Discussion of Issues
Issue 1:
Is the quality of service provided by CHC VII, Ltd.
satisfactory?
Recommendation:
Yes. CHC has
been responsive to customer complaints and is currently in compliance with the
Department of Environmental Protection (DEP) standards; therefore, the quality
of service should be considered satisfactory. (Wooten)
Staff
Analysis:
Pursuant
to Section 367.081(2)(a)1, F.S., and Rule 25-30.433(1), Florida Administrative
Code (F.A.C.), in water and wastewater rate cases, the Commission shall
determine the overall quality of service provided by the utility. This
determination is made from an evaluation of the quality of the Utility’s
product (water), and the Utility’s attempt to address customer satisfaction
(water and wastewater). The Rule further states that the most recent chemical
analyses for the water system, outstanding citations, violations, and consent
orders on file with the DEP and the county health department, and any DEP and
county health department officials’ testimony concerning quality of service
shall be considered. In addition, any customer testimony, comments, or complaints
received by the Commission are also reviewed. The operating conditions of the
water and wastewater systems are addressed in Issue 2.
Quality of the Utility’s Product
In evaluation of CHC’s product quality, staff reviewed the
Utility’s compliance with the DEP’s primary and secondary drinking water
standards. Primary standards protect public health while secondary standards
regulate contaminants that may impact the taste, odor, and color of drinking
water. In the DEP’s last Sanitary Survey Report dated September 16, 2021, no
chemical or bacteriological exceedances were noted for the previous 12 months,
and the Utility was determined to be in compliance with DEP standards.
The Utility’s Attempt to Address Customer
Satisfaction
Staff reviewed the Commission’s Consumer Activity Tracking
System records, and there were five complaints recorded during the test year
and four years prior for CHC. Three complaints were related to improper billing
and two complaints were related to Water Quality/Water Pressure. All complaints
were resolved by the Utility. Staff requested all complaints received by the
Utility during the test year and four years prior, and the Utility responded
that it did not receive any complaints during this timeframe. Staff also
requested all complaints received by the DEP during the test year and four
years prior and was informed of only one complaint, filed on August 9, 2019,
which related to water quality that was resolved by the Utility.
A customer meeting was held on November 2, 2022, no customers
spoke at the meeting; however, three customer comments were placed in the
docket file. All three customers commented that they oppose the proposed rate
increase. One of the customers also noted that there was an odor coming from
the water. Staff performed a supplemental review, through November 18, 2022, of
complaints filed in the Consumer Activity Tracking System following the
customer meeting and found no additional complaints.
Conclusion
CHC has been
responsive to customer complaints and is currently in compliance with the DEP;
therefore, the quality of service should be considered satisfactory.
Issue 2:
Are the infrastructure and operating conditions of
CHC VII, Ltd.’s water and wastewater systems in compliance with DEP
regulations?
Recommendation:
Yes. CHC’s water and wastewater systems are
currently in compliance with the DEP. (Wooten)
Staff
Analysis:
Rule 25-30.225, F.A.C., requires that each water
utility shall operate and maintain its plant and facilities by employing
qualified operators in accordance with the rules of the DEP in order to provide
safe and efficient service up to and including the point of delivery into the
piping owned by the customer. During a rate making proceeding, 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 and Wastewater Systems Operating Conditions
CHC’s water system has a permitted capacity of 1,296,000
gallons per day (gpd). The Utility’s water system has two wells, Well Nos. 1
and 2, with pumping capacities of 600 gallons per minute (gpm) and 900 gpm,
respectively. Groundwater from Well No. 1 is treated through liquid
chlorination. CHC’s Well No. 2 is used solely to provide untreated water for
golf course irrigation and is not included in the potable water system. The
water system also has one hydropneumatic tank with a capacity of 20,000
gallons. Staff reviewed CHC’s sanitary survey report conducted by the DEP to
determine the Utility’s overall water facility compliance. A review of the
inspection conducted on September 16, 2021, indicated that CHC’s water
treatment facility is in compliance with the DEP’s rules and regulations.
CHC’s wastewater system consists of a permitted 0.176 million
gallons per day (MGD) per Three Month Average Daily Flow (3MADF) design capacity extended aeration domestic wastewater
treatment plant (WWTP) that provides secondary treatment with basic
disinfection. Staff reviewed the Utility’s compliance evaluation inspection
conducted by the DEP to determine the Utility’s overall wastewater facility
compliance. A review of the most recent inspection by DEP conducted on October
15, 2020, indicated that CHC’s wastewater treatment facility was in compliance
with the DEP’s rules and regulations. DEP is tentatively planning a compliance
evaluation inspection of the wastewater facility for the upcoming year.
Conclusion
CHC’s water and wastewater systems are currently in
compliance with the DEP.
Issue 3:
What are the used and useful (U&U) percentages
of the CHC VII, Ltd. water treatment plant (WTP), water distribution, WWTP, and
wastewater collection systems?
Recommendation:
CHC’s WTP, water distribution, WWTP, and wastewater
collection system should be considered 100 percent U&U. No adjustment is
recommended for excessive unaccounted for water (EUW) or excessive infiltration
and inflow (I&I). (Wooten)
Staff
Analysis:
CHC’s water system has one well for potable water, Well No. 1, which is rated at a total capacity
of 600 gpm. The raw water pumped from the well is treated with liquid chlorine,
which is injected prior to entry into the 20,000-gallon hydropneumatic tank. The treated water from the tank is then pumped into the water distribution system. The distribution system is a composite network consisting of approximately 9,060 linear
feet of 6-inch polyvinyl chloride (PVC)
pipe, 1,740 linear
feet of 4-inch
PVC pipe, and 8,760 linear
feet of 2-inch PVC pipe. The distribution system supports 40 fire hydrants.
The WWTP has a
DEP permitted capacity of 0.176 million MGD per 3MADF. The collection system is made up of approximately 28,105
linear feet of 8-inch PVC pipe. There are 84 brick manholes
throughout the wastewater collection system and seven lift stations.
Used and Useful (U&U)
Rule 25-30.432, F.A.C., addresses the method by which the
U&U of a wastewater system is determined, and Rule 25-30.4325, F.A.C.,
addresses the method by which the U&U of a water system is determined. In
the previous rate case, the
WTP, WWTP, water distribution and wastewater collections systems were determined
to be 100 percent U&U.
Water Treatment Plant
Pursuant to Rule 25-30.4325(4), F.A.C., a WTP is considered 100 percent used and
useful if the system is served by a
single well. Since the Utility’s
assets include only one potable well
and there has been no changes to the system, staff recommends the WTP should be
considered 100 percent U&U, which is consistent with the Commission’s
decision in the prior rate case.
Wastewater Treatment Plant
There has been no change in the service
area in the past five years and there are no plans for expansion; therefore,
consistent with the Commission’s previous order and pursuant to Rule 25-30.4325,
F.A.C., staff recommends a U&U of 100 percent for the WWTP.
Water Distribution
Because the
service territory the system is designed to serve was deemed fully built out
per the previous rate case and there is no potential for expansion, staff
recommends the water distribution system continues to be considered 100 percent
U&U.
Wastewater Collection
The service area had no growth in the past five years and
no change in capacity. Therefore, consistent with the prior Commission Order,
the wastewater collection system should be considered 100 percent U&U.
Excessive Unaccounted for Water
Rule
25-30.4325, F.A.C., provides additional factors to be considered when
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. When establishing the Rule, the Commission recognized that some uses of water
are readily measurable and others are not. The Commission allows
10 percent of unaccounted water for the uses of water that is not metered, which includes but is not limited to: line flushing;
hydrant testing; street
cleaning; and theft. The rule provides that to determine whether adjustments to operating expenses,
such as purchased electrical power
and chemicals cost are necessary,
the Commission will consider all relevant factors as to the reason for EUW, solutions implemented to correct the problem, or whether a proposed solution
is economically feasible.
The unaccounted for water is calculated by subtracting both the gallons
used for flushing
and the gallons sold to customers
during the test year from the total gallons
pumped during that same period. The
Monthly Operating Reports that the Utility files with DEP, indicates that the
Utility treated 56,025,000 gallons during the test year. In response to a staff
data request the Utility indicated that it purchased no water and used 339,000
gallons for other uses during the test year. According to the staff audit
report, the Utility sold 54,744,000 gallons of water for the test year. When
both the gallons sold and water used for other uses are subtracted from the
total gallons pumped there are 942,000 gallons or, 2 percent, that are
unaccounted for. Thus, CHC has no
excessive unaccounted for water for the test year.
Infiltration and Inflow (I&I)
Infiltration
typically results from groundwater entering a wastewater collection system
through broken or defective pipes and joints; whereas inflow results from water
entering a wastewater collection system through manholes or lift stations. The
allowance for infiltration is 500 gpd per inch diameter pipe per mile, and an
additional 10 percent of water sold is allowed for inflow. Rule 25-30.432,
F.A.C., provides that in determining the WWTP amount of U&U, the Commission
will consider I&I.
Since all wastewater collection systems experience
I&I, the conventions noted above provide guidance for determining whether
the I&I experienced at a WWTP is excessive. Staff calculates the allowable
infiltration based on system parameters, and calculates the allowable inflow
based on water billed to customers. The sum of these amounts is the allowable
I&I. Staff next calculates the estimated amount of wastewater returned from
customers. The estimated return is determined by summing 80 percent of the
water billed to residential customers with 90 percent of the water billed to
non-residential customers. Adding the estimated return to the allowable I&I
yields the maximum amount of wastewater that should be treated by the
wastewater system without incurring adjustments to operating expenses. If this
amount exceeds the actual amount treated, no adjustment is made. If it is less
than the gallons treated, then the difference is the excessive amount of
I&I.
From January 1, 2021, through December 31, 2021, the
allowance for infiltration was calculated as 7,771,458 gallons, and the
allowance for inflow was calculated as 5,474,400 gallons; therefore, the total
I&I allowance was calculated as 13,245,858 gallons. Based on staff’s audit,
the total water billed to residential customers was 40,267,000 gallons, and the
total water billed to general service customers was 1,397,000. Therefore, the
estimated amount of wastewater returned from customers was calculated as
33,470,900 gallons. Summing the estimated return and the allowable I&I
results in a maximum of 46,716,758 gallons of wastewater that should be treated
by the wastewater system without incurring adjustments to operating expenses.
Based on the Utility’s discharge monitoring reports, the actual amount of
wastewater treated during the test year was 14,955,000 gallons. Therefore,
there is no excessive I&I and no adjustment to purchased power and
chemicals are recommended.
Conclusion
CHC’s WTP, water distribution, WWTP, and wastewater
collection system should be considered 100 percent U&U. No adjustment is
recommended for EUW or excessive I&I.
Issue 4:
What is the appropriate average test year rate base
for CHC VII, Ltd.?
Recommendation:
The appropriate average test year rate base for CHC
VII, Ltd. is $337,885 for water and $312,012 for wastewater. (Richards, Wooten)
Staff
Analysis:
The appropriate components of the Utility’s rate
base include utility plant in service (UPIS), land and land rights, accumulated
depreciation, and working capital. CHC does not have any
contributions-in-aid-of-construction (CIAC). Staff selected the test year ended
December 31, 2021, for the instant rate case. Commission audit staff determined
that the Utility’s books and records are in compliance with the National Association
of Regulatory Utility Commissioners’ Uniform System of Accounts (NARUC USOA). A
summary of each component and the recommended adjustments are discussed below.
Utility
Plant in Service
The Utility recorded UPIS of $692,466 for water and
$760,130 for wastewater. There was an auditing adjustment increasing UPIS by
$10,110, and $20,669, for water and wastewater, respectively. Staff made an
adjustment decreasing UPIS by $4,225 for wastewater to reflect appropriate
plant retirements. Staff made adjustments decreasing UPIS by $375 for water and
wastewater to reflect the appropriate amounts in plant Accounts 341 and 391 –
Transportation Equipment. Staff increased wastewater UPIS by $875 to reflect
staff’s capitalization from operation and maintenance (O&M) account 620 for
a generator. Staff also decreased UPIS by $4,105 for water and $48,719 for
wastewater to reflect averaging adjustments.
Pro
Forma Plant Additions
Table 4-1 shows the pro-forma
plant projects requested by CHC. The
Handrails Replacement Project consists of replacing
entry stair handrails at the lift station that were rusted. Additionally, the
Utility identified damage to the previous lift station that could not be
repaired. Thus, a new lift station was necessary and the Utility moved forward with
its construction. The components of the new lift station include: new pumps and
control panels, concrete pole and panel installation, and install lift station.
The project consists of the purchase of the pumps, back-up pumps, control
panels, and installation of all components of the lift station. The Meter
Reading Equipment Upgrades Project consists of the Utility switching to new
meter reading software. According to the Utility, there are issues being
encountered in capturing all of the readings from the meters due to the reading
system being outdated and not functioning properly with the meters. These
issues would be resolved with the new meter reading software. Staff recommends that these pro forma project costs are
appropriate.
As is Commission practice, staff requested that three bids
be provided for each pro forma project. However, the Utility provided one bid
for each item. According to the Utility, multiple bids were sought for each
project; however the vendors that were ultimately selected were the only vendors
that were able to complete the work in a timely manner. Regarding the Electronic Meter Reading Equipment
Upgrades project, it is being completed by the same company that installed the
Utility’s water meters as they have familiarity with the meters and software. Staff
recommends that the pro forma project costs are appropriate.
Table 4-1
Pro Forma Plant Items
|
|
|
Water
|
Wastewater
|
|
Project
|
Additions
|
Ret.
|
Additions
|
Ret.
|
|
Acct. 334 – Meter Reading Equip. Upgrade
|
$3,611
|
($2,708)
|
$0
|
$0
|
|
Acct. 370 – Handrail Replacement
|
|
0
|
0
|
18,924
|
(14,193)
|
|
Acct. 370 – Install Lift Station
|
|
0
|
0
|
38,035
|
(28,526)
|
|
Acct. 370 – Concrete Pole & Panel Install
|
0
|
0
|
4,475
|
(3,356)
|
|
Acct. 370 – New Pumps & Control Panel
|
0
|
0
|
41,762
|
(31,322)
|
|
Total Pro Forma adjustments
|
$3,611
|
($2,708)
|
$103,196
|
($77,397)
|
Source: Responses to staff data requests.
As detailed above in Table 4-1, staff increased UPIS by
$3,611 for water and $103,196 for wastewater. These amounts were offset by
retirements of $2,708 and $77,397 for water and wastewater, respectively. Table
4-2 below summarizes staff’s adjustments to UPIS:
Table 4-2
Staff Adjustments to UPIS
|
Description
|
Water Adj.
|
Wastewater Adj.
|
|
To reflect auditing adjustments.
|
$10,110
|
$20,669
|
|
To reflect staff’s adj. to record appropriate plant
retirements.
|
0
|
(4,225)
|
|
To reflect appropriate transportation plant balance.
|
(375)
|
(375)
|
|
To reflect capitalization of generator.
|
0
|
875
|
|
To reflect averaging adjustments.
|
(4,105)
|
(48,719)
|
|
To reflect pro forma additions.
|
3,611
|
103,196
|
|
To reflect pro forma retirements.
|
(2,708)
|
(77,397)
|
|
Total adjustments to UPIS.
|
$6,533
|
($5,976)
|
Source: Responses to staff data requests.
As described above and summarized in Table 4-2, staff’s
adjustments to UPIS result in an increase of $6,533 for water and a decrease of
$5,976 for wastewater. Therefore, staff recommends an average UPIS balance of $698,999
($692,466 + $6,533) for water and $754,154 ($760,130 - $5,976) for wastewater.
Land and
Land Rights
The Utility recorded land and land rights balances of
$3,165 for water and $5,082 for wastewater. Staff made no adjustments to this
account, and therefore recommends land and land rights balances of $3,165 and
$5,082 for water and wastewater, respectively.
Used and
Useful
As previously discussed in Issue 3, the Utility’s systems
are considered 100 percent U&U. Therefore, no U&U adjustments are
necessary.
Accumulated
Depreciation
The Utility recorded an accumulated depreciation balance
of $409,243 for water and $517,954 for wastewater. Staff made auditing
adjustments decreasing accumulated depreciation for water by $11,604 and
increasing wastewater by $45,037. Staff also made an adjustment decreasing accumulated
depreciation by $4,225 for wastewater to reflect the appropriate amount of
plant retirements. Staff made further adjustments decreasing accumulated
depreciation by $230 for water and increasing accumulated depreciation by
$1,658 for wastewater to reflect the appropriate balances in plant Accounts 341
and 391 - Transportation Equipment. Additionally, staff increased accumulated
depreciation by $88 for wastewater to reflect the capitalizing of a generator.
Staff made adjustments decreasing accumulated depreciation for water by $13,656
and wastewater by $12,216 to reflect the appropriate averaging adjustments.
Finally, staff decreased accumulated depreciation by $2,655 for water and
$76,365 for wastewater for retirements related to pro forma additions. Staff’s
adjustments are summarized below in Table 4-3.
Table 4-3
Staff Adjustments to
Accumulated Depreciation
|
Description
|
Water Adj.
|
Wastewater Adj.
|
|
To reflect auditing adjustments.
|
$11,604
|
($45,037)
|
|
To reflect staff’s adj. to record appropriate plant
retirements.
|
0
|
4,225
|
|
To reflect appropriate transportation plant balances.
|
230
|
(1,658)
|
|
To reflect capitalization of generator.
|
0
|
(88)
|
|
To reflect averaging adjustments.
|
13,656
|
12,216
|
|
To reflect pro forma additions.
|
2,655
|
76,365
|
|
Total adjustments
to accumulated depreciation.
|
$28,145
|
$46,023
|
Source: Responses to staff data requests.
As described above and summarized in Table 4-3, staff’s
adjustments to accumulated depreciation result in a decrease of $28,145 for
water and $46,023 for wastewater. Therefore, staff recommends an average
accumulated depreciation balance of $381,098 ($409,243 - $28,145) for water and
$471,931 ($517,954 - $46,023) for wastewater.
Working
Capital Allowance
Working capital is defined as the short-term investor-supplied
funds that are necessary to meet operating expenses. Consistent with Rule
25-30.433(3), F.A.C., staff used the one-eighth O&M expense (less rate case
expense) formula for calculating the working capital allowance. Section
367.081(9), F.S., prohibits a utility from earning a return on the unamortized
balance of rate case expense. As such, for this calculation staff removed the
rate case expense balance of $1,326 for water and $1,311 wastewater. This
resulted in an adjusted O&M expense of $134,551 ($135,877 - $1,326) for
water and $197,658 ($198,969 - $1,311) for wastewater. Applying this formula,
staff recommends a working capital allowance of $16,819 ($134,551 ÷ 8) for
water and $24,707 ($197,658 ÷ 8) for wastewater.
Rate
Base Summary
Based on the foregoing, staff recommends that the
appropriate average test year rate base is $337,885 for water and $312,012 for
wastewater. Rate base is shown on Schedule Nos. 1-A and 1-B. The related
adjustments are shown on Schedule No. 1-C.
Issue 5:
What is the appropriate return on equity and overall
rate of return for CHC VII, Ltd.?
Recommendation:
The appropriate return on equity (ROE) is 10.45
percent with a range of 9.45 percent to 11.45 percent. The appropriate overall
rate of return is 3.48 percent. (Richards)
Staff
Analysis:
The Utility’s capital structure consists entirely of
long-term debt. Audit staff determined that no test year adjustments were necessary.
The Utility’s capital structure has been reconciled with staff’s recommended
rate base. The appropriate ROE is 10.45 percent based on the
Commission-approved leverage formula currently in effect.
Staff recommends an ROE of 10.45 percent with a range of 9.45 percent to 11.45
percent, and an overall rate of return on 3.48 percent. The ROE and overall
rate of return are shown on Schedule No. 2.
Issue 6:
What are the appropriate test year revenues for CHC
VII, Ltd.’s water and wastewater systems?
Recommendation:
The appropriate test year revenues for CHC’s water
system are $144,466 and $168,062 for the wastewater system. (Bruce)
Staff
Analysis:
CHC recorded test year revenues of $144,438 for
water and $168,182 for wastewater. The Utility did not record any miscellaneous
revenues during the test year. To determine the appropriate service revenues
for water and wastewater, staff applied the number of billing determinants to
the Utility’s existing rates. As a result, staff determined that service
revenues for water should be $144,466, which is an increase of $28. For
wastewater service, staff determined service revenues should be $168,062, which
is a decrease of $120. Based on the above, staff recommends the appropriate
test year revenues for CHC’s water and wastewater systems are $144,466 and
$168,062, respectively.
Issue 7:
What is the appropriate operating expense for CHC
VII, Ltd.?
Recommendation:
The appropriate amount of operating expense for CHC
VII, Ltd. is $172,805 for water and $248,384 for wastewater. (Richards, Wooten)
Staff
Analysis:
The Utility recorded operating expense of $171,178
for water and $226,530 for wastewater. The test year O&M expenses have been
reviewed by staff, including invoices and other supporting documentation. Staff
has made several adjustments to the Utility’s operating expenses which are described
below.
Operation
and Maintenance Expense
After review of the Utility’s records, staff made no
adjustments to the Utility’s recorded amounts to Sludge Removal (711),
Purchased Power (615 / 715), and Chemicals expense (618 / 718). Staff’s
recommended balances for these accounts are shown on Schedule No. 3-D and 3-E.
Salaries
and Wages – Employees (601 / 701)
The Utility recorded salaries and wages – employees
expense of $78,181 for water and $74,800 for wastewater. Staff reviewed the Utility’s
response to Staff’s Second Data Request containing salary information on a per
employee basis and the audited employee responsibilities and duties. The
Utility does not employ its own staff and is operated and managed by employees
of Mobile Home Lifestyles, Inc. and Realco Properties, Inc. The Utility’s
salary expenses are allocated by the percentage of time the employees spend
working on water and wastewater utility matters. The Utility shares a full-time
wastewater operator and engineer with four other sister water and wastewater
utilities. Staff reviewed the employee allocations and salaries and believe
they are reasonable. Therefore staff recommends salaries and wages – employees
expense of $78,181 for water and $74,800 for wastewater.
Materials
and Supplies (620 / 720)
The Utility recorded materials and supplies expense of
$7,566 for water and $9,708 for wastewater. Staff reduced materials and
supplies for wastewater by $875 to reflect capitalizing a generator. Staff made
no adjustments to the water expense. Therefore, staff recommends materials and
supplies expense of $7,566 for water and $8,833 ($9,708 - $875) for wastewater.
Contractual
Services – Professional (631 / 731)
The Utility recorded contractual services – professional
expense of $1,777 for water and $5,275 for wastewater. Staff increased this
amount for wastewater by $2,875 to reflect an auditing adjustment to include a
missing invoice. Staff made no adjustments to the water balance. Therefore,
staff recommends contractual services – professional expense of $1,777 for
water and $8,150 ($5,275 + $2,875) for wastewater.
Contractual
Services – Testing (635 / 735)
The Utility recorded contractual services – testing
expense of $3,840 for water and $1,742 for wastewater. Staff decreased this
account by $1,400 for water to reflect the appropriate annual expense
associated with triennial testing. Staff made no adjustments to the wastewater
balance. Therefore, staff recommends contractual services – testing expense of
$2,440 ($3,840 - $1,400) for water and $1,742 for wastewater.
Contractual
Services – Other (636 / 736)
The Utility recorded contractual services – other expense
of $16,532 for water and $53,352 for wastewater. Staff decreased contractual
services – other by $171 to reflect removal of a duplicate invoice. Staff made
an additional adjustment decreasing this account by $560 to reclassify Florida Rural
Water Association (FRWA) membership costs to O&M Account 675.
The Utility requested one O&M pro forma project: to
have the interior of its water tanks coated. The water tank is required to be
inspected by DEP every five years, and coated as needed based on the results of
the inspection. During the most recent inspection, it was determined that the
interior of the water tank required a new coating. The Utility sought multiple
bids; but, obtained one bid because only one vendor would bid the project. This
project is anticipated to cost $8,000 and is scheduled to be completed by the
end of 2022. Based on the above, staff recommends the cost of coating the
interior of the water tanks be amortized over five years. Staff increased
contractual services – other by $1,600 to reflect the requested pro forma
project amortized over five years ($8,000 ÷ 5 years).
Staff made no adjustments to this account for wastewater.
Therefore, staff recommends contractual services – other expense of $17,400
($16,532 - $171 - $560 + $1,600) for water and $53,352 for wastewater.
Transportation
Expense (650 / 750)
The Utility recorded transportation expense of $10,540 for
water and $8,728 for wastewater. Staff reduced this amount by $3,983 for water
and $3,354 for wastewater to reflect audit adjustments to capitalize vehicle investments.
Therefore, staff recommends transportation expense of $6,557 ($10,540 - $3,983)
for water and $5,374 ($8,728 - $3,354) for wastewater.
Insurance
Expense (655 / 755)
The Utility recorded insurance expense of $3,473 for both
water and wastewater. Staff increased these amounts each by $172 to reflect the
insurance premiums for the upcoming year. Therefore, staff recommends insurance
expense of $3,645 ($3,473 + $172) for water and $3,645 ($3,473 + $172) for
wastewater.
Rate
Case Expense (665 / 765)
The Utility did not record any rate case expense. The
Utility is required by Rule 25-22.0407, F.A.C., to mail notices containing the
rate case overview, final rates, and four-year rate reduction. Because of the
rescheduling of the customer meeting due to Hurricane Ian, the Utility was
required to mail out a second rate case overview along with notices for the new
customer meeting. Staff calculated noticing costs to be $3,734. In
correspondence with staff, the Utility advised two representatives will be
present at the Commission Conference.
Staff calculated the round-trip distance from the Utility to Tallahassee as 486
miles. Based on the 2022 IRS business mileage rate of $0.625, staff calculated travel
and lodging expense for both representatives of $1,008. As the Utility is
scheduled to have three sister utilities participate in the December 6, 2022
Commission Conference, staff equally divided the total travel and lodging
amount of $1,008 amongst the four. As such, in the instant docket, staff
recommends travel and lodging of $252 ($1,008 ÷ 4).
The Utility retained the legal services of Dean Mead. On
September 21, 2022, the Utility provided staff with a schedule of actual and
estimated rate case expense. In
its schedule, the Utility indicated actual legal fees of $273, in addition to
estimated legal fees of $4,290. Staff believes these fees are reasonable and in
line with previous dockets represented by Dean Mead. Additionally, the Utility
paid a filing fee of $1,000 for water and $1,000 for wastewater.
Staff calculated the total amount of noticing costs,
travel expenses and legal fees of $8,549 ($3,734 + $252 + $4,290). Staff
allocated these costs between water and wastewater based on the number of ERCs,
which totaled $4,306 for water and $4,243 for wastewater. In addition to the
$1,000 filing fee for each system, staff recommends total rate case expense of
$5,306 for water and $5,242 for wastewater, which amortized over four years is
$1,326 and $1,311 for water and wastewater, respectively.
Bad
Debt Expense (670 / 770)
The Utility recorded bad debt expense of $760 for water
and $828 for wastewater for the test year. Staff notes that it is Commission
practice to calculate bad debt expense using a three-year average when the
information is available. In
its three most recent Annual Reports for 2021, 2020 and 2019, the Utility
recorded bad debt expense of $760, $323 and $330 for water, and $113, $60 and $115
for wastewater. This represents a decrease of $289 for water and $725 for
wastewater. Therefore, staff recommends bad debt expense of $470 ($760 - $289)
for water and $103 ($828 - $725) for wastewater.
Miscellaneous
Expense (675 / 775)
The Utility recorded miscellaneous expense of $2,243 for
water. There was no miscellaneous expense recorded for wastewater. Staff
increased miscellaneous expense by $560 to reflect the reclassified expense
from O&M Account 636 for FRWA membership. Therefore, staff recommends
miscellaneous expense for water of $2,803 ($2,243 + $560).
Operation
and Maintenance Expense Summary
The Utility recorded test year O&M expense of $138,622
for water and $199,565 for wastewater. Based on the above adjustments, staff recommends
the O&M expense be decreased for water by $2,744 and $597 for wastewater.
This results in total O&M expense of $135,877 ($138,622 - $2,744) for water
and $198,969 ($199,565 - $597) for wastewater. Staff’s recommended adjustments
to O&M are shown on Schedule Nos. 3-D and 3-E.
Depreciation
Expense
The Utility recorded depreciation expense of $24,810 for
water and $17,393 for wastewater. Using the depreciation rates prescribed in
Rule 25-30.140, F.A.C., staff increased these amounts by $2,563 for water and
$14,075 for wastewater to reflect an auditing adjustment. Staff increased
depreciation by $2,878 for wastewater to reflect appropriate plant retirements.
Staff further decreased depreciation expense by $62 for water and wastewater to
reflect the appropriate depreciation to plant Accounts 341 and 391 -
Transportation Equipment. Staff increased depreciation expense for wastewater
by $88 due to the capitalization adjustment to UPIS. Additionally, staff
increased depreciation expense by $53 for water and $1,032 for wastewater due
to pro forma adjustments. These adjustments result in an increase to
depreciation of $2,554 ($2,563 - $62 + $53) for water and an increase of $18,011
($14,075 + $2,878 - $62 + $88 + $1,032) for wastewater. Therefore, staff recommends
depreciation expense of $27,364 ($24,810 + $2,554) for water and $35,404
($17,393 + $18,011) for wastewater.
Taxes
Other Than Income (TOTI)
The Utility recorded TOTI of $7,747 for water and $9,571
for wastewater. Staff increased TOTI by $417 and $12 for water and wastewater,
respectively, due to an audit adjustment. Staff decreased TOTI by $415 for
water and $18 for wastewater to reflect the appropriate regulatory assessment
fees (RAFs) based on adjusted Utility test year revenues. Additionally, staff
increased TOTI by $12 for water and $342 for wastewater to reflect property
taxes associated with pro forma additions. These adjustments result in a test
year TOTI increase of $13 ($417 - $415 + $12) for water and $337 ($12 - $18 +
$342) for wastewater.
As discussed in Issue 9, staff recommends revenues be
increased by $40,098 for water and $91,180 for wastewater 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 $1,804
for water and $4,103 for wastewater to reflect RAFs of 4.5 percent of the
change in revenues. Therefore, staff recommends TOTI of $9,564 ($7,747 + $13 +
$1,804) for water and $14,011 ($9,571 + $337 + $4,103) for wastewater.
Operating
Expense Summary
The Utility recorded operating expenses of $171,178 for
water and $226,530 for wastewater. The application of staff’s recommended
adjustments to the Utility’s operating expense result in a total operating
expense of $172,805 for water and $248,384 for wastewater. Operating expenses
are shown on Schedule Nos. 3-A and 3-B, and the related adjustments are shown
on Schedule No. 3-C.
Issue 8:
Does CHC VII, Ltd. meet the criteria for application
of the operating ratio methodology?
Recommendation:
No. CHC VII, Ltd. does not meet the requirement for
application of the operating ratio methodology for calculating the revenue requirement
(Richards)
Staff
Analysis:
Rule 25-30.4575(2), F.A.C., provides that, in rate
cases processed under Rule 25-30.455, F.A.C., the Commission will use the
operating ratio methodology to establish the Utility’s revenue requirement when
its rate base is not greater than 125 percent of O&M expenses, less rate
case expense, and the use of the operating ratio methodology does not change
the Utility’s qualification for a SARC.
With respect to CHC VII, Ltd., staff has recommended a
rate base of $337,885 for water and $312,012 for wastewater. After removal of
rate case expense, staff has calculated an O&M expense of $134,551 ($135,877
- $1,326) for water and $197,658 ($198,969 - $1,311) for wastewater. Based on
staff’s recommended amounts, the Utility’s rate base is 251 percent of its
adjusted O&M expense for water, and 158 percent of its adjusted O&M
expense for wastewater. Based on these ratios, the Utility does not qualify for
application of the operating ratio methodology.
Issue 9:
What is the appropriate revenue requirement for CHC
VII, Ltd.?
Recommendation:
The appropriate revenue requirement is $184,564 for
water, resulting in an annual increase of $40,098 (27.76 percent). The
appropriate revenue requirement for wastewater is $259,242, resulting in an
annual increase of $91,180 (54.25 percent). (Richards)
Staff
Analysis:
CHC should be allowed an annual increase of $40,098
(27.76 percent) for water and $91,180 (54.25 percent) for wastewater. This
should allow the Utility the opportunity to recover expenses and earn a 3.48
percent return on rate base for water and wastewater. The calculations for
water are shown in Table 9-1, and for wastewater in Table 9-2.
Table 9-1
Water Revenue Requirement
|
Water Rate Base
|
$337,885
|
|
Rate of Return
|
3.48%
|
|
Return on Rate Base
|
$11,758
|
|
Water O&M Expense
|
135,877
|
|
Depreciation Expense
|
27,364
|
|
Taxes Other Than Income
|
9,564
|
|
Revenue Requirement
|
$184,564
|
|
Less Test Year Revenues
|
$144,466
|
|
Annual Increase / (Decrease)
|
$40,098
|
|
Percent Increase / (Decrease)
|
27.76%
|
Source:
Staff calculations.
Table 9-2
Wastewater Revenue
Requirement
|
Wastewater Rate Base
|
$312,012
|
|
Rate of Return
|
3.48%
|
|
Return on Rate Base
|
$10,858
|
|
Wastewater O&M Expense
|
198,969
|
|
Depreciation Expense
|
35,404
|
|
Taxes Other Than Income
|
14,011
|
|
Revenue Requirement
|
$259,242
|
|
Less Test Year Revenues
|
$168,062
|
|
Annual Increase / (Decrease)
|
$91,180
|
|
Percent Increase / (Decrease)
|
54.25%
|
Source:
Staff calculations.
Issue 10:
What are the appropriate rate structures and rates
for CHC VII, Ltd.’s water and wastewater systems?
Recommendation:
The recommended rate structures and monthly water
and wastewater rates are shown on Schedule Nos. 4-A and 4-B, respectively. 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. (Bruce)
Staff
Analysis:
Water Rates
CHC is located in Polk County
within the SWFWMD. The Utility provides water service to 873 residential
customers and 10 general service customers and 6 irrigation customers. A review
of the billing data indicates approximately 11 percent of the residential
customer bills during the test year had zero gallons, which indicates a
non-seasonal customer base. According to the Utility, however, the customer
base is seasonal and while customers are out of residence, these customers are
required to have irrigation systems on timers. The average residential water
demand was 4,750 gallons per month during the test period. The average water
demand, excluding zero gallons bills, was 5,352 gallons per month.
CHC’s current rate structure
consists of a monthly base facility charge (BFC) and a two-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) 0-5,000 gallons; (2) all usage in excess of 5,000 gallons per month. The general
service and irrigation customers rate structure consists of a monthly BFC and a
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.
In this case, staff recommends
that 40 percent of the water revenue be generated from the BFC, which will
provide sufficient revenues to design gallonage charges that send pricing
signals to customers using above the non-discretionary level. The average
people per household served by the water system is 3; therefore, based on the
number of people per household, 50 gallons per day per person, and the number
of days per month, the non-discretionary usage threshold should be 5,000
gallons per month.[11] Staff’s
review of the billing analysis indicates that the discretionary usage above 5,000
gallons represents 36 percent of the bills, which account for approximately 35
percent of the water demand. This is considered moderately high discretionary
usage for this customer base.
For this case, staff recommends a
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) 0-5,000 gallons; (2) 5,001-10,000
gallons; (3) all usage in excess of 10,000 gallons per month. This rate
structure sends the appropriate pricing signals because it targets customers
with high consumption levels and minimizes price increases for customers at
non-discretionary levels. In addition, the third tier provides an additional
pricing signal to customers using in excess of 10,000 gallons of water per
month, which represents approximately 13 percent of the usage. General service and
irrigation customers should be billed a BFC and a gallonage charge.
Based on
staff’s recommended revenue increase of 27.8 percent, the residential
consumption can be expected to decline by 2,174,000 gallons resulting in
anticipated average residential demand of 4,543 gallons per month. Staff
recommends a 4.4 percent reduction in test year residential gallons for rate setting
purposes. As a result, the corresponding reductions are $257 for purchased
power expense, $269 for chemical expense, and $25 for RAFs to reflect the
anticipated repression, which results in a post repression revenue requirement
of $184,013.
Wastewater Rates
The Utility provides wastewater
service to 873 residential customers and 3 general service customers.
Currently, the residential wastewater rate structure consists of a uniform BFC
for all meter sizes and a gallonage charge with a 8,000 gallonage cap. The
general service rate structure consists of a uniform BFC for all meter sizes
and a gallonage charge that is 1.2 times higher than the residential gallonage
charge.
Staff
performed an analysis of the Utility’s billing data to evaluate various BFC cost
recovery percentages and gallonage caps for the residential 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; and (3) implement a gallonage cap that considers
approximately the amount of water that may return to the wastewater system.
Consistent
with Commission practice, staff allocated 50 percent of the wastewater revenue
to the BFC due to the capital intensive nature of wastewater plants. CHC’s
current residential wastewater cap is 8,000 gallons per month. The wastewater
gallonage cap recognizes that not all water used by the residential customers
is returned to the wastewater system. It is Commission practice to set the
wastewater cap at approximately 80 percent of residential water sold. Based on
staff’s review of the billing analysis, approximately 80 percent of the
residential gallons are captured at the 8,000 gallon consumption level. For
this reason, staff recommends a continuation of the Utility’s current gallonage
cap of 8,000 gallons per month.
General
service customers should continue to be billed a BFC by meter size and a
gallonage charge that is 1.2 times higher than the residential gallonage
charge. Staff evaluates wastewater repression between the non-discretionary
threshold (5,000 gallons) and the wastewater gallonage cap (8,000 gallons).
Between those two levels, the expected wastewater repression is de minimis. Therefore,
staff does not recommend a repression adjustment for wastewater.
Conclusion
Based on the above, the recommended rate structures and
monthly water and wastewater rates are shown on Schedule Nos. 4-A and 4-B,
respectively. 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
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 11:
What is the appropriate amount by which rates should
be reduced four years after the published effective date to reflect removal of
the amortized rate case expense?
Recommendation:
The rates should be reduced as shown on Schedule No.
4, to remove rate case expense grossed-up for RAFs and amortized over a
four-year period. Pursuant to Section 367.081(8), F.S., the decrease in rates
should become effective immediately following the expiration of the rate case
expense recovery period. CHC should be required to file revised tariffs and a
proposed customer notice setting forth the lower rates and rationale no later
than one month prior to the effective date of the new rates. If the Utility
files revised tariffs reflecting 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 and the reduction in the rates due to
the amortized rate case expense. (Procedural Agency Action) (Bruce, Richards)
Staff
Analysis:
Section 367.081(8), F.S.,
requires that the rates be reduced by the amount of the rate case expense
previously included in rates immediately following the expiration of the
recovery period. With respect to CHC, the reduction will reflect the removal of
revenue associated with the amortization of rate case expense and the gross-up
for RAFs. The total reduction is $1,389 for water and $1,372 for wastewater.
Staff recommends that the rates should be reduced as shown
on Schedule No. 4, to remove rate case expense grossed-up for RAFs and
amortized over a four-year period. Pursuant to Section 367.081(8), F.S., the
decrease in rates should become effective immediately following the expiration
of the rate case expense recovery period. CHC should be required to file
revised tariffs and a proposed customer notice setting forth the lower rates
and rationale no later than one month prior to the effective date of the new rates.
If the Utility files revised tariffs reflecting 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 and the reduction in the
rates due to the amortized rate case expense.
Issue 12:
Should the recommended rates be approved for CHC
VII, Ltd. on a temporary basis, subject to refund with interest, in the event
of a protest filed by a party other than the Utility?
Recommendation:
Yes. Pursuant to Section 367.0814(7), F.S., the
recommended rates should be approved for the Utility on a temporary basis,
subject to refund with interest, in the event of a protest filed by a party
other than the utility. CHC should file revised tariff sheets and a proposed
customer notice reflecting the Commission-approved rates. The approved rates
should be effective for services 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. Further, prior to
implementing any temporary rates, the Utility should provide appropriate
financial 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’s Office of Commission Clerk no
later than the 20th of each month indicating both the current monthly and total
amount 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. (Procedural Agency Action) (Richards)
Staff
Analysis:
This recommendation proposes an increase in rates. A
timely protest might delay a 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 proposed rates be approved on a temporary basis. CHC should
file revised tariff sheets and a proposed customer notice reflecting 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 it has been
received by the customers. The additional revenue produced by staff’s
recommended rates and collected by the utility should be subject to the refund
provisions discussed below.
CHC should be authorized to initiate the temporary rates
upon staff’s approval of an appropriate security for the potential refund and
cost of the proposed customer notice. Security should be in the form of either
a bond or letter of credit in the amount of $89,315. Alternatively, the Utility
may establish an escrow agreement with an independent financial institution.
If the utility chooses a bond for securing the potential
refund, 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 for securing the
potential refund, the letter of credit 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. This 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 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.
Issue 13:
Should CHC VII, Ltd. be required to notify the
Commission within 90 days of an effective order finalizing this docket, that it
has adjusted its books for all the applicable National Association of
Regulatory Utility Commissioners (NARUC) Uniform System of Accounts?
Recommendation:
Yes. CHC should be required to notify the
Commission, in writing, that it has adjusted its books in accordance with the
Commission’s decision. CHC should submit a letter within 90 days of the
Commission’s final order in this docket, confirming that the adjustments to all
applicable NARUC USOA primary accounts have been made to the Utility’s books
and records. In the event the Utility needs additional time to complete the
adjustments, a notice providing good cause should be filed not less than seven
days prior to the deadline. Upon providing a notice of good cause, staff should
be given administrative authority to grant an extension of up to 60 days.
(Richards)
Staff Analysis:
CHC should be required to notify the Commission, in
writing, that it has adjusted its books in accordance with the Commission’s
decision. CHC should submit a letter within 90 days of the Commission’s final
order in this docket, confirming that the adjustments to all the applicable
NARUC USOA primary accounts have been made to the Utility’s books and records.
In the event the Utility needs additional time to complete the adjustments, a
notice providing good cause should be filed not less than seven days prior to
the deadline. Upon providing a notice of good cause, staff should be given
administrative authority to grant an extension of up to 60 days.
Issue 14:
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. Once these actions are complete, this docket should be closed
administratively. (Jones)
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. Once these actions are complete, this docket should be closed
administratively.
