The Florida Senate
BILL ANALYSIS AND FISCAL IMPACT STATEMENT
(This document is based on the provisions contained in the legislation as of the latest date listed below.)
Prepared By: The Professional Staff of the Committee on Regulated Industries
BILL: SB 194
INTRODUCER: Senator Hooper
SUBJECT: Utility System Rate Base Values
The Florida Senate
DATE: March 20, 2023
ANALYST STAFF DIRECTOR REFERENCE ACTION
1. Schrader Imhof RI Pre-meeting
2. AEG
3. FP
The Florida Senate
I. Summary:
HB 194 creates s. 367.0811, F.S., to authorize public water and wastewater utilities to utilize an
alternative fair market valuation methodology to establish the rate base for an acquired utility
using the lesser of either:
The purchase price paid for the acquired utility; or
The average of three appraisals of the value of the acquired utility (appraised by three
licensed appraisers chosen from a list established by the Florida Public Service Commission).
II. Present Situation:
Challenges for Small Water Utilities
The water and wastewater industry is one of the most capital intensive industries in the United
States.
1
As of 2018, the United States Environmental Protection Agency (EPA) estimated that
$473 billion was needed to maintain and improve water infrastructure over the next 20 years and
that thousands of treatment plants, storage tanks, and other key infrastructure need to be
improved or replaced.
2
According to the American Society of Engineers (AASE) there is a water
1
National Regulatory Research Institute, A Review of State Fair Market Value Acquisitions Policies for Water and
Wastewater Systems, Sep. 2021 (available at: https://pubs.naruc.org/pub/ED8E5710-1866-DAAC-99FB-B70190F3D64A).
2
Environmental Protection Agency, Infographic: EPA’s 6
th
Drinking Water Infrastructure Needs Survey and Assessment,
Aug. 2018, https://www.epa.gov/sites/default/files/2018-08/documents/dwinsa_infographic_august_2018_final.pdf.
REVISED: BILL: SB 194 Page 2
main break in the United States every two minutes and 6 million gallons of treated water is lost,
on average, each day to such breaks.
3
AASE also states that funding for water infrastructure has
not kept up with the needs to address aging systems and, in many places, water infrastructure is
aging and deteriorating.
4
Small water systems can especially struggle to make these needed investments. This happens for
a number of reasons:
Lack of expertise, these systems may simply lack the staff or managerial expertise necessary
to identify systems in need of maintenance, repair, or replacement.
Lack of capital, or at least the inability to access to lower-cost capital, to invest in system
infrastructure.
Lack of economies of scale inherent in larger systems.
System abandonment due to disinterest of owners or management in running a system, death
of the owner or operator of the system with no clear plan of succession, or frustration with an
inability to meet water standards and other regulatory requirements.
5
These challenges show up in system violations. Of the 38,853 Safe Drinking Water Act
(SDWA)
6
violations in the United States in 2021, 30,153 (77 percent) were in very small
systems. For Florida, of the 1,382 SDWA violations, 1,017 (73 percent) were in very small
systems.
Fair Market Value Statutes in General
Given the potential issues with small water systems, states have looked into ways to encourage
system consolidation. One tool that has been used in other states is a concept called fair market
valuation. Fair market valuation (FMV) is a regulatory tool that seeks to incentivize larger water
utilities that may be better positioned to make investments in the system and may have better
access to economies of scale, lower cost capital, and water and wastewater system expertise.
7
To
date, 14 states have passed some sort of FMV legislation: California, Illinois, Indiana, Iowa,
Kentucky, Maryland, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Texas, West
Virginia, and Virginia.
8
3
American Society of Engineers, 2021 Report Card for America’s Future, https://infrastructurereportcard.org/ (last visited
Mar. 18, 2023).
4
American Society of Engineers, The Economic Benefits of Investing in Water Infrastructure, pg. 9-12, 2020
https://www.uswateralliance.org/sites/uswateralliance.org/files/publications/VOW%20Economic%20Paper_0.pdf
5
National Regulatory Research Institute, supra note 1, at 8-11.
6
The Safe Drinking Water Act, Pub. L. 93-523, is intended to ensure the quality drinking water by regulating public water
systems in the United States. Under this Act, the EPA sets standards for drinking water quality and oversees the states,
federally-recognized tribes, and territories that implement the United States’ drinking water program.
7
National Regulatory Research Institute, supra note 1, at 1-11, and United States Government Accountability Office, Private
Water Utilities: Actions Needed to Enhance Ownership Data, pgs 38-39, Mar. 2021 (available at:
https://www.gao.gov/assets/gao-21-291.pdf).
8
National Association of Water Companies: Truth from the Tap, The Many Benefits of Utility Valuation Reform,
https://truthfromthetap.com/the-many-benefits-of-utility-valuation-reform/ (last visited: Mar. 18, 2023). BILL: SB 194 Page 3
Valuation of a Water Utility
The traditional basis for determining the rate base of a utility is the original cost minus
depreciation (also known as net book value).
9
This type of valuation is typically called “original
cost valuation.”
10
Two other types of valuation are fair value—which attempts to value at a rate
more closely reflecting actual market value—and reproduction cost—which attempts to value at
a rate that would permit the reproduction of the property in question.
11
The theory behind
original cost valuation is that by applying a required rate of return (i.e. a return on investment) of
the depreciated original cost of the investment in utility property devoted to public service, and
then accounting for utility operating costs and taxes, the investors in the utility are given
reasonable return on their capital put at risk in operating the utility.
12
Stemming from this original cost methodology, the traditional method for valuing a utility is to
use the original rate base value of the utility and deduct any depreciation. The presumption with
this methodology is that the value of the system is based on the value of the presumed life left in
the system, based off of the original investment.
13
Proponents of FMV state that this
methodology can sometimes undervalue a system and make it difficult to acquire as sellers can
feel as though they are not getting a fair value for their system.
14
Thus, what FMV statutes
attempt to do, is set a rate that attempts to match the “market rate” for the system. This is
typically done by requiring multiple appraisals of the system to be acquired and comparing that
with the price paid for the system.
15
Potential Issues with Fair Market Valuation
Generally, the purpose of FMV statutes is to encourage larger utilities (that generally have
improved economies of scale and better access to capital) to acquire smaller or distressed
systems, with the intent of improving water and wastewater system infrastructure for the
acquired utility. However, FMV statutes can present some risks to ratepayers:
It can encourage utilities to simply swap assets and increase ratepayer costs without any
guarantee of improvement of quality of service or increased cost efficiencies.
16
Buyers and sellers both have an incentive to raise the purchase price of the acquired utility as
high as possible. Typical market forces controlling acquisition prices (i.e. buyer and seller
pressuring the acquisition price in opposing directions) do not work the same for monopoly
businesses. Buyers can benefit when a premium is reflected in rate base that they can pass
along to customers, plus the additional opportunity to service new customers. Sellers can
9
Florida Public Service Commission, Bill Analysis for SB 194 (Feb. 10, 2023) (on file with the Senate Regulated Industries
Committee).
10
Walter J, Primeaux, Jr., Edward L. Bubnys, and Robert H. Rasche, Fair Value Versus Original Cost Rate Base Valuation
During Inflation, The Energy Journal, Vol. 5, No. 2 (Apr. 1984) (available at: https://ipu.msu.edu/wp-
content/uploads/2018/12/41321682.pdf).
11
Id.
12
Florida Public Service Commission, Bill Analysis for SB 194, supra note 9.
13
National Regulatory Research Institute, supra note 1, at 1.
14
Id. and National Association of Water Companies: Truth from the Tap, Municipalities and Taxpayers Deserve a Fair Deal
for Utility Assets, https://truthfromthetap.com/wp-content/uploads/2022/01/FMV-Factsheet.pdf (last visited Mar. 18, 2023).
15
National Regulatory Research Institute, supra note 1, at 1.
16
Florida Public Service Commission, Bill Analysis for SB 194, supra note 9. BILL: SB 194 Page 4
stand to reap a financial windfall from proceeds from the sale, and these proceeds
significantly exceed their investment.
17
Monopoly assets can be difficult to value because there are not as many comparable
available. There may also be a shortage of experts who can do these types of valuations.
18
Acquisitions can result in significant “rate shock” for ratepayers, especially in systems that
have been historically underinvested in.
19
FMV statutes can encourage “bad behavior” in utility owners considering selling their
systems as these owners may calculate that they do not need to invest in/properly maintain
their system in order to sell it for a profit.
20
The hope with most FMV statutes is that struggling and distressed utilities will be acquired
by larger, better run utilities. However, what can happen with FMV statutes is that the most
lucrative systems to acquire are the ones that are acquired first (or at all), and, potentially, the
ones most in need of investment are not.
21
Increases in the underlying value of the land upon which the acquired utility is situated can
result in significant rate increases solely based on real estate prices.
22
Inflated purchase costs can run counter to two of the typical reasons for FMV statutes: lower
costs for the consumer and improved performance.
23
Given these risks, most states that have enacted FMV statutes have placed restrictions on which,
and under what circumstances, a water or wastewater utility may be acquired under an FMV
statute. These may include:
Requiring that the acquiring utility be of sufficient size.
Requiring that the acquired utility be municipal, small, or disadvantaged or distressed.
Requiring that acquisition benefit from economies of scale.
Providing an initial moratorium or a limit on rate increases (i.e. “rate shock protection”). This
could be through a rate stabilization plan submitted by the acquiring utility or required by the
utility regulator.
Requiring disclosure of anticipated rate impacts in an FMV application.
24
Other proposed ideas for ratepayer protections include limiting or linking rate increases to cost
savings or service improvements, or creating competition amongst potential acquirers and the
acquirer with the most value offered to the ratepayer “wins” (this would essentially be an auction
of the utility once it puts itself up for sale).
25
17
Janice Beecher, Water utility consolidation: is fair market value fair?, Michigan State University Institute of Public
Utilities, June 25, 2019 (available at: https://ipu.msu.edu/wp-content/uploads/2019/06/Beecher-Fair-Market-Value-Water-
June-2019.pdf), Scott Hempling, Water Mergers: are they making economic sense?, Jun. 2019 (available at:
https://energiahoy.com/2019/06/02/water-mergers-are-they-making-economic-sense/), and United States Government
Accountability Office, supra note 7, at 39-40.
18
National Regulatory Research Institute, supra note 1, at 17.
19
Id.
20
Id. at 18.
21
Id. at 18-19.
22
Florida Public Service Commission, Bill Analysis for SB 194, supra note 9.
23
Scott Hempling, supra note 17.
24
National Regulatory Research Institute, supra note 1, at 19-31.
25
Scott Hempling, supra note 17. BILL: SB 194 Page 5
Florida Public Service Commission
The Florida Public Service Commission (PSC) is an arm of the legislative branch of
government.
26
The role of the PSC is to ensure Florida’s consumers receive utility services,
including electric, natural gas, telephone, water, and wastewater, in a safe, affordable, and
reliable manner.
27
In order to do so, the PSC exercises authority over public utilities in one or
more of the following areas: rate base or economic regulation; competitive market oversight; and
monitoring of safety, reliability, and service issues.
28
Florida Public Service Commission Regulation of Water and Wastewater Utilities
Florida’s Water and Wastewater System Regulatory Law, ch. 367, F.S., regulates water and
wastewater systems in the state. Section 367.011, F.S., states that the PSC has exclusive
jurisdiction over each utility with respect to its authority, service, and rates. For the chapter, a
“utility” is defined as “a water or wastewater utility and, except as provided in s. 367.022, F.S.,
includes every person, lessee, trustee, or receiver owning, operating, managing, or controlling a
system, or proposing construction of a system, who is providing, or proposes to provide, water or
wastewater service to the public for compensation.” Section 367.022, F.S., exempts certain types
of water and wastewater operations from PSC jurisdiction and the provisions of ch. 367, F.S.
(except as expressly provided). Such exempt operations include: municipal water and wastewater
systems, public lodging systems that only provide service to their guests, systems with a 100-
person or less capacity, landlords that include service to their tenants without specific
compensation for such service, and mobile home parks operating both as a mobile home park
and a mobile home subdivision that provide “service within the park and subdivision to a
combination of both tenants and lot owners, provided that the service to tenants is without
specific compensation.”
29
The PSC also does not regulate utilities that have exempted
themselves from regulation pursuant to s. 367.171, F.S.
Currently, the PSC has over 149 water, wastewater, and water and wastewater utilities that are
under its regulatory authority.
30
This is in comparison to four investor-owned electric utilities
and eight investor-owned gas utilities in the state.
31
Florida’s investor-owned water and
wastewater utilities are much less consolidated than the state’s investor-owned electric and gas
utilities. Many of these systems are quite small—currently the United States Environmental
Protection Agency (EPA) classifies 83.2 percent of Florida’s water systems as very small
(meaning that the system serves 500 people or less).
32
PSC data also shows that the vast majority
of water and wastewater systems are quite small, with 83 water systems and 58 wastewater in
26
Section 350.001, F.S.
27
See Florida Public Service Commission, Florida Public Service Commission Homepage, http://www.psc.state.fl.us (last
visited Mar 3, 2023).
28
Florida Public Service Commission, About the PSC, https://www.psc.state.fl.us/about (last visited Mar 16, 2023).
29
Section 367.022(2), F.S.
30
Email from Mark Futrell, Deputy Executive Director—Technical, Florida Public Service Commission, to Senate Regulated
Industries Staff (Mar 19, 2023)(on file with the Senate Regulated Industries Committee).
31
Florida Public Service Commission, 2022 Facts and Figures of the Florida Utility Industry, pg. 5, Apr. 2022 (available at:
https://www.floridapsc.com/pscfiles/website-files/PDF/Publications/Reports/General/FactsAndFigures/April%202022.pdf)
32
Environmental Protection Agency, Enforcement Compliance History Online, https://echo.epa.gov/trends/comparative-
maps-dashboards/drinking-water-dashboard (last visited Mar. 18, 2023). BILL: SB 194 Page 6
Florida having gross annual revenues of $300,000 or less. This means these utilities qualify (due
to their small size) to have PSC staff assistance in their rate cases.
33
Water and Wastewater Ratemaking in Florida
Florida is an “original cost” state in terms of rate base value. The PSC sets rates for all water and
wastewater utilities within its jurisdiction and the rates must be “just, reasonable, compensatory,
and not unfairly discriminatory.”
34
Florida Administrative Code Rule 25-30.115, requires that
water and wastewater utilities maintain their accounts and records in conformity with the 1996
National Association of Regulatory Utility Commissioners (NARUC) Uniform Systems of
Accounts (USOA).
35
The NARUC USOA states that “’original cost’, as applied to a utility plant,
means the cost of such property to the person first devoting it to the public service.”
36
As to the “compensatory” aspect of rates, the PSC is required, in each rate-setting proceeding, to
consider “cost of providing the service, which shall include, but not be limited to, debt interest;
the requirements of the utility for working capital; maintenance, depreciation, tax, and operating
expenses incurred in the operation of all property used and useful in the public service; and a fair
return on the investment of the utility in property used and useful in the public service.”
37
However, the PSC is prohibited from allowing “the inclusion of contributions-in-aid-of-
construction
38
in the rate base of any utility during a rate proceeding,” nor can the PSC, “impute
prospective future contributions-in-aid-of-construction against the utility’s investment in
property used and useful in the public service; and accumulated depreciation on such
contributions-in-aid-of-construction shall not be used to reduce the rate base, nor shall
depreciation on such contributed assets be considered a cost of providing utility service.”
As to the “a fair return on the investment of the utility in property used and useful in the public
service” required under s. 367.081(2)(a)1., F.S., the PSC has consistently interpreted the
“investment of the utility” to be the original cost of the property when first dedicated to public
service. Florida Administrative Code Rule 25-30.140(1)(r), states that, “[i]n the event that an
asset is acquired that is already in public service, the original historic cost of the asset should be
recorded in plant in service.”
Water and Wastewater Utility Acquisitions in Florida
Section 367.031, F.S., requires that each water and wastewater utility under the PSC’s
jurisdiction must obtain a certificate of authorization from the PSC. This certificate grants the
33
Many small water and wastewater utilities struggle with the resources and expertise necessary to properly file for and
complete a full rate case. Thus, Fla. Admin. Code R. 25-30.455, authorized pursuant to s. 367.0814, F.S., provides that
“water and wastewater utilities whose total gross annual operating revenues are $300,000 or less for water service or
$300,000 or less for wastewater service, or $600,000 or less on a combined basis,” may apply with the PSC for staff
assistance with rate applications. In staff-assisted rate cases (SARCs),
34
Section 367.081(2)(a)1., F.S.
35
NARUC USOA is incorporated by reference into Florida Admin. Code Rule 25-30.115.
36
Florida Public Service Commission, Bill Analysis for SB 194, supra note 9.
37
Section 367.081(2)(a)1., F.S.
38
Section 367.021(3), F.S., defines “Contribution-in-aid-of-construction” as “any amount or item of money, services, or
property received by a utility, from any person or governmental authority, any portion of which is provided at no cost to the
utility, which represents a donation or contribution to the capital of the utility, and which is used to offset the acquisition,
improvement, or construction costs of the utility property, facilities, or equipment used to provide utility services.” BILL: SB 194 Page 7
utility the authorization to provide water or wastewater service within a defined geographic area.
This certificate of authorization, or the corresponding utility’s facilities, may not be sold,
assigned, or transferred without authorization from the PSC. Pursuant to s. 367.071(1), F.S., the
PSC may approve a sale, assignment, or transfer if such is in the public interest. A sale, transfer,
or assignment may occur prior to PSC approval, if the contract executing such transaction is
made contingent to PSC approval. Section 367.071(5), F.S., provides that the PSC “may
establish the rate base for a utility or its facilities or property when the commission approves a
sale, assignment, or transfer thereof, except for any sale, assignment, or transfer to a
governmental authority.”
III. Effect of Proposed Changes:
Section 1 of the bill creates s. 367.0811, F.S., to establish an alternative FMV process for
establishing the rate base of a purchased water system to be used for ratemaking purposes in the
acquiring utility’s next rate case. This method differs, and is an alternative, from the original cost
method existing in current statute in s. 367.081, F.S.
The rate base established by the proposed procedure in the bill cannot exceed the lesser of the
purchase price negotiated between the parties to the acquisition transaction or the average of
three required appraisals. This amount “may not be adjusted for capital in aid of construction
used and useful in serving the public.”
39
The rate base value established may also include
reasonable transaction and closing costs incurred by the acquiring utility and reasonable fees
paid to the appraisers. The appraisers used in valuing the utility to be acquired must be paid by
the acquiring utility (acquirer), chosen from a list provided by the PSC, and the appraisal they
provide must be consistent with the Uniform Standards of Professional Appraisal Practice.
The acquiring utility and the utility system to be acquired (acquiree) must jointly retain a
licensed engineer to assess the tangible assets of the acquiree. This assessment must be provided
to the appraisers to assist in valuing the acquiree.
A petition filed pursuant to s. 367.0811, F.S., to establish an FMV rate base value must include:
The requested rate base value for the acquiree.
Copies of the required appraisals, including the average of the valuations produced by each
appraisal.
A copy of the required assessment of tangible assets.
A 3-year plan to address each deficiency identified by the assessment of tangible assets. The
plan must address impact on quality of service and any planned improvements to water
quality.
The 5-year projected rate impact on the customers of the acquiree, including, but not limited
to, the rate impact of all of the following:
o Any cost efficiencies expected to result from the acquisition transaction.
o Use of this section, instead of the original cost method pursuant to s. 367.081, F.S., to
establish the rate base value.
39
This portion should likely read “may not be adjusted for contributions in aid of construction or used and useful in serving
the public,” as those terms are commonly used in Florida and other jurisdictions in regards to setting rate base. See Technical
Deficiencies, infra Section VI, of this analysis. BILL: SB 194 Page 8
The contract of sale.
The estimated value of fees and transaction and closing costs to be incurred by the acquiring
utility.
A tariff, including rates equal to the rates of the utility system being acquired.
If a completed petition meets all of the filing requirements of the bill, the PSC will have eight
months from the date of filing to issue a final order on the petition. In its order, the PSC may
grant the petition, in whole or in part, or with modifications in the public interest, or may deny
the petition if it is in the public interest. However, the PSC may not approve a rate base value
higher than that requested in the petition.
In future rate cases, the bill permits the PSC to, pursuant to ch. 367, F.S., set rates for the
acquired utility system in future rate cases and may classify the acquired utility system as a
separate entity for ratemaking purposes if it is deemed to be in the public interest.
The acquiring utility under s. 366.0811, F.S., must be engaged in an arms-length transaction with
the acquiree and have 10,000 or more customers, or provide 3 million gallons per day of
permitted drinking water.
The bill also directs the PSC to adopt rules to implement the section.
Section 2 of the bill provides an effective date of July 1, 2023.
IV. Constitutional Issues:
A. Municipality/County Mandates Restrictions:
None.
B. Public Records/Open Meetings Issues:
None.
C. Trust Funds Restrictions:
None.
D. State Tax or Fee Increases:
None.
E. Other Constitutional Issues:
None.
V. Fiscal Impact Statement:
A. Tax/Fee Issues:
None. BILL: SB 194 Page 9
B. Private Sector Impact:
In its analysis of the bill the PSC stated that the alternative utility valuation authorized in
the bill will likely cause significant new costs for the private sector. The PSC elaborated
that under SB 194, “small utilities will likely see higher valuations, which will increase
the purchase price of utilities; this could lead to higher rates for customers.” SB 194 may
encourage “larger utilities to acquire smaller systems, potentially resulting in better
access to low cost capital and improved infrastructure.” However, as currently drafted,
SB 194 does not require such benefits in order for the PSC to approve a petition.
Customers may simply see rate increases due to purchase price valuation,
40
with no
required improvement in service. Customers may also see a rate impact from transaction,
closing, and appraiser costs allowed to be included in rate base value under the bill.
C. Government Sector Impact:
According to the PSC’s analysis, the impact of SB 194 on state agencies is not known at
this time. It is unclear how the change to the PSC’s cost for transfer and rate proceedings
will be affected.
41
VI. Technical Deficiencies:
Lines 36 and 37 of the bill read, in part, “and may not be adjusted for capital in aid of
construction used and useful in serving the public.” This portion should likely read “and may not
be adjusted for contributions in aid of construction or used and useful in serving the public,” as
the terms “contributions in aid of construction” and “used and useful in serving the public” are
commonly used in Florida and other jurisdictions in regards to setting rate base.
Line 84-86 of the bill reads “the commission may grant the petition, in whole or in part, or with
modifications in the public interest, or may deny the petition if it is in the public interest.” For
clarity, the sponsor may wish to revise the sentence as follows, “the commission may, in the
public interest, grant the petition, in whole or in part, or with modifications, or may deny the
petition.”
VII. Related Issues:
In its analysis of the bill, the PSC stated that it does not have expertise in property appraisers and
thus they may be ill-equipped to establish and maintain a list of approved appraisers. The PSC
suggested an alternative to have another agency with expertise in the area, such as the
Department of Business and Professional Regulation, which regulates appraisers, maintain this
list.
42
SB 194 may generate litigation, as the PSC states that all FMV acquisitions may have to be
processed exclusively as s. 120.57, F.S., hearings. In addition, the PSC believes there may be
litigation from ratepayers and consumer advocates in regards to assessment of potentially
40
Florida Public Service Commission, Bill Analysis for SB 194, supra note 9.
41
Id.
42
Id. BILL: SB 194 Page 10
excessive rates and evaluation costs. The PSC also anticipates that it may have litigation in
regards to establishing and maintaining the list of appraisers.
43
VIII. Statutes Affected:
This bill creates section 367.0811 of the Florida Statutes.
IX. Additional Information:
A. Committee Substitute – Statement of Changes:
(Summarizing differences between the Committee Substitute and the prior version of the bill.)
None.
B. Amendments:
None.
This Senate Bill Analysis does not reflect the intent or official position of the bill’s introducer or the Florida Senate.
43
Id.