Discussion
of Issues
Issue 1:
Should the Commission propose the amendment of Rule
25-30.0371, F.A.C., Acquisition Adjustments?
Recommendation:
Yes. The
Commission should propose the amendment of Rule 25-30.0371, F.A.C.,
as set forth in Attachment A. The
Commission should certify the rule as a minor violation rule. (Sunshine, Cicchetti,
Guffey)
Staff Analysis:
The purpose of this rulemaking is to amend Rule
25-30.0371, F.A.C., to update and clarify the rule. Based upon stakeholder
responses and comments received at and from the workshops to
examine the Commission’s regulatory policies and practices in the water
and wastewater industries in Florida, staff recommends the Commission propose
the amendment of Rule 25-30.0371, F.A.C., as set forth in Attachment A. Staff is recommending a substantial revision
of the current rule.
The proposed amendments to the rule provide greater
regulatory certainty and clarity to the acquisition adjustment process. This includes establishing separate
regulatory pathways for utilities to seek approval of a positive acquisition
adjustment that are dependent upon the condition of the utility to be acquired. Regulatory requirements for a “non-viable”
utility mimic the traditional purpose of the rule, to incentivize the
acquisition of “troubled systems” that are in financial distress or unable to
provide safe service. In addition, the
rule amendments also provide an additional pathway for a positive acquisition
adjustment if a utility seeks to acquire a “viable” system that is otherwise
providing safe service and is in a financially healthy position if the
acquisition results in net economic and quality of service benefits to
customers.
The recommended rule amendments provide necessary
definitions to effectuate these new processes for viable and non-viable
utilities; establish when an acquiring utility may petition the Commission to receive
an acquisition adjustment; when and under what circumstances an acquisition
adjustment will be allowed for the acquisition of either a viable or non-viable
utility; enumerate the required contents of a petition; delineate the factors
the Commission will consider in determining whether to allow an acquisition
adjustment; determine when the amortization period for an acquisition
adjustment will begin; confirm the Commission’s existing authority to review an
acquisition adjustment; establish that a negative acquisition adjustment will
no longer be included in rate base; and provide a necessary notice provision to
ensure customers of the acquiring utility and the acquired utility are made
aware of the filing of a petition for an acquisition adjustment and advised
that they may file a motion to intervene in any proceeding on the petition.
Below is a detailed explanation of each section of staff’s
recommended rule amendments, including stakeholder comments on the specific draft
rule provisions.
Subsection (1) – Definitions
This
subsection provides specific definitions for the terms “acquisition
adjustment,” “positive acquisition adjustment,” and “negative acquisition
adjustment.” Staff also recommends adding a definition for “good cause,” which will
clarify when a utility may be granted an extension of the 3-year period to
petition for an acquisition adjustment as provided in subsection (3) and (4) of
the amended rule.
Of
particular note are staff’s recommended definitions of “non-viable utility” and
“viable utility” in paragraphs (1)(e) and (f) of the draft rule, which set
forth the status of an acquired utility for purposes of determining which
process an acquiring utility must follow when petitioning the Commission for an
acquisition adjustment, with acquisition of a “non-viable utility” following
the requirements of subsection (3) of the draft rule and a “viable utility”
following the requirements of subsection (4) of the draft rule.
A
“non-viable utility,” as defined, means a utility that is either: (1) currently
unable, or is projected to be unable, to provide and maintain safe, adequate,
and reliable service and facilities to its customers within the next 5 years
due to a history of enforcement or compliance actions by regulatory agencies
based on violations of primary, or exceedance of secondary, water quality
standards or other health, safety, and environmental standards; and
insufficient investment, repair, or maintenance of assets or an inability to
acquire and maintain adequate managerial, operational, financial, or technical
capabilities to ensure safe and reliable service to its customers; or (2) is
insolvent, meaning it is unable to pay its debts. A “viable utility,” is defined as all
utilities that are not non-viable.
Stakeholder Comments
The inclusion of secondary water quality standards,
as well as utility insolvency, within the definition of “non-viable utility,”
as provided in subparagraphs (1)(e)1.a. and 2., were discussed at the workshops
and raised in post-workshop comments.
Inclusion of Secondary Water Quality
Standards
OPC asserted secondary
water quality standards should not be included in the definition of “non-viable
utility,” as there are no Commission orders actually revoking a utility’s
certificate due to secondary water quality standards, which OPC believes will result
in the unintended consequence of classifying otherwise viable utilities as
non-viable utilities and thereby lowering the burden of proof for a positive
acquisition adjustment. OPC additionally
commented it could support the addition of secondary water quality
violations to the definition of a non-viable utility by tying secondary
standards to those which interfere with the customer’s ordinary use and
enjoyment of water service such as black water or sulfur taste, which are the
same standards considered by the Commission for return on equity adjustments in
the rate-setting process.”
CSWR, in response, stated whether the
Commission has ever revoked a utility’s certificate for failing to comply with
secondary water standards has no relevance to whether that criteria should be
removed given that compliance with secondary standards is an element to be
considered in fixing rates, and a failure to comply with those standards is
indicative of a non-viable utility because it is unable to provide safe and
reliable service.
SWS, in response to the definition for
“non-viable utility,” suggested “in addition to primary water quality
standards, the Commission should consider secondary quality standards as
required or ordered by the Commission or an appropriate agency, and applicable
wastewater or other environmental and safety standards. This treatment aligns
with the treatment of water utilities during a rate case.”
Staff recommends inclusion of secondary
water standards within the definition of “non-viable utility,” as it aligns
with the treatment of water utilities during a rate case and certain utilities
may lack the resources to adequately address secondary water quality standards. OPC’s suggestion for the amended rule to be
more explicit in the description of secondary standards is not necessary and
may actually detract from compliance with all secondary water quality
standards.
Definition of Insolvent Utilities
Regarding insolvent utilities, OPC suggested
the inclusion of the phrase “or with the financial assistance of its
parent company” after the word “utility,” as there are several small utilities
that reflect net operating losses on their annual reports on a standalone basis
and/or their parent is the only reason the utilities are able to pay all their
debts and make plant improvements.
Additionally, OPC recommends “the rule should include an objective
measure for determining whether the acquired utility is insolvent or unable to
service its debt obligations, such as a debt service coverage ratio of less
than 1 or some other certain level or measure. This change would ensure that
financial distress to the owners of the acquired utility was real and not just
a matter of the way books are kept.”
CSWR, in response, states “[w]hether there is a parent
that can provide financial support does not change the fact that the utility is
operating in an unsustainable manner because it cannot meet the financial
obligations attendant to providing utility service.”
Staff agrees with CSWR and recommends approval of the rule
language in subsections (1), which defines one of the two means of establishing
when a utility is non-viable, i.e., a utility that is insolvent or unable to
service its debt. OPC’s suggestion of
incorporating a more explicit definition of insolvency such as a debt service coverage
ratio of less than 1 is not recommended because it is just one of potentially
many factors that may need to be considered depending on the circumstances.
Subsection (2) - Petition
This subsection provides the process by which a
water or wastewater utility may petition the Commission to establish an
acquisition adjustment, for either a viable or non-viable utility, to include
some or all of a positive acquisition adjustment in the acquired utility’s rate
base; provides that an acquiring utility may seek such approval at the time of transfer
of the certificate of authorization or anytime within 3 years from Commission’s
transfer order; authorizes a utility to request an extension of the 3-year
period for good cause; and provides the petition may be made as a separate
filing or as part of a rate proceeding.
Stakeholder Comments
OPC suggested the 3-year time period should not
be included, reasoning “the customers of the utility deserve to know how
their rates will change due to a positive acquisition adjustment at the time of
transfer, and that the customers’ point of entry to object to a transfer is
when the transfer is before the Commission for approval, not at a future time.” OPC further reasoned “there is potential risk
exposure to customers by not addressing an acquisition at the time of the
transfer. If the acquiring utility is later denied a portion or all of its
requested positive acquisition adjustment, it could result in a utility
management decision to divest the acquired assets and/or delay planned plant
improvements, leaving captive customers in limbo and creating the opposite
effect of worsening service.” Lastly,
OPC suggested the acquiring utility be required to submit its petition in
conjunction with its transfer application.
CSWR stated an acquiring utility should have the option of
filing a request for an acquisition adjustment at the time of transfer or at a
later date after the approval of the transfer, believing that a utility should
have the opportunity to operate a system for a period of time after closing to
identify needed improvements and to present a more complete picture of the
benefits to be realized by the acquisition, adding that allowing a request for
an acquisition adjustment to be made after a transfer does not harm customers
who will still have the ability to object to an acquisition adjustment when a
utility files a request for an adjustment.
SWS stated the timing of application for an
acquisition adjustment being limited to 3 years from the transfer is an
arbitrary and unnecessary structure that could add to the regulatory burden of
the parties to the extent that requiring a filing by a certain date, as opposed
to the preferred timing of inclusion in a subsequent base rate case, does not
support administrative efficiency and the more natural demonstration of
benefits based on evidence available and commonly presented in a ratemaking
proceeding. However, nothing in the
amended rule prevents a utility from filing its petition as a part of a rate
case proceeding within 3 years of the transfer.
Staff agrees with the rationale of CSWR
which supports a reasonable timeframe to seek an acquisition adjustment after
the time of transfer. The acquiring
utility should have the flexibility to submit its petition at the time
of transfer or anytime within 3 years thereafter as three years is a reasonable
time for the utility to operate the acquired system after transfer and closing
and identify needed improvements to present
a more accurate and complete picture of the benefits to be realized from the
acquisition. Three years is also appropriate because data tends to get stale
after 3 years. OPC’s concern of
potential exposure to customers if an acquisition is not addressed at the time
of transfer is without merit as the recommended rule language requires the
acquiring utility to provide notice to customers in advance of the proceeding
considering the inclusion of an acquisition adjustment. In addition, the
recommended rule requires a CPVRR analysis to support the projected 5-year rate
impact on customers in the case of the acquisition of viable systems. Finally,
the recommended rule codifies the Commission’s existing authority to review and
prospectively reduce or remove a positive acquisition adjustment if the
Commission finds that customer benefits did not materialize or subsequently
changed within 5 years of the order approving the acquisition adjustment.
Subsection (3) – Positive Acquisition
Adjustments for Non-Viable Utility
This subsection sets forth factors the Commission will
consider for a utility to be allowed a full or partial positive acquisition
adjustment for a non-viable utility; factors considered in determining whether
an acquired utility’s customers benefit; and the information the acquiring
utility must file in its petition for a positive acquisition adjustment. It should be noted that a utility is not
required to meet all of the factors enumerated in paragraph (3)(a); rather, the
rule simply sets out the specific factors the Commission will consider in
determining whether the acquired utility customers benefit and give whatever
weight it believes is appropriate to the factors based on the record of the
hearing.
Paragraph (3)(b) of the draft rule encompasses what
information staff believes should be contained in the utility’s petition for an
acquisition adjustment for a non-viable utility. Staff has crafted the language in paragraph
(3)(b) to align with the factors in paragraph (3)(a), which the Commission will
consider in determining whether the acquired utility customers benefit from the
requested acquisition adjustment. Staff
recommends the information the utility must file with its petition include:
·
the amount of acquisition adjustment and
amortization period requested;
·
how acquisition was part of an arms-length transaction;
·
the contract of sale, estimated cost of fees,
and closing costs;
·
calculation of book value and composite
remaining life of assets purchased;
·
whether acquired utility is solvent; description
of acquiring utility’s managerial, operational, financial, or technical
capabilities to furnish and maintain safe and adequate service and facilities
over the next 5 years;
·
any regulatory actions issued by governmental
agencies regarding provision of acquired
utility’s service(s) over the past 5 years;
·
acquired utility’s annual capital investments
and operations and maintenance expenses over the past 5 years;
·
5-year projected impact on cost of service to
acquired utility customers;
·
any planned infrastructure additions and
maintenance to improve acquired utility’s quality of service or compliance with
environmental regulations;
·
any engineering studies or appraisals done
regarding the purchase; and
·
how the acquiring utility has greater access to
capital than the acquired utility, if applicable.
Stakeholder Comments
This subsection was debated by the stakeholders at the
workshops and in post-workshop comments. OPC stated the recommended rule
removes the longstanding “extraordinary circumstances” and “negative
acquisition adjustment” policies, which it says were designed to balance all of
the provisions of the public interest, suggesting that if those previous lines
of safeguard protections for customers are removed, the rule must be modified
in a way that places fair and equitable surrogate safeguards for customers of
both viable and non-viable utilities purchased by acquiring utilities.
OPC opposes the proposed rule because it fails to provide
customer safeguards and creates an incentive for acquiring utilities to
willfully grow their rate base through acquisitions via premium purchase prices
above net book values (“NBV”) that would serve to economically enrich utility
shareholders on the backs of captive utility customers through increased rates
in the future, despite the purported non-economic qualitative benefits that
customers would be receiving from the acquiring utility.
OPC asserts that Florida is an original cost state, and the rule appears to move Florida away from cost-based
regulation to a form of market-based regulation, without any discernable
guidelines, solely for the benefit of acquiring utilities. The rule thus
unfairly discriminates against existing regulated utilities who are fulfilling
their part of the compact and already providing satisfactory quality of service
to their customers.
SWS disagreed with OPC, arguing that
its comments do not address or provide practical solutions for the very real
concern that struggling utilities are not incented to transfer their systems
before or while experiencing service or financial issues. Allowing greater flexibility in the setting
of acquisition adjustments will incentivize owners of non-viable systems to
pursue a transfer for a reasonable price, which is not only in the best
interest of owners of the non-viable system, but is also in the best interest
of the customers of the non-viable system as a result of being taken over by a
capable utility operator for the long-term. SWS lastly suggests:
The Commission should be incentivizing
acquisitions before ‘extraordinary circumstances’ come to pass – struggling
systems that lack long-term viability should have an incentive to divest to a
utility with more competent management, operations, and finances. The
Commission’s policies and [r]ules should reflect this and incentivize – for
buyer and seller – acquisitions of non-viable systems.
CSWR supported the proposed rule amendments,
as they “retain the Commission’s flexibility to consider other potential benefits,
and an acquiring utility is not required to show all the listed benefits in order
to receive a full or partial adjustment.”
Staff recommends approval of the
rule language in subsection (3), as it has the effect of incentivizing
non-viable utilities to transfer their troubled systems to viable utilities;
incentivizes viable utilities to pursue such transfers at a reasonable price;
and provides flexibility to the Commission to consider various potential
customer benefits. The recommended rule makes clear under what circumstances a
positive acquisition adjustment can be allowed for a non-viable system.
Furthermore, the Commission has the discretion to determine, based on the
record of the hearing, if qualitative factors indicate the acquisition will be
to the customers’ benefit. Staff disagrees with OPC’s concern about a
lack of safeguards because the recommended rule codifies the Commission’s
existing authority to review and prospectively reduce or remove a positive
acquisition adjustment if the Commission finds that customer benefits did not
materialize or subsequently changed within 5 years of the order approving the
acquisition adjustment. Staff
believes the recommended rule language will allow for acquisitions when it is
in everyone’s best interest, even when there are not extraordinary
circumstances.
Subsection (4) – Positive Acquisition Adjustments for Viable Utility
This subsection provides the
requirements that must be demonstrated by an acquiring utility to be allowed a
full or partial positive acquisition adjustment for a viable utility; the
factors the Commission will consider in determining whether acquired utility customers
benefit; and the information that the acquiring utility must file in its
petition for a positive acquisition adjustment.
This subsection further requires that when an
acquiring utility purchases a viable system and seeks approval of a positive acquisition
adjustment, it must demonstrate that the purchase was made as part of an
arms-length transaction and that the transaction incorporating a full or
partial acquisition adjustment is projected to provide a positive cumulative
present value of the revenue requirements (CPVRR) customer benefit over a
5-year period from the date of acquisition.
In the event the CPVRR does not result in an objective positive customer
benefit, the recommended rule amendments provide the Commission will consider
specified factors in determining whether to allow an acquisition adjustment. By operation of math, the inclusion of any
amount of acquisition adjustment in the determination of revenue requirement
will place upward pressure on customer rates, all other elements held constant.
In order for the Commission to make an informed decision whether to approve a
requested acquisition adjustment, it must have reliable information from the
acquiring utility regarding the magnitude of the impact on customer rates.
Based on comments received from the stakeholders, staff believes the 5-year
period for the CPVRR analysis strikes an appropriate balance between obtaining
this relevant and necessary information while not being overly burdensome on
the acquiring utility.
To
assist the Commission in the determination of whether the CPVRR results in a
positive customer benefit over the 5-year period, the acquiring utility must
file a CPVRR in the form of a spreadsheet with its petition. Rule 25-30.0371(4)(b)6., F.A.C., creates a form
titled, “Water and/or Wastewater Utilities Cumulative
Present Value of the Revenue Requirements for Acquisition Adjustment Worksheet”
that may be completed by a viable utility acquiring another viable system and that
may be included in its petition for a positive acquisition adjustment unless the
acquiring utility decides to provide its own CPVRR in an Excel spreadsheet with
the data and information included in the CPVRR analysis, along with providing the
spreadsheet formulas intact and all supporting data and assumptions used in the
spreadsheet.
Paragraph
(4)(b) of the draft rule encompasses what information staff believes should be
contained in the utility’s petition for an acquisition adjustment for a viable
utility. Staff has crafted the language
in paragraph (4)(b) to align with the factors in paragraph (4)(a), which the
Commission will consider in determining whether the acquired utility customers
benefit from the requested acquisition adjustment. Staff recommends that the information the
utility must file with its petition include:
·
the amount of acquisition adjustment and
amortization period requested;
·
how acquisition was part of an arms-length
transaction;
·
the contract of sale, estimated cost of fees,
and closing costs;
·
calculation of book value and composite
remaining life of assets purchased;
·
CPVRR in spreadsheet form or Excel spreadsheet
with data and information included in CPVRR analysis with all supporting data
and assumptions used;
·
description of anticipated improvements or
planned infrastructure additions and maintenance by the acquiring utility;
·
description of anticipated cost savings from the
acquisition;
·
5-year projected impact on cost of service to
acquired utility customers; and
·
any engineering studies or appraisals done
regarding purchase.
Stakeholder Comments
None
of the stakeholders objected to the concept of a CPVRR being required to
substantiate the projected 5-year rate impact or disputed the Commission’s need
to obtain the information the CPVRR provides; however, SWS raised its concern
that the CPVRR limits the calculation of benefits to a 5-year window.
OPC also supported a CPVRR projected 5-year
rate impact, stating that, “[t]he objective standard of a 5-year CPVRR analysis
must be applicable for all positive acquisition adjustments in order to
demonstrate offsetting economic customer savings in the public interest.” However, it also asserted that “it would be impossible to demonstrate that
any qualitative benefits outweigh the potential rate impact to customers, absent a positive CPVRR benefit for customers
over a 5-year period.
SWS suggested the CPVRR “presents a formulaic, limited
calculation of benefits to customers that omits relevant and valuable
qualitative benefits that the acquirer can bring to the acquired customers,”
adding “[t]he Commission’s considerations or criteria to approve a transaction,
and any applicable acquisition adjustment, should consider all relevant aspects
of the acquisition. SWS further
suggested that a CPVRR does not account for the potential array of scenarios
that may be presented and limits the calculation of benefits to a 5-year window,
adding that in many acquisitions, especially of viable systems, the cost
efficiency opportunities that come from integration of the utilities may take
time, and costs to effectuate the integration will likely come before
benefits.”
CSWR
suggested a full or partial acquisition adjustment “should still be
allowed if there are other qualitative benefits such as improved customer
service, improved monitoring and reporting of and response to health and safety
requirements, or improved billing, record keeping and compliance with
regulatory reporting requirements.”
Staff recommends approval of the
rule language in subsection (4), as it will provide viable utilities the
flexibility to seek a positive acquisition adjustment if the CPVRR
quantitatively establishes a positive customer benefit, as well as providing
flexibility for when the CPVRR does not result in a positive customer benefit. It does so by providing the Commission the
ability to weigh other factors described in subparagraphs (4)(a)1.-6., which demonstrate
a positive customer benefit.
Subsection (5) – Amortization
Period for a Positive Acquisition Adjustment
This subsection amends the date upon which a
positive acquisition adjustment will begin by providing that the Commission
will set the amortization period in the order approving a positive acquisition
adjustment, which will begin either on the date of the approving order or on
the date the sale closes, whichever occurs last.
Stakeholder Comments
OPC stated that since the rule
became effective in 2002, no utility has raised the concern that the
amortization should not start until after closing. In response, SWS stated the Commission has
never approved a positive acquisition adjustment since the rule became
effective, which OPC publicly acknowledged is correct.
SWS supports the language in the recommended proposed
rule, stating it provides for flexibility should the acquiring utility request
a deferral of the approval of the transfer, or if the Commission were to only
provisionally approve the acquisition adjustment at the time of acquisition
approval. SWS further added that
amortization before closing would be inconsistent with the matching of
amortization of the adjustment with the acquired system assets’ depreciation.
CSWR stated this section is to address the
circumstance where the closing of a transfer takes place after an acquisition
adjustment is approved.
Staff
recommends approval of the rule language in subsection (5), for
both internal consistency within the amended rule, as well as to address the
circumstance where the closing of a transfer may take place after an
acquisition adjustment is approved.
Subsection (6) – Subsequent
Review of Acquisition Adjustments
This subsection recognizes the Commission’s
authority to review a positive acquisition adjustment if it finds customer
benefits did not materialize or subsequently changed within 5 years of the date
of the order approving the positive acquisition adjustment.
Staff
recommends approval of the recommended rule language in subsection (6), as it recognizes
the Commission’s existing authority and flexibility to review an acquisition
adjustment on a case-by-case basis, as well as providing the Commission flexibility
to address on a case-by-case basis, depending on the evidence in the record of
the hearing and the appropriateness of an acquisition adjustment in light of
whether customer benefits materialized as projected or subsequently changed
within 5 years of the approval of the acquisition adjustment (thus enabling the
Commission to modify an acquisition adjustment accordingly).
Subsection (7) – Negative
Acquisition Adjustment
This
subsection eliminates the provisions of the current rule regarding negative
acquisition adjustments. The amended
rule provides that a negative acquisition adjustment will not be included in
rate base.
Stakeholder Comments
OPC
believes that a negative acquisition adjustment should remain in the rule. OPC asserted the current policy benefits
customers with a lower rate base if the purchase price is equal to or less than
80 percent of the net book value. OPC
lastly asserted that the current rule balances the interest of the acquiring
utility and its customers, particularly where the acquired utility has been
neglected, thus selling below book value and causing customers to pay for
improvements.
CSWR
agrees with the amended language advising “[t]he imposition
of a negative acquisition adjustment does not align with the goal of
encouraging beneficial acquisitions. Elimination of the negative adjustment
does not harm customers. It encourages
the acquiring utility to negotiate for a lower price, and the additional
earnings provide a resource that could be used to reinvest in the acquired
system.” CSWR further noted:
As Staff has pointed out that no other state imposes a
negative acquisition adjustment and that there is a lack of parity in the
treatment of rate base in a transfer situation in that the rate base of the
existing utility carries over to the acquiring utility unless the acquiring
utility pays less that the existing rate base. Imposition of a negative
adjustment discourages an acquiring utility to negotiate the lowest price or
from acquiring a small troubled system at all.
Furthermore, allowing the acquiring utility to earn on the seller’s
actual rate base provides an additional source of revenue that could be used to
reinvest in the utility.
SWS opined there are serious concerns with
maintaining negative acquisition adjustments, noting “the proposed rule does
not appear to contemplate scenarios that include a seller with a negative book
value (negative rate base). Uncertainty on the treatment of such acquisitions
inevitably will limit the ability and incentive for well-managed utilities to
acquire these systems, constraining the seller’s market for buyers and
resulting in missed opportunities for consolidation and regionalization of
water and wastewater systems in the State.”
Staff recommends approval of the
rule language in subsection (7). Continuing
to apply negative acquisition adjustments, as defined, in rate base has the negative
effect of limiting the ability of, and thereby disincentivizing, viable
utilities from acquiring non-viable systems, as well as constraining the
seller’s market for buyers, resulting in missed opportunities for consolidation
and regionalization of water and wastewater systems in Florida. Furthermore, denying the net book value of a
system to a purchaser, notwithstanding a purchase price lower than net book
value, is not consistent with original cost-based accounting.
Subsection (8) – Notice
This subsection requires, at the time an
acquiring utility files its petition, to provide a draft notice for review by
Commission staff. Commission staff will
review the draft notice within 7 days, and once approved, the acquiring utility
must provide the notice, in the manner directed in the rule, to OPC and to each
customer and owner of property located within the service area for both the
acquiring utility and to customers of the utility being acquired. The recommended rule language permits the
acquiring utility to combine this notice with the notice of Application for
Authority to Transfer and provides what the notice must contain, thereby
allowing the acquiring utility to avoid duplication of efforts.
Staff
recommends approval of the language in subsection (8), as a notice requirement
safeguards the due process rights of both the acquiring and acquired utility
customers by requiring the notice provide a statement that any customer
substantially affected by the petition may file a motion to intervene in
accordance with Rule 28-106.205, F.A.C.
Minor Violation Rule Certification
Pursuant to Section 120.695, F.S., for each rule
filed for adoption, the agency head shall certify whether any part of the rule
is designated as a rule the violation of which would be a minor violation. Under
Section 120.695(2)(b), F.S., a violation of a rule is minor if it does not
result in economic or physical harm to a person or adversely affect the public
health, safety, or welfare or create a significant threat of such harm. Rule
25-30.0371, F.A.C., should be listed as a minor violation rule by the Commission.
This rule is a minor violation rule because the violation of this rule would
not result in economic or physical harm to a person, cause an adverse effect on
the public health, safety, or welfare, or create a significant threat of such
harm. Violations of Rule 25-30.0371, F.A.C., would be minor violations.
Therefore, for the purposes of filing the rule for adoption with the Department
of State, staff recommends that the Commission certify Rule 25-30.0371, F.A.C.,
as a minor violation rule.
Statement of Estimated Regulatory Costs
Section 120.54(3)(b)1., F.S., encourages
agencies to prepare a Statement of Estimated Regulatory Costs (SERC) before the
adoption, amendment, or repeal of any rule. A SERC was prepared for this
rulemaking and is appended as Attachment B. As required by Section
120.541(2)(a)1., F.S., the SERC analysis includes whether the amended rule is
likely to have an adverse impact on economic growth, private sector job
creation or employment, or private sector investment in excess of $1 million in
the aggregate within five years after implementation.
The
SERC concludes that the amended rule will likely not directly or indirectly
increase regulatory costs in excess of $200,000 in the aggregate in Florida
within one year after implementation. Further, the SERC concludes that the amended
rule will not likely increase regulatory costs, including any transactional
costs, or have an adverse impact on business competitiveness, productivity, or
innovation, in excess of $1 million in the aggregate within five years of
implementation. Thus, pursuant to Section 120.541(3), F.S., the rule does not
require legislative ratification.
Further, the SERC concludes that the amended rule will not likely
have an adverse impact on economic growth, private-sector job creation or
employment, private sector investment, business competitiveness, productivity,
or innovation in excess of $1 million in the aggregate within five years of
implementation. Thus, the amended rule does not require legislative
ratification pursuant to Section 120.541(3), F.S.
In
addition, the SERC states that the amended rule would have no adverse impact on
small businesses, would have no implementation or enforcement costs on the
Commission or any other state or local government entity, and would have no
impact on small cities or small counties. The SERC states that there will be no
transactional costs likely to be incurred by individuals and entities required
to comply with the requirements. None of the impact/cost criteria established
in Section 120.541(2)(a), F.S., will be exceeded as a result of the amended rule.
Conclusion
Based on the foregoing, staff recommends the
Commission should propose the amendment of Rule 25-30.0371, F.A.C., as set
forth in Attachment A. Staff further recommends the Commission certify Rule
25-30.0371, F.A.C., as a minor violation rule.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. If no
requests for hearing or JAPC comments are filed, the rule should be filed for
adoption with the Department of State, and the docket should be closed.
(Sunshine)
Staff Analysis:
If no requests for hearing or JAPC comments are
filed, the rule should be filed for adoption with the Department of State, and
the docket should be closed.
25-30.0371 Acquisition Adjustments.
(1) Definitions Definition. For
the purpose of this rule, the following definitions apply: an
acquisition adjustment is defined as the difference between the purchase price
of utility system assets to an acquiring utility and the net book value of the
utility assets. A positive acquisition adjustment exists when the purchase
price is greater than the net book value. A negative acquisition adjustment
exists when the purchase price is less than the net book value.
(a) “Acquisition adjustment”
means the difference between the purchase price of utility system assets to an
acquiring utility and the net book value of the acquired utility’s assets.
(b) “Good cause” means a
showing of financial hardship, unforeseen events, or other events outside the
utility’s control.
(c)
“Positive acquisition adjustment” means the purchase price is greater than the
net book value.
(d) “Negative acquisition
adjustment” means the purchase price is less than the net book value.
(e) “Non-viable utility”
means a utility that meets either of the following subparagraphs:
1. A utility that is currently unable or is projected to be
unable to provide and maintain safe, adequate, and reliable service and
facilities to its customers over the 5-year period following the date of
acquisition due to:
a. A history of enforcement or compliance actions by
federal, state, or local regulatory agencies based on violations of primary or
exceedance of secondary water quality standards or other health, safety, and
environmental standards; and
b. Insufficient investment, repair, maintenance of assets or
an inability to acquire and maintain adequate managerial, operational,
financial, or technical capabilities to ensure safe and reliable service to its
customers; or
2. A utility that is
insolvent, i.e., unable to pay debts.
(f) “Viable utility” means all utilities that are not
non-viable as defined in paragraph (1)(e) of this rule.
(2) Petition. A utility that acquires another utility may
petition the Commission to establish an acquisition adjustment under either
subsection (3) or subsection (4) of this rule to include some or all of a
positive acquisition adjustment in the acquired utility’s rate base. A utility
may seek approval of a positive acquisition adjustment at the time the utility
seeks approval to transfer the certificate of authorization or anytime within 3
years of the issuance date of the Commission order approving the transfer of
the certificate of authorization. The utility may request an extension of the
3-year period, which must include a statement of good cause. The petition for a
positive acquisition adjustment may be made as a separate filing or as part of
a rate proceeding.
(3)(2) Positive Acquisition Adjustments for Non-Viable Utility.
A positive acquisition adjustment shall not be included in rate base absent
proof of extraordinary circumstances. Any entity that believes a full or
partial positive acquisition adjustment should be made has the burden to prove
the existence of extraordinary circumstances. In determining whether extraordinary
circumstances have been demonstrated, the Commission shall consider evidence
provided to the Commission such as anticipated improvements in quality of
service, anticipated improvements in compliance with regulatory mandates,
anticipated rate reductions or rate stability over a long-term period,
anticipated cost efficiencies, and whether the purchase was made as part of an
arms-length transaction. Amortization of a positive acquisition adjustment
shall be pursuant to paragraph (4)(a) below.
(a) A full or partial positive acquisition adjustment will
be allowed if it is demonstrated that the acquired utility meets the definition
of non-viable utility under paragraph (1)(e) of this rule; that the purchase
was made as part of an arms-length transaction; and that customers from the
acquired utility will benefit from the acquisition. In determining whether the
acquired utility customers benefit, the Commission will consider the following
factors:
1. Anticipated improvements in quality of service;
2. Anticipated improvements in compliance with water or
wastewater regulatory requirements;
3. Anticipated impacts on the cost of providing service
over the next 5 years from the date of acquisition;
4. Anticipated cost efficiencies, including any economies
of scale;
5. Ability to attract capital at reasonable cost; and
6. The professional and experienced managerial, financial,
technical, and operational resources of the acquiring utility.
(b) Contents of Petition. The acquiring utility must file
the following information in its petition:
1. The amount of the acquisition adjustment requested;
2. The amortization period requested;
3. An explanation of how the acquisition was made as part
of an arms-length transaction;
4. The contract of sale, including the estimated cost of
the fees and transaction closing costs to be incurred by the acquiring utility;
5. A calculation of the net book value of the acquired
utility including the composite remaining life of the assets purchased;
6. A statement as to whether the acquired utility is
insolvent or unable to service its debt obligations;
7. A description of the acquiring utility’s managerial,
operational, financial, or technical capabilities to furnish and maintain safe
and adequate service and facilities over the next 5 years from the date of
acquisition;
8. Any notices of violation, consent decrees or other
regulatory actions issued by a federal, state, regional, or local agency
regarding the provision of the acquired utility’s water or wastewater service
over the past 5 years from the date of acquisition, including any notices of violation
of primary or notices of exceedances of secondary water quality standards;
9. The acquired
utility’s annual capital investments and operations and maintenance expenses
over the past 5 years from the date of acquisition;
10. Any planned infrastructure additions and maintenance by
the acquiring utility to improve the acquired utility’s quality of service or
compliance with environmental regulations;
11. Any engineering studies or appraisals the acquiring
utility procured pertaining to the purchase of the acquired utility;
12. The 5-year projected impact on the cost of providing
service to the customers of the utility system being acquired, including the
impact of any operation and maintenance cost savings and economies of scale
expected to result from the acquisition transaction, the impact of the cost of
any plant infrastructure additions, and the impact of the acquisition
adjustment; and
13. An explanation as to how the acquiring utility has
greater access to capital than the acquired utility, if applicable.
(3) Negative Acquisition Adjustments. If the
purchase price is greater than 80 percent of net book value, a negative
acquisition adjustment will not be included in rate base. When the purchase
price is equal to or less than 80 percent of net book value, a negative acquisition adjustment shall be included in rate
base and will be equal to 80 percent of net book value less the purchase price.
Amortization of a negative acquisition adjustment shall be pursuant to
subparagraph (4)(b)1. or (4)(b)2. below.
(4) Positive Acquisition Adjustments for Viable Utility.
(a) A full or partial positive acquisition adjustment will
be allowed if the acquiring utility demonstrates that the purchase was made as
part of an arms-length transaction and the transaction incorporating the full
or partial positive acquisition adjustment is projected to provide a positive
cumulative present value of the revenue requirements (CPVRR) customer benefit
over a 5-year period from the date of acquisition. If the CPVRR does not result
in a positive customer benefit over the 5-year period, the Commission will
consider the following factors in determining whether to allow a full or
partial acquisition adjustment:
1. Anticipated improvements in quality of service and
compliance with any regulatory requirements;
2. Anticipated rate reductions or rate stability over the
next 5 years from the date of acquisition;
3. Anticipated cost savings;
4. Increased ability to attract capital at reasonable cost;
5. Lower overall cost of capital; and
6. Additional professional and experienced managerial,
financial, technical, and operational resources.
(b) Contents of Petition. The acquiring utility must file
the following information in its petition:
1. The amount of the acquisition adjustment requested;
2. The amortization period requested;
3. An explanation of how the acquisition was made as part
of an arms-length transaction;
4. The contract of sale, including the estimated cost of
fees and transaction closing costs to be incurred by the acquiring utility;
5. A calculation of the net book value of the acquired
utility including the composite remaining life of the assets purchased;
6. A CPVRR in
the form of a spreadsheet. Form PSC 1034 (3/24), entitled “Water and/or
Wastewater Utilities Cumulative Present Value of the Revenue Requirements for
Acquisition Adjustment Worksheet,” which is incorporated by reference in this
rule and is available at [hyperlink], is an example CPVRR that may be completed
and included in the acquiring utility’s petition to comply with this
subparagraph. The form may also be obtained from the Commission’s website,
www.floridapsc.com;
7. An Excel spreadsheet with the data and information
included in the CPVRR analysis with the spreadsheet formulas intact;
8. All supporting data and assumptions used in the CPVRR
spreadsheet;
9. A description of any anticipated improvements or planned
infrastructure additions and maintenance by the acquiring utility;
10. A description, including any supporting data, of any
anticipated cost savings resulting from the acquisition;
11. The 5-year projected rate impact on the customers of
the utility system being acquired, including the rate impact of any cost
efficiencies and economies of scale expected to result from the acquisition transaction,
the rate impact of the cost of any plant infrastructure additions, and the rate
impact of the acquisition adjustment; and
12. Any engineering studies or appraisals the acquiring
utility procured pertaining to the purchase of the acquired utility.
(4) Amortization Period.
(a) In setting the amortization period for a Commission
approved positive acquisition adjustment pursuant to subsection (2), above, the
Commission shall consider evidence such as the composite remaining life of the
assets purchased and the condition of the assets purchased. Amortization of the
acquisition adjustment shall begin on the date of issuance of the order
approving the transfer of assets.
(b) The appropriate period over
which to amortize a Commission approved negative acquisition adjustment
pursuant to subsection (3), above, shall be determined as follows:
1. If the purchase price is
greater than 50 percent of net book value, the negative acquisition adjustment
shall be amortized over a 7-year period from the date of issuance of the order
approving the transfer of assets. In this case, the negative acquisition
adjustment shall not be recorded on the books for ratemaking purposes or used
for any earnings review unless the purchaser files for a rate increase pursuant
to Section 367.081(2), 367.0814, 367.0817 or 367.0822, F.S., that will be
effective during the amortization period.
2. If the purchase price is 50
percent of net book value or less, the negative acquisition adjustment shall be
amortized from the date of issuance of the order approving the transfer of
assets as follows:
a. 50 percent of the negative
acquisition adjustment shall be amortized over a 7-year period; and
b. 50 percent of the negative
acquisition adjustment shall be amortized over the remaining life of the
assets.
(5) Amortization Period for a Positive Acquisition
Adjustment. The Commission will set the amortization period in the order
approving the positive acquisition adjustment.
Amortization of the acquisition adjustment will begin on the date of
issuance of the order approving the positive acquisition adjustment or on the
date the sale closes, whichever occurs last.
(6) Nothing herein removes the Commission’s existing
authority to review a positive acquisition adjustment if the Commission finds
that customer benefits did not materialize or subsequently changed within 5
years of the date of the order approving the positive acquisition adjustment.
(7) Negative Acquisition Adjustment. A negative acquisition
adjustment will not be included in rate base.
(8) Notice. At the time the petition is
filed with the Commission, the acquiring utility must provide a draft notice
for review by Commission staff. Commission staff will review the draft notice
within 7 days. Once staff has approved the notice, the acquiring utility must
provide notice by regular mail to the Office of Public Counsel and by regular
mail or personal service to each customer and owner
of property located within the service area for both the acquiring utility and
the utility being acquired, to the extent the utilities’ customers are within
the Commission’s jurisdiction. The notice required by this rule may be combined
with the notice of Application for Authority to Transfer issued pursuant to
Rule 25-30.030, F.A.C. The notice must contain:
(a) Title: Notice of Utility’s Petition to Establish an
Acquisition Adjustment;
(b) A statement that
the utility has filed a petition with the Commission to establish an
acquisition adjustment for either a viable or a non-viable utility system;
(c) The date the petition was filed with the Commission;
(d) The docket number associated with the petition;
(e) A statement of the 5-year projected rate impact or the
anticipated effect of the requested acquisition adjustment on rates for the
next five years;
(f) A statement that the utility’s petition is available on
the Commission’s website;
(g) The acquiring utility’s address, telephone number, and
business hours; and
(h) A statement that any customer substantially affected by
the petition may file a motion to intervene in accordance with Rule 28-106.205,
F.A.C.
Rulemaking Authority 350.127(2),
367.121(1)(f) FS. Law Implemented 367.071(5), 367.081(2)(a), 367.121(1)(a), (b)
FS. History–New 8-4-02, Amended 11-22-10.
