Discussion
of Issues
Issue 1:
Does Neighborhood meet the definition of a
non-viable utility as defined in Rule 25-30.0371(1)(e), F.A.C.?
Recommendation:
Yes. Neighborhood 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,
Ramirez-Abundez)
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, subsection (4) of the rule
requires the provision of a cumulative present value of the revenue
requirements (CPVRR) analysis for viable utilities. CSWR-Florida
did not include a CPVRR for Neighborhood in its petition.
Maintenance of Safe, Adequate, and Reliable
Services
The current absence of regulatory violations or
enforcement actions does not, standing alone, establish that a utility is
viable. Under Rule 25-30.0371(1)(e)1., F.A.C., those matters are criteria for
determining whether the utility was unable to provide and maintain safe,
adequate, and reliable service and facilities. Accordingly, staff believes the
relevant inquiry is not simply whether Neighborhood continues to experience
compliance deficiencies, but whether the nature, frequency, duration, and
severity of historical deficiencies, considered together with the condition of
the system and the Utility's managerial, operational, financial, and technical
capabilities, demonstrate an inability to provide and maintain safe, adequate,
and reliable service.
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 a federal, state, regional, or local agency regarding the provision
of water service for the five years prior to the date of acquisition. Staff
reviewed this data as well as prior Commission orders and Neighborhood’s
compliance post-acquisition. Based upon this review, staff believes that, prior
to acquisition, Neighborhood had been unable to maintain safe, adequate, and
reliable services and facilities. This was demonstrated by Neighborhood’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
had inadequate managerial and operational personnel to ensure safe and reliable
service to its customers.
On November 23, 2016, in
Neighborhood’s last rate case, before the system was acquired by CSWR-Florida,
the Commission determined that Neighborhood’s quality of service was
satisfactory, and its water quality was in compliance with the Florida
Department of Environmental Protection (DEP) standards. Regarding the operating
condition of Neighborhood’s plant and facilities, the DEP identified the following
deficiencies in Neighborhood’s Sanitary Survey Reports dated September 29,
2011, and January 24, 2014: (1) well casings corroded (repeat); (2) aerator
screens not cleaned; (3) tank inspections not performed by a licensed engineer;
(4) ground storage tank corroded (repeat); and (5) no Operation and Maintenance
manual (repeat). Neighborhood corrected all but one deficiency, the tank
inspection (No. 3), which was overdue by 18 months. Neighborhood indicated that
this deficiency remained uncorrected due to insufficient funds from declining
revenues and requested that the tank inspection be included as a pro forma
project.[9]
From 2019 through
2022, prior to CSWR-Florida’s acquisition of Neighborhood on November 17, 2022,
the system had recurring compliance and operational issues with the DEP, as
well as monitoring and reporting violations documented in the federal Safe
Drinking Water Information System (SDWIS).[10] The DEP issues included a bacteriological
monitoring violation and failure to provide the required public notice, an
inoperable emergency generator resulting in a lack of standby power, corrosion
below an aerator, leaking pumps, and biological growth in a well pump. The DEP
issued multiple warning letters and other regulatory actions addressing these
issues, including a Consent Order executed in June 2022 that required payment
of $2,500 for violations related to the failed generator, leaking pumps, and
biological growth in a well pump. The SDWIS violations involved routine
monitoring under the Revised Total Coliform Rule, monitoring and reporting
under the Lead and Copper Rule, and inadequate reporting under the Consumer
Confidence Rule. A more detailed description of the DEP compliance history is
provided in Attachment A to this recommendation.[11]
Neighborhood
returned to compliance with the DEP before the acquisition on June 7, 2022,
upon completion of the requirements in the Consent Order discussed in Item 6 in
Attachment A. Staff reviewed Neighborhood’s compliance history following the
acquisition and determined the system has remained in compliance with the DEP.[12]
As discussed
above, Neighborhood has had a history of regulatory compliance issues, prior to
acquisition. These historical violations were not limited to managerial or
administrative deficiencies such as reporting issues or late submission of
filing requirements, but included serious operational and infrastructure
related deficiencies that directly affected the condition, maintenance, and
operation of the water system, including equipment deterioration, permit
exceedances, and ongoing treatment plant failures. Even though
Neighborhood is currently in compliance with DEP, staff believes the nature,
frequency, duration, and severity of Neighborhood’s historical deficiencies,
considered together with the condition of the system and the Utility's
managerial, operational, financial, and technical capabilities, demonstrate an
inability to provide and maintain safe, adequate, and reliable service. Based
on Neighborhood’s history of failing to maintain safe, adequate, and reliable
services, staff recommends Neighborhood should be considered a non-viable
utility.
Insolvency
While Neighborhood 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 Neighborhood has been
unable to meet its debt obligations or otherwise satisfy its financial
liabilities as they became due. Accordingly, staff does not believe that
Neighborhood meets the non-viability criterion based on insolvency.
Conclusion
Neighborhood meets the criteria 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, Neighborhood has
been the subject of enforcement and compliance actions by the DEP arising from
its historical noncompliance with health, safety, and environmental standards. Prior
to acquisition, it has also failed to adequately invest, repair, and maintain
its facilities, and additionally has lacked adequate managerial and operational
capabilities. Therefore, staff believes that Neighborhood meets the definition
of a non-viable utility under Rule 25-30.0371, F.A.C.
Issue 2:
Was the purchase of Neighborhood made as part of an
arms-length transaction?
Recommendation:
The Purchase and
Sale Agreement between CSWR-Florida and Neighborhood 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 Neighborhood water 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 Neighborhood. CSWR-Florida further
claims that there was no prior relationship or influence between it and the
seller. The parties entered into an Agreement for Purchase and Sale of Utility
System, dated May 27, 2021, which includes a purchase price of $460,000 for all
assets used by the seller to provide water service to customers in Duval
County. The transaction closed in November 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 Neighborhood
- 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 September 17, 2021, that
estimated the original installation cost of the assets in 1991, the
hypothetical installation cost in 2021, and an estimated depreciated book value
of $438,860.
CSWR-Florida also obtained an engineering evaluation conducted by Woodard &
Curran, dated August 2021, to assess the condition of the water treatment plant
and systems and recommendations for repair or improvements.
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 $399,937 to recover
the premium it paid to purchase the assets of Neighborhood.
If approved, the price premium would be included in Neighborhood’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 $11.43 per month without consolidation, and $0.18 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 Neighborhood 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.
Issue 3:
Will the customers of Neighborhood 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 Neighborhood will
benefit from the acquisition by CSWR-Florida through experienced and
anticipated improvements in quality of service, regulatory compliance, the
ability to attract capital, and the provision of professional and experienced
managerial, financial, technical, and operational resources. (Cohn,
Ramirez-Abundez, 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 will 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 Section 25-30.433(1), F.A.C.
A review of Neighborhood’s historical chemical analyses,
both before and after the acquisition (2020 through 2026), indicated that the
system has consistently remained in compliance with the DEP’s primary and
secondary standards. Primary standards protect public health while secondary
standards regulate contaminants that may impact the taste, odor, and color of
drinking water. Neighborhood’s overall regulatory compliance is discussed in Attachment
A.
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 Neighborhood’s customers as a result of the acquisition.[19]
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 water 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 (QR) codes on bills, and a Florida-specific website,
improve information delivery to customers regarding system operations, and
planned and completed system improvements.
7.
Third-party call center that provides round-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
the DEP and the Commission’s Consumer Activity Tracking System from January
2020 through February 2026.[20] This
includes complaints filed prior to CSWR-Florida’s acquisition on November 17,
2022. Under the prior owner, the DEP received no complaints, and the Commission
received one improper billing complaint in 2022. While under CSWR-Florida’s
ownership, the DEP received no complaints, and the Commission received two
improper billing complaints in 2025 and 2026, one water pressure complaint in
2025, and one connection delay complaint in 2025.
Staff also analyzed the complaints received by CSWR-Florida
from November 2022 to June 2026; however, complaints filed with the Utility
prior to the acquisition are unavailable. Table 3-1 shows the total number of
complaints by category that CSWR-Florida reported.
For reference, Neighborhood serves approximately 447 customers.
Table 3-1
Number of Utility Post-Acquisition Complaints by
Category
|
Year
|
Billing
|
Customer Service
|
Water Product Quality
|
Service Interruptions
|
Total
|
|
2022
|
-
|
1
|
-
|
-
|
1
|
|
2023
|
34
|
5
|
10
|
84
|
133
|
|
2024
|
51
|
9
|
9
|
20
|
89
|
|
2025
|
17
|
12
|
10
|
161
|
200
|
|
2026
|
18
|
11
|
3
|
67
|
99
|
|
Total
|
120
|
38
|
32
|
332
|
522
|
Source: Document No. 05209-2026.
The complaints range from billing disputes to service
interruptions to general inquiries. Based on the provided complaint log,
CSWR-Florida has been responsive to these customer complaints.[23] In order
to resolve these complaints, the Utility: (1) assisted customers with payment
methodologies and provided payment plans; (2) restored service, repaired lines,
corrected the water pressure, and investigated complaints regarding odor and
color and tested water quality; and (3) answered questions about the rates and
boil water notices.
The identified customer concerns should be further mitigated
by the distribution line repair and remote monitoring projects, which will be
discussed further below. In addition, it appears that CSWR-Florida has been
responsive to these billing complaints as they arise. CSWR-Florida identified
improvements such as a third-party call center and cloud-based billing system
intended to improve the customers’ experience. Based on the above, staff
believes that Neighborhood’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 Neighborhood’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 Neighborhood’s customers will benefit from
anticipated improvements in regulatory compliance, as result of CSWR-Florida’s
acquisition, staff reviewed Neighborhood’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., which staff reviewed 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 Neighborhood’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.
In the 2016 order issued in Neighborhood’s last rate case
before the system was acquired by CSWR-Florida, the Commission determined that
Neighborhood’s quality of service was satisfactory and that its water quality
was in compliance with DEP standards. However, the Commission also identified
deficiencies in the operating condition and maintenance of the plant and
facilities, as indicated by the DEP, including corroded well casings and tanks,
failure to complete required tank inspections, and deficiencies in operation
and maintenance documentation.[24] From 2019
through 2022, prior to CSWR-Florida’s acquisition, Neighborhood had additional
DEP compliance issues involving bacteriological monitoring, public
notification, standby power, corrosion, and leaking pumps, as well as SDWIS
monitoring and reporting violations.[25]
In June 2022, the DEP executed a Consent Order addressing several of the
outstanding issues, which required payment of a $2,500 penalty.
Neighborhood returned to compliance with the DEP on June
7, 2022, prior to acquisition, upon completion of the requirements in the
Consent Order discussed in Item 6 in Attachment A. Staff reviewed
Neighborhood’s compliance history following the acquisition and determined the
system has remained in compliance with the DEP.[26]
As part of its petition, CSWR-Florida included a
third-party engineering report, from Woodard & Curran, dated April 2021,
which evaluated the system and identified 16 projects deemed necessary and
their associated cost of $189,000. In addition, CSWR-Florida identified six
additional projects based on its own assessment following acquisition.[27] The
projects that have been completed by CSWR-Florida total approximately $287,847
and are listed below.[28]
1.
Well Pump Replacement (Well #2) – Refurbished
vertical turbine pump/motor and pump motor starters, and installed pump motor
and 15 Horsepower vertical hollow shaft inverter duty turbine motor. These
projects were completed February 1, 2024, April 1, 2024, and January 1, 2026.
The total cost is $81,899.
2.
Well 2 Maintenance – Cleared vegetation,
replaced damaged piping, installed a new flow meter, and refurbished 6” station
valve. These projects were completed January 1, 2024, and May 1, 2024. The
total cost is $10,674.
3.
Hydropneumatic Tank Recoating/Rehabilitation
Interior/Exterior – Rehabilitated water and main storage tank to extend its
useful life. These projects were completed May 31, 2023, through April 1, 2024.
The total cost is $28,409.
4.
New Air Compressor Installed – Installed a new air
compressor to maintain pressure and air gap in hydro tank. These projects were
completed April 1, 2024, and June 1, 2024. The total cost is $10,048.
5.
Emergency Generator Replacement – Installed a
60KW generator to ensure the facility can deliver uninterrupted service in the
event of a power outage. These projects were completed May 31, 2023, and
January 1, 2025. The total cost is $82,682.
6.
Chlorine Analyzer Installation – Installed
chlorine analyzers to ensure that adequate chlorine residuals are maintained in
drinking water, prevent bacteriological contamination issues, and reduce manual
testing requirements. These projects were completed January 1, 2024, and April
1, 2024. The total cost is $1,915.
7.
Remote Monitoring – Installed remote monitoring
equipment to allow operators to monitor the analyzer and ensure they are
performing as required. These projects were completed May 31, 2023, June 1,
2024, and June 1, 2025. The total cost of the projects is $11,757.
8.
Safety Equipment Installation – Installed new
chemical shower and emergency eye wash station at treatment site to ensure
operator safety in the event of a fire or exposure to disinfection chemicals.
These projects were completed April 1, 2024, June 1, 2024, and July 1, 2024.
The total cost is $10,838.
9.
Booster Pumps Replacements – Replaced booster
pumps to ensure the pumping system can continue to provide adequate system
pressure due to three pumps failing since closing the acquisition. These
projects were completed January 1, 2024, and May 1, 2024. The total cost is
$16,326.
10.
General Distribution Repairs – Installed
automatic flushers on flushing hydrants, exercised/repaired/installed
additional isolation valves, repaired any leaks or breaks that could be
identified. These projects were completed May 31, 2023, through July 1, 2024.
The total cost is $33,299.
11.
Tank Inspections – Completed required hydro tank
inspections. CSWR-Florida identified an estimated completion of the first
quarter of 2024. The actual in-service dates and estimated costs were not
available as the third-party operation firm used by CSWR-Florida did not
provide the specific details associated with the projects.[29]
12.
Tank 2/Aeration Unit Exterior Recoating –
Recoated the exterior of Tank 2 to address the longer-term issues related to
corrosion until it can be replaced. CSWR-Florida identified an estimated
completion of the first quarter of 2024. The actual in-service dates and
estimated costs were not available as the third-party operation firm used by
CSWR-Florida did not provide the specific details associated with the projects.[30]
13.
Flood Lighting Installation – Installed flood
lighting for after-hour operation to ensure operators can safely complete
maintenance activities after dark and during emergency maintenance responses.
CSWR-Florida identified an estimated completion of the fourth quarter of 2023.
The in-service dates and estimated costs were not available as the third-party
operation firm used by CSWR-Florida did not provide the specific details
associated with the projects.[31]
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. CSWR-Florida also provided a preliminary
estimate of $1,250,000 for upgrades to the existing plant, which includes the
decommissioning and replacement of both ground storage tanks and aeration
treatments. However, these projects have not yet commenced because CSWR-Florida
is currently evaluating the possibility of interconnecting the Neighborhood
system with JEA (City of Jacksonville). CSWR-Florida began discussions with JEA
in January 2026 and indicated that it is currently reviewing cost information
for the proposed interconnection.[32]
As discussed, Neighborhood has had a history of regulatory
compliance issues, prior to acquisition. These historical violations were not
limited to managerial or administrative deficiencies, such as, reporting issues
or late submission, but included serious operational and infrastructure related
deficiencies that directly affected the condition, maintenance, and operation
of the water system, including equipment deterioration, 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 Neighborhood’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.[33]
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 water and wastewater systems serving
approximately 448,000 customers.[34] 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, Neighborhood’s O&M expense was $176,445. The Utility’s
average O&M expense during the five-year period preceding the acquisition
was $159,564.
CSWR-Florida acquired Neighborhood on November 17, 2022.
In response to staff’s first data request, CSWR-Florida projected an average
O&M expense of $155,682 during the first five years following the
acquisition.[35] Table 3-2
summarizes Neighborhood’s historical and projected O&M expenses.
Table 3-2
Neighborhood’s Actual and
Projected O&M Expenses Pre- and Post-Acquisition
|
Year
|
O&M Expense
|
Difference from
Previous Year (%)
|
|
2017 (Actual)
|
$136,080
|
|
|
2018 (Actual)
|
$147,440
|
8.35%
|
|
2019 (Actual)
|
$174,748
|
18.52%
|
|
2020 (Actual)
|
$163,109
|
-6.66%
|
|
2021 (Actual)
|
$176,445
|
8.18%
|
|
Pre-Acquisition
Average
|
$159,564
|
|
|
2023 (Projected)
|
$145,159
|
|
|
2024 (Projected)
|
$150,240
|
3.50%
|
|
2025 (Projected)
|
$155,498
|
3.50%
|
|
2026 (Projected)
|
$160,940
|
3.50%
|
|
2027 (Projected)
|
$166,573
|
3.50%
|
|
Projected
Post-Acquisition Average
|
$155,682
|
|
Source: Document Nos.
14784-2025, and 01165-2026.
The Utility provided the
following (post-acquisition) actual operating expenses for the first three
years of operations under CSWR-Florida: $203,233, $232,118, and $254,642
respectively.[36] The
average actual O&M expense for the first three years of operations was
$229,998.
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.[37] 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 Neighborhood will be less than if they
were incurred by the utility on a stand-alone basis.[38]
Actual post-acquisition O&M expenses increased by 14.2
percent and 9.7 percent respectively between the first three years. By 2025,
Neighborhood’s O&M expense had increased to $254,642, approximately 44.3
percent above the pre-acquisition expense level of $176,445 recorded in 2021.
In response to staff’s sixth data request, the Utility
stated that it anticipates operating expenses to remain generally consistent
with those reflected in its first three years of actual operations. Given the
ongoing improvements to utility operations, the Utility explained it would be
inconsistent to anticipate a reduction in O&M expenses in the future;
however, it does not anticipate large increases in O&M expenses absent
unanticipated issues arising.[39]
Staff recognizes that a portion of post-acquisition
expenses are necessary to address aging infrastructure and improve system
operations. Staff also notes that Neighborhood benefits from access to shared
managerial, technical, and administrative resources that are distributed across
a substantially larger customer base. However, the Utility’s actual O&M
expenses during its first three years of operation exceed pre-acquisition
O&M expense levels and trend upward each year, which may reduce the extent
to which customers benefit from anticipated efficiencies 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 Neighborhood 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 Neighborhood’s ability to attract third-party
funding.
As demonstrated in its petition, CSWR-Florida has greater
access to capital than Neighborhood 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 compared to Neighborhood 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 as well as obtain commercial debt financing upon
conclusion of its pending rate case.[40]
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 Neighborhood 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 has made a similar determination when it authorized CSWR-Florida to
operate several systems in Florida, including Neighborhood.[41]
Staff recommends that CSWR-Florida, in conjunction with
its parent company, continues to demonstrate that it has managerial, financial,
technical, and operational resources to provide water and wastewater services
in Florida.
Conclusion
Staff recommends the customers of Neighborhood benefit
from the acquisition by CSWR-Florida through actual and anticipated
improvements in quality of service, regulatory compliance, the ability to
attract capital, and the provision of professional and experienced managerial,
financial, technical, and operational resources of CSWR-Florida.
Issue 4:
What is the appropriate amount, if any, of the
positive acquisition adjustment?
Recommendation:
Staff recommends the Commission approve an acquisition
adjustment of $52,222 related to the purchase of Neighborhood by CSWR-Florida. Further, staff recommends the Commission exercise its
existing authority under Rule 25-30.0371(6), F.A.C., to revisit the Neighborhood 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 $399,937 related to its 2022 purchase of Neighborhood’s water system and allow that acquisition
adjustment to be amortized over 30 years. The total purchase price was $460,000
for assets with a NBV of $60,063. 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
|
|
Neighborhood
|
$460,000
|
$60,063
|
$399,937
|
666%
|
7.66x
|
Source: Document No. 14784-2025 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 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.[42] 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 Neighborhood for the following
reasons.
The filed
information supports a finding that Neighborhood was a non-viable utility at
the time of acquisition. The record demonstrates that customers have benefited
and may 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 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 $52,222 for Neighborhood, 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 Neighborhood
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.[44] 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 (6.66 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.
Partial Acquisition Adjustment Recommendation
for Neighborhood
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 changed 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 Neighborhood’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 Neighborhood’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 Neighborhood, which reported a
rate base of $467,721 in its Minimum Filing
Requirements, and incorporating audit and technical staff’s proposed
adjustments, results in an adjusted rate base of $427,521.[45] Applying a 50-basis-point incremental return over a
30-year amortization period produces a target earnings incentive of $69,002.
Using the Utility’s WACC of approximately 8.52 percent,
that earnings incentive corresponds to an acquisition adjustment of
approximately $52,222. 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
|
$427,521
|
|
50-Basis-Point Future Value Factor
|
× 1.1614
|
|
Future Value
|
$496,523
|
|
Target Earnings (Future Value - Adjusted Rate Base)
|
$69,002
|
|
Time Period
|
30 Years
|
|
CSWR-Florida’s WACC
|
8.52%
|
|
Acquisition Adjustment[47]
|
$52,222
|
Source: Staff calculations.
As previously mentioned, staff recognizes that alternative
incentive levels may be reasonable, and therefore, evaluated the impacts of
alternative incentive rates. The resulting acquisition adjustments under
different incentive/return rates is summarized in Table 4-3.
Table 4-3
Incentive Range
|
Range - Basis
Points
|
Acquisition
Adjustment
|
Stand-Alone Bill
Impact
|
Consolidated Bill
Impact
|
|
25
|
$25,167
|
$0.72
|
$0.01
|
|
50
|
$52,222
|
$1.49
|
$0.02
|
|
75
|
$81,301
|
$2.32
|
$0.04
|
|
100
|
$112,549
|
$3.22
|
$0.05
|
Source: Staff calculations.
Staff calculated an acquisition adjustment of $52,222
based on an incentive level of 50 basis points. Staff’s proposed acquisition
adjustment represents approximately 13.1 percent of CSWR-Florida’s requested
amount. The bill impact associated with staff’s recommendation when formulated
through the latest assumed customer and cost data filed in the docket, is $1.49
per customer per month on a stand-alone basis for 30 years, or $0.02 per
customer per month on a consolidated basis for 30 years.[48]
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 $52,222 related to the
purchase of Neighborhood by CSWR-Florida. Further, staff recommends the Commission
exercise its existing authority under Rule 25-30.0371(6), F.A.C., to revisit
the Neighborhood 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 water 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 Neighborhood 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.
