Discussion
of Issues
Issue 1:
Is the quality of service provided by Sunny Hills
satisfactory?
Recommendation:
Yes. Sunny Hills is meeting all Department of
Environmental Protection (DEP) primary and secondary standards with the
exception of the secondary standard for iron at a backup well, Well No. 1. The
Utility is taking measures to address the iron levels at Well No. 1 and has
been responsive to customer complaints. Therefore, the quality of service
provided by Sunny Hills should be considered satisfactory. (Phillips)
Staff Analysis:
Pursuant to Section 367.081(2)(a)1, F.S., and Rule
25-30.433(1), Florida Administrative Code (F.A.C.), the Commission, in every
rate case, shall make a determination of the quality of service provided by the
utility by evaluating the quality of the utility’s product (water) and the
utility’s attempt to address customer satisfaction. The Rule requires that the
most recent chemical analyses, outstanding citations, violations, and consent
orders on file with the DEP and the county health department, along with any
DEP and county health department officials’ testimony concerning quality of
service shall be considered. In addition, any customer testimony, comments, or complaints
shall also be considered. The operating condition of the water system is
addressed in Issue 2.
Quality of Utility’s Product
In evaluation of Sunny Hill’s product, staff reviewed the
Utility’s compliance with the DEP primary and secondary drinking water
standards. Primary standards protect public health while secondary standards
regulate contaminates that may impact the taste, odor, and color of drinking
water. The most recent comprehensive chemical analyses were performed on
November 22, 2021 and all results were found to be in compliance with DEP regulations,
except for the secondary standard for iron at Well No. 1, one of two backup
wells. A review of the DEP records did not show any consent orders against the
Utility.
The Utility’s Attempt to Address Customer
Satisfaction
Staff reviewed the complaints filed in the Commission’s
Consumer Activity Tracking System (CATS), complaints filed with the DEP, and
complaints received by the Utility from January 1, 2017 through December 31,
2021. The Commission also received written customer correspondence in this
docket from six customers. A customer meeting was held on Tuesday July 19, 2022,
where two customers provided comments, one of whom had already provided written
comments. Staff also performed a supplemental review of the complaints filed in
CATS and with DEP following the July 19, 2022 customer meeting. Table 1-1 shows
the number of complaints categorized by complaint type and source. The majority
of the complaints filed were filed with the Utility and were related to low
water pressure, discolored water, and leaks.
Table 1-1
Number of Complaints by Type
and Source
|
|
|
Correspondence /
|
|
|
|
|
Subject
|
CATS
|
Customer Meeting
|
DEP
|
Utility
|
Total
|
|
Water Pressure
|
1
|
|
|
119
|
120
|
|
Discolored Water
|
1
|
4
|
14
|
68
|
87
|
|
Damaged Meter
|
|
|
|
12
|
12
|
|
Billing
|
6
|
|
|
|
6
|
|
Leaks
|
|
1
|
|
56
|
57
|
|
Rate Increase
|
|
5
|
|
|
5
|
|
Total*
|
8
|
10
|
14
|
255
|
287
|
*A single customer complaint may be counted multiple times
if it fits into multiple categories, was reported to multiple agencies, or was reported
multiple times.
Starting the week of July 22, 2022, the DEP noted an
increase of complaints associated with discolored water. While the operator
reported that system pressure and chlorination were adequate, the DEP conducted
a site visit to investigate the complaints and noted that backup Well No. 1 had
elevated iron levels and had been operating due to a valve repair on the
primary well. The DEP’s field inspection observed the distribution system
produce tinted water that cleared after flushing and recommended repairing the
primary well and reducing iron content by means of a sequestering agent or
filtration, with a notation that the Utility had already submitted plans for an
iron filtration system to be installed.
Low pressure, discolored water, and leaks are all related
to the Utility’s distribution system. Sunny Hills has a large distribution
system that is over forty years old and was installed before the current owners
purchased the system. In addition to the size and age of the system, the surrounding
soil is mostly sand and likely to shift. This can result in distribution lines
breaking and leaking. When a line breaks the pressure is reduced throughout the
distribution system. When the pressure drops the Utility uses a backup well to
help maintain pressure; however, as noted above the raw water supply located at
Well No. 1 has high levels of natural iron that leads to discolored water when
this well is utilized. As discussed further in Issue 4, Sunny Hills is adding
an iron filtration system at Well No. 1. In addition, line breaks may allow for
sediment to enter the distribution system, and repairing the break will cause
sediment to become dislodged resulting in discolored water. Due to the size of
the distribution system it is difficult for the Utility’s workers to locate
breaks when they occur; however, the Utility has capped and removed from
service several unused water lines that were believed to contribute to leaks. After
repairs are made, and in response to customer complaints, the operator will
flush the lines to remove sediment. Sunny Hills stated that most customer
complaints are resolved by flushing.
Conclusion
Sunny Hills is meeting
all DEP primary and secondary standards with the exception of the secondary
standard for iron at a backup well, Well No. 1. The Utility is taking measures
to address the iron levels at Well No. 1 and has been responsive to customer
complaints. Therefore, the quality of service provided by Sunny Hills should be
considered satisfactory.
Issue 2:
Are the infrastructure and operating conditions of
Sunny Hills’ water system in compliance with DEP regulations?
Recommendation:
Yes. The Utility’s water system is currently in
compliance with DEP regulations. (Phillips)
Staff Analysis:
Rule 25-30.225(2), F.A.C., requires each water and
wastewater utility to maintain and operate its plant and facilities by
employing qualified operators in accordance with the rules of the DEP. Rule
25-30.433(2), F.A.C., requires consideration of whether the infrastructure and
operating conditions of the plant and facilities are in compliance with Rule
25- 30.225, F.A.C. In making this determination, the Commission must consider
testimony of the DEP and county health department officials, sanitary surveys
for water systems and compliance evaluation inspections for wastewater systems,
citations, violations, and consent orders issued to the utility, customer
testimony, comments, and complaints, and utility testimony and responses to the
aforementioned items.
Water System Operating Condition
Sunny Hill’s water system consists of three wells: the
main well with a capacity of 504,000 gallons per day (gpd), and two backup wells
with capacities of 432,000 and 288,000 gpd for a total permitted design
capacity of 1,224,000 gpd. The Utility also has three storage units: a main
water storage tank with a capacity of 150,000 gallons, and two 10,000 gallon
hydropneumatic tanks, for a total capacity of 170,000 gallons. Sunny Hills uses
two chlorine treatment plants to treat the raw water. Staff reviewed Sunny
Hills’ sanitary surveys conducted by the DEP to determine the Utility’s overall
water facility compliance. A review of the sanitary survey conducted on
December 3, 2021, and the DEP site inspection on July 29, 2022, indicated that
Sunny Hills’ water treatment facility is in compliance with the DEP’s rules and
regulations.
Conclusion
Based on the above, Sunny Hills’ water system is currently
in compliance with DEP regulations.
Issue 3:
Should the audit adjustments to rate base be made?
Recommendation:
Yes. Plant in service should be decreased by $5,627
and accumulated depreciation should be increased by $8,916. (Richards)
Staff Analysis:
Staff’s audit report was filed on July 1, 2022.
Sunny Hills did not file a formal response to the audit. Audit Finding No. 1
determined that utility plant in service (UPIS) should be decreased by $5,627
to include the actual total additions and retirements to UPIS from March 28,
2013, through December 31, 2021. Audit Finding No. 1 also determined that
accumulated depreciation should be increased by $8,916.
Conclusion
Adjustments decreasing UPIS by $5,627 and increasing
accumulated depreciation by $8,916 should be made.
Issue 4:
What are the used and useful (U&U) percentages
of Sunny Hills’ water treatment plant (WTP), storage, and water distribution
system?
Recommendation:
Staff recommends that Sunny Hills’ water treatment
system is 91 percent U&U, the water storage 100 percent U&U, and the
water distribution system 10 percent U&U. Additionally, staff recommends
that the Utility has 4.2 percent excessive unaccounted for water (EUW). (Phillips)
Staff Analysis:
Rule 25-30.4325, F.A.C., provides factors to be
considered in determining U&U and EUW calculations. As stated in Issue 2,
Sunny Hills’ water system is comprised of three wells with a permitted design
capacity of 1,224,000 gpd, and three water tanks with a capacity of 170,000
gallons. Sunny Hills’ U&U percentages were last determined by the Commission
in Docket No. 20100330-WS.
Used and Useful Percentages
Water Treatment Plant
Rule 25-30.4325(5), F.A.C., states that water treatment
plant U&U is calculated by dividing the peak demand, which is based on the
highest daily usage, by the firm reliable capacity, which is the capacity of
all wells excluding the single largest well. The Utility calculated peak demand
to be 509,142 gpd and firm reliable capacity to be 720,000 gpd, resulting in a
70.7 percent U&U. Staff’s review determined that an alternate day should be
used for peak demand value, as the highest demand day was during a line break
and pursuant to Rule 25-30.4325(7)(b)1, F.A.C., the peak day must have no
unusual occurrences. Based on staff’s analysis, thepeak
demand is 351,480 gpd based on the next highest peak day. Staff also reviewed
the firm reliable capacity and determined it should be modified to reflect
storage on the Utility’s system. Instead of using 24 hours of pumping, 16 hours
of pumping should be used for the calculation pursuant to Rule
25-30.4325(6)(b), F.A.C. This yields a firm reliable capacity of 480,000 gpd.
As a result, staff calculated a U&U level of 73.2 percent. However, in
Sunny Hills’ last rate case the water treatment system was determined to be 91
percent U&U. Therefore, to be consistent with the Commission’s previous
determination, staff recommends that the water treatment system is 91 percent
U&U.
Water Storage
Rule 25-30.4325(8), F.A.C., states that water storage
U&U is calculated by dividing the peak demand by usable storage. The
Utility calculated the water storage system to be 299.5 percent U&U based
on a usable storage capacity of 170,000 gallons. As noted above, staff modified
the peak demand to reflect a day without an unusual occurrence. Staff’s review
also removed the two hydrodynamic tanks from the calculation of usable storage,
consistent with Rule 25-30.4325(8), F.A.C., reducing the usable storage value
to 150,000 gallons. As a result, staff calculated a U&U of 234.3 percent.
Rule 25-30.4325(8), F.A.C., states that if storage capacity is less than the
peak demand, the U&U should be considered 100 percent U&U. Therefore,
consistent with the Commission’s previous determination, staff recommends the
water storage system is 100 percent U&U.
Water Distribution
The Utility calculated the water distribution system to be
8.8 percent U&U based on a total system capacity of 6,384 equivalent
residential connections (ERCs) and a projected 560 ERCs based on a negative
growth rate of 3.2 percent. Staff notes that there are currently 577 ERCs on
the Utility’s system, and recommends that while Rule 25-30.431, F.A.C.,
requires the Commission to consider the rate of growth, a negative growth value
in this instance would not be appropriate as the distribution system is currently
being used to serve customers. Therefore, based on 577 current ERCs and 6,384
potential ERCs, the distribution system is 9.0 percent U&U. However, in
Sunny Hills’ last rate case the distribution system was determined to be 10
percent U&U. Therefore, to be consistent with the Commission’s previous
determination, staff recommends that the water distribution system is 10
percent U&U.
Excessive Unaccounted for Water
Rule 25-30.4325, F.A.C., provides factors to be considered
in determining whether adjustments to operating expenses are necessary for EUW.
EUW is defined as "unaccounted for water in excess of 10 percent of the
amount produced." Unaccounted for water is all water produced that is not
sold, metered, or accounted for in the records of the Utility. Sunny Hills
estimated the EUW to be 4.5 percent based on producing 42,130,660 gallons, an
estimated total sales of 25,494,000 gallons, and 10,516,498 gallons used for
other uses, such as flushing and losses due to line breaks/leaks during the
test year. Staff’s review confirmed the values for water produced and other
uses, but based on the audit report the actual gallons sold during the test
year were slightly higher, at 25,628,000 gallons. The resulting calculation
([42,130,660 – 25,628,000 - 10,516,498] ÷ 42,130,660) for unaccounted for water
is 14.2 percent; therefore, the Utility has EUW of 4.2 percent. Staff
recommends an adjustment of 4.2 percent should be made to purchased power and
chemical expenses.
Conclusion
Staff recommends that Sunny Hills’ water treatment system
is 91 percent U&U, the water storage 100 percent U&U, and the water
distribution system 10 percent U&U. Additionally, staff recommends that the
Utility has 4.2 percent EUW.
Issue 5:
Should adjustments be made to the Utility’s non-U&U
balance?
Recommendation:
Yes. The Utility’s non-U&U balance should be
decreased by $27,613. (Richards)
Staff Analysis:
Based on the calculations discussed in Issue 4,
staff determined the non-U&U plant balance totaled $2,177,531. When
compared to the total plant balance for Sunny Hills of $4,226,841, staff
calculated a non-U&U composite rate of 51.52 percent ($2,177,531 ÷
$4,226,841).
Utility Plant in Service
In MFR Schedule A-5, the Utility recorded a non-U&U
balance for plant of $2,156,891. Based on staff’s calculations outlined in
Issue 4, staff reduced this amount by $323. The Utility also included a non-U&U
adjustment of $20,963 for pro forma plant additions; staff made no adjustment
to this amount.
Accumulated Depreciation
In MFR Schedule A-9, the Utility recorded a non-U&U
balance for accumulated depreciation of $1,244,518. Based on staff’s
calculations outlined in Issue 4, staff increased this amount by $4,075. The
Utility also included a non-U&U adjustment to the accumulated depreciation
balance of pro forma of $476. Staff further increased this amount by $478.
Negative Acquisition Adjustment
The Utility recorded a non-U&U adjustment to the negative
acquisition adjustment of $839,646, and to the accumulated amortization of the
negative acquisition adjustment of $608,568. Staff used the non-U&U
composite rate of 51.52 percent to decrease the Utility’s non-U&U
adjustments by $47,024 and $69,761 for acquisition adjustment and accumulated
acquisition adjustment, respectively.
Conclusion
Staff recommends reducing the Utility’s non-U&U
balance by $27,613 ($323 + $4,075 + $478 - $47,024 + $69,761).
Issue 6:
Should further adjustments be made to the Utility’s
rate base?
Recommendation:
Yes. The Utility’s test year rate base should
further be reduced by $97,414. (Richards)
Staff Analysis:
Staff made adjustments to the Utility’s reported
accumulated depreciation, contributions in aid of construction (CIAC),
accumulated amortization of CIAC, accumulated amortization of the acquisition
adjustment, and working capital. Those adjustments are detailed below.
Accumulated Depreciation
In addition to Audit Finding 1 described in Issue 3, staff
made an averaging adjustment to reduce accumulated depreciation by $4,218.
CIAC and Accumulated Amortization of CIAC
To reflect an appropriate balance determined by the audit,
staff increased CIAC by $8,712 and accumulated amortization of CIAC by $6,124.
In MFR Schedules A-12 and A-14, the Utility recorded a non-U&U balance of
$381,292 for CIAC and $183,509 for accumulated amortization of CIAC. Using the
non-U&U composite rate of 51.52 percent detailed in Issue 5, staff reduced
these amounts by $3,149 and $7,122 for CIAC and accumulated amortization of
CIAC respectively.
Accumulated Amortization of Negative Acquisition
Adjustment
The Utility’s 2014 transfer order established a negative
acquisition adjustment for the water system of $1,538,571.
Fifty percent of the acquisition adjustment was amortized over 7 years with the
remainder amortized over the life of the assets, which was calculated as 21
years. In the instant case, the Utility recorded an accumulated amortization of
the negative acquisition adjustment of $1,148,084. Based on the 2014 order,
staff calculated the accumulated amortization from June 13, 2014, through
December 31, 2021, as $1,045,888. This resulted in a decrease of $102,196 to
the Utility’s recorded amount.
Working Capital Allowance
In MFR Schedule A-17, the Utility
recorded a working capital balance of $37,324. Rule 25-30.433(3), F.A.C.,
requires Class B utilities to use the formula method, or one-eighth of
operation and maintenance (O&M) expenses, to calculate the working capital
allowance. As discussed in Issue 12, staff recommends a total O&M balance
of $293,581. Section 367.081(9), F.S., prohibits a utility from earning a
return on the unamortized balance of rate case expense (RCE). As such, staff
removed the RCE of $1,554; this resulted in an adjusted O&M balance of $292,027
($293,581 - $1,554). Based on this, staff calculated working capital expense of
$36,503 ($292,027 ÷ 8). This resulted in a decrease to the Utility’s recorded
working capital expense of $821 ($37,324 - $36,503).
Table 6-1
Additional Staff Adjustments
to Test Year Rate Base
|
Description
|
Amount
|
|
To reflect an averaging adjustment to accumulated
depreciation.
|
$4,218
|
|
To reflect an auditing adjustment to CIAC.
|
(8,712)
|
|
To reflect a non-used and useful adjustment to CIAC.
|
(3,149)
|
|
To reflect an auditing adjustment to accum. amort. of
CIAC.
|
6,124
|
|
To reflect a non-used and useful adj. to accum. amort. of
CIAC.
|
7,122
|
|
To reflect the appropriate accum. amort. of negative
acquisition adj.
|
(102,196)
|
|
To reflect 1/8 O&M expense, less RCE for working
capital.
|
($821)
|
|
Total additional
staff adjustments to test year rate base.
|
($97,414)
|
Source: Staff calculations.
Conclusion
Based on the above adjustments
and detailed in Table 6-1 above, staff recommends reducing the Utility’s test
year rate base by $97,414.
Issue 7:
Should any adjustments be made to the Utility’s pro
forma adjustments?
Recommendation:
Yes. Pro forma accumulated depreciation should be
reduced by $6,245 and depreciation expense should be increased by $5,767.
Additionally, property taxes should be decreased by $1,172. There is no
adjustment to the Utility’s pro forma plant. (Phillips, Richards)
Staff Analysis:
The Utility requested two
pro forma plant additions. For its first project, Sunny Hills is seeking to add
an iron filtration system to the backup well by the end of 2022. As discussed
in Issue 1, the raw water located at this well contains high amounts of iron
that can cause discolored water when this well is utilized. In order to reduce
the iron levels, the Utility is planning on placing a “green sand” filtration
system that will remove the raw iron from the water. Sunny Hills will be
utilizing a retired filtration vessel skid that was previously used to remove
sulfur from an affiliated utility in order to reduce cost. For the second
project, Sunny Hills is also seeking to retire and replace the existing damaged
generator located at Well No. 1. Rule 62-555.320(14)(a), F.A.C., requires Sunny
Hills to have this generator due to the number of customers the Utility serves.
As is Commission practice, the Utility received three bids for each pro forma
project and selected the least cost option.
In MFR Schedule A-3, the Utility
recorded a cost of $232,925 for the iron filtration system described above.
Additionally, the Utility recorded a cost of $150,357 for the new generator
located at Well No. 1, with a retirement amount of $112,768 for the old
generator. These two projects resulted in a pro forma increase to plant of
$270,514 ($232,925 + $150,357 - $112,768). Staff made no adjustments to the pro
forma plant balance.
Additionally, the Utility
recorded an adjustment reducing accumulated depreciation by $106,534 for the
two pro forma projects. Staff recalculated this amount, and reduced the Utility’s
adjustment by $6,245 to reflect the appropriate accumulated depreciation.
The Utility made corresponding adjustments to increase
depreciation expense by $5,757 net of non-U&U adjustment, and increased
property taxes by $2,868. Staff made further adjustments to these amounts,
increasing depreciation expense by an additional $5,767 net of non-U&U, and
decreasing property taxes by $1,172.
Conclusion
Accumulated depreciation should
be reduced by $6,245 and depreciation expense should be increased by $5,767.
Additionally, property taxes should be decreased by $1,172.
Issue 8:
What is the appropriate rate base for the test year
ended December 31, 2021?
Recommendation:
Consistent with staff’s recommended adjustments, the
appropriate rate base for the test year ended December 31, 2021, is $665,162.
(Richards)
Staff Analysis:
In its MFRs, the Utility requested a rate base of
$755,752. Based on staff’s previously recommended adjustments, the appropriate
rate base is $665,162. The schedule for rate base is attached as Schedule No.
1-A, and the adjustments are shown on Schedule No. 1-B.
Issue 9:
What is the appropriate return on equity (ROE)?
Recommendation:
Based on the Commission’s leverage formula currently
in effect, the appropriate ROE for the Utility is 7.84 percent. (Richards)
Staff Analysis:
The ROE included in the Utility’s MFR Schedule D-1
is 8.74 percent. Based on the current leverage formula in effect, and the
Utility’s equity ratio of 97.27 percent, the appropriate ROE is 7.84 percent.
Staff recommends an allowed range of plus or minus 100 basis points be
recognized for ratemaking purposes.
Conclusion
The appropriate ROE for the
Utility is 7.84 percent.
Issue 10:
What is the appropriate weighted average cost of
capital based on the proper components, amounts, and cost rates associated with
the capital structure for the test year ended December 31, 2021?
Recommendation:
The appropriate weighted average cost of capital for
the test year ended December 31, 2021, is 7.68 percent. (Richards)
Staff Analysis:
In its filing, the Utility requested an overall cost
of capital of 8.56 percent. The Utility’s capital structure consists of common
equity and customer deposits. Based upon the proper components, amounts, and
cost rates associated with the capital structure, staff recommends a weighted
average cost of capital of 7.68 percent. Schedule No. 2 details staff’s
recommended overall cost of capital.
Conclusion
The appropriate weighted average cost of capital for the
test year ended December 31, 2021, is 7.68 percent.
Issue 11:
What are the appropriate amount of test year
revenues for Sunny Hills’ water system?
Recommendation:
The appropriate test year revenues for Sunny Hills’
water system are $361,770 (Bethea)
Staff Analysis:
Sunny Hills reflected, in its MFRs, test year
revenues of $351,891. The water revenues included $344,137 of service revenues
and $7,754 of miscellaneous revenues. Staff determined service revenues by
applying the number of billing determinants to the rates in effect at the time
of filing. As a result, staff determined that service revenues should be
$356,495, which is an increase of $12,358. Staff also made an adjustment to
miscellaneous revenues to remove $2,479 of Allowance for Funds Prudently
Invested charges that were inaccurately reflected in miscellaneous revenues.
Staff determined that miscellaneous revenues should be $5,275 ($7,754 - $2,479).
Based on the above, the appropriate test year revenues for Sunny Hills’ water
system, including miscellaneous revenues, are $361,770 ($356,495 + $5,275).
Issue 12:
Should further adjustments be made to the Utility’s
O&M expense?
Recommendation:
Yes. O&M expense should be decreased by $4,677.
(Richards)
Staff Analysis:
Based on its review of the test year O&M
expense, staff recommends several adjustments to the Utility’s O&M expense
as summarized below.
Purchased Power
In its filing, Sunny Hills
reflected purchased power expense of $14,677, which included an adjustment for
excessive unaccounted for water (EUW). Based on the EUW calculation described
in Issue 4, staff made an adjustment increasing this amount by $50.
Chemicals Expense
Sunny Hills recorded chemicals
expense of $1,355 which included an adjustment for EUW, in its MFR filing.
Based on the EUW calculation described in Issue 4, staff made an adjustment
increasing this amount by $4.
Insurance Expense
The Utility recorded insurance
expense of $2,924 for the cost of an insurance policy. During the audit, the
Utility provided a copy of the insurance policy which had a total cost of
$3,069. Staff allocated 50 percent of this total cost to water, and the other
50 percent to wastewater. Staff calculated the water portion of the insurance
policy to be $1,535 ($3,069 ÷ 2). Therefore, staff decreased the insurance
expense by $1,389 ($2,924 - $1,535).
Rate Case Expense
The Utility estimated annual
amortization of rate case expense of $1,509 in its filing. Staff calculated
rate case expense of $6,218 which amortized over four years is $1,554,
resulting in an increase of $45. Staff’s amount includes $468 for travel to the
Commission Conference, a filing fee of $3,500, and total noticing costs of
$2,250.
Bad Debt Expense
In its filing, the Utility
recorded bad debt expense of $7,246. This amount reflects the amount of bad
debt expense in the Utility’s 2021 Annual Report. It is Commission practice to
use a 3-year average when calculating bad debt expense. Staff calculated bad
debt expense of $3,859 which reflects an average of the Utility’s reported
2019, 2020, and 2021 amounts. Therefore, staff recommends a decrease of $3,387
($7,246 - $3,859) to the Utility’s recorded bad debt expense.
Conclusion
Based on the adjustments above,
staff recommends a decrease of $4,677 ($50 + $4 - $1,389 + $45 - $3,387) to the
Utility’s test year O&M expense.
Issue 13:
Should further adjustments be made to the Utility’s
operating expense?
Recommendation:
Yes. The Utility’s operating expenses should be
further decreased by $1,111. (Richards)
Staff Analysis:
Staff made several adjustments to the Utility’s
operating expenses which are detailed below.
Net Depreciation Expense
In MFR Schedule B-13, the Utility
recorded test year depreciation expense of $51,050 net of a non-U&U
adjustment. Staff decreased this amount by $9,353 to reflect the removal of
depreciation expense for accounts which were fully depreciated. Staff further
decreased this amount by $339 to reflect the appropriate non-U&U
adjustments. As discussed in Issue 7, staff increased depreciation expense by
$5,767 to reflect the appropriate depreciation expense associated with pro
forma additions. In the audit, staff recommended CIAC be increased by $1,134
with a decrease of $912 for a non-U&U adjustment. Therefore, staff
recommends a decrease of $4,148 ($9,353 + $339 - $5,767 + $1,134 – 912) to the
Utility’s depreciation expense.
Amortization of Negative Acquisition Adjustment
As discussed in Issue 6, the 2014
transfer order for Sunny Hills, detailed how the negative acquisition
adjustment will be amortized over the life of the assets.
Based on staff’s calculations, the amortization of the negative acquisition
adjustment is $36,633. This represents a $688 increase from the Utility’s
recorded amortization amount of $35,945. Using staff’s composite non-U&U
rate of 51.52 percent, staff decreased the amortization of the negative
acquisition adjustment by $18,872 which represents a further decrease of $986
from the Utility’s recorded non-U&U adjustment. Therefore, staff recommends
decreasing amortization of the acquisition adjustment by $298 ($688 - $986).
Taxes Other Than Income
In the Utility’s MFR Schedule
B-15, Sunny Hills recorded property and tangible taxes of $18,709 net of
non-used and useful adjustments. Staff increased this amount by $961 to reflect
the appropriate amount of property and tangible taxes using the composite non-U&U
percentage of 51.52 percent. As discussed in Issue 6, staff made an adjustment
decreasing tax expense by $1,172 to reflect pro forma projects. Additionally,
staff increased TOTI by $445 to reflect the appropriate regulatory assessment
fees (RAFs). Taken together, this result in a test year adjustment of $234
($961 - $1,172 + $445) to TOTI.
Additionally, as discussed in
Issue 15, staff recommends revenues be increased by $55,646 in order to reflect
the change in revenue required to cover expenses and allow an opportunity to
earn the recommended rate of return. As a result, TOTI should be increased by
$2,504 to reflect RAFs of 4.5 percent of the change in revenues.
Conclusion
Based on the adjustment above,
staff recommends further decreasing the Utility’s test year operating expense
by $3,615 ($4,148 - $298 - $234). This amount is offset by an increase in TOTI
of $2,504 to reflect RAFs for the recommended change in revenues. As such,
staff recommends a net decrease of $1,111 ($3,615 - $2,504) to the Utility’s
operating expense.
Issue 14:
What is the appropriate operating expense for the
test year ended December 31, 2021?
Recommendation:
Consistent with staff’s recommended adjustments, the
appropriate operating expense for the test year ended December 31, 2021, is
$363,822. (Richards)
Staff Analysis:
In its MFRs, the Utility recorded operating expense
of $372,114. Based on staff’s previously recommended adjustments, the
appropriate operating expense is $363,822. The schedule for water operations is
attached as Schedule No. 3-A, and the adjustments are shown on Schedule No.
3-B.
Conclusion
The appropriate operating expense
for the test year ended December 31, 2021, is $363,822.
Issue 15:
What is the appropriate revenue requirement for the
test year ended December 31, 2021?
Recommendation:
Staff recommends a revenue requirement of $417,416
be approved.
Table 15-1
Staff’s Recommended Revenue
Requirement
|
Test Year
|
|
Revenue
|
|
|
Revenue
|
$ Increase
|
Requirement
|
% Increase
|
|
$361,770
|
$55,646
|
$417,416
|
15.38%
|
Source: Staff’s calculations
(Richards, Bethea)
Staff Analysis:
In its filing, the Utility requested an annual
revenue requirement of $442,631. This requested revenue requirement represents
an increase of $90,740, or approximately 20.50 percent, over the reported test
year revenues of $351,891. Consistent with its recommendations concerning rate
base, cost of capital, and operating income issues, staff recommends a revenue
requirement of $417,416.
Conclusion
Staff recommends a revenue
requirement of $417,416 be approved.
Issue 16:
What are the appropriate rate structures and rates
for Sunny Hills’ water system?
Recommendation:
The recommended rate structure and monthly water
rates are shown on Schedule No. 4. The Utility should file revised tariff
sheets and a proposed customer notice to reflect the Commission-approved rates.
The approved rates should be effective for service rendered on or after the
stamped approval date on the tariff 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:
Sunny
Hills is located in Washington County within the Northwest Florida Water
Management District. The Utility provides water service to 559 residential and
18 general service customers. Approximately 23 percent of the residential
customer bills during the test year had zero gallons, indicating a seasonal
customer base. The average residential water demand is 3,343 gallons per month.
The average water demand excluding zero gallon bills is 4,312 gallons per
month. Currently, the Utility’s water rate structure consists of a monthly base
facility charge (BFC) and a three-tier inclining block rate structure, which
includes separate gallonage charges for discretionary and non-discretionary
usage for residential water customers. The rate blocks are: (1) 0-6,000
gallons; (2) 6,001-12,000 gallons; and (3) all usage in excess of 12,000
gallons per month. The general service rate structure consists of a monthly BFC
and a uniform gallonage charge.
Staff
performed an analysis of the Utility’s billing in order to evaluate the
appropriate rate structure for the residential water customers. The goal of the
evaluation was to select the rate design parameters that: (1) produce the
recommended revenue requirement; (2) equitably distribute cost recovery among
the utility’s customers; (3) establish the appropriate non-discretionary usage
threshold for restricting repression; and (4) implement, where appropriate,
water conserving rate structures consistent with Commission practice.
The
Utility’s existing rate structure was implemented in 2012 when Sunny Hills was part
of Aqua Utilities Florida, Inc. (Aqua) system.
In 2014, the Commission approved the transfer of certain water and wastewater
facilities of Aqua to Sunny Hills with the existing rates and charges remaining
in effect at the time of the transfer. Staff believes that for a stand-alone system,
the existing three-tier rate structure should be evaluated based on the usage
characteristics of Sunny Hills’ customers. Staff evaluated alternate rate
structures, such as a two-tier inclining block rate structure, with usage
blocks of monthly consumption of 0-4,000 gallons and all usage above 4,000 gallons.
However, due to the staff-recommended relatively modest percentage increase in
the total revenue requirement (15.38 percent), changing the rate structure
results in higher bill increases at lower consumption levels and reductions in
bills at higher consumption levels, which is contrary to a
conservation-oriented rate structure. Therefore, in this instance, staff
recommends an across-the-board increase to the Utility’s rates at the time of
filing. To determine the appropriate percentage increase to apply to the
service rates, miscellaneous revenues should be removed from the test year
revenues, which results in a 15.61 percent increase to be applied
across-the-board.
Based on the above, the recommended rate structure and
monthly water rates are shown on Schedule No. 4. The Utility should file
revised tariff sheets and a proposed customer notice to reflect the
Commission-approved rates. The approved rates should be effective for service
rendered on or after the stamped approval date on the tariff 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 17:
Should Sunny Hills’ 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. Sunny Hills 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.[16] The
definitions for initial connection charges and normal reconnection charges were
subsumed in the definition of the premises visit charge. Sunny Hills’
miscellaneous service charges consist of initial connection and normal
reconnection charges. Therefore, staff recommends that the initial connection
and normal reconnection charges be removed, and the definition for the premises
visit charge be updated to comply with amended Rule 25-30.460, F.A.C. The
premises visit will remain at $22.96 for normal hours and $34.44 for after
hours.
Based on the
above, 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.
Sunny Hills 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 18:
What is the appropriate amount by which rates should
be reduced to reflect the removal of amortized rate case expense?
Recommendation:
The water rates should be reduced, as shown on
Schedule No. 4, to remove the annual amortization of rate case expense
grossed-up for RAFs. The decrease in rates should become effective immediately
following the expiration of the rate case expense recovery period. Sunny Hills
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. (Bethea, Richards)
Staff Analysis:
The water rates should be reduced, as shown on
Schedule No. 4, to remove the annual amortization of rate case expense
grossed-up for RAFs. The decrease in rates should become effective immediately
following the expiration of the rate case expense recovery period, pursuant to
Section 367.081(8), F.S. Sunny Hills 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 19:
Should any portion of the interim water revenue
increase granted be refunded?
Recommendation:
No. The Commission approved an interim revenue
increase of $21,472 to allow the Utility to earn an operating revenue of
$385,727. This amount is less than the recommended revenue requirement of $417,416.
(Richards)
Staff Analysis:
The Commission approved an
interim rate increase of $21,472 or 5.98 percent to allow Sunny Hills to earn
an operating revenue of $385,727.
Because this amount is less than staff’s recommended revenue requirement of
$417,416, no refund is necessary.
Issue 20:
Should the Utility be required to notify, within 90
days of an effective order finalizing this docket, that it has adjusted its
books for all the applicable National Association of Regulatory Commissioners
Uniform System of Accounts (NARUC USOA) associated with the Commission approved
adjustments?
Recommendation:
Yes. The Utility should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Sunny Hills should submit a letter within 90 days of the
final order in this docket, confirming that the adjustments to all the
applicable NARUC USOA accounts have been made to the Utility’s books and
records. In the event the Utility needs additional time to complete the adjustments,
notice should be provided within seven days prior to the deadline. Upon
providing good cause, staff should be given administrative authority to grant
an extension of up to 60 days. (Richards)
Staff Analysis:
The Utility should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. Sunny Hills should submit a letter within 90 days of the
final order in this docket, confirming that the adjustments to all the
applicable NARUC USOA accounts have been made to the Utility’s books and
records. In the event the Utility needs additional time to complete the
adjustments, notice should be provided within seven days prior to the deadline.
Upon providing good cause, staff should be given administrative authority to
grant an extension of up to 60 days.
Issue 21:
Should this docket be closed?
Recommendation:
No. If no person whose substantial interests are affected
by the proposed agency action files a protest within 21 days of the issuance of
the Proposed Agency Action Order, a Consummating Order should be issued. The
docket should remain open for staff’s verification that the revised tariff
sheets and customer notice have been filed by the Utility and approved by
staff, and the Utility has provided staff with proof that the adjustments for
all applicable NARUC USOA accounts have been made. Once these actions are
complete, this docket should be closed administratively. (Rubottom)
Staff Analysis:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the Proposed Agency Action Order, a Consummating Order should be
issued. The docket should remain open for staff’s verification that the revised
tariff sheets and customer notice have been filed by the Utility and approved
by staff, and the Utility has provided staff with proof that the adjustments
for all applicable NARUC USOA accounts have been made. Once these actions are
complete, this docket should be closed administratively.
