STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ISLAND SERVICES, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-1176

) PSC NO. 790857-W

FLORIDA PUBLIC SERVICES )

COMMISSION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, administrative hearings on this petition were held in Ft. Pierce, Florida before Public Service Commission Hearing Officers Harry Lamb on February 12, 1980, and R. T. Carpenter on June 17 and 18, 1980. Effective July 1, 1980, this pending matter was transferred to the Division of Administrative Hearings with R. T. Carpenter continuing as the assigned Hearing Officer. The parties were represented by:

APPEARANCES

For Petitioner: R. M. C. Rose, Esquire

1020 East Lafayette Street Tallahassee, Florida 32301

For Respondent: Marta M. Crowley, Esquire

Florida Public Service Commission Fletcher Building

101 East Gaines Street Tallahassee, Florida 32301

For Intervenor: Douglas E. Gonano, Esquire (Mr. Dwight Citizens Federal Building

DeBolt) 1600 South Federal Highway, Suite 200

Fort Pierce, Florida 33450

Petitioner seeks to increase its rates and charges for water service in St.

Lucie County under the provisions of Section 367.081, Florida Statutes (1979). An interim increase authorized by Public Service Commission Order 9140 is currently in effect under bonding and escrow arrangements.

At the initial hearing, Petitioner was not represented by counsel and sought a continuance. This continuance was granted, and Petitioner waived the right to disposition of its rate increase application within the eight month period established by Section 367.081(5), Florida Statutes.

Following the initial hearing, Petitioner also raised the issue of jurisdiction, contending that it is not a public utility subject to regulation

by the Public Service Commission. See Section 367.022, Florida Statutes. Ruling was reserved on this issue.

FINDINGS OF FACT

1. The Petitioner is a wholly owned subsidiary of Queens Cove Properties, Inc. Mr. Alex B. Cardenas is president of the parent development company as well as the utility.

   
   

2. The water system was constructed for the sole purpose of providing water to purchasers of lots in the Queens Cove subdivision. However, the Petitioner obtained certification as a public utility to serve the general area in the belief that it was required to do so. See Section 367.031, Florida Statutes.

   
   

3. Lots in this subdivision have sold for $15,000 to $24,000, which includes undifferentiated amounts for availability of water service. The water service is part of a "bundle of rights" which the purchaser obtains with his lot. (e.g. bridge, roads, underground utilities). In addition, existing lot owners have purchased the "bundle of rights" separately from their land (where Queens Cove was not the original property seller) at prices ranging from $4,000 to $8,000. Again, the charge for water service availability was not differentiated from other rights.

   
   

4. At the time of the second hearing, the utility had 45 connections--42 single family residences, one developer's office, one model home, and an irrigation outlet. Ten customers testified (five by adoption) at these hearings as to service problems.

   
   

5. The water treatment plant is of the reverse osmosis type. This system is complex and costly to maintain, but is useful where as here the raw water contains a high level of natural impurities. The utility has not properly maintained this system and water taste, smell and clarity are generally poor. The customers also experience frequent periods of very low water pressure. Furthermore, they are unable to contact the utility when outages occur after business hours since there is no emergency phone number provided. The testimony of a Department of Environmental Regulation (DER) representative also established that chlorine residuals are not properly maintained and a high coliform reading in June, 1980, will require monitoring by DER. Thus, overall service is unsatisfactory and must be improved before the Petitioner is allowed to receive a return on its investment. See Section 367.081(2), Florida Statutes, which requires the Commission to consider service in setting rates.

   
   

6. Profits earned by a utility with service deficiencies such as these would normally be placed in escrow until the problems were corrected. Here, however, the utility does not seek to earn a return on its investment, but only to break even. In addition, there was no competent, substantial evidence adduced by either Petitioner or Respondent to demonstrate what the utility's investment is. Therefore, rate base cannot be determined in this proceeding, and consequently no return can be established.

   
   

7. Appendix one hereto details Petitioner's test year expenses as set out in its rate application, with adjustments to correct erroneous entries and to delete or reduce expenses which were not shown to be reasonable and prudent. No controversy exists with the exception of allowances for plant manager compensation, office rent and rate case expense.

8. The Petitioner's request for an annual manager's salary of $20,000 was not supported by the evidence. No salary is currently paid for this function, nor is a plant manager as such required or utilized. Rather, the limited functions of a plant manager can be handled by one of the full time maintenance or administrative employees. This procedure is consistent with management practices in other small, developer-owned water utilities. Such delegation does not, however, relieve the owner from his duty to hire qualified personnel and provide adequate resources.

   
   

9. A separate allowance for office rent is not justified. The Petitioner has no office in the immediate area but uses the owner-developer's office in Stuart. There is no need for a separate office under the present organizational structure, and therefore no expense for this item should be authorized.

   
   

10. Evidence on rate case expense (attorney and accountant fees) was submitted by post-hearing pleadings pursuant to agreement of the parties. The Petitioner seeks $9,702 rate case expense, amortized over three years, or $3,234 annually. The Respondent proposes to allow $6,000 amortized over five years, or

    $1,200 annually. As with other expenses, the amount authorized will be paid by customers and any portion disallowed will be borne by the owner of the utility.

    
    

11. The rate case expense sought here is $215 per customer, which far exceeds the average water/sewer utility rate case expense of $6.92 per customer. A substantial portion of these expenses were incurred as a result of Petitioner's failure to keep adequate records and its initial decision to proceed without counsel. Therefore, the reduction of authorized expenses to

    $6,000 proposed by Respondent is appropriate. However, Petitioner's proposed three-year amortization period better represents industry experience and is consistent with current Commission policy. Therefore, the rate case expense authorized is $6,000 amortized over three years, or $2,000 annually.

    
    

12. The Petitioner currently bills its customers on a monthly basis using a minimum gallonage charge. This rate design neither encourages conservation of water nor accurately reflects the cost of providing service. Therefore, the utility should be required to adopt the base facility charge rate structure. This charge includes a fixed amount for the customer's share of the utility's fixed costs, as well as a gallonage charge to represent the variable expenses associated with water consumption.

    
    

13. Petitioner requested authority to increase its tap-in or meter installation fee from $100 to $200. This increase was authorized on an interim (escrow) basis by Order 9140. The utility has now withdrawn its request for the increase and should return the escrowed amounts to all customers who have paid the $200. In addition, Petitioner should be required to pay interest on customer deposits at the rate of 6 percent prior to July 1, 1980, and 8 percent after that date. See Section 25-10.72, Florida Administrative Code. Since no interest on deposits has ever been paid, the credit must be retroactive to the date of each customer's deposit.

    
    

14. Proposed findings of fact were submitted by the Petitioner and the Public Service Commission. To the extent these proposed findings have not been adopted herein or are inconsistent with the above findings, they have been specifically rejected as irrelevant or not supported by the evidence.

    CONCLUSIONS OF LAW

    
    

15. Section 367.011(2), Florida Statutes (1979) provides:

    
    

    The Florida Public Service Commission

    shall have exclusive jurisdiction over each utility with respect to its authority, service, rates, and issuance and sale of its securities maturing more than 12 months after date of issue, except as provided in this chapter.

    
    

16. Section 367.031 provides:

    
    

    Each utility shall obtain a certificate authorizing it to provide service.

    
    

17. Section 367.022 provides:

    
    

    The following are not subject to regulation by the commission as a utility:

    1. The sale, distribution or furnishing of bottled water;

    2. Systems owned, operated, managed or controlled by governmental agencies;

    3. Manufacturers providing service solely in connection with their operations;

    4. Public lodging establishments providing service solely in connection with service to their guests;

    5. Landlords providing service to their tenants without specific compensation for the service;

    6. Systems designed to serve or serving

       100 persons or less; and

    7. Nonprofit corporations, associations, or cooperatives providing service solely to members who own and control such nonprofit corporations, associations, or cooperatives.

       
       

18. Petitioner contends it is not a public utility within the meaning of the above statutes and should be declared exempt from regulation. It has, however, obtained certification as a public utility and has applied to increase its rates under Section 367.081, Florida Statutes.

    
    

19. Petitioner must either continue to operate as a water utility subject to Public Service Commission regulation or demonstrate the applicability of one of the exceptions to regulation provided in Section 367.022, Florida Statutes (quoted above)

    
    

20. Petitioner did not present any evidence to demonstrate that it falls within any of the exceptions provided, and is therefore subject to continued Public Service Commission jurisdiction and regulation as a utility. However, the service problems identified herein and Petitioner's stated desire to get out of the utility business warrant further investigation by the Commission in separate proceedings. Likewise, Petitioner may by separate application seek to establish its rate base investment and an appropriate return thereto.

21. In consideration of the above, the revenue rate structure and charges recommended herein will result in rates and charges which are just, reasonable, compensatory, and not unjustly discriminatory within the meaning of Section 367.081(2), Florida Statutes.

RECOMMENDATION

Based on tide foregoing findings of fact and conclusions of law, it is RECOMMENDED that the petition of Island Services, Inc. be granted in part,

and that Petitioner be authorized to file new rates structured on the base facility charge concept, designed to generate gross water revenue of $12,823 annually, based on the average number of customers served during the test year. It is further

RECOMMENDED that Petitioner be required to refund $100 to all customers who have paid the interim $200 water connection charge and that its tariff be amended to show that $100 is the authorized charge for this service. It is further

RECOMMENDED that Petitioner pay interest on deposits at the annual rate of

6 percent through June 30, 1980, and at 8 percent thereafter, with such payments retroactive to the dates of deposit.

DONE and ORDERED this 6th day of August, 1980, in Tallahassee, Florida.

R. T. CARPENTER, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

COPIES FURNISHED:

R. M. C. Rose, Esquire 1020 East Lafayette Street Tallahassee, Florida 32301

Marta M. Crowley, Esquire

Florida Public Service Commission Fletcher Building, 101 E. Gaines St. Tallahassee, Florida 32301

Douglas E. Gonano, Esquire Citizens Federal Building Suite 200

1600 South Federal Highway Fort Pierce, Florida 33450

Docket for Case No: 80-001176

Orders for Case No: 80-001176