Discussion
of Issues
Issue 1:
Should the Commission approve HC Waterworks, Inc.’s request
for a limited proceeding?
Recommendation:
The Commission should approve the Utility’s request
for a limited proceeding rate increase as modified by staff. HCWW should be
allowed an annual increase of $17,879 or 2.36 percent for water, and $15,883 or
18.74 percent for wastewater. The adjusted revenues are reflected on Schedule
Nos. 1-A and 1-B. (Richards, Casper, P. Buys)
Staff Analysis:
Limited proceedings generally address specific or
significant changes that would adversely affect the normal operating income of
the Utility and are usually narrow in scope. Staff believes that HCWW’s case as
filed is sufficiently narrow in scope to qualify for a limited proceeding.
Staff also believes that HCWW has met all the minimum filing requirements as
set forth in Rule 25-30.445, F.A.C.
Secondary Water Quality Standards
Pursuant to Rule 25-30.445(4)(o),
F.A.C., HCWW provided a copy of all customer complaints received during the
past five years regarding Florida Department of Environmental Protection (DEP)
secondary water quality standards, as well as a copy of the Utility’s most
recent secondary water quality standards test results. The test results dated
October 2018, indicate that the Utility is currently passing DEP secondary
water quality standards.
In its last rate case, the
Commission found the Utility’s quality of service unsatisfactory due to the
number of customer complaints and reduced the Utility’s return on equity by 50
basis points. The
Commission also directed the Utility to engage with its customers and the
Office of Public Counsel (OPC) to address the customer service issues. OPC
protested the Commission’s decision and later entered into a settlement
agreement with the Utility. Pursuant to Order No. PSC-2021-0089-S-WS, the
Commission approved the settlement agreement, which required the Utility to
file quarterly reports regarding customer complaints and correspondence.
The quarterly reports indicate a declining trend in overall customer complaints
as well as complaints regarding secondary water quality issues.
As part of the instant Docket,
the Commission received 20 customer comments opposing the rate increase. Of the
20 customer comments, 16 of the customers also commented on poor water quality;
specifically, chlorine smell, cloudy water, discolored clothes from water, unacceptable
water pressure, and bad taste.
As previously discussed, the Utility
has provided the necessary information to comply with Rule 25-30.445(4)(o),
F.A.C., and Order No. PSC-2021-0089-S-WS. Therefore, based on a review of the
information provided by the Utility, as well as supplemental information
gathered throughout the course of this docket, staff does not believe any
actions need to be taken at this time with respect to secondary water quality
standards.
Rate Base
In its application, the Utility recorded total rate base
of $3,392,108 for water and $17,235 for wastewater. When calculating working
capital allowance, the Utility included anticipated rate case expense for the
current docket. Pursuant to Section 367.081(9), F.S., staff removed the unamortized
balance of rate case expense when calculating working capital. The removal of
rate case expense resulted in a decrease of $47 for water and $94 for
wastewater. Therefore, staff recommends total rate base of $3,392,061
($3,392,108 – $47) for water and $17,141 ($17,235 – $94) for wastewater.
Rate of Return
Rule 25-30.445(4)(e), F.A.C., requires that the weighted
average cost of capital be calculated based on the most recent 12-month period
and include all of the appropriate capital structure components. In its filing,
HCWW provided a weighted average cost of capital (rate of return) of 6.87
percent, based on a capital structure consisting of long-term debt, common
equity and customer deposits.
The Utility’s capital structure has been reconciled with
staff’s recommended rate base. In its application, the Utility reported a
return on equity (ROE) of 9.72 percent. However, in its last rate case, the
Commission set the ROE for HCWW at 9.17 percent, with a range of 8.17 percent
to 10.17 percent. With
ROE set at the Commission-ordered 9.17 percent, staff recommends an overall
rate of return of 6.61 percent.
Operating Expense
In its application, HCWW requested an increase to
operating expenses of $35,056 for water and $1,114 for wastewater. The
components for the operating expense were operations and maintenance (O&M)
expense, depreciation, net amortization expense and taxes other than income
(TOTI). Staff’s adjustments to operating expenses are detailed below.
Operations and Maintenance Expense
In its application, the Utility recorded O&M expense
of $374,550 and $92,729 for water and wastewater, respectively. These amounts
included $375 for amortization of rate case expense for both water and
wastewater. Staff believes it is more appropriate to follow Commission practice
and allocate noticing costs based on the number of customers for water (980),
or 75.56 percent; and wastewater (317), or 24.44 percent. In its application,
the Utility is requesting recovery of the required filing fee, required
noticing costs, and travel expense to attend the May 3, 2022 Commission
Conference. Staff has recalculated rate case expense as shown in Table 1-1.
Table 1-1
Calculation of Rate Case
Expense
|
|
Water
|
Wastewater
|
|
Expense
|
Allocation
|
Allocation
|
|
Filing Fee
|
$1,000
|
$200
|
|
Noticing Costs
|
2,214
|
716
|
|
Travel Expense
|
189
|
61
|
|
Total Rate Case Expense
|
$3,403
|
$977
|
|
Amortized Amount
|
$851
|
$244
|
Source: Staff
calculations.
Based on the above, staff has determined the appropriate
amount of rate case expense amortized over four years is $851 (($1,000 + $2,214
+ $189) ÷ 4) for water, and $244 (($200 + $716 + $61) ÷ 4) for wastewater.
These amounts represent an increase of $476 ($851 – $375) for water and a decrease
of $131 ($244 – $375) for wastewater. Therefore, staff recommends total O&M
expense of $375,026 ($374,550 + $476) for water and $92,598 ($92,729 – $131)
for wastewater.
Net Amortization Expense
In its application, the Utility recorded net amortization
expense of $39,346 for water and $6,146 for wastewater. In HCWW’s 2014 Transfer
Order, the Commission found:
Pursuant to Rule 25-30.0371, F.A.C., a negative
acquisition adjustment of $849,440 for the water system and $21,078 for the
wastewater system shall be recognized for rate-making purposes as of March 28, 2013.
Beginning with the date of the issuance of this Order, 50 percent of the
negative acquisition adjustment, which is $424,720 for the water system and
$10,539 for the wastewater system, shall be amortized over a seven-year period
and the remaining 50 percent shall be amortized over the remaining life of the
assets as discussed above.
In the Utility’s application, the remaining life of the
assets were calculated at 12 years for both water and wastewater. At 12 years,
the amortized amount of the remaining negative acquisition adjustment is
$35,393 ($424,720 ÷ 12 years) for water and $878 ($10,539 ÷ 12 years) for
wastewater. In response to staff’s data request, the Utility corrected these
amounts to $404,520 with a remaining life of 23.59 years for water and $7,497
with a remaining life of 11.63 years for wastewater.
Using the updated amounts, staff calculated the
appropriate amortization of the negative acquisition adjustment to be $17,148
($404,520 ÷ 23.59 years) for water and $645 ($7,497 ÷ 11.63 years) for
wastewater. This represents a decrease of $18,245 ($35,393 – $17,148) for water
and a decrease of $234 ($878 – $645) for wastewater.
Taxes Other Than Income
In its application, the Utility recorded TOTI of $35,033
for water and $4,010 for wastewater. These amounts included $329 in property
taxes and $34,705 in regulatory assessment fees (RAFs) for water, and $197 in
property taxes and $3,813 in RAFs for wastewater.
Staff calculated annualized revenues of $758,659 for water
and $84,737 for wastewater. Based on these amounts, staff determined RAFs of
$34,140 ($758,659 x 4.5 percent) for water and $3,813 ($84,737 x 4.5 percent)
for wastewater. Based on these calculations, staff reduced RAFs by $564
($34,705 – $34,140) for water and made no adjustment to RAFs for wastewater.
Staff made no adjustments to property taxes. Therefore, staff recommends TOTI
of $34,469 ($35,033 – $564) for water and $4,010 for wastewater.
Operating Expense Summary
Based on the above, staff is recommending a decrease to
operating expense of $18,334 for water and a decrease of $364 for wastewater. A
summary of staff’s adjustments are shown in Tables 1-2 and 1-3 for water and
wastewater, respectively.
Table 1-2
Adjustments to Water
Operating Expense
|
|
Per
|
Staff
|
Per
|
|
Expense
|
Utility
|
Adjustment
|
Staff
|
|
Operating and Maintenance
|
$374,550
|
$476
|
$375,026
|
|
Depreciation
|
199,770
|
0
|
199,770
|
|
Net Amortization Expense
|
(39,346)
|
(18,245)
|
(57,591)
|
|
Taxes Other than Income
|
35,033
|
(564)
|
34,469
|
|
Total
|
$570,007
|
($18,334)
|
$551,673
|
Source: Utility’s application and staff calculations.
Table 1-3
Adjustments to Wastewater
Operating Expense
|
|
Per
|
Staff
|
Per
|
|
Expense
|
Utility
|
Adjustment
|
Staff
|
|
Operating and Maintenance
|
$92,729
|
($131)
|
$92,598
|
|
Depreciation
|
8,544
|
0
|
8,544
|
|
Net Amortization Expense
|
(6,146)
|
(234)
|
(6,380)
|
|
Taxes Other than Income
|
4,010
|
0
|
4,010
|
|
Total
|
$99,137
|
($364)
|
$98,773
|
Source: Utility’s application and staff calculations.
Conclusion
As outlined in Table 1-4, staff recommends a revenue
requirement increase of $17,879 for water and an increase of $15,883 for
wastewater. These amounts represent a 2.36 percent increase for water and an
18.74 percent increase for wastewater. Staff’s revenue requirement calculations
are shown on Schedule Nos. 1-A and 1-B.
Table 1-4
Staff’ Recommended Increases
|
|
Water
|
Wastewater
|
|
Rate Base
|
$3,392,061
|
$17,141
|
|
Rate of Return
|
6.61%
|
6.61%
|
|
Return on Rate Base
|
$224,061
|
$1,132
|
|
Add Total Operating Expenses
|
551,673
|
98,773
|
|
Recommended Revenues
|
$775,734
|
$99,905
|
|
Less Annualized Revenues
|
758,659
|
84,737
|
|
Recommended Increase
|
$17,075
|
$15,168
|
|
4.5% RAFs on Increase
|
805
|
715
|
|
Total Recommended Increase
|
$17,879
|
$15,883
|
|
Percent Increase
|
2.36%
|
18.74%
|
Source: Staff calculations.
Issue 2:
What are the appropriate water and wastewater rates
for HC Waterworks, Inc.?
Recommendation:
The recommended monthly water and wastewater rates
are shown on Schedule Nos. 2-A and 2-B. The recommended rates should be
designed to produce additional revenues of $17,879 (2.36 percent increase) for
water and $15,883 (18.74 percent increase) for wastewater. The percent
increases should be applied as an across-the-board increase to the existing
service rates. 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 sheets 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:
As discussed in Issue 1,
staff recommends that HCWW be allowed to generate additional annual service
revenues of $17,879 for water and $15,883 for wastewater. This represents a
2.36 percent increase for the Utility’s water service revenues and an 18.74
percent increase for the Utility’s wastewater service revenues. The
corresponding percentage increases should be applied as an across-the-board increase
to the existing water and wastewater rates.
Based on the above, the recommended monthly water and
wastewater rates are shown on Schedule Nos. 2-A and 2-B. The recommended rates
should be designed to produce additional revenues of $17,879 (2.36 percent
increase) for water and $15,883 (18.74 percent increase) for wastewater. The
percent increases should be applied as an across-the-board increase to the
existing service rates. 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 sheets 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.
Issue 3:
Should the initial customer deposits for HC
Waterworks, Inc. be approved?
Recommendation:
The appropriate initial customer deposits should be
$122 for the single family residential 5/8 inch x 3/4 inch meter size for water
and $84 for the single family residential 5/8 inch x 3/4 inch meter size for
wastewater. The initial customer deposits for all other residential meter sizes
and all general service meter sizes should be two times the average estimated
bill for water and wastewater. The approved initial customer deposits should be
effective for connections made on or after the stamped approval date on the
tariff sheets pursuant to Rule 25-30.475, F.A.C. The Utility should be required
to collect the approved deposits until authorized to change them by the
Commission in a subsequent proceeding. (Bethea)
Staff Analysis:
Rule 25-30.311, F.A.C.,
provides the criteria for collecting, administering, and refunding customer
deposits. Customer deposits are designed to minimize the exposure of bad debt
expense for the Utility and, ultimately, the general body of ratepayers. An
initial customer deposit ensures that the cost of providing service is
recovered from the cost causer. Historically, the Commission has set initial
customer deposits equal to two times the average estimated bill.[15] Currently, the Utility’s initial customer deposit
for single family residential water customers is $108 for the 5/8 inch x 3/4
inch meter size. For wastewater, the Utility’s initial customer deposit for single
family residential service is $50 for the 5/8 inch x 3/4 inch meter size.
However, these amounts do not cover two months’ average bill based on staff’s
recommended rates. The average monthly bills based on staff’s recommended rates
are $60.93 for water and $42.17 for wastewater.
Based on the above, the appropriate initial customer
deposits for the residential 5/8 inch x 3/4 inch meter size are $122 for water
and $84 for wastewater. The initial customer deposit for all other residential
meter sizes and all general service meter sizes should be two times the average
estimated monthly bill for water and wastewater. The approved initial customer
deposits should be effective for connections made on or after the stamped
approval date on the tariff sheets pursuant to Rule 25-30.475, F.A.C. The
Utility should be required to collect the approved initial customer deposits
until authorized to change them by the Commission in a subsequent proceeding.
Issue 4:
Should HC Waterworks, Inc.’s miscellaneous service
charges be revised to conform to amended Rule 25-30.460, F.A.C.?
Recommendation:
Yes. Staff recommends the miscellaneous service
charges be revised to conform to the recent amendment to Rule 25-30.460, F.A.C.
The tariff should be revised to reflect the removal of initial connection and
normal reconnection charges. The Utility should be required to file a proposed
customer notice to reflect the Commission-approved charges. The approved
charges should be effective 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 charge
should not be implemented until staff has approved the proposed customer notice
and the notice has been received by customers. The Utility should provide proof
of the date notice was given no less than 10 days after the date of the notice.
(Bethea)
Staff Analysis:
Effective June 24, 2021, Rule 25-30.460, F.A.C., was
amended to remove initial connection and normal reconnection charges.[17] 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 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 existing and staff recommended
miscellaneous service charges are reflected in Tables 4-1 and 4-2.
Table 4-1
Existing Miscellaneous
Service Charges
|
Miscellaneous
Service Charge
|
Normal Hours
|
After Hours
|
|
Initial Connection Charge
|
$22.84
|
$34.25
|
|
Normal Reconnection Charge
|
$22.84
|
$34.25
|
|
Violation Reconnection Charge (Water)
|
$36.33
|
$57.09
|
|
Violation Reconnection Charge (Wastewater)
|
Actual Cost
|
Actual Cost
|
|
Premises Visit Charge
|
$22.84
|
$34.25
|
|
(in lieu of disconnection)
|
|
|
|
Late Payment Charge
|
$5.19
|
$5.19
|
|
NSF Charges
|
Pursuant to Section
68.065, F.S.
|
|
Convenience Charge
|
$2.70
|
$2.70
|
Source: Utility tariffs.
Table 4-2
Staff Recommended
Miscellaneous Service Charges
|
Miscellaneous
Service Charge
|
Normal Hours
|
After Hours
|
|
Premises Visit Charge
|
$22.84
|
$34.25
|
|
Violation Reconnection Charge (Water)
|
$36.33
|
$57.09
|
|
Violation Reconnection Charge (Wastewater)
|
Actual Cost
|
Actual Cost
|
|
Late Payment Charge
|
$5.19
|
$5.19
|
|
NSF Charges
|
Pursuant to Section
68.065, F.S.
|
|
Convenience Charge
|
$2.70
|
$2.70
|
Source: Utility tariff and Rule
25-30.460, F.A.C.
Conclusion
Staff recommends the
miscellaneous service charges be revised to conform to the recent revision to
Rule 25-30.460, F.A.C. The Utility should be required to file a proposed
customer notice to reflect the Commission-approved charges. The approved
charges should be effective 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 charge
should not be implemented until staff has approved the proposed customer notice
and the notice has been received by customers. The Utility should provide proof
of the date notice was given no less than 10 days after the date of the notice.
Issue 5:
What is the appropriate amount by which rates should
be reduced in four years after the published effective date to reflect the
removal of the amortized rate case expense as required by Section 367.081(8),
F.S.?
Recommendation:
The water and wastewater rates should be reduced, as
shown in Schedule Nos. 2-A and 2-B, 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 four-year rate
case expense recovery period, pursuant to Section 367.081(8), F.S. HCWW 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, separate data should be filed for the price index and/or
pass-through increase or decrease and the reduction in the rates due to the
amortized rate case expense. (Casper, Richards, Bethea)
Staff Analysis:
Section 367.081(8), F.S., requires that the rates be
reduced immediately following the expiration of the four-year 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. This results in a reduction of $891 for
water and $256 for wastewater.
The water and wastewater rates should be reduced as shown
in Schedule Nos. 2-A and 2-B, 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 four-year rate case
expense recovery period, pursuant to Section 367.081(8), F.S. HCWW 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,
separate data should be filed 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 6:
Should the recommended rates be approved for HC
Waterworks, Inc. on a temporary basis, subject to refund, in the event of a
protest filed by a substantially affected person or party?
Recommendation:
Yes. The recommended rates should be approved for
the Utility on a temporary basis, subject to refund, in the event of a protest
filed by a substantially affected person or party other than the Utility. 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 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
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. (Casper, Richards)
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. 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 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.
The Utility 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 $22,560. 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.
The 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 Office of Commission Clerk no later than
the 20th day 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 7:
Should this docket be closed?
Recommendation:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the 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.
(Sandy)
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 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.
