STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
UTILITIES, INC. OF FLORIDA, )
)
Petitioner, )
)
vs. ) CASE NO. 80-1893
) PSC DOCKET NO. 800359-WS
FLORIDA PUBLIC SERVICE )
COMMISSION, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, an administrative hearing was held on January 20, 1981, in the Maitland Civic Center Auditorium in Maitland, Florida. The broad issue for determination at the hearing was whether the rates proposed in the petitioner's application for increased rates and charges for water and sewer service are just, reasonable, compensatory and not unjustly discriminatory.
APPEARANCES
For Petitioner: R.M.C. Rose
Myers, Kaplan, Levinson, Kevin and Richards
1020 East Lafayette Street, Suite 103
Tallahassee, Florida 32301
For Respondent: Harry D. Boswell, Staff Counsel
Florida Public Service Commission
101 East Gaines Street Tallahassee, Florida 32301
INTRODUCTION
On May 21, 1980, the petitioner Utilities, Inc. of Florida filed with the respondent Florida Public Service Commission (PSC) a rate increase application for the water and sewer service it provides in Orange and Seminole Counties, Florida. The Commission authorized interim increases for water service by Orders dated July 10, 1980 and September 22, 1980. The matter was referred to the Division of Administrative Hearings on October 14, 1980 for the purposes of conducting a hearing.
The parties filed with the undersigned Hearing Officer a Prehearing Stipulation and an Amended Prehearing Stipulation. The latter document defined four issues which remained in dispute between the parties and these four issues were again agreed to between the parties at the beginning of the hearing. This
Recommended Order, as was the testimony at the hearing, is therefore confined to the four issues in dispute between the parties, to wit:
1.) the proper amount of working capital; 2.) the proper amount for uncollectible
revenues;
3.) the proper amount of accumulated depreciation; and
4.) the proper rate of return.
At the administrative hearing held on January 20, 1981, nine members of the general public gave testimony. The petitioner presented the testimony of Patrick J. O'Brien, its corporate treasurer; Stanley L. Cohen, a certified public accountant; and Frank Fondo, the operator of petitioner's sewage treatment plant and water operations. Petitioner's Exhibits 1 through 10 were received into evidence. The respondent presented the testimony of David H. Demaree, petitioner's Vice President; James Shoptaw, an engineer with the PSC; Marty Deterding, an account analyst in the Water and Sewer Department of the PSC; Joyce Fabelo, a rate auditor with the PSC; and James Gollahon, a financial analyst with the PSC. Received into evidence were Respondent's Exhibits A through D.
At the conclusion of the hearing, the parties requested that they be permitted ten days from the filing of the hearing transcript within which to file their proposed recommended orders with the Hearing Officer. The transcript was received by the Division of Administrative Hearings on February 2, 1981.
Petitioner's attorney requested an additional two working days to file his proposed order and both parties submitted their proposed recommended orders on February 16, 1981. To the extent that the parties' proposed findings of fact are not incorporated in this Recommended Order, they are rejected as being either irrelevant or immaterial to the issues for determination, 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 four issues presented for determination are found:
WORKING CAPITAL
In calculating debt and equity costs for the petitioner, it is appropriate to use the parent company's capital structure. Here, forty percent (40 percent) of the parent's capital structure is equity and sixty percent (60 percent) is debt.
In order to support its operating and/or construction activities, the petitioner receives advances from its parent company, Utilities, Inc., a Delaware corporation, or from its subsidiary, Water Service Corporation. The petitioner has treated these advances as part of its equity structure since there is a cost to these funds to petitioner, in substance if not in form. If these funds do have a specific, identifiable cost in the test year ending December 31, 1979, such as interest, they are properly includable as part of petitioner's equity structure. Pursuant to an Agreement between petitioner and its parent, the monetary advances by petitioner's parent company or its subsidiary to support petitioner's operating and/or construction activities will
bear interest at the end of each calendar quarter at the rate of prime plus one quarter of one percent per annum on the average advances outstanding during the quarter. (Petitioner's Exhibit 10). This is a known and identifiable cost, and therefore the position taken by the petitioner regarding working capital allowance is correct.
The proper amount attributable as "working capital allowance" is
$54,699 for the water rate base and $28,179 for the sewer rate base for the test year ending December 31, 1979.
UNCOLLECTIBLE REVENUES
For the years 1977, 1978, 1979 and 1980, the petitioner's bad debt expense averaged 1.2 percent of its total revenues. (Petitioner's Exhibit 9). The petitioner proposes a pro forma bad debt expense contending that the number of people who do not pay their bills remains essentially constant and that as rates increase, the dollars increase in relationship to the rates. In other words, petitioner proposes that the annual expense for uncollectible accounts should be increased by the same percentage that the test year dollars uncollected from customers who did not pay their bills relates to the amount of dollars which would be collected under the increased rate. The respondent's witness felt there had been no proof of the direct relationship between the increase in uncollectible accounts.
In designing rates for the future, the amount of the customer's consumption of utility services during the test year are employed on the assumption that past consumption will represent future consumption.
ACCUMULATED DEPRECIATION
The petitioner has requested an adjustment in its depreciation rate from 2.0 to 2.86 percent, based on all facilities other than general plant. The respondent has concurred with this requested increase to 2.86 percent, but would apply that depreciation rate to the beginning of the 1979 test year, thereby treating the difference as a deduction in rate base. If the adjusted rate is applied to the expense side, it must also be applied to the investment side, according to respondent's accounting analyst. The petitioner feels that the depreciation expense should be treated as a reduction in rate base only to the extent that it has been allowed in previous rates and collected from the customers. The increased expense will not be collected until the year 1981.
The effect of charging the increased depreciation back to the 1979 test year would mean a $9,732 reduction in the water rate base and an $8,540 reduction in the sewer rate base.
RATE OF RETURN
The petitioner and the respondent agree that petitioner's capital structure is composed of forty percent equity and sixty percent debt capital, and that the cost of debt is 9.63 percent, for a weighted cost of 5.78 percent. The petitioner feels that the appropriate return to be placed on equity capital is 19.63 percent, for a weighted cost of 7.89 percent and an overall 13.63 percent return on rate base. The respondent would place the cost rate for equity at 16 percent, for a weighted cost of 6.40 percent and an overall 12.18 percent return on rate base.
The petitioner utilized three methods of calculation to arrive at its proposed rate of return on equity capital, and then averaged the three results.
One such method was to create a hypothetical Ba rating and then add a risk factor of 4 percent, resulting in a cost of equity of 20.7 percent. A second method, utilizing a combination of dividend yield on listed water companies and a growth factor, resulted in a cost of equity capital of 18.72 percent. The third approach involved the addition of the 4 percent risk factor of equity over debt to the average yield outstanding for various water companies, resulting in a return of 18.4 percent, Considering an attrition allowance on equity capital of 1.2 percent, a 14.7 percent overall rate of return would be within the bounds of a reasonable rate of return.
Utilizing a comparable earnings analysis of nonregulated and regulated utilities, including electric, gas and telephone as well as water and sewer utilities, and taking dividend yield rates and adding growth rates, respondent's financial analyst computed the reasonable range of the cost of equity for the Florida water and sewer industry to be between 14.25 and 16.25 percent. With the equity ratio being 40 percent, respondent's witness recommended a 16 percent return on equity, with permission to fluctuate plus or minus one percent.
PUBLIC TESTIMONY
Members of the public who testified at the hearing were concerned with increased charges for water and sewer service since many of them were on fixed and limited incomes. While one witness complained of mosquito larvae in a dish of water left over a weekend for a dog, other witnesses opined that they had received good service from the petitioner.
CONCLUSIONS OF LAW
The Florida Public Service Commission is empowered to fix and approve rates which are just, reasonable, compensatory and not unjustly discriminatory. Section 367.081, Florida Statutes (1979). In ratemaking proceedings, the utility bears the burden of establishing entitlement to the requested rate relief by competent, substantial evidence. Rule 25-10.175(1), Florida Administrative Code.
In this proceeding, the petitioner (utility) and the respondent (PSC) stipulated that there were only four issues in dispute between the parties as to the appropriate rate and charges to be implemented by the petitioner. These four issues concern the treatment of:
1.) working capital,
2.) uncollectible revenues,
3.) accumulated depreciation, and
4.) rate of return on equity capital.
The evidence adduced at the hearing was sufficient to illustrate that the monetary advances received by the petitioner from its parent company or subsidiary to support petitioner's operating and/or construction activities are not cost-free. Inasmuch as such advances have, in substance, borne a cost to the petitioner and will bear a cost in the form of interest, they are known and measurable and are not properly included as working capital. The evidence therefore supports the positions of both petitioner and respondent that the proper amount attributable to working capital allowance is $54,699 for the water rate base and $28,179 for the sewer rate base for the test year ending December 31, 1979.
With regard to the issue concerning uncollectible revenues, the undersigned concludes that petitioner has failed to establish by competent, substantial evidence a direct relationship between an increase in rates and an increase in uncollectible accounts. While past consumption of utility services may be fairly representative of future consumption in designing future rates, insufficient evidence was adduced to establish that there is a similar relationship with regard to bad debt expenses. Indeed, the petitioner's own Exhibit 9 is not illustrative of a consistent level of uncollectible accounts as a percentage of total revenue. Petitioner has failed to establish that its test year expense for uncollectible accounts should be increased by the ratio which the new rates will bear to the old rates.
The issue concerning accumulated depreciation is one of timing. The parties are in agreement as to the increase in the rate of depreciation from 2.0 to 2.8 percent. Respondent contends that the increased depreciation rate should be applied to the beginning of the test year. Petitioner contends that to do so would retroactively increase the depreciation at a time when petitioner could not charge rates which include the increased depreciation, and therefore would be confiscatory. Inasmuch as the rates allowing the increased depreciation rate of 2.86 percent will not be collected until 1981, the test year rate base should not be reduced by the increased depreciation rate. The undersigned concludes that the petitioner's position on this issue is fair and reasonable and is in keeping with the prospective nature of rate changes.
The remaining issue is the appropriate return or cost that is to be placed on equity capital. The petitioner, through the testimony of Stanley L. Cohen, presented competent evidence as to three methods of calculation it used, and then took an averaging approach to arrive at a figure of 19.63 percent as a cost of equity. The respondent did not cross-examine petitioner's witness. Instead, the respondent presented the testimony of James Gollahon who used other methods of deriving a cost of equity capital. Insufficient evidence was produced by the respondent to clearly illustrate that the petitioner's calculations or methods of arriving at a reasonable rate of return were erroneous. The undersigned concludes that the petitioner has presented competent, substantial evidence that a return of 19.63 percent on equity capital would be fair. The parties having agreed that the return on debt capital should be 9.63 percent and that the equity/debt ratio is 40 percent/60 percent, the resulting overall rate of return on rate base is 13.63 percent.
Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the petitioner's application for a rate increase be granted as requested except for adjustments made for uncollectible debts or accounts.
Respectfully submitted and entered this 5th day of March, 1981.
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 5th day of March, 1981.
COPIES FURNISHED:
R.M.C. Rose
Myers, Kaplan, Levinson, Kevin and Richards
Suite 103
1020 East Lafayette Street Tallahassee, Florida 32301
Harry D. Boswell Staff Counsel
Florida Public Service Commission
101 East Gaines Street Tallahassee, Florida 32301
Steve Tribble, Clerk Public Service Commission
101 East Gaines Street Tallahassee, Florida 32301
================================================================= AGENCY FINAL ORDER
================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION
In re: Application of UTILITIES, DOAH CASE NO. 80-1893 INC. OF FLORIDA for an increase DOCKET NO. 800395-WS(CR)
in water and sewer rates in ORDER NO. 10049 Seminole and Orange Counties, ISSUED: 6-9-81
Florida.
/
The following Commissioners participated in the disposition of this matter: JOSEPH P. CRESSE, Chairman
GERALD L. GUNTER JOHN R. MARKS, III KATIE NICHOLS
Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on January 20, 1981, in Maitland, Florida.
The Hearing Officer's Recommended Order was entered on March 5, 1981, and oral argument was held on May 11, 1981, on exceptions filed by the Commission staff. We now enter our order.
ORDER
BY THE COMMISSION:
This docket was initiated by the Application of Utilities, Inc. of Florida seeking an increase in its water and sewer rates to be charged in its certificated territory located in Orange and Seminole Counties. This utility provides service to approximately 2,500 water customers and 1,100 sewer customers.
On July 10, 1980, we issued Order No. 9446 suspending the filed schedules pursuant to Section 367.081(2)(5), Florida Statutes (1979), but authorized an interim increase in water revenues of $22,344 which would increase its total authorized water revenue to $286,722. On reconsideration, this latter amount was enlarged to $294,296.
After several conferences between the Utility and the Commission staff, this matter went to a hearing on January 20, 1981, with differences on only four basic issues, which are set out below in the Hearing Officer's Recommended Order, which is as follows:
"RECOMMENDED ORDER
Pursuant to notice, an administrative hearing was held on January 20, 1981, in the Maitland Civic Center Auditorium in Maitland, Florida. The broad issue for determination at the hearing was whether the rates proposed in the
petitioner's application for increased rates and charges for water and sewer service are just, reasonable, compensatory and not unjustly discriminatory.
APPEARANCES
For Petitioner: R.M.C. Rose
Myers, Kaplan, Levinson, Kevin and Richards
1020 East Lafayette Street, Suite 103
Tallahassee, Florida 32301
For Respondent: Harry D. Boswell
Staff Counsel
Florida Public Service Commission
101 East Gaines Street Tallahassee, Florida 32301
INTRODUCTION
On May 21, 1980, the petitioner Utilities, Inc. of Florida filed with the respondent Florida Public Service Commission (PSC) a rate increase application for the water and sewer service it provides in Orange and Seminole Counties, Florida. The Commission authorized interim increases for water service by Orders dated July 10, 1980 and September 22, 1980. The matter was referred to the Division of Administrative Hearings on October 14, 1980 for the purposes of conducting a hearing.
The parties filed with the undersigned Hearing Officer a Prehearing Stipulation and an Amended Prehearing Stipulation. The latter document defined four issues which remained in dispute between the parties and these four issues were again agreed to between the parties at the beginning of the hearing. This Recommended Order, as was the testimony at the hearing, is therefore confined to the four issues in dispute between the parties, to wit:
1.) the proper amount of working capital; 2.) the proper amount for uncollectible
revenues;
3.) the proper amount of accumulated depreciation; and
4.) the proper rate of return.
At the administrative hearing held on January 20, 1981, nine members of the general public gave testimony. The petitioner presented the testimony of Patrick J. O'Brien, its corporate treasurer; Stanley L. Cohen, a certified public accountant; and Frank Fondo, the operator of petitioner's sewage treatment plant and water operations. Petitioner's Exhibits 1 through 10 were received into evidence. The respondent presented the testimony of David H. Demaree, petitioner's Vice President; James Shoptaw, am engineer with the PSC; Marty Deterding, an account analyst in the Water and Sewer Department of the PSC; Joyce Fabelo, a rate auditor with the PSC: and James Gollahon, a financial analyst with the PSC. Received into evidence were Respondent's Exhibits A through D.
At the conclusion of the hearing, the parties requested that they be permitted ten days from the filing of the hearing transcript within which to file their proposed recommended orders with the Hearing Officer. The transcript was received by the Division of Administrative Hearings on February 2, 1981.
Petitioner's attorney requested an additional two working days to file his proposed order and both parties submitted their proposed recommended orders on February 16, 1981. To the extent that the parties' proposed findings of fact are not incorporated in this Recommended Order, they are rejected as being either irrelevant or immaterial to the issues for determination, 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 four issues presented for determination are found:
WORKING CAPITAL
In calculating debt and equity costs for the petitioner, it is appropriate to use the parent company's capital structure. Here, forty percent (40 percent) of the parent's capital structure is equity and sixty percent (60 percent) is debt.
In order to support its operating and/or construction activities, the petitioner receives advances from its parent company, Utilities, Inc., a Delaware corporation, or from its subsidiary, Water Service Corporation. The petitioner has treated these advances as part of its equity structure since there is a cost to these funds to petitioner, in substance if not in form. If these funds do have a specific, identifiable cost in the test year ending December 31, 1979, such as interest, they are properly includable as part of petitioner's equity structure. Pursuant to an Agreement between petitioner and its parent, the monetary advances by petitioner's parent company or its subsidiary to support petitioner's operating and/or construction activities will bear interest at the end of each calendar quarter at the rate of prime plus one quarter of one percent per annum on the average advances outstanding during the quarter. (Petitioner's Exhibit 10). This is a known and identifiable cost, and therefore the position taken by the petitioner regarding working capital allowance is correct.
The proper amount attributable as "working capital allowance" is
$54,699 for the water rate base and $28,179 for the sewer rate base for the test year ending December 31, 1979.
UNCOLLECTIBLE REVENUES
For the years 1977, 1978, 1979 and 1980, the petitioner's bad debt expense averaged 1.2 percent of its total revenues. (Petitioner's Exhibit 9). The petitioner proposes a pro forma bad debt expense contending that the number of people who do not pay their bills remains essentially constant and that as rates increase, the dollars increase in relationship to the rates. In other words, petitioner proposes that the annual expense for uncollectible accounts should be increased by the same percentage that the test year dollars uncollected from customers who did not pay their bills relates to the amount of dollars which would be collected under the increased rate. The respondent's witness felt there had been no proof of the direct relationship between the increase in uncollectible accounts.
In designing rates for the future, the amount of the customer's consumption of utility services during the test year are employed on the assumption that past consumption will represent future consumption.
ACCUMULATED DEPRECIATION
The petitioner has requested an adjustment in its depreciation rate from 2.0 to 2.86 percent, based on all facilities other than general plant. The respondent has concurred with this requested increase to 2.86 percent, but would apply that depreciation rate to the beginning of the 1979 test year, thereby treating the difference as a deduction in rate base. If the adjusted rate is applied to the expense side, it must also be applied to the investment side, according to respondent's accounting analyst. The petitioner feels that the depreciation expense should be treated as a reduction in rate base only to the extent that it has been allowed in previous rates and collected from the customers. The increased expense will not be collected until the year 1981.
The effect of charging the increased depreciation back to the 1979 test year would mean a $9,732 reduction in the water rate base and an $8,540 reduction in the sewer rate base.
RATE OF RETURN
The petitioner and the respondent agree that petitioner's capital structure is composed of forty percent equity and sixty percent debt capital, and that the cost of debt is 9.63 percent, for a weighted cost of 5.78 percent. The petitioner feels that the appropriate return to be placed on equity capital is 19.63 percent, for a weighted cost of 7.89 percent and am overall 13.63 percent return on rate base. The respondent would place the cost rate for equity at 16 percent, for a weighted cost of 6.40 percent and an overall 12.18 percent return on rate base.
The petitioner utilized three methods of calculation to arrive at its proposed rate of return on equity capital, and then averaged the three results. One such method was to create a hypothetical Ba rating and then add a risk factor of 4 percent, resulting in a cost of equity of 20.7 percent. A second method, utilizing a combination of dividend yield on listed water companies and a growth factor, resulted in a cost of equity capital of 18.72 percent. The third approach involved the addition of the 4 percent risk factor of equity over debt to the average yield outstanding for various water companies, resulting in a return of 18.4 percent, [sic] Considering an attrition allowance on equity capital of 1.2 percent, a 14.7 percent overall rate of return would be within the bounds of a reasonable rate of return.
Utilizing a comparable earnings analysis of nonregulated and regulated utilities, including electric, gas and telephone as well as water and sewer utilities, and taking dividend yield rates and adding growth rates, respondent's financial analyst computed the reasonable range of the cost of equity for the Florida water and sewer industry to be between 14.25 and 16.25 percent. With the equity ratio being 40 percent, respondent's witness recommended a 16 percent return on equity, with permission to fluctuate plus or minus one percent.
PUBLIC TESTIMONY
Members of the public who testified at the hearing were concerned with increased charges for water and sewer service since many of them were on fixed and limited incomes. While one witness complained of mosquito larvae in a dish
of water left over a weekend for a dog, other witnesses opined that they had received good service from the petitioner.
CONCLUSIONS OF LAW
The Florida Public Service Commission is empowered to fix and approve rates which are just, reasonable, compensatory and not unjustly discriminatory. Section 367.081, Florida Statutes (1979). In ratemaking [sic] proceedings, the utility bears the burden of establishing entitlement to the requested rate relief by competent, substantial evidence. Rule 25-10.175(1), Florida Administrative Code.
In this proceeding, the petitioner (utility) and the respondent (PSC) stipulated that there were only four issues in dispute between the parties as to the appropriate rate and charges to be implemented by the petitioner. These four issues concern the treatment of:
1.) working capital,
2.) uncollectible revenues,
3.) accumulated depreciation, and
4.) rate of return on equity capital.
The evidence adduced at the hearing was sufficient to illustrate that the monetary advances received by the petitioner from its parent company or subsidiary to support petitioner's operating and/or construction activities are not cost-free. Inasmuch as such advances have, in substance, borne a cost to the petitioner and will bear a cost in the form of interest, they are known and measurable and are not properly included as working capital. The evidence therefore supports the positions of both petitioner and respondent that the proper amount attributable to working capital allowance is $54,699 for the water rate base and $28,179 for the sewer rate base for the test year ending December 31, 1979.
With regard to the issue concerning uncollectible revenues, the undersigned concludes that petitioner has failed to establish by competent, substantial evidence a direct relationship between an increase in rates and an increase in uncollectible accounts. While past consumption of utility services may be fairly representative of future consumption in designing future rates, insufficient evidence was adduced to establish that there is a similar relationship with regard to bad debt expenses. Indeed, the petitioner's own Exhibit 9 is not illustrative of a consistent level of uncollectible accounts as a percentage of total revenue. Petitioner has failed to establish that its test year expense for uncollectible accounts should be increased by the ratio which the new rates will bear to the old rates.
The issue concerning accumulated depreciation is one of timing. The parties are in agreement as to the increase in the rate of depreciation from 2.0 to 2.8 percent. Respondent contends that the increased depreciation rate should be applied to the beginning of the test year. Petitioner contends that to do so would retroactively increase the depreciation at a time when petitioner could not charge rates which include the increased depreciation, and therefore would be confiscatory. Inasmuch as the rates allowing the increased depreciation rate of 2.86 percent will not be collected until 1981, the test year rate base should not be reduced by the increased depreciation rate. The undersigned concludes that the petitioner's position on this issue is fair and reasonable and is in keeping with the prospective nature of rate changes.
The remaining issue is the appropriate return or cost that is to be placed on equity capital. The petitioner, through the testimony of Stanley L. Cohen, presented competent evidence as to three methods of calculation it used, and then took an averaging approach to arrive at a figure of 19.63 percent as a cost of equity. The respondent did not cross-examine petitioner's witness. Instead, the respondent presented the testimony of James Gollahon who used other methods of deriving a cost of equity capital. Insufficient evidence was produced by the respondent to clearly illustrate that the petitioner's calculations or methods of arriving at a reasonable rate of return were erroneous. The undersigned concludes that the petitioner has presented competent, substantial evidence that a return of 19.63 percent on equity capital would be fair. The parties having agreed that the return on debt capital should be 9.63 percent and that the equity/debt ratio is 40 percent/60 percent, the resulting overall rate of return on rate base is 13.63 percent.
RECOMMENDATION
Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the petitioner's application for a rate increase be granted as requested except for adjustments made for uncollectible debts or accounts."
We are in agreement with the hearing Officer's Recommended Order except as to the Conclusion of Law relating to the appropriate return on equity. The Petitioner had presented the testimony of Stanley L. Cohen in support of its case on this issue who used three methods of calculating the cost of equity.
The Commission staff did not cross-examine petitioner's witness, but presented a cost of capital witness of its own as to the fair rate of return on equity for Utilities, Inc. of Florida. The Hearing Officer concluded that in doing so, insufficient evidence was produced to clearly illustrate that the petitioner's calculations or methods of arriving at a reasonable rate of return were erroneous and, therefore, must be accepted without adjustment with a recommended rate of return of 19.63 percent on equity and 13.63 percent overall, using a debt cost of 9.63 percent and an equity/debt ratio of 40 percent/60 percent. We think this conclusion was in error for the reasons stated herein.
Mr. Cohen used three different methods in his calculation of a fair rate of return on equity. In his first method, he hypothesized the cost of Ba rated debt at 16.7 percent and then added a risk premium of 4.0 percent to get a return on equity of 20.4 percent. In his second method, he utilized the dividend yields and growth rates of ten large water and sewer companies which were published in the Public Utilities Fortnightly. Using a simple average of these ten companies he came up with a return of 18.72 percent. In his third method, Mr. Cohen used the average yield of water company bonds plus a 4 percent risk factor for a return of 18.4 percent. As he stated on page 4 of the transcript,
"So what you have is this. You have on the low end of the identifiable range, and it's very difficult to identify yield on nonlisted securities. They are judgment calls. You have a low of 18.4 and a high of 20.7. If you merely did an arithmetic average of those alternative methods, you would come up with 19.27."
We are unable to find in the record a basis for the 19.63 percent return on equity which the Hearing Officer recommended and, therefore, reject it. We also have problems with accepting the return which the Petitioner's Witness Cohen advocated. In making his calculation, Mr. Cohen relied largely on the current high level of interest rates and did not take into consideration the wide fluctuations those rates have been undergoing. If the risk premium approach is used, we think the wide variations in interest rates which have prevailed in the last few years must be considered. Nor do we think it is appropriate to factor in the rate for a Ba bond in making a determination of the equity cost of a regulated utility such as the Petitioner. Ba bonds are considered speculative which we do not equate to the situation before us. Mr. Cohen's calculations using the discounted cash flow was based on the dividend yield of ten water and sewer companies and their simple growth in earnings over five years. In using only the growth in earnings and a simple versus compound growth rate, we think the growth rate is over-estimated. Mr. Cohen's Exhibit No. 8 indicates growth in earnings averaged 2.05 percent for the latest 12 months so we believe that Mr. Cohen's use of an 8.8 percent growth rate overstates what we believe to be the present indications.
Mr. Gollahon, staff witness, made a comparable earnings analysis and market analysis of both utilities and unregulated companies to derive an equity range for small water and sewer companies from 14.25 percent with a 65 percent equity ratio, to 16.25 percent at a 35 percent equity ratio. In making this determination, Mr. Gollahon applied certain techniques to levelize the highs and lows that are expected to occur in the future.
Mr. Gollahon also computed a risk factor using linear and exponential regression calculations to indicate the upward trend in debt costs. The result of his calculations was a 2.65 percent risk premium which would reflect the average risk premium over the next several years. This is in contrast to Mr.
Cohen's calculation wherein he subtracted the embedded cost of debt rather than the current cost of debt from the allowed equity returns to obtain his 4 percent risk premium. Using the risk premium method, he derived a cost of equity of
15.08 percent to 16.25 percent.
In his comparable earnings approach, Mr. Gollahon used two test groups - one group utilized the historical earnings of utilities and the other group included Standard and Poor's 400 Industrials. Using the adjusted returns on the utilities, he came up with a range of 13.19 percent to 15.2 percent. In his comparison with the Standard and Poor's 400 Industrials, he showed that the utilities should earn slightly less than the unregulated over the next two years. This calculated out to a range of 13.5 percent to 15.24 percent.
In consideration of the above, we find that a return of 16 percent on equity is fair and just. When the 40 percent/60 percent equity/debt ratio and
9.63 percent embedded debt cost is used, the following capital structure and weighted cost of capital results:
PROPORTION COST RATE WEIGHTED COST
Common Stock Equity 40 percent 16.0 percent 6.40 percent
Long Term Debt 60 19.63 5.78
12.18 percent
We would also permit the return on equity to fluctuate plus or minus one percentage point. This would give an overall cost of capital of 11.78 percent to 12.58 percent.
RATE BASE
We have calculated the following rate bases to be used in this docket based on the Recommended Order and the Agreement of the parties.
Water Rate Base Utilities, Inc. of Florida
Test Year Ended 12-31-79
Utility Adjusted Rate Base Per Exhibit $652,507 Commission Adjustments (see Attachment "A")
Utility Plant in Service $(66,987) Accumulated Depreciation (28,544)
C.I.A.C. (net of amortization) 39,852 Income Tax Lag
for test year (1,184) for increased revenues (5,981)
Total Adjustments (62,844) Commission Adjusted Rate Base (pro forma) $589,663
Sewer Rate Base Utilities, Inc. of Florida
Test Year Ended 12-31-79
Utility Adjusted Rate Base Per Exhibit $401,243 Commission Adjustments (see Attachment "A")
Utility Plant in Service $ 40,612 Accumulated Depreciation (41,640)
C.I.A.C. (net of amortization) 32,202 Income Tax Lag
for test year (2,247) for increased revenues (2,748)
Total Adjustments 26,179 Commission Adjusted Rate Base (pro forma) $427,422
NET OPERATING INCOME
We have made the following calculation of the net operating income for the test year ended December 31, 1979. (See attached statements "B" for explanation).
Utilities, Inc. of Florida
N.O.I. - Water
Utility Adjusted Revenue for Test Year $367,327
Commission Adjustments (102,018) Commission Adjusted Revenue for Test Year $265,309 Operating Expenses
Company Adjusted per exhibit $299,821 Commission Adjustments (53,359)
$246,462
Commission Adjusted N.O.I. for Test Year $18,847
Utilities, Inc. of Florida
N.O.I. - Sewer
Utility Adjusted Revenue for Test Year $206,365
Commission Adjustments (41,385) Commission Adjusted Revenue for Test Year $165,480 Operating Expenses
Company Adjusted per exhibit $164,602 Commission Adjustments (23,527)
$141,075
Commission Adjusted N.O.I. for Test Year $24,405
REVENUE REQUIREMENT
We have previously determined that Utilities, Inc. of Florida should be authorized a rate of return of 12.18 percent and with a pro forma rate base of
$589,663 for its water division it would have a net operating income requirement of $71,821, which together with a provision for income taxes and other expenses would generate a total revenue requirement of $350,316.
In the sewer division, we are authorizing the requested increase with a total revenue requirement of $206,865 since it would not exceed the 12.18 percent return on a sewer rate base of $427,422.
TARIFF REVISIONS
In order to implement the authorized increases, the Utility shall amend its tariffs to show the following charges:
Bi-Monthly Water Rates
Residential Service
Meter Size Base Facility Charge 5/8" x 3/4" $ 6.70
1" 16.75
Gallonage Charge - $1.02 per 1,000 gallons General Service
Meter Size Base Facility Charge
1" | $ 16.75 |
1 1/2" | 33.50 |
2" | 53.60 |
3" | 107.20 |
Gallonage Charge - $1.02 per 1,000 gallons Bi-Monthly Sewer Rates
Residential Service
Base Facility Charge
Flat Rate $ 10.48
Gallonage Charge - $1.41 per 1,000 up to 20,000 General Service
Meter Size Base Facility Charge
1 1/2" $ 52.40
2" 83.84
3" 167.68
Gallonage Charge - $1.41 per 1,000 Plant Capacity Charges
Water - per ERC | $200 |
Sewer - Cost per equivalent residential connection | $570 |
Meter Installation | Fee |
3/4" or 5/8" meter | $150 |
1" meter | $250 |
1 1/2" meter | $450 |
2" meter | $650 |
Over 2" meter | Price to be determined. |
We find that these rates and charges are just and reasonable and should be authorized with the condition that the maximum number of equivalent residential connections be limited to 3,230 for water and 1,257 for sewer.
Refund Provisions
The utility placed the water and sewer rates proposed in its application into effect pursuant to the provisions of Section 367.081(5), Florida Statutes. The proposed rates became effective February 9, 1981. On April 20, 1981, the Commission approved the acceptance of the corporate undertaking filed by Utilities, Inc. in lieu of a bond. Since this order approves a water revenue requirement which is less than the company placed into effect, a refund is necessary.
The refund will affect all customers who received bills for meter readings made at any time between February 9, 1981 and the date the new rates become effective. As to customers who have left the system owing money, the refund shall be applied to the unpaid balance and any remainder shall be refunded to the customer. Refunds should include interest on all refundable monies,
calculated with the use of the average commercial paper rate for the period in question which we calculate to be 15.625 percent.
In determining the excess billing, we require the companies to recalculate all customers' bills using both the rate schedules which were placed into effect pursuant to the file and suspend provision and the rate schedules designed to generate gross annual water revenues of $350,316.
The difference calculated will constitute the refund to the customer and will be reflected as a credit on each existing customer's bill. For customers who have left the system and are entitled to a refund, the company shall mail a refund check to the last mailing address on record. A special checking account should be used for the express purpose of issuing refund checks. In the event checks are returned because of no forwarding address, the refund will revert back to the special checking account.
The refund procedures should commence no later than 30 days from the date of the order. We view a 60 day time period as a reasonable time in which to complete the refund process. At the conclusion of the process, the company shall promptly submit the following information to the Commission: (1) Number of existing accounts which received a credit; (2) Number of off-line accounts receiving a check; (3) The amount of money refunded; (4) The number of accounts which did not receive a refund due to uncollectible accounts; and, (5) The dollar amount of the refund monies for which a refund had not been effected for whatever reason.
FINDINGS AND CONCLUSIONS
In consideration of the above and the entire record, we make the following findings of fact and conclusions of law:
Utilities, Inc. of Florida is a public utility subject to the jurisdiction of this Commission.
The value of the Utility's rate base devoted to public service on which it is entitled to earn a fair return is $589,663 for its water division and
$427,422 for its sewer division.
The Company's adjusted net operating income for the test year was
$18,847 and $24,405 for its water and sewer divisions, respectively.
A range of 15 percent to 17 percent constitutes a fair and reasonable return on equity for Utilities, Inc. of Florida with rates to be set at the mid- point of 16 percent which gives an overall rate of return of 12.18 percent.
The rates collected on an interim basis pursuant to Order Nos. 9446 and 9559 were lawful, just and reasonable and the revenues received thereunder should be retained by the Company.
That the revised rates, as authorized herein constitute just, reasonable compensatory and not unfairly discriminatory rates within the meaning of Chapter 367, Florida Statutes.
The use of a base facility charge rate structure eliminates discrimination against seasonal customers and encourages conservation and is appropriate for use in this docket.
NOW, THEREFORE, IN CONSIDERATION THEREOF, it is
ORDERED by the Florida Public Service Commission that each and every finding of fact and conclusion of law as expressed herein is approved. It is further
ORDERED that Utilities, Inc. of Florida is hereby authorized to file rate schedules consistent herewith designed to generate gross annual revenues of
$350,316 for the water system and $206,865 for the sewer system, which represent increases over the test year revenues of $85,007 and $41,335, respectively. It is further
ORDERED that Utilities, Inc. of Florida will make refunds to its water customers consistent with the discussion in the body of this order. It is further
ORDERED that the rates approved as a result of this Order shall be effective for consumption after the date of this order, but no bills will be rendered thereunder until after the filing and approval of revised tariff pages appropriate with this Order. It is further
ORDERED that the Company include in each bill during the first billing cycle during which this increase is effective a bill stuffer explaining the nature of the increase, average level of increase, a summary of the tariff changes, and the reasons therefor. Said bill stuffer shall be submitted to the Commission's Water and Sewer Department for approval prior to implementation.
By Order of the Florida Public Service Commission this 9th day of June , 1981.
(SEAL) HDB
Steve Tribble COMMISSION CLERK
| Issue Date | Proceedings |
|---|---|
| Jun. 11, 1981 | Final Order filed. |
| Mar. 05, 1981 | Recommended Order sent out. CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Jun. 09, 1981 | Agency Final Order | |
| Mar. 05, 1981 | Recommended Order | Petitioner should be granted rate increase with exception of uncollectible bills. |
SEMINOLE UTILITY COMPANY vs. PUBLIC SERVICE COMMISSION, 80-001893 (1980)
OLD BRIDGE UTILITIES, INC. vs. PUBLIC SERVICE COMMISSION, 80-001893 (1980)
BUCCANEER SERVICE COMPANY vs. PUBLIC SERVICE COMMISSION, 80-001893 (1980)
FERNCREST UTILITIES, INC. vs. PUBLIC SERVICE COMMISSION, 80-001893 (1980)
SUGAR MILL UTILITY COMPANY vs. PUBLIC SERVICE COMMISSION, 80-001893 (1980)
