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 Fiscal Policy
BILL: CS/SB 194
INTRODUCER: Regulated Industries Committee and Senator Hooper
SUBJECT: Utility System Rate Base Values
DATE: April 24, 2023 REVISED:
ANALYST STAFF DIRECTOR REFERENCE ACTION
1. Schrader Imhof RI Fav/CS
2. Sanders Betta AEG Favorable
3. Schrader Yeatman FP Favorable
Please see Section IX. for Additional Information:
COMMITTEE SUBSTITUTE - Substantial Changes
I. Summary:
CS/SB 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 water
or wastewater utility system1 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
(PSC)).
The impact to state revenues and expenditures is indeterminate at this time as the impact to state
agencies is not known at this time nor is clear how the change to the PSC’s cost for transfer and
rate proceedings will be affected.
The effective date of the bill is July 1, 2023.
1
Under the bill, the acquired system may be an investor-owned water or wastewater utility, a municipal water or wastewater
utility as described in s. 367.022(2).
BILL: CS/SB 194 Page 2
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.2 As of 2018, the United States Environmental Protection Agency (EPA) estimated
$473 billion was needed to maintain and improve water infrastructure over the next 20 years and
thousands of treatment plants, storage tanks, and other key infrastructure need to be improved or
replaced.3 According to the American Society of Engineers (AASE) there is a water main break
in the United States every two minutes and six million gallons of treated water is lost, on
average, each day to such breaks.4 AASE also states funding for water infrastructure has not kept
up with the need to address aging systems and, in many places, water infrastructure is aging and
deteriorating.5
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.6
These challenges show up in system violations. Of the 38,853 Safe Drinking Water Act
(SDWA)7 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
2
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).
3
Environmental Protection Agency, Infographic: EPA’s 6th 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.
4
American Society of Engineers, 2021 Report Card for America’s Future, https://infrastructurereportcard.org/ (last visited
March 18, 2023).
5
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
6
National Regulatory Research Institute, supra note 2, at 8-11.
7
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.
BILL: CS/SB 194 Page 3
access to economies of scale, lower cost capital, and water and wastewater system expertise.8 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.9
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).10 This type of valuation is typically called “original
cost valuation.”11 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.12 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.13
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 the value of the system is based on the value of the presumed life left in the
system, based off of the original investment.14 Proponents of FMV state 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.15 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.16
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:
8
National Regulatory Research Institute, supra note 2, at 1-11, and United States Government Accountability Office, Private
Water Utilities: Actions Needed to Enhance Ownership Data, pgs 38-39, March 2021 (available at
https://www.gao.gov/assets/gao-21-291.pdf).
9
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: March 28, 2023).
10
Florida Public Service Commission, Bill Analysis for SB 194 (Feb. 10, 2023) (on file with the Senate Appropriations
Committee on Agriculture, Environment, and General Government).
11
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 (April 1984) (available at https://ipu.msu.edu/wp-
content/uploads/2018/12/41321682.pdf).
12
Id.
13
Florida Public Service Commission, Bill Analysis for SB 194, supra note 10.
14
National Regulatory Research Institute, supra note 2, at 1.
15
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 March 18, 2023).
16
National Regulatory Research Institute, supra note 2, at 1.
BILL: CS/SB 194 Page 4
 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.17
 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
stand to reap a financial windfall from proceeds from the sale, and these proceeds
significantly exceed their investment.18
 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.19
 Acquisitions can result in significant “rate shock” for ratepayers, especially in systems that
have been historically underinvested in.20
 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.21
 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.22
 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.23
 Inflated purchase costs can run counter to two of the typical reasons for FMV statutes: lower
costs for the consumer and improved performance.24
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 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”). This
could be through a rate stabilization plan submitted by the acquiring utility or required by the
utility regulator.
17
Florida Public Service Commission, Bill Analysis for SB 194, supra note 10.
18
Janice Beecher, Water utility consolidation: is fair market value fair?, Michigan State University Institute of Public
Utilities, 5, 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?, June 2019 (available at
https://energiahoy.com/2019/06/02/water-mergers-are-they-making-economic-sense/), and United States Government
Accountability Office, supra note 8, at 39-40.
19
National Regulatory Research Institute, supra note 2, at 17.
20
Id.
21
Id. at 18.
22
Id. at 18-19.
23
Florida Public Service Commission, Bill Analysis for SB 194, supra note 10.
24
Scott Hempling, supra note 18.
BILL: CS/SB 194 Page 5
 Requiring disclosure of anticipated rate impacts in an FMV application.25
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).26
Florida Public Service Commission
The Florida Public Service Commission (PSC) is an arm of the legislative branch of
government.27 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.28 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.29
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 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 the PSC’s 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.”30 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.31 This is in comparison to four investor-owned electric utilities
25
National Regulatory Research Institute, supra note 2, at 19-31.
26
Scott Hempling, supra note 18.
27
Section 350.001, F.S.
28
See Florida Public Service Commission, Florida Public Service Commission Homepage, http://www.psc.state.fl.us (last
visited Mar. 3, 2023).
29
Florida Public Service Commission, About the PSC, https://www.psc.state.fl.us/about (last visited March 28, 2023).
30
Section 367.022(2), F.S.
31
Email from Mark Futrell, Deputy Executive Director—Technical, Florida Public Service Commission, to Senate Regulated
Industries Staff (March 19, 2023)(on file with the Senate Regulated Industries Committee).
BILL: CS/SB 194 Page 6
and eight investor-owned gas utilities in the state.32 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 the system serves 500 people or less).33 The PSC data also shows the vast ma