Discussion
of Issues
Issue 1:
Should the transfer of Certificate Nos. 517-W and
450-S in Brevard County from Aquarina Utilities, Inc. to CSWR-Florida Utility
Operating Company, LLC be approved?
Recommendation:
Yes. The transfer of the
water and wastewater systems and Certificate Nos. 517-W and 450-S is in the
public interest and should be approved effective the date that the sale becomes
final. The resultant Order should serve as the Buyer’s certificate and should
be retained by the Buyer. The Buyer should
submit the executed and recorded deed for continued access to the land upon
which its facilities are located and copies of its permit transfer applications
to the Commission within 60 days of the Order approving the transfer, which is
final agency action. If the sale is not finalized within 60 days of the transfer
Order, the Buyer should file a status update in the docket file. The
Utility’s existing rates and charges, including the modification to
miscellaneous service charges pursuant to Rule 25-30.460, Florida Administrative
Code (F.A.C.), should remain in effect until a change is authorized by the
Commission in a subsequent proceeding. The tariff pages reflecting the transfer
should be effective on or after the stamped approval date on the tariff sheet,
pursuant to Rule 25-30.475(1), F.A.C. The Seller is current with respect
to annual reports and regulatory assessment fees (RAFs) through December 31,
2020. The Seller should be responsible for filing annual reports and paying
RAFs for 2021, and the Buyer should be responsible for filing the annual
reports and paying RAFs for all future years. (M. Watts, Blocker, Bruce)
Staff Analysis:
On May 3, 2021, CSWR-Aquarina filed an application
for the transfer of Certificate Nos. 517-W and 450-S from AUI to CSWR-Aquarina
in Brevard County. The application is in compliance with Section 367.071, F.S.,
and Commission rules concerning applications for transfer of certificates. The
sale to CSWR-Aquarina will become final after Commission approval of the
transfer, pursuant to Section 367.071(1), F.S.
Noticing, Territory, and Land
Ownership
CSWR-Aquarina
provided notice of the application pursuant to Section 367.071, F.S., and Rule
25-30.030, F.A.C. No objections to the transfer were filed, and the time for
doing so has expired. The application contains a description of the service
territory which is appended to this recommendation as Attachment A. In its
response to staff’s August 16, 2021 deficiency letter, CSWR-Aquarina provided a
copy of an unrecorded warranty deed as evidence that the Buyer will have rights
to long-term use of the land upon which the treatment facilities are located
pursuant to Rule 25-30.037(2)(s), F.A.C. CSWR-Aquarina should submit the
executed and recorded deed to the Commission within 60 days of the Order.
Purchase Agreement and Financing
Pursuant to Rule 25-30.037(2)(g), (h), and (i), F.A.C., the application
contains a statement regarding financing and a copy of the purchase and sale agreement,
which includes the purchase price, terms of payment, and a list of the assets
purchased. There are no guaranteed revenue contracts, customer advances, or
debt of AUI that must be disposed of with regard to the transfer. CSWR-Aquarina
will review all leases and developer agreements and will assume or renegotiate
those agreements on a case-by-case basis prior to closing. Any customer
deposits will be refunded to customers by the Seller prior to the closing.
According to the purchase and sale agreement, the total purchase price for the
assets is $2,500,000. The Seller has allocated $825,000, $775,000, and $900,000
of the purchase price to potable water, non-potable water, and wastewater
systems, respectively. According to the Buyer, the closing has not yet taken
place and is dependent on Commission approval of the transfer, pursuant to
Section 367.071(1), F.S.
Facility
Description and Compliance
The AUI water system consists of three potable wells and
is permitted by the SJRWMD to withdraw 0.43 million gallons per day (MGD) on an
annual average basis. However, only two wells are currently connected to the water
system and in production. The two production wells have a combined capacity of
2.0 MGD. Both wells pump water into the non-potable storage tank. Water for the
potable system is pumped from the non-potable storage tank into a
reverse-osmosis (RO) system for purification. The water is then chlorinated,
pumped into a potable ground storage tank, and ultimately drawn into a
hydro-pneumatic tank for distribution to the potable water system. Water for
the non-potable irrigation system is distributed directly from the non-potable
storage tank via two pumps that service the fire protection and common area
irrigation systems.
The wastewater treatment plant is permitted to treat .099
MGD on an annual average daily flow. The wastewater treatment plant is
authorized to accept and treat RO reject water from the existing Aquarina RO
water treatment plant. Flows, including RO reject water, are limited to .099
MGD, the permitted capacity of the existing disposal system. CSWR-Aquarina
provided copies of the Utility’s current permits from the Florida Department of
Environmental Protection (DEP) and SJRWMD pursuant to Rule 25-30.037(2)(r)1,
F.A.C. The Buyer should provide copies of its permit transfer applications,
reflecting the change in ownership, to the Commission, within 60 days of the
Order.
Staff reviewed the most recent sanitary survey and water
quality tests submitted to the DEP, and the water treatment system appears to
be in compliance with all applicable standards set by the DEP. Staff also
reviewed the DEP compliance evaluation inspections (CEI) for the wastewater
treatment plant. The DEP’s November 1, 2019, CEI characterized all elements of
the inspection as “in-compliance.” In Exhibit G of the Buyer’s application,
CSWR-Aquarina provides its assessment of AUI’s water and wastewater treatment
plants, and lists several improvements and repairs it recommends be made to the
systems. The Buyer’s suggested repairs and improvements, which do not appear to
be required by a governmental authority, are discussed further in Issue 3.
Technical and Financial Ability
Pursuant to Rule 25-30.037(2)(l) and (m), F.A.C., the
application contains statements describing the technical and financial ability
of the Buyer to provide service to the proposed service area. As referenced in the transfer application, the
Buyer will fulfill the commitments, obligations, and representation of the
Seller with regards to utility matters. CSWR-Aquarina’s application states that
it owns and operates more than 257 water/wastewater systems in Missouri,
Arkansas, Kentucky, Louisiana, Texas, and Tennessee that currently serve more
than 48,860 water and 77,595 wastewater customers. The Buyer plans to use
qualified and licensed contractors to provide routine operation and maintenance
of the systems, as well as to handle billing and customer service. Staff reviewed the financial statements of CSWR-Aquarina
and believes the Buyer has documented adequate resources to support the Utility’s
water and wastewater operations. Based
on its review, staff recommends that the Buyer has demonstrated the technical and financial ability to provide service to the
existing service territory.
Rates and Charges
The
Utility's rates and charges were last approved in a 2020 limited alternative
rate case.[6] The
Commission approved the Utility’s late payment charge in 2014.[7] The
miscellaneous service charges and service availability charges were amended in
2016.[8]
Since the Utility’s last rate case, the rates have been changed by two price
index rate increases for water and one price index rate increase for
wastewater. The Utility had a rate
decrease to remove an expired rate case expense amortization. Rule 25-9.044(1),
F.A.C., provides that, in the case of a change of ownership or control of a
Utility, the rates, classifications, and regulations of the former owner must
continue unless authorized to change by the Commission. Therefore, staff
recommends that the Utility's existing rates and service availability charges
as shown on Schedule No. 1-A, remain in effect, until a change is authorized by
the Commission in a subsequent proceeding.
With respect to miscellaneous service charges,
effective June 24, 2021, Rule 25-30.460, F.A.C., was amended to remove initial
connection and normal reconnection charges.[9]
The definitions for initial connection charges and normal reconnection charges
were subsumed in the definition of the premises visit charge. It was envisioned
that utility tariffs would be reviewed by staff on a prospective basis to
ensure conformance with the amended rule.
The Utility’s current tariff contains an initial
connection charge ($26), a normal reconnection charge ($38), and a premises
visit charge ($26). The normal reconnection charge is more than the premises
visit charge. Since the premises visit now entails a broader range of tasks,
staff believes the premises visit charge should be revised to reflect the
amount of the normal reconnection charge of $38. Therefore, staff recommends
that the initial connection and normal reconnection charges be removed, the
premises visit charge be revised to $38, and the definition for the premises
visit charge be updated. The appropriate miscellaneous service charges are
shown on Schedule No. 1-B.
Regulatory Assessment Fees and Annual Report
Staff has verified that the Utility is current on the
filing of annual reports and RAFs through December 31, 2020. The Seller will be
responsible for filing the Utility’s annual report and paying RAFs for 2021, and
the Buyer will be responsible for filing the Utility’s annual reports and paying
RAFs for all future years.
Conclusion
Based on the foregoing, staff recommends the transfer of
the water and wastewater systems and Certificate Nos. 517-W and 450-S is in the
public interest and should be approved effective the date that the sale becomes
final. The resultant Order should serve as the Buyer’s certificate and should
be retained by the Buyer. The Buyer should
submit the executed and recorded deed for continued access to the land upon
which its facilities are located and copies of its permit transfer applications
to the Commission within 60 days of the Order approving the transfer, which is
final agency action. If the sale is not finalized within 60 days of the transfer
Order, the Buyer should file a status update in the docket file. The
Utility’s existing rates and charges including the modification to
miscellaneous service charges pursuant to Rule 25-30.460, F.A.C., should remain
in effect until a change is authorized by the Commission in a subsequent proceeding.
The tariff pages reflecting the transfer should be effective on or after the
stamped approval date on the tariff sheet, pursuant to Rule 25-30.475(1),
F.A.C. The Seller is current with respect to annual reports and RAFs
through December 31, 2020. The Seller should be responsible for filing annual
reports and paying RAFs for 2021, and the Buyer should be responsible for
filing the annual reports and paying RAFs for all future years.
Issue 2:
What is the appropriate net book value for the CSWR-Aquarina
potable water, non-potable water, and wastewater systems for transfer purposes?
Recommendation:
For transfer purposes, the net book value (NBV) of
potable water, non-potable water, and wastewater systems is $278,878, $262,867,
and $82,768, respectively, as of August 16, 2021. Within 90 days of the date of
the Consummating Order, CSWR-Aquarina should be required to notify the
Commission in writing, that it has adjusted its books in accordance with the
Commission’s decision. The adjustments should be reflected in CSWR-Aquarina’s
2022 Annual Report when filed. (Blocker)
Staff Analysis:
Rate base was last established on December 29, 2016,
in Order No. PSC-2016-0583-PAA-WS.
The purpose of establishing NBV for potable water, non-potable water, and
wastewater systems for transfers is to determine whether an acquisition
adjustment should be approved. CSWR-Aquarina’s request for a positive
acquisition adjustment is addressed in Issue 3. The NBV does not include normal
ratemaking adjustments for used and useful plant or working capital. The
Utility’s NBV has been updated to reflect balances as of August 16, 2021.
Staff’s recommended NBV, as described below, is shown on Schedule No. 2.
Utility Plant in Service (UPIS)
According
to the Utility’s general ledger, the potable water, non-potable water, and
wastewater UPIS balances were $1,735,739, $1,120,935, and $1,686,513,
respectively, as of August 16, 2021. Staff auditors reviewed the Utility’s records since the last
rate case and determined that several Commission-ordered adjustments were
incorrectly recorded. Additionally, staff auditors reviewed plant additions and
retirements to UPIS from December 31, 2014, to August 16, 2021, and determined
that several other adjustments are necessary. Accordingly, staff
recommends that the UPIS balances for potable water, non-potable water, and
wastewater be reduced by $140,084, $42,946, and $51,566, respectively, as of
August 16, 2021.
Land
The Utility’s general ledger reflected potable water,
non-potable water, and wastewater land balances of $37,582, $24,498, and
$33,680, respectively, as of August 16, 2021. There have been no additions to
land since December 31, 2014. Therefore, staff recommends no adjustments to its
land balances.
Accumulated Depreciation
The Utility’s general ledger reflected potable water,
non-potable water, and wastewater accumulated depreciation balances of
$1,331,136, $852,057, and $1,487,140, respectively, as of August 16, 2021.
Staff reviewed the Utility’s records since the last rate case and determined
that Commission-ordered adjustments were incorrectly recorded. Additionally, the
Utility did not record any accumulated depreciation in 2017 or any retirements
since the last rate case. Staff recalculated depreciation accruals for all water
and wastewater accounts since that last rate case through August 16, 2021,
using audited UPIS balances and the depreciation rates established by Rule
25-30.140, F.A.C. Accordingly,
staff recommends that the accumulated depreciation balances for potable water,
non-potable water, and wastewater be reduced by $140,848, $30,533, and $49,009,
respectively, as of August 16, 2021.
Contributions-in-Aid-of-Construction (CIAC) and
Accumulated Amortization of CIAC
The Utility’s general ledger reflected potable water,
non-potable water, and wastewater CIAC balances of $362,028, $35,785, and
$605,133, respectively, as of August 16, 2021. The Utility’s general ledger also
reflected potable water, non-potable water, and wastewater accumulated
amortization of CIAC balances of $201,870, $23,662, and $428,254, respectively,
as of August 16, 2021. Staff traced CIAC and accumulated amortization of CIAC
balances from December 31, 2014, to August 16, 2021, using supporting
documentation. Staff determined that the Utility did not start with the
Commission-approved balances in Order No. PSC-16-0583-PAA-WS.
Staff recalculated CIAC using the audited plant balances and depreciation rates
established by Rule 25-30.140(2), F.A.C. Staff also recalculated accumulated
amortization of CIAC using the audited CIAC balances and the rates established
by Rule 25-30.140(2), F.A.C. Accordingly, staff recommends that the CIAC
balances for potable water, non-potable water, and wastewater be increased by
$11,495, $11,851, and $7,362, respectively,
as of August 16, 2021. Staff also recommends that the accumulated amortization
of CIAC balances for potable water, non-potable water, and wastewater be
increased by $7,582, $5,878, and $36,514, respectively, as of August 16, 2021.
Net Book Value
The Utility’s general ledger reflected a NBV of $282,027,
$281,253, and $56,174 for potable water, non-potable water, and wastewater,
respectively, as of August 16, 2021. Based on the adjustments described above,
staff recommends a NBV of $278,878, $262,867, and $82,768 for CSWR-Aquarina’s
potable water, non-potable water, and wastewater systems, respectively, as of
August 16, 2021. Staff’s recommended NBV and the National Association of
Regulatory Utility Commissioners, Uniform System of Accounts (NARUC USOA) balances
for UPIS and accumulated depreciation are shown on Schedule No. 2 as of August
16, 2021. As addressed in Issue 3, a positive acquisition adjustment should not
be recognized for rate making purposes.
Conclusion
Based on the above, staff recommends that for transfer
purposes the NBV of CSWR-Aquarina’s potable water, non-potable water, and
wastewater systems is $278,878, $262,867, and $82,768, respectively, as of
August 16, 2021. Within 90 days of the date of the Consummating Order, the
Buyer should be required to notify the Commission in writing, that it has
adjusted its books in accordance with the Commission’s decision. The adjustments
should be reflected in CSWR-Aquarina’s 2022 Annual Report when filed.
Issue 3:
Should a positive acquisition adjustment be
recognized for ratemaking purposes?
Recommendation:
No.
Pursuant to Rule 25-30.0371, F.A.C., a positive acquisition adjustment should
not be granted as the Buyer failed to demonstrate extraordinary circumstances.
(Blocker, M. Watts)
Staff Analysis:
In its filing, the Buyer requested a positive acquisition
adjustment be included in the calculation of CSWR-Aquarina’s rate base. An
acquisition adjustment results when the purchase price differs from the NBV of
the assets at the time of acquisition. Pursuant to Rule 25-30.0371, F.A.C., a
positive acquisition adjustment results when the purchase price is greater than
the NBV and a negative acquisition adjustment results when the purchase price
is less than the NBV. A positive acquisition adjustment, if approved, increases
rate base.
According to the purchase agreement, the Buyer purchased
the Utility for $2,500,000. The Buyer has allocated $825,000, $775,000, and
$900,000 of the purchase price to potable water, non-potable water and
wastewater, respectively. As discussed in Issue 2, staff is recommending a
total NBV for the potable water, non-potable water and wastewater systems of
$624,513 ($278,878 + $262,867 + $82,768). This would result in a total positive
acquisition adjustment of $1,875,487.
Any entity that believes a full or partial positive
acquisition adjustment should be made has the burden to prove the existence of
extraordinary circumstances. Rule 25-30.0371(2), F.A.C., states:
In determining whether extraordinary circumstances
have been demonstrated, the Commission shall consider evidence provided to the
Commission such as anticipated improvements in quality of service, anticipated
improvements in compliance with regulatory mandates, anticipated rate
reductions or rate stability over a long-term period, anticipated cost
efficiencies, and whether the purchase was made as part of an arms-length
transaction.
One of the Buyer’s justifications for the purchase price
is to ensure sale proceeds are sufficient to pay off the Seller’s long-term
debt obligations. While the factors listed in the rule are listed
by way of example and other evidence may be offered, the purpose of the rule is
to provide incentive for the acquisition of small, troubled systems, the
elimination of substandard operating conditions, and allow customers to receive
benefits which amount to a better quality of service at a reasonable rate. Order
No. PSC-02-0997-FOF-WS, issued July 23, 2002, in Docket No. 20001502-WS, In re: Proposed Rule 25-30.0371, F.A.C.,
Acquisition Adjustment. The items enumerated in the rule are consistent
with the promotion of benefits to customers and bringing troubled systems into
regulatory compliance; paying off the Seller’s long-term debt obligation is
not.
Staff believes the Buyer failed to demonstrate the
extraordinary circumstances necessary to support the inclusion of a positive
acquisition adjustment, as discussed below.
Improvements in Quality
of Service and Compliance with Regulatory Mandates
In its application, CSWR-Aquarina listed six business
practices that it believes will improve the quality of service to its customers:
(1) provision of 24-hour emergency service phone numbers; (2) on-call emergency
service personnel who are required to respond to emergency service calls within
prescribed time limits; (3) a computerized maintenance management system; (4)
access to resources not usually available to comparably sized systems and the
ability to supplement local personnel with resources owned by the parent and
sister companies; (5) online bill payment options; and (6) an updated website
for customer communication, bulletins, procedures, etc.
Staff reviewed the complaints
filed with the Commission for the five-year period prior to the application, May
2016 to May 2021. The Commission recorded a total of 31 complaints out of its
approximately 330 customers, pertaining to billing (3 complaints), quality of
service (5 complaints), outages (15 complaints), water quality/pressure (2
complaints), repair (3 complaints), or delay in connection (3 complaints).
Twenty of the 31 total complaints were received on May 8 and 9, 2017, and were
related to a single event at the water treatment plant caused by a power surge
due to a faulty transformer, which was replaced by Florida Power & Light
Company. In 2017, AUI made some improvements to its nonpotable water system to
address the problems that caused the complaints relating to that system, for
which it requested recovery as part of a limited proceeding in 2019.
There were no complaints involving the wastewater treatment system. Based on
the foregoing analysis, AUI appears to respond and resolve customer complaints
in a timely manner. Additionally, a majority of the Utility’s customer
complaints were attributable to a single event beyond the Utility’s control. As
discussed in Issue 1, the Utility is currently in compliance with the DEP’s
rules and regulations. Staff also reviewed the DEP inspection reports for the
three years prior to the Utility’s transfer application and found that the
Utility was also in compliance during that time frame after correcting minor
deficiencies identified by the DEP. There was no record of DEP compliance
enforcement action within the past three years and there appears to be no
pending regulatory requirements from any governmental authority.
Based on the Commission’s
complaint data and the DEP’s reports, it does not appear that AUI currently has
issues with respect to quality of service and regulatory compliance such that
they would warrant extraordinary efforts to remedy. For this reason, staff does
not believe the Utility has demonstrated extraordinary circumstances for its
requested positive acquisition adjustment. Instead, staff believes that the
proposed anticipated improvements in quality of service and compliance with regulatory
mandates demonstrates CSWR-Aquarina’s intention to responsibly execute its
obligations as a utility owner. While staff does not believe
the Utility’s anticipated improvements justify its requested positive acquisition
adjustment, these improvements may be considered for prudency and cost recovery
in a future rate proceeding.
Anticipated Cost
Efficiencies
In its
application, the Buyer stated that based on its size and anticipated consolidation
of many small systems under one financial and managerial entity would result in
operational cost efficiencies particularly in the areas of:
·
PSC and environmental regulatory reporting
·
Managerial and operational oversight
·
Utility asset planning
·
Engineering planning
·
Ongoing utility maintenance
·
Utility record keeping
·
Customer service responsiveness
·
Improved access to capital necessary to repair
and upgrade Aquarina to ensure compliance with all health and environmental
requirements and ensure service to customers remains safe and reliable
The Buyer also stated that CSWR-Aquarina would bring long-term rate
stability to the Utility, should the transfer be approved. Staff agrees that
economies of scale and potential consolidation of several systems in Florida,
as proposed by CSWR-Aquarina, could bring some amount of long-term rate
stability. However, absent specific and detailed support for these assertions,
the Buyer has failed to meet its burden for demonstrating extraordinary
circumstances. Instead, much of the information provided by the Buyer lacks
specificity and was provided nearly verbatim in each of the other two
CSWR-Florida Utility Operating Company, LLC transfer dockets.
Staff and OPC made several requests for quantifiable information to
support the Buyer’s assertions, such as anticipated rate impact and
potential/projected cost efficiencies. The Buyer repeatedly stated that it was
unable to provide quantitative information at the granularity requested by
staff. However, staff does not believe its requests were unreasonable given
that the burden of proof to support a positive acquisition adjustment lies with
the Buyer. This is particularly true in the instant case when the requested
relief is a positive acquisition adjustment of $1,875,487, which is approximately
three times greater than the system’s current NBV of $624,513. Further, in
response to staff’s first data request for an estimate and breakdown of
projected operation and maintenance (O&M) expenses, the Buyer stated that
the benefit from the increase in economies of scale and other advantages
provided by CSWR-Aquarina would not necessarily be reflected in cost savings
compared to current Aquarina operations.
Staff’s recommendation is also
consistent with the Commission’s decision in Order No. PSC-2020-0458-PAA-WS. In
that docket, Royal Waterworks, Inc. (RWI) identified estimates of anticipated
cost efficiencies, including a reduction in O&M expense and a reduction of
cost of capital that would result from the transfer. Additionally, RWI provided
several improvements it made to the water treatment plant and wastewater lift
station since acquisition to improve the quality of service and compliance with
regulatory mandates. While the Commission acknowledged that RWI accomplished
cost savings, it did not believe the actions performed demonstrated
extraordinary circumstances that would justify approval of a positive
acquisition adjustment.
Conclusion
Pursuant to Rule 25-30.0371, F.A.C., staff believes a
positive acquisition adjustment should not be granted as the Buyer did not
demonstrate extraordinary circumstances. Staff believes the Buyer’s anticipated
improvements in quality of service and compliance with regulatory mandates does
not illustrate extraordinary circumstances and instead demonstrates
CSWR-Aquarina’s intentions to responsibly execute its obligations as a utility
owner. Additionally, the Seller’s long-term debt is not a persuasive factor to
be considered in the request of a positive acquisition adjustment pursuant to
Rule 25-30.0371(2), F.A.C.
Issue 4:
Should this docket be closed?
Recommendation:
Yes. If no protest to the proposed agency action is
filed by a substantially affected person within 21 days of the date of the
issuance of the Order, a Consummating Order should be issued and the docket
should be closed administratively upon Commission staff’s verification that the revised tariff sheets have been filed, the
Buyer has notified the Commission in writing that it has adjusted its books in
accordance with the Commission’s decision, that the Buyer has submitted the
executed and recorded warranty deed and that the Buyer has submitted copies of
its applications for permit transfers to the DEP and the SJRWMD, within 60 days
of the Commission’s Order approving the transfer. (Crawford)
Staff Analysis:
If no protest to the proposed agency action is filed
by a substantially affected person within 21 days of the date of the issuance
of the Order, a Consummating Order should be issued and the docket should be
closed administratively upon Commission staff’s verification that the revised
tariff sheets have been filed, the Buyer has notified the Commission in writing
that it has adjusted its books in accordance with the Commission’s decision, that
the Buyer has submitted the executed and recorded warranty deed and that the
Buyer has submitted copies of its applications for permit transfers to the DEP
and the SJRWMD, within 60 days of the Commission’s Order approving the transfer.
