Discussion
of Issues
Issue 1:
Does North Peninsula meet the definition of a
non-viable utility as defined in Rule 25-30.0371(1)(e), F.A.C.?
Recommendation:
Yes. North Peninsula meets the definition of a
non-viable utility. If the Commission finds that the Utility is not non-viable,
Issues 2 through 5 should be considered moot. (Bloom, J. Crawford, P. Buys,
Higgins)
Staff Analysis:
Rule 25-30.0371(1))(e), F.A.C., provides the
definition of a non-viable utility for the purposes of an acquisition
adjustment. Under the rule, a utility is considered non-viable if it falls
within either of two specified categories.
First, a utility is considered non-viable when it is
“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.”[5] The rule
further sets forth the criteria used to determine whether a utility has failed
to maintain safe, adequate, and reliable services and facilities. These
criteria are as follows:
a.
Failure to comply with or 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.[6]
Second, a utility is considered non-viable if it is
insolvent, meaning the utility cannot pay its debts.[7]
It is important to note that a utility qualifies as non-viable if it falls
within either of the two categories described in the rule.
If the Commission finds that a utility is not non-viable,
Issues 2 through 5 should be considered moot. In addition, finding a utility
not non-viable does not automatically entitle a utility to a positive
acquisition adjustment for viable utilities as set out under Rule
25-30.0371(4), F.A.C. The utility would need to meet certain different criteria
set out in the subsection of the rule. For example, the rule requires an
applicant to provide a cumulative present value of revenue requirements (CPVRR)
analysis for viable utilities.
CSWR-Florida did not include a CPVRR for North Peninsula in its petition.
Maintenance of Safe, Adequate, and Reliable
Services
Pursuant to Rule 25-30.0371(3)(b)8., F.A.C., CSWR-Florida
submitted notices of violation, consent decrees or other regulatory actions
issued by federal, state, regional, or local agencies regarding the provision
of wastewater service for the five years prior to the date of acquisition.[9] Staff
reviewed this data as well as North Peninsula’s regulatory compliance post-acquisition.
From 2017 through 2022, prior to CSWR-Florida’s
acquisition of North Peninsula on May 26, 2022, the system had a history of
recurring compliance and operational deficiencies with the Florida Department
of Environmental Protection (DEP). These issues included deficiencies in
monitoring and reporting, repeated fecal coliform exceedances, insufficient
staffing by appropriately certified operators, deteriorated and improperly
maintained wastewater treatment plant (WWTP) components, including significant
corrosion and structural deterioration, excessive vegetation and solids in the
rapid infiltration basins, inadequate maintenance of groundwater monitoring
wells, and excessive odors beyond the facility boundaries. The DEP issued
multiple warning letters, requests for additional information, and Consent
Orders addressing these deficiencies, including a Consent Order in July 2018
and a subsequent Consent Order in August 2021. On May 6, 2022, shortly before
CSWR-Florida’s acquisition, the DEP issued a Notice of Violation identifying
several uncorrected Consent Order violations, including continued vegetation
and corrosion issues, deficiencies with groundwater monitoring wells,
insufficient certified staffing, and failure to control foul odors. A more
detailed description is provided in Attachment A to this recommendation.[10]
Based upon staff’s review, staff recommends that, prior to
acquisition, North Peninsula had been unable to maintain safe, adequate, and
reliable services and facilities. This was demonstrated by North Peninsula’s
failure to comply with enforcement actions by state and local regulatory
agencies concerning violations of health, safety, and environmental standards.
In addition, the system received insufficient investment, repair, maintenance,
and inadequate managerial and operational personnel to ensure safe and reliable
service to its customers.
Following the acquisition, CSWR-Florida entered into a
Consent Order with the DEP on April 18, 2023, to correct the unresolved
compliance issues identified in the May 6, 2022, Notice of Violation (No. 10 in
Attachment A), which occurred under the prior owner.
This Consent Order contained several required actions to be completed for the
system to return to compliance, and also required the Utility to submit quarterly
status reports on the progress of the projects being completed under this
Order. CSWR-Florida has been meeting its reporting requirements and addressed
all violations identified in the Consent Order except the WWTP corrosion.
CSWR-Florida is required to complete all necessary improvements by December 30,
2028. In an effort to address the corrosion, CSWR-Florida considered: (1)
interconnecting with the City of Ormond Beach Publicly Owned Treatment Works
and decommissioning its existing treatment facility; (2) rehabilitating the
existing plant; or (3) a complete plant replacement. The Utility ultimately
decided to replace the existing WWTP, largely based on permitting issues and
costs. The WWTP replacement project is estimated to cost a total of $4,250,000
and be in-service May 30, 2028.[11] Aside from this Consent Order, CSWR-Florida
reported three sanitary sewer overflows (SSOs) to the DEP as they occurred
since acquiring the system.[12],
As discussed
above, North Peninsula has had a history of significant regulatory compliance
issues prior to acquisition. Although one significant compliance issue remains,
CSWR-Florida has committed to a long-term solution through the replacement of
its WWTP. North Peninsula’s historical violations were not limited to managerial
or administrative deficiencies, such as reporting errors or late filing
submissions. They also included serious operational and infrastructure-related
deficiencies that directly affected the condition, maintenance, and operation
of the wastewater system, including equipment deterioration, insufficient
certified staffing, permit exceedances, and ongoing treatment plant failures.
Based on North
Peninsula’s inability to maintain safe, adequate, and reliable services, staff
recommends North Peninsula should be considered a non-viable utility.
Insolvency
While North
Peninsula has reported having a negative net income in prior years, there is no
evidence that the utility has been insolvent. Specifically, no evidence
indicates that North Peninsula has been unable to meet its debt obligations or
otherwise satisfy its financial liabilities as they become due. Accordingly,
staff does not believe that North Peninsula meets the non-viability criterion
based on insolvency.
Conclusion
North Peninsula
meets the criteria of non-viability set forth in Rule
25-30.0371(1)(e)1., F.A.C., for a utility that has failed to maintain safe,
adequate, and reliable service and facilities. Specifically, North Peninsula
has been the subject of enforcement and compliance actions by DEP arising from
its historical and ongoing noncompliance with health, safety, and environmental
standards. It has also historically failed to adequately invest, repair, and
maintain its facilities, and additionally has lacked adequate managerial and operational
capabilities. Therefore, staff recommends that North Peninsula meets the
definition of a non-viable utility under Rule 25-30.0371, F.A.C.
Issue 2:
Was the
purchase of North Peninsula Utilities Corporation made as part of an arms-length
transaction?
Recommendation:
The Purchase and Sale Agreement between
CSWR-Florida and North Peninsula appears to be an arms-length transaction
because it involved two independent unrelated corporate entities with no shared
ownership or affiliation. However, staff believes the Commission has discretion
to find otherwise if the information provided, or lack thereof, demonstrates
there were external factors that affected the purchase price paid by
CSWR-Florida to the detriment of its customers. (D’Sa, D. Buys)
Staff
Analysis:
Rule
25-30.0371(3)(a), F.A.C., indicates, amongst other criteria, that the
Commission may allow a positive acquisition adjustment if the acquisition is
part of an “arms-length transaction.” While the rule does not specifically
define an arms-length transaction, staff believes in simple terms it can be
defined as a transaction where the buyer and seller act independently and have
no pre-existing relationship, with each party acting in their own self-interest
to reach a mutually agreed upon price. Typically, for a transaction to be
considered arms length, buyers and sellers act independently to attain the most
beneficial outcome for themselves; buyers negotiate to pay the lowest possible
price, while sellers attempt to achieve the highest possible price.
In its petition,
CSWR-Florida asserts that the acquisition of the North Peninsula wastewater
system satisfies the requirements of an arms-length transaction. The Utility
states that the purchase price and terms of sale were determined through
negotiations between representatives of CSWR-Florida and North Peninsula.
CSWR-Florida further claims that there was no prior relationship or influence
between it and the seller. The parties entered into a Purchase and Sale
Agreement, dated May 12, 2021, which includes a purchase price of $1,400,000
for all assets used by the seller to provide wastewater service to customers in
Volusia County. The transaction closed in May 2022.
Upon
review of the filing, staff believes that the Utility has filed the required
documentation under Rule 25-30.0371(3)(a), F.A.C., including the contract of
sale and a calculation of the NBV of the acquired utility. As indicated above,
the transaction involves two distinct corporate entities -
CSWR-Florida and North Peninsula - with no documented shared board members or
parent company. Therefore, staff believes the acquisition could be considered
an arms-length transaction as required by Rule 25-30.0371(3)(a), F.A.C.
However, staff
believes this is not a “check the box” rule. The Commission has discretion to
weigh the evidence on the arms-length transaction requirement. It also has the
discretion to infuse its policy on this matter since it is not clear from the
record whether CSWR-Florida acted fairly to the customers by paying a price
that appears to be higher than necessary in lieu of performing more due
diligence to evaluate an actual fair market value. In this case, the Utility
obtained an Asset Valuation Report dated November 21, 2021, that estimated the
original installation cost of the assets in 1979, the hypothetical installation
cost in 2021, and an estimated depreciated book value of $312,207.[15]
CSWR-Florida also obtained an engineering evaluation conducted by Woodard &
Curran, dated April 2022, to assess the condition of the WWTP and
recommendations for repair or improvements.[16]
In response to
Staff’s First Data Request, No. 1, CSWR-Florida explained it evaluates
potential utility acquisitions by conducting site visits to assess the system’s
condition, in addition to reviewing Commission annual reports and other
publicly available information from health and environmental regulators.
Purchase prices are negotiated at arm’s length, with CSWR-Florida seeking the
lowest price acceptable to the seller. CSWR-Florida stated that utility owners
generally have financial incentives to retain their systems, making sales at NBV
uncommon except in extraordinary circumstances. The Utility’s Florida
acquisitions have therefore been completed at prices above NBV. The Utility
also asserted that NBV can significantly understate a small utility’s actual
economic value because regulatory practices may discourage adequate
capitalization of infrastructure investments. As a result, CSWR-Florida does
not rely on NBV alone when determining acquisition prices. Instead, it
considers the system’s physical condition, operational risks, required capital
investments, and negotiated market value. A final purchase price is determined through
arms-length negotiations between the parties, with CSWR-Florida’s ultimate
objective being to pay the least amount that a utility/seller will accept.
CSWR-Florida undertook no additional due diligence to determine the fair market
value of the acquired utility.
CSWR-Florida
requested approval of a positive acquisition adjustment of $1,151,182 to
recover the premium it paid to purchase the assets of North Peninsula.
If approved, the price premium would be included in North Peninsula’s rate base
and ultimately increase the rates paid by customers. By establishing a purchase
price based on the anticipation of consumer-funded recovery, the transaction
may not wholly be at arms-length because both buyer and seller have an impetus
to seek a higher than necessary sale price. The price paid may be inflated by a
perception or expectation of a guaranteed regulatory recovery upon the
Commission approving the full acquisition adjustment. This interaction creates
a concept referred to as regulatory circularity, or more precisely,
purchase-price/rate-base circularity. This form of regulatory circularity
occurs when the purchase price of a regulated asset or utility is used to establish
the rate base, while the regulated revenues generated from that rate base are
themselves an important determinant of the asset's economic value and hence of
the purchase price. In this scenario, a utility's market value depends on its
potential earnings, and its earnings are decided by the rates the regulator
allows. Including a potentially higher-than-necessary acquisition adjustment in
the rate base to establish consumer rates has the potential to create a flawed,
self-justifying loop; because here, the price premium is fundamentally detached
from the NBV of the assets. Effectively, this codifies a purchase price that is
substantially above book value as the foundational baseline for future rates,
validating the exact circularity trap.
The bill impact
associated with the Utility’s request when formulated through the latest
assumed customer and cost data filed in the docket and amortized over 30 years
is $23.90 per month without consolidation, and $0.50 per month consolidated
with the other systems owned by CSWR-Florida.
If the full acquisition adjustment is approved, then it is the customers who
ultimately pay for the price premium above book value. As contemplated by Rule
25-30.0371(3)(a), F.A.C., the Commission could approve a partial positive
acquisition adjustment if circumstances justify an amount less than
CSWR-Florida’s request.
Conclusion
The Purchase and
Sale Agreement between CSWR-Florida and North Peninsula appears to be an
arms-length transaction because it involved two independent unrelated corporate
entities with no shared ownership or affiliation. However, staff believes the
Commission has discretion to find otherwise if the available information, or
lack thereof, demonstrates there were external factors that affected the
purchase price paid by CSWR-Florida to the detriment of its customers.
Issue 3:
Will the customers of North Peninsula benefit from
the acquisition through anticipated improvements in quality of service,
regulatory compliance, cost efficiencies, cost of providing service, the
ability to attract capital, and the professional and experienced managerial,
financial, technical, and operational resources?
Recommendation:
Yes. Staff believes the customers of North Peninsula
will benefit from the acquisition by CSWR-Florida through anticipated
improvements in quality of service, regulatory compliance, cost efficiencies,
cost of providing service, the ability to attract capital, and the provision of professional and experienced
managerial, financial, technical, and operational resources. (P. Buys, Cohn,
Souchik, Higgins)
Staff Analysis:
Quality of Service
Rule 25-30.0371(3)(a)1., F.A.C., requires that in
determining the appropriateness of a positive acquisition adjustment for a
non-viable utility, the Commission will consider if the acquired utility’s
customers benefit from anticipated improvements in quality of service as a
result of the acquisition. A utility’s quality of service considers the quality
of its product (water) and its attempt to address customer satisfaction (water
and wastewater), pursuant to Rule 25-30.433(1), F.A.C. Since North Peninsula is
a wastewater-only utility, staff’s analysis evaluates the utility’s attempt to
address customer satisfaction.
Pursuant to Rule 25-30.0371(3)(b)10., F.A.C., CSWR-Florida
listed its actual and expected improvements in the quality of service provided
to North Peninsula’s customers as a result of the acquisition.[20] These
improvements are described below.
1.
Infrastructure upgrades and preventative
maintenance program investments to reduce the risk of system failures, and
ensure a safe and reliable wastewater system, while minimizing disruptions and
protecting the public’s health and environment.
2.
Having appropriate staffing levels by qualified
operations and maintenance (O&M) personnel that will make a minimum of
three weekly site visits, perform weekly inspections of the facilities,
complete all routinely scheduled work orders, prepare and file necessary
regulatory reports, and ensure personnel are on call for emergencies.
3.
Computerized work order-based maintenance management
system that uses GPS and radio frequency identification technology to provide
faster work order processing by O&M personnel.
4.
Remote system monitoring implementation that allows
operators to identify and remedy system malfunctions before they affect
customer service.
5.
Environmental Management Information System
implementation which provides improved real-time regulatory and permit
compliance information, helping to ensure the system complies with applicable
laws and permit limits.
6.
Multiple
modes of communication, such as periodic letters, postcards, Quick Response
codes on bills, and a Florida-specific website, that improve information
delivery to customers regarding system operations and planned and completed
system improvements.
7.
Third-party call center that provides around-the-clock
access for customers.
8.
Cloud-based customer information and billing system that
provides customers with electronic access to usage, billing, and payment
information, as well as work-order management.
9.
Customer service response monitoring system that tracks
customer service metrics, such as speed of answer, dropped calls, and call length,
which allows CSWR-Florida to remedy issues quickly and improve quality of
service. This system also offers a voluntary survey to customers who call to
gauge their satisfaction.
Additionally, staff reviewed the complaints received by
DEP and the Commission’s Consumer Activity Tracking System (CATS) from January
2020 through February 2026.[21] This
includes complaints filed prior to CSWR-Florida’s acquisition on May 26, 2022.
Under the prior owner, the DEP received five odor complaints (three in 2020,
one each in 2021 and 2022), and the Commission received one improper billing
complaint in 2021. While under CSWR-Florida’s ownership, no complaints were
received by the DEP, and two service repair complaints were recorded in CATS in
2025.
Staff also analyzed the complaints received by
CSWR-Florida from July 2022 to June 2026; however, complaints filed with the
Utility prior to acquisition are unavailable. Table 3-1 shows the total number
of complaints by category that CSWR-Florida reported.
For reference, North Peninsula serves approximately 615 customers.
Table 3-1
Number of Utility
Post-Acquisition Complaints by Category
|
Year
|
Billing
|
Customer Service
|
Wastewater Odor/Quality
Issues
|
Service
Interruptions
|
Total
|
|
2022
|
10
|
4
|
1
|
14
|
29
|
|
2023
|
16
|
4
|
2
|
20
|
42
|
|
2024
|
4
|
7
|
28
|
8
|
47
|
|
2025
|
12
|
1
|
12
|
2
|
27
|
|
2026
|
4
|
1
|
-
|
1
|
6
|
|
Total
|
46
|
17
|
43
|
45
|
151
|
Source: Document No. 04688-2026.
The complaints range from billing/payment disputes to
manholes overflowing to general inquiries. Based on the provided complaint log,
CSWR-Florida has been responsive to these customer complaints.
In order to resolve the complaints, the Utility:
1.
assisted customers with payment methodologies and
provided payment plans;
2.
cleaned out sewer lines from backups and clogs, fixed
cracks in lines, and investigated complaints of odors and noise; and,
3.
answered questions about the rates and the WWTP project
and located service lines.
The identified customer concerns should be further
mitigated by the total plant replacement project, anticipated to be in-service
May 30, 2028, and discussed further below. In addition, it appears that
CSWR-Florida has been responsive to billing/payment disputes as they arise.
CSWR-Florida identified improvements such as a third-party call center and
cloud-based billing system aimed at improving the customers’ experience. Based
on the above, staff believes that North Peninsula’s customers will benefit from
the acquisition through anticipated improvements in quality of service.
CSWR-Florida has identified and, in some cases, already implemented the above
improvements aimed at system reliability, regulatory compliance,
responsiveness, and overall customer experience. Staff believes these
improvements will enhance the quality of service provided to North Peninsula’s
customers.
Regulatory Compliance
Rule 25-30.0371(3)(a)2., F.A.C., requires that in
determining the appropriateness of a positive acquisition adjustment for a
non-viable utility, the Commission will consider if the acquired utility’s
customers will benefit from anticipated improvements in regulatory compliance
as a result of the acquisition. Pursuant to Rule 25-30.433(2), F.A.C., in
determining a utility’s regulatory compliance, the Commission will consider
whether the infrastructure and operating conditions of the plant and facilities
are in compliance with Rule 25-30.225, F.A.C. Rule 25-30.225(2), F.A.C.,
requires each water and wastewater utility to maintain and operate its plant
and facilities by employing qualified operators in accordance with the rules of
the DEP. To determine whether North Peninsula’s customers will benefit from
anticipated improvements in regulatory compliance, as a result of
CSWR-Florida’s acquisition, staff reviewed North Peninsula’s compliance history
for the 5 years preceding the date of the acquisition, as well as its
compliance history post-acquisition.
As discussed in Issue 1, CSWR-Florida submitted notices of
violation, consent decrees, or other regulatory actions issued during the 5
years prior to the date of acquisition, pursuant to Rule 25-30.0371(3)(b)8.,
F.A.C. Staff reviewed this information along with DEP records and prior
Commission Orders. Staff’s analysis in this issue considers this
pre-acquisition compliance history, as detailed in Attachment A, as well as the
Commission’s determination regarding North Peninsula’s compliance in its last
rate case prior to CSWR-Florida’s acquisition, the system’s compliance
following the Utility’s acquisition, and any improvements that the Utility
identified pursuant to Rule 25-30.0371(3)(b)10., F.A.C., that may improve
compliance with environmental regulations.
Prior to acquisition, North Peninsula had recurring
compliance and operational deficiencies, including deficiencies in monitoring
and reporting, insufficient certified staffing, deteriorated and improperly
maintained WWTP components, deficiencies with groundwater monitoring wells, and
excessive odors. In the 2019 order issued in North Peninsula’s last rate case
before the system was acquired by CSWR-Florida, the Commission determined that
the system’s condition was not in compliance with the DEP as it was under a
Consent Order (No. 6 in Attachment A).[25]
Following the acquisition, CSWR-Florida entered into a
Consent Order with the DEP for the North Peninsula system on April 18, 2023, to
address unresolved compliance issues identified in the May 6, 2022, Notice of
Violation (No. 10 in Attachment A) that occurred under the prior owner. As
discussed in Issue 1, CSWR-Florida has been meeting its reporting requirements
under the Consent Order and has addressed all identified violations except the
WWTP corrosion. The Utility plans to address the remaining issue through
replacement of the existing WWTP, which is estimated to cost $4,250,000 and be
in service by May 30, 2028.[26] Since
acquiring the system, CSWR-Florida has also reported three SSOs to the DEP.[27]
As part of its petition, CSWR-Florida included a
third-party engineering report, from Woodard & Curran, dated April 2022,
which evaluated the system and identified six projects deemed necessary and
their associated cost of $514,000. In addition, CSWR-Florida identified five
additional projects based on its own system assessment following acquisition.
The projects that have been completed by CSWR-Florida total approximately $702,438
and are listed below.[28]
1.
Facility Tanks – Patched leaks and installed
temporary tank due to the failure of the concrete package plant used for flow
equalization. This project was completed May 1, 2024, and cost $150,428.
2.
Aeration Equipment – Made repairs to and
replaced damaged air lines, diffusers, blowers, and sludge returns, and
installed a sound dampening barrier around the blowers. The sound barrier is to
address complaints of excessive noise. These projects were completed May 31, 2023,
through June 1, 2024. The total cost of the projects is $167,803.
3.
Disinfection System – Repaired chemical feed
pump to ensure proper dosage and patched a leak in the chlorine contact
chamber. These projects were completed May 31, 2023, February 1, 2024, and
April 1, 2024. The total cost is $7,368.
4.
Electrical Equipment – Repaired and replaced
failed panels, blower timers, pumps, breakers, and placed a temporary
generator. These projects were completed January 1, 2024, April 1, 2024, and
June 1, 2024. The total cost is $41,046.
5.
Monitoring Equipment – Installed remote
monitoring equipment on the lift stations, replaced failed meters for sampling,
repaired a ground sampling well, and connected equipment to remote monitor.
These projects were completed May 31, 2023, April 1, 2024, and July 1, 2024.
The total cost for the projects is $67,660.
6.
Solids Handling Equipment – Replaced the return
active sludge pumps and decant pump in the digester. This project was completed
May 31, 2023, and cost $5,045.
7.
Rapid Infiltration Basins – Mowed and tilled the
rapid infiltration basins (RIBs) and replaced the discharge valve controlling
flow from the plant to the RIBs. This project was completed May 1, 2024, and
cost $1,239.
8.
Collection System – Completed a Closed-Circuit
Television inspection to identify damaged lines, repaired those lines, and
repaired damaged manhole rings to reduce infiltration and inflow. These
projects were completed May 31, 2023, through July 1, 2025. The total cost for
these projects is $140,739.
9.
Lift Stations – Replaced damaged or poorly
performing pumps, repaired discharge lines, repaired pump rails and chains,
replaced the level transducers, and repaired electrical and control systems.
These projects were completed May 31, 2023, through June 1, 2025. The total
cost of the projects is $57,952.
10.
Basic Site Cleanup – Removed impacted sludge
from treatment basins, removed trash, debris, and vegetation from site, removed
vegetation from lift station sites. This project was completed on March 1,
2025, and cost $14,264.
11.
Site Safety – Repaired stairs and catwalks,
installed eyewash stations, and repaired fences. These projects were completed
January 1, 2024, through June 1, 2024. The total cost for these projects is
$48,894.
In addition to the projects listed above, and as discussed
in the Quality of Service section, CSWR-Florida has also implemented an
Environmental Management Information System which provides real-time regulatory
and permit compliance information, and helps to ensure the system complies with
applicable laws and permit limits.
As discussed, North Peninsula has had a history of
significant regulatory compliance issues prior to acquisition. Although one
significant compliance issue remains, CSWR-Florida has committed to a long-term
solution through the replacement of its WWTP at a projected cost of $4,250,000.
However, North Peninsula’s historical violations were not limited to managerial
or administrative deficiencies, such as reporting errors or late submissions,
but included serious operational and infrastructure-related deficiencies that
directly affected the condition, maintenance, and operation of the wastewater
system, including equipment deterioration, insufficient certified staffing,
permit exceedances, and ongoing treatment plant failures. Given the severity
and nature of these violations, staff believes CSWR-Florida’s completed
projects and continued investments demonstrate meaningful improvements in
regulatory compliance. Therefore, staff recommends that North Peninsula’s
customers will benefit from the anticipated improvements in regulatory
compliance as a result of CSWR-Florida’s acquisition, and that this criterion
for a positive acquisition adjustment has been met.
Cost Efficiencies and Cost of Providing Service
Pursuant to Rule 25-30.0371(3) and 25-30.0371(4), F.A.C.,
in determining whether the acquired utility customers benefit from the
acquisition, the Commission will consider the anticipated impacts on the cost
of providing service over the next five-year period from the date of
acquisition, as well as anticipated cost efficiencies, including any economies
of scale.
Economies of scale means that an entity is able to reduce
its overall fixed costs of operations by spreading those costs over additional
production units, or customers, while maintaining its fixed cost structure.[29]
According to the Utility’s petition, CSWR, LLC
(CSWR-Florida’s parent company) and CSWR-Florida are part of an affiliate group
that currently owns and operates wastewater systems serving approximately 247,000
customers.[30] The affiliate group owns and operates more
than 940 water and wastewater plants in 11 states, with 38 of them being in
Florida. As a result, the Utility is positioned to achieve cost efficiencies
through economies of scale by sharing administrative functions, operational
personnel, technical expertise, and other resources across multiple systems.
These arrangements may improve operational efficiency, reduce duplicate costs,
and help moderate future increases in the cost of providing service.
In addition, CSWR, LLC’s operation of multiple utility
systems may increase its bargaining power for materials, equipment, and
contracted services. By procuring these goods and services on a larger scale,
the Utility may achieve lower per-unit costs and reduce expenses
that would otherwise be borne by individual systems. Furthermore, the
allocation of fixed costs across a larger customer base may improve overall
cost efficiency and contribute to long-term rate stability.
In 2021, the final year of operation prior to acquisition
by CSWR-Florida, North Peninsula’s O&M expense was $255,137. North
Peninsula’s average O&M expense during the five-year period
preceding the acquisition was $235,612.
CSWR-Florida acquired North Peninsula on May 26, 2022. In response
to staff’s first data request, CSWR-Florida projected an average O&M
expense of $194,765 during the first five years following the acquisition.[31] Table 3-2
summarizes North Peninsula’s historical and projected O&M expenses.
Table 3-2
North Peninsula’s Actual and
Projected O&M Expenses Pre- and Post-Acquisition
|
Year
|
O&M Expense
|
Difference from
Previous Year (%)
|
|
2017 (Actual)
|
$221,844
|
|
|
2018 (Actual)
|
$238,554
|
7.53%
|
|
2019 (Actual)
|
$224,859
|
-5.74%
|
|
2020 (Actual)
|
$237,668
|
5.70%
|
|
2021 (Actual)
|
$255,137
|
7.35%
|
|
Pre-Acquisition Average
|
$235,612
|
|
|
2022 (Projected)
|
$181,600
|
|
|
2023 (Projected)
|
$187,956
|
3.50%
|
|
2024 (Projected)
|
$194,534
|
3.50%
|
|
2025 (Projected)
|
$201,343
|
3.50%
|
|
2026 (Projected)
|
$208,390
|
3.50%
|
|
Projected Post-Acquisition Average
|
$194,765
|
|
Source: Document Nos. 01362-2025, and 01161-2026.
The Utility provided the following (post-acquisition) actual
operating expenses for the first three years of operations under CSWR-Florida:
$308,518, $236,596, and $202,899 respectively.[32]
The average actual O&M expense for the first three years of operations was
$249,338.
The Utility explained that actual O&M expenses
exceeded the post-acquisition pro forma estimates due to unforeseen maintenance
and repair expenditures associated with the aging infrastructure, including
leaks and equipment failures that were not anticipated at the time the pro
forma was prepared.[33] The
Utility further states that certain administrative and operational expenses
incurred at the CSWR-Florida level are allocated among systems based on
customer count. According to the Utility, these shared costs support
managerial, technical, operational, and financial services that are provided
across multiple systems and would otherwise need to be incurred independently
by a stand-alone utility. As a result, CSWR-Florida believes that, through
economies of scale, costs incurred by North Peninsula will be less than if they
were incurred by the utility on a stand-alone basis.[34]
Although the actual post-acquisition O&M expenses
initially exceeded the Utility’s projections, expenses show a declining trend
each year following the acquisition. Actual post-acquisition O&M expenses
decreased by 23.3 percent and 14.2 percent respectively between the first three
years. By 2025, North Peninsula’s O&M expense had decreased to $202,899,
approximately 20.5 percent below the pre-acquisition expense level of $255,137
recorded in 2021 and 4.3 percent above the Utility’s projected O&M of
$194,534 for year three of operations.
Staff recognizes that a portion of post-acquisition
expenses are necessary to address aging infrastructure and improve system
operations. Staff also notes that North Peninsula benefits from access to
shared managerial, technical, and administrative resources that are distributed
across a substantially larger customer base. Based on the Utility’s operational
structure, anticipated economies of scale, and the declining trend in O&M
expenses, staff recommends that customers are anticipated to benefit from cost
efficiencies and anticipated improvements in the cost of providing service.
Ability to Attract Capital
Rule 25-30.0371(3)(a)5., F.A.C., provides
that in determining whether to grant a full or partial positive acquisition
adjustment for the acquisition of a non-viable system, the Commission will
consider the acquiring utility’s ability to attract capital at reasonable
costs. Subsection
25-30.0371(3)(b)13., F.A.C.,
requires an explanation of how the acquiring utility has greater access to
capital than the acquired utility, if applicable. As discussed below, staff
recommends that North Peninsula benefits from being part of a substantially
larger utility that operates numerous water and wastewater systems across
multiple states. These economies of scale improve operational efficiencies and increase
North Peninsula’s ability to attract third-party funding.
As demonstrated in its petition, CSWR-Florida has greater
access to capital than North Peninsula through its affiliation with its parent
company CSWR, LLC, which has obtained private placement financing through
Brookfield Asset Management, Ltd (Brookfield). CSWR-Florida explained that
CSWR, LLC secured a $325 million debt facility from Brookfield. For that
reason, CSWR-Florida has greater access to debt and equity capital necessary to
fund improvements than compared to North Peninsula prior to the acquisition.
CSWR-Florida’s greater access to capital has enabled it to make the necessary
utility improvements in establishing compliance status with DEP requirements.
CSWR-Florida explained that although it currently lacks sufficient independent
net operating income to directly obtain commercial debt financing using its own
creditworthiness, CSWR-Florida anticipates generating sufficient net income to
support debt service and obtain commercial debt financing upon conclusion of
its pending rate case.[35]
CSWR-Florida’s goal is to achieve a more balanced capital structure of
approximately 50 percent equity and 50 percent debt through the use of
non-affiliated commercial debt financing.
Based on its analysis, staff recommends that CSWR-Florida
has demonstrated the customers of North Peninsula will benefit from the
acquisition through anticipated improvements in the ability to attract capital.
Professional and
Experienced Managerial, Financial, Technical, and Operational Resources
CSWR, LLC
currently owns and operates numerous water and wastewater systems serving
thousands of customers. The petition indicates that CSWR-Florida
benefits from its affiliation with CSWR, LLC, which is a large multi-state utility
organization. CSWR, LLC or its affiliates have received regulatory approvals
for utility-related matters in Missouri, Kentucky, Louisiana, Texas, Tennessee,
Mississippi, Florida, North Carolina, South Carolina, and Arizona. CSWR, LLC
has received more than 290 separate orders from regulators in each of those
states that determined it, or its affiliates, have the technical, managerial,
and financial qualifications necessary to acquire, own, and operate water
and/or wastewater systems. The Commission made a similar determination when it
authorized CSWR-Florida to operate several systems in Florida, including North
Peninsula.[36]
Staff recommends that CSWR-Florida, in conjunction with
its parent company, continues to demonstrate that it possesses the managerial,
financial, technical, and operational resources to provide water and wastewater
services in Florida.
Conclusion
Staff recommends the customers of North Peninsula will benefit
from the acquisition by CSWR-Florida through actual and anticipated improvements
in quality of service, regulatory compliance, cost efficiencies, cost of
providing service, the ability to attract capital, and the provision of
professional and experienced managerial, financial, technical, and operational
resources.
Issue 4:
What is the appropriate amount, if any, of the
positive acquisition adjustment?
Recommendation:
Staff
recommends the Commission approve an acquisition adjustment of $85,117 related
to the purchase of North Peninsula by CSWR-Florida. Further, staff recommends
the Commission exercise its existing authority under Rule 25-30.0371(6),
F.A.C., to revisit the North Peninsula acquisition adjustment if it finds that
customer benefits did not materialize or subsequently improve within 5 years of
the order granting the adjustment. (Higgins, Cicchetti, Bloom, J.
Crawford)
Staff Analysis:
CSWR-Florida requests that
the Commission approve a positive acquisition adjustment of $1,151,182
related to its 2022 purchase of the North Peninsula wastewater system and allow
that acquisition adjustment to be amortized over 30 years. The total purchase
price was $1,400,000 for assets with a NBV of $247,528.
This information, as well as the percentage difference between the purchase
price and NBV and the purchase price as a multiple of NBV are shown in Table
4-1.
Table 4-1
Acquisition Adjustment
Summary
|
Acquired Utility
|
Purchase Price
|
Net Book Value
|
Requested
Acquisition Adjustment
|
Percentage
Difference Between the Purchase Price and NBV
|
Purchase Price as a
multiple of NBV
|
|
North Peninsula
|
$1,400,000
|
$247,528
|
$1,151,182
|
466%
|
5.66x
|
Source: Document No. 01739-2025 and staff calculations.
An acquisition premium (or
discount) in utility regulation is the difference between what a utility pays
to acquire another utility and its assets and the depreciated original book
cost of those assets. When the utility seeks to include that difference in its
cost of service, or rate base, it will do so by seeking an acquisition
adjustment. Concerning the instant request, the question before the Commission
is whether customers or utility investors should pay for any of the price above
NBV, and if so, by what amount?
In general, Commission regulatory practice starts with a
presumption against including acquisition premiums in rates; however, Rule
25-30.0371, F.A.C., affords an exception where clear, measurable ratepayer
benefits can be demonstrated as a result of the acquisition.[38] The purpose for this exception was
historically to encourage large, sophisticated companies to buy and operate
smaller, troubled utilities, to facilitate better quality of service to the
utility’s customers and improved operation, investment, and maintenance of the
utility.
Summary
Rule 25-30.0371,
F.A.C., allows for a full or partial acquisition adjustment to recognize the
need to incentivize a utility while maintaining reasonable rate impact. Staff
recommends that the Commission should approve an acquisition adjustment
associated with CSWR-Florida’s purchase of the North Peninsula wastewater
system for the following reasons. The filed information supports a finding that
the North Peninsula system was a non-viable utility at the time of acquisition.
Under its previous ownership, North Peninsula was unable to provide safe,
adequate, and reliable service, as evidenced by extensive deterioration of
treatment facilities, repeated failures of its treatment plant, and a
documented pattern of enforcement actions and compliance deficiencies by
government regulators.
In addition, an
adjustment is warranted based on the information received in this case, because
customers have benefited and should continue to benefit from the acquisition by
CSWR-Florida. Benefits include improved system reliability, enhanced compliance
with environmental regulations, staffing and operational expertise,
implementation of modern monitoring and management technologies, and improved
customer service capabilities. These improvements are both immediate and
ongoing, and they directly address the deficiencies that rendered the system
non-viable.
Moreover, the
transaction was conducted as an arm’s-length purchase between unaffiliated
entities, and there is no evidence suggesting the purchase price was influenced
by affiliate relationships or other improper considerations. The acquisition is
consistent with staff’s understanding of the policy objective of Rule
25-30.0371, F.A.C., which is to promote the consolidation of small (especially
troubled) water and wastewater systems into larger organizations.
For these
reasons, the Commission should find that a full or partial positive acquisition
adjustment is warranted. In determining the appropriate amount of the
acquisition adjustment, the Commission should balance two competing
considerations: (1) encouraging the acquisition and rehabilitation of
non-viable systems as being in the public interest; and (2) ensuring that
customers, who have no engagement in negotiating a purchase price, do not bear
unreasonable costs associated with an acquisition adjustment. It is staff’s
opinion that much of the acquisition premium in this instance reflects business
judgment rather than costs that should be borne by customers. However, a limited
portion should be recoverable because it provides an appropriate regulatory
incentive consistent with staff’s understanding of the policy objectives of
Rule 25-30.0371, F.A.C.
Staff believes
the appropriate outcome is to allow recovery only to the level that fairly
preserves utility incentives while protecting customer interests. As discussed
in greater detail below, staff recommends setting the incentive level to 50
basis points of return related to the acquired system’s rate base. Thus, staff
believes an acquisition adjustment of $85,117 for North Peninsula, should be
approved. Staff believes this harmonizes the purpose of the rule with the
Commission’s obligation to set rates consistent with the requirements of
Section 367.081(2)(a)1., F.S.
Policy
Rationale for Granting, Limiting, or Denying an Acquisition Adjustment
As discussed previously, there is no
specific statutory provision addressing acquisition adjustments in Chapter 367,
F.S. However, staff believes the legal framework applicable to this issue is
the statutory requirement that the Commission prescribe fair and reasonable
rates and charges under Section 367.121(1)(a), F.S., and to fix rates that are
just, reasonable, compensatory, and not unfairly discriminatory under Section
367.081, F.S. This is consistent with the landmark U.S. Supreme Court case, Fed.
Power Comm'n v. Hope Nat. Gas Co., holding that the legality of utility
rates depends on whether they are just and reasonable overall, not on any
particular accounting method used to calculate them.
Rule 25-30.0371, F.A.C., allows the
Commission discretion under Section 367.081(2)(a), F.S., to fix rates that are
just, reasonable, compensatory, and not unfairly discriminatory. The Commission
is not limited to granting the Utility’s entire request; both the statute and
the rule give the Commission discretion to examine and weigh the evidence
offered by the Utility. Rate impact is not alone a basis for denying an
otherwise warranted acquisition adjustment. Rather, it is relevant to determining
whether the amount sought to be recovered from customers bears a reasonable
relationship to the demonstrated benefits of the acquisition and the incentive
necessary to encourage the acquisition and rehabilitation of a non-viable
utility.
If the Commission believes any of the cost
to acquire North Peninsula is rooted in a financial or business-related
decision, staff believes that it may not be appropriate for customers to pay
the entire premium above book value;
rather, the Commission may find that some portion of the price reflects business judgment, with that portion of the
premium to be borne by the purchaser.[40] A
reduction of the acquisition adjustment would offer balance between investor
and customer interests in this regard. Further, the Commission may be concerned
with setting a precedent of approving a requested acquisition adjustment for a non-viable
system that is many multiples (4.65 times) of NBV. In other words, some level
of premium is appropriate to encourage acquisition of troubled systems, but
this should be weighted with the actual benefits received by the customers who
are acquired, recognizing that the customers are not a party to negotiating the
purchase price between the seller and buyer.
Customers of North Peninsula may benefit by
improvements in regulatory compliance and infrastructure conditions as
discussed in Issue 3. However, as of May 19, 2026, North Peninsula’s wastewater
system is not in regulatory compliance with DEP.[41] In
this regard, the Commission may find that customers should not bear the cost of
the prior ownership’s failure to adequately maintain the system and remain in
regulatory compliance.
Partial Acquisition Adjustment
Recommendation for North Peninsula
Staff recommends that, in this case, based
on the record showing anticipated improvements in quality of service,
wastewater regulatory requirements, impacts on the cost of providing service,
cost efficiencies, including economies of scale, the ability to attract capital
at reasonable cost; and the professional and experienced managerial, financial,
technical, and operational resources of the acquiring utility, that the
Commission should limit, in part or whole, any acquisition adjustment if it
found that the benefits of the transaction are too speculative or not likely to
be realized. Rule 25-30.0371(6), F.A.C., states:
“[n]othing 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 improve within 5 years of the date of the
order approving the positive acquisition adjustment.” Staff understands
this language as authority for the Commission to re-evaluate, and if warranted,
rescind future recovery of any unamortized acquisition adjustment if meaningful
customer benefits do not materialize as projected.
If the Commission determines that some
acquisition adjustment is appropriate, staff evaluated the requested
acquisition adjustment using a return-based analysis that the Commission may
consider in determining a reasonable recoverable amount in this proceeding. This
analysis is a way to develop an acquisition adjustment that corresponds to an
incentive level (rate of return) for the acquiring utility. Rather than
beginning with the acquisition premium itself, the analysis begins by
identifying a reasonable incentive expressed as an incremental return. That
incremental return is then applied to the acquired utility’s rate base to
calculate an earnings incentive. Using the Utility’s weighted average cost of
capital (WACC), that earnings amount can then be translated into the
corresponding acquisition adjustment necessary to produce the selected level of
return. In this manner, the acquisition adjustment is evaluated in relation to
the level of incentive it would provide. The calculations supporting this
analysis are discussed below.
The information provided in this docket
provides several reasons why the Commission may find this examination useful.
First, expressing the incentive in terms of incremental return associates the
acquisition adjustment with a familiar ratemaking concept. The Commission has
long relied on authorized returns as a means of balancing investor and customer
interests and, in other contexts, has adjusted authorized returns to recognize
differing levels of risk or performance. Evaluating an acquisition adjustment
through the lens of incremental return provides one means of assessing whether
the requested incentive is reasonable considering the evidence presented.
Second, this analysis can be used to
evaluate the requested acquisition adjustment in relation to the acquired
utility’s investment in utility assets rather than solely the difference
between purchase price and NBV. For purposes of this proceeding, staff relied
on North Peninsula’s rate base information, together with audit and technical
staff adjustments, filed in Docket No. 20250052-WS, to illustrate how this
analysis may be performed using a utility’s financial information. Staff
recognizes that the evidence available will vary from case to case, and this
analysis is based on the information available in this instance rather than
suggesting that identical financial information or calculations will be
available or appropriate in every acquisition adjustment case.
Third, by expressing the requested
acquisition adjustment as the amount of additional rate base necessary to
produce a selected incremental return, the Commission can evaluate whether the
resulting incentive is proportionate to the circumstances of this acquisition
and supported by the information available in this docket.
For purposes of this proceeding, staff
evaluated incremental return levels of 25, 50, 75 and 100 basis points to
illustrate a range of potential incentives. Based on the information in this
docket, staff concluded that an incremental return of 50 basis points
represents one reasonable level of incentive. Staff then applied each
incremental return level to North Peninsula’s adjusted rate base to calculate
the corresponding earnings incentive. Using the Utility’s WACC, staff
translated those earnings amounts into the acquisition adjustment necessary to
produce the selected incentive over a 30-year amortization period.
Applying this analysis to North Peninsula,
which reported a rate base of $744,524 in its Minimum
Filing Requirements, and incorporating audit and technical staff’s proposed
adjustments, results in an adjusted rate base of $696,815. Applying a 50-basis-point incremental
return over a 30-year amortization period produces a target earnings incentive
of $112,466. Using the
Utility’s WACC of approximately 8.52 percent, that earnings incentive
corresponds to an acquisition adjustment of approximately $85,117. The calculations supporting this analysis are shown in
Table 4-2.
This analysis is
offered as one method of evaluating whether the requested acquisition
adjustment represents a reasonable incentive based on the evidence presented in
this proceeding. The weight to be afforded this analysis, together with all
other evidence in the record, remains within the Commission’s discretion.
Table 4-2
Acquisition Adjustment
Calculation
|
Description
|
Figures
|
|
Adjusted Rate Base
|
$696,815
|
|
50-Basis-Point Future Value Factor
|
× 1.1614
|
|
Future Value
|
$809,281
|
|
Target Earnings (Future Value - Adjusted Rate Base)
|
$112,466
|
|
Time Period
|
30 Years
|
|
CSWR-Florida’s WACC
|
8.52%
|
|
Acquisition Adjustment[44]
|
$85,117
|
Source: Staff calculations.
As previously mentioned, staff recognizes that alternative
incentive levels may be reasonable, and therefore, evaluated the impacts of
alternative incentive rates. A summary of resulting
acquisition adjustments under different incentive/return rates is shown in
Table 4-3.
Table 4-3
Incentive Range
|
Range - Basis Points
|
Acquisition Adjustment
|
Stand-Alone Bill Impact
|
Consolidated Bill Impact
|
|
25
|
$41,020
|
$0.85
|
$0.02
|
|
50
|
$85,117
|
$1.77
|
$0.04
|
|
75
|
$132,512
|
$2.75
|
$0.06
|
|
100
|
$183,444
|
$3.81
|
$0.08
|
Source: Staff Calculations.
Staff calculated an acquisition adjustment of $85,117
based on an incentive level of 50 basis points. Staff’s proposed acquisition
adjustment represents approximately 7.4 percent of CSWR-Florida’s requested
amount. The fully loaded bill impact associated with staff’s recommendation when
formulated through the latest assumed customer and cost data filed in the
docket, is $1.77 per customer per month for 30 years on a stand-alone basis, or
$0.04 per customer per month for 30 years on a consolidated basis. Staff
notes these figures are inclusive of the return on the acquisition adjustment
principal balance and associated gross up for income taxes.
Conclusion
Staff recommends
the Commission approve an acquisition adjustment of $85,117 related to the
purchase of North Peninsula by CSWR-Florida. Further, staff recommends the
Commission exercise its existing authority under Rule 25-30.0371(6), F.A.C., to
revisit the North Peninsula acquisition adjustment if it finds that customer
benefits did not materialize or subsequently improve within 5 years of the
order granting the adjustment.
Issue 5:
What is the appropriate amortization period for any
positive acquisition adjustment?
Recommendation:
Staff recommends that the amortization period for
the positive acquisition adjustment should be 30 years. This period should
begin on the date of issuance of the order approving the acquisition
adjustment. (Worrall)
Staff Analysis:
The Commission determines the amortization period
for all acquisition adjustments. In this instance, and pursuant to Rule
25-30.0371(5), F.A.C., amortization will begin on the date of issuance of the
order approving the acquisition adjustment or on the date the sale closes,
whichever occurs last. In its petition, the Utility requested an amortization
period of 30 years. This amortization period was formulated based on the
Utility’s belief that 30 years aligns with the average lifespan of a wastewater
system. Further, spreading the acquisition over a longer period would lessen
the rate impact relative to a shorter period. Staff concurs in this assessment,
and thus, recommends that the 30-year amortization period is reasonable.
Conclusion
Based on the above,
staff recommends the amortization period for the acquisition adjustment for
North Peninsula to be 30 years. Pursuant to Rule 25-30.0371(5), F.A.C., the
amortization period should begin on the date of issuance of the order approving
the acquisition adjustment.
Issue 6:
Should this docket be closed?
Recommendation:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the order, this docket should be closed upon the issuance of a
consummating order. (Bloom, J. Crawford)
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 order, this docket should be closed upon the issuance of a
consummating order.
