Case Background
On May 29, 2024,
St. Joe Natural Gas Company, Inc. (SJNG or Company) filed a petition seeking
Commission approval to increase rates and charges. SJNG provides sales and
transportation of natural gas and is a public utility subject to the
Commission's regulatory jurisdiction under Chapter 366, Florida Statutes
(F.S.). SJNG currently serves approximately 3,186 residential and commercial
customers in Gulf and Bay Counties. In its petition, SJNG requested an increase
of $1,043,838 in additional gross annual revenues. The requested increase,
according to SJNG, will provide the Company with an opportunity to earn an
overall rate of return of 6.05 percent on the Company's plant and property used
to serve its customers based on a midpoint return on equity of 11.00 percent.
The Company based its request on a 13-month average rate base of $3,381,746 for
the projected test year ending December 2024. SJNG is also proposing to
restructure its residential service class to reduce stratification within the
residential classes. Per Rule 25-7.140(1)(d), Florida Administrative Code
(F.A.C.), SJNG has elected to use the five month Proposed Agency Action process
authorized in Section 366.06(4) F.S.
SJNG‘s last approved rate case was in 2008 in Docket No.
20070592-GU. More
recently, in Docket No. 20230022-GU, the Commission approved new depreciation
rates with an implementation date of January 1, 2023. Notably, in Docket No.
20160033-GU, the
Commission approved SJNG's request to reallocate the $285,011 annual revenue
deficiency resulting from the permanent loss of its largest customer, the
Arizona Chemical Company, to the remaining customer classes. Also, in Docket
No. 20200039-GU, the
Commission approved a temporary storm cost recovery surcharge to deal with
Hurricane Michael recovery.
The Utility stated that the key drivers for the proposed
rate increase are: current rates not recovering its property tax expense or
property insurance expense, increases to rate base associated with extensions
to serve new customers, increasing operating expenses reflecting nearly 16
years of inflation, and increases in regulatory costs, particularly federal
pipeline safety regulations.
In its petition, the Company also requested an interim
rate increase of $612,209 based on a historic test year ended December 31, 2023.
Section 366.071, F.S., addresses interim rates and procedures and requires the
Commission to authorize within 60 days of a filing for an interim rate increase
the collection of interim rates. On May 29, 2024, the Company waived the 60-day
provision of Section 366.071(2), F.S., and agreed to defer implementation of
the proposed interim rates until the issue is addressed at the scheduled August
6, 2024, Commission Conference. This
recommendation addresses the requested interim revenue increase and rates and
the suspension of the Company’s requested permanent rate increase. The
Commission has jurisdiction over this request under Sections 366.06 and
366.071, F.S.
Discussion
of Issues
Issue 1:
Should the request for a permanent increase in rates
and charges be suspended for SJNG?
Recommendation:
Yes. Staff recommends that the requested permanent
increase in rates and charges be suspended for SJNG. (Vogel)
Staff Analysis:
Staff recommends that the requested permanent
increase in rates and charges be suspended for SJNG to allow staff time to
analyze the case. Pursuant to Section 366.06(3), F.S., the Commission may
withhold consent to the operation of all or any portion of a new rate schedule,
delivering to the utility requesting such a change, a reason, or written
statement of good cause for doing so within 60 days. On May 29, 2024, the
Company waived the 60-day provision of Section 366.071(2), F.S., and agreed to
defer the file and suspend requirements until the issue is addressed at the
scheduled August 6, 2024 Commission Conference.
Staff believes that the reasons stated above are good cause consistent with the
requirements of Section 366.06(3), F.S.
Issue 2:
Is SJNG's proposed interim rate base appropriate?
Recommendation:
No. The appropriate interim rate base for SJNG
should be $3,166,968. (Vogel)
Staff Analysis:
In its filing, the Company proposed an interim 13-month
average rate base of $3,186,767 for the period ended December 31, 2023. Pursuant
to Section 366.071(5)(a), F.S., the Company is permitted to elect either an
average or year-end rate base to calculate its interim revenue request. Staff
reviewed the rate base adjustments made in the current interim filing for
consistency with the Commission-approved adjustments in SJNG’s last rate case
proceeding, where appropriate, as well as other applicable dockets. Based
on staff’s review, it appears that the Company made applicable adjustments that
are consistent with the prior Commission Orders. However, the Company made
adjustments to plant and accumulated depreciation based on its non-utility
allocation percentage from 2022. Therefore, staff recommends adjustments to
decrease plant and accumulated depreciation by $58,773 and $38,974,
respectively, to reflect non-utility allocation for the proper 2023 interim
test year. As such, staff recommends that $3,166,968 is the appropriate amount
of rate base for the historical interim test year ended December 31, 2023. The
calculations are shown on Attachment A.
Issue 3:
Is SJNG's proposed interim return on equity and overall
rate of return appropriate?
Recommendation:
No. The appropriate return on equity for SJNG should
be 10.00 percent and the overall cost of capital should be 4.81 percent for
purposes of determining interim rates. (Vogel)
Staff Analysis:
For purposes of its interim rate request, SJNG used
an overall cost of capital of 5.46 percent based on a return on equity (ROE) of
11.00 percent. The Company reflected a capital structure for the 13-month
average historical interim test year ended December 31, 2023. Staff believes
several adjustments are necessary.
Pursuant to Section 366.071(2)(a), F.S., the appropriate
ROE for purposes of determining an interim rate increase is the minimum of the
Company’s currently authorized ROE range. In its last rate case, SJNG’s ROE
midpoint was set at 11.00 percent, with a range of plus or minus 100 basis
points. Therefore, staff recommends an ROE of 10.00 percent for the purpose of
determining interim rates.
In the last rate case, the Commission made an adjustment to
limit the Company’s equity ratio to no more than 60 percent equity as a
percentage of investor sources of capital. In
the present filing, SJNG’s equity ratio exceeds 60 percent. Therefore, staff
recommends making an adjustment to the capital structure to limit the equity
ratio to 60 percent equity as a percentage of investor capital.
Additionally, MFR Schedule F-8 reflected total capital
that was not equal to the rate base that staff is recommending. Therefore,
staff made pro rata adjustments to the investor sources of capital to reconcile
to rate base. These adjustments result in an overall cost of capital of 4.81
percent.
Staff recommends that the capital structure of SJNG for
the historical interim 13-month average test year reflect an ROE of 10.00 percent,
resulting in an overall cost of capital of 4.81 percent. Attachment B details
the calculations of the overall cost of capital.
Issue 4:
Is SJNG's proposed interim test year net operating
income appropriate?
Recommendation:
No. The appropriate historical base year ended December
31, 2023, net operating income for SJNG should be negative $250,357. (Vogel)
Staff Analysis:
The proposed net operating income for SJNG of negative
$284,430 is the twelve-month amount for the historical interim test year ended
December 31, 2023. Staff reviewed the net operating income adjustments made in
the current interim filing for consistency with the Commission-approved
adjustments in the last rate case proceeding, as well as other applicable
dockets.
Based on staff’s review, it appears that the Company made applicable
adjustments that are consistent with the prior Commission Order. However, MFR
Schedule F-4 failed to reflect the Company’s adjustment to depreciation expense
based on its non-utility allocation percentage. Therefore, staff is
recommending an adjustment to reduce depreciation expense by $34,073 to reflect
the appropriate 2023 allocation. Staff is also recommending adjustments to rate
base in Issue 2 and cost of capital in Issue 3. These adjustments have fallout
effects which have altered the proposed net operating income for SJNG.
Staff recommends that negative $250,357 is the appropriate
amount of net operating income for the historical interim test year ended
December 31, 2023. The calculations are shown on Attachment A.
Issue 5:
Is SJNG's proposed interim net operating income
multiplier appropriate?
Recommendation:
No. SJNG should be granted an interim net operating
income (NOI) multiplier of 1.3503. (Vogel)
Staff Analysis:
On MFR Schedule F-6, SJNG calculated an interim NOI
multiplier of 1.3356 based on a revenue expansion factor of 74.8744 using a 21
percent federal income tax rate, a 4.458 percent state income tax rate, a 0.3
percent bad debt rate and a 0.5 percent factor for regulatory assessment fees.
However, the appropriate state income tax rate for the interim test year should
be 5.5 percent. Therefore, staff recommends that 1.3503 is the appropriate
interim NOI multiplier. The calculations are shown below.
Table 5-1
Interim NOI Multiplier
|
Description
|
|
|
Revenue Requirement
|
100.0000%
|
|
Regulatory Assessment Fee
|
-0.5000%
|
|
Bad Debt Rate
|
-0.3000%
|
|
Net Before Income Tax
|
99.2000%
|
|
State Income Tax @ 5.5%
|
-5.4175%
|
|
Federal Income Tax @ 21%
|
-19.6862%
|
|
Revenue Expansion Factor
|
74.0578%
|
|
NOI Multiplier (100/74.0578)
|
1.3503
|
Issue 6:
Should SJNG's requested interim revenue increase be
granted?
Recommendation:
No. The appropriate interim revenue increase for
SJNG should be $543,665. (Vogel)
Staff Analysis:
SJNG requested interim rate relief of $612,209 for
the historical test year ended December 31, 2013. As discussed in Issues 2, 3,
4, and 5, staff is recommending adjustments to the Company’s rate base, cost of
capital, NOI, and NOI multiplier. These adjustments result in fallout
adjustments to the total interim revenue increase for SJNG. As such, staff
recommends that the appropriate revenue increase is $543,665 for the historical
test year ended December 31, 2023.
The interim revenue increases would allow SJNG an
opportunity to earn an overall rate of return of 4.81 percent based on the
minimum range of return on equity of 10.00 percent.
After a determination of the permanent rate increase has
been made, the interim rate increase will be reviewed to determine if any
portion should be refunded to customers. The calculation of interim rate relief
is shown in Table 6-1.
Table 6-1
Interim Revenue Increase
|
Description
|
|
|
Jurisdictional Adjusted Rate Base
|
$3,166,968
|
|
Overall Rate of Return
|
4.81%
|
|
Jurisdictional Net Operating Income
|
$152,268
|
|
Jurisdictional Adjusted Net Operating Income
|
($250,357)
|
|
Revenue Deficiency
|
$402,625
|
|
Net Operating Income Multiplier
|
1.3503
|
|
Interim Revenue Increase
|
$543,665
|
|
Base Rate Revenues
|
$1,293,560
|
|
Recommended Percentage Increase Factor
|
42.03%
|
Issue 7:
Should SJNG's proposed interim rates and associated
tariffs be approved?
Recommendation:
No, SJNG’s proposed interim rates and associated
tariff should not be approved. If the staff-recommended adjustments are
approved by the Commission, the Company should file a revised interim tariff
for administrative approval by staff. The interim rates should be made
effective for all meter readings occurring on or after thirty days from the
date of the Commission vote. In addition, pursuant to Rule 25-22.0406(8),
F.A.C., the Company should provide notice to customers of the revised rates.
The notice must be approved in advance by staff and provided to the customers
with the first bill containing the new rates. (Hampson)
Staff Analysis:
As discussed in Issue 6, staff recommends
adjustments to the interim revenue request by SJNG. Attachment C to the
recommendation provides the allocation of the interim increase. Furthermore,
Attachment C provides the resulting cents-per-therm increase to be applied to
the rate classes to recover the staff-recommended interim revenue increase.
These increases were calculated using the methodology contained in Rule
25-7.040, F.A.C., which requires that any increase be applied evenly across the
board to all rate classes based on their base rate revenues.
The interim rates should be made effective for all meter
readings occurring on or after thirty days from the date of the Commission vote.
The Company included proposed interim tariff sheet No. 84 in its petition. If
the staff-recommended adjustments are approved by the Commission, the Company
should file a revised interim tariff for administrative approval by staff.
Pursuant to Rule 25-22.0406(8), F.A.C., the Company should provide notice to
customers of the revised rates. The notice must be approved in advance by staff
and provided to the customers with the first bill containing the new rates.
Issue 8:
What is the appropriate security to guarantee the
amount subject to refund?
Recommendation:
The appropriate security to guarantee the funds
collected subject to refund is a corporate undertaking. (McGowan, Ferrer)
Staff Analysis:
Staff recommends that all funds collected subject to
refund be secured by a corporate undertaking. The criteria for a corporate
undertaking include sufficient liquidity, ownership equity, profitability, and
interest coverage to guarantee any potential refund. SJNG requested an interim
revenue increase of $612,209. In Issue 6, staff recommends an interim revenue
increase of $543,665. Based on an estimated eight-month collection period of
interim rates, staff has calculated the maximum amount of revenues that may
need to be protected is $364,256. Staff reviewed SJNG’s three most recent
annual reports filed with the Commission (2023, 2022, and 2021) to determine if
the Company can support a corporate undertaking to guarantee the funds
collected during the interim collection period. SJNG’s financial information
demonstrates the Company has acceptable levels of liquidity, ownership equity,
and interest coverage to support a potential refund of $364,256.
Staff believes SJNG has adequate resources to support a
corporate undertaking in the amount recommended in Issue 6. Based on this
analysis, staff recommends that a corporate undertaking of $364,256 is
acceptable. This brief financial analysis is only appropriate for deciding if
the Company can support a corporate undertaking in the amount requested and
should not be considered a finding regarding staff's position on other issues
in this proceeding.
Issue 9:
Should this docket be closed?
Recommendation:
No. This docket should remain open to process the
revenue increase request of the Company. (Dose)
Staff Analysis:
This docket should remain open pending the
Commission’s final resolution of the Company’s requested rate increase.
