STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOHN V. SMITH WATER COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 80-1185

) FPSC Docket No. 780527-W

FLORIDA PUBLIC SERVICE )

COMMISSION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before P. Michael Ruff, Hearing Officer with the Division of Administrative Hearings, on August 22, 1980 in Destin, Florida, on the petition of John V. Smith Water Company for increased water rates to its customers in Walton County, Florida pursuant to Section 367.081, Florida Statutes. The Utility's rate base for the test year ending June 30, 1979 was $60,473, based upon which its 11.88 percent previously authorized rate of return produced an operating income of $7,184, derived from gross operating revenues of $27,726.

APPEARANCES

For Petitioner: John V. Smith

234 Deer Avenue Niceville, Florida

For Respondent: William H. Harrold, Esquire

101 E. Gaines Street Tallahassee, Florida

By a petition filed June 14, 1970 John V. Smith Water Company (Company, Utility) sought to increase its water revenue to $35,922 on an annual basis.

The Public Service Commission issued Order No. 8417 on August 2, 1978 wherein it suspended the Utility's proposed at schedules and granted an interim rate increase for the Utility's Villa Tasso System. Subsequent to the filing of the original petition, the Utility purchased the Seagrove Beach water system, which purchase was approved by Order No. 8710 by the Commission. A petition was filed on March 25, 1980 wherein the Utility requested increased rates for the newly acquired Seagrove Beach System. The Commission issued Order No. 9345 in Docket No. 780527-W consolidating the Seagrove Beach System's petition with the pending application by the Company. Since an interim rate increase was sought and granted, pending determination of the appropriate level of permanent rates, the Utility was required by the Commission to file a $4,000 commercial letter of credit to protect the interest of the customers should the interim rates be determined to be excessive, and a refund to customers therefore appropriate.

The issues in the proceeding, pursuant to the criteria enunciated in Section 367.081, Florida Statutes, are whether the quality of water service

comports with all state regulatory standards and whether the rates and revenues sought by the Utility will result in a rate of return on its net investment, used and useful in the public service, which is just, reasonable, compensatory and not unduly discriminatory.

The Utility presented two witnesses in support of its petition and the Respondent, Public Service Commission, presented four witnesses, as well as Exhibits 1, 2, 2A, 3, and 3A.

FINDINGS OF FACT

1. The Utility's water plants are operating satisfactorily and are under no citations or corrective orders promulgated by the Department of Environmental Regulation. One customer service problem exists with regard to frequency of service outages and low pressure. The Utility had not previously been informed of the particular customer's problem and gave assurances that it would be corrected immediately.

   
   

2. As demonstrated by a report of the Department of Environmental Regulation incorporated in Exhibit 1, the Utility provides good quality water that meets all pertinent standards of the Florida Safe Drinking Water Act of 1977, and in every way the quality of water service provided by the Utility was shown to be satisfactory.

   
   

   Rate Base

   
   

3. In order to present a truer picture of the Utility's average rate base, and taking into account the factor of recent growth of the system, Commission expert engineering and accounting witnesses recalculated the Utility's figures for plant in service based upon a thirteen-month average as opposed to the twelve-month test year employed by the Utility. Thus equipment accounts and equipment retirement accounts were recalculated on a thirteen-month average in arriving at a total plant in service figure, based upon which the actual rate base was calculated. These calculations as well as adjustments to reclassify certain expenses which should have been capitalized in the plant accounts and then based on a thirteen-month average, demonstrated a total plant in service adjustment figure of $7,770. These, together with an adjustment for additional total accumulated depreciation of $2,807 and other relatively minor adjustments to the Utility's capital accounts, none of which were contested by the Utility, result in a rate base, or net investment figure, of $90,173. The adjustments and calculations supportive of this figure, all of which were uncontroverted by the Petitioner, appear attached hereto and are incorporated by reference herein as Schedule 1, Attachments 1 and 2.

   
   

   Operating Statement

   
   

4. The Utility seeks to increase its revenues to the above- stated amount. Determination of an appropriate revenue figure necessitate re-allocations and adjustments to operation and maintenance expenses to add in necessary employee salaries and to reclassify and delete certain operation and maintenance expenses properly attributable to water systems not involved in this rate case. Additional, depreciation expense on contributed property must be disallowed and an adjustment for increased revenues necessary to result in an agreed upon 12.45 percent rate of return on rate base with concomitant adjustments to allow for increased gross receipts tax and income tax, established an appropriate revenue requirement of $35,922 per year. The Respondent's accounting witness established that the 12.45 percent rate of return on the Utility's rate base is

   the minimum necessary to insure a reasonable, compensatory rate of return to the Utility and to assure the company's financial viability in order that the quality of service to customers does not deteriorate. These adjustments to the initial operating statement accounts depicted in Exhibit 2, were not refuted by the Utility. The adjustments and calculations supportive of this revenue figure are set forth in greater detail in Schedule 2 of Exhibits 2 and 2A attached hereto and incorporated by reference herein.

   
   

5. There was no dispute regarding the appropriate cost of capital for the company. The weighted cost of capital was shown to be 12.45 percent, based upon the Utility's undisputed cost of equity at 14 percent, as well as its imbedded debt cost of 9.47 percent.

   
   

6. The rate structure should be predicated upon a base facility charge rate design. The base facility charge type of rate structure will insure that each customer, even seasonal residents who do not use a minimum amount of water per month sufficient to defray their portions of the cost of service, actually pay the minimum necessary for the Utility to meet its fixed costs which are attributable to their connections.

   
   

7. In the case of the systems involved in this proceeding, a base facility charge of $3.35 for a 5/8" x 3/4" meter and a gallonage charge of 88 cents per 1,000 gallons will produce the revenue requirement of $35,922. Both the Petitioner and the Respondent agree to the feasibility and appropriateness of this base facility charge rate design and these amounts.

   
   

   CONCLUSIONS OF LAW

   
   

8. Section 367.081 Florida Statutes mandates the Florida Public Service Commission to consider, in a rate proceeding such as this, the quality of service provided by a petitioning utility and the cost for providing such service, including interest on its long-term debt, cost of its capital generally, and to set rates which will produce a rate of return on its net investment, used and useful in the public service (rate base), which is just, reasonable and compensatory to the utility and not unduly discriminatory to any customer or group of customers.

   
   

9. In consideration of the above statutory criteria, the competent, substantial evidence in the record, the foregoing findings of fact, as well as arguments of counsel, the Hearing Officer concludes that the petition of John V. Smith Water Company for an increase in rates for its water service to customers in Walton County, Florida should be granted, and that the Utility should be permitted to earn a 12.45 percent rate of return on its rate base of $90,173 so as to produce an authorized gross annual operating revenue $35,922.

RECOMMENDATION

Having considered the competent, substantial evidence of record, the foregoing findings of fact and conclusions of law, it is RECOMMENDED that John

V. Smith Water Company should be authorized to receive gross annual revenues for its water service to customers in Walton County, Florida of $35,922 and that the Utility be authorized to file revised tariff pages containing rates designed to produce annual water revenues in that amount. It is further

RECOMMENDED that the $4,000 letter of credit previously required to be filed by the Public Service Commission be returned to the Utility for cancellation.

DONE and ENTERED this 20th day of November, 1980, in Tallahassee, Florida.

P. MICHAEL RUFF Hearing Officer

Division of Administrative Hearings Room 101 Collins Building Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 20th day of November, 1980.

COPIES FURNISHED:

John V. Smith

234 Deer Avenue Niceville, Florida

William H. Harrold, Esquire

101 E. Gaines Street Tallahassee, Florida 32301

Robert T. Mann Chairman

Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Steven C. Tribble Commission Clerk

Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Docket for Case No: 80-001185

Orders for Case No: 80-001185