Discussion
of Issues
Issue 1:
Does Rolling Oaks meet the definition of a
non-viable utility as defined in Rule 25-30.0371(1)(e), F.A.C.?
Recommendation:
Yes. Rolling Oaks 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 petitioner to provide a cumulative present value of revenue
requirements (CPVRR) analysis for viable utilities.
CSWR-Florida did not include a CPVRR for Rolling Oaks 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 a federal, state, regional, or local agency regarding the provision
of water and wastewater service for the five years prior to the date of
acquisition. Staff reviewed this data as well as Rolling Oaks’ regulatory
compliance post-acquisition. Because Rolling Oaks was transferred to CSWR-Florida
on November 30, 2022, following Citrus County’s rescission of jurisdiction,
there are no prior Commission rate case orders.
From 2017 through 2022, prior to CSWR-Florida’s
acquisition of Rolling Oaks, the wastewater system had recurring compliance and
operational issues with the Florida Department of Environmental Protection (DEP),
and the water system had monitoring and reporting violations documented in the
federal Safe Drinking Water Information System (SDWIS).[9]
The DEP issues included effluent exceedances for fecal coliform and total
residual chlorine, damage to the effluent disposal area fencing, groundwater
monitoring exceedances for pH and nitrate-nitrogen, several sanitary sewer
overflows (SSOs), and deficiencies identified during inspections involving
treatment equipment, facility maintenance, missing emergency contact
information, and biosolids reporting. The DEP issued multiple Compliance
Assistance Offers and other regulatory actions addressing these issues. In
September 2022, the DEP issued a final permit requiring Rolling Oaks to upgrade
the facility to 1 million gallons per day (MGD) and meet a 3 milligrams per
liter (mg/L) total nitrogen limit established in Administrative Order No.
047-SWD22. The SDWIS violations involved monitoring and reporting under the
Lead and Copper Rule, the Ground Water Rule, and the Revised Total Coliform
Rule. A more detailed description of the DEP compliance history is provided in
Attachment A to this recommendation.[10]
Based upon this review, staff believes that, prior to
acquisition, Rolling Oaks had been unable to maintain safe, adequate, and
reliable services and facilities. This was demonstrated by Rolling Oaks’
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.
Following the acquisition, the DEP issued CSWR-Florida a
Warning Letter on March 4, 2026, which contained several required actions for
the system to return to compliance. The following are the issues that the DEP
Warning Letter identified: (1) the plant had an ongoing discharge of solids to
the rapid infiltration basins due to a plant upset; (2) the facility had not
complied with AO No. 047-SWD22 (No. 13(a) in Attachment A), which required
meeting total nitrogen (TN) limits; (3) the facility had been reporting flows
under the incorrect version of the Discharge Monitoring Reports (DMR); (4) the three-month
average daily flow exceeded 50 percent of the permitted capacity for greater
than three consecutive months; (5) exceedances were noted in the effluent and
groundwater sampling without providing sufficient comments in the DMRs; and (6)
groundwater well-pads were not properly maintained. CSWR-Florida is required to
complete all necessary improvements to meet the 3 mg/L TN effluent limitation
in the AO by October 23, 2027.
Rolling Oaks’ wastewater permit renewal (No. 13(a) in Attachment
A), states that Rolling Oaks’ Wastewater Treatment Plant (WWTP) is required to
meet the DEP’s TN limits. In Exhibit 4 of the petition, CSWR-Florida stated
that the WWTP cannot currently meet the DEP’s TN limits and therefore must be
improved and upgraded to handle the 1 MGD capacity identified in the permit
renewal. Therefore, Rolling Oaks’ WWTP will be replaced by a larger plant
designed to meet the TN limits required by the DEP, and to handle the increased
capacity. CSWR-Florida has engaged a third-party engineering firm to design a
new wastewater treatment facility with a true capacity of 1 MGD, and will
incorporate treatment processes capable of achieving effective removal of TN.
The design of the new facility is currently in development, with an estimated
total cost of $20,000,000, and estimated in-service date of August 2028.[11]
As discussed above, Rolling Oaks’ wastewater system 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 upgrade of its WWTP. Rolling Oaks’
historical violations were not limited to managerial or administrative
deficiencies, such as reporting errors or late submissions. They also included serious
operational and infrastructure-related deficiencies that directly affected the
condition, maintenance, and operation of its wastewater system, including
equipment deterioration, permit exceedances, and ongoing treatment plant
failures.
Based on Rolling Oaks’ inability to maintain safe,
adequate, and reliable services, staff recommends Rolling Oaks should be
considered a non-viable utility.
Insolvency
While Rolling Oaks 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 Rolling Oaks has been
unable to meet its debt obligations or otherwise satisfy its financial
liabilities as they became due. Accordingly, staff does not believe that
Rolling Oaks meets the non-viability criterion based on insolvency.
Conclusion
Rolling Oaks 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, Rolling Oaks
has been the subject of enforcement and compliance actions by the 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 believes that Rolling
Oaks meets the definition of a non-viable utility under Rule 25-30.0371, F.A.C.
Issue 2:
Was the purchase of Rolling Oaks made as part of an
arms-length transaction?
Recommendation:
The Purchase
and Sale Agreement between CSWR-Florida and Rolling Oaks 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 Rolling Oaks water and 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 Rolling Oaks. 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 December 30, 2021, which includes a
purchase price of $33,000,000 for all assets used by the seller to provide
water and wastewater service to customers in Citrus 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 Rolling Oaks - 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 August 23, 2022, that estimated the original installation cost of the
assets in 1979, the hypothetical installation cost in 2021, and an estimated
depreciated book value of $1,887,153.
CSWR-Florida also obtained an Appraisal Report by Valbride Property Advisers,
dated June 7, 2021, that estimated the market value of the parcel of land owned
by Rolling Oaks Utilities at $4,725,000 as of August 22, 2022.
CSWR-Florida also obtained an engineering evaluation conducted by Clearpoint
Consulting Engineers, P.A., dated March 2022, to assess the condition of the
water and WWTP 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 $32,444,319 to recover the premium it paid to purchase the assets
of Rolling Oaks.
If approved, the price premium would be included in Rolling Oaks’ 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 $36.70 per water
customer and $36.70 per wastewater customer per month without consolidation,
and $14.20 per water customer and $14.20 per wastewater customer per month
consolidated with the other systems owned by CSWR-Florida.[18] 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 Rolling Oaks 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 Rolling Oaks 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 Rolling Oaks 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 Rolling Oaks’ 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. Rolling Oaks’ overall regulatory compliance is discussed in
greater detail in Attachment A.
Pursuant to Rule 25-30.0371(3)(b)10., F.A.C., CSWR-Florida
listed the actual and expected improvements in the quality of service provided
to Rolling Oaks’ 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 safe and
reliable water and wastewater systems, 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, as well as 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
the DEP[20] from
January 2020 through February 2026, and the Commission’s Consumer Activity
Tracking System (CATS) from May 2024 through February 2026.[21]
This includes complaints filed prior to CSWR-Florida’s acquisition on November
30, 2022. Under the prior owner, the DEP received one boil water notice
complaint in July 2022. While under CSWR-Florida’s ownership, the DEP received
one boil water notice complaint in 2026, one odor complaint in 2024, and two
miscellaneous complaints in 2023. Additionally, post-acquisition, between 2024
and 2026, CATS recorded six improper billing complaints, one outage complaint,
three water pressure complaints, one inaccurate meter reading complaint, and
one unfulfilled disconnection request complaint.
Staff also analyzed the complaints received by CSWR-Florida
from December 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, Rolling Oaks serves approximately 11,703 customers.
Table 3-1
Number of Utility Post-Acquisition Complaints by
Category
|
Year
|
Billing
|
Customer Service
|
Wastewater Odor/Quality Issues
|
Water Product Quality
|
Service Interruptions
|
Total
|
|
2022
|
1
|
-
|
-
|
-
|
16
|
17
|
|
2023
|
538
|
70
|
5
|
15
|
537
|
1,165
|
|
2024
|
370
|
111
|
12
|
24
|
311
|
828
|
|
2025
|
269
|
54
|
48
|
19
|
719
|
1,109
|
|
2026
|
54
|
36
|
39
|
15
|
771
|
915
|
|
Total
|
1,232
|
271
|
104
|
73
|
2,354
|
4,034
|
Source: Document No. 05210-2026.
The complaints range from billing/payment disputes to
service interruptions to general inquiries.
Based on the provided complaint log,
CSWR-Florida has been responsive to these customer complaints.[24] In order
to resolve the complaints, the Utility: (1) assisted customers with payment
methodologies, provided payment plans, and sent out technicians to investigate
meter issues; (2) cleaned out sewer lines from backups and clogs, restored
service, repaired lines, and corrected the water pressure; (3) investigated
complaints regarding odor and color and tested water quality; (4) answered
questions about the rates and boil water notices; and (5) returned call-back
requests within 48 hours or by a specified timeframe.
The identified customer concerns should be further mitigated
by the distribution line repair and remote monitoring projects, which will be
discussed further below along with the Utility’s regulatory compliance. In addition, the wastewater system has been
subject to several significant compliance issues with the DEP, such as SSOs,
which CSWR-Florida plans to remedy. While CSWR-Florida also reported receiving
billing complaints as discussed above, it appears that CSWR-Florida has been
responsive to these complaints as they arise and identified improvements such
as a third-party call center and cloud-based billing system intended to improve
the customer’s experience. Based on the above, staff believes that Rolling
Oaks’ 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. The
additional regulatory compliance projects to address the wastewater system
should also improve quality of service as it relates to sewage overflows, which
pose environmental and health concerns. Staff believes these improvements will
enhance the quality of service provided to Rolling Oaks’ 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 Rolling Oaks’ customers will benefit from
anticipated improvements in regulatory compliance, as a result of CSWR-Florida’s
acquisition, staff reviewed Rolling Oaks’ 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 and Attachment A, CSWR-Florida
submitted any 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 the DEP
records. Staff’s analysis in this issue considers this pre-acquisition
compliance history, as detailed in Attachment A, as well as the system’s
compliance following CSWR-Florida’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. Because Rolling Oaks was
transferred to CSWR-Florida on November 30, 2022, following Citrus County’s
rescission of jurisdiction, there are no prior Commission rate case orders.
For the five years preceding the acquisition, Rolling
Oaks’ water system experienced consistent monitoring and reporting violations with
the DEP primarily associated with total coliform from positive bacteriological
tests, as well as monitoring and reporting violations documented in the federal
SDWIS, as discussed in Issue 1; however, the system maintained a compliant
status with the DEP during this time period.[25]
Following the acquisition, CSWR-Florida has maintained the water system’s DEP
compliance.[26]
As addressed in Issue 1 and Attachment A, Rolling Oaks’
wastewater system had recurring compliance and operational issues with the DEP prior
to CSWR-Florida’s acquisition, including effluent and groundwater monitoring exceedances,
SSOs, and deficiencies involving treatment equipment, facility maintenance, and
biosolids reporting. In September 2022, the DEP issued a final permit requiring
Rolling Oaks to upgrade the facility to 1 MGD and meet a 3 mg/L total nitrogen
limit established in Administrative Order No. 047-SWD22 (No. 13(a) in
Attachment A). Following the acquisition, the DEP issued a Warning Letter in
March 2026 addressing continued wastewater compliance issues, including failure
to meet the 3 mg/L total nitrogen limit, reporting deficiencies, and other
operational and maintenance deficiencies. CSWR-Florida is required to complete
the necessary improvements to meet the 3 mg/L total nitrogen limit by October
23, 2027.
As part of its petition, CSWR-Florida included a
third-party engineering report, from Clearpoint Consulting Engineers, P.A.,
dated March 2022, which evaluated the water system and identified six projects
deemed necessary and their associated cost of $1,457,500. In addition, CSWR-Florida
identified two additional projects based on its own system assessment following
acquisition.[27] The water
system projects that have been completed by CSWR-Florida total $1,308,722 and
are listed below.
1.
Disinfection System – Installed chlorine
monitoring system, refurbished chlorine injector, rebuilt disinfection residual
monitoring equipment, refurbished sterner pump, installed French drain
discharge line, and replaced/cleaned injection point and duck bill. These
projects were completed May 31, 2023, through December 1, 2024. The total cost
of the projects is $89,511.
2.
Distribution System – Repaired isolation valves,
repaired fire/flushing hydrants, and repaired leak. These projects were completed
May 31, 2023, through November 1, 2025. The total cost of the projects is
$564,125.
3.
Electrical System – Refurbished charging system,
installed breaker panel/site lighting, installed new conduit/wiring to control
box, installed new starter motor, refurbished fuel injection pump. These
projects were completed May 31, 2023, through September 1, 2025. The total cost
of the projects is $83,057.
4.
Meters – Installed new meters. These projects
were completed May 31, 2023, through June 1, 2025. The total cost of the
projects is $188,524.
5.
Remote Monitoring – Installed remote monitoring
equipment and supervisory control and data acquisition system on well. These
projects were completed May 31, 2023, through January 1, 2025. The total cost
of the projects is $70,928.
6.
Site Improvements – Refurbished well houses,
painted wells, removed trees, replaced well house exterior doors, and installed
fencing. These projects were completed May 31, 2023, through January 1, 2025.
The total cost of the projects is $213,152.
7.
Wells – Refurbished well, well pump motor, well
pipe, and vertical turbine pump, installed new meter spigot, and replaced lube
lines. These projects were completed May 31, 2023, through September 1, 2025.
The total cost of the projects is $99,425.
For the wastewater system, the third-party engineering
report identified ten projects deemed necessary and their associated costs of
$1,937,500. In addition, CSWR-Florida identified seven additional projects
based on its own system assessment following acquisition.[28]
The wastewater projects that have been completed by CSWR-Florida total
approximately $1,937,733.
1.
Aeration Equipment – Refurbished blower and
blower rooms, and installed new aeration drop leg and diffusers. These projects
were completed May 31, 2023, through April 1, 2025. The total cost of the
projects is $231,227.
2.
Clarifier Upgrades & Improvements –
Refurbished clarifier and repaired damaged skimmer arm. These projects were
completed April 1, 2024, and June 1, 2025. The total cost of the projects is
$160,046.
3.
Collection System/Sewer System – Refurbished
gravity sewer main, sewer main, sewer lateral, and effluent line, and installed
isolation valves, effluent pump, and new riser outfall pipe. These projects
were completed January 1, 2024, through January 1, 2026. The total cost of the projects is $97,547.
4.
Disinfection System – Installed chlorine
monitoring system, piping for disinfection residual monitoring equipment, and
duplex skit mount system, and replaced baffles in chlorine contact chamber.
These projects were completed January 1, 2024, through March 1, 2025. The total
cost of the projects is $30,119.
5.
Electrical System – Installed submersible pump
control panel, new light/outlet, new conduit/light, float control system, and
40 horsepower (HP) soft starter, completed electrical upgrades for blower room
and lift station, refurbished lift station control panel, and constructed
H-Frame for control boxes and remote monitoring. These projects were completed
January 1, 2024, through June 1, 2025. The total cost of the projects is
$100,930.
6.
Facility Structures – Poured concrete
containment system for screening and converted lime tank to influent surge
tank. These projects were completed January 1, 2024, through June 1, 2025. The
total cost of the projects is $46,435.
7.
Lift Stations – Refurbished lift station, force
main, gate valve, and base elbow, installed chain for sewage pump, check valve,
3 HP sewage pump, floats/floats system, base/rail system, magnetic flow meter,
and guide rails and piping for pump, and primed lift station pump. These
projects were completed May 31, 2023, through January 1, 2026. The total cost
of the projects is $408,384.
8.
Monitoring Equipment – Installed remote
monitoring units, chlorine monitoring system, and composite samplers. These
projects were completed May 31, 2023, through January 1, 2025. The total cost
of the projects is $154,613.
9.
Pumping Equipment – Replaced broken pumps. This
project was completed January 1, 2024. The total cost of the project is $3,884.
10.
Safety – Installed eye wash and safety shower,
and refurbished safety cabinets and handrails. These projects were completed
January 1, 2024, through January 1, 2025. The total cost of the projects is
$22,220.
11.
Site Improvement – Installed garage doors for
lab, lift stations lighting, lift stations fencing, electric gate opener, and
fencing at the wastewater treatment facility (WWTF), removed vegetation,
constructed building over tank/skid, refurbished walking beam, parking
lot/driveway, maintenance building, and lab, painted tank/chlorine contact
chambers and WWTF, and poured concrete pad around chlorine contact chambers.
These projects were completed May 31, 2023, through April 1, 2025. The total
cost of the projects is $619,119.
12.
Solids Handling Equipment Installation –
Installed solids handling equipment. These projects were completed April 1,
2024, and May 1, 2025. The total cost of the projects is $52,997.
13.
Treatment Equipment Installation – Installed
treatment equipment. This project was completed March 1, 2024. The total cost
of the project is $10,212.
In addition to the improvements 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, permit compliance information, and helps to ensure the system
complies with applicable laws and permit limits. Additionally, as discussed in
Issue 1, CSWR-Florida plans to replace the existing Rolling Oaks WWTP because
it cannot currently meet the DEP’s 3 mg/L TN limit or the 1 MGD capacity
requirement established in the September 2022 permit renewal. CSWR-Florida has
engaged a third-party engineering firm to design a new facility with treatment
processes capable of achieving the required TN removal and a true capacity of 1
MGD. The project is estimated to cost $20,000,000 and be placed in service by
August 2028.[29]
As discussed, Rolling Oaks’ wastewater system 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 upgrade of its WWTP. However, Rolling Oaks’ 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 its wastewater 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 Rolling
Oaks’ 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.[30]
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.[31] 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, Rolling Oaks’ O&M expense was $2,451,109. Rolling Oaks’
average O&M expense during the two-year period preceding the acquisition
was $2,447,062. The Utility was not able to provide annual reports for 2017
through 2019.
CSWR-Florida acquired Rolling Oaks on November 30, 2022.
In response to staff’s first data request, CSWR-Florida projected an average
O&M expense of $2,456,459 during the first five years following the
acquisition.[32] Table 3-2
summarizes Rolling Oaks’ historical and projected O&M expenses.
Table 3-2
Rolling Oaks’ Actual and
Projected O&M Expenses Pre- and Post-Acquisition
|
Year
|
O&M Expense
|
Difference from
Previous Year (%)
|
|
2017 (Actual)
|
N/A
|
|
|
2018 (Actual)
|
N/A
|
|
|
2019 (Actual)
|
N/A
|
|
|
2020 (Actual)
|
$2,443,014
|
|
|
2021 (Actual)
|
$2,451,109
|
0.33%
|
|
Pre-Acquisition
Average
|
$2,447,062
|
|
|
2022 (Projected)
|
$2,290,420
|
|
|
2023 (Projected)
|
$2,370,584
|
3.50%
|
|
2024 (Projected)
|
$2,453,555
|
3.50%
|
|
2025 (Projected)
|
$2,539,429
|
3.50%
|
|
2026 (Projected)
|
$2,628,309
|
3.50%
|
|
Projected
Post-Acquisition Average
|
$2,456,459
|
|
Source: Document Nos. 14979-2025, and 03006-2026.
The Utility provided the following (post-acquisition) actual
operating expenses for the first three years of operations under CSWR-Florida:
$3,881,519, $3,511,102, and $3,191,974 respectively.[33]
The average actual O&M expense for the first three years of operations was
$3,528,198, 44.2 percent above the pre-acquisition
average O&M expense, and 43.6 percent above the Utility’s projected average
O&M expense during the first five years following the acquisition.
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.[34] 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 Rolling Oaks will be less than if they
were incurred by the utility on a stand-alone basis.[35]
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 9.5 percent and 9.1 percent respectively between the first three
years. By 2025, Rolling Oaks’ O&M expense had decreased from CSWR-Florida’s first year of operations to
$3,191,974, approximately 30.2 percent above the pre-acquisition expense level
of $2,451,109 recorded in 2021.
In response to staff’s fifth 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 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.[36]
Staff recognizes that a portion of post-acquisition
expenses are necessary to address aging infrastructure and improve system
operations. Staff also notes that Rolling Oaks 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, 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 Rolling Oaks 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 Rolling Oaks’ ability to attract third-party funding.
As demonstrated in its petition, CSWR-Florida has greater
access to capital than Rolling Oaks through its affiliation with its parent
company CSWR, LLC, which has obtained private placement financing through
Brookfield Asset Management, LTD (Brookfield).[37]
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 Rolling Oaks 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 rate case.[38]
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 Rolling Oaks 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 Rolling Oaks.[39]
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 Rolling Oaks will 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 $144,992 related
to the purchase of Rolling Oaks by CSWR-Florida. Further, staff recommends the
Commission exercise its existing authority under Rule 25-30.0371(6), F.A.C., to
revisit the Rolling Oaks 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 $32,444,319 related to its 2022 purchase of
Rolling Oaks’ water and wastewater systems and allow that acquisition
adjustment to be amortized over 30 years. The total purchase price was
$33,000,000 for assets with a NBV of $555,680. 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
|
|
Rolling Oaks
|
$33,000,000
|
$555,680
|
$32,444,319
|
5,839%
|
59.39x
|
Source: Document No. 14979-2025 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.[40] 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
Rolling Oaks for the following reasons. The filed information supports a
finding that Rolling Oaks was a non-viable utility at the time of acquisition. Under
its previous ownership, Rolling Oaks 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
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 $144,992 for Rolling Oaks, 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.,[41] 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 company’s entire request; both the statute and the rule give the
Commission discretion to examine and weigh the evidence offered by the company.
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 Rolling
Oaks 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.[42]
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 (58.39 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 Rolling Oaks
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 annual 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 Rolling Oaks’
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 Rolling Oaks’ 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 Rolling Oaks, which reported a
rate base of $3,616,764 in its Minimum Filing
Requirements, and incorporating audit and technical staff’s proposed
adjustments, results in an adjusted rate base of $1,186,986.[43] Applying a 50-basis-point incremental return over a
30-year amortization period produces a target earnings incentive of $191,580.
Using the Utility’s WACC of approximately 8.52 percent,
that earnings incentive corresponds to an acquisition adjustment of approximately
$144,992. 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
|
$1,186,986
|
|
50-Basis-Point Future Value Factor
|
× 1.1614
|
|
Future Value
|
$1,378,566
|
|
Target Earnings (Future Value - Adjusted Rate Base)
|
$191,580
|
|
Time Period
|
30 Years
|
|
CSWR-Florida’s WACC
|
8.52%
|
|
Acquisition Adjustment[45]
|
$144,992
|
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 the 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
|
$69,875
|
$0.08
|
$0.03
|
|
50
|
$144,992
|
$0.16
|
$0.06
|
|
75
|
$225,727
|
$0.26
|
$0.10
|
|
100
|
$312,486
|
$0.35
|
$0.14
|
Source: Staff calculations.
Staff calculated an acquisition adjustment of $144,992
based on an incentive level of 50 basis points. Staff’s proposed acquisition
adjustment represents approximately 0.4 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 $0.16
per water customer and $0.16 per wastewater customer per month on a stand-alone
basis over 30 years, or $0.06 per water customer and $0.06 per wastewater
customer per month on a consolidated basis over 30 years.[46]
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 $144,992 related to the
purchase of Rolling Oaks by CSWR-Florida. Further, staff recommends the
Commission exercise its existing authority under Rule 25-30.0371(6), F.A.C., to
revisit the Rolling Oaks 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 water and
wastewater systems. 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 Rolling Oaks 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.
