) DOCKET NO. 790772-WS
vs. ) CASE NO. 80-1186
Respondent. )
Pursuant to Notice, an administrative hearing was held before WILLIAM B. THOMAS, Hearing Officer with the Florida Public Service Commission, on May 29 and 30, 1980, in Jacksonville, Florida, on the application of Buccaneer Service Company for increased water and sewer rates to its customers in Duval County, pursuant to Section 367.081 of the 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.
For Petitioner: Martin Sack, Jr. For Intervenor: Kelly S. Hodge For Respondent: Samuel H. Lewis
By this application, Buccaneer Service Company seeks authority to increase its water and sewer rates, based on a test year ended December 31, 1978. During this test period the utility alleges an operating income of $3,400 for its water operations and $349 for sewer operations. This application seeks increases in gross annual revenues of $24,692 and $58,610 for water and sewer, respectively, which would yield a 12.51 percent return on the utility's requested rate bases of $59,401 for water and $87,134 for sewer. The issues to be determined are whether the water and sewer service provided by Buccaneer Service Company meet all relevant quality standards, the establishment of an appropriate rate structure for the utility, and that amount of revenue is just, reasonable, compensatory and not unfairly discriminatory, in accordance with Section 367.081 of the Florida Statutes.
There were no customers of the utility present at the public hearing, except for the Department of the Navy. As a result, there is no public testimony in the record relating to the quality of the water and sewer service
provided by the utility. However, a representative of the Department of Environmental Regulation and an engineer from the Public Service Commission agree that the utility's water treatment meets all relevant quality standards, and its sewage treatment is within acceptable limits.
Nevertheless, there exist problems of infiltration into the company's sewage lines which have resulted in variations in its level of treatment efficiency. The Department of the Navy acknowledges that some of these infiltration problems originate at the Navy housing facility, and the Navy asserts that corrective measures will be undertaken. In the meantime, the Navy contends that the sewage flows from its housing facility have been underestimated, resulting in an overstatement of revenue to the utility. However, there is insufficient specific evidence in the record to support a finding of fact resolving this issue. Since the variations in the utility's sewage treatment efficiency are within acceptable levels, the Company's wastewater treatment is found to be satisfactory.
Rate Base
By its exhibits, the utility has alleged its adjusted rate base to be
$59,401 for water and $87,134 for sewer. Public Service Commission adjustments reduce and correctly state the water rate base to be $19,356 and the sewer rate base to be $65,552.
The utility contests the removal of $16,530 from sewer rate base as a contribution in aid of construction (CIAC). This amount is the difference between the $155,000 paid by the Duval County School Board to a partnership consisting of the utility's partners and others, and the $138,170 recorded on the books of the utility. It contends the $16,330 represents a contractor's profit to one of the former partners of utility, but this amount is properly recordable as CIAC and should be removed from rate base.
Other adjustments are either not contested, or make no material difference in the utility's revenue requirements, and should be accepted. The accompanying schedules 1 and 3 detail the rate base for both water and sewer with appropriate explanations for the adjustments.
Cost of Capital
Representatives from the utility and from the Public Service Commission presented evidence on the issue of cost of capital. The major area of disagreement relates to the company's capital structure. The Commission contends that the utility is 100 percent debt, while the utility asserts the capital structure to be 52.97 percent equity and 47.03 percent debt. The Commission's contention is based on the annual reports filed by the utility wherein a deficit is reported in the equity account. The utility, however, has made several adjustments to the investment shown in the annual reports which it alleges increase equity from a deficit of $39,804 to a positive amount of
$92,727.
The first adjustment made by the utility is in the amount of $22,700 to make the amount of investment equal to rate base, in accordance with principles of double entry bookkeeping. However, because revenue requirements of public utilities are based on used and useful plant in service rather than on total assets, it is not uncommon for the rate base to be different in amount from the total capitalization. Thus, this adjustment is unnecessary and improper.
The utility's second adjustment increases the amount of investment by
$39,464 as the Unrecovered Cost of Abandonment of Utility Plant. The plant to which this adjustment refers was abandoned, and because of the hazards presented by the abandoned structure, it was disassembled and scrapped. The unrecovered costs were written off for tax purposes, but were not written off for regulatory purposes. This amount should be treated as any other loss, and the adjustment to increase investment should be disallowed. When a utility has recovered the cost of a loss due to abandonment through a write off against income, the placement of the amount of the investment in the capital account results in accounting twice for the loss.
The third adjustment involves an amount of $57,067 representing loans procured by the utility's partners from a financial institution. Although these loans were made directly to the partners, the proceeds were used by the utility and the company services the debt. The utility contends that these funds are equity, and it has increased the investment account by the amount thereof. However, the intent of the parties to the transaction was that the funds borrowed by the partners were loaned to the utility, not invested in it. Accordingly, the utility's adjustment is improper; the amount of the loan should be considered as debt in the utility's capital structure; and it should be allowed to earn the embedded cost of this debt, but not an equity return on the amount thereof.
In summary, since this utility's equity account has a deficit balance, the appropriate capital structure is 100 percent debt. The cost of this debt is its embedded cost, estimated to be 11.75 percent overall, and the weighted cost is 10.21 percent, as shown in the following table.
CAPITAL STRUCTURE
COMPONENT | PERCENT OF AMOUNT CAPITAL | COST RATE | WEIGHTED COST |
Mortgage Note | $36,593 | 20.9 | 8.00 | 2.312 |
Loans Outstanding | 48,162 | 38.0 | 9.69 | 3.681 |
Proposed Note | 41,870 | 33.1 | 12.76 | (est) 4.220 |
TOTAL $126,625 100.0 10.213 perc.
These "Amounts" are the non-current portion of the debt. Operating Statements
The accompanying schedules 2 and 4 detail the operating statements for both water and sewer, with appropriate adjustments. The utility contests the Commission's disallowance of depreciation on its proforma plant acquisition. However, the plant has not yet been constructed. Thus, although the proforma plant adjustments have been agreed to, depreciation expense thereon cannot be allowed.
The utility further challenges a Commission adjustment disallowing depreciation expense on contributed assets. This adjustment is proper and should be allowed.
The utility also contends that it should be allowed income taxes, asserting that an unincorporated proprietorship is entitled to the same income tax expense as a corporation, and that the related income taxes do not have to be paid, merely accrued. However, the purpose of the income tax accounts in the
NARUC Uniform System of Accounts is to allow entities which pay income accounts in which to record them. There is no provision in the uniform system for recordation of a nonexistent expense. Since the utility admits that the partnership has paid no income taxes, the disallowance is proper.
Finally, the utility contests what it claims is disallowance by the Commission of all its proposed amortization of abandoned plant. However, the exhibits reflect that the Commission increased the amount of amortization expense from $2,790 to $3,284 for water, and from $3,016 to $6,468 for sewer, to allow for amortization of the abandoned plant.
Revenue requirements
The application of a 10.21 percent rate of return to the adjusted rate base for both water and sewer requires that the utility receive gross annual revenues of $33,752 for water and $81,432 for sewer. These revenues represent increases of $9,381 and $23,446 for water and for sewer, respectively. See Schedules 2 and 4 attached).
Rate structure
The utility provides water service to an average of 67 residential customers, 12 general service customers and 11 multi-dwelling customers (Average
346 Units). It provides sewer service to an average of 26 residential customers, 12 general service customers and 4 multi-dwelling customers (Average 645 Units).
The present residential water rates are structured to provide for a minimum quarterly charge, which includes a minimum number of gallons, and a one- step excess rate over that minimum. The proposed rates follow the same basic structure. The present general service water rates are structured in the same manner, except that the rates for this classification are approximately 25 percent higher than residential. The proposed rates follow the same basic structure. The present multi-dwelling water rates are structured in compliance with the provisions of the old Rule 25-10.75, Florida Administrative Code, which provided that the rate for master metered multiple dwelling structures should be
66 2/3 percent of the minimum residential rate, with an equal minimum gallonage allowance included within the unit minimum charge. The total number of gallons to be included within the minimum gallonage allowance was determined by the number of units served, with excess gallons over the cumulative allowance to be billed at the excess residential rate. The proposed races follow the same basic structure for determining the minimum gallonage allowance and excess gallonage over the minimum allowance. The proposed minimum charge per unit has been structured approximately 25 percent higher than the proposed minimum unit charge for residential service. The proposed excess rate has been structured at the same level as general service, which is approximately 25 percent higher than the residential service rate.
Any rate structure that requires a customer to pay for a minimum number of gallons, whether those gallons are used or not, is discriminatory. Over 27 percent of this utility's basic residential customers did not use as much as the minimum gallonage allowance during the test year. The average number of gallons consumed in the gallon brackets below the minimum allowance bracket was 3,197 gallons per customer per quarter. A rate structure that requires the general service customers to pay a higher rate than the other classifications of service is also discriminatory.
Since the Cost of Service to Multiple Dwelling Structures Rule 25- 10.75, Florida Administrative Code, was repealed by Commission Order No. 7590, issued January 18, 1977 in Docket No. 760744-Rule, it has been the practice of the Public Service Commission to structure this type customer in the general service classification, and to structure water rates under the Base Facility Charge form of rate design. The basic concept of this type rate design is to determine a base charge whose foundation is based on the associated costs of providing service to each type customer. The charge covers associated costs such as transmission and distribution facility maintenance expenses, depreciation, property taxes, property insurance, an allocated portion of customer accounts expenses, etc. The amount of the charge is determined by an equivalent residential connection formula using the standard meter size as the base. There are not any gallons included within the frame of the Base Facility Charge. The second structure is to determine the appropriate charge for the water delivered to the customer. This charge would cover related costs such as pumping expenses; treatment expenses, an allocated portion of customer accounts expenses, etc. The primary reasoning supporting this type structure is that each customer pays a prorata share of the related facility costs necessary to provide service, and thereafter the customer pays for only the actual number of gallons consumed under the gallonage charge.
The present residential sewer rates are structured in the manner of a quarterly flat-rate charge for all residential customers. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above that minimum. The present general service sewer rates are structured so that a percentage factor is applied to the water bill to determine the sewer charge. The rates for this classification are structured approximately 25 percent higher than residential. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above the minimum. The proposed rates are structured approximately 25 percent higher than residential. The present multi-dwelling sewer rates are structured in compliance with the provisions of the old Rule 25- 10.75, Florida Administrative Code, which provided that the rate for sewer service to multiple dwelling units should be 66 2/3 percent of the basic charge for sewer service to single residential units. The proposed rates are structured with a minimum charge for each unit, which includes a minimum number of gallons, and an excess rate over the minimum. The minimum charge per unit and the excess rate are structured approximately 25 percent higher than residential.
Since the repeal of Rule 25-10.75, Florida Administrative Code, it has been the practice of the Public Service Commission to structure this type customer in the general service classification of customers, and to structure sewer rates under the Base Facility Charge form of rate design. This should be implemented by the utility for both water rates and sewer rates.
The utility has been misapplying its schedule of rates for the commercial sewer classification of service. The schedule calls for 250 percent of the water bill with a minimum charge of $0.15 monthly ($24.45 quarterly). However, the utility has been billing its commercial sewer customers 250 percent of the water bill plus the minimum charge. This amounted to an overcharge to this customer classification of approximately $1190 during the test period. The utility should be required to make the appropriate refund to each commercial sewer customer, and the amount of this overcharge has been removed from test year revenues on the attached schedule 4.
The utility is collecting a meter installation charge of $200, and a charge of $246 for each connection to the sewer system, without any apparent tariff authority. Further, the charges made for customer reconnect after disconnection for nonpayment are not adequate to cover the associated costs of this service. An investigation docket should be opened to consider the appropriateness of the meter installation charge, and to receive evidence of actual costs of service restoration. Finally, insufficient facts were presented to support a finding relative to the validity of the utility's sewer service contract with the Navy or the compatibility of the charges for sewer service to the Navy with the utility's tariff. These issues should be revisited during the course of the investigation docket. However, the utility's practice of requiring customer deposits when service is billed in advance should be discontinued.
CONCLUSIONS OF LAW
Section 367.081(2) of the Florida Statutes requires the Public Service Commission to fix rates which are just, reasonable, compensatory, and not unfairly discriminatory; and the Commission is required to consider the value and quality of the service, and the cost of providing the service, including debt interest, working capital requirements, maintenance, depreciation, tax and operating expenses incurred in the operation of all property used and useful in the public service. From the factual findings and these statutory criteria, it is concluded as follows:
The quality of the water and sewer service provided by the utility meets all state standards.
The utility's adjusted rate base for water is $19,356 and its adjusted rate base for sewer is $65,552.
The utility's capital structure consists of 100 percent debt, and the overall weighted cost of this debt is 10.21 percent.
The gross annual revenue requirement for water is $33,752, and the gross annual sewer revenue requirement is $81,423. These revenues represent gross increases in annual revenues of $9,301 for water and $23,446 for sewer.
The Base Facility Charge form of rate design will produce rates which are just, reasonable, compensatory, and not unfairly discriminatory.
Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Buccaneer Service Company, 1665 Selva
Marina Drive, Atlantic Beach, Florida 32233, be granted in part, and that the utility be authorized to receive gross annual water revenue of $33,752, and gross annual sewer revenue of $81,423, by rates to be approved by the Public Service Commission. It is further
RECOMMENDED that the utility be required to adopt a Base Facility charge form of rate design for both water and sewer rates, and to make appropriate changes in its tariff. It is further
RECOMMENDED that the utility be required to refund to each commercial sewer customer a prorata portion of the total amount of overcharges collected since the beginning of the test year. It is further
RECOMMENDED that an investigation docket be opened for the purpose of making further inquiry into the appropriateness of the utility's meter installation charge, to receive evidence of actual costs of service restoration, and to determine the validity of the utility's contract for sewer service with the Navy and the appropriate rate to be charged for this service. And it is further
RECOMMENDED that the utility be required to discontinue the practice of collecting customer deposits for service which is billed in advance.
THIS RECOMMENDED ORDER entered on this 6th day of August, 1980.
WILLIAM B. THOMAS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301
