Discussion
of Issues
Issue 1:
Should the transfer of Certificate No. 363-W in Marion
County from Sunshine Utilities of Central Florida, Inc. to CSWR-Florida
Utility Operating Company, LLC be approved?
Recommendation:
Yes. The transfer of the water system and
Certificate No. 363-W 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 resultant 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 Buyer should be responsible for filing annual
reports and paying RAFs for all future years. (Maloy,
Blocker, Sibley)
Staff Analysis:
On May 5, 2021, CSWR-Sunshine filed an
application for the transfer of Certificate No. 363-W from SUCF
to CSWR-Sunshine in Marion County. The application complies with Section
367.071, F.S., and Commission rules concerning applications for transfer of
certificates. The sale to CSWR-Sunshine will become final after Commission
approval of the transfer, pursuant to Section 367.071(1), F.S.
Noticing, Territory, and Land
Ownership
CSWR-Sunshine 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 September 8, 2021
deficiency letter, CSWR-Sunshine provided an unrecorded warranty deed as
evidence that the buyer will have 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-Sunshine
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 SUCF that must be disposed of with
regard to the transfer. CSWR-Sunshine 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 $6,000,000. 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 Utility consists of 23 separate water systems. Raw
water is drawn from ground well(s), is primarily treated by hypochlorination,
and stored in hydropneumatic tank(s) until distribution for each of the
Utility’s respective water systems. The most recent inspections conducted by
the Florida Department of Environmental Protection (DEP) determined all 23
systems were in compliance with DEP’s rules and regulations. On December 21,
2021, Sun Ray Estates, one of the Utility’s 23 systems, was issued a Warning
Letter by the DEP for failure to monitor disinfection by-products (DBPs) contaminants
during September 2021. Staff notes that the DEP has notified the Utility in the
past of this same violation and once notified, it appears the Utility remits
its monitoring reports for DBPs to the DEP as required.
CSWR-Sunshine provided copies of the Utility’s current
permits from the 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. In Exhibit
G of the Buyer’s application, CSWR-Sunshine provided its assessment of SUCF’s
water systems, 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-Sunshine’s
application states that it owns and
operates more than 257 water/wastewater
systems in Missouri, Arkansas, Kentucky, Louisiana, Texas, and Tennessee that
service 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-Sunshine and believes the Buyer has
documented adequate resources to support the Utility’s water operations. Based on the above, staff recommends that the
Buyer has demonstrated the technical and financial ability to provide service
to the existing service territory.
Rates and Charges
Sunshine’s rates and charges
were last approved in a file and suspend rate case in 2012. Since the Utility’s
last rate case, the rates have been changed by four price index rate increases
and a rate decrease to remove an expired rate case amortization.[6] 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
Sunshine’s existing rates and charges as shown on Schedule No. 1-A, remain in
effect, until a change is authorized by the Commission.
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.[7] The definitions for initial
connection charges and normal reconnection charges were subsumed in the
definition of the premises visit charge. It was envisioned that the utility
tariffs would be reviewed by staff on a prospective basis to ensure conformance
with the amended rule.
The Utility’s miscellaneous service charges
consist of initial connection and normal reconnection charges. These charges
are the same as the premises visit charge. Therefore, staff believes it is
appropriate at this time to remove the initial connection and normal
reconnection charges and update the definition for the premises visit charge to
comply with amended Rule 25-30.460, F.A.C. 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 with
respect to annual reports and RAFs through December 31, 2020. CSWR-Sunshine
will be responsible for filing annual reports and paying RAFs upon the date of
closing and thereafter.
Conclusion
Based on the foregoing, staff
recommends the transfer of the water system and Certificate No. 363-W 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. CSWR-Sunshine should be
responsible for filing annual reports and paying RAFs for 2021 and all future
years.
Issue 2:
What is the appropriate net book value for the
CSWR-Sunshine water system for transfer purposes?
Recommendation:
For transfer purposes, the net book value (NBV) of
the water system is $248,089 as of May 31, 2021. Within 90 days of the date of
the Consummating Order, CSWR-Sunshine 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-Sunshine’s
2022 Annual Report when filed. (Blocker)
Staff Analysis:
Rate base was last established on July 10, 2012, by
Order No. PSC-12-0357-PAA-WU.
The purpose of establishing NBV for transfers is to determine whether an
acquisition adjustment should be approved. CSWR-Sunshine’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 May 31,
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 total UPIS
balance was $3,331,335 as of May 31, 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, 2010, to May 31, 2021,
and determined that several other adjustments are necessary. Accordingly,
staff recommends that the UPIS balance be reduced by $131,410 as of May 31,
2021.
Land
The Utility’s general ledger reflected a land balances of
$80,777 as of May 31, 2021. There have been no additions to land since December
31, 2010. Therefore, staff recommends no adjustments to its land balances.
Accumulated Depreciation
According to the Utility’s general ledger, the total
accumulated depreciation balance was $2,686,158 as of May 31, 2021. Staff
auditors recalculated depreciation accruals for all water accounts since that
last rate case through May 31, 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 balance be increased by $50,210
as of May 31, 2021.
Contributions-in-Aid-of-Construction (CIAC) and
Accumulated Amortization of CIAC
According to the Utility’s general ledger, the balances
for CIAC and accumulated amortization of CIAC were $2,036,044, and $1,574,029,
respectively, as of May 31, 2021. Staff auditors traced CIAC and accumulated
amortization of CIAC balances from December 31, 2010, to May 31, 2021, using
supporting documentation. Staff determined that the Utility did not start with
the Commission-approved balances in Order No. PSC-12-0357-PAA-WU.
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
balance be reduced by $3,015 as of May 31, 2021. Staff also recommends that the
accumulated amortization of CIAC balance be increased by $162,755 as of May 31,
2021.
Net Book Value
The Utility’s general ledger reflected a NBV of $263,939
as of May 31, 2021. Based on the adjustments described above, staff recommends
a NBV of $248,089 as of May 31, 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 May 31, 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 a NBV of $248,089 as
of May 31, 2021, for transfer purposes. 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-Sunshine’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 CSWR-Sunshine failed to
demonstrate extraordinary circumstances. (Blocker, Maloy)
Staff Analysis:
In its filing, the Utility requested a positive
acquisition adjustment be included in the calculation of CSWR-Sunshine’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 will
purchase the Utility for $6,000,000. As discussed in Issue 2, staff is
recommending a total NBV of $248,089. This would result in a total positive
acquisition adjustment of $5,751,911.
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 cover the fair market value of the
Utility’s land. 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; covering
the fair market value of land 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-Sunshine 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. In response to staff’s data
requests, CSWR-Sunshine provided a list of several improvements it plans to
make after its acquisition which it believes will improve both quality of
service and compliance with regulatory mandates relating to the Utility’s
chemical storage, electrical system, ground well, as well as the installation
of new flow meters on wells, blow off valves in distribution systems, and remote
monitoring system.
Staff
reviewed the complaints filed with the Commission for the five-year period prior
to the application, May 2016 to May 2021. For the five-year period, the
Commission recorded a total of 13 complaints, out of its approximately 3,934
customers, of which pertaining to billing (7 complaints), communication with
customers (3 complaint), outages caused by electrical issues (2 complaints), or
safety issues (1 complaint). Of the 3 communication-related customer
complaints, 2 were regarding the timing of a boil water notice and the third
was regarding a situation where the utility was digging in the right-of-way
near the customer’s residence, and the customer was not provided advanced notice
of the digging. In response, the Utility provided its contact information to
these customers to improve future communications. There were 2 customer
complaints attributable to incoming power fluctuations which caused outages; the
Utility installed adjustable voltage controls in the pumps to remedy the
unstable electricity. Further, in the analyzed period, 1 customer reported a
safety concern with a plastic water meter cover that was damaged from vehicle
traffic and the Utility replaced it with a concrete cover and installed a pole
in front of the meter box to resolve this issue. Based on the foregoing
analysis, the Utility appears to respond and resolve customer complaints in a
timely manner. 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. If an
area of concern was identified by the DEP, it was corrected promptly by SUCF.
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, with the exception of the recently issued DEP Warning
Letter regarding a monitoring violation, as discussed previously in Issue 1.
Based on the Commission’s complaint data and the DEP’s
reports, it does not appear that the Utility 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 CSWR-Sunshine
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-Sunshine’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 and Rates
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 Sunshine’s systems to ensure compliance with all health and
environmental requirements and ensure service to customers remains safe and
reliable
The Buyer also stated that CSWR-Sunshine
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-Sunshine, 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-Sunshine 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 lies with the Buyer. This is
particularly true in the instant case when the requested relief is a positive
acquisition adjustment of $5,751,911, which is approximately 23 times greater
than the system’s current NBV of $248,089. 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-Sunshine
would not necessarily be reflected in cost savings compared to current Sunshine
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 CSWR-Sunshine 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-Sunshine’s intentions to responsibly execute its obligations as a utility
owner. Additionally, the fair market value of the Utility’s land is not a
factor 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, which is final agency action. (Lherisson)
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, which is final agency action.
