STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

WILLIAM J. CAMPBELL, et al., )

)

Petitioners, )

)

vs. ) DOAH CASE NO.: 80-1612

) FPSC DOCKET NO.: 800154-S

1. MORRIS AND SONS, INC., and ) FLORIDA PUBLIC SERVICE COMMISSION )

   )

   Respondents, )

   and )

   ) CITIZENS OF THE STATE OF FLORIDA, )

   )

   Intervenor. )

   )

   
   

   RECOMMENDED ORDER

   
   

   Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, R. L. Caleen, Jr., held a formal hearing in this case on January 30, 1981, in Springfield, Florida.

   
   

   APPEARANCES

   
   

   For Petitioners Jack Shreve, Esquire

   and Intervenor: Lawrence P. Bush, Esquire

   Office of the Public Counsel Room 4, Holland Building Tallahassee, Florida 32301

   
   

   For Respondents: Marta M. Suarez-Murias, Esquire

   101 East Gaines Street Tallahassee, Florida 32301

   
   

   ISSUE PRESENTED

   
   

   Whether, and to what extent, Respondent S.E. Morris and Sons, Inc., should be allowed to increase its sewer rates.

   
   

   BACKGROUND

   
   

   On June 24, 1980, Respondent S. E. Morris and Sons, Inc., ("Applicant") filed an application to increase the sewer rates it charges its customers in Bay County, Florida.

   
   

   By Order No. 9454, dated July 16, 1980, the Respondent Public Service Commission ("Commission") granted an interim rate increase designed to produce

   $12,552 in gross annual revenues. Consequently, Applicant's existing monthly flat rate of $4.00 increases to $13.08. The Commission determined, at the same

   time, that the Applicant's data should be examined further before the interim rates become permanent.

   
   

   Thereafter, on September 3, 1980, the Commission forwarded this case to the Division of Administrative Hearings ("DOAH") for the purpose of conducting a Section 120.57 hearing. By notice dated September 16, 1980, final hearing was set for October 27, 1980.

   
   

   Pursuant to Prehearing Order, the parties--then consisting only of the Applicant and the Commission--were asked to confer prior to hearing for the purpose of, among other things, identifying and narrowing disputed issues of fact. In response, the Commission filed a motion requesting release from the Prehearing Order on grounds that: (1) this was a "short-form rate case", a situation where the Commission assists and actually prepares the rate case; (2) there was no controversy or substantial factual dispute between the Applicant and the Commission regarding the proposed rate increase, i.e., the parties were in agreement that the Applicant should be granted a permanent sewer rate of

   $13.08 per month; (3) that several customers had protested the proposed rate increase; and (4) this case was referred to DOAH for the purpose of allowing those protesting customers an opportunity to present objections to the rate increase.

   
   

   By order dated October 8, 1980, the scheduled October 27, 1980, hearing was continued in order to allow affected persons a "point of entry" into the Commission's ratemaking action. See, Section 120.57(1), Florida Statutes, Rule 28-5.111, Florida Administrative Code; U.S. Service Industries-Florida v. State Department of Health and Rehabilitative Services, 385 So.2d 1147, 1149 (Fla. 1st DCA 1980). At that time the case was not yet ready for a Section 120.57 hearing. Such hearings are held to resolve issues of material fact or law between parties. The only persons disputing the Commission's proposed ratemaking action were several customers who were not parties to the hearing.

   The record did not indicate that they had requested a hearing; neither did it identify the factual issues between the customers and the Commission. By the October 8, 1980, order, the Commission was requested to notify the several protesting customers, explain to them their right to request a Section 120.57 hearing to contest the factual or legal basis of the Commission's proposed action, and provide a specific time period within which the right to request a Section 120.57 hearing could be exercised.

   
   

   On October 17, 1980, the Commission responded by forwarding a petition signed by 65 customers who opposed the requested rate increase. The petition labeled the rate increase as "absurd" and requested that the increase be "reconsidered and adjusted to reflect some degree of sanity." The Commission also replied that it was not feasible to contact the customers to advise them of their rights under Section 120.57.

   
   

   By order dated October 27, 1980, the 65 protesting customers were deemed parties; their petition was considered a request for a Section 120.57(1) hearing, and the Commission's referral of the petition to DOAH was considered a granting of their request. The protesting customers, now parties, were given 20 days to amend their petition to comply with Section 28-5.201(2), Florida Administrative Code, e.g., identify disputed issues of fact involving the Commission's proposed ratemaking decision.

   
   

   On November 24, 1980, Intervenor, Citizens of the State of Florida, moved to intervene, which motion was granted. Intervenor was directed to declare its

   position and identify all disputed issues of material fact involving the proposed rate increase.

   
   

   Thereafter, by notice dated December 30, 1980, final hearing was reset for January 30, 1981.

   
   

   At final hearing, neither the Applicant nor the Petitioners (65 protesting customers) appeared on their own behalf. Evidence in favor of granting the rate increase was presented by the Commission; evidence in opposition was presented by Intervenor, which also called several protesting customers as its own witnesses. The Commission called John Williams, Tom Morris, Jim Estler, Milton Edward Clark, Connie McCaskill, Richardson Addison, and Bill Lowe as its witnesses, and offered Respondent's Exhibit 1/ Nos. 1 through 4 into evidence. Intervenor called Donald G. Hale, George Neal, Ann Johnson, D.C. Todd, and William A. Bonifay as its witnesses and introduced Intervenor's Exhibit 1/ Nos. 1 through 4.

   
   

   The issues upon which evidence was presented at hearing involve:

   
   

   1. The quality of Applicant's sewer service;

   2. A proposed adjustment to depreciation expense and accumulated depreciation accounts;

   3. A proposed adjustment to rate base to reflect that only 80 percent of the utility plant is "used and useful"; and

   4. Whether Applicant should be allowed a rate above that amount requested in its original filing.

FINDINGS OF FACT

Based on the evidence presented at hearing, the following facts are determined:

1. Applicant owns and operates a small sewage treatment plant located on Santee Drive in Morris Manner Subdivision, Springfield, Florida. The plant operates on a contact stabilization mode and has a design capacity of 35,000 gallons per day. (Testimony of Addison; R-1.)

   
   

2. The plant and collection system were built in the late 1960s to serve a residential subdivision known as Morris Manor, then being developed by the Applicant. There are currently 79 residential customers served by the sewer plant. An additional 22 lots located in Morris Manor subdivision may eventually be sold, developed, and hooked into the existing sewer system. (Testimony of Addison; R-1.)

   
   

   I.

   Quality of Service

   
   

3. Several customers complained of noxious odors emitted from the sewer plant. Prior to July, 1980, the plant was operated in an extended aeration mode, with a design capacity of 15,000 gallons per day. However, the plant's flow frequently exceeded 15,000 gallons per day, a fact which most likely contributed to periodic odor problems. The Applicant's failure to properly clean and maintain the plant's polishing pond also contributed to increasing odor problems, particularly during the summer time. (Testimony of Estler.)

4. On September 12, 1980, Applicant executed a Consent Order with the Florida Department of Environmental Regulation requiring a change in mode to contact stabilization and proper cleaning and maintenance of the polishing pond. Under the changed mode, the plant's design capacity is effectively increased to 35,000 gallons per day. The Applicant has complied with the provisions of the Consent Order. During the past six months, the plant has operated in conformance with Department of Environmental Regulation treatment requirements. The odor problems have been ameliorated, and, with the proper monitoring and maintenance, should not reoccur. In view of the substantial improvement in the plant's operation and maintenance and its current compliance with state standards, it is concluded that the sewer service applied by the Applicant is of acceptable and satisfactory quality. (Testimony of Estler, Addison.)

   
   

   II.

   Rate Base

   
   

5. A utility providing satisfactory sewer service has a statutory right to an opportunity to earn a fair return on its investment in property used and useful in the public service. Section 367.081(2), Fla. Stat. (Supp. 1980).

   That investment constitutes its rate base. Here, the parties dispute two items concerning the Applicant's proposed rate base: (1) accumulated depreciation, and (2) "used and useful" plant.

   
   

6. In the past, the Applicant depreciated its plant using a 15-year serviceable life, 6.67 percent, straight-line depreciation rate. This rate was used by the Applicant for tax purposes, and was indicated on its annual reports filed with the Commission. However, use of a 40-year life, 2.5 percent depreciation rate is more appropriate. The Commission's response is to represcribe the preferred 40-year, 2.5 percent rate as though the company had, in fact, used that rate in the past; the effect is to decrease accumulated depreciation reserve and correspondingly increase net rate base. (Testimony of Lowe, Hale; I-4A, I-4B, I-2, R-2.)

   
   

7. If, in the past, the Applicant actually recovered its book depreciation expense (at a 15-year, 6.67 percent rate), the Commission admits that its proposed recalculation of accumulated depreciation reserve would allow Applicant to recover plant costs--to the extent of the add-back--a second time. (Tr. 163.) It is now impossible to discern whether the claimed depreciation expenses were actually recovered through past rates. But if the past rates were insufficient for such purpose, that is a loss which must be borne by the Applicant. Rate payers have no obligation to compensate Applicant for past losses by paying higher rates in the future. (Testimony of Hale, Lowe; I-2.)

   
   

8. In the past, the Commission has consistently disallowed recalculation of depreciation reserve which results in customers being required to build depreciation reserve anew. In Re Belvedere Water Company, 83 PUR 3d 202 (1970). The only reason offered in this case for departing from this practice is the small size of the Applicant's utility:

   
   

   ". . .if this were a large utility, my stand would be opposite; but because this is a very small utility, I don't think the company should be penalized." (Tr. 163.)

   
   

   This is an unacceptable basis for deviating from a regulatory requirement. Its application would adversely affect predictability in regulatory decision making and even-handed treatment of utility customers. The Commission's proposed

   recalculation of accumulated depreciation reserve is therefore rejected. The more appropriate treatment, one which comports with generally accepted accounting principles and the Commission's past practice, is to leave the existing depreciation reserve unaltered. The Applicant's plant should be depreciated at the preferred 40-year, 2.5 percent rate in the future. Those future charges would accumulate and increase the depreciation reserve account. (Testimony of Hale.)

   
   

9. A utility is entitled to an opportunity to earn a fair return only on property which is used and useful In the public service. 367.081(2), Fla. Stat. The Applicant's sewer plant, under its current contact stabilization mode of operation, can adequately treat an average flow of 35,000 gallons per day. By applying the standard average flow criteria of 350 gallons per day per residence, it is concluded that Applicant's plant can adequately treat the sewage flow generated by 100 homes. Currently only 79 homes utilize its service. Thus, the plant has excess capacity of approximately 20 percent. The remaining 21 vacant subdivision lots--which the plant is capable of serving--are owned by the Applicant; no definite plan has been made to sell or develop them in the future. Consequently, use of the plant's current excess capacity is neither imminent nor reasonably expected in the foreseeable future. (Testimony of Addison, Estler.)

   
   

10. The Commission's engineer treated the plant as 100 percent "used and useful"--its full valuation was consequently included in Applicant's proposed rate base. He based his "used and useful" conclusion on the fact that, several times during the test period 2/ , peak flows exceeded 35,000 gallons per day. Yet, he agreed that average flows are more significant in determining the operating capacity of a plant than peak flows; he gave no engineering reason why peak rather than average flows should be used to calculate "used and useful" plant; and he admitted that the plant has adequate capacity to handle an additional 20 homes. (Tr. 135.) It is concluded, therefore, that, since 20 percent of the plant is neither used and useful now, nor reasonably expected to be so in the foreseeable future, only 80 percent of the plant's valuation should be considered used and useful and included in rate base. (Testimony of Estler, Hale.)

    
    

11. In accordance with the foregoing findings, the Applicant's rate base is depicted below:

    
    

    RATE BASE

    Test Period Ended 12/31/79

    
    

    Utility Plant in Service	$11,940
    Accumulated Depreciation	(6,676)
    Contributions in Aid of construction	-0-
    Working Capital Allowance	1,337
    Income Tax Lag	-0-
    NET (Adjusted) RATE BASE	$ 5,548 3/

    
    

    III.

    Net Operating Income

    
    

12. Two items remained in dispute concerning the Applicant's net operating income: (1) calculation of depreciation expense, and (2) salary expense.

    
    

    Depreciation Expense

13. Since the Applicant should be allowed to allocate the balance of its plant over its remaining 30-year service life--using a 40-year, 2.5 percent depreciation rate--the Applicant's proposed depreciation expense should be reduced $597. Depreciation expense for the test year should therefore be $175. The Commission agrees that, assuming Intervenor's position on accumulated depreciation revenue is proper, this adjustment is also appropriate.

    
    

    Salary Expense

    
    

14. Tom Morris visits the plant for one to two hours on a daily basis and performs essential clean-up and maintenance tasks. For this service he receives an annual salary of $2,600. This calculates to a hourly wage of $5-$6 per hour which is not considered unreasonable for the work performed. This salary should, therefore, be allowed. (Testimony of Morris, Hale; R-2.)

15. Net operating income is thus depicted as follows: ADJUSTED OPERATING STATEMENT

    Test Year Ended 12/31/79

    
    

    Operating Revenue:	$ 3,479
    Operating Expenses:
    Operation and Maintenance	10,699
    Depreciation Expense	175
    Taxes O/T Income	73
    Income Taxes	-0-
    TOTAL OPERATING EXPENSE	$10,947
    Operating Income	$(7,469)

    
    

    (Testimony of Lowe; R-2.)

    
    

    IV.

    Cost of Capital

    
    

16. The Commission used a 12.16 percent overall weighted cost of capital, including a 12.5 percent return on equity, which was uncontroverted:

    
    

    		PERCENT OF TOTAL	COST RATE	WEIGHTED COST RATE
    Equity	$204,114	94.7 percent	12.5 percent	11.84 percent
    Debt	11,532	5.3	6.0	.32
    TOTAL	$215,646	100.0 percent		12.16 percent

    
    

    A fair rate of return on the Applicant's net rate base is determined to be 12.16 percent. (Testimony of Lowe; R-2.)

    
    

    V.

    Additional Revenue Requirements

    
    

17. By applying a 12.16 percent rate of return against a rate base of

    $5,548, it is concluded that Applicant should be allowed to earn a return, or operating income of $674.64. Annual gross revenues of $11,826 4/ are required to cover operating expenses and produce such a return, resulting in a net increase of $8,348 in gross revenues.

    VI.

    Rate Design

    
    

18. If economically feasible, the Applicant's flat monthly rates should be replaced by an alternative rate structure known as the "base facility charge rate design." This is a more equitable structure because it contains a commodity charge which varies according to the amount of water consumed. The Applicant currently pays the City of Springfield 20 percent of the sewer fee in exchange for mailing and collecting sewer bills from customers. The costs of converting the city's billing system to the base facility charge rate design is not known. The Applicant should be required to determine the costs associated with converting to the base facility charge rate design, and report its findings to the Commission within 90 days of entry of the final order in this case.

    
    

    VII.

    Whether Applicant Should be Limited to Rates Originally Requested

    
    

19. In order to determine its eligibility for Commission staff assistance in preparing its rate-making application, the Applicant completed and filed the appropriate Commission forms. 5/ In its initial eligibility filing, Applicant included a proposed sewer rate of $11.00 per month. Subsequently, a revised form was filed indicating a proposed rate of $13.00 per month. The Intervenor contends that Applicant should be limited to the $11.00 per month rate originally proposed. (I-1, 1-2.)

    
    

20. It would be unreasonable to impose such a rate limit based on initial eligibility information documents. Such documents are necessarily completed before a rate application and supporting documents are completed and analyzed. The request for staff assistance in preparing the rate application, in itself, presupposes that the utility, due to its small size, lacks the expertise and specialized knowledge required to prepare and present a rate application. No contention is made that customers would be unfairly surprised by a flat rate which is more than $11.00 per month. Indeed, the uniform rate approved by the Commission was $13.08 per month; all customers were notified prior to hearing that Applicant proposed to make the interim rate permanent. (I-1, I-2.)

    
    

    CONCLUSIONS OF LAW

    
    

21. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 120.57(1), Fla. Stat.

    
    

22. Subsections 367.081(1), (2), and (3), Florida Statutes (1979), provide:

    
    

    "(1) Rates and charges being charged and collected by a utility shall be changed only by approval of the commission.

    "(2) The commission, shall, either upon request or upon its own motion, fix rates which are just, reasonable, compensatory, and not unjustly discriminatory. In all such proceedings, 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 requirements for 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 return on the utility's investment in property used and useful in the public service. The commission shall also consider the utility's investment in property required by duly authorized governmental authority to

    be constructed in the public interest within a reasonable time in the future, not to exceed

    24 months.

    "(3) The commission, in fixing rates, may determine the prudent cost of providing service during the period of time the rates will be in effect following the entry of a final order relating to the utility's rate request and may use such costs to determine the revenue requirements that will allow the utility to earn a fair rate of return on its rate base."

    
    

23. The evidence establishes that rates filed to produce annual gross revenue of $11,826, an increase of $8,348 over existing revenue, will be reasonable, compensatory, and not unjustly discriminatory within the meaning of Section 367.081, supra. To the extent the interim rates produce revenue in excess of the authorized revenues specified above, such rates are determined to be unjustified and the Applicant should be required to refund such excess revenue, with interest, to its customers. See, 367.081(5), Fla. Stat. (1979).

    
    

24. The Commission and Intervenor have filed proposed findings of fact. Those findings of fact not incorporated herein are rejected as unsupported by the evidence or unnecessary to resolution of the issues presented.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED:

1. That S.E. Morris and Sons, Inc., be authorized to file new rates designed to generate gross annual revenues of $11,826 based on the average number of customers served during the test year. To the extent interim rates result in excess revenues, such revenues should be refunded to the customers.

   
   

2. That, within 90 days from entry of the final order in this case, S.E. Morris and Sons, Inc., be required to determine and report to the Commission the economic feasibility of redesigning its rates pursuant to the base facility charge rate design system. If such an alternative rate design is not economically practicable, new monthly flat rates designed to produce the required revenue should be filed.

DONE AND RECOMMENDED this 24th day of April, 1981, in Tallahassee, Florida.

R. L. CALEEN, JR. Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 24th day of April, 1981.

ENDNOTES

1/ Respondent's and Intervenor's Exhibits will be referred to as "R- " and "I- ", respectively.

2/ The Commission has approved a test period consisting of the 12 months preceding December 31, 1979.

3/ Reflects a 20 percent adjustment to the balance of Utility Plant in Service per finding No. 10.

4/ Derived by adding $675 and total operating expenses of $10,947, plus a $204 adjustment due to gross receipts tax on revenue increase.

5/ The form is entitled "Florida Public Service Commission Summary of Preliminary Information to Determine Eligibility for Staff Assistance on Water & Sewer Rate Cases."

COPIES FURNISHED:

Marta Suarez-Murias, Esquire Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Paul J. Laris

604 Jennings Avenue

Lana B. Corley 611 David Avenue

Springfield, Florida 32401

Mr. and Mrs. L. J. Brincrek

110 Santee Drive

Jack Shreve, Esquire and

Lawrence P. Bush, Esquire Office of the Public Counsel

Room 4, Holland Building Tallahassee, Florida 32301

Herb and Cecile Howard

507 Jennings Avenue

Leroy S. Staudtl

141 Santee Drive

Docket for Case No: 80-001612

Orders for Case No: 80-001612