STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FERNCREST UTILITIES, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-1200

) FLORIDA PUBLIC SERVICE COMMISSION )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Donald R. Alexander, Hearing Officer for the Division of Administrative Hearings, on August 13 and 14, 1980, in Cooper City, Florida, on the application of Ferncrest Utilities, Inc. for an increase in its rates and charges for water and sewer service provided its customers in Broward County, Florida, pursuant to Section 367.081, Florida Statutes.

APPEARANCES

For Petitioner: R.M.C. Rose and

T, E. Sundstrom, Esquires

Suite 103, 1020 East Lafayette Street

Tallahassee, Florida 32301

For Respondent: M. Robert Christ, Esquire

101 E. Gaines Street Tallahassee, Florida 32301

For Intervenor Everglades Lakes Mobile Home Association's Concerned Citizens:

Jerome L. Hall, Esquire

Suite 304, 200 Southeast 6th Street Fort Lauderdale, Florida 33301

On May 0, 1930, Ferncrest Utilities, Inc. filed an application with the Public Service Commission requesting new rates which would produce $162,374 and 5207,472 in annual gross revenues for its water and sewer systems respectively. By Commission Order No. 9414, dated June 5, 1930, the petitioner was authorized on an interim basis to increase its water revenues by $57,669 and its sewer revenues by $46,163 pending a final hearing. It was also directed to post a bond or obtain a letter of credit in the final sum of $80,000 conditioned upon a refund to its customers if the interim increase should ultimately be determined excessive. The issues to be determined herein 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 unfairly discriminatory, in accordance with Section 367.081(2), Florida Statutes.

FINDINGS OF FACT

Quality of Service

1. At the end of the test year (calendar year 1979), the utility provided water and sewer service to approximately 2,577 customers, most of whom reside in two mobile home parks. Of that number, seven testified at the hearing. Two were concerned with the magnitude of the increase sought by the utility, one complained of an odor emanating from the sewage treatment plant, and the remainder described the water as being discolored and having a bad taste. There were no complaints about poor water pressure or interruptions in service.

   
   

2. At present, there are no citations or corrective orders with regard to the utility's water plant. Its sewage treatment facility is being operated pursuant to a temporary operating permit granted by the Florida Department of Environmental Regulation. The effluent from the sewage treatment facility is meeting all applicable standards. Rate Base

   
   

3. Petitioner has proposed an average water rate base of $311,028 and a year-end sewer rate base of $426,373 (Exhibit No. 4). However, it proposes to include in water rate base additional costs associated with the construction of a water storage tank. This increases the utility's proposed average water rate base to $376,118. The Commission urges a number of adjustments to rate base which collectively have the effect of reducing the amounts proposed by the utility. These adjustments affect plant in service, construction work in progress, accumulated depreciation and working capital allowance, and should be accepted. First, a reduction in water plant and an increase in sewer plant are required to correct certain costs recorded in the wrong system account. It is also necessary to increase water plant and sewer plant to reflect the capitalization of certain costs that were improperly expensed. Second, the proposed inclusion in rate base of costs associated with the (1) automatic switching for chlorine feed and chlorine scale, (2) chlorine emergency repair kit, and (3) a 500,000 gallon concrete storage tank is improper because these expenditures are substantially beyond the scope of the test period and are not "required by (a) duly authorized governmental authority." Section 367.081(2), Florida Statutes. Third, because of the adjustment to plant in service, it is also necessary to adjust accumulated depreciation. Finally, revisions to the operation and maintenance expenses discussed hereinafter necessitate a mechanical adjustment to the utility's working capital allowance. The following schedules portray the adjusted rate bases for water and sewer operations, and a brief description of each of the adjustments made in arriving at those amounts.

   
   

   Ferncrest Utilities, Inc. Average Water Rate Base

   Year Ended December 31, 1979

   
   

   	COMPANY	ADJUSTMENTS	ADJUSTED BALANCES
   Utility Plant in Service	$ 625,030	(1)	$ 625,030
   Construction Work in
   Progress	209,985	(200,375)	(2)9,610
   Accum. Depreciation	(95,911)	- (3)	(95,911)
   CIAC	(376,191)	-	(376,191)
   Working Capital Allowance	13,205	(244)(4)	12,961
   Income Tax Lag	-0-	(234)	(234)

   
   

   Adjusted Rate Base $ 376,118 $ 175,265

   1. During the hearing, the utility revised its rate base exhibit to reflect the changes in plant in service discussed in the main body of this order (Exhibit No. 4). Accordingly, no adjustment is shown on the schedule.

      
      

   2. Reduces construction work in progress by eliminating the expected costs associated with the automatic switchings for chlorine feed and chlorine scale, chlorine emergency repair kit, and a 500,000 gallon concrete storage tank.

      
      

   3. During the hearing, the utility agreed with the change in accumulated depreciation occasioned by the revisions in plant in service in item (1)(Exhibit No. 4). Therefore, no adjustment is shown on this schedule.

      
      

   4. Restates the working capital allowance to reflect one-eighth of operation and maintenance expenses.

   
   

   Ferncrest Utilities, Inc. Year End Sewer Rate Base

   Year Ended December 31, 1979

   
   

   	COMPANY	ADJUSTMENTS	ADJUSTED BALANCES
   Utility Plant in Service	$1,373,224	- (1)	$1,373,224
   Construction work in
   Progress	2,285	(2,285)(2)	-0-
   Accum. Depreciation	(180,902)	-	(180,902)
   CIAC	(780,457)	-	(780,457)
   Working Capital Allowance	12,223	(428)(3)	11,795
   Income Tax Lag	-0-	(603)	(603)
   Adjusted Rate Base	$ 426,373		$ 423,057

   
   

   1. The utility revised its rate base exhibit during the hearing in accordance with the plant in service adjustments discussed above (Exhibit No. 4). Accordingly, no adjustment is reflected on the schedule.

      
      

   2. Reduces construction work in progress by eliminating those expected costs associated with the automatic switchings for chlorine feed and chlorine scale and a chlorine emergency repair kit.

      
      

   3. Restates the working capital allowance to reflect one-eighth of operation and maintenance expenses.

   
   

   Net Operating Income

   
   

4. On Exhibit No. 13, the utility shows an operating loss of $39,241 for its water operations and an Operating loss of $14,857 for its sewer operations for calendar year 1979. The utility then adjusts its results of operations by including the additional revenues required to earn a fair rate of return, and additional operating and maintenance expenses that it contends should be recognized. As adjusted, Ferncrest portrays an operating income of $54,236 and

   $61,483 for its water and sewer operations respectively. Certain adjustments are required, however, which affect revenue, operation expense, maintenance expense, depreciation expense, taxes other than income and income taxes.

   Revenues must first be reduced to reflect only that amount which is being recommended hereinafter. Operation expense should be restated to (1) reflect the expenses in the proper system account, (2) show the proper accrual, (3) remove expenses that should be capitalized, (4) recognize additional expenses

   not reflected in test year operations, and (5) correct improper amortization periods and pro forma adjustments. Maintenance expense must necessarily be corrected to transfer out charges improperly recorded therein. Depreciation expense should be recalculated using an average depreciable base for water operations and a year-end depreciable base for sewer operations in accordance with the rate bases used above. Finally, an adjustment to gross receipts taxes and income taxes is required to conform such taxes to the appropriate amount of revenues being recommended herein. The adjusted operating incomes of the utility and a description of the adjustments made in arriving at those amounts are shown on the following schedule.

   
   

   FERNCREST UTILITIES, INC.,

   Operating Income - Water Year Ended December 31, 1979

   
   

   ADJUSTED

   COMPANY ADJUSTMENTS BALANCE

   Operating Revenues Operating Expenses:	178,221	(33,349)	(1)	$144,872
   Operation	$ 98,298		(2)	98,298
   Maintenance	7,342	(1,957)	(3)	5,385
   Depreciation	3,367	-	(4)	3,367
   Taxes other than	Income 12,211	(833)	(5)	11,378
   Income Taxes	2,766	(1,595)	(6)	1,171
   Total Operating Expenses	$ 123,985			119,599
   Operating Income	$ 54,236			$ 25,273

   
   

   1. Revenues are adjusted downward to reflect only that amount being recommended herein.

      
      

   2. The utility has agreed to utilize the amount of operation expenses reflected above (Exhibit No. 13) . Therefore, no adjustment is shown on the schedule.

      
      

   3. Reduces maintenance expense by eliminating the pro forma annual cost of motor maintenance, and amortizing certain repairs over a 3-year period (Exhibit No. 15, Schedule 1; Exhibit No. 17, Schedule B)

      
      

   4. Because the utility has agreed to the revision of depreciation expense stated above, the actual adjustment is not reflected on the schedule (Exhibit No. 13).

      
      

   5. Restates gross receipts taxes owed by the utility to conform with the recommended revenue increase (Exhibit No. 13)

      
      

   6. Conforms income taxes with increase in revenues.

   Ferncrest Utilities, Inc. Operating Income - Sewer

   Year Ended December 31, 1979

   
   

   ADJUSTED

   COMPANY ADJUSTMENTS BALANCE

   Operating Revenues $ 181,672 (4,109) (1) $ 177,563 Operating Expenses

   Operation 90,312	(273)	(2)	90,039
   Maintenance 7,474	(3,150)	(3)	4,324
   Depreciation 7,478	-		7,478
   Taxes other than Income 11,006	(102)	(4)	11,704
   Income Taxes 3,119	(105)	(5)	3,014
   Total Operating Expenses 120,109			116,559
   Operating Income $ 61,493			$ 61 004

   
   

   1. Adjusts revenues to reflect the actual amount being recommended heroin (Exhibit No. 13)

      
      

   2. Reduces operation expenses by using a 2-year amortization period for recalibration of a motor in lieu of charging all expenses to test year operations alone, and reclassifying STP deodorant costs to A/C 704 (Exhibit No. 15, Schedule 2).

      
      

   3. Revises maintenance expense by eliminating the pro forma annual cost of motor maintenance (Exhibit No. 17, Schedule A)

      
      

   4. Adjusts taxes other than income to reflect the appropriate amount of gross receipts taxes related to the recommended increase in revenues (Exhibit No. 13).

      
      

   5. Conforms income taxes with increase in revenues.

   
   

   COST OF CAPITAL

   
   

5. The utility's application reflects it had a deficit in its equity accounts and no outstanding long-term debt as of the end of the test period. It did have approximately $600()00 in short-term debt which it characterized as "demand monies." It intends to roll over the short-term debt by borrowing

   $600,000 from The Dania Bank at 14 percent interest rate. The utility's capital structure would then consist of 100 percent debt at a cost rate of 14 percent.

   It was this return that was initially used by the utility in developing its revenue requirements. However, Commission approval is required in order to consummate that loan agreement. Such approval was denied by Order No. 9539, dated September 15, 19-30, in Docket No. 800577-US. On reconsideration the Commission approved the application by Order No. 9665, dated November 26, 1900, provided the utility use $120,000 of the proceeds as cumulative preferred stock. Accordingly, the pro forma capital structure will consist of 16.65 percent equity and 83.15 percent long term debt, By agreement of the parties, a cost rate of 14 percent should be assigned to the debt component and a 16 percent cost rate assigned to equity. The overall resulting cost of capital is 14.42 percent, and that rate should be used in determining the utility's revenue requirements.

   
   

   REVENUE REQUIREMENTS

6. Given the above cost of capital, a grant of $68,540 in additional annual water revenues and $83,663 in additional annual sewer revenues should enable Ferncrest to earn a fair return on its utility operations.

   RATE STRUCTURE

   
   

7. Residential water customers are now assessed a minimum monthly charge which includes a minimum number of gallons and a one-sept excess rate over that minimum gallonage. A declining block type of rate structure is used for general service water customers.

   
   

8. Residential sewer customers with 5/8" x 3/4" meters pay a flat rate each month irrespective of usage, while those with larger meter sizes have the same structure as do residential water customers. General service sewer rates are based upon a declining block rate structure.

   
   

9. The base facilities charge advocated by the Commission is superior to the rate designs presently used. Under this type of structure, a minimum charge will be assessed to recover the fixed or base costs of providing service, such as depreciation, taxes and a portion of billing and collecting expenses. Thereafter, a variable charge will be made for the gallons actually consumed. Because this type of rate structure offers greater control to the customer as to the amount of his bill, and allocates costs in a more equitable manner, it should be adopted.

   
   

10. During the test year, a $5.50 fee was collected from approximately 50 customers per month who did not pay their bills in a timely fashion. This revenue ($3,300 on an annual basis) should be treated as miscellaneous revenue in designing the new rates.

    
    

11. The utility reguests approval of a new tariff provision that governs the use of oversized lines and facilities constructed for developers (Exhibit No. 10) This provision is necessary in order to prescribe the deposit requirements for main extensions, and should be approved.

    
    

12. The utility owns and operates a sewage collection and sewage treatment system which provides sewage treatment and disposal services to an adjacent travel park. As a result of this discharge, Ferncrest incurs chemical costs that exceed its applicable tariff rates. It proposes to amend its tariff to permit the recovery of such costs from the travel park (Exhibit No. 1) . Without this provision, the general body of ratepayers would be required to subsidize a portion of the operations. Accordingly, it should be accepted.

    
    

13. The Commission proposes that language be added to the tariff which states: "During the period that service is not being furnished to the premises, a monthly standby charge equivalent to the base facility charge will be made.

    If service is terminated and resumed at the same address to the same customer within twelve months from the date of termination, an amount equal to the base facility charge for the period of the service termination will be collected as a condition precedent to the restoration of service." This change is necessary in order for the utility to recoup the fixed costs incurred in maintaining service to the customers, and it should be incorporated into the tariff.

    
    

14. Finally, because an average rate base has been used for water operations and a year-end rate base for sewer operations, rate allocations for the systems should be based upon average and year-end customers and consumption respectively.

    CONCLUSIONS OF LAW

    
    

15. Section 367.021(2), Florida Statutes, provides in part as follows:

    
    

    (2) The Commission shall, either upon request or upon its own motion, fix rates which are just, reasonable, compensatory, and not unfairly discriminatory. In all such proceed- ings, the commission shall consider the value and quality of the service and the cost of providing the service, which shall include, but not be limited to, debt interest, the utility's working capital, maintenance, depreciation, tax, and operating expenses incurred in the operation of all property

    used and useful in the public service, and a fair rate of return on the utility's investment

    in, property used and useful in the public service.

    
    

16. Petitioner has established by competent substantial evidence that the quality of service being rendered the public is satisfactory and in compliance with all applicable standards. The evidence also shows that after giving consideration to all legitimate and necessary costs for providing water and sewer services, the utility should be authorized to increase its water and sewer rates by $60,540 and $83,663 respectively on an annual basis. The use of a base facilities charge type rate structure to generate these additional revenues results in rates that are just, reasonable, compensatory and not unfairly discriminatory.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Ferncrest Utilities, Inc. be granted in

part and that the utility be authorized to file new tariffs to be approved by

the Florida Public Service Commission that will generate $68,540 and $83,663 in additional annual gross revenues for the utility's water and sewer operations. It is further

RECOMMENDED that the utility file appropriate tariff sheets in conformity with the Rate Structure portion of this Order. It is further

RECOMMENDED that the bond or letter of credit filed by the utility be returned for cancellation.

This Recommended Order entered on this 12th day of December, 1980, in Tallahassee, Florida.

DONALD R. ALEXANDER

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 12th day of December, 1980.

COPIES FURNISHED:

R.M.C. Rose, Esquire

Suite 103, 1020 E. Lafayette Street

Tallahassee, Florida 32301

Jerome L. Hall, Esquire

Suite 304, 200 S.E. 6th Street Fort Lauderdale, Florida 33301

Marta M. Crowley, Esquire

101 East Gaines Street Tallahassee, Florida 32301

Docket for Case No: 80-001200

Orders for Case No: 80-001200