vs. ) DOAH CASE NO.: 80-2032
Respondent. )
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, R. L. Caleen, Jr., held a public hearing in this cause on February 15, 1981, in New Port Richey, Florida.
For Petitioner: B. Kenneth Gatlin, Esquire
Whether, and to what extent, Magnolia Valley Services, Inc., should be allowed to increase its water and sewer service rates.
Petitioner, Magnolia Valley Services, ("APPLICANT"), is a utility seeking authority to increase the water and sewer rates it charges its customers in Pasco County, Florida.
On October 29, 1980, the Respondent, Florida Public Service Commission ("COMMISSION"), forwarded this case to the Division of Administrative Hearings for the conducting of a Section 120.57 hearing. Pursuant to the parties' request, final hearing was subsequently set for February 18, 1981.
By agreement of the parties, only three factual issues remained for consideration at hearing: (1) the proper depreciation rate, (2) whether an attrition allowance should be allowed, and (3) whether a proposed $600 test period sewer operating charge was adequately documented.
At hearing, the APPLICANT called Jerry O. Gregg as its sole witness, and offered Petitioner's Exhibit 1/ Nos. 1 through 4 into evidence. The COMMISSION called as its witnesses Joseph Heiker, Orville Walker, and George
Magente, and offered Respondent's Exhibit 1/ Nos. 1 through 3 into evidence. Harold Pepper testified as an interested customer.
The parties requested and were granted an opportunity to submit proposed findings of fact within ten days from the filing of the transcript of hearing. The transcript was filed on February 25, 1981.
I.
By application filed on August 14, 1980, APPLICANT sought authority to increase its water and sewer rates, on an interim and permanent basis, in amounts sufficient to produce $60,847 in annual gross water revenues, and
$100,768 in sewer revenues. By Order No. 9571 dated September 30, 1980, the COMMISSION authorized an interim sewer revenue increase, under bond, of $8,205, and denied an interim increase in water revenues. The COMMISSION has approved APPLICANT's use of a test year ending December 31, 1979. At hearing, the APPLICANT amended its application by reducing its requested water revenues to
$50,287, and increasing requested sewer revenues to $101,522. (Testimony of Gregg, Prehearing Statement; P-4.)
II.
Depreciation Rate
Depreciation is a method of allocating the cost of fixed assets to their estimated useful life. As an above-the-line operating expense, it affects a utility's net operating income; by its impact on accumulated depreciation of plant-in-service and accumulated amortization of contributions-in-aid-of- construction, it also effects calculation of rate base. (Testimony of Walker, Gregg; P-3, R-1.)
The COMMISSION has promulgated no rules as guidelines which establish generally, or in particular, the useful life of utility assets or the method by which their depreciation should be calculated. In practice, however, it has allowed utilities to apply a straight-line 2.5 percent depreciation rate and a 40-year useful life to all depreciable assets. Any deviation from this 2.5 percent across-the-board rate must be justified by the utility. (Testimony of Heiker.)
Here, the APPLICANT proposes depreciation rates which vary according to the estimated useful life of the plant or equipment involved. In contends that its shorter estimates of useful life of specific assets reflect reality and actual experience more accurately than an across-the-board 40-year life standard. For example, rate meters are routinely replaced on a 20-year basis and lack of reserve capacity and changing voltages have substantially reduced the expected life of electrical motors and equipment. The APPLICANT's estimates of useful life were established by the opinion of a utility consultant and engineer whose qualifications went unchallenged by the COMMISSION; no competent evidence was offered to discredit or rebut his conclusions. The COMMISSION's engineer candidly admitted that depreciation "is really a nebulous thing," (Tr.
64) and declined to assert that the APPLICANT's depreciation schedules were erroneous. (Tr. 69.) The COMMISSION disputed the APPLICANT's depreciation
schedules by referring to an unpublished 1973 staff memorandum retained at the agency's offices and not produced at hearing. That memorandum purportedly adopted 1973 depreciation rates developed by the American Water Works Association. Upon motion of APPLICANT, testimony concerning the contents of that memorandum was subsequently stricken. The COMMISSION engineer also testified that he was unfamiliar, even generally, with how the American Water Works Association's depreciation rates were derived. In light of the quality of the evidence presented of record, the APPLICANT's depreciation rates (including estimated useful life) are accepted as persuasive. (Testimony of Heiker, Gregg; P-1, P-3.)
III.
Attrition Allowance
The APPLICANT seeks to include in operating expenses an attrition allowance of $1,992 for water and $8,161 for sewer operations based on alleged attrition it experienced between 1975 and 1979. It defines attrition as increased annual expenses which cannot be recovered at the time they are incurred. The COMMISSION opposes the requested attrition allowance on the grounds that: (1) the attrition study performed by the APPLICANT is unreliable, and (2) that the recent enactment of Section 367.081(4), Florida Statutes (Supp. 1980), which allows the passing through of certain increased expenses to customers, eliminates the need for a special attrition allowance. (Testimony of Gregg, Walker; P-2.)
The COMMISSION's position is well taken. First, a major portion of the cost increases experienced by the APPLICANT in the past will be able to be passed through to its customers pursuant to Section 367.081, Florida Statutes (Supp. 1980). 2/ Those costs include increased power costs and ad valorem taxes. The APPLICANT responds that Section 367.081(4), supra, will not enable it to fully recover increasing expenses when they occur because rates may be adjusted, based on increased operating costs, not more than twice a year. Section 367.081(4)(e), supra. However, this new law should be implemented before it is pronounced inadequate to fulfill its purpose. Experience may show that major costs increase sporadically, or at predictable cycles, which facilitate carefully timed rate increases under Section 367.081(4), and that two such increases a year may prove fully adequate. (Testimony of Gregg, Walker; P- 2, R-1.)
Secondly, the attrition study (P-2) submitted by the APPLICANT does not reasonably justify, or provide a reliable basis for projecting an attrition rate into the future. The 1975-1979 historical cost increases have not occurred at a constant rate. The 1979 increase in water operation costs was less than one- half of the average increase experienced between 1975 and 1979; in sewer operations, the 1979 cost increases were less than one-third of the four-year average. Moreover, a major factor in increased sewer costs was the 1978 conversion to a spray irrigation, total retention, sewage treatment system. Since this system meets the 1983 federal Clean Water Act standard of no- discharge, it is unlikely that increased operational costs relating to treatment changes will continue to occur. In short, the 1975-1979 historical cost increases of APPLICANT have been sporadic and do not support an assumption that they will continue to occur at the same rate. To include an attrition allowance based on such an assumption would be unwarranted. (Testimony of Gregg, Walker; P-2, R-1.)
IV.
Allowance of an Undocumented Operating Charge
The APPLICANT proposed a $600 sewer expense item which was opposed by the COMMISSION because of lack of documentation. In response, the APPLICANT submitted--immediately prior to hearing--a cancelled check in the amount of
$1,000. The discrepancy between the two amounts remains unexplained. Such action falls short of providing adequate documentation, and the proposed $600 sewer expense item must therefore be rejected. See, 25-10.77, FAC.
V.
Elements of Ratemaking and Applicant's Gross Revenue Requirements
The parties agree: (1) that 14.5 percent is a fair and reasonable rate of return on rate base and reflects the actual cost of capital to APPLICANT; that the new rates should be designed in accordance with the base facility design concept, and that the quality of APPLICANT's water and sewer service is satisfactory. The remaining elements of ratemaking--rate base and net operating income--are not in dispute, and are depicted below: 3/
RATE BASE
Test | Year | Ended 12/31/79
Water |
Sewer |
Plant in Service
Accumulated |
| $269,887 | $511,200 |
Depreciation $(37,384) 4/ $(54,685)
Net Plant $232,503 $456,515 Contributions in Aid
of Construction (179,251) (360,055)
Accumulated Amortization 22,421
Net Contributions in Aid of | 4/ | 41,231 | 4/ |
Construction (156,830) |
| (318,824) |
|
Working Capital 3,515 |
| 7,082 |
|
TOTAL $ 79,188 |
| $144,773 |
|
OPERATING STATEMENT
Test Year Ended 12/31/79
Water Sewer
Operating Revenues $53,300 $72,608 Operating Expenses:
Operations | 25,552 |
| 45,353 |
|
Depreciation | 3,848 | 5/ | 4,876 | 5/ |
Maintenance | 2,572 | 6/ | 11,306 | 6/ |
Amortization |
|
| 1,439 |
|
Taxes Other Than Income |
4,654 |
7/ |
8,338 |
7/ |
TOTAL Operating Expenses $36,626 $71,312 Net Operating Income$16,674 $ 1,296
By applying a 14.5 percent rate of return against a rate base Of
$79,188 for water and $144,773 for sewer, it is concluded that the APPLICANT should be allowed an opportunity to earn a return, or net operating income of
$11,482 for water and $20,992 for sewer. Annual gross revenues of $48,108 (water) and $92,304 (sewer) are required to produce such a return--resulting in a net annual reduction of water revenues of $5,192 and a net increase of $19,696 in sewer revenues.
VI.
Interruption of Service Treatment Without Advance Notice
Although the overall quality of its service has been adequate, infra, the APPLICANT has unnecessarily inconvenienced customers by interrupting water service without advance notice. These interruptions were planned in advance and not made on an emergency basis. The APPLICANT failed to adequately explain or excuse its failure to give timely notice. (Testimony of Pepper.)
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 120.57(1), Fla. Stat. (1979).
Section 367.081(2), Florida Statutes (Supp. 1980), empowers the COMMISSION to establish water and sewer rates which are "just, reasonable, compensatory, and not unfairly discriminatory." Id. In exercising such power, the COMMISSION must consider all the standards applicable to ratemaking prescribed by the Legislature. Utilities Operating Co., Inc. v. King, 143 So.2d 854 (Fla. 1962). Those standards include:
". . .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." 367.081(2), supra.
During the course of this proceeding, the parties, by stipulation, disposed of most of the issues relating to these ratemaking standards. The only remaining
disputed issues of material fact involved the APPLICANT's requested attrition allowance, depreciation rate, and one undocumented operating expense: these are the issues which must be determined based on the evidence presented at hearing.
At hearing, upon objection, the COMMISSION's testimony concerning the contents of a 1973 staff member's memorandum was stricken. That ruling warrants further comment.
The issue to which this testimony was directed--the useful life of certain utility equipment and the rate at which it should be depreciated--was one susceptible of determination by conventional proof. Although the issue may require presentation of expert engineering testimony, its resolution involves adjudicative facts, not legislative facts which involve law and policy and which sometimes elude conventional methods of proof. See, e.g., Bowling v. Department of Insurance, So.2d (Fla. 1st DCA, Case No. PP-379, 1981).
When a utility chooses to seek varied depreciation rates--rather than an across-the-board rate of 2.5 percent--the COMMISSION's apparent policy springs from a 1973 staff memorandum on the subject. That memorandum purportedly concluded that certain specific depreciation schedules developed by the American Water Works association should be utilized. Until and unless it adopts this apparent depreciation policy by rule, the COMMISSION:
". . .may be required. . .to defend its policy in a Section 120.57 proceeding where. . .[it] will be required to present evidence and argument and to 'expose and elucidate its reasons for discretionary action.'"
State Department of Administration v. Harvey, 356 So.2d 323, 326 (Fla. 1977).
Thus, the COMMISSION's views on the applicable depreciation rates are "in need of testing by cross-examination, countervailing testimony or documentary proof, or in other ways appropriate to the form of the evidence." See, e.g., Anheuser-Busch, Inc. v. Department of Business Regulation, So.2d (Fla. 1st DCA, Case No. 55-38, 1981). Its views require evidentiary support in the record. See, Florida Cities Water Company v. Public Service Commission, 384 So.2d 1280 (Fla. 1980). In entering its final order, it "cannot act solely on.
. .[its] own information," Manatee City v. Florida Public Employee Relations,
387 So.2d 446, 449 (Fla. 1st DCA 1980); nor can its own opinion as to proper depreciation rates circumvent the need to present competent evidence on the issue at hearing. See, Metropolitan Dade County Water and Sewer Board v. Community Utilities Corporation, 200 So.2d 831, 833 (Fla. 3rd DCA 1967).
The COMMISSION testimony at hearing--which, on objection was stricken-
-was incompetent evidence: it consisted of hearsay offered not to supplement or explain other evidence but solely to support a finding of fact. 120.58(1), Fla. Stat. (1979). The stricken testimony related on out-of-court written statement made by a COMMISSION employee who did not testify at hearing, which statement was offered to prove the truth of its contents. See, 90.801, Fla. Stat. (1979).
The main substantive objection to the introduction of hearsay is that it deprives the adverse party of the right to cross-examine 8/ the declarant. See, McCormick, Evidence, 245 (2nd ed. 1972). Its shortcomings were described by Chancellor Kent in 1812:
"Hearsay testimony is from the very nature of it attended with. . .doubts and difficulties and it cannot clear them up. A person who relates a hearsay statement is not obliged to enter into any particulars, to answer any questions, to solve any difficulties, to reconcile any contradictions, to remove any ambiguities; he entrenches himself in the simple assertion that he was told so, and leaves the burden entirely on his dead or absent author." Id. at 583.
Such shortcomings were evident in the stricken testimony. The COMMISSION engineer thought depreciation a "nebulous thing", and offered no opinion of his own. He opposed the APPLICANT's suggested depreciation rates solely on the ground that they conflicted with assertions of an absent author. The engineer was unfamiliar with the depreciation rates adopted in 1973 by the absent COMMISSION employee. He could not explain or justify them; neither could he answer questions concerning them. He effectively entrenched himself in an absent author's assertion that one depreciation schedule, ostensively used by an industry association in 1973, was technically accurate, reliable, and proper for use in utility ratemaking. Such evidence falls short of the quality of evidence required in Section 120.57(1) proceedings and must be excluded. 120.57(1)(b)4., 120.58(1), Fla. Stat. (1979).
The APPLICANT has established that it is entitled to an opportunity to earn: (1) annual gross revenues of $48,108 from its water operations, resulting in a reduction of annual gross revenues of $5,192 from the test year, and (2) annual gross revenues of $92,304 from its sewer operations, resulting in annual gross revenues of $19,696 above the test year.
It has been further established that tariff rates, designed in accordance with the base facility charge concept and filed to produce the above revenues, are just, reasonable, compensatory, and not unfairly discriminatory within the meaning of Section 367.081(2), Florida Statutes (Supp. 1980).
By failing to give notice to customers prior to interruption of water service for construction purposes, the APPLICANT violated Section 25-10.56(2), Florida Administrative Code.
The parties 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.
Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED:
That Magnolia Valley Services, Inc., be authorized to file new rates structured on the base facility charge concept and designed to generate gross annual revenues of $48,108 for water operations and $92,304 for sewer operations, based on the average number of customers served during the test year. It is further RECOMMENDED that the utility be directed to strictly comply in the future with Section 25-10.56, Florida Administrative Code, by giving advance notice of service interruptions which are not emergency in nature.
DONE AND ORDERED this 1st day of April, 1981, in Tallahassee, Florida.
R. L. CALEEN, JR. Hearing Officer
Filed with the Clerk of the Division of Administrative Hearings this 1st day of April, 1981.
2/ The COMMISSION's adoption of implementing rules is imminent.
3/ Of course, the parties dispute these elements to the extent they are affected by the issues here in dispute: depreciation rate, attrition allowance, and a $600 operating expense item.
4/ Reflects APPLICANT's proposed depreciation rates. See, Section II, infra, (P-1, pp. 18-22).
5/ Reflects APPLICANT's proposed depreciation rates, infra.
6/ Omits requested attrition allowance. Sewer maintenance figure omits $600 undocumented expense, infra.
7/ If these tax figures are affected by the adoption of the APPLICANT's proposed depreciation rates, infra, Section II, they should be recalculated, and the resulting totals modified, accordingly.
8/ A right guaranteed parties in Section 120.57(1) proceedings. 120.57(1)(b)4., Fla. Stat. (1979).
B. Kenneth Gatlin, Esquire Post Office Box 669 Tallahassee, Florida 32302
