Florida Public Service Commission native order document 03422-2024

FILED 5/22/2024
DOCUMENT NO. 03422-2024
FPSC - COMMISSION CLERK
BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION
In re: Water and wastewater industry annual
reestablishment of authorized range ofreturn
on common equity for water and wastewater
utilities 	ur suant to Section 367.081(4)(t), F.S.
DOCKET NO. 20240006-WS
ORDER NO. PSC-2024-0165-PAA-WS
ISSUED: May 22 , 2024
The following Commissioners participated in the disposition of this matter:
MIKE LA ROSA, Chairman
ARTGRAHAM
GARYF.CLARK
ANDREW GILES FAY
GABRIELLA P ASSIDOMO
NOTICE OF PROPOSED AGENCY ACTION
ORDER ESTABLISHING AUTHORIZED RANGE OF RETURN ON
COMMON EQUITY FOR WATER AND WAS TEWATER UTILITIES
BY THE 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 (F.A .C. ).
Background
Section 367.081(4)(t), Florida Statutes (F.S.), authorizes us 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 (WAW) utilities. The original version of the current leverage formula
methodology was established in Order No. PSC-2001-2514-FOF-WS.1 On October 23, 2008, we
held a formal hearing in Docket No. 20080006-WS to allow interested parties to provide
testimony regarding the validity of the leverage formula.2 Based on the record in that proceeding,
we approved the 2008 leverage formula in Order No. PSC-2008-0846-FOF-WS. 3 In that order,
'Ord er No. PSC-2001-2514-FOF-WS, issued December 24, 2001, in Docket No. 20010006-WS, In re: Water and
wastewater industry annual reestablishm en t of authorized range of return on common equity of water and
wastewater utilities pursuant to Section 367.081 (4)(/), F.S.
2 At the May 20, 2008, Commission Co nference, upon request of the Office of Public Counsel, we voted to set the
establishment of the appropriate leverage formula directly for hearing.
3Order No. PSC-2008-0846-FOF-WS, issued December 3 1, 2008, in Docket No. 20080006-WS, In re: Water and
wastewater industry annual reestablishm en t of authorized range of return on common eq uity for water and
wastewater utilities pursuant to Section 367.081 (4)(/), F.S.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 2
we reaffirmed the methodology that was previously approved in Order No. PSC-2001-2514-
FOF-WS. 4
From 2012 through 2017, we found that the range of returns on equity derived from the
annual leverage formulas were not optimal for determining the appropriate authorized ROE for
WAW utilities due to Federal Reserve monetary policies that resulted in historically low interest
rates. Consequently, we decided it was reasonable to continue using the range of returns on
equity of 8.74 percent to 11.16 percent from the 2011 leverage formula approved by Order No.
PSC-2011-0287-PAA-WS until 2018. 5
On November 8, 2017, Commission staff held a workshop to solicit input from interested
persons regarding potential changes to the current leverage formula methodology. The only
stakeholders that filed comments in the docket were the Office of Public Counsel (OPC) and
Utilities, Inc. of Florida (UIF). OPC also filed post-workshop comments on January 31, 2018.
On June 26, 2018, we approved the current leverage formula by Order No. PSC-2018-0327-
PAA-WS. 6 The June 2018 Order provided necessary and timely updates to the leverage formula
methodology.
Section 367.081(4)(f), F.S., authorizes us to establish a range of returns for setting the
authorized ROE for WAW utilities. However, use of the leverage formula by the utilities is
discretionary and a utility can file cost of equity testimony in lieu of using the leverage formula.
We may set an ROE for WAW utilities based on record evidence in any proceeding. If a utility
files cost of equity testimony, 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
Methodology
In the instant docket, we updated the current leverage formula using the most recent
financial data applied to the methodology approved in Order No. PSC-2001-2514-FOF-WS,
reaffirmed in Order No. PSC-2008-0846-FOF-WS and modified in Order No. PSC-2018-0327-
PAA-WS. The methodology uses ROEs derived from widely accepted financial models applied
to an index of natural gas and WAW companies that have actively traded stock and forecasted
financial data. To establish the proxy group, we selected five natural gas companies and six
4Order No. PSC-2001-2514-FOF-WS, issued December 24, 2001, in Docket No. 20010006-WS, In re: Water and
wastewater industry annual reestablishment of authorized range of return on common equity for water and
wastewater utilities pursuant to Section 367.081(4)(f), F.S.
5Order No. PSC-2011-0287-PAA-WS, issued July 5, 2011, in Docket No. 20110006-WS, In re: Water and
wastewater industry annual reestablishment of authorized range of return on common equity for water and
wastewater utilities pursuant to Section 367.081(4)(f), F.S.
6Order No. PSC-2018-0327-PAA-WS, issued June 26, 2018, in Docket No. 20180006-WS, In re: Water and
wastewater industry annual reestablishment of authorized range of return on common equity for water and
wastewater utilities pursuant to Section 367.081(4)(f), F.S.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 3
WAW companies that derive at least 50 percent of their total revenue from regulated operations
and have a Standard and Poor’s (S&P) credit rating. These selected companies have market
power and are influenced significantly by economic regulation and have an average S&P bond
rating of ‘A’.
Consistent with the approved methodology, we used a market capitalization weighted
average for: (1) the Discounted Cash Flow model results, (2) the Beta values in the Capital Asset
Pricing Model, and (3) the equity ratio of the proxy group.
Assumed Cost of Debt
We used a projected yield on Corporate Baa bonds to estimate the bond yield of an
average Florida WAW utility in the calculation of the weighted average cost of capital of the
proxy group. A projected yield is used because required returns are forward looking and based
on projections.
Consistent with the methodology approved in Order No. PSC-2018-0327-PAA-WS, we
used the average of the projected Corporate Baa rated bond yield of 5.825 percent for the
upcoming four quarters as published in the April 1, 2024 Blue Chip Financial Forecast (Blue
Chip). We then added the 120-month historical average spread of 0.117 between the Baa and A
Corporate Utility Bond yields to the projected Corporate Baa rated bond yield of 5.825 percent to
estimate a projected Baa3 rated utility bond yield of 5.94 percent.
We added a 50 basis point adjustment for small-company risk and a 50 basis point
adjustment for a private placement premium to the projected Baa3 rated utility bond yield of 5.94
percent to reflect the risk for a typical Florida WAW utility, which resulted in a projected
assumed debt cost rate of 6.94 percent.
5.825% + 0.117% + 0.50% + 0.50% = 6.94%
Estimated Cost of Equity
The current leverage formula relies on two ROE models described below. We adjusted
the results of these models to reflect differences in risk and debt cost between the proxy group
and the average Florida WAW utility. Both of the ROE models include an adjustment of
approximately four percent for flotation costs. The ROE models are as follows:
A multistage Discounted Cash Flow (DCF) model applied to an index of natural gas and
WAW utilities that have publicly traded stock and are followed by Value Line. This DCF model
is an annually compounded model and uses prospective dividend growth rates as published by
Value Line.
A Capital Asset Pricing Model (CAPM) that relies on a market return for companies
followed by Value Line, the average projected yield on the U.S. Treasury’s 30-year bonds as of
April 1, 2024, published by Blue Chip, and the weighted average beta for the index of natural gas

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 4
and WAW utilities. The market return for the CAPM was calculated using a quarterly DCF
model with stock prices as of April 8, 2024. Consistent with our approved methodology since
2001, the CAPM result was adjusted upward by 20 basis points to reflect flotation cost of
approximately four percent.
Consistent with Order No. PSC-2018-0327-PAA-WS, we averaged the results of the
DCF and CAPM models and adjusted the result of 9.04 percent as follows:
A bond yield differential of 47 basis points was added to reflect the difference in yields
between an A/A2 rated bond, which is the median bond rating for the combined utility index, and
a BBB-/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 assumed lower credit quality
of a typical Florida WAW utility.
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 illiquid. Investors require a
premium for the lack of liquidity of privately 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 and smaller companies are
considered by investors to be more risky than larger companies.
After the above adjustments, the resulting cost of equity estimate of 10.51 percent is
included in the weighted average capital structure of the proxy group to derive the leverage
formula. The derivation resulted in an adjustment of 73 basis points to reflect an estimated
required return of 11.24 percent at an equity ratio of 40 percent. Table 1 shows the components
that comprise the upper range of the leverage formula.
Table 1
Adjusted Return on Equity
DCF Model 	7.91%
CAPM 	10.17%
Average 	9.04%
Bond Yield Differential 	0.47%
Private Placement Premium 	0.50%
Small-Utility Risk Premium 	0.50%
Adjusted ROE Average 	10.51%
Adj. To Reflect Required
Equity Return at a 40% Equity Ratio 0.73%
Upper Range of ROE 	11.24%
Source: Commission staff Worksheets

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 5
Leverage Formula
The updated leverage formula is: ROE = 6.94% + (1.719 ÷ Equity Ratio)
The resulting range of returns is 8.66 percent at 100 percent equity to 11.24 percent at 40
percent equity.
Using the most recent financial data in the leverage formula increases the lower end of
the current allowed ROE range by 20 basis points and increases the upper end of the range by 57
basis points. Overall, the spread between the range of returns on equity based on the updated
leverage formula is 258 basis points (8.66 percent to 11.24 percent). In comparison, the range of
returns on equity for the current leverage formula from 2023 is 221 basis points (8.46 percent to
10.67 percent).
In developing the updated leverage formula, we acknowledge that the leverage formula
depends on four basic assumptions:
1) 	Business risk is similar for all WAW utilities;
2) 	The cost of equity is an exponential function of the equity ratio but a linear function of
the debt to equity ratio over the relevant range;
3) 	The marginal weighted average cost of investor capital is constant over the equity ratio
range of 40 percent to 100 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 an average Florida WAW utility over an equity ratio
range of 40 percent to 100 percent.
For these reasons, the leverage formula is assumed to be appropriate for the average Florida
WAW utility.
Based on the aforementioned, we find that the revised leverage formula methodology
applied to a proxy group of natural gas and WAW utilities with updated financial data based on
market-capitalization weighted averages produces a reasonable range of ROEs for WAW utilities
and reflects current financial markets. As such, the following leverage formula shall be used until
a new leverage formula is determined in 2025:
ROE = 6.94% + (1.719 ÷ Equity Ratio)
Where the Equity Ratio = Common Equity ÷ (Common Equity + Preferred Equity +
Long-Term and Short-Term Debt).

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 6
The appropriate range of returns on equity is 8.66% at 100% equity to 11.24% at 40%
equity.
Additionally, we find it appropriate to cap returns on common equity at 11.24 percent for
all WAW utilities with equity ratios less than 40 percent to discourage imprudent financial risk.
This cap is consistent with the methodology approved in Order No. PSC-2018-0327-PAA-WS.
Based on the foregoing, it is
ORDERED by the Florida Public Service Commission that the appropriate range of
returns on common equity for water and wastewater utilities pursuant to Section 367.081(4)(f),
Florida Statutes, is the leverage formula methodology approved in Order No. PSC-2018-0327-
PAA-WS, using a proxy group comprised of natural gas and WAW utilities and updated
financial data. Accordingly, the following leverage formula shall be used until the leverage
formula is addressed again in 2025:
ROE = 6.94 + (1.719 ÷ Equity Ratio)
Where the Equity Ratio = Common Equity ÷ (Common Equity + Preferred Equity +
Long-Term and Short-Term Debt)
Range: 8.66% at 100% equity to 11.24% at 40% equity
Returns on common equity shall be capped at 11.24 percent for all WAW utilities with equity
ratios less than 40 percent. It is further
ORDERED that the provisions of this Order, issued as proposed agency action, shall
become 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, 2540 Shumard Oak Boulevard, Tallahassee, Florida 32399-0850, by the
close of business on the date set forth in the “Notice of Further Proceedings” attached hereto. It
is further
ORDERED that this docket shall remain open to allow us to monitor changes in capital
market conditions and to readdress the reasonableness of the leverage formula as conditions
warrant.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS
PAGE 7
By ORDER of the Florida Public Service Commission this 22nd day of May, 2024.
DD
I
Florida Pu lie Se 	ice Commission
2540 Shumard Oak Boulevard
Tallahassee, Florida 32399
(850) 413-6770
www.floridapsc.com
Copies furnished: 	A copy of this document is
provided to the parties of record at the time of
issuance and, if applicable, interested persons.
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. Any 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, Florida Administrative Code. 	This
petition must be received by the Office of Commission Clerk, 2540 Shumard Oak Boulevard,
Tallahassee, Florida 32399-0850, by the close of business on June 12, 2024.
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.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 8 	Page 1 of 6
SUMMARY OF RESULTS
2024 Water and Wastewater Leverage Formula
Updated
Results
(1) DCF ROE for Proxy Group 	7.91%
(2) CAPM ROE for Proxy Group 	10.17%
AVERAGE 	9.04%
Bond Yield Differential 	0.47%
Private Placement Premium 	0.50%
Small-Utility Risk Premium 	0.50%
Adjustment to Reflect Required Equity
Return at a 40% Equity Ratio 0.73%
Cost of Equity for Average Florida
WAW Utility at 40% Equity Ratio 11.24%
2024 Leverage Formula (Updated Results)
Return on Common Equity = 6.94% + (1.719 ÷ Equity Ratio)
Range of Returns on Equity = 8.66% to 11.24%

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 9 	Page 2 of 6
Marginal Cost of Investor Capital
Average Water and Wastewater Utility
Weighted
Marginal 	Marginal
Capital Component 	Ratio 	Cost Rate 	Cost Rate
Common Equity 	48.15% 	10.51% 	5.06%
Total Debt 	51.85% 	6.94%* 	3.60%
100.00% 	8.66%
A 40% equity ratio is the floor for calculating the required return on common equity.
The return on equity at a 40% equity ratio: 6.94% + (1.719 ÷ 0.40) = 11.24%
Marginal Cost of Investor Capital
Average Water and Wastewater Utility at 40% Equity Ratio
Weighted
Marginal 	Marginal
Capital Component 	Ratio 	Cost Rate 	Cost Rate
Common Equity 	40.00% 	11.24% 	4.50%
Total Debt 	60.00% 	6.94%* 	4.16%
100.00% 	8.66%
Where: Equity Ratio = Common Equity ÷ (Common Equity + Preferred Equity + Long-Term
and Short-Term Debt)
*Assumed Baa3 rate for April 2024 plus a 50 basis point private placement premium and a 50
basis point small-utility risk premium.
Sources:
Value Line Selection and Opinion
Company 10-K Filings

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 10 	Page 3 of 6
Discounted Cash Flow Model Results
February 26, 2024 – March 28, 2024
DCF
STOCK PRICE 	DCF 	Weighted
COMPANY 	High 	Low 	Avg. 	Results 	Weight 	Results
Atmos Energy Corporation 	119.05 	111.02 	115.04 	8.13% 	22.48% 	1.83%
NiSource, Inc. 	27.72 	25.59 	26.65 	8.71% 	13.86% 	1.21%
Northwest Natural Holding 	38.43 	35.40 	36.92 	8.35% 	1.70% 	0.14%
ONE Gas, Inc. 	64.68 	57.96 	61.32 	7.94% 	4.58% 	0.36%
Spire, Inc. 	61.68 	57.94 	59.81 	8.56% 	4.31% 	0.37%
American States Water 	74.40 	69.98 	72.19 	7.37% 	3.40% 	0.25%
American Water Works 	122.41 	116.38 	119.40 	7.57% 	29.80% 	2.26%
Essential Utilities, Inc. 	37.13 	33.94 	35.54 	7.72% 	12.94% 	1.00%
California Water Services 	48.56 	44.93 	46.75 	7.08% 	3.40% 	0.24%
Middlesex Water 	53.31 	48.59 	50.95 	8.50% 	1.18% 	0.10%
SJW Group 	58.47 	54.39 	56.43 	6.71% 	2.35% 	0.16%
Average Weighted DCF Result: 	7.91%
The ROE of 7.91% represents the expected cost of equity required to match the average stock
price, less four percent for flotation costs, with the present value of expected cash flows.
Sources:
Stock prices obtained from Yahoo Finance for the period February 26, 2024 through March 28,
2024.
Natural Gas company dividends, earnings, and ROE obtained from Value Line Ratings &
Reports issued February 23, 2024.
Water and Wastewater company dividends, earnings, and ROE obtained from Value Line
Ratings & Reports issued April 5, 2024.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 11 	Page 4 of 6
Capital Asset Pricing Model Cost of Equity for
Water and Wastewater Industry
CAPM analysis formula
K 	= 	RF + Beta (MR − RF) + 0.20%
K 	= 	Investor’s required rate of return
RF 	= 	Risk-free rate
(April 2024 Blue Chip forecast for 30-year U.S. Treasury Bond Yield)
3Q 2024 	4Q 2024 	1Q 2025 	2Q 2025 	3Q 2025
4.20% 	4.20% 	4.10% 	4.10% 	4.00%
Average = 4.12%
Beta 	= 	Measure of industry-specific risk (market cap weighted average for the proxy
group of natural gas and WAW utilities)
MR 	= 	Market Return (Value Line Investment Analyzer Web Browser)
10.17% = 4.12% + 0.896 (10.65% − 4.12%) + 0.20%
Note:
We calculated the market return using a quarterly DCF model for a large number of dividend
paying stocks followed by Value Line. As of April 9, 2024, the result was 10.65%. The market
return is adjusted to reflect a flotation cost of three percent. We added 20 basis points to the
CAPM result to reflect an assumed flotation cost of approximately two percent.

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 12 	Page 5 of 6
Bond Yield for Water and Wastewater Industry
Credit Rating 	(A) 	Spread 	(A-) 	Spread 	(BBB+) 	Spread 	(BBB) 	Spread 	(BBB-)
0.117 	0.117 	0.117 	0.117
120-Month Avg. Spread: 	0.117%
Total Equity Bond
Yield Differential: 	0.117% x 4 = 0.468%
2Q 2024 	3Q 2024 	4Q 2024 	1Q 2025
Forecast Corporate Baa Bond 	5.90% 	5.80% 	5.80% 	5.80%
Average Forecasted Corporate
Baa Bond Rate: 	5.825%
Assumed Bond Yield for Baa3 Utilities: 0.117% + 5.825% = 5.942%
Updated
Results
Private Placement Premium 	0.50%
Small-Utility Risk Premium 	0.50%
Assumed Bond Yield for Baa3 Utilities 	5.94%
Assumed Bond Yield for Florida WAW Utilities 	6.94%
Sources:
Value Line Selection and Opinion for the 120-Month Avg. Spread
Blue Chip Financial Forecast issued April 1, 2024

ORDER NO. PSC-2024-0165-PAA-WS
DOCKET NO. 20240006-WS 	Attachment 1
PAGE 13 	Page 6 of 6
2024 Leverage Formula Proxy Group
S&P 	V/L Market 	Equity 	Value 	Value Line
Bond 	Regulated 	Capital 	Equity 	Ratio 	Line 	Beta
Company 	Rating 	Revenue 	(in millions) 	Ratio 	(Weighted) 	Beta 	(Weighted)
Atmos Energy Corporation 	A- 	95.89% 	$17,200 	61.20% 	13.76% 	0.85 	0.1911
NiSource, Inc. 	BBB+ 	67.80% 	10,600 	41.77% 	5.79% 	0.90 	0.1247
Northwest Natural Holding 	A+ 	92.63% 	1,300 	43.52% 	0.74% 	0.85 	0.0144
One Gas, Inc. 	A- 	98.92% 	3,500 	47.56% 	2.18% 	0.85 	0.0389
Spire, Inc. 	A- 	92.15% 	3,300 	38.47% 	1.66% 	0.85 	0.0367
American States Water 	A 	72.77% 	2,600 	46.05% 	1.56% 	0.70 	0.0238
American Water Works 	A 	92.16% 	22,800 	44.20% 	13.17% 	0.95 	0.2831
Essential Utilities, Inc. 	A 	86.40% 	9,900 	45.53% 	5.89% 	1.00 	0.1294
Cal. Water Serv. Group 	A+ 	97.67% 	2,600 	53.70% 	1.82% 	0.75 	0.0255
Middlesex Water 	A 	92.32% 	900 	50.74% 	0.60% 	0.75 	0.0088
SJW Group 	A- 	97.27% 	1,800 	41.38% 	0.97% 	0.85 	0.0200
Average 	A 	89.63% 	$6,955 	46.74% 	48.15% 	0.845 	0.896