HOUSE OF REPRESENTATIVES STAFF ANALYSIS
BILL #: CS/CS/HB 125 Utility System Rate Base Values
SPONSOR(S): Commerce Committee, Energy, Communications & Cybersecurity Subcommittee, McClain
TIED BILLS: IDEN./SIM. BILLS: CS/SB 194
REFERENCE ACTION ANALYST STAFF DIRECTOR or
BUDGET/POLICY CHIEF
1) Energy, Communications & Cybersecurity 18 Y, 0 N, As CS Walsh Keating
Subcommittee
2) Commerce Committee 17 Y, 0 N, As CS Walsh Hamon
SUMMARY ANALYSIS
When a water or wastewater utility regulated by the Public Service Commission (PSC) acquires an existing
water or wastewater utility system, the PSC establishes a rate base value for the acquired utility system. The
rate base value established by the PSC is the amount upon which the acquiring utility may earn a rate of
return. This value is determined using the acquired utility’s net book value, i.e., the original cost of the utility’s
assets when first dedicated to public service, less depreciation. This valuation method is called the “original
cost” method.
If the purchase price of a utility system is greater than its net book value, no part of the difference is included in
the acquiring utility’s rate base absent a showing of extraordinary circumstances, which may include
anticipated cost efficiencies and improvements in service quality and regulatory compliance, among other
things. If the PSC determines that extraordinary circumstances exist, it will allow the acquiring utility to include
all or part of the difference in its rate base as a “positive acquisition adjustment.” This adjustment would be
reflected in the utility’s rates that are set during the utility’s next general rate case.
As an alternative to the current process, the bill allows certain PSC-regulated water and wastewater utilities
(those with over 10,000 customers or those that are permitted to produce at least 3 million gallons of drinking
water per day) that acquire an existing system to petition the PSC to establish rate base for the acquired
system based on the lesser of: (1) the purchase price negotiated by the two utilities; or (2) the average of three
appraisals of the system conducted by licensed appraisers chosen from a list established by the PSC.
Appraisal fees and transaction costs may also be included. An engineering assessment must be conducted
and provided to the appraisers to be used for purposes of the appraisal.
To support a petition to use this approach, a utility must provide the PSC certain information specified in the
bill, including a rate stabilization plan if the requested relief would result in a significant individual rate increase.
The bill provides a list of factors that the PSC must consider when reviewing a utility petition and authorizes the
PSC to set reasonable performance goals based on these factors for review in a subsequent rate proceeding.
Within 8 months of receiving a complete petition, the PSC must issue a final order granting the petition, in
whole or in part or with modifications, or denying the petition, consistent with the public interest.
The bill is not expected to have a fiscal impact on state or local governments. The bill may encourage
transactions involving the purchase of water or wastewater utility systems by eligible utilities. These
transactions may lead to needed infrastructure improvements, cost efficiencies, and improvements in service
quality and regulatory compliance for small or troubled utility systems, though this result is not required by the
bill. For acquisitions by PSC-regulated utilities that petition to use the alternative valuation process created in
the bill, the PSC may consider potential rate impacts, rate stabilization plans, and proposed improvement plans
in its consideration of each petition.
The bill provides an effective date of July 1, 2023.
This docum ent does not reflect the intent or official position of the bill sponsor or House of Representatives .
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 FULL ANALYSIS
I. SUBSTANTIVE ANALYSIS
A. EFFECT OF PROPOSED CHANGES:
Present Situation
Regulated Water and Wastewater Utilities
In various areas throughout Florida, water and wastewater services are provided through privately-
owned and operated utilities. These privately-owned utilities, sometimes referred to as investor-owned
utilities, range in size from very small systems, owned by individuals as sole proprietorships and
serving only a few dozen customers in a small neighborhood, to a few systems owned by large
interstate corporations which serve tens of thousands of customers in multiple Florida counties.
For privately-owned utilities operating within a single Florida county, the county has the option to
regulate rates and service or allow the Public Service Commission (PSC) to regulate those utilities. 1
Regardless of whether the county has opted to regulate those utilities, the PSC has jurisdiction over all
water and wastewater utility systems whose service transverses county boundaries, except for systems
owned and regulated by intergovernmental authorities.2 As of 2021, the PSC had jurisdiction over 124
investor-owned water/wastewater utilities in 38 counties.3 Still, the vast majority of water and
wastewater customers in the state are served by water and wastewater utilities not regulated by the
PSC, primarily by systems owned, operated, managed, or controlled by governmental authorities.
For each utility within its jurisdiction, the PSC has exclusive authority to regulate the utility’s rates and
service.4 The PSC must establish rates that are just, reasonable, compensatory, and not unfairly
discriminatory.5 In doing so, the PSC must consider the value and quality of the service and the cost of
providing the service, which includes, but is not 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.6 The PSC has consistently interpreted the “investment of
the utility” to be the original cost of the utility’s property when first dedicated to public service. 7 Land is
included in the original cost at the time it was first dedicated to public use, meaning that under current
accounting practices used to establish a utility’s rate base, appreciation of the land’s value is not
considered.8
Acquisition of Water and Wastewater Utility Systems by Regulated Utilities
Each water or wastewater utility subject to the PSC’s jurisdiction must obtain a certificate of
authorization to provide water or wastewater service. 9 A PSC–regulated utility may not sell, assign, or
transfer its certificate of authorization, facilities, or majority organizational control without approval by
the PSC. Likewise, PSC approval is required for the transfer of a utility system exempt from PSC
jurisdiction, such as a system owned or operated by a governmental authority, to a PSC-regulated
utility. To grant approval, the PSC must determine that the sale, assignment, or transfer is in the public
interest and that the acquiring utility will fulfill the commitments, obligations, and representations of the
utility to be acquired.10 If a contract for sale is made contingent upon PSC approval, the sale of the
1 S. 367.171, F.S. If a county chooses to allow regulation by the PSC, it may rescind this election only after 10 continuous
years of PSC regulation.
2 Id.
3 Florida Public Service Commission, Facts and Figures of the Florida Utility Industry, p. 28 (Apr. 2022).
4 S. 367.011, F.S.
5 S. 367.081, F.S.
6 Id.
7 Florida Public Service Commission (FPSC), Agency Analysis of 2023 House Bill 125, p. 1 (Feb. 10, 2023).
8 Id. at 5.
9 S. 367.031, F.S.
10 S. 367.071(1), F.S.
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 utility may occur prior to such approval.11 The PSC considers, among other things, the financial ability
of the buyer to maintain and operate the acquired utility and the technical ability of the buyer to provide
service.12
When the PSC approves a sale, assignment, or transfer of an existing utility system to a PSC-regulated
utility, the PSC may establish the rate base for the utility being transferred.13 The PSC establishes the
value of an existing utility’s rate base using “original cost.” Using original cost, the value of a utility’s
rate base is determined using the depreciated original cost, or net book value, of the property devoted
to the public service. Contributions in aid of construction (CIAC) are deducted from rate base to ensure
that costs are not imposed on current customers for infrastructure that was contributed to the utility
without the utility’s direct investment.14 This rate base is the amount upon which the utility may earn a
fair return, as established by the PSC.15
A utility system may be acquired at a price higher or lower 16 than the net book value of its assets. If the
purchase price is greater than net book value, no part of the difference is included in a utility’s rate base
absent a showing by the utility of extraordinary circumstances.17 In determining whether a utility has
demonstrated extraordinary circumstances, the PSC will consider evidence including:
 Anticipated improvements in quality of service;
 Anticipated improvements in compliance with regulatory mandates;
 Anticipated rate reductions or rate stability over a long-term period;
 Anticipated cost efficiencies; and
 Whether the purchase was made as part of an arms-length transaction.18
If the PSC determines that extraordinary circumstances exist, it will allow the acquiring utility to include
all or part of the difference in its rate base as a “positive acquisition adjustment.” This adjustment will be
reflected in the utility’s rates that are set during the utility’s next general rate case.
Challenges for Small Water and Wastewater Utility Systems
Some small water and wastewater systems may struggle to make needed investments. This can
happen due to a variety of factors, such as:
 Lack of staff or managerial expertise;
 Lack of capital, or inability to access lower-cost capital, to invest in system infrastructure;
 Lack of economies of scale inherent in larger systems; and
 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. 19
These challenges can show up in system violations. Of the 38,853 Safe Drinking Water Act (SDWA)20
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.
11 FPSC, supra note 7, at 1.
12 Rule 25-30.037 (2), F.A.C.
13 S. 367.071(5), F.S.
14 FPSC, supra note 7, at 2.
15 Id.at 1.
16 When the purchase price is equal to or less than 80 percent of net book value, a negative acquisition adjustment must
be included in rate base. Rule 25-30.0371(3), F.A.C.
17 Rule 25-30.0371(2), F.A.C.
18 Id.
19 National Regulatory Research Institute (NRRI), A Review of State Fair Mark et Value Acquisitions Policies for Water and
Wastewater Systems, Sep. 2021, at 8-11, available at https://pubs.naruc.org/pub/ED8E5710 -1866-DAA C-99FB -
B70190F3D64A).
20 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 st ates,
federally-recognized tribes, and territories that implement the United States’ drinking water program.
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 Given the potential issues with small water and wastewater systems, some states have explored ways
to encourage system consolidation. Some states have adopted a rate mechanism referred to as fair
market valuation (FMV), which is intended to encourage the acquisition of small or struggling water or
wastewater utilities by other utilities that may be positioned to make investments in those systems and
provide greater economies of scale, lower cost capital, and greater management and technical
expertise.21 FMV differs from the traditional “original cost” valuation method by allowing a purchasing
utility to include in its rate base the “market” value of an acquired water or wastewater utility system,
which may be estimated through appraisals. This mechanism may increase the allowable rate base
associated with an acquisition.22
Proponents of the FMV mechanism state that the original cost methodology can sometimes make it
difficult to acquire a struggling water or wastewater utility system because the seller may feel that the
original cost methodology undervalues its system and is unwilling to sell.23 The FMV mechanism also
presents risks to an acquiring utility’s ratepayers:
 The market forces that control prices in a competitive environment (i.e., buyers and sellers
pressuring an acquisition price in opposing directions) are different in a monopoly utility
environment. In a monopoly environment, buyers can benefit when a premium is reflected in the
rate base upon which they earn a return through rates, and sellers can benefit from sales
proceeds that exceed their investment. Thus, both buyers and sellers can benefit from higher
purchase prices.24
 Monopoly utility assets can be difficult to value because there are not many comparable
transactions to rely upon. There may also be a shortage of experts who can do these types of
valuations, yet appraisers hold considerable power in the FMV process. FMV determinations
can be affected by the party who selects the appraiser, whether the appraiser has a conflict of
interest, the method used to determine the final value, the variation between appraisals (a single
high appraisal may significantly increase the average price), and the qualifications of the
appraiser.25
 Use of FMV may encourage utilities to swap assets and increase ratepayer costs without any
guarantee of improvement of quality of service or increased cost efficiencies.26
 Acquisitions may result in “rate shock” for ratepayers, especially in systems that have been
historically underinvested in.27
 Use of FMV encourages acquisitions that provide the greatest financial benefit to a purchasing
utility, regardless of whether the acquired utility systems are small, struggling systems that may
benefit from acquisition.28
 Increases in the underlying value of the land upon which the acquired utility is situated may
result in significant rate increases solely based on real estate prices.29
Given these risks, some states that use the FMV mechanism place restrictions on its use, including:
 Requiring the acquiring utility be of sufficient size.
 Requiring the acquired utility be municipal, small, or disadvantaged or distressed;
 Requiring acquisition benefit from economies of scale;
 Providing an initial moratorium or a limit on rate increases (i.e. “rate shock protection”); and
 Requiring disclosure of anticipated rate impacts in an FMV application. 30
21 NRRI, supra note 19, at 1-11.
22 Id., at 1.
23 Id.
24 See, e.g., Janice Beecher, Water utility consolidation: is fair mark et value fair?, Michigan State University Institute of
Public Utilities, 2019, at 13, available at https://ipu.msu.edu/wp-content/uploads/2019/06/Beecher-Fair-Market-V alue-
Water-June-2019.pdf ; Scott Hempling, Water Mergers: are they mak ing economic sense?, Jun. 2019 (available at
https://energiahoy.com/2019/06/02/water-mergers -are-they-making-economic-sens e/).
25 NRRI, supra note 19, at 17.
26 FPSC, supra note 7.
27 NRRI, supra note 19, at 18; FPSC supra note 7, at 3.
28 NRRI, supra note 19, at 18-19.
29 FPSC supra note 7, at 5.
30 NRRI, supra note 19, at 19-31.
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 Pending PSC Rulemaking Proceedings on Acquisition Adjustments
On March 30, 2023, the PSC issued a rule development notice to amend its rules related to water and
wastewater utility acquisition adjustments. The notice included a draft rule, and a rule development
workshop was scheduled for April 13, 2023.
The draft rule creates two categories of positive acquisition adjustments based on whether the utility
system being purchased is considered “viable” or “nonviable.” Adjustments for the purchase of viable
systems require a showing of a positive cumulative present value benefit over a 5-year period.
Adjustments for the purchase of non-viable systems require a lesser showing that customers will
benefit through improved quality of service, regulatory compliance, rate reductio