Discussion
of Issues
Issue 1:
Should the Utility's proposed final water rates be
suspended?
Recommendation:
Yes. Sunny Hills’ proposed final water rates should
be suspended. (Richards)
Staff Analysis:
Section 367.081(6), F.S., provides that the
Commission may, for good cause, withhold consent to the implementation of
requested rates within 60 days after the date the rate request is filed.
Further, Section 367.081(10), F.S., permits the proposed rates to go into
effect (secured and subject to refund) at the expiration of five months from
the official date of filing if: (1) the Commission has not acted upon the
requested rate increase; or (2) the Commission's action is protested by a party
other than the Utility.
Staff reviewed the filing and considered the information
filed in support of the rate application and the proposed final rates. Staff
believes that further investigation of this information, including potential on-site
reviews, is needed. Staff initiated an audit of Sunny Hills’ books and records.
The audit is tentatively due on June 21, 2022. In addition, staff sent its
first data request to the Utility on May 24, 2022.
The Utility's response to the data request is due on June 13, 2022. Based on the
foregoing, staff recommends Sunny Hills' proposed final water rates be
suspended.
Issue 2:
Should any interim revenue increase be approved?
Recommendation:
Yes. Sunny Hills should be authorized to collect
annual revenues as indicated below:
|
|
Adjusted Test
|
|
Revenue
|
|
|
|
Year Revenues
|
$ Increase
|
Requirement
|
% Increase
|
|
Water
|
$364,255
|
$21,472
|
$385,727
|
5.89%
|
(Richards, Phillips, Bethea)
Staff Analysis:
On April 7, 2022, Sunny Hills filed its rate base,
cost of capital, and operating statements to support its requested interim
increase in rates. Pursuant to Section 367.082(1), F.S., in order to establish
a prima facie entitlement for interim relief, the Utility shall demonstrate
that it is earning outside the range of reasonableness on its rate of return.
Pursuant to Section 367.082(2)(a), F.S., in a proceeding for an interim
increase in rates, the Commission shall authorize, within 60 days of the filing
for such relief, the collection of rates sufficient to earn the minimum of the
range of rate of return. Based on the Utility's filing and the recommended
adjustments below, staff believes that the Utility has demonstrated a prima
facie entitlement in accordance with Section 367.082(1), F.S.
Pursuant to Section 367.082(5)(b)1., F.S., the achieved
rate of return for interim purposes must be calculated by applying adjustments
consistent with adjustments made in the Utility's most recent rate proceeding
and annualizing any rate changes. Staff reviewed Sunny Hills’ interim request,
as well as the order from the Utility's most recent rate proceeding, and
believes adjustments are necessary as discussed below. Staff has attached
accounting schedules to illustrate staff’s recommended rate base, capital
structure, and test year operating income amounts. Rate base is labeled as
Schedule No. 1-A, with the adjustments shown on Schedule No. 1-B. Capital
structure is labeled as Schedule No. 2. Operating income is labeled as Schedule
No. 3-A, with the adjustments shown on Schedule No. 3-B.
Rate Base
Pursuant to Section 367.082, F.S., the method used to
calculate Used and Useful (U&U) in the Utility’s last rate case must be
used for interim purposes. In Order No. PSC-2012-0102-FOF-WS, the Commission
found Sunny Hills’ water treatment system to be 91 percent U&U.
Additionally, the Commission found the Utility’s water storage system to be 100
percent U&U, and the water distribution system to be 10 percent U&U.
Based on a review of the prior order, staff recommends that the water treatment
system be 91 percent U&U, its storage system be 100 percent U&U, and
the water distribution system be 10 percent U&U.
In its filing, the Utility recorded a net plant balance of
$1,805,063, which included a reduction of $2,156,891 for non-used and useful;
and a net accumulated depreciation balance of $1,103,305, which included a
reduction of $1,244,518 for non-used and useful. The Utility recorded a land
balance of $10,779. Staff made no adjustments to these accounts, and therefore
recommends a plant balance of $1,805,063, an accumulated depreciation balance
of $1,103,305, and a land balance of $10,779.
Sunny Hills recorded a net contributions in aid of
construction (CIAC) balance of $344,016, which included a reduction of $381,292
for non-used and useful. Staff made an adjustment increasing CIAC by $252 to
reflect the appropriate amount of CIAC. The Utility recorded a net amortization
of CIAC balance of $152,754, which included a reduction of $183,509 for
non-used and useful. Staff increased amortization of CIAC by $10 to reflect the
appropriate amount. Therefore, staff recommends CIAC balance of $344,268
($344,016 + $252) and an amortization of CIAC balance of $152,764 ($152,754 +
$10).
In its filing, the Utility recorded a net acquisition
adjustment of $698,925, which included a decrease of $839,646 for non-used and
useful. The Utility also recorded a net accumulated amortization of acquisition
adjustment of $539,516, which included a decrease of $608,568 for non-used and
useful. Staff made no adjustments to either of these accounts, and therefore
recommends an acquisition adjustment of $698,925, and an accumulated
amortization of acquisition adjustment of $539,516.
Sunny Hills recorded a working capital allowance $37,282
in its filing. Section 367.081(9), F.S., prohibits a utility from earning a
return on the unamortized balance of rate case expense. As such, staff
decreased working capital allowance by $561 to reflect the removal of rate case
expense. Therefore, staff recommends a working capital allowance of $36,721
($37,282 – $561).
In its MFR Schedule G-2, the Utility recorded total water
rate base of $399,148. Based on the adjustments above, staff decreased rate
base by $803 ($252 – $10 + $561). Therefore, staff recommends interim water
rate base of $398,345 ($399,148 – $803).
Cost of Capital
Pursuant to Section 367.082(2)(a), F.S., in a proceeding
for an interim increase in rates, the Commission shall authorize, within 60
days of the filing of such relief, the collection of rates sufficient to earn
the minimum range of return calculated in accordance with subparagraph (5)(b)2.
Since its previous rate case, the Utility was transferred from Aqua Utilities
Florida, Inc. to Sunny Hills Utility Company. Commission
practice has established that an approved return on equity (ROE) does not
survive a transfer.
Therefore, staff has used the 2021 leverage formula to
calculate an ROE of 7.85 percent. As
the Rule requires the use of the bottom of the range, staff recommends an ROE
for purposes of determining the interim rate of return for Sunny Hills of 6.85
percent.
The Utility’s capital structure consists of common equity
and customer deposits. Staff has reconciled investor sources of capital with
rate base, and recommends an overall cost of capital of 6.47 percent.
Net Operating Income
In its MFR Schedule G-4, the Utility recorded test year
revenues of $351,891. The Utility had a rate change during the test year. Staff
increased test year revenues by $12,364 to reflect the annualization of test
year revenues, and therefore recommends that the appropriate test year operating
revenues, before any revenue increase, is $364,255 ($351,891 + $12,364).
In its filing, the Utility reflected an O&M expense of
$298,257. Upon review of the corresponding MFR Schedules, staff made several
adjustments to O&M.
Rule 25-30.4325(1)(e), F.A.C., describes excessive
unaccounted for water (EUW) as unaccounted for water in excess of 10 percent of
the amount produced. Based on its MFRs, the Utility applied an EUW adjustment
of 4.5 percent to purchased power and chemicals expenses. This resulted in an
adjustment to decrease purchased power by $696 and to decrease chemicals by
$64. However, in its previous rate case, EUW was set at 2.10 percent.
In its filing, the Utility recorded test year amounts for
purchased power of $15,373 and chemicals of $1,419. After applying a 4.5
percent EUW adjustment to both accounts, the Utility made an adjustment
decreasing these accounts by $696 and $64 for purchased power and chemicals,
respectively. Staff then increased these amounts by $373 for purchased power,
and $34 for chemicals, to correct the adjustment and reflect the 2012 ordered
EUW adjustment of 2.10 percent. Therefore, staff recommends purchased power
expense of $15,050 ($15,373 – $696 + $373), and chemicals expense of $1,389 ($1,419
– $64 + $34).
The Utility recorded amortized rate case expense of $1,509
for the instant case. Staff removed this amount from interim rates, and
therefore recommends rate case expense of zero ($1,509 – $1,509).
In its filing, the Utility recorded bad debt expense as
$7,246, which reflects the amount recorded in its 2021 annual report. Staff
notes that in its previous rate case, bad debt expense was calculated using a
three-year average. Based on the Utility’s annual reports, Sunny Hills recorded
bad debt expense of $2,074, $2,256, and $7,246, for the years 2019, 2020, and
2021, respectively. The three-year average of these amounts is $3,859 (($2,074
+ $2,256 + $7,246) ÷ 3). Therefore, staff made an adjustment decreasing bad
debt expense by $3,387, and recommends a bad debt expense of $3,859 ($7,246 –
$3,387).
The adjustments to purchased power, chemicals, amortized
rate case expense, and bad debt expense referenced above represent a total
reduction to O&M expense of $4,489. Therefore, staff recommends O&M
expense of $293,768 ($298,257 – $4,489).
On interim MFR Schedule G-4, the Utility reflected
depreciation expense of $47,475. Upon review of corresponding MFR Schedule
B-13, staff determined that the total amount included $5,757 of depreciation
expense associated with pro forma items. As a result, staff decreased
depreciation expense by $5,757. Therefore, staff recommends depreciation
expense of $41,718 ($47,475 – $5,757).
On interim MFR Schedule G-4, the Utility reflected taxes
other than income (TOTI) expense of $37,411. Upon review of corresponding MFR
Schedule B-15, staff determined that the amount included $2,868 of property
taxes associated with pro forma items. As a result, staff decreased TOTI by
$2,868. Therefore, staff recommends TOTI balance of $34,543 ($37,411 – $2,868).
Revenue Requirement
Based on the above adjustments, staff recommends a revenue
requirement of $385,727. This represents an interim increase in annual revenues
of $21,472 (or 5.89 percent). This increase will allow the Utility the
opportunity to recover its operating expenses and earn a 6.47 percent return on
its rate base.
Issue 3:
What are the appropriate interim water rates?
Recommendation:
The interim rate increase of 5.98 percent for water
should be applied as an across-the-board increase to the water service rates.
The rates, as shown on Schedule No. 4, should be effective for service rendered
on or after the stamped approval date on the tariff sheets pursuant to Rule
25-30.475(1), Florida Administrative Code (F.A.C.). The Utility should file
revised tariff sheets and a proposed customer notice to reflect the
Commission-approved rates. In addition, the approved rates should not be
implemented until the required security has been filed, 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:
Staff
recommends that interim service rates for Sunny Hills be designed to allow the
Utility the opportunity to generate annual operating revenues of $385,727 for
water. Before removal of miscellaneous revenues, this would result in an increase
of $21,472 (5.89 percent). To determine the appropriate percentage increase to
apply to the service rates, miscellaneous revenues should be removed from the
test year revenues. The calculation is as follows:
Table 3-1
Percentage Service Rate
Increase
|
|
|
Water
|
|
1
|
Total Test Year Revenues
|
$364,255
|
|
2
|
Less: Miscellaneous
Revenues
|
$5,275
|
|
3
|
Test Year Revenues from Service Rates
|
$358,980
|
|
4
|
Revenue Increase
|
$21,472
|
|
5
|
Percentage Service Rate Increase (Line 4/Line 3)
|
5.98%
|
Source: Staff’s
Interim Recommended Revenue Requirement
Staff
recommends that the interim rate increase of 5.98 percent for water be applied
as an across-the-board increase to the water service rates. The rates, as shown
on Schedule No. 4, 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. The Utility should file revised tariff sheets and a proposed customer
notice to reflect the Commission-approved rates. In addition, the approved
rates should not be implemented until the required security has been filed,
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 4:
What is the appropriate security to guarantee the
interim increase?
Recommendation:
The appropriate security to guarantee the funds
collected subject to refund is a corporate undertaking. (Richards)
Staff Analysis:
Pursuant to Section 367.082, F.S., revenues
collected under interim rates shall be placed under bond, escrow, letter of
credit, or corporate undertaking subject to refund with interest at a rate
ordered by the Commission. As recommended in Issue 2, the recommended total
annual interim revenue increase is $21,472. Staff calculated the potential
refund of revenues and interest collected under interim conditions in
accordance with Rule 25-30.360, F.A.C., and determined the amount to be $14,366.
This amount is based on an estimated eight months of revenue being collected
from staff’s recommended interim rates over the Utility's current authorized
rates.
The owner/president provided the most recent three years
of his personal financial net worth. Staff reviewed the confidential personal financial
information provided by the owner/president. Staff believes that in this
circumstance the owner/president has demonstrated the financial ability and
wherewithal to guarantee the interim refund in this rate increase, if
necessary. Further, the owner/president provided a personal guarantee in the
amount of $14,366 in this docket.
Pursuant to Rule 25-30.360(6), F.A.C., the Utility should
provide a report by the 20th day of each month indicating the monthly and total
revenue collected subject to refund. Should a refund be required, the refund
should be with interest and undertaken in accordance with Rule 25- 30.360,
F.A.C. Under no circumstances should maintenance and administrative costs
associated with any refund be borne by the customers. Such costs are the
responsibility of, and should be borne by, the Utility.
Accordingly, the appropriate security to guarantee the
funds collected subject to refund is a corporate undertaking.
Issue 5:
Should this docket be closed?
Recommendation:
The docket should remain open pending the
Commission’s PAA decision on the Utility’s requested rate increase. (Rubottom)
Staff Analysis:
The docket should remain open pending the
Commission’s PAA decision on the Utility’s requested rate increase.
