vs. ) CASE NO. 80-2192
) PSC Docket No. 800367-WS
Intervenor. )
Pursuant to notice, administrative hearings were held before Diane D. Tremor, Hearing Officer with the Division of Administrative Bearings, in Palm Bay, Florida on February 12, June 11, and August 24-28, 1981. The broad issue for determination at the hearings was whether the rates proposed in the petitioner's application for increased rates and charges for water and sewer service to customers in its Port Malabar Division are just, reasonable, compensatory and not unfairly discriminatory.
For Petitioner: Richard D. Melson and
Gary P. Sams
and Nancy H. Roen
General Development Utilities, Inc. 1111 South Bayshore Drive
For Respondent: Gregory J. Krasovsky
Stephen C. Burgess and Suzanne S. Brownless Room 4, Holland Building
On July 2, 1980, petitioner General Development Utilities, Inc. (GDU) filed an application with the Florida Public Service Commission (PSC) for an increase in its water and sewer rates for the service it provides at its Port Malabar Division in Brevard County, Florida. Interim rate increases were authorized by PSC Order No. 9509 issued on August 28, 1980.
On January 30, 1981, the petitioner and the respondent PSC submitted a prehearing stipulation which narrowed the issues in dispute to two: the general inflation adjustment and depreciation expenses. A final hearing on those issues was scheduled for February 12 and 13, 1981. On the first day of the hearing, the Office of Public Counsel (OPC) intervened in this cause. After lengthy discussion and after the taking of customer testimony, the parties agreed to dissolve the former prehearing stipulation, continue the hearing and reframe the issues in light of the intervention of the Office of Public Counsel. A second hearing was held on June 11, 1981, for the limited purpose of taking additional customer testimony. Thirteen customers testified at the hearing held on June 11 and those portions of the transcript containing the testimony of eleven customers who testified at the February 12th hearing were incorporated into the record.
The final prehearing stipulation filed by all parties identified twelve issues to be tried at the final hearing. These issues concern the quality of service, the portions of petitioner's water and sewer facilities which are used and useful, water losses, construction work in progress (CWIP) accumulated depreciation on contributions-in-aid-of-construction (CIAC), working capital, federal income taxes, depreciation rate, inflation adjustment, the Highland Shores/Knecht Road adjustment, cost of capital and rate case expenses.
At the hearings held on August 24-28, 1981, petitioner presented the testimony of seven witnesses and petitioner's Exhibits 1-18 were received into evidence. Those testifying on petitioner's behalf were Curtis Morris, petitioner's division manager for utility operation; Charles E. Fancher, Jr., petitioner's director of finance; Harold E. Schmidt, a senior vice president of General Development Corporation and a former president of petitioner; John F. Guastella, who was accepted as an expert witness in the area of engineering with specialization in water and sewer utilities and rate, rate design and ratemaking principles for public utilities; Barry K. Asmus, who was accepted as an expert witness in the area of accounting with specialization in the field of water and sewer utilities; Stanley Cohen, who was accepted as an expert witness in accounting with specialization in public utilities and financial analysis of public utilities; and Gerald P. Mozian, petitioner's executive vice president.
The respondent PSC presented the testimony of William A. Becker, who was accepted as an expert witness in the field of engineering with specialization in water and sewer utilities; William Lowe, accepted as an expert in accounting for water and sewer regulated industries; and Joyce Fabelo, accepted as an expert in rates and rate design for water and sewer regulated utilities. Respondent's Exhibits 1-5 were received into evidence.
The Office of Public Counsel presented the testimony of David Parcell, accepted as an expert witness in the area of the cost of capital in the public utility realm; Hugh Larkin, Jr., accepted as an expert witness in accounting matters as they apply to public utilities; and Donald Hale, accepted as an expert witness in public utility accounting as it relates to certain specified
issues. Exhibits 1, and 4-11 were received into evidence on behalf of the OPC. Also received into evidence were Hearing Officer's Exhibits 1-5.
Subsequent to the hearing, each of the parties filed proposed findings of fact, proposed conclusions of law and proposed recommended orders on October 23, 1981, with corrections filed on October 28 and November 4, 1981. To the extent that the parties' proposed findings of fact are not included in this Recommended Order, they are rejected as being either not supported by competent, substantial evidence adduced at the hearing, immaterial or irrelevant to the issues in dispute, or as constituting conclusions of law as opposed to findings of fact.
The parties' proposed conclusions of law have been carefully considered by the undersigned.
Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found:
Petitioner GDU is a wholly-owned subsidiary of General Development Corporation and has eight operating divisions. At the end of the 1979 test year, the petitioner's Port Malabar Division had 3,899 water connections and 3,760 sewer connections. At the end of July, 1981, the system was serving 4,852 water customers and 4,332 sewer customers.
During the test year, petitioner's Port Malabar water system consisted of 16 shallow wells, 47 miles of distribution and transmission lines, and a three million gallon per day lime softening treatment plant with two storage facilities. The sewer system consisted of 17 lift stations, about 44 miles of collection and force mains and a treatment plant-rated at two million gallons per day. During the test year, 28 employees were assigned to the water and sewer operations. At the time of the August hearing, petitioner had 34 employees.
Quality of Service
The water and sewer service customers of petitioner who testified at the hearing were primarily concerned about the magnitude of the proposed rate increase and its impact upon persons with fixed incomes. Many customers testified that they were satisfied with the water and sewer service provided to them. The few complaints voiced about service included odor from a new lift station, the high mineral content of the water, water lost during construction projects, interruptions in service without notice, and, on occasion, dirty water.
Petitioner maintains a customer service and local billing office in the Port Malabar area. It is the customary practice of petitioner to give its customers advance notice of any interruption in service. Water utilized for construction purposes is metered and billed to the individual contractors. The odor problem from the recently installed lift station has been resolved. Petitioner has an ongoing program for monitoring water quality and compliance with state and federal water quality standards. All drinking water requirements and standards for sewage treatment plant effluent have been complied with by petitioner. Petitioner presently has 3 sewage treatment plant operators and is attempting to secure one more operator to meet the Department of Environmental Regulation's requirement of four.
Used and Useful
The term "used and useful" is a ratemaking term to establish that portion of investment upon which a utility is entitled to earn a return. Facilities which are used and useful are those used to serve present customers, with a reasonable reserve added for future customers. A knowledge of engineering principles is necessary to perform a used and useful analysis.
The used and useful analysis performed by petitioner resulted in a determination that the water treatment plant is 100 percent used and useful. The methodology utilized was to take the maximum day's water production during the test year and add an allowance for 18 months' growth based on an average of the prior three years growth rates. The actual growth rate of 953 water customers between the end of the test year and July, 1981, a 24.4 percent increase, closely matched the increase used in petitioner's calculations. The eighteen month period is representative of the period of time required for a utility to design, receive approval, complete construction and place the facility in usage. The utility's methodology made no allowance for fire demand and thus the results are conservative. Using a similar methodology, the PSC
engineering expert also found the water plant to be 100 percent used and useful.
The Office of Public Counsel's accounting expert determined that the petitioner's water plant was only 81 percent used and useful. His methodology utilized a peak day flow different than that utilized by petitioner for the reasons that he felt it was more representative of actual customer demand and did not reflect excess water loss. This witness also felt that the use of the marginal reserve or growth factor resulted in the inclusion of plant associated with future customers and allowed the utility to over-recover its depreciation expenses.
Petitioner's used and useful analysis of water distribution mains resulted in the determination that $162,501 should be deemed held for future use and therefore excluded from rate base. For purposes of this calculation, petitioner utilized as-built plans and excluded those mains in sparsely settled areas unless they fronted on an occupied lot or on a fire hydrant located within
500 feet of an occupied lot. The PSC expert witness determined that the water distribution system was 100 percent used and useful.
The OPC's witness determined that the used and useful portion of the water distribution system was 80.96 percent. His analysis was apparently based on the actual billings during the test year as compared to the total potential connections.
By averaging the average daily flow and the average maximum flow days, and then adding an eighteen month allowance for future growth, the petitioner determined that the sewage treatment plant was 60.5 percent used and useful. Maximum flow days are more significant than average days from an engineering design perspective, and thus petitioner's calculations are quite conservative. The PSC witness determined that the sewage treatment plant was 100 percent used and useful.
Based upon average daily flow and making no allowance for growth, the OPC's witness determined that the sewer plant was only 40 percent used and useful. His rationale for using the average daily flow was not adequately explained.
Comparing the actual connections plus an eighteen month allowance for growth to potential connections, petitioner determined that the sewage collection and distribution mains are 100 percent used and useful. The PSC witness agreed. The witness for the OPC calculated the sewage collection line system as being only 73.4 percent used and useful, apparently giving no weight to a growth allowance.
Water Loss
Petitioner calculates its unaccounted for water loss at 9 percent, though a little over 1 percent is due to meter slippage because of mechanical design. Petitioner's meters are read on a monthly basis and are calibrated by a private firm once a year for the water meters and twice a year for the sewer meters. A range for water loss between 10 percent and 15 percent is considered reasonable in the industry.
Pointing to the facts that many Florida water utilities have water losses at 5 percent or lower and that petitioner's own water losses were less in 1980, the OPC witness felt that the unaccounted for water should be calculated at a 5 percent rate.
Construction Work in Progress
A portion of the assets carried on the petitioner's books as construction work in progress (CWIP) were actually completed, paid for, in service and generating revenues during the test year. These assets--$246,9l6 of water mains and $1,053,476 of sewer mains--were reflected as CWIP because the bookkeeping process of classifying them to the proper plant accounts had not been completed. The assets were subjected to the petitioner's used and useful analysis, and they should be reclassified as utility plant in service.
A utility is entitled to recover the cost of carrying its construction program. The two alternative methods of recovery are to allow the average balance of CWIP to be included in rate base or to allow the interest or other return on the construction balances to be capitalized as part of the cost of the asset and amortized over its useful life. This latter method is referred to as allowance for funds used during construction (AFUDC).
If AFUDC is not added to the rate base and if the amount of construction is reasonable based upon engineering standards, CWIP should be includable in rate base. Over the long run, this method is less costly to customers than charging AFUDC. Petitioner did not charge AFUDC on the assets claimed as CWIP and the amounts claimed were less than in previous years and met the standard of reasonableness.
The witness for the OPC was of the opinion that CWIP should be excluded from rate base because the assets benefited the utility rather than the current customers, and current ratepayers should not be required to finance the utility's investments. He further felt that if these funds were included in rate base, the result would be a mismatch between rate base and the utility's income statement.
Contributions-in-Aid-of-Construction
Petitioner has properly excluded from its rate base those moneys which represent CIAC. However, it has included in rate base accumulated depreciation on CIAC. Petitioner has done this by adding back to rate base that portion of
total accumulated depreciation associated with CIAC after subtracting both total accumulated depreciation and CIAC from plant in service. The PSC method reaches the same result by subtracting from plant in service both total accumulated depreciation and net CIAC (CIAC less accumulated depreciation on CIAC).
If the depreciation expense on contributed property has already been included as an above-the-line expense and re- covered through rates, accumulated depreciation corresponding to such expenses should be removed from rate base. Petitioner has never recovered depreciation on contributed property as an expense for ratemaking purposes.
Working Capital
An allowance for working capital should be included in rate base. Petitioner utilized the formula approach for calculating its working capital needs. This methodology is recognized by PSC rule and is a simplistic, rule-of- thumb approach. It is calculated by taking one-eighth or 12 1/2 percent of the utility's annual operation and maintenance expenses. It does not reflect some items which provide a source of working capital and it does not necessarily measure the actual working capital requirements or investment of any particular company, The result obtained from using the formula approach must be reduced by an amount for federal income tax lag.
The balance sheet approach to determine working capital requirements is generally preferred by the PSC staff and its use is urged by the Office of Public Counsel in this proceeding. This method involves deducting current liabilities from current assets to determine the amount of funds the utility has currently available to meet its working capital needs. The balance sheet approach more accurately addresses the specific working capital variables of the company to which it is applied.
The PSC's accounting witness recommended use of the formula approach in this case because of the absence of a staff audit of the petitioner's balance sheet, In actuality, the difference in terms of dollars between the two approaches, as calculated by the petitioner and the OPC, is an immaterial amount. On cross-examination and rebuttal, the intervenor's calculation of working capital requirements by use of the balance sheet approach was shown to be incorrect and the result obtained was therefore understated.
Federal Income Tax
Petitioner GDU is a wholly-owned subsidiary of General Development Corporation which is a wholly-owned subsidiary of GDV, Inc. GDU files its federal income tax returns as part of the consolidated group which contains no other public utilities. Using this subsidiary approach, each member of the group computes its tax liability as if it were a freestanding company. Petitioner computed its federal income tax liability at the full statutory rate of 46 percent. While the petitioner's actual capital structure is almost 100 percent equity, its tax was computed by recognizing its parent company's capital structure. Petitioner did not contribute any tax losses that could be used by the group on its consolidated return. A certified public accountant with the PSC staff agreed with the petitioner's use of the subsidiary approach and the 46 percent statutory rate for calculation of petitioner's federal income tax expense.
During the 1979 test year, the consolidated group actually paid taxes to the Internal Revenue Service at less than the 46 percent statutory rate.
This was the result of losses at the parent company level. The witness for the OPC was of the opinion that the petitioner's tax expense should be calculated so as to recognize the actual tax expense of the corporation as a whole and that only those taxes which are eventually flowed through to the Internal Revenue Service should be claimed. He would calculate petitioner's effective tax rate by use of a "payout ratio" methodology which involves adjusting the statutory rate by the ratio of taxes actually paid to the IRS to the total taxes paid by all subsidiaries.
Depreciation Rate
On the basis of an estimation of the average service lives for each of its primary plant accounts, petitioner has calculated an overall depreciation rate of 3.43 percent for water assets and 3.11 percent for sewer assets. This component method of depreciation has been used by petitioner for over twenty years. In estimating the service lives of its assets, petitioner relied upon its experience with its own water and sewer assets in Florida and recognized that such assets are affected by Florida's high temperatures and humidity levels and the flat topography. The composite 2.5 percent depreciation rate customarily utilized by the PSC assumes a forty year service life of assets. In actuality, petitioner has retired two of its wells in less than twenty years and most of its meters have been replaced. The service lives used by petitioner are comparable with other depreciation data from the PSC, a National Association of Regulatory Utility Commissioner's (NARUC) survey and a Texas Public Service Commission survey on average service lives. The petitioner's witnesses were of the opinion that the 2.5 percent rate or forty year composite service life is not appropriate because it does not consider the unique physical characteristics of water and sewer systems in Florida.
The OPC urges the application of the 2.5 percent overall depreciation rate on the basis that petitioner did not produce sufficient evidence that a change from Commission policy was necessary.
Inflation Adjustment
Petitioner proposes to adjust certain operating and maintenance expenses upward by 8.3 percent as an allowance for the effect of inflation on those expenses. No adjustment is proposed for those items which were the subject of other adjustments or for those items not expected to increase directly with inflation. The figure of 8.3 percent was derived from a three- year average of percentage increases in the Consumer Price Index (CPI) from 1976 through 1979. The CPI is a "market basket" approach to measuring inflation on the average consumer, and includes such items as foodstuffs and home mortgages. Based upon its 1980 expense figures and discounting increases in expenses attributable to growth in customers, petitioner experienced a 10 percent inflationary increase for water operations and a 9 percent increase for sewer operations for 1980 over 1979. Since at least 1976, petitioner has never earned its authorized rate of return, primarily due to the effects of inflation.
The PSC staff has not audited the petitioner's 1980 expense figures. Such figures have been audited by an outside CPA firm for financial purposes, but not for regulatory purposes. The 10 percent and 9 percent increases in water and in sewer operations measure only increased costs and do not account for increased revenues.
Pursuant to a 1980 amendment to Chapter 367, Florida Statutes, public utilities are now entitled to automatically adjust their major categories of
operating costs incurred during the previous calendar year by applying a price increase or decrease index to those costs. Section 367.081(4)(a), Florida Statutes. The PSC has established an 8.99 percent index for application by utilities in 1981.
Highland Shores/Knecht Road Adjustments
It is anticipated that the City of Palm Bay will purchase petitioner's water distribution system serving one commercial and 54 residential customers in the Highland Shores subdivision and 8 customers on Knecht Road. Petitioner eliminated certain amounts from its revenues, variable expenses and rate base to reflect this transaction, but did not adjust non-variable fixed costs which would not be affected by loss of these customers. Adjustments were made to chemical and electrical expenses and depreciation and property taxes associated with the plant serving those areas. No adjustments were made to payroll or other labor expenses. Petitioner presented evidence that the loss of those customers would not reduce personnel requirements or labor costs.
The witness for the OPC proposed across-the-board adjustments for all operating and maintenance expenses based upon percentages of consumption and usage figures associated with these areas.
Cost of Capital
In actuality, the capital structure of petitioner consists almost entirely of equity invested in the utility by its parent, General Development Corporation. With adjustments for funds not available to petitioner, petitioner used its parent's capital structure in performing its cost of money analysis since the ultimate source of its equity funding consists of a mixture of debt and equity at the parent company level. All parties agreed that the proper capital structure to use in this case is that of petitioner's parent, General Development Corporation.
Employing a discounted cash flow method and a risk premium analysis, petitioner has determined tat its cost of equity capital ranges from 18.06 percent to 22.32 percent, with a midpoint of 20.19 percent. Under the discounted cash flow method, the five year annual growth rates of ten water utilities were averaged and added to the average dividend yield for those utilities, to obtain an 18.06 percent return on equity. Under the risk premium analysis, petitioner analyzed utility debt costs by considering the current costs and yields of bonds, and then added a 4 percent risk premium to reflect the higher yield associated with equity as compared to debt. This analysis resulted in equity ranges between 20.59 percent and 22.32 percent. These figures are comparable to the combination of dividend yield and price appreciation of the Fortune 500 companies.
The OPC witness concluded that a reasonable return on equity for petitioner would be between 14 percent and 14.5 percent. In measuring this cost of equity for petitioner, the comparable earnings method and a discounted cash flow method was employed. The former method involves an observation of the equity returns achieved by companies of comparable risks. Mr. Parcell examined the earnings of unregulated companies and large public utilities. His discounted cash flow method combined dividend yield and growth in retained earnings for nine water companies.
The petitioner presented evidence that its current cost of debt is
15.3 percent instead of the 10.89 percent originally indicated in its application.
Rate Case Expenses
Petitioner originally estimated its rate case expenses at $25,000 based upon the assumption that there were only two issues in dispute between the utility and the PSC staff and that the proceedings could be handled by in-house personnel. Following the intervention of the Office of Public Counsel, the corresponding increase in the number of issues to be litigaged and the six additional days of actual hearing, petitioner is claiming that rate case expenses are $105,787. This figure is based upon the hourly rates of various professionals and the actual expenses incurred for the hearings. Petitioner expects the rates which will result from these proceedings to be in effect for no more than two years. This is consistent with petitioner's past history. Petitioner therefore seeks to amortize its rate case expenses over a two-year period and to divide them equally between the water and sewer operations.
The OPC presented testimony expressing the opinion that the expenses claimed by petitioner in this proceeding were unreasonable and entirely out of line. It was pointed out that the expenses requested amount to about 20 percent of the total proposed revenue increase. It is contended that the hourly rates charged by petitioner's witnesses are excessive and that it was unreasonable to engage more than one witness per issue in a case of this magnitude. The hourly rates charged by the OPC's witnesses were set pursuant to an annual contract between those witnesses and the Office of Public Counsel. The OPC also believes that rate case expenses should be amortized over a three to five year period to properly take into account the newly enacted automatic pass-through provisions of Chapter 367, Florida Statutes, which should increase the time between rate cases. One witness testifying for the OPC did not feel that rate case expenses should be recovered at all through rates.
The PSC staff witness did not feel that the rate case expenses claimed by petitioner were excessive when compared with other utilities of similar size.
CONCLUSIONS OF LAW
The Florida Public Service Commission is empowered to fix and approve rates which are just, reasonable, compensatory, and not unfairly discriminatory. Section 367.081, Florida Statutes, (1980). In rate making 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 parties stipulated that there were twelve issues in dispute as to the appropriate rate and charges to be implemented by the petitioner. These twelve issues concern the following:
Quality of service.
Used and useful property.
Water loss.
Construction work in progress.
Accumulated depreciation on contributions- in-aid-of-construction.
Working capital.
Federal income taxes.
Depreciation rate.
Inflation adjustment.
Highland Shores/Knecht Road adjustments.
Cost of capital.
Rate case expenses.
Quality of Service
Among the considerations which the Florida Public Service Commission must take into account when it fixes water and sewer rates which are just, reasonable, compensatory and not unfairly discriminatory are the value and the quality of the service provided. Florida Statutes, Section 367.081(2).
The testimony of petitioner's customers supports, a conclusion that the water and sewer service provided by petitioner is satisfactory. The few complaints regarding dirty water or the high mineral content of the water were not supported by competent evidence, and the evidence establishes that petitioner's water and sewer service presently meets or exceeds all pertinent local, state and federal standards. The problem with odor from a newly installed sewage lift station has been corrected, and it appears that petitioner customarily handles its consumer complaints in a courteous and expeditious manner.
Used and Useful
In fixing utility rates, the Public Service Commission must consider the cost of providing the service, which would include all expenses incurred in the operation of all property used and useful. The utility is entitled to earn a fair return on its investment in property used and useful in the public service. Florida Statutes Section 367.081(2).
The petitioner's used and useful analysis resulted in a determination that 100 percent of the water treatment plant and the sewage collection and distribution system were used and useful in the public service. It was further determined that 60.5 percent of the sewage treatment plant was used and useful, and that $162,501 attributable to the water distribution lines must be excluded from rate base. These latter conclusions were the result of a very conservative approach and resulted in a greater amount of property held for future use than that found by the PSC's engineer. Use of the eighteen-month factor and the reserve for future growth was demonstrated to be proper in the calculation of plant used and useful in the public service. A public utility has an obligation to provide for normal growth within its certificated territory. Florida Statutes, Section 367.111; Florida Administrative Code, Rule 25-10.123. It is concluded that petitioner's used and useful calculations are supported by the evidence and, though conservative, are reflective of the utility's actual operations.
Water Loss
The petitioner's reported water loss of 9 percent was not proven to be excessive or unreasonable by industry standards. No adjustment to rate base or operating expense related to water loss is justified.
Construction Work in Progress
The inclusion of CWIP in rate base and the capitalization of interest costs through allowance for funds used during construction are alternative means
of accounting for expenditures associated with construction of service facilities. The petitioner has adequately demonstrated that its inclusion of the CWIP balance in rate base was appropriate since it did not charge AFUDC and the amounts included were reasonable. The Office of Public Counsel has failed to prove that such a method of recovering the cost of construction is an undue burden on the current ratepayer. Those assets actually in service during the test year which were carried on the utility's books as construction work in progress should be transferred to utility plant in service.
Accumulated Depreciation on CIAC
The inclusion of accumulated depreciation associated with contributions-in-aid-of-construction in rate base is appropriate so long as the utility has not recovered such depreciation as an operation expense. Accumulated depreciation on CIAC is not to be used to reduce rate base and is not to be considered as a cost of A, providing utility service. Florida Statutes, Section 367.081(2).
The evidence in this case demonstrates that petitioner has not recovered depreciation on CIAC as an operating expense. Therefore, the inclusion in rate base of accumulated depreciation on CIAC is appropriate.
Working Capital
While the balance sheet approach in determining the working capital requirements of a utility more accurately depicts the actual needs of any particular company, it could not adequately be applied in this proceeding because the balance sheet of petitioner was unaudited. The formula approach is authorized by PSC Rule 25-10.176(2)(g), Florida Administrative Code, and there is not sufficient evidence in the record upon which to make a correct calculation using the balance sheet approach. The formula approach utilized and applied by petitioner in determining working capital allowance is therefore appropriate.
Federal Income Taxes
While the 46 percent federal income tax rate may prove to be hypothetical in terms of the amount actually received by the Internal Revenue Service, the evidence adduced by the petitioner in this case demonstrates that the subsidiary approach is justified. Here, the losses at the parent company level had nothing to do with petitioner's utility operations. To require those losses to be shared with petitioner and its ratepayers would ignore actuality and attribute hypothetical tax deductions to the petitioner.
Depreciation Rate
The petitioner's proposed composite rates of depreciation are based upon actual experience and comparisons with other surveys of average service lives. The 2.5 percent rate customarily used by the PSC appears to be an approximate rate which is utilized for administrative convenience when more specific rates are not available. A more specific rate based upon actual experience is preferable, and petitioner's proposed composite rates of 3.11 percent on sewer assets and 3.43 percent on water assets are supported by competent, substantial evidence.
Inflation Adjustment
The petitioner attempted to justify its proposed 8.3 percent inflation adjustment to certain operation and maintenance expenses by use of the Consumer Price Index, by actual cost increases experienced in its water and sewer operations in 1980 and by pointing to the similarity with the 8.99 percent inflationary index rate recently established by the PSC. The CPI is a general index which includes the price of articles totally unrelated to the petitioner, such as groceries and home mortgages. The actual percentage cost increases experienced by petitioner in 1980 over 1979 are not reflective of cost decreases, increases in revenues or other factors which may tend to offset inflationary increases. The 8.99 percent inflation factor established by the PSC under the new automatic pass-through provisions of Section 367.081(4)(a), Florida Statutes, was established for the year 1980, not for the petitioner's test year of 1979. It is concluded that the petitioner has failed to adequately demonstrate that it is necessary to apply an 8.3 percent inflation adjustment to certain of its operating and maintenance expenses.
Highland Shores/Knecht Road Adjustments
Petitioner has adequately demonstrated that certain fixed costs would not be affected by the loss of the Highland Shores/Knecht Road customers, and that the effect upon operating expenses would be insignificant. The adjustments proposed by petitioner resulting in exclusions from rate base, revenues and variable expenses related to those customers are appropriate. Other expenses were not demonstrated to vary with the number of customers which would be lost as a result of the sale of this system.
Cost of Capital
There being no evidence to the contrary, it is concluded that the appropriate capital structure to be utilized in computing petitioner's cost of capital is that of its parent, General Development Corporation, and that the appropriate cost of debt is 15.3 percent.
After considering the testimony from the cost of money expert witnesses of the petitioner and the Office of Public Counsel, it is concluded that the 4 percent risk premium approach is not supported by the evidence in this case. Petitioner's witness did not adequately support the use of the 4 percent figure as opposed to any other figure and the use of current yields without a trend analysis or other adjustment to compensate for fluctuations in the market does not seem reasonable. The range of reasonableness of cost of equity found by the witness for the OPC, 14 percent to 14.5 percent, is below the petitioner's weighted average cost of debt. Given the relative risk of equity and debt, these figures do not appear reasonable. It is concluded that a return on equity of 18.06 percent, as found by Mr. Cohen's discounted cash flow methodology, is fair and results in a reasonable cost of equity for petitioner.
Rate Case Expenses
While the OPC presents a strong argument that rate case expenses should not be borne by the utility's customers, such expenses are a cost of providing service and have been traditionally allowed by the PSC to be recovered through rates. The undersigned does not find that the hourly rates charged by petitioner's witnesses were unreasonable or that the utility engaged in "overkill" in presenting its evidence on the disputed issues.
Rate case expenses should be amortized over the expected life of the rates authorized. The petitioner presented sufficient evidence to establish that these expenses should be amortized over a two-year period. While it may have been intended that the newly enacted Section 367.001(4)(a), Florida Statutes, would increase the time period between rate increase requests in the general industry, it would be speculative to conclude that its effect will be the same for every utility. For the reasons stated, it is concluded that the amount of $105,787 claimed by petitioner as the rate case expenses involved in this proceeding is supported by the evidence, is reasonable given the large number of issues and the length of the hearings, and should be amortized over a two-year period and allocated equally between the petitioner's water and sewer operations.
Based upon the findings of fact and conclusions of law recited above, it is RECOMMENDED that the issues in dispute in this proceeding be resolved as follows:
Respectfully submitted and entered this 8th day of December, 1981, in Tallahassee, Florida.
DIANE D. TREMOR
Filed with the Clerk of the Division of Administrative Hearings this 8th day of December, 1981.
Gary P. Sams, Esquire and Richard D. Melson, Esquire Hopping, Boyd, Green & Sams
Nancy H. Roen, Esquire
General Development Utilities, Inc. 1111 South Bayshore Drive
Gregory J. Krasovsky, Esquire Florida Public Service Commission
Stephen C. Burgess, Esquire and Suzanne S. Brownless, Esquire Room 4, Holland Building Tallahassee, Florida 32301
