STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

1. C. UTILITIES, INC., )

   )

   Petitioner, )

   )

   vs. ) CASE NO. 80-1184

   ) DOCKET NO. 790399-WS FLORIDA PUBLIC SERVICE COMMISSION )

   staff and public generally, )

   )

   Respondent, )

   )

   
   

   RECOMMENDED ORDER

   
   

   PURSUANT TO NOTICE, an administrative hearing was held before WILLIAM B. THOMAS, Hearing Examiner with the Florida Public Service Commission, on May 6, 1980, in Port Richey, Florida, on the application of J. C. Utilities, Inc., for increased rates and charges for water and sewer service provided to its customers in Pasco County, pursuant to Section 367.081, Florida Statutes. On July 1, 1980, the matter was transferred to the Division of Administrative Hearings, but continues to be assigned to WILLIAM B. THOMAS, as DOAH Hearing Officer, for a recommended order.

   
   

   APPEARANCES

   
   

   For Petitioner, J. C. Utilities, Inc. Jack H. Geller

   
   

   For Respondent, Florida Public Service Commission Samuel H. Lewis

   
   

   By Order No. 9032, dated August 23, 1979, the Florida Public Service Commission suspended the rate schedules filed by J. C. Utilities, Inc., and granted the company an interim increase in sewer revenue of $33,725. Order No. 9032 further required the utility to post a bond in the penal sum of $21,000 to assure a refund to the customers if the interim rates are determined to be excessive.

   
   

   The utility's application requested gross revenue for water service of

   $277,092, and gross revenue for sewer service of $116,303. The only rate increase the company has ever received for its service has been the surcharge increase on water purchased from Pasco Water Authority (PWA). The issues to be determined are whether the utility's water and sewer service meets all relevant quality standards, and what amount of revenue is just, reasonable, compensatory and not unjustly discriminatory, in accordance with Section 367.081(2), Florida Statutes.

   FINDINGS OF FACT

   
   

   1. Quality of Service: Twelve customers testified at the hearing in opposition to the proposed rate increase. The major customer objection is the size of the increase sought. Other objections are directed at the utility's rate structure, and the required tie-in to the PWA pipeline. Some customers desire to have separate rates set for the two areas served by J. C. Utilities, Inc., (Timber Oaks and San Clemente East), and one customer objected to the taste and smell of the water being provided. Nevertheless, an engineer from the Florida Public Service Commission presented evidence that the utility is meeting all state standards and is not under citation by the Department of Environmental Regulation. On the basis of the entire record, the evidence supports a finding that the utility's water and sewer service is satisfactory. Used and Useful Plant in Service. The utility contends that 33.72 percent of its sewer plant is not used and useful in the public service, and has deleted this amount from its sewer rate base. The Florida Public Service Commission engineer agrees, based on the actual recorded flows of the sewer plant and the growth of the system. The water plant in service is 100 percent used and useful in the public service. Acquisition Adjustment: The utility calculated an addition to rate base of

      $17,370 for San Clemente East (net of 1978 amortization) for acquisition costs, and presented evidence to demonstrate that this acquisition is in the public interest. Based on the entire record, the evidence supports a finding that this acquisition benefits the customers of J. C. Utilities, Inc., and is in the public interest. Thus, the adjustment is warranted. Income tax expense: Several questions are raised in the area of income tax expense. These deal with whether to treat the utility as a separate entity or part of a group filing consolidated tax returns, the appropriate computation of state income taxes, and the effect the capital structure of the utility has on taxable income for ratemaking purposes. All of these questions except one address the ultimate dollar amount of tax expense. The exception addresses the appropriateness of the expense. Only if income taxes are determined to be appropriate can the dollar amount of such taxes be considered.

      
      

   2. When net operating income is equal to or less than interest expense, there is no taxable income. This is generally true whenever a company's capital structure consists largely of debt or of debt only. The capital structure of J.

      C. Utilities, Inc., is comprised entirely of debt, according to the company's financial statements. The annual report shows capital stock of $10, a deficit in retained earnings of $68,834, and additional paid-in capital of $490. The utility's financial witness verified that J. C. Utilities, Inc. has no externally financed debt and relies for funds on its parent, U.S. Homes Corporation. The application reflects that the company's capital structure consists of customer deposits (debt), and loans and advances from the parent company (debt). This evidence supports a finding that the utility's capital structure is 100 percent debt. Accordingly, there can be no allowance for either state or federal income taxes in making a determination of revenue requirements for this utility. (See Order No. 9256 in Docket No. 790027-W) and all questions relating to the dollar amount of income tax expense are irrelevant.

      
      

   3. Cost of capital: J. C. Utilities, Inc., is financed totally by its parent company, U.S. Homes Corporation. The application originally requested a rate of return of 11.5 percent. At the hearing, various witnesses for the utility suggested rates ranging from 13.2 percent to 25 percent. However, since the utility has no equity, no return on equity can be provided. In calculating an appropriate rate of return to be granted to the utility, the original cost of debt rate of 11 percent and the recently revised rate of 8 percent on customer

      deposits can be used. These cost of capital components and rates thereon yield a weighted average cost of capital of 11.32 percent. This rate is supported by the evidence, and should be granted. Depreciation on Contributed Property: Appropriate adjustments have been made to the utility's water rate base and sewer rate base, and operating statements, to reflect the practice of the Florida Public Service Commission to add back accumulated depreciation on contributed property in rate base, and remove these items from operating expense. These adjustments appear on the attached schedules.

      
      

   4. Rate Base and Operating Statements: The attached schedules 1 through 6 detail the utility's rate base for water, rate base for sewer, and the water and sewer operating statements. Appropriate explanations for the various adjustments also appear in these schedules. Construction water: During the test year, the utility did not bill for construction water in the months of January, February, and March. Starting in April construction water ,and line flushing was metered and billed to the various construction companies connected with the Timber Oaks development. During the final nine months of the year when the construction water was accounted for a total of 28,626,903 gallons were sold which generated $17,590 in water revenue. In order to estimate the unaccounted for construction water, the nine months billing can be annualized. This amounts to an additional 9,542,301 gallons, which increases test year revenue by $5,725.

      
      

   5. Rate Structure: In order to structure rates that will be fair to all customers, they must not only generate the approved revenue, but should also assure that all classes of customers share in the cost to provide service. The base facility type of rate structure establishes a monthly minimum service charge, which covers fixed costs such as depreciation, property taxes, and allocated portions of billing, collecting, and customer accounting expenses. Meter size is still used to determine the demand factor. After the base charge is established, a charge per 1,000 gallons is determined. This charge recovers costs related to transmission and treatment, and allocated portions of billing, collections, accounting expense, plant labor, etc. Customers then pay a gallonage charge based on use. This allows each customer some control over the amount paid for service. This form of rate structure should be used in setting rates for J. C. Utilities, Inc.

      
      

   6. Separate rate structures: J. C. Utilities, Inc. provides water service to the separate, unconnected systems serving San Clemente East and Timber Oaks. An appropriate rate structure should be established to provide separate water rates for San Clemente and Timber Oaks, so that the customers of each system pay rates to cover only the costs associated with these systems.

      
      

   7. P.W.A. surcharge: Because permanent rates are to be established, the utility should no longer be permitted to make a separate surcharge for PWA water purchased. This expense should be incorporated into the other costs of J. C. Utilities, Inc.

      
      

   8. Connection charges: In its application, the utility requested an increase in water and sewer connection charges. The company used the current number of customers served by the water system to arrive at the customer hydraulic share. The correct way to establish the hydraulic share is to divide the number of customers that can be served by the system into the cost of the water plant. However, there is other information needed in order to accurately and fairly set connection charges, which was not presented by the utility. Rather than deny the request for an increase in water and sewer connection fees, an investigation docket should be opened for the purpose of determining whether increases are warranted.

      CONCLUSIONS OF LAW

      
      

   9. The quality of the water and sewer service provided by the utility meets all state standards.

      
      

   10. The utility's adjusted rate base for water is $61,535 (San Clemente East) and $207,945 (Timber Oaks), and its adjusted rate base for sewer is

       $141,308.

       
       

   11. The overall weighted cost of capital is 11.32 percent.

       
       

   12. The gross annual water revenue requirement is $28,731 (San Clemente East) and $203,725 (Timber Oaks), and the gross annual sewer revenue requirement is $99,473.

       
       

   13. These revenue requirements are just, reasonable, compensatory, and not unjustly discriminatory (Section 367.081(2) Florida Statutes).

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of J. C. Utilities, Inc., 2001 Ponderosa

Avenue, Port Richey, Florida 33568, be granted in part, and that the utility be

authorized to receive gross annual water revenues of $28,731 for San Clemente East, and $203,725 for Timber Oaks, and gross annual sewer revenue of $99,473, by rates to be approved by the Florida Public Service Commission. It is further

RECOMMENDED that an acquisition adjustment of $17,370 be allowed for San Clemente East. It is further

RECOMMENDED that the utility be required to implement a base facility charge in structuring its rates, in the manner set forth above. It is further

RECOMMENDED that a separate investigation docket be opened for the purpose of resolving the matter of the utility's request for increased water and sewer connection charges.

THIS RECOMMENDED ORDER entered on this 8th day of July, 1980, in Tallahassee, Florida.

WILLIAM B. THOMAS

Hearing Officer

Division of Administrative Hearings

101 Collins Building Tallahassee, Florida 32301

================================================================= AGENCY FINAL ORDER

================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION

In re: Application of J. C. DOCKET NO. 790399-WS (CR)

Utilities, Inc. to amend its ORDER NO. 9808 rates and charges. ISSUED: 2-23-81

/ DOAH CASE NO. 80-1184

The following Commissioners participated in the disposition of this matter: JOSEPH P. CRESSE, CHAIRMAN

GERALD L. GUNTER JOHN R. MARKS, III KATIE NICHOLS

Pursuant to Notice, an administrative hearing was held before William B. Thomas, Hearing Examiner with the Florida Public Service Commission, on May 6, 1980, in Port Richey, Florida, on the application of J. C. Utilities, Inc., for increased rates and charges for water and sewer service provided to its customers in Pasco County, pursuant to Section 367.081, Florida Statutes. On July 1, 1980, the matter was transferred to the Division of Administrative Hearings, but continues to be assigned to William B. Thomas, as DOAH Hearing Officer, for a recommended order.

APPEARANCES: Jack H. Geller, Esquire, Suite

200, Clearwater professional Center, 600 Bypass Drive, Clearwater, Florida 33156, for

J. C. Utilities, Inc., Petitioner.

Samuel H Lewis, Esquire, 101 East Gaines Street, Tallahassee, Florida 32301, for the Florida public Service Commission and the public generally.

The Hearing Officer's Recommended Order was filed on July 8, 1980. Timely exceptions to the Hearing Officer's recommended order were filed by the petitioner. Now after consideration of all of the evidence in the record, we enter our order.

ORDER

BY THE COMMISSION:

The Hearing Officer's Recommended Order is as follows:

"By Order No. 9032, dated August 23, 1979, the Florida Public Service Commission suspended the rate schedules filed by J. C. Utilities, Inc., and granted the company an interim increase in sewer revenue

of $33,725. Order No. 9032 further required the utility to post a bond in the penal sum of $21,000 to assure a refund to the customers if the interim rates are determined to be excessive.

The utility's application requested gross revenue for water service of $277,092, and gross revenue for

sewer service of $116,303. The only rate increase the company has ever received for its service has been the surcharge increase on water purchased from Pasco Water Authority (PWA). The issues to be determined are whether the utility's water and sewer service meets all relevant quality standards, and what amount of revenue is just, reasonable, compensatory and not unjustly discriminatory, in accordance with Section 367.081(2) Florida Statutes.

FINDINGS OF FACT

Quality of Service: Twelve customers testified at the hearing in opposition to the proposed rate increase.

The major customer objection is the size of the increase sought. Other objections are directed at the utility's rate structure, and the required tie-in to the PWA pipeline. Some customers desire to have separate rates set for the two areas served by J. C. Utilities, Inc., (Timber Oaks and San Clemente East) , and one customer objected to the taste and smell of the water being provided. Nevertheless, an engineer from the Florida Public Service Commission presented evidence that the utility is meeting all state standards and is not

under citation by the Department of Environmental Regu- lation. On the basis of the entire record, the evidence supports a finding that the utility's water and sewer service is satisfactory.

Used and Useful Plant in Service: The utility contends the 33.72 percent of its sewer plant is not used and useful in the public service, and has deleted this amount from its sewer rate base. The Florida Public Service Commission engineer agrees, based on the actual recorded flows of the sewer plant and the growth of the system. The water plant in service is 100 percent used and useful in the public service.

Acquisition Adjustment: The utility calculated an addition to rate base of $17,370 for San Clemente East (net of 1978 amortization) for acquisition costs, and presented evidence to demonstrate that this acquisition is in the public interest. Based on the entire record, the evidence supports a finding that this acquistion (sic) benefits the customers of J.C. Utilities', Inc., and is in the public interest. Thus, the adjustment is warranted.

Income tax expense: Several questions are raised in

the area of income tax expense. These deal with whether to treat the utility as a separate entity or part of a group filing consolidated tax returns, the appropriate computation of state income taxes, and the effect the capital structure of the utility has on taxable income for ratemaking purposes. All of these questions except one address the ultimate dollar amount of tax expense.

The exception addresses the appropriateness of the expense. Only if income taxes are determined to be appropriate can the dollar amount of such taxes be con- sidered.

When net operating income is equal to or less than interest expense, there is no taxable income. This is generally true whenever a company's capital structure consists largely of debt or of debt only. The capital structure of J. C. Utilities, Inc., is comprised entirely of debt, according to the company's financial statements. The annual report shows capital stock of $10, a deficit in retained earnings of $68,834, and additional paid-in capital of $490. The utility's financial witness ver- fled (sic) that J. C. Utilities, Inc. has no externally financed debt and relies for funds on its parent, U.S. Homes Corporation. The application reflects that the company's capital structure consists of customer

deposits (debt), and loans and advances from the parent company (debt). This evidence supports a finding that the utility's capital structure is 100 percent debt.

Accordingly, there can be no allowance for either state or federal income taxes in making a determination of revenue requirements for this utility. (See Order No. 9256 in Docket No. 790027-W), and all questions relating to the dollar amount of income tax expense

are irrelevant.

Cost of capital: J. C. Utilities, Inc., is financed totally by its parent company, U.S. Homes Corporation. The application originally requested a rate of return of 11.5 percent. At the hearing, various witnesses for the utility suggested rates ranging from 13.2 percent to 25 percent. However, since the utility has no equity, no return on equity can be provided. In

calculating an appropriate rate of return to be granted to the utility, the original cost of debt rate of 11 percent and the recently revised rate of 8 percent

on customer deposits can be used. These cost of capital components and rates thereon yield a weighted average cost of capital of 11.32 percent. This rate is sup- ported by the evidence, and should be granted.

Depreciation on Contributed Property: Appropriate adjustments have been made to the utility's water rate base and sewer rate base, and operating statements, to reflect the practice of the Florida Public Service Commission to add back accumulated depreciation on

contributed property in rate base, and remove these items from operating expense. These adjustments appear on the attached schedules.

Rate Base and Operating Statements: The attached schedules 1 through 6 detail the utility's rate base for water, rate base for sewer, and the water and sewer operating statements. Appropriate explanations for the various adjustments also appear in these schedules.

Construction water: During the test year, the utility did not bill for construction water in the months of January, February and March. Starting in April con- struction water and line flushing was metered and billed to the various construction companies connected with

the Timber Oaks development. During the final nine months of the year when the construction water was accounted for, a total of 28,626,903 gallons were sold which generated $17,590 in water revenue. In order to estimate the unaccounted for construction water, the nine months billing can be annualized. This amounts to an additional 9,542,301 gallons, which increases test year revenue by $5,725.

Rate Structure: In order to structure rates that will be fair to all customers, they must not only generate the approved revenue, but should also assure that all classes of customers share in the cost to provide service. The base facility type of rate structure establishes a monthly minimum service charge, which covers fixed costs such as depreciation, property taxes, and allocated portions of billing, collecting, and customer accounting expenses. Meter size is still

used to determine the demand factor. After the base charge is established, a charge per 1,000 gallons is determined. This charge recovers costs related to transmission and treatment, and allocated portions of billing, collections, accounting expense, plant labor, etc. Customers then pay a gallonage charge based on use. This allows each customer some control over the amount paid for service. This form of rate structure should be used in setting rates for J. C. Utilities, Inc.

Separate rate structures: J. C. Utilities, Inc. provides water service to the separate, unconnected systems serving San Clemente East and Timber Oaks. An appropriate rate structure should be established to provide separate water rates for San Clemente and

Timber Oaks, so that the customers of each system pay rates to cover only the costs associated with these systems.

P.W.A. surcharge: Because permanent rates are to be established, the utility should no longer be permitted to make a separate surcharge for PWA water purchased.

This expense should be incorporated into the other costs of J. C. Utilities, Inc.

Connection charges: In its application, the utility requested an increase in water and sewer connection charges. The company used the current number of cus- tomers served by the water system to arrive at the customer hydraulic share. The correct way to establish the hydraulic share is to divide the number of customers that can be served by the system into the cost of the water plant. However, there is other information needed in order to accurately and fairly set connection charges, which was not presented by the utility. Rather than

deny the request for an increase in water and sewer connection fees, an investigation docket should be opened for the purpose of determining whether increases ace warranted.

CONCLUSIONS OF LAW

1. The quality of the water and sewer service provided by the utility meets all state standards.

   
   

2. The utility's adjusted rate base for water is $61,535 (San Clemente East) and $207,945 (Timber Oaks), and its adjusted rate base for sewer is

   $141,308.

   
   

3. The overall weighted cost of capital is 11.32 percent.

   
   

4. The gross annual water revenue requirement is $28,731 (San Clemente East) and $202,725 (Timber Oaks), and the gross annual sewer revenue requirement is $99,473.

   
   

5. These revenue requirements are just, reasonable, compensatory, and not unjustly discriminatory (Section 267.081(2), Florida Statutes).

RECOMMENDATION

Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of J. C. Utilities,

Inc., 2001 Ponderosa Avenue, Port Richey, Florida 33568, be granted in part, and that the utility be authorized to receive gross annual water revenues of

$28,731 for San Clemente East, and $203,725 for Timber Oaks, and gross annual sewer revenue of $99,473, by rates to be approved by the Florida Public Service Commission. It is further

RECOMMENDED that an acquisition adjustment of

$17,370 be allowed for San Clemente East. It is further

RECOMMENDED that the utility be required to imple- ment a base facility charge in structuring its rates, in the manner set forth above. It is further

RECOMMENDED that a separate investigation docket

be opened for the purpose of resolving the matter of the utility's request for increased water and sewer connection charges.

At the oral argument the Applicant indicated that there were three issues raised by its exceptions. The first deals with income tax provisions and was withdrawn. The remaining issues are (1) cost of capital, and (2) objection to the staff's proposed findings being untimely filed.

Insofar as the cost of capital is concerned, the Hearing Officer recommended granting essentially that which the Applicant requested in his Petition for rate increase. At the hearing, an Applicant witness testified that the cost of the money for the parent company, U.S. Home Corporation, was now up to 13.2 percent, but submitted no substantial evidence to that effect. The Applicant's Attorney, in a June 16, 1980 letter to the Examiner which he termed "closing summation or post-trial brief", confused this issue of cost of debt by continuing to request a rate of return on debt of 11.5 percent. We, therefore, find that the record will only support the weighted average cost of capital of

11.32 percent found by the Hearing Officer.

At the oral argument, and in his exceptions, the Applicant's attorney stated that the "staff counsel requested an extension to submit the same (proposed findings) after the time set by the Hearing Officer had already expired and then proceeded to file the report after this proported extension had expired." The Hearing Officer, as evidenced by the transcript of the proceedings, allowed the parties thirty days from the date of the filing of the transcript of record with Clerk of this Commission to file their proposed findings. A review of the transcript of record indicates a posting with the Commission Clerk on May 27, 1980. The Staff Counsel's request for an extension of time was filed on June 27, 1980. This certainly falls within the thirty day period. F.A.C. 25-2.57, Computation of Time, provides that the computation of time shall "exclude the first day and include the last day." Therefore, with the exclusion of May 27, 1980, the request was filed within thirty days as required by the Hearing Officer. Staff Counsel requested a three day extension until June 30, 1980, in which to file Staff's proposed findings. The Applicant's objections to the proposed findings being filed one day late is a little late itself in that it should have been the subject of a Motion to Strike filed with the Hearing Officer. This objection, therefore, is moot.

We believe the findings of the Hearing Officer are correct. Based on the above, we find the Hearing Officer's findings and recommendation to be supported by the record and, therefore, adopt his Recommended Order.

Based upon the foregoing findings of fact and conclusions of law, it is ORDERED by the Florida Public Service Commission that the application of J.

C. Utilities, Inc., 2001 Ponderosa Avenue, Port Richey, Florida 33568, be

granted and the utility is authorized to file revised tariff pages, to be approved by the Commission, that are designed to generate gross annual water revenues of $28,731 for San Clement East, and $203,725 for Timber Oaks, and gross annual sewer revenues of $99,473. It is further

ORDERED that the monthly rates for water and sewer service shall be based upon a base facility charge concept. It is further

ORDERED that the revised tariff pages shall not become effective until filed and approved. It is further

ORDERED that the increased rates for water and sewer service shall be effective for meters read on or after 30 days from the date of this Order. It is further

ORDERED that the utility be required to notify each customer of the rate increases authorized herein, explaining the reasons for said increases. The letter of explanation is to be submitted to this Commission for prior approval. It is further

ORDERED that the utility's bond, which provided security for the interim rate increase approved by Order No. 9032, be and the same is hereby released.

By ORDER of the Florida Public Service Commission, this 23rd day of February 1981.

Steve Tribble COMMISSION CLERK

(SEAL)

Docket for Case No: 80-001184

Orders for Case No: 80-001184