STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

ROLLING OAKS UTILITIES, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-1863

) PSC DOCKET NO. 800364-WS FLORIDA PUBLIC SERVICE COMMISSION )

)

Respondent, )

and )

) OFFICE OF THE PUBLIC COUNSEL, )

)

Intervenor. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, commencing on January 8, 1981, and continuing on April 10 and May 14, 1981, in the Recreational Hall at Beverly Hills, Florida. The broad issue for determination at the hearing was whether the rates proposed in petitioner's application, as amended, for increased rates for water and sewer service are just, reasonable, compensatory and not unfairly discriminatory. The actual issues in dispute, as more fully discussed below, concerned five basic areas: quality of service, the amount to be charged for delinquent accounts, the billing cycle to be utilized by petitioner, the appropriate amount of contributions-in-aid-of-construction for petitioner's sewer operations and the appropriate amount of rate case expenses.

APPEARANCES

For Petitioner: R.M.C. Rose and

Martin S. Friedman

1020 East Lafayette Street Tallahassee, Florida 32301

For Respondent: Marta A. Suarez-Murias

Paul Sexton, Staff Counsel

101 East Gaines Street Tallahassee, Florida 32301

For Intervenor: Suzanne Drownless

and Steven Burgess

Room 4, Holland Building Tallahassee, Florida 32301

INTRODUCTION

By application filed with the Florida Public Service Commission on June 26, 1980, the petitioner seeks a rate increase for the water and sewer service it provides in Beverly Hills, Citrus County, Florida. Interim increases in sewer rates were authorized by Florida Public Service Commission Order No. 9457, issued August 6, 1980, and Order No. 9692, issued December 12, 1980.

Prior to the January 8, 1981 hearing, the then parties of record (petitioner and respondent Public Service Commission) entered into certain prehearing stipulations which narrowed the issues in dispute to the quality of service provided by petitioner to its customers, the proper billing cycle to be used and the reasonableness of delinquent account charges. At this portion of the hearing, the petitioner adduced the testimony of Kurt T. Borowsky, accepted as an expert witness in the field of public utility accounting, and Sam Coker, supervisor of petitioner's utility personnel. The respondent produced the testimony of Louis Chastain, accepted as an expert witness in the area of water and sewer operations from an engineering standpoint; Norvelle Walker, an accounting analyst with the Public Service Commission, and Arthur Atkisson, a rate analyst with the Public Service Commission. Fifteen members of the general public also testified.

After the conclusion of the January 9 hearing, the Florida Public Service Commission filed, on January 26, 1981, a "motion for new hearing." The Office of Public Counsel thereafter moved to intervene in the proceedings and also moved for a new hearing. A motion hearing was held on February 19, 1981. By Order entered on February 25, 1981, the respondent's motion for new hearing was granted, said new hearing to be limited to facts and issues relating to the appropriate amount of contributions-in-aid-of-construction (CIAC) imputable to petitioner's sewer operations and the appropriate amount of rate case expenses attributable to the reopening of the hearing. The Office of Public Counsel's motion to intervene was granted, its motion for new hearing was denied and the intervenor was not permitted to raise issues not at issue at the time of intervention.

At the hearings which occurred on April 10 and May 14, 1981, the petitioner produced the testimony of Murray A. Kellner; Stanley L. Cohen, accepted as an expert witness in public utilities accounting; Kurt T. Borowsky; and L. Donald Sutton, accepted as an expert in the area of generally accepted accounting principles. The respondent produced the testimony of Norvelle Walker, accepted as an expert in utility accounting, and four customers of petitioner--B. Palminteri, R. Romano S. Bishevsky and Charles Lertora. Received into evidence at the hearings were petitioner's Exhibits 1 through 8, respondent's Exhibits A through K and Hearing Officer Exhibit 2.

On June 25, 1981, all parties submitted proposed findings of fact, proposed conclusions of law and proposed recommendations. To the extent that the parties' proposed findings of fact are not included in this Recommended Order, they are rejected as being either irrelevant and immaterial to the issues in dispute, not supported by competent, substantial evidence adduced at the hearing or as constituting conclusions of law as opposed to findings of fact.

FINDINGS OF FACT

Upon consideration of the oral and documentary evidence adduced at the hearing, the following facts relevant to the issues presented for determination are found:

1. At the first hearing on January 8, 1981, the petitioner and the respondent stipulated and agreed that an appropriate rate base for petitioner's water operations was $249,622, that an appropriate rate base for petitioner's sewer operations was $714,919, and that an appropriate overall rate of return on petitioner's net investment was 13.07 percent. The reopening of the hearing was occasioned by a dispute over the appropriate amount of contributions-in-aid-of- construction (CIAC) attributable to petitioner's sewer operations. The petitioner takes the position that $84,500 is the appropriate amount of CIAC and the respondent and intervenor are of the opinion that the appropriate amount of CIAC is $317,000. Thus, the prior stipulation with regard to the figures contained in petitioner's Exhibit 4 is dissolved and the appropriate rate bases are dependent upon a resolution of the disputes concerning CIAC and additional rate case expenses occasioned by the reopening of the hearing.

   
   

   Quality of Service.

   
   

2. The fifteen customers who testified at the hearing were concerned primarily with the large increase in sewer rates requested by the petitioner. The majority of petitioner's customers are elderly, retired persons on fixed incomes.

   
   

3. Other than one witness who did not like the taste of the water and two customers who complained of billing errors, there was no adverse testimony concerning the quality of water or sewer services provided by petitioner to its customers.

   
   

4. The petitioner's water and treated sewage consistently meets the standards and regulations imposed by regulatory agencies. There are no corrective orders or citations outstanding against petitioner's water or sewer operations.

   
   

   Charge for Delinquent Accounts.

   
   

5. The petitioner presently computes a late payment charge of five percent of the overdue balance on delinquent accounts. Its request to charge a $10.00 fee when delinquency in payment results in a termination of water service and a charge of $2.20 for processing a delinquent bill which does not result in a termination of service is based upon actual labor and mailing costs necessary to the performance of these functions. These charges are reasonable and comport with similar charges made by other utility companies.

   
   

   Monthly Versus Quarterly Billing Cycle.

   
   

6. The petitioner is presently billing its customers on a quarterly basis and has requested approval to change to monthly billing. The additional expense associated with monthly, as opposed to quarterly, billing would amount to

   $22,626.00 annually, or approximately 64 cents per customer per bill. The working capital allowance formula of one-eighth operation end maintenance expense is based upon a 45-day lag period or monthly billing system. If petitioner continues to bill on a quarterly cycle, its working capital allowance should be increased.

   
   

7. Meters do occasionally stop working, meter boxes and covers become broken and water lines can develop leaks. Billing on a monthly basis would allow the petitioner to determine on a more frequent basis when a meter or a water line becomes inoperable, thus assuring that customers are accurately

   billed and preventing hazardous conditions with possible liability on petitioner's behalf. On a quarterly billing system, a meter could be incorrectly functioning for 90 to 150 days before the utility becomes aware of it. Between 1978 and 1900, the petitioner replaced 405 meters. No evidence was offered as to the amount of water, and therefore revenue, lost as a result of the nonfunctioning meters.

   
   

8. With the exception of those in Duval County, most water and sewer utilities bill their customers on a monthly basis.

   
   

   Rate Case Expenses.

   
   

9. Prior to the close of the January 8, 1991, hearing, the petitioner and the respondent Public Service Commission stipulated that the appropriate amount of rate case expense was $57,900.00 and that said expense should be amortized over a three-year period. The only remaining issue is the appropriate amount of rate case expense resulting from the reopening of the hearing due to the dispute regarding CIAC, and the appropriate period of amortization as to those expenses.

   
   

10. The petitioner has claimed additional rate case expenses attributable to the new hearing in the amount of $15,100.00, for a total rate case expense of

    $73,000.00. This $15,100.00 is made up of additional attorneys' fees in the amount of $9,000.00, additional fees to three certified public accountant firms in the amount of approximately $4,000.00 and additional printing costs and miscellaneous costs of approximately $2,000.00. These amounts constitute estimates based upon incurred and expected hours of professional time occasioned by the new hearing. The figures were prepared for the April 10 hearing and do net include expenses or time spent on the May 14, 1981 hearing.

    
    

11. The subject application is the petitioner's first application for a rate increase. While the use of one accounting firm may have been more economical and efficient, the use of two independent accounting firms is not unusual in a utility's first rate case due to the necessity of gathering historical data, the preparation of the minimum filing requirements of the Public Service Commission and the expertise required in regulatory matters. The two independent consulting firms did not engage in duplications of effort. The reopening of the hearing to resolve the CIAC dispute also resulted in many hours of PSC staff time.

    
    

12. The petitioner has gained an extended benefit from the legal and accounting work done in this first application for a rate increase, and rate case expenses in a future application should be lower as a result of the efforts devoted to the present rate increase request. A three-year period has been a normal and reasonable period of time between rate cases.

    
    

    Contributions-in-aid-of-construction.

    
    

13. The petitioner provides water and sewer service to the Beverly Hills Subdivision, which was developed in several stages. Units 1, 2 and 3 have septic tanks and Units 4, 5 and 6 are connected to a centralized sewerage treatment plant. During the period of 1069 and 1970, the petitioner collected a premium of $500.00 for homes sold in Units 4 and 5. There was evidence that some purchasers of homes in Units 4 through 6 were charged a premium of

    $1,000.00. Since no evidence was adduced as to the number of $1,000.00 fees which were collected, it is assumed for computational purposes that all such fees collected were in the amount of $500.00. There premiums were printed on petitioner's promotional literature as "houses in sewer areas extra." On land

    sales contracts, the premiums were referred to as "land improvements," "sewers" or "Unit 4 or 5 improvements," and on the closing statements the premiums were referred to as "land improvement fee." This fee was separate from and in addition to the monthly or quarterly charge for day to day sewer service. The utility presented no evidence that there was any other reason for the collection of $500.00 for "improvements" in Units 4 through 6. The collected premiums for the years 1969 and 1970 in the amount of $84,500.00 were recorded on the petitioner's books as "sales -- sewer charge" and the petitioner reduced the plant account and revenues by this amount. Also, in 1969, a New York branch office collected $500.00 fees in the total amount of $14,500.00. This amount was recognized by petitioner as taxable income and was not credited to the plant account. While the petitioner does not concede that the $500.00 premiums collected in 1969 and 1970 actually constitute CIAC, it does not contest the inclusion of the $84,500.00 as CIAC since it did not pay federal income taxes on that amount in 1969 and 1980.

    
    

14. In 1971, petitioner continued to collect $500.00 premiums for lots sold in Units 4 through 6 and treated them in the same manner as they were treated on its books and records in 1969 and 1970. The amount of $54,500.00 was collected as premiums in 1971. Subsequently, the Internal Revenue Service audited the petitioner's 1971 tax return and treated the $500.00 collections amounting to $54,500.00 as revenue subject to income tax liability.

    
    

15. The petitioner continued to collect the $500.00 premiums from purchasers in Units 4 through 6 until 1974. Due to the Internal Revenue Service report or directive which classified the 1971 $500.00 premiums as revenues, the petitioner incurred federal income tax liability on the premiums collected from 1971 through 1974. In 1972, the books of the petitioner changed with respect to the treatment of the $500.00 premiums. Prior to that time, the funds were segregated and declared as reductions to plant. After that time, the funds were treated on the corporate books as revenues from the sale of homes and were placed in a separate corporate account. Funds from sources other than sewer premiums wore also deposited into that account and monies from that account were used for such things as engineering services, sewer plant construction, roads, advertising, repairs, storm drainage and materials.

    
    

16. Promotional materials, contracts of sale and closing statements, as well as customer testimony, indicate that petitioner consistently characterized the $500.00 fees for Units 4 through 6 as a charge for the sewer service available in those Units. The only difference between the homes in Units 1 through 3 and the homes in Units 4 through 6 was the presence of the sewer system in the latter as opposed to septic tanks in the former.

    
    

17. Between 1969 and 1974, the petitioner sold 634 homes which included the $500.00 (or in some instances $1,000.00) premium for sewer service. Assuming a $500.00 fee from each purchaser, the total premiums collected amount to $317,000.00.

    
    

18. The petitioner paid federal income taxes on all such $500.00 fees collected with the exception of the $84,500.00 collected in 1969 and 1970. Due to the three-year statute of limitations on refunds, the petitioner cannot now recover or recoup the taxes paid on that income. The imputation of CIAC to funds which petitioner has treated in the past for Internal Revenue purposes as income will substantially reduce petitioner's future sewer rate base and will reduce the petitioner's cash flow potential. If CIAC is imputed to these

    $500.00 premiums, it is estimated that the petitioner's sewer operation would offer revenue reductions in the approximate amount of $25,000.00 per year.

19. Prior to December of 1973, no governmental agency regulated petitioner's water and sewer rates. The petitioner came under the jurisdiction of the Florida Public Service Commission in December of 1973. Although the petitioner did not produce the revenue agent's report which allegedly required the $500.00 fees to be reported as income, the testimony of petitioner's expert witness was that only a regulated utility could report tax-free Contributions- in-aid-of-construction. For federal income tax purposes, the CIAC of an unregulated utility was treated as ordinary taxable income. The assets represented by such funds can be depreciated for income tax purposes.

    
    

    CONCLUSIONS OF LAW

    
    

20. When considering rate increase requests, the Florida Public Service Commission is charged with the responsibility of fixing rates which are just, reasonable, compensatory and not unfairly discriminatory. The value, quality and the cost of the service provided must be considered by the Public Service Commission. Section 367.081(2), Florida Statutes. In this proceeding, the parties stipulated to all items which are to be considered as the cost of providing water and sewer service to the petitioner's customers, with four exceptions. Testimony and evidence was adduced as to these four remaining issues as well as the issue of quality of service.

    
    

    Quality of Service

    
    

21. The evidence adduced at the hearing establishes that the water provided and the sewage treated by the petitioner meets all state and local regulatory standards and criteria. The thrust of the complaints of the customers who testified at the hearing was their objection to the requested rate increase, particularly with respect to the sewer operations. There is no basis in the record herein for a finding other than that the quality of service rendered by the petitioner is adequate.

    
    

    Charge for Delinquent Accounts

    
    

22. The $10.00 charge to customers when their delinquency in payment of their utility bill results in a termination of service and the $2.20 charge for processing a bill when termination of service does not occur are based upon actual and reasonable costs of accomplishing such functions. Such amounts are incurred by the petitioner as a result of the customer's failure to abide by the petitioner's payment rules, and the delinquent customer should bear the burden of these actual and reasonable charges.

    
    

    Monthly versus Quarterly Billing Cycle

    
    

23. A quarterly billing cycle is an exception to the prevailing practice in the utility industry of monthly billing. Although the expenses for monthly billing are greater than for quarterly billing, the petitioner's working capital requirements would be reduced and the advantages of monthly billing could result in an actual savings to the utility and the customer. The reading of meters on a more frequent basis provides the advantages of detecting and more quickly determining the existence of faulty meters, meter covers and water lines and thus prevents losses of water revenues and provides for more accurate customer billing. It is concluded that the request to change from a quarterly to a monthly billing cycle is supported by substantial, competent evidence and should be approved.

    Rate Case Expenses

    
    

24. The petitioner has presented evidence that its expenses occasioned by this rate case application are in the amount of $73,000.00. Of this amount, the parties had previously stipulated that $57,900.00, amortized over a three-year period, was accurate and reasonable. The remaining $15,100.00 is claimed as a result of the reopening of the hearing to consider the issue of CIAC. With adequate and diligent preparation and discovery, the facts underlying this issue could well have been disposed of at the first hearing in January of 1981. The evidence adduced at the additional hearings required in this proceeding, as well as the Public Service Commission's own admission, established that many hours of preparation and hearing time were occasioned on behalf of the petitioner's witnesses and the members of the PSC staff concerning the issue of CIAC. It is concluded that the additional $15,100.00 claimed by petitioner as expenses resulting from the reopening of the hearing are supported by the record and are reasonable and just. There is nothing in the record to support a change in the stipulated and normal amortization period of three years.

    
    

    Contributions-in-aid-of-construction

    
    

25. It is the contention of the petitioner that the $500.00 premiums collected from purchasers in Units 4 through 6 from 1969 through 1974 do not constitute contributions-in-aid-of-construction. In the alternative, petitioner claims that only these premiums upon which it did not claim as revenues for income purposes ($84,500.00) are subject to a CIAC imputation and that the CIAC treatment of premiums collected prior to the time petitioner came under respondent's jurisdiction may not be retroactively applied to the petitioner. The respondent Public Service Commission and the intervenor Office of Public Counsel take the position that the entire amount of premiums collected ($317,000.00) constitute CIAC and that petitioner's sewer rate case must be reduced by that amount.

    
    

26. A utility is entitled to a fair return on its investment in property used and useful in the public service. In this case, it has been stipulated that this utility is entitled to an overall rate of return on its net investment (rate base) of 13.07 percent. What is in dispute is the appropriate amount of the petitioner's net investment or rate base in its sewer operations. Contributions-in-aid-of-construction are not to be included in rate base. Such funds include any amount of money received by a utility which represents a donation or contribution to the capital of the utility and which is utilized to offset the acquisition, improvement or construction costs of the utility's property, facilities or equipment used to provide utility services to the public. Section 367.081(2), Florida Statutes (1980 Supp.). The reason for the exclusion of CIAC from rate base is simple. The utility is only entitled to a return on its own investment. The utility should not be entitled to earn a return on money contributed by the customers and then require those customers, whose rates increase as the utility's rate base increases, to pay higher fees for that which they had already paid.

    
    

27. Here, it is clear that the petitioner, in its advertising, its oral representations, its sales contracts and its closing statements, did consistently make a specific segregated and itemized charge for sewer service in Units 4 through 6 from 1969 to 1974. In 1969 and 1970, the petitioner recorded its plant account with a net reduction in the amount of the $500.00 premiums received. This practice continued until the Internal Revenue Service required that such premiums be treated as income. The petitioner's collection practice

    continued until 1974, and the fact that it ceased to record these fees as contributions to capital for federal income tax purposes is not dispositive of whether they indeed constituted CIAC for regulatory purposes. Nor is the manner in which the Internal Revenue Service defines and treats contributions to capital dispositive of the Public Service Commission's definition and application of CIAC. The undersigned concludes that the $500.00 premiums received by the petitioner for purchases of homes in Units 4 through 6 were received to reduce petitioner's investment in plant and to provide requested sewer service, and thus constitute contributions-in-aid-of-construction.

    
    

28. The only remaining issues are whether it would now be unfair and unjust to impute CIAC classification to these funds retroactively or in light of the federal income tax treatment of such funds by the petitioner. It is concluded that it would not.

    
    

29. This is the petitioner's first rate case. It is incumbent upon the respondent to review the petitioner's accounts on an historical basis in order to derive and compute the petitioner's net investment or rate base so that future rates may be established. There being no attempt to establish rates for an earlier period of time, the imputation of CIAC status to certain funds when computing the petitioner's net investment as of the test year does not constitute retrospective rate making.

    
    

30. The Florida Public Service Commission and the Internal Revenue Service are not bound by the regulations, decisions or accounting methods of each other. The interest of the Internal Revenue Service is the taxation of revenues received lay the taxpayer. The interest of the Public Service Commission when it sets rates which are just, reasonable, compensatory and not unfairly discriminatory is in both the utility and its customers. The same items are often given different treatment by each body. While it may be true that the utility in this case cannot now change its method of reporting 1971 through 1974 federal income tax revenues, it is equally true that petitioner has gained some, if not equal, tax benefits from reporting the subject premiums as revenues.

    
    

31. An applicant for a rate increase must support its CIAC valuation by competent substantial evidence in establishing its rate base. Tamarac Utilities, Inc. v. Hawkins, 364 So.2d 437 (Fla. 1978). The evidence establishes that the $500.00 premiums were collected and received by petitioner to reduce its investment in plant and to provide the requested sewer service. The funds were properly treated by petitioner as reductions to plant in 1969 and 1970. Collection of the funds for the same purposes continued until 1974. The only change which occurred was a change in accounting and recording occasioned by the Internal Revenue Service's directive to treat such funds as revenues for income tax purposes. Such an event does not change the character of the premiums received by the petitioner and does not permit the utility to earn a return on the customer's investment. There being no demonstration by the petitioner that the $500.00 premiums collected from home buyers between 1969 and 1974 were for any purpose other than contributions to defray the cost of the sewerage treatment system, the petitioner's sewer rate base should be reduced by the total amount of such premiums received; to wit: $317,000.00.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the issues in dispute between the parties be resolved as follows:

1. The quality of service provided by the petitioner to its water and sewer customers be found adequate;

   
   

2. A delinquent account charge he set at $10.00 if service must be disconnected and $2.20 if only a delinquent notice must be mailed;

   
   

3. The petitioner's request to change from a quarterly to a monthly billing cycle be granted;

   
   

4. Rate case expenses in the amount of $73,000.00 be approved, said amount to be amortized over a three-year period; and

   
   

5. The $500.00 premiums collected between 1969 and 1974, in the total amount of $317,000.00, be treated as contributions-in-aid-of-construction and the petitioner's sewer rate base be accordingly reduced.

Respectfully submitted and entered this 14th day of July, 1981, in Tallahassee, Florida.

DIANE D. TREMOR, 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 14th day of July, 1981.

COPIES FURNISHED:

R.M.C. Rose and Martin Friedman

1020 East Lafayette Street Tallahassee, Florida 32301

Marta M. Suarez-Murias and Paul Sexton, Staff Counsel

Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Suzanne Brownless and Steven Burgess

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

Steve Tribble, Clerk

Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Charles E. Lertora, Jr.

Beverly Hills Civic Association, Inc. Post Office Box 23

Beverly Hills, Florida 32665

Docket for Case No: 80-001863

Orders for Case No: 80-001863