COLUMBIA COUNTY UTILITY COMMITTEE POST OFFICE BOX 1529

LAKE CITY, FLORIDA32056-1529

EASTSIDE VILLAGE CLUBHOUSE 189 SE CLAUDIA WAY

LAKE CITY, FLORIDA 32025

AGENDA

FEBRUARY 8, 2011

6:00 P.M.

HONORABLE SCARLET FRISINA, UTILITY COMMITTEE CHAIRPERSON:

1) Call to Order

2) Agenda Additions/Deletions

3) Proposed Board Action/Limited Proceedings: a. Eastside Village/Kirby D. Morgan Rate Adjustment Hearing

MEMORANDUM

To: Columbia County Utility Committee From: David Kraus, Senior Staff Assistant Date: January 28, 2011 RE: Staff Recommendations on Eastside Village/Kirby D. Morgan, Inc Rates

SUMMARY

County staff reviewed the November 23, 2010 Price Increase Request submitted by the Kirby D. Morgan, Inc. wastewater utility. The request is based upon a reasonable rate of return on equity for the Pro Forma year 2010 using the leverage formula established by the Florida Public Service Commission in Order Number PSC-10-0401-PAA-WS. Additionally, Staff has reviewed the Provisional Franchise Agreement with representatives of Kirby D. Morgan, Inc. Staff recommends approving a provisional franchise agreement with stipulated rates for Kirby D. Morgan, Inc.

This recommendation is made to the Columbia County Utility Committee as part ofa Proposed Board Action initiated by the Board of County Commissioners. The Columbia County Utility Committee will hear testimony and review evidence at their meeting on February 8, 2010. The Utility Committee will make a final recommendation to the Board of County Commissioners at a formal public hearing.

Findings of Fact

1) Kirby D. Morgan, Inc provides only wastewater services and provides these services to approximately 219 customers in Eastside Village. The City of Lake City provides water throughout the community and provides wastewater services to the remainder of the community.

2) Kirby D. Morgan. Inc cannot expand the utility. Eastside Village is essentially built out and the City of Lake City provides water and sewer services throughout the surrounding area. As such, the utility should be considered 100% "used and useful" in setting rates.

3) The Florida Public Service Commission last approved a rate on July 18, 2007. This increase to $24.15 per month resulted from a 2007 Price Index Rate Adjustment and became effective August 1, 2007.

4) On May 3, 2007, the Columbia County Board of County Commissioners adopted Ordinance 2007-15, the Columbia County Utilities Regulatory Ordinance, which became effective on May 8, 2007.

5) On August 20, 2007, the Florida Public Service Commission issued an order acknowledging the rescission ofjurisdiction over Kirby D. Morgan, Inc. (Docket Number 070345-WS, Order Number PSC -07-0667-FOF-WS).

6) Kirby D. Morgan, Inc has operated since 2007 without a Franchise and in violation of the Columbia County Utilities Regulatory Ordinance.

7) On July 1, 2008, Kirby D. Morgan, Inc increased their rates to $35.00 per month. The Utility did not seek County approval.

8) On January 1, 2010, Kirby D. Morgan, Inc increased their rates to $45.00 per month. The Utility did not seek County approval.

9) On March 11, 2010, County Attorney Marlin Feagle notified Kirby D. Morgan Inc. that that they would need to bring their utility into compliance with 2007-15.

10) On April 26, 2010, Kirby D. Morgan, Inc. formally requested approval of the rate increase stating that management was not previously aware of any requirement to seek County approval for rate increases.

11) On June 18, 2010, the Public Service Commission issued an order establishing the authorized range of returns on common equity for water and wastewater utilities (Order Number PSC-10-0401-PAA-WS).

12) On July 1, 2010, the Columbia County Board of County Commissioners appointed a hearing officer. Between July and September the Utility and the Hearing Officer exchanged information. The Hearing Officer found the Minimum Filing Requirements deficient and no Official Filing Date was set.

13) On October 26, 2011, the Utility Committee begins consideration of Provisional Franchise Agreements and Proposed Board Actions as alternatives to the formal hearing process. The intent is to control rate case expenses and speed the process to resolution.

14) On November 23, 2010, Kirby D. Morgan acknowledged that the current rate of $45.00 exceeds the allowable maximum return of equity. Under the Public Service Commission's leverage formula, Kirby D. Morgan, Inc. would be eligible for a rate of $44.09 in 2010. Kirby D Morgan, Inc. acknowledged that the difference between what was billed in 2010 and the allowable rate for 2010 would need to be refunded to the customers.

15) On December 16, 2010, The Columbia County Board of County Commissioners approved for Provisional Franchise Agreements to be offered to the regulated private utilities.

16) On January 6, 2011, the Board of County Commissioners adopted an amendment to Ordinance 2007-15 authorizing Proposed Board Actions.

17) On January 20, 201, the Board of County Commissioners, by its own motion, authorized a Proposed Board Action to resolve the Kirby D. Morgan, Inc. rate adjustment case.

18) On January 25, 2011, County staff conducted a Customer Meeting of the Eastside Village/Kirby D. Morgan, Inc customers at the Eastside Village Clubhouse.

19) The quality of service is satisfactory. The County has not received any service quality complaints and several customers complemented the service at the Customer Meeting held January 25, 2011.

20)County staff has reviewed all of the exhibits provided by Kirby D. Morgan as part of the rate adjustment process and found them to contain sufficient evidence to support the stipulated rates, fees and charges as set forth in this recommendation.

21) The Provisional Franchise Agreement and the stipulation of rates as the settlement of all issues related to the determination of rates, fees and charges for services rendered by Kirby D. Morgan, Inc within its service area is supported by competent, substantial evidence. Based upon the stipulation by both parties and on the testimony and documentary evidence presented at the Customer Meeting, and barring any conflicting evidence to be presented to the Utility Committee at their meeting, I find that stipulated rates are just, reasonable, compensatory and not unfairly discriminatory.

RECOMMENDATION

Based upon the findings of fact, I recommend to the Columbia County Utilities Committee to adopt a recommendation to the Columbia County Board of County Commissioners to approve a Provisional Franchise Agreement with Kirby D. Morgan, Inc with a stipulated rate of:

$44.09 per month base rate

$0.91 per month refund

$43.18 per month revised rate

Respectfully submitted January 28, 2011

Revised Statement of Revenues and Expenditures

Operation and Maintenance Expense Purchased Power Materials and Supplies

Professional KM Mgt Fees OMC CPA, etc Testing

Other Repairs Contractual Service

Insurance Expense Miscellaneous Expenses

Bank Charges Dues Misc. Telephone

Total Operation and Maintenance Expense

Pro Forma Year 2010

$ 7,500 6,200

33,600 2,700 2,500

18,000 7,500

200

1,000 250

4,200 83,650

$

Test Year 2009

6,697 12,896

8,000 1,811 2,092

29,864 7,240

152

1,587 238

3,779 74,356

$

2008

7,803 2,104

21,500 1,773 2,025

15,280 7,096

982

18 1,477

60,058

$

2007

5,605 1,805

25,728 2,260 1,375

8,699 6,450

2 145

1,184 1,445

54,698

$

2006

6,329 2,627

33,456 2,511 1,790

13,665 7,170

158

67,706

Taxes Depreciation

Total Expenses

8,900 5,230

97,780 $

900 13,012 88,268 $

8,922 68,980 $

8,392 6,007

69,097 $

3,071 5,526

76,303

Revenue 118,260 92,035 77,923 60,502 60,090

Net Income (Loss) $ 20,480 $ 3,767 $ 8,943 $ (8,595) $ (16,213)

Estimated RAF $ 5,321.70 $ 4,141.58 $ 3,506.54 $ 2,722.59 $ 2,704.05

KIRBY D. MORGAN, INC. Comparative Schedule of Operation and Maintenance Expenses For the Years Ended December 31, 2009, 2008, 2007 and 2006

Operation and Maintenance Expense Purchased Power Materials and Supplies Contractual Services

Professional KM Mgt Fees OMC CPA, etc

Testing Other

Repairs Contractual Service

Insurance Expense Miscellaneous Expenses

Bank Charges Dues Miscellaneous Telephone

Test Vear 2009

$ 6,697 12,896

8,000 1,811 2,092

29,864 7,240

152

1,587 238

3,779

2008

$ 7,803 2,104

21,500 1,773 2,025

15,280 7,096

982

18 1,477

2007

$ 5,605 1,805

25,728 2,260 1,375

8,699 6,450

2 145

1,184 1,445

$

2006

6,329 2,627

33,456 2,511 1,790

13,665 7,170

158

Total Operation and Maintenance Expense 74,356 60,058 54,698 67,706

Taxes Depreciation

900 13,012 8,922

8,392 6,007

3,071 5,526

Total Expenses $ 88,268 $ 68,980 $ 69,097 $ 76,303

Revenue 92,035 77,923 60,502 60,090

Net Income {Loss) $ 3,767 $ 8,943 $ (8,595) $ (16,213)

II II KIRBY D. MORGAN, INC.

II SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS AND ACCOUNTING POLICIES

December 31, 2010

NOTE 1 • NATURE OF PROJECTIONS II These projections were prepared for the purpose of complying with Columbia County Ordinance 2007-15, Section 5. The wastewater utility operated by Kirby D. Morgan, Inc.

II is requesting a rate increase sufficient to cover the operational costs of the sewer

II facility. The facility provides sewer services to the residents of Eastside Village Retirement Community. The residents remit a monthly fee as established from time time.

As required by the Ordinance, this projection includes the revenue for the facility

II based on the existing rate of $35.00 per month times the number of current residents (223) in the community. The projection includes a separate column for the revenue

II assuming the proposed rate of $45.00 per month per resident is approved. Currently, there are three residents who are not paying on their accounts and have substantial outstanding balances ($460, $530, and $1055). There are currently seven other residents with smaller past due balances. The projected revenue has been adjusted to reflect revenue for 220 accounts to account for the anticipated lack of payment

II from the three accounts. There may be other delinquent accounts, but these would be expected to be insignificant. Further, the actual revenue for the year would likely be different than the projection as some residents do not remit on a timely basis.

II The expenses are based on historical amounts with adjustments for expected items as described in Note 3, below.

II NOTE 2-ACCOUNTING PRESENTATION

As indicated by the title to the accompanying financial statements, the projected

•• •••II financial statement information is presented on an income tax basis of accounting.

Tl1is is the method used by the company for income tax reporting .

NOTE 3 • EXPENSE PROJECTIONS

The expenses presented on the accompanying financial projection are based on actual historical expense amount incurred on tl1e income tax basis of accounting with adjustments for known and expected changes.

Depreciation Expense

Depreciation expense is computed on the income tax Modified Accelerated Cost Recovery System (MACRS). Under this system, the., cost of the asset is generally recovered by reporting depreciation expense over a specific recovery period . Additionally, the cost of the asset may be recovered by making a special election under Internal Revenue Code Section 179 to expense the cost of the asset in the year of purchase.

ri Page 4

I KIRBY D. MORGAN, INC.

II SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS AND ACCOUNTING POLICIES

December 31, 2010

I NOTE 3 - EXPENSE PROJECTION (continued)

Depreciation Expense (continued)

I Expenditures for major renewals and betterments that extent the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.

Ill Depreciation for the projection period was based on the actual scheduled expense for the existing assets and does not include allowance for the purchase of additional

I assets.

Management Fees

I Eastside Village Realty, Inc., (EVR) a related entity provides support services for

I Kirby D. Morgan, Inc. EVR receives a management fee for these services. Payment to EVR has been sporadic over the years, due to cash flow difficulties. This projection proposes increasing the management fee to cover the costs of the following items provided by EVR:

I Management Services - 20 hours per week @$20 per hour $ 20,800

I Secretarial Services - 5 hours per week @$14 per hour 3,640 1 /2 Utilities cost for shared office

Electricity 2,940 Water 1,200 Telephone 960

5,100 1/2 Cost of Liability Insurance Coverage 4601111 Office Supplies (paper, toner, stamps) 3,600

Total $ 33,600Ill Taxes and Licenses

Tax expense for the following items: Existing Proposed

Rates Rates Real Property Tax $900 $9001111 2009 Regulatory Assessment Fee 4,150 4,150 201 O Regulatory Assessment 3,000 3,850

$ 8,050 $ 8,900

•• II

Page 5

I

I II KIRBY D. MORGAN, INC.

II SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS AND ACCOUNTING POLICIES

December 31, 2010

NOTE 3 - EXPENSE PROJECTION (continued)

II Taxes and Licenses (Continued}

The Regulatory Assessment Fee would be paid to the County. The County Ordinance Ill II

allows for this fee to be passed on to customers with an itemized billing to the customer. The company did not anticipate this fee when it announced the revised $45 fee to residents. Furthermore, residents are not "billed" monthly, but pay the

II announced fee to the company without receiving a billing statement. The additional cost of preparing and mailing monthly bills to residents is not included in the accompanying projection.

Insurance Expense

II Insurance expense includes the cost of a policy on the utility service truck.

II Ill Ill Ill

' ' 'I i. Page 6

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4424 NW AMERICAN LANE. SUITE 101 LAKE CITY. FLORIDA 32055 -coMPANY L.L.P. (386) 752-4621 FAX {386) 752-8966

CERTIFIED PUBLIC ACCOUNTANTS

November 23, 2010

David Kraus, Senior Staff Assistant Columbia County Board of County Commissioners Post Office Box 1529 Lake City, FL 32056

RE: Kirby D. Morgan, Inc. Wastewater Facility 2010 Price Increase Application - Rate of Return Application

Dear Mr. Kraus:

We hereby submit a request for a 2010 Price Increase based on the Rate of Return on Equity for the Pro Forma Year 2010 Financial Information submitted to your agency earlier this year. As you are aware, we have been working with your office this year to bring Kirby D. Morgan Inc. Wastewater Facility (KDM) into compliance with the County's Utility Ordinances. We have submitted detailed financial information as requested by your office for all prior periods and required historical and pro forma financial information for a 2010 price increase application.

A brief outline of the facts is as follows:

0 The Public Service Commission approved a rate of $24.15 per month on August 1, 2007 based on our Price Increase Application. That rate increase was granted based on financial information for the year ended December 31, 2006.

0 Effective May 11, 2007 the Public Service Commission rescinded jurisdiction of KDM. 0 KDM was under the jurisdiction of Columbia County beginning May 12, 2007;

however, KDM was not aware of any requirements set forth by the County. The County made no contact with KDM regarding any requirements until January 27, 2010.

0 Effective July l, 2008 KDM increased rates to $35 per month in an effort to cover expenses.

0 Effective January 1, 2010 KDM increased rates to $45 per month.

We have submitted formal price increase application information on two occasions and on both occasions have received deficiency notices from your counsel, Brian Armstrong. In the September 28, 2010 deficiency notice, Mr. Armstrong provided Public Service Commission Docket No. 100006-WS which establishes the Authorized Range of Return on Common Equity for Water and Wastewater Utilities at 10.85%. A copy of that Docket is attached for your information.

We are assuming that the county will adhere to this authorized rate and therefore submit financial data to support our request for 2010 Price Increase based on this authorized rate. The attached Schedule of Rate of Return on Equity includes the following information:

MEMBERS OF AMERICAN AND FLORIDA INSTITUTES OF CERTIFIED PUBLIC ACCOUNTANTS

) )Kirby D. Morgan, Inc. Page 2

0 Revenue and Expenses for the test year 2009 indicate that KDM generated a 4.48% rate of return. The maximum authorized rate for 2009 was 11.30%. Accordingly, KDM's return was well below the authorized rate. This evidence supports KDM's decision to increase rates from $35 to $45 in 2010. A copy of the historical financial information for tax year 2009, 2008 and 2007, as previously submitted is also attached to support the historical financial information presented in the application schedule.

0 Our office also prepared a Pro Forma Financial Statement to show the financial impact of retaining the $35 rate verses adopting the $45 rate. A copy of that statement, as previously submitted is also attached.

0 The Rate of Return application schedule includes a revision of the revenue calculation and few additional expenses not listed in the Pro Forma statement. In providing the additional information as requested in the deficiency letters, we refined the revenue estimate to include only the existing 219 customer outlets. We learned that four of the customer outlets are not currently serviced as there are no houses on these lots. The original estimate of revenue included 220 customer outlets (223 less currently non paying customers). This revised revenue includes the total actual customer base less an estimate of 3% for uncollectible accounts. The 3% estimate is based on historical collections. The uncollectible revenue is listed as a separate line item. The actual prior year regulatory assessment fees to be paid in 2010 are also included. These items were not included in the prior reporting as we were not aware the county would be collecting for these prior periods.

0 It should be noted that the Rate of Return application does not include the estimated $3,585 in additional administrative and professional fees associated with this price increase application procedure. We were not clear on whether these costs were allowable. We have included an alternative Rate of Return application with Rate Case Amortization in the event that you deem this allowable. The Rate Case Amortization is the additional costs ($3,585) over the allowable four year period.

0 Our Rate of Return application indicates that a rate of $45 would generate a rate of return of 13.47% for KDM, which is in excess of the authorized PSC rate. Our schedule includes a calculation to show that KDM would be allowed to charge $44.06 per month in order not to exceed the authorized PSC rate.

0 KDM could charge $44.41 if the board elects to allow the Rate Case amortization expense in this Rate of Return application.

We request that the board consider granting KDM authority for the $45 rate as charged in 2010. However, should you determine that the $44.09 rate is appropriate, KDM could bill customers $43.18 in 2011 to allow for the 2010 rate adjustment as noted:

Without Rate Case Amortization With Rate Case Amortization $44.09 Allowable Rate 2010 $44.41 $45.00 Rate Charged in 2010 $45.00 $ .91 2010 Overbilli ng $ .59

$44.09 Allowable Rate 2011 $44.41 ( .91) 2010 Overbilling ( .59) $43.18 Revised Rate for 2011 $43.82

') )Kirby D. Morgan, Inc. Page 3

Thank you for your assistance in coordinating with the County Utility Committee and the Hearing Officer for a resolution to this Price Increase Application. We look forward to hearing from you regarding the board's decision to accept this Price Increase Application.

Sincerely,

\Jc,_,_\·t, c_, o. 0. (~~1. .u~\ (Ce,\ Patricia B. Stuart, CPA For the Firm

Cc: Kirby D. Morgan Denise Bose Brian P. Armstrong Terry McDavid, Esquire

KIRBY D. MORGAN, INC. Rate of Return on Equity For the Years Ended December 31, 2009

and the Pro Forma Return for the Year Ending December 31, 2010

Maximum ROE Rate

Pro Forma Year 2010

Proposed

Rate

Existing

Rate

Test Year 2009

Revenue Expenses

$115,790 97,703

$ 118,260 97,780

$ 91,980 96,930

$ 92,035 88,269

Net Income (Loss) 18,087 20,480 (4,950) 3,766

Additional Expenses Estimated Uncollectible Revenue 2007 Regulatory Assessment Fee 2008 Regulatory Assessment Fee

Total Additional Expenses

3,474 1,590 3,507 8,571

3,548 1,590 3,507 8,645

2,759 1,590 3,507 7,856

Adjusted Net Income $ 9,516 $ 11,835 $ {12,806! $ 3,766

Rate Equity

$ 44.06 97,391

$ 45.00 99,710

$ 35.00 75,069 87,876

Return on Equity 10.83% 13.47% -14.57% 4.48%

Maximum Return on Equity 10.85% 10.85% 10.85% 11.30%

·) )

KIRBY D. MORGAN, INC. Rate of Return on Equity - With Rate Case Amortization For the Years Ended December 31, 2009

and the Pro Forma Return for the Year Ending December 31, 2010

Maximum ROE Rate

Pro Forma Year 2010

Proposed

Rate

Existing

Rate

Test Year 2009

Revenue Expenses

$ 116,709 97,703

$ 118,260 97,780

$ 91,980 96,930

$ 92,035 88,269

Net Income (Loss) 19,006 20,480 (4,950} 3,766

Additional Expenses Estimated Uncollectible Revenue Rate Case Expense Amortization 2007 Regulatory Assessment Fee 2008 Regulatory Assessment Fee

Total Additional Expenses

3,501 891

1,590 3,507 9,490

3,548 891

1,590 3,507 9,536

2,759 891

1,590 3,507 8,748

Adjusted Net Income $ 9,517 $ 10,944 $ {13,698} $ 3,766

Rate Equity

$ 44.41 97,392

$ 45.00 98,819

$ 35.00 74,177 87,876

Return on Equity 10.83% 12.45% -15.59% 4.48%

Maximum Return on Equity 10.85% 10.85% 10.85% 11.30%

t )'1---------..,)----------

BEFORE THE FLORIDA PUBLIC SERVICE COMMISSlON

In re: Water and wastewater industry annual DOCKET NO. 100006-WS reestablishment of authorized range of return ORDER NO. PSC-10-0401-PAA-WS on common equity for water and wastewater ISSUED! June 18. 2010 utilities pursuant to Section 367.081(4)( , F.S.

The following Commissioners participated in the disposition of this matter:

NANCY ARGENZTANO, Chairman LISA POLAK EDGAR

NATHAN A. SKOP

NOTICE OF PROPOSED AGENCY ACTION ORDER ESTABLISHlNG AUTHORlZED RANGE OF REI1JRNS ON COMMON EOUJTY

FOR WATER AND WASTEWATER UTILITIES

BY nrn COMMISSION:

NOTICE is hereby given by the Florida Public Service Commission that the action discussed herein is preliminary in nature and will become final unless a person whose interests are substantially affected files a petition for a formal proceeding. pursuant to Rule 25-22.029, Florida Administrative Code.

Background

Section 367 .081 {4)(t), Florida Statutes (F.S.), authorizes this Commission to establish. not less than once each year, a leverage formula to calculate a reasonable range of returns on equity (ROE} for water and wastewater (WA W) utilities. The leverage formula methodology currently in use was established in Order No. PSC-01-2514-FOF-WS. 1 On October 23, 2008, we held a formal bearing in Docket No. 080006·WS to allow interested parties to provide testimony regarding the validity of the leverage formula. Based on the record in that proceeding, we approved the 2008 leverage fonnula in Order No. PSC-08-0846.fOF-WS.2 In that order. we reaffirmed the methodology that was previously approved in Order No. PSC-01-2514-FOF-WS.

1 ~ Order No. PSC-0].2514-FOF-WS, issued December 24, 2001, in Docket No. 010006-WS, In re: Wat~ ·wastiwater ·,ndustry annlfal reesmblishment of authorjzed range of return ~nunon eQuitv for wa1cr and wutewater utilities pursuan1 IP Scctjpn 367.081 (41(t), F,S.1 ~ Ord" No. PSC,-08-0846-FOF·WS, issued December 31', 2008, in Docket No. 080006·WS, ln re: Water and wastewamr industry apnuar reestablishment gf auchoriged r~nge of return on common equity for water and wastewaw utilities pursuant to Section 367.081 l"Allil. F.s .. , ' . ..

. 5 I I

) ----)

ORDER NO. PSC-10-0401-PAA-WS DOCKET NO. 100006-WS PAGE2

In 2009, we established the leverage fonnula currently in effect in Order No. PSC~09-0430-PAA-WS.3

This Order utilizes the current leverage formula methodoJogy established in Order No. PSC-08-0846-FOF-WS. This methodology uses returns on equity derived from financial models applied to an index of natura1 gas utilities. Based on the results of our annual review, there is an insufficient number of WAW utHities that meet the requisite criteria to assemble an appropriate proxy group. Therefore, we have used natural gas utilities as the proxy companies for the leverage fonnula since 2001. There are many natural gas utilities that have actively traded stocks and forecasted financial data. We used natural gas utilities that derive at least 52 percent of their revenue from regulated rates. These utilities have market power and are influenced significantly by economic regulation. As explained in the body of this Order, the model results based on natural gas utilities are adjusted to reflect the risks faced by Florida WAW utilities.

Although Subsection 367.081(4)(:f), F.S., authorizes this Commission to establish a range of returns for setting the authorized ROE for W AW utilities., we retain the discretion to set a ROE for WAW utilities based on record evidence in any proceeding. 1fone or more parties fi1es testimony in opposition to the use of the leverage formula, we will determine the appropriate ROE based on the evidentiary record in that proceeding.

We have jurisdiction pursuant to Section 367.081, F.S.

Decision

The current leverage formula methodology was applied using updated financial dat~ and is calcu1ated as foUows:

Return on Common Equity- 7.46% + 1.356/.Equity Ratio

Where the Equity Ratio =Common Equity/ (Common Equity + Preferred Equity+ LQng-Tenn and Short-Term Debt)

Range: 8.82%@ 100% equity to 10.85%@40% equity

Section 367.081(4)(£), F.S., authorizes us to establish a leverage formula to calculate a reasonab1e range of returns on equity for WAW utilities. We must estabJish this leverage fonnula not less than once a year.

We note that the leverage fonnula depends on four basic assumptions:

l) Business risk is similar for all WAW utilities;

2) The cost of equity is an exponential function of the equity ratjo;

1 ~ Order No. PSC-09-0430·PAA-WS, issued June 19, 2009, in Docket No. 090006-WS, In re: Water and wastewater industry annual reestablishment a( authorized range of return on common equjty for water and wastewater utiljriea pursuant ta S¢ction36Z.08 l(4l(Q. F.S.

ORDER NO. PSC-10-0401-PAA-WS DOCKET NO. 100006-WS PAGE3

3) The marginal weighted average cost of investor capital is constant over the equity ratio range of40 percent to l 00 percent; and,

4) The debt cost rate at an assumed Moody's Baa3 bond rating, plus a 50 basis point private placement premium and a 50 basis point small utility risk premium, represents the average marginal cost of debt to a Florida WAW uti1ity over an equity ratio range of40 percent to 100 percent.

For these reasons, the leverage formula is assumed to be appropriate for the average Florida WAW utility.

The leverage formula relies on two ROE models. We adjusted the results of these models to reflect differences in risk and debt cost between the index of companies used in the models and the average Florjda WAW utiJity. Both models include a four percent adjustment for flOlation costs. The models are as follows:

• A Discounted Cash Flow (DCF) model applied to an index of natural gas utilities (NG) that have publicly traded stock and are followed by the Value Line Investment Survey (Value Line). This DCF model is an armual model and uses prospective growth rates. The index consists of 9 companies that derive at least 50 percent of their totaJ revenue from gas distribution service. These companies have a median Standard and Poor's bond rating of A.

• A Capital Asset Pricing Model (CAPM) using a market return for companies followed byValue Line. the average yield on the Treasury's long-term bonds projected by the Blue Chip Financial Forecasts, and the average beta for the index of NG utilities. The market return for the 2010 leverage foonula was calculated using a quarterly DCF model.

We averaged the indicated returns of the above models and adjusted the result as fo Hows:

• A bond yield differentjaJ of 53 basis points is added to reflect the difference in yields between an A/A2 rated bond. which is the median bond rating for the NG utility index, and a BB8-/Baa3 rated bond. Florida WAW utilities are assumed to be comparable to companies with the lowest investment grade bond rating, which is Baa3. This adjustment compensates for the difference between the credit quality of"A" rated debt and the credit quality of the minimum investment grade rating.

• A private placement premium of 50 basis points is added to reflect the difference in yields on publicly traded debt and privately placed debt, which is i11iquid. Investors require a premium for the lack of liquidity ofprivately placed debt.

• A small utility risk premium of 50 basis points is added because the average Florida WAW utility is too·small to qualify for privately placed debt.

After the above adjustments, the resulting cost of equity estimate is included in the average capita] stn1cture for the NG utilities. The cost of equity is detennined at a 40 percent

ORDER NO. PSC-10-0401-P AA-WS DOCKET NO. 100006-WS PAGE4

equity ratio and the leverage formula is derived. The derivation of the approved leverage fonnula using the current methodology with updated financial data is presented in Attachment 1.

For administrative efficiency, the leverage formula is derived to determine the appropriate retum for an average Florida WAW utility. Tradjtionally, we have applied the same leverage formula to all WAW utilities. As is· the case with other regulated companies under our jurisdiction. we have discretion in the detennination of the appropriate ROE based on the evidentiary record in any proceeding. If one or more parties file testimony in opposition to the use of the leverage fonnula, we will detennine the appropriate ROE based on the evidentiary record in that proceeding.

We find it appropriate to cap returns on common equity at 10.8S percent for all water and wastewater utilities with equity ratios less than 40 percent. We find that this will discourage imprudent financial risk. This cap is consistent with the methodology in Order No. PSC-08~ 0846-FOF-WS.

Based on the foregoin& it is

ORDERED by the Florida Public Service Commission that the leverage formula methodology,summarized herein and in Attachment 1. is hereby approved. It is further

ORDERED that Attachment l is incorporated herein by reference. It is further

ORDERED that returns on common equity are hereby capped at 10.85 percent for all water and wastewater utilities with equity ratios of less than 40 percent in order to discourage imprudent financial risk. It is further

ORDERED that the provisions of this Order, issued as proposed agency action. shall b~ome final and effective upon the issuance of a Consummating Order unless an appropriate petition. in the form provided by Rule 28-106.201, Florida Administrative Code, is received by the Commission Clerk, 2S40 Shumard Oak Boulevard, Tallahassee, FJorida 32399-0BSO. by the close ofbusiness on the date set forth in the "Notice of Further Proceedings" attached hereto. It is further

ORDERED that in the event this Order becomes final, this docket shall remain open t.o allow our staff to monitor changes in capital market conditions and to readdress the reasonableness of the leverage formula as conditions warrant.

--- --------- )~--------------.,.);,--------------ORDER NO. PSC-10-0401-PAA-WS DOCKET NO. l 00006-WS PAGES

By ORDER of the Florida Public Service Commission this l 8th day ofJune. 2010.

ANNCOLE Commission Clerk

(SEAL)

ELS

NOTICE OF FURTHER PROCEEDINGS OR JUDICIAL REVIEW

The Florida Public Service Commission is required by Section 120.569(1 ). Florida Statutes. to notify parties of any administrative hearing that is available- under Section 120.57. Florida Statutes, as well as the procedures and time limits that apply. This notice should not be construed to mean all requests for an administrative hearing will be granted or result in the relief sought.

Mediation may be available on a case-by-case basis. If mediation is conducted, it does not affect a substantially interested person's right to a hearing.

The action proposed herein is preliminary in nature. My person whose substantial interests are affected by the action proposed .by this order may file a. petition for a formal proceeding, in the form provided by Rule 28-106.201, FJorida Administrative Code. This petirion must be received by the Office of Commission Clerk. 2540 Shumard Oak Boulevard, Tallahassee, Florida 32399-0850, by the close ofbusiness on Julv 9. 2010.

In the absence of such a petition. this order shall become final and effective upon the issuance of a Consummating Order.

Any objection or protest filed in this/these docket(s) before the issuance date of this order is considered abandoned unless it satisfies the foregoing conditions and is renewed within the specified protest period.

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ORDER NO. PSC-t0-0401-PAA-WS DOCKET NO. 100006-WS PAGE6

Attaclunent I Page 1 of6

SUl\llMARY OF RESULTS

Leverage Fonnula Update

AQurove~ 2010 2009

Results Results

(A) DCF ROE for Natural Gas Index 8.92% 9.87%

(B) CAPM ROE for Natural Gas Index ~ ~

AVERAGE 8.75% 9.58%

Bond Yield Differential 0.53% 0.44%

Private Placement Premium 0.50% 0.50%

Small-Utility Risk Premium 0.50% 0.50%

Adjustment to Reflect Required Equity

Return at a 40% Equity Ratio

Cost of Equity for Average Florida WAW

Utility at a 40% Equity Ratio 10 85°4t 11.30%

2009 Leverage Formula (Currently in Effect)

Return on Common Equity = 8.58%+ 1.087/ER

Range ofReturns on Equity :::: 9.67% - 11.30%

2010 Leverage Formula (Approved)

Return on Common Equity = 7 -46% + 1.3S6/ER

Range ofReturns on Equity = 8.82% - I 0.85%

ORDER NO. PSC-10-0401-PAA-WS DOCKET NO. 100006-WS PAGE7

Attachment 1 Page 2 of6

Marginal Cost of!nvestor CapitaJ Average Water and Wastewater Utility

Capital Component Marginal Cost Rate

Weighted Marginal Cost Rate

Common Equity Total Debt

48.16% 51.84%

10.28% 7.46% *

4.95% 3.87%

100.000/o 8.82%

A 40% equity ratio is the floor for calculating the required return on common equity. The return on equity at a 40% equity ratio is 7.46% + 1.3561.40 = 10.85%

Marginal Cost of Investor Capital Average Water & Wastewater Utility at 40% Equity Ratio

Weighted Marginal Marginal

Capital Component Cost Rate Cost Rate

Common Equity 40.00% 10.85% 4.34% Total Debt 60.00% 7.46%* 4.48%

100.00% 8.82%

Where: ER:: .Equity Ratio= Common Equity/(Common Equity+ Preferred Equity+ Long-Term Debt+ Short-Term Debt)

* Assumed Baa3 rate for March 2010 plus a .50 basis point private placement premium and a 50 basis point small utility risk premium.

Sources: Moody's Credit Perspectives and Value Line SeJection and Opinion

) )

KIRBY D. MORGAN, INC.

PROJECTION

For the Year Ending December 31, 201 o

) )

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4424 NWAMERICAN LANE, SUITE 101 LAKE CITY, FLORIDA 32055-cOMPANY L.L.P. (386) 752-4621 FAX (386) 752-8968

CERTIFIED PUBLIC ACCOUNTANTS

Kirby D. Morgan Kirby D. Morgan, Inc. Lake City, Florida

We have compiled the accompanying projected statement of assets, liabilities and stockholder's equity (deficit) - income tax basis of Kirby 0. Morgan, Inc. ( an S corporation) as of December 31, 2010, and the related projected statement of revenues, expenses, and retained earnings (deficit) ~ income tax basis for the year then ending, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The financial statements have been prepared on the income tax basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. The accompanying projection was prepared for submission of a rate increase application to the Columbia County Board of County Commissioners.

A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection. We have not examined the projection and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, even if the rate increase is granted, there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

The accompanying projection and this report are intended solely for the information and use of Kirby D. Morgan, Inc. and the Columbia County Board of County Commissioners and is not intended to be and should not be used by anyone other than these specified users.

Certified Public Accountants

April 23, 2010

MEMBERS OF AMERICAN AND FLORIDA INSTITUTES OF CERTIFIED PUBLIC ACCOUNTANTS

) ) KIRBY D. MORGAN, INC.

PROJECTED STATEMENT OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)- INCOME TAX BASIS

December 31, 2010

ASSETS CURRENT ASSETS

Cash in Bank

PROPERTY AND EQUIPMENT, at cost LESS ACCUMULATED DEPRECIATION

NET PROPERTY AND EQUIPMENT

OTHER ASSETS Deposits Loan to Related Party

TOTAL OTHER ASSETS

LIABILITIES AND STOCKHOLDER'S EQUITY STOCKHOLDER'S EQUITY (DEFICIT)

Common Stock Paid in Capital Retained Earnings (Deficit)

TOTAL STOCKHOLDER'S EQUITY (DEFICIT)

Existing Rates

$1,968

188,306 141,372

46,934

1,275 33,169

34,444

$831346

$100 109,571 (26,325)

$83,346

Proposed Rates

$27,518

186,306 141,372

46,934

1,275 33,169

34,444

$108,896

$100 109,571

(775)

$108,896

See Summary of Significant Assumptions and Accounting Policies and Accountants' Report - 2 -

) ·) KIRBY D. MORGAN, INC.

PROJECTED STATEMENT OF REVENUES, EXPENSES AND RETAINED EARNINGS (DEFICIT) - INCOME TAX BASIS

For the Year Ending December 31, 201 O

Existing Rates

SEWER FEES $92,400

OPERATING EXPENSES Repairs and Maintenance 18,000 Depreciation 5,230 Supplies 5,000 Management Fees 33,600 Contractual Service 7,500 Utilities 7,500 Telephone 4,200 Water Tests 2,500 Professional Fees 2,700 Bank Charges 1,000 Office Supplies 1,200 Taxes and Licenses 8,050 Dues and Subscriptions 250 Insurance 200

TOTAL OPERATING EXPENSES 96,930

NET INCOME (4,530)

RETAINED EARNINGS (DEFICIT) - BEGINNING (21,795)

RETAINED EARNINGS (DEFICIT) - ENDING ($26,325)

Proposed Rates

$118,800

18,000 5,230 5,000

33,600 7,500 7,500 4,200 2,500 2,700 1,000 1,200 8,900

250 200

97,780

21,020

(21,795)

($775)

See Summary of Significant Assumptions and Accounting Policies and Accountants' Report - 3 -

:) )

KIRBY D. MORGAN, INC.

FINANCIAL STATEMENT

For the Years Ended December 31, 2009, 2008 and 2007

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4424 NW AMERICAN LANE, SUITE 101 LAKE CITY, FLORIDA 32055 -coMPANY L.L.P. (386) 752-4621 FAX (386) 752-8966

CERTIFIED PUBLIC ACCOUNTANTS

Kirby D. Morgan Kirby D. Morgan, Inc. Lake City, Florida

We have compiled the accompanying statement of assets, liabilities and stockholder's equity (deficit) - income tax basis of Kirby D. Morgan, Inc. ( an S corporation) as of December 31, 2009, 2008 and 2007, and the related statement of revenues, expenses, and retained earnings (deficit) - income tax basis for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The financial statements have been prepared on the income tax basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles.

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

Management has elected to omit substantially all of the disclosures ordinarily included in financial statements prepared on the income tax basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the Company's assets, liabilities, capital, revenues, and expenses. Accordingly, these financial statements are not designed for those who are not informed about such matters.

Certified Public Accountants

April 19, 2010

MEMBERS OF AMERICAN AND FLORIDA INSTITUTES OF CERTIFIED PUBLIC ACCOUNTANTS

) ) KIRBY D. MORGAN, INC.

STATEM ENT OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) • INCOME TAX BASIS

December 31, 2009, 2008 and 2007

2008

$4,959

180,856 123,130

57,726

1,275 20,149

21,424

$84,109

$100 109,571 (25,562)

$84,109

2007

$5,209

178,153 114,208

63,945

1,275 4,737

6,012

$75,166

$100 109,571 (34,505)

$75,166

ASSETS CURRENT ASSETS

Cash in Bank

PROPERTY AND EQUIPMENT, at cost LESS ACCUMULATED DEPRECIATION

NET PROPERTY AND EQUIPMENT

OTHER ASSETS Deposits Loan to Related Party

TOTAL OTHER ASSETS

LIABILITIES AND STOCKHOLDER'S EQUITY STOCKHOLDER'S EQUITY (DEFICIT)

Common Stock Paid in Capital Retained Earnings (Deficit)

TOTAL STOCKHOLDER'S EQUITY (DEFICI $87,876 =====

2009

$1,268

188,306 136,142

52,164

1,275 33,169

34,444

$87,876

$100 109,571 (21,795)

See Accountants' Compilation Report - 2 -

) ) KIRBY D. MORGAN, INC.

STATEMENT OF REVENUES, EXPENSES AND RETAINED EARNINGS (DEFICIT) • INCOME TAX BASIS For the Years Ended December 31, 2009, 2008 and 2007

SEWER FEES

OPERATING EXPENSES Repairs and Maintenance Depreciation Supplies Management Fees Contractual Service Utilities Telephone Water Tests Professional Fees Bank Charges Office Supplies Taxes and Licenses Dues and Subscriptions Insurance Miscellaneous Expense

TOTAL OPERATING EXPENSES

INCOME FROM OPERATIONS

OTHER INCOME Other Income

NET INCOME

RETAINED EARNINGS (DEFICIT) • BEGINNING

RETAINED EARNINGS (DEFICIT) • ENDING

2009 $89,806

29,864 13,012 11,898 8,000 7,240 6,697 3,779 2,092 1,811 1,587

998 900 238 152

0

88,268

1,538

2,229

3,767

(25,562)

($21,795)

2008 $77,923

15,280 8,922 1,904

21,500 7,096 7,803 1,477 2,025 1,773

982 200

0 0 0

18

68,980

8,943

0

8,943

(34,505)

($25,562)

gQQZ $60,502

8,699 6,007 1,526

25,728 6,450 5,605 1,445 1,375 2,260

2 279

8,392 145

0 1,184

69,097

(8,595)

0

(8,595)

(25,910)

($34,505)

See Accountants' Compilation Report - 3 -

Comparison of Sewer Only Rates

• Eastside Village $45.00

• Columbia County $55.67

• City of Lake City $69.79 - The City raised its rates twice in 2010

Considerations in Rate Setting The Board of County Commissioners has the "powers and rights": • To fix rates which are just, reasonable, compensatory, not unfairly discriminatory

and fairly balance the interest of the Utility and the ratepayers.

In determining rates, the Board of County Commissioners shall consider: • value and quality of service

- Compliance issues with FDEP and County - Customer complaints

• the cost of providing service including - Debt interest and working capital - Maintenance, operating expenses, depreciation and taxes

• a fair return on the utility's investment; 2010 PSC established reasonable range of returns cap at 10.85% Can use an alternative approach - 10% of O&M

Current KDM Request

Pro Forma Test Year Year,2010 2009

Maximum Proposed Existing ROE Rate Rate Rate

Revenue $ 115,790 $ 118,260 $ 91,980 $ 92,035 Expenses 97,703 97,780 96,930 88,269

Net Income {Loss, 18,087 20,480 (4,950) 3,766

Additional Expenses Estimated Uncollectible Revenue 3,474 3,548 2,759 2007 Regulatory Assessment Fee 1,590 1,590 1,590 2008 Regulatory Assessment Fee 3,507 3,507 3,507

Total Additional Expenses 8,571 8,645 7,856

Adjusted Net Income $ 9,516 $ 11,835 $ {12,806} $ 3,766

Rate $ 44-06 $ 45.00 $ 35.00 Equity 97,391 99,710 75,069 87,876

Return on Equity 10.83% 13-47% -14.57% 4.48%

Maximum Return on Equity 10.85% 10.85% 10.85% 11.30%