Year Rate Reduction. 22

Issue 13 Temporary Rates. 23

Issue 14 Commission-Ordered Adjustments. 25

Issue 15 Docket Closure. 26

Schedule No. 1-A Water Rate Base. 27

Schedule No. 1-B Adjustments to Rate Base. 28

Schedule No. 2 Capital Structure. 29

Schedule No. 3-A Water Operating Income. 30

Schedule No. 3-B Adjustments to Operating Income. 31

Schedule No. 3-C Water O&M Expense. 32

Schedule No. 4 Monthly Water Rates. 33

Case Background

McLeod Gardens Utilities, LLC (McLeod or Utility) is a Class C utility serving approximately 96 residential water customers in Polk County. On November 27, 2001, the Florida Public Service Commission (Commission) approved the Utility’s application for an Original Certificate to provide water service under the name McLeod Gardens Water Company.[1] The Utility was transferred to the present operator in 2017.[2] McLeod’s rates and charges were approved in its last staff-assisted rate case (SARC) in 2002 when the Utility was still known as McLeod Gardens Water Company.[3] 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. Staff selected a test year ended December 31, 2019, for the instant case. The Commission approved an interim rate increase of $2,608 (7.7 percent) for the Utility’s water system on September 21, 2020.[4] Due to the COVID-19 pandemic, Commission staff conducted a virtual customer meeting on December 16, 2020, but no customers attended. Representatives from the Utility and Office of Public Counsel (OPC) were in attendance.

The Commission has jurisdiction in this case pursuant to Sections 367.011, 367.081, 367.0812, 367.0814, 367.091, and 367.121, Florida Statutes (F.S.).

Conclusion

Based on the above, the quality of service provided by the Utility should be considered satisfactory. The Utility is passing all DEP primary and secondary standards and has been responsive to its customer complaints. Therefore, the quality of service provided by McLeod should be considered satisfactory.

Issue 2:

Are the infrastructure and operating conditions of McLeod’s water system in compliance with the DEP regulations?

Recommendation:

Yes. The Utility’s water treatment facilities are currently in compliance with DEP regulations. (Lewis)

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. In making this determination, the Commission must consider testimony of the DEP and county health department officials, sanitary surveys for water systems and compliance evaluation inspections for wastewater systems, citations, violations, and consent orders issued to the utility, customer testimony, comments, and complaints, and utility testimony and responses to the aforementioned items.

Water System Operating Conditions

McLeod’s water system has a permitted design capacity of 712,800 gallons per day (gpd). The Utility's water system has two wells with a combined pumping capacity of 495 (425 and 70) gallons per minute. The treated water is pumped into a 10,000 gallon hydropneumatic storage tank before entering the distribution system. A review of the DEP records did not show any consent orders against the Utility. Staff reviewed the sanitary surveys conducted by the DEP in 2018, 2019, and 2020. The 2018 survey listed three deficiencies, two for not having records on site, and the third for not having vacuum breakers on the point of entry tap and other taps at the plant. The 2019 survey stated that the water treatment plant (WTP) was in compliance and there were no deficiencies indicated by the 2020 sanitary surveys.

Additionally, the DEP issued a Warning Letter on February 17, 2017, which stated that the Utility had failed to properly clean and paint the interior of the hydropneumatic tank. There were no DEP enforcement actions listed in 2018 and 2019, and there are not any enforcement actions pending in 2020. Therefore, since the Utility’s last three sanitary surveys did not indicate any deficiencies, and since there are no enforcement actions pending, the Utility’s WTP is in compliance.

Conclusion

Based on the above, McLeod’s water treatment facilities are currently in compliance with DEP regulations.

Issue 3:

What are the used and useful (U&U) percentages of McLeod’s WTP and water distribution system?

Recommendation:

McLeod’s WTP and water distribution system should be considered 100 percent U&U. There appears to be no excessive unaccounted for water (EUW); therefore, staff recommends that no adjustment be made to operating expenses for chemicals and purchased power. (Lewis)

Staff Analysis:

McLeod’s WTP has two wells rated at a combined 495 gallons per minute (gpm). The Utility’s water system does not have a storage tank, but has one hydropneumatic tank totaling 10,000 gallons in capacity. The distribution system is composed of approximately 3,280 feet of 6 and 8 inch polyvinyl chloride (PVC) pipes.

Water Treatment Plant Used and Useful

Rule 25-30.4325, F.A.C., addresses the method by which the U&U of a water system is determined. The formula for calculating U&U for the WTP is given by [2 x (Maximum Day Peak Demand – EUW)/1,440 + Fire Flow + Growth] / Firm Reliable Capacity. Peak demand is based on a peak hour for a water treatment system with no storage capacity. The formula for calculating peak hour demand is given by [((SMD-EUW)/1,440) x 2], SMD is the single maximum day in the test year where there is no unusual occurrence on that day, such as a fire or line break. Based on the Monthly Operating Reports that the Utility files with the DEP, the SMD in the test year was 88,000 gpd, which occurred on July 2, 2019.

As discussed below, there appears to be no EUW. Subsequently, the peak hour demand is calculated to be 122 gpm [((88,000 gpd – 0)/1,440 min/day) x 2]. The Utility has fire hydrants and the required Fire Flow is 350 gpm. Growth allowance is based on the requirements outlined in Rule 25-30.431, F.A.C., which states that a linear regression analysis using average equivalent residential connections (ERCs) for the last five years should be used to determine growth. Staff obtained data for the period of 2015-2019 to perform a linear regression over five years, and the growth in customer gallonage was calculated to be 22,917 gpd or 15.9 gpm. Firm Reliable Capacity assumes loss of the largest capacity well (425 gpm) and is therefore 70 gpm. This calculation results in a U&U greater than 100 percent; as such, staff recommends the WTP be considered 100 percent U&U. In addition, in the 2001 rate case, the Commission deemed the U&U for the system as 100 percent.[5]

Water Distribution System Used and Useful

The water distribution system is evaluated based on ERCs consisting of growth, customer demand, and system capacity. During the test year, 96 customer lots were being served. The Utility provided system maps that indicated 176 lots would be served in the planned development. Several planned roads have not been constructed. Therefore, the service territory should not be considered built out. However, the Commission previously deemed the U&U of the distribution system as 100 percent. Considering all of the water mains are required to adequately serve the existing customers, and consistent with prior Commission practice, staff recommends the distribution system be considered 100 percent U&U.

Excessive Unaccounted for Water

Rule 25-30.4325, F.A.C., additionally provides factors to be considered in determining whether adjustments to operating expenses are necessary for EUW. EUW is defined as "unaccounted for water in excess of 10 percent of the amount produced." Unaccounted for water is all water produced that is not sold, metered, or accounted for in the records of the Utility.

The Monthly Operating Reports (MORs) indicated that the Utility pumped 13,511,000 gallons during the test year. The MORs did not indicate any line breaks or fire use during the test year. The data from the 2019 Annual Report indicates 7,037,000 gallons were utilized for flushing of the system, which represents 52 percent of the water treated.[6] According to the staff audit report, the Utility sold 6,469,049 gallons of water for the test year. The resulting calculation ([13,511,000 – 7,037,000 – 6,469,049]/ 13,511,000) for unaccounted for water is 0.04 percent; therefore, there is no EUW. Staff recommends no adjustments to purchased power and chemicals.

Conclusion

McLeod’s WTP and water distribution system should both be considered 100 percent U&U. There appears to be no EUW; therefore, staff recommends that no adjustment be made to operating expenses for chemicals and purchased power.

Issue 4:

What is the appropriate average test year rate base for McLeod?

Recommendation:

The appropriate average test year rate base for McLeod is $47,179. (Richards, Lewis)

Staff Analysis:

The appropriate components of the Utility’s rate base include utility plant in service (UPIS), land, accumulated amortization, contributions-in-aid-of-construction (CIAC), accumulated amortization of CIAC, and working capital. The Utility’s net book value was established as part of its transfer proceeding in Docket No. 20160193-WU.^{^[7]} Staff selected the test year ended December 31, 2019, for the instant rate case. Commission audit staff determined that the Utility’s books and records are in compliance with the National Association of Regulatory Utility Commissioners’ Uniform System of Accounts (NARUC USOA). A summary of each component and the recommended adjustments are discussed below.

Utility Plant in Service (UPIS)

The Utility recorded $240,330 for UPIS. Audit staff made an adjustment decreasing UPIS by $26 to reflect appropriate Commission-ordered adjustments to Account 334 – Meters and Meter Installation.[8]

The Utility did not record a balance in UPIS account 341 – Transportation Equipment to reflect the allocated portion of vehicles owned by Florida Utility Services 1, LLC (FUS1) and used by the Utility. The Utility submitted documentation supporting five vehicles with a cost of $87,904.^{^[9]} After McLeod’s 3 percent allocation, staff increased UPIS by $2,637 to account for the appropriate amount of Transportation Equipment. Because these vehicles were purchased prior to the start of the test year, staff did not include an averaging adjustment to these amounts. However, staff did make an averaging adjustment increasing UPIS by $13 to reflect test year beginning and ending UPIS average balance. Further, staff increased UPIS by $17,829 to reflect pro forma additions, offset by a decrease of $8,846 for pro forma retirements.

As described above and summarized in Table 4-1, staff’s adjustments to UPIS result in an increase of $11,633 ($2,637 + $13 + $17,829 - $8,846). Therefore, staff recommends an average UPIS balance of $251,937 ($240,330 - $26 + $11,633).

Rate Base Summary

Based on the foregoing, staff recommends that the appropriate average test year rate base is $47,179. Rate base is shown on Schedule No. 1-A. The related adjustments are shown on Schedule No. 1-B.

Issue 5:

What is the appropriate return on equity and overall rate of return for McLeod?

Recommendation:

The appropriate return on equity (ROE) is 7.85 percent with a range of 6.85 percent to 8.85 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. As such, the Operating Ratio method is being used in this case. (Richards)

Staff Analysis:

As discussed in Issue 9, 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.

The Utility has no long-term debt, $28,995 in equity, and $2,730 in customer deposits. In response to an email by staff, the Utility stated its equity consists of $21,568 paid in capital, $34,503 in negative retained earnings, and related party debt totaling $41,930.^{^[12]} It is Commission practice to treat related party debt as equity when no interest or scheduled payments for principal are being made.^{^[13]} As such, staff adjusted the Utility’s capital structure to reflect the related party debt as common equity. Therefore, the beginning equity balance for McLeod is $28,995 ($21,568 - $34,503 + $41,930).

The Utility’s capital structure has been reconciled with staff’s recommended rate base. The appropriate ROE for the Utility is 7.85 percent based upon the Commission-approved leverage formula currently in effect.^{^[14]} Staff recommends an ROE of 7.85 percent, with a range of 6.85 percent to 8.85 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. As such, the Operating Ratio method is being used in this case.

Issue 6:

Should the Commission approve an Allowance for Funds Used During Construction (AFUDC) rate for McLeod?

Recommendation:

Yes. The appropriate AFUDC rate for McLeod is 7.51 percent. The appropriate monthly compounding rate to achieve an annual rate of 7.51 percent is 0.605314 percent. (Cicchetti, Richards)

Staff Analysis:

On November 12, 2020, McLeod submitted a request that the Commission establish an AFUDC rate in this proceeding. In its request, the Utility stated “FUS1 plans to file a petition for approval of Capital Project Improvement Plans for a majority of its systems with the Commission.”[15] According to the Utility, FUS1 has engaged the engineering services of the Florida Rural Water Association (FRWA) to prepare an analysis report evaluating each of its systems and recommend corrective actions along with funding sources. The Utility further stated that it believes “most, if not all, of the proposed capital projects will qualify for AFUDC treatment as authorized by Rule 25-30.116, F.A.C.”[16] McLeod is not currently authorized to accrue AFUDC and does not have a Commission-approved AFUDC cost rate. Staff believes it is appropriate to establish an AFUDC rate for the Utility.

Staff used the capital structure proposed in Issue 5 to calculate the annual AFUDC rate and monthly compounding rate for McLeod. Based on its review, staff believes an AFUDC rate of 7.51 percent is appropriate and recommends Commission approval. Staff also recommends a monthly compounding rate of 0.605314 percent to achieve an annual AFUDC rate of 7.51 percent.

Issue 7:

What are the appropriate test year revenues for McLeod?

Recommendation:

The appropriate test year revenues for McLeod Gardens are $34,222. (Bethea)

Staff Analysis:

The Utility recorded total test year revenues of $33,563. The water revenues included $31,790 of service revenues and $1,773 of miscellaneous revenues. The Utility had a rate increase subsequent to the test year as a result of a price index adjustment. Staff annualized revenues to reflect the change 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 $32,839. This results in an increase of $1,049 ($32,839 - $31,790) to test year service revenues. Staff also made an adjustment to miscellaneous revenues to remove $390 of service availability charges that were erroneously reflected in miscellaneous revenues. This results in miscellaneous revenues of $1,383 ($1,773 - $390). Based on the above, the appropriate test year revenues for McLeod are $34,222 ($32,839 + $1,383).

Issue 8:

What is the appropriate test year operating expense for McLeod?

Recommendation:

The appropriate amount of operating expense for McLeod is $46,107. (Richards)

Staff Analysis:

The Utility recorded operating expense of $41,417. The test year O&M expenses have been reviewed by staff, including invoices and other supporting documentation. Staff has made several adjustments to the Utility’s operating expenses as described below.

Operation and Maintenance Expenses

Previously, the Commission approved common O&M expenses be shared by all utilities under the parent company, FUS1.^{^[17]} O&M common costs are allocated among all of the utilities in the FUS1 system based on each utility’s number of customers relative to the total number of customers receiving service under FUS1. Based on the number of customers for McLeod, the allocation of FUS1 common costs for this utility is 3 percent.

Salaries and Wages – Employees (601)

The Utility recorded salaries and wages expense for employees of $7,638. Staff increased this amount by $2,221 to reflect the Utility’s allocated portion of a $74,046 increase approved in Docket No. 20200152-WS.^{^[18]} This amount included salary increases for eight positions and the addition of one new Compliance Technician position. Therefore, staff’s recommendation for salaries and wages expense for the test year is $9,859 ($7,638 + $2,221).

Salaries and Wages – Officers and Directors (603)

The Utility recorded salaries and wages expense for officers and directors of $2,373. Staff made no adjustments, and therefore recommends salaries and wages expense for officers and directors of $2,373.

Employee Pensions and Benefits (604)

The Utility recorded employee pensions and benefits expense of $179. Staff made no adjustments, and therefore recommends employee pensions and benefits expense of $179.

Purchased Power (615)

The Utility recorded purchased power expense of $2,008. Staff made no adjustments, and therefore recommends purchased power expense of $2,008.

Fuel for Power Production (616)

The Utility recorded fuel for power production expense of $261. Staff made no adjustments, and therefore recommends fuel for power production expense of $261.

Amortization Expense

The Utility recorded an amortization expense of $5,775. Staff increased this amount by $17 to reflect the CIAC adjustments which were discussed in Issue 4. Therefore, staff recommends an amortization expense of $5,792 ($5,775 + $17).

Taxes Other Than Income (TOTI)

The Utility recorded TOTI of $2,794. As a result of the staff audit, an adjustment was made to decrease TOTI by $46. In addition, staff increased TOTI by $12 to reflect the appropriate Regulatory Assessment Fees (RAFs) based on corrected Utility test year revenues. Staff further increased TOTI by $141 to reflect the appropriate taxes associated with pro forma plant additions. These adjustments by staff total an increase in TOTI of $107 ($12 - $46 + $141).

As discussed in Issue 7, revenues have been increased by $16,562 to reflect the change in revenue required to cover expenses and allow an opportunity to earn the recommended rate of return. As a result, TOTI should be increased by $745 to reflect RAFs of 4.5 percent of the change in revenues. Therefore, staff recommends TOTI of $3,647 ($2,794 + $107 + $745).

Income Taxes

McLeod is a sole proprietorship, and therefore did not record any income tax for the test year. As such, staff recommends no adjustments to income tax expense.

Operating Expenses Summary

The Utility recorded operating expenses of $41,417. The application of staff’s recommended adjustments to the Utility’s operating expenses result in a total operating expense of $46,107. Operating expenses are shown on Schedule No. 3-A, and the related adjustments are shown on Schedule No. 3-B.

Issue 9:

Does McLeod meet the criteria for the application of the Operating Ratio Methodology?

Recommendation:

Yes. McLeod meets the requirement for application of the operating ratio methodology for calculating the revenue requirement. The margin should be 12 percent of O&M expenses. (D. Brown)

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 expenses, if any, must be removed from O&M expense prior to calculating the margin of 12 percent.

As discussed in Issues 4 and 8, staff has recommended a rate base of $47,179, and O&M expense of $38,972. Based on the recommended amounts, McLeod’s rate base is only 121 percent of its O&M expense. In addition, the application of the operating ratio methodology does not change the Utility’s qualification for a SARC. As such, McLeod 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.

Issue 10:

What is the appropriate revenue requirement for McLeod?

Recommendation:

The appropriate revenue requirement is $50,784, resulting in an annual increase of $16,562 (48.40 percent). (D. Brown)

Staff Analysis:

McLeod should be allowed an annual increase of $16,562 (48.40 percent). This should allow the Utility the opportunity to recover its expenses and a 12 percent operating margin on its O&M expenses. The calculations are shown in Table 10-1:

Table 10-1

Revenue Requirement

Adjusted O&M Expense		$38,972
Operating Margin (%)		x 12.00%
Operating Margin ($)		$4,677
Adjusted O&M Expense		38,972
Depreciation Expense (Net)		3,489
Taxes Other Than Income		3,647
Revenue Requirement		$50,784
Less Adjusted Test Year Revenues		34,222
Annual Increase		$16,562
Percent Increase		48.40%

Issue 11:

What are the appropriate rate structure and rates for McLeod’s water systems?

Recommendation:

The recommended rate structure and monthly water rates are shown on Schedule No. 4. The Utility should file revised tariff sheets and a proposed customer notice to reflect the Commission-approved rates. The approved rates should be effective for service rendered on or after the stamped approval date on the tariff 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 the notice. (Bethea)

Staff Analysis:

McLeod is located in Polk County within the Southwest Florida Water Management District. The Utility provides water service to approximately 96 residential customers. Approximately 13 percent of the residential customer bills during the test year had 1,000 gallons or less in usage, indicating a non-seasonal customer base. The average residential water demand is 5,640 gallons per month. The average water demand for customer bills greater than 1,000 gallons is 6,440 gallons per month. Currently, the Utility’s water rate structure consists of a monthly base facility charge (BFC) and uniform gallonage charge for the residential and general service customers.

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.

The average people per household served by the water system is 3; therefore, based on the number of people per household, 50 gallons per day per person, and the number of days per month, the non-discretionary usage threshold should be 5,000 gallons per month.[24] Staff’s review of the billing analysis indicates that the discretionary usage above 5,000 represents 40 percent of the bills, which account for approximately 38 percent of the water demand. This is considered high discretionary usage for this customer base.

In this case, staff recommends that 35 percent of the water revenues be generated from the BFC due to the high discretionary usage, which will provide sufficient revenues to design gallonage charges that send pricing signals to customers using above the non-discretionary level. Staff recommends a BFC and a three-tier inclining block rate structure, which includes separate gallonage charges for non-discretionary and discretionary usage for residential water customers. The rate blocks are: (1) 0-5,000 gallons; (2) 5,001-10,000 gallons; and (3) all usage in excess of 10,000 gallons per month. This rate structure sends the appropriate pricing signals because it targets customers with high consumption levels and minimizes price increases for customers at non-discretionary levels. In addition, the third tier provides an additional pricing signal to customers using in excess of 10,000 gallons of water per month, which represents approximately 16 percent of the usage. General service customers should be billed a BFC and uniform gallonage charge.

Based on the customer billing data provided by the Utility, approximately 38 percent of total residential consumption is discretionary and subject to the effects of repression. Customers will typically reduce their discretionary consumption in response to a price increase, while non-discretionary consumption remains relatively unresponsive. Based on a recommended revenue increase of 50.4 percent for water, which excludes miscellaneous revenues, the residential consumption can be expected to decline by 697,000 gallons, resulting in anticipated average residential demand of 5,032 gallons per month. Staff recommends a 10.8 percent reduction in test year gallons for rate setting purposes and corresponding reductions of $216 for purchased power, $214 for chemicals, and $20 for RAFs to reflect the anticipated repression. This results in a post repression revenue requirement of $48,950.

Issue 12:

What is the appropriate amount by which rates should be reduced four years after the published effective date to reflect the removal of the amortized rate case expense?

Recommendation:

The rates should be reduced as shown on Schedule No. 4, to remove rate case expense grossed-up for RAFs and amortized over a four-year period. Pursuant to Section 367.081(8), F.S., the decrease in rates should become effective immediately following the expiration of the rate case expense recovery period. McLeod 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, the Utility shall file separate data 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, D. Brown) (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 $347.

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. McLeod 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, the Utility shall file separate data 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 13:

Should the recommended rates be approved for McLeod 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. McLeod 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. (D. Brown) (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. McLeod 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.

McLeod 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 $11,164. Alternatively, the Utility could establish an escrow agreement with an independent financial institution.

If the Utility chooses a bond as security, the bond should contain wording to the effect that it will be terminated only under the following conditions:

1. The Commission approves the rate increase; or,

2. If the Commission denies the increase, the Utility shall refund the amount collected that is attributable to the increase.

If the Utility chooses a letter of credit as a security, it should contain the following conditions:

1. The letter of credit is irrevocable for the period it is in effect.

2. The letter of credit will be in effect until a final Commission order is rendered, either approving or denying the rate increase.

If security is provided through an escrow agreement, the following conditions should be part of the agreement:

1. The Commission Clerk, or his or her designee, must be a signatory to the escrow agreement.

2. No monies in the escrow account may be withdrawn by the Utility without the prior written authorization of the Commission Clerk, or his or her designee.

3. The escrow account shall be an interest bearing account.

4. If a refund to the customers is required, all interest earned by the escrow account shall be distributed to the customers.

5. If a refund to the customers is not required, the interest earned by the escrow account shall revert to the Utility.

6. All information on the escrow account shall be available from the holder of the escrow account to a Commission representative at all times.

7. The amount of revenue subject to refund shall be deposited in the escrow account within seven days of receipt.

8. This escrow account is established by the direction of the Florida Public Service Commission for the purpose(s) set forth in its order requiring such account. Pursuant to Cosentino v. Elson, 263 So. 2d 253 (Fla. 3d DCA 1972), escrow accounts are not subject to garnishments.

9. The account must specify by whom and on whose behalf such monies were paid.

In no instance should the maintenance and administrative costs associated with the refund be borne by the customers. These costs are the responsibility of, and should be borne by, the Utility. Irrespective of the form of security chosen by the Utility, an account of all monies received as a result of the rate increase should be maintained by the Utility. If a refund is ultimately required, it should be paid with interest calculated pursuant to Rule 25-30.360(4), F.A.C.

The Utility should maintain a record of the amount of the bond, and the amount of revenues that are subject to refund. In addition, after the increased rates are in effect, pursuant to Rule 25-30.360(6), F.A.C., the Utility should file reports with the Commission Clerk’s office no later than the 20th of every month indicating the monthly and total amount of money subject to refund at the end of the preceding month. The report filed should also indicate the status of the security being used to guarantee repayment of any potential refund.

Issue 14:

Should McLeod be required to notify the Commission within 90 days of an effective order finalizing this docket, that it has adjusted its books for all the applicable National Association of Regulatory Utility Commissioners (NARUC) Uniform System of Accounts (USOA) associated with the Commission approved adjustments?

Recommendation:

Yes. McLeod should be required to notify the Commission, in writing, that it has adjusted its books in accordance with the Commission’s decision. McLeod 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 providing good cause should be filed not less than 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. (D. Brown) (Procedural Agency Action)

Staff Analysis:

McLeod should be required to notify the Commission, in writing, that it has adjusted its books in accordance with the Commission’s decision. McLeod should submit a letter within 90 days of the final order in this docket, confirming that the adjustments to all the applicable NARUC USOA primary accounts have been made to the Utility’s books and records. In the event the Utility needs additional time to complete the adjustments, notice providing good cause should be filed not less than seven days prior to the deadline. 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. (Passidomo)

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.

	MCLEOD GARDENS UTILITIES, LLC	SCHEDULE NO. 1-A
	TEST YEAR ENDED 12/31/2019	DOCKET NO. 20200168-WU
	SCHEDULE OF WATER RATE BASE
		BALANCE		BALANCE
		PER	STAFF	PER
	DESCRIPTION	UTILITY	ADJ.	STAFF

1.	UTILITY PLANT IN SERVICE	$240,330	$11,607	$251,937

2.	LAND & LAND RIGHTS	7,000	0	7,000

3.	ACCUMULATED DEPRECIATION	(164,389)	9,583	(154,806)

4.	CIAC	(123,776)	(195)	(123,971)

5.	ACCUMULATED AMORTIZATION OF CIAC	73,900	(2,489)	71,411

6.	ACQUISITION ADJUSTMENT (NET)	(9,223)	0	(9,223)

7.	WORKING CAPITAL ALLOWANCE	0	4,830	4,830

8.	WATER RATE BASE	$23,842	$23,337	$47,179

	MCLEOD GARDENS UTILITIES, LLC	SCHEDULE NO. 1-B
	TEST YEAR ENDED 12/31/2019	DOCKET NO. 20200168-WU
	ADJUSTMENTS TO RATE BASE
			WATER
	UTILITY PLANT IN SERVICE
1.	To reflect an auditing adjustment.		($26)
2.	To reflect allocated percentage of vehicles.		2,637
3.	To reflect an averaging adjustment.		13
4.	To reflect pro forma additions.		17,829
5.	To reflect pro forma retirement.		(8,846)
	Total		$11,607

	ACCUMULATED DEPRECIATION
1.	To reflect an auditing adjustment.		($2,327)
2.	To reflect allocated percentage of vehicles.		(828)
3.	To reflect an averaging adjustment.		4,391
4.	To reflect pro forma adjustments.		8,347
	Total		$9,583

	CIAC
1.	To reflect meter installation charge.		($115)
2.	To reflect plant capacity charge.		(275)
3.	To reflect an averaging adjustment.		195
	Total		($195)

	ACCUMULATED AMORTIZATION OF CIAC
1.	To reflect an auditing adjustment.		($409)
2.	To reflect meter installation charge.		7
3.	To reflect plant capacity charge.		10
4.	To reflect an averaging adjustment.		(2,097)
	Total		($2,489)

	WORKING CAPITAL ALLOWANCE
	To reflect 1/8 of test year O&M expenses.		$4,830

	MCLEOD GARDENS UTILITIES, LLC				SCHEDULE NO. 2
	TEST YEAR ENDED 12/31/2019				DOCKET NO. 20200168-WU
	SCHEDULE OF CAPITAL STRUCTURE

		BALANCE	PRO RATA	BALANCE	PERCENT
		PER	ADJUST-	PER	OF		WEIGHTED
	CAPITAL COMPONENT	UTILITY	MENTS	STAFF	TOTAL	COST	COST

1.	LONG-TERM DEBT	$0	$0	$0	0.00%	0.00%	0.00%
2.	SHORT-TERM DEBT	0	0	0	0.00%	0.00%	0.00%
3.	COMMON EQUITY	28,995	15,454	44,449	94.21%	7.85%	7.40%
4.	CUSTOMER DEPOSITS	2,730	0	2,730	5.79%	2.00%	0.12%
5.	DEFERRED INCOME TAXES	0	0	0	0.00%	0.00%	0.00%
	TOTAL CAPITAL	$31,725	$15,454	$47,179	100.00%		7.51%

			RANGE OF REASONABLENESS			LOW	HIGH
			RETURN ON EQUITY			6.85%	8.85%
			OVERALL RATE OF RETURN			6.57%	8.45%

	MCLEOD GARDENS UTILITIES, LLC			SCHEDULE NO. 3-A
	TEST YEAR ENDED 12/31/2019			DOCKET NO. 20200168-WU
	SCHEDULE OF WATER OPERATING INCOME
		TEST		STAFF	ADJ
		YR PER	STAFF	ADJ TEST	FOR	REV
		UTILITY	ADJ	YEAR	INC.	REQ

1.	TOTAL OPERATING REVENUE	$33,563	$659	$34,222	$16,562	$50,784
					48.40%

	OPERATING EXPENSES
2.	OPERATION & MAINTENANCE	$36,056	$2,916	$38,972	$0	$38,972

3.	DEPRECIATION (NET)	8,342	939	9,281	0	9,281

4.	AMORTIZATION (NET)	(5,775)	(17)	(5,792)	0	(5,792)

5.	TAXES OTHER THAN INCOME	2,794	107	2,902	745	3,647

6.	INCOME TAXES	0	0	0	0	0

	TOTAL OPERATING EXPENSES	$41,417	$3,945	$45,362	$745	$46,107

7.	OPERATING INCOME / (LOSS)	($7,854)		($11,140)		$4,677

8.	WATER RATE BASE	$23,842		$23,337		$47,179

9.	OPERATING MARGIN					12.00%

	MCLEOD GARDENS UTILITIES, LLC	SCHEDULE NO. 3-B
	TEST YEAR ENDED 12/31/2019	DOCKET NO. 20200168-WU
	ADJUSTMENTS TO OPERATING INCOME
			WATER
	OPERATING REVENUES
1.	To reflect an auditing adjustment to Service Revenues.		$397
2.	To reflect the appropriate test year Service Revenues.		652
3.	To reflect the appropriate test year Miscellaneous Revenues.		(390)
	Total		$659

	OPERATION AND MAINTENANCE EXPENSE
1.	Salaries and Wages – Employees (601)
	To reflect allocated pro forma increase per Docket No. 20200152-WS.		$2,221

2.	Contractual Services – Professional (631)
	To reflect engineering plans for well house amortized over five years.		$65

3.	Contractual Services – Other (636)
	To reflect allocated pro forma increase per Docket No. 20200152-WS.		$40

4.	Insurance Expense (655)
	To reflect allocated pro forma increase per Docket No. 20200152-WS.		$214

5.	Regulatory Commission Expense (665)
	To reflect 1/4 rate case expense.		$332

6.	Bad Debt Expense (670)
	To reflect three-year average bad debt expense.		$44

	TOTAL OPERATING AND MAINTENANCE ADJUSTMENTS		$2,916

	DEPRECIATION EXPENSE
1.	To reflect allocated portion of vehicles.		$440
2.	To reflect pro forma additions.		499
	Total		$939

	AMORTIZATION EXPENSE (NET)
	To reflect CIAC adjustment to Service Revenues.		($17)

	TAXES OTHER THAN INCOME
1.	To reflect an auditing adjustment.		($46)
2.	To reflect appropriate test year RAFs.		12
3.	To reflect property taxes associated with pro forma plant additions.		141
	Total		$107

	TOTAL OPERATING EXPENSE		$3,945

MCLEOD GARDENS UTILITIES, LLC		SCHEDULE NO. 3-C
TEST YEAR ENDED 12/31/2019		DOCKET NO. 20200168-WU
ANALYSIS OF WATER O&M EXPENSE
		TOTAL	STAFF	TOTAL
		PER	ADJUST-	PER
ACCT. #	DESCRIPTION	UTILITY	MENTS	STAFF

601	Salaries and Wages – Employees	$7,638	$2,221	$9,859
603	Salaries and Wages – Officers and Directors	2,373	0	2,373
604	Employee Pensions and Benefits	179	0	179
615	Purchased Power	2,008	0	2,008
616	Fuel for Power Production	261	0	261
618	Chemicals	1,990	0	1990
620	Materials and Supplies	1,438	0	1,438
631	Contractual Services – Professional	538	65	603
635	Contractual Services – Testing	2,928	0	2,928
636	Contractual Services – Other	8,201	40	8,241
640	Rents	1,154	0	1,154
650	Transportation Expense	1,155	0	1,155
655	Insurance Expense	1,865	214	2,079
665	Regulatory Commission Expense	1,059	332	1,391
670	Bad Debt Expense	57	44	101
675	Miscellaneous Expense	3,212	0	3,212

	Total O&M Expense	$36,056	2,916	$38,972

	Working Capital is 1/8 of O&M Less RCE			$4,830

MCLEOD GARDEN UTILITIES LLC.				SCHEDULE NO. 4
TEST YEAR ENDED 12/31/2019			DOCKET NO. 20200168-WU
MONTHLY WATER RATES
	UTILITY	COMMISSION	STAFF	4 YEAR
	CURRENT	APPROVED	RECOMMENDED	RATE
	RATES	INTERIM RATES*	RATES	REDUCTION

Residential and General Service
Base Facility Charge by Meter Size
5/8"X3/4"	$11.88	$12.61	$14.94	$0.11
3/4"	$17.82	$18.92	$22.41	$0.17
1"	$29.70	$31.53	$37.35	$0.28
1-1/2"	$59.40	$63.05	$74.70	$0.55
2"	$95.04	$100.88	$119.52	$0.88
3"	$190.08	$201.76	$239.04	$1.76
4"	$297.00	$315.25	$373.50	$2.75
6"	$594.03	$630.50	$747.00	$5.50

Charge per 1,000 gallons - Residential
All gallons	$2.97	$3.15	N/A	N/A
0 - 5,000 gallons	N/A	N/A	$4.56	$0.03
5,001 - 10,000 gallons	N/A	N/A	$6.84	$0.05
Over 10,000 gallons	N/A	N/A	$9.13	$0.06

Charge per 1,000 gallons - General Service	$2.97	$3.15	$5.51	$0.04

Typical Residential 5/8" x 3/4" Meter Bill Comparison
5,000 Gallons	$26.73	$28.36	$37.74
10,000 Gallons	$41.58	$50.42	$71.94
15,000 Gallons	$56.43	$59.86	$117.59

*Interim rates became effective January 9, 2021.

[1]Order No. PSC-01-2317-PAA-WU, issued November 27, 2001, in Docket No. 20001381-WU, In re: Application for certificate to operate water utility in Polk County by Tevalo, Inc. d/b/a McLeod Gardens Water Company.

[2]Order No. PSC-2017-0367-PAA-WU, issued September 29, 2017, in Docket No. 20160193-WU, In re: Application for approval of transfer of certain water facilities and Certificate No. 619-W from McLeod Gardens Water Company to McLeod Gardens Utilities, LLC, in Polk County.

[3]Order No. PSC-02-1733-PAA-WU, issued December 9, 2002, in Docket No. 20011677-WU, In re: Application for staff-assisted rate case in Polk County by Tevalo, Inc. d/b/a McLeod Gardens Water Company.

[4]Order No. PSC-2020-0317-PCO-WU, issued September 21, 2020, in Docket No. 20200168-WU, In re: Application for staff-assisted rate case in Polk County, and request for interim rate increase, by McLeod Gardens Utilities, LLC.

[5]Order No. PSC-01-2317-PAA-WU, issued November 27, 2001, in Docket No. 20001381-WU, In re: Application for certificate to operate water utility in Polk County by Tevalo, Inc. d/b/a McLeod Gardens Water Company.

[6]In response to staff’s third data request, the Utility indicated that it conducts significant flushing due to the high amount of hydrogen sulfide in its source water, which may cause a sulfur smell in the water product. The Utility has engaged with the Florida Rural Water Association and is exploring treatment options to mitigate the sulfur smell which may reduce flushing.

^{^[7]}Order No. PSC-2017-0367-PAA-WU, issued September 29, 2017, in Docket No. 20160193-WU, In re: Application for approval of transfer of certain water facilities and Certificate No. 619-W from McLeod Gardens Water Company, to McLeod Gardens Utilities, LLC, in Polk County.

[8]Ibid.

^{^[9]}Document No. 11980-2020, filed on November 13, 2020.

[10]Document No. 13003-2020 filed November 30, 2020.

^{^[11]}Order No. PSC-2017-0367-PAA-WU, issued September 29, 2017, in Docket No. 20160193-WU, In re: Application for approval of transfer of certain water facilities and Certificate No. 619-W from McLeod Gardens Water Company, to McLeod Gardens Utilities, LLC, in Polk County.

^{^[12]}Document No. 13281-2020, filed on December 9, 2020.

^{^[13]}Order No. PSC-2013-0140-PAA-WS, issued March 25, 2013, in Docket No. 20120183-WU, In re: Application for staff-assisted rate case in Lake County by TLP Water, Inc.; Order No. PSC-2014-0195-PAA-WS, issued May 1, 2014, in Docket No. 20130211-WS, In re: Application for staff-assisted rate case in Polk County by S.V. Utilities, Ltd.; Order No. PSC-2016-0583-PAA-WS, issued December 29, 2016, in Docket No. 20150010-WS, In re: Application for staff-assisted rate case in Brevard County by Aquarina Utilities, Inc.; Order No. PSC-2018-0549-PAA-WS, issued November 19, 2018, in Docket No. 20170219-WS, In re: Application for staff-assisted rate case in Polk County by River Ranch Water Management, LLC.

^{^[14]}Order No. PSC-2020-0222-PAA-WS, issued June 29, 2020, in Docket No. 20200006-WS, In re: Water and wastewater industry annual reestablishment of authorized range of return on common equity for water and wastewater utility pursuant to Section 367.081(4)(f), F.S.

[15]Document No. 11981-2020, filed on November 13, 2020.

[16]Ibid

^{^[17]}Order No. PSC-2019-0503-PAA-SU, issued November 25, 2019, in Docket No. 201802020-SU, In re: Application for staff-assisted rate case in Polk County by West Lakeland Wastewater, LLC.

^{^[18]}Order No. PSC-2020-0396-PAA-WS, issued October 22, 2020, in Docket No. 20200152-WS, In re: Application for a limited alternative rate increase proceeding in Polk and Marion Counties, by Alturas Water, LLC. Sunrise Water, LLC. Pinecrest Utilities, LLC. and East Marion Utilities, LLC.

^{^[19]}Ibid

^{^[20]}Ibid

^{^[21]}Order No. PSC-2017-0367-PAA-WU, issued September 29, 2017, in Docket No. 20160193-WU, In re: Application for approval of transfer of certain water facilities and Certificate No. 619-W from McLeod Gardens Water Company, to McLeod Gardens Utilities, LLC, in Polk County.

^{^[22]}Document No. 04286-2020, filed on August 7, 2020.

^{^[23]}Document No. 11553-2020, filed on October 27, 2020.

[24]Average person per household was obtained from www.census.gov/quickfacts/polkcountyflorida.

Adjustment	Water
To reflect allocated amount for vehicles.	$2,637
To reflect an averaging adjustment.	13
To reflect pro forma additions.	17,829
To reflect pro forma retirements	(8,846)
Total adjustments to UPIS	$11,633