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HomeMy WebLinkAboutDocumentation_Regular_Tab 8E_10/11/2001 MIMOANDM DATE: OCTOBER 5,2001 TO: MICHAEL COUZZO,VILLAGE MANAGER FROM: JOANN FORSYTHE,FINANCE DIRECTOR ), RE: STAFF RECOMMENDATION FOR THE CALCULATION OF THE AUTOMATIC ANNUAL PRICE INDEX RATE TO ADJUST THE WATER UTILITY RATES FOR THE F/Y/E 9/30/2002 Staff Recommendation: Staff recommends the following criteria for calculating the automatic annual price index rate for F/Y/E 9/30/2002. a. The period for calculating the index factor components will be the most recently completed fiscal year of operations of the Utility System (i.e., as of September 30`h of each fiscal year). If audited financial statements are not available then the actual amounts for each fiscal year with any known adjustments that can be reasonable estimated at the time,should be used. b. The rate adjustment is effective with bills rendered November 1'`. These bills would be for October usage that is billed in November. c. The Village should revise Sections 18-3(l) and (m) of the Rate Ordinance prior to the determination of the next index adjustment to define the rate index application process and provide flexibility on when it can be implemented. When the Finance Department attempted to calculate the automatic annual price index rate for F/Y/E 9/30/2002, we looked to the Rate Ordinance 18-3(1) and (m) for guidance to determine the correct components for the calculation. The Ordinance refers to "Fiscal year operating expenses" without defining "fiscal year" (i.e., the most recent audited fiscal year expenses, the most recent actual fiscal year expenses, etc.). Staff contacted John Randolph, Village Attorney and Robert Ori, Public Resources Management Group, Inc. for guidance. Attached is a letter from Robert Ori that has been reviewed by the Village Attorney, which offers guidance for calculating the rate adjustment with consideration of the revenue bond covenants in place as well as the ordinance, addressing the adjustment. 10/9/0112:52 PM 10/05/01 13:37 FAX 4076285884 PRMG • I'I? Public Resources urces Management Group, Inc: • • A . Utility, Rate, Financial and Management Consultants . October 4,2001 . Ms.JoAnn Forsythe • PRMG#1056-02•• . Finance Director • Village of Tequesta • 136 Bridge Road . Tequesta,Florida 33469 . Subject: Annual Price Index Rate Adjustment . • . . Dear JoAnn . . • . • . . . As we:recently discussed, there seems to be some concern on how the Village of Tequesta (the "Village") should calculate the automatic annual rate adjustment as adopted by Ordinance No 529 and as enumerated in Section 18-3 of the Village's Code of Ordinances (the "Rate' Ordinance"). As you know, the purpose of the annual rate adjustment as reflected in the Rate Ordinance is to provide a mechanism such that rates can be adjusted annually to recover the effects of inflation on the cost of operations, thus preserving net revenue margins of the Utility System. This is of particular importance since the Village has issued and has outstanding utility revenue bonds for which repayment is from a pledge of the net revenues of the Utility System. Based on the intent of the Rate Ordinance and based on information reflected in Resolution.No. • 99/00,the automatic annual rate adjustment or price index is calculated using a two-part formula. . The two-part formula used by the Village to calculate the index is as follows: Part 1: (Fiscal Year Operating Expenses-Cost of Water Purchased)=Net Operating Expenses; . And Part 2: (Net Operating Revenues x Price Index Rate Adjustment Factor)I Fiscal Year Revenue=Percent Rate Adjustment. • The concern that the Village. has is that the period for the calculation of the index factor components is not defined in the Rate Ordinance, thus causing some uncertainty in•the . determination of the index factor. Based on my experience with other municipalities and the Florida'Public Service Commission' (FPSC) procedures for the determination of a price.index adjustment, the key factors in the ' . . • determination of the index is consistency in annual application and matching the factors to actual costs and revenues. Based on our discussions, I would suggest the following for•the Village's consideration in the calculation of the index. . Fiscal Year Operating Results-Operating Expenses —.The Fiscal Year'operating results would include the operating expenses, cost of purchased water, and, in part, the rate revenues used in the calculation of the index. The Rate Ordinance requires that the index be applied to the level of • 225 SOTiTI•I SWOOI'E AVENUE ''SUITE 211 ,. AtIMTLAidll, FL 32751 TELEPHONE (407) 628-2601) • FAX (41)7) 628-5884 . _____ _._1.0e.05/01 13:38 FAX 4076285884 P1AG e003 Ms.Jo Forsythe Village of Tequesta October 4,. 2001 Page 2 . operating expenses as generally defined by common! a believe links to a historical calculation period. Y accepted accounting ' recently completed fiscal I would recommend that the fiscal principles be for e ofmost each fiscalently year). year of operations.of the Utility System(i.e., yearfor the This would allow the Village to calculate of September 30th actual costs and revenuesthe most the rate adjustment based on adjustment process. This is also theis used defensible figures to rely the regulation private isia s withinm Florida. With respect upon m this rate is based on prior year utilities results,e which the FPSC for the price indexing.. to the FPSC procedures process theess in. is filed with the FPSC(the annual reportingindex. • As we discussed with respect to the use of previous• year Process). the annual audit will'not be available well into the sub applied.aa I believe that the actualuentfiscal yeare for w is being• subsequent for whiehththee index of • reareasonable forthe determination.hthe use of the unaudited actual amounts for each fiscal sonable (those that are ofthe .index factor. I would yearo is • unaudited year-endnormal at year-end or can be reasonably estimated)ghbe Made actual results. Isoany known �the - determination of the applicable operating expenses be retainedanyto the a rate m nstio adjustment whichwiil affect the suggeste that by the Village sinceed upon in tore ratepayers of the Village.e Village the index Fiscal Year Operating, Results-Revenues - • results deals with pe the. late revenues. Mother component of the Fiscal 18-3 are subject to rate and should be'includeYear operating the rate revenues which are enumerated in Section Revenue as reflected in the index formulainreflected determination • The revenue should be consistent with the nnation of the operating expenses. recommend that the Village incorporate in the determination eof rev one adjustment tut a period o "annualize"the revenues as a result.of rate changes which ma ' (e.g., � would1 revenues. This adjustment is the automatic rate adjustment)as then current rate d for sent) d, the g the e year.e recognized a will (e. ,the an application o Since the Village will be applying the estiment rates oe a if the rates were s effect for r index a the in the pricea indexy formula should reflect that the FPSC requires in the determination of the full fiscal determine thethe price index fora regulated s is utilitie adjustment that determine rates were annualized in z revenues,inone must determine the billingdeterminates utilities. To sounds difficult, a simple what that adjusted revenus would Although time frame subject to "old" P pproach.would be to simply ratio any revenues for periods that were rates to determine the revised revenues. documentation relied upon in the determination of the applicable � _ . documentation n ati the x a rate adjustment which willAgain,blerevenues I would suggest thatb any PP aatepa be retained by the affect the future ratepayers of the Village. _ Index Adjustment Factor — Indulation anThe Rate Ordinance. s the of change to� specifies the index factor to be used in the Ordinance states that the period of will relydetermine the index.factor. • e U. S. • Department of Labor, Bureau of Labor Statistics theConsumer Price Index published by, �e late June to May. is my understandingfor the twelvemonth period of chane between evaluations in its It is m b that the Village uses this timeframe for other cost �5,vth the g, budgeting, and rate adjustment analyses. period of change in determination of the index. Over time, The key is to be consistent l�Dcur in the index if the Village were to rely upon a immaterial because periods are eventuallyreflected any fluctuation that would . .P different determination period would be in.the index calculation ( dos I056-021TequestaNricelndcic i), If the Village 10/05/01 13:38 FAX 4076285884 PRMG 004 Ms.JoAnn Forsythe Village of Tequesta October 4,2001 • Page 3 • were receptive to a change in the index calculation period,I would suggest the use of the twelve- month period of change from September to August. This index would essentially match the time frame for which the operating expenses were determined and which the rate index is being calculated,thus providing a higher degree of accuracy in the rate index factor(the period of time of the index and the determination of expenses/revenues is essentially the same). This is also the general practice of the FPSC in the determination of the CPI Index Factor for the regulated utilities. If the Village feels thatrevising the index calculation period would not be consistent • with other practices of the Village, then maintenance of the current index calculation period • would be appropriate. • Implementation Date — The Rate Ordinance.provides for an implementation date for bills rendered on and after October 1, 1999 and each year thereafter. It is not clear that the index must • be each October 1st, that would require a legal opinion. Based on my suggestions and • - recommendations referenced above, the application of the rate index essentially would result.in a rate adjustment effective with bills rendered November 15t. It should.be noted that I think the overall intent of the Rate Ordinance is still in place since the index would apply to October usage . that is billed to the customer in November. This would also provide the Village the ability to notify its customers of the public hearing (for adoption of the rate resolution)that will adopt the change in rates associated with the implementation of the automatic rate index adjustment. As you can see, all my suggestions deal with defensibility in cost and revenue determination, consistency in periods of calculation,and conservatism to the customer(e.g., annualized revenue . calculation). As mentioned earlier, if the Village consistently determines and applies the index from year to year, I believe that will be in the best interest of the Village and its ratepayers. I would further suggest that the Village revise Section 18-3(1) of the Rate Ordinance prior to the determination of the next index adjustment to define the rate index application process and provide.flexibility on when it can be implemented. I hope my recommendations and suggestions are useful to the Village as it prepares its upcoming automatic annual rate adjustment for the Fiscal Year 2002 test period. If you have any questions or comments with respect to my suggestions,please do not hesitate to give me a call. Very truly yours, Public Resources Management Group,Inc. . Robert J.Ori • President • cc: John C.Randolph,Esquire,Jones,Foster,Johnston and Stubbs • :Torn Jensen,Reese Macon and Associates 1056-021TequestaPriceindex(1).doc OCT. 2.2001 3:28PM JONES FOSTER JOHNSTON & STUBBS 140.946 r.i/i OJFOSTER ONESE Flaglcr Center'Ibwer,Suite 1100 Mailing Address JOHNSTO505 South Flagler Drive Post Office Box 3475 STr m�J�BS P.A. West Palm Beach,Florida 33401 West Palm Beach,Florida 33402-3475 • 1 / Telephone(561)659-3000 Facsimile(561)832-1454 Attorneys and Counselors John C.Randolph,Esquire Direct Dial:,561-650-0458 Direct Fax 661-650-0435 E-Mail• jandolph©junes-foster.com October 2, 2001 JoAnn Forsythe, Finance Director ' Village of Tequesta Post Office Box 3273 Tequesta, Florida 33469 Re: Village of Tequesta Water Rates Our File No. 13153.1 Dear Jody: This is a follow up to your question in regard to the indexing issue relating to water rates. Hopefully you received my message in regard to this matter and you have had an opportunity to resolve it through your discussions with Robert Ori. If you need any further assistance in regard to this matter, please do not hesitate to contact me. Sincerely, JONES, F$ S R, JOHNSTON & STUBBS, P.A. John C. Randolph JCR:ssm