STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FREDRIC W. HOLLAND, )

)

Petitioner, )

)

vs. ) CASE NO. 82-2654

)

FLORIDA PUBLIC SERVICE )

COMMISSION and LAKE COUNTY )

SERVICE CORPORATION, )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on January 27, 1983, in Leesburg, Florida. The issues for determination at the hearing were whether a 10.44 percent return on investment is reasonable and appropriate and whether the quality of water and service provided by the Lake County Service Corporation are adequate.

APPEARANCES

For Petitioner: Fredric W. Holland

1619 Sailfish Avenue

Leesburg, Florida 32748

For Respondents: M. Robert Christ, Esquire

Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

INTRODUCTION

By a staff-assisted rate case application, respondent Lake County Service Corporation requested an increase in its rates for water and sewer services to its customers in Lake County, Florida. By "Notice of Proposed Agency Action" far entered on August 3, 1982, the respondent Public Service Commission (PSC) stated its intent to authorize the utility to collect an increase of water revenues of $7,802 and sewer revenues of $11,627 to produce annual revenues of

$17,109 and $20,317, respectively. Letters of objection were received from three customers of the utility, and the PSC referred the matter to the Division of Administrative Hearings for further proceedings. By Order dated October 7, 1982, the undersigned held that these letters did not comply with the requirements of Rule 28-5.201(2), Florida Administrative Code, and permitted petitioners fourteen days within which to file proper petitions in accordance with said rule. Petitioner Holland did file such a petition, and the utility's motion to dismiss that petition was DENIED.

In his petition, Mr. Holland raised three issues concerning the PSC's proposed agency action. The first of these issues was abandoned at the commencement of the hearing. The remaining issues for determination are whether a return on investment in the amount of 10.44 percent is reasonable and appropriate and whether the utility's quality of water and service are adequate.

At the hearing, the petitioner testified in his own behalf and presented the testimony of his wife, Kristine Holland. Petitioner's Exhibits A and B were received into evidence. Testifying for the respondents were Michael J. Griffin, Sr., a public utility financial analyst with the PSC; Paul Mueller, the treasurer of the respondent utility; and William A. Becker, an engineer in the PSC water and sewer department. Respondent's Exhibits 1 through 3 were received into evidence. Testifying as public witnesses at the conclusion of the hearing were customers William D. Manley and William J. Brett and the caretaker at Valencia Terrace, George Lavendar.

All parties were given the opportunity to file proposed findings of fact and proposed conclusions of law with the Hearing Officer subsequent to the hearing. Counsel for the respondent PSC did file a proposed recommended order. To the extent that respondent PSC's proposed findings of fact are not incorporated in this Recommended Order, they are rejected as being either not supported by competent substantial evidence adduced at the hearing, irrelevant or immaterial to the issues in dispute 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 relevant facts are found:

Return on Investment

1. The respondent Lake County Service Corporation is a private water and wastewater treatment system which provides water and sewer service to residents of Valencia Terrace near Leesburg in Lake County, Florida.

   
   

2. The respondent utility is entirely owned by First Federal Savings and Loan Association of Lake County, which is the sole supplier of funds to the utility. The respondent utility has not had a rate increase since 1972 and has been operating at a loss.

   
   

3. Inasmuch as the First Federal Savings and Loan Association is the sole supplier of funds and the 100 percent owner of the utility, it is appropriate to use the capital structure of that Savings and Loan Association to determine a reasonable and proper cost of capital or rate of return on investment for the respondent utility. However, adjustments should be made to the capital structure of the Savings and Loan institution by removing short-term debts and liabilities (such as customer savings of less than one year) since they are subject to demand withdrawals and would be inappropriate for inclusion. After short-term maturities or debts are adjusted out, the capital structure of the financial institution resembles more closely that of a utility.

   
   

4. After adjustments, the capital structure of the parent company was made up of 85.04 percent debt and 14.96 percent equity. The average cost of debt was

   9.29 percent and the appropriate cost of equity was 17 percent, based upon a leverage scale developed by the PSC in Order No. 10603, Docket Number 820006-WS, issued on February 17, 1982. Based upon the adjusted capital structure of the

   Savings and Loan Association and the utilization of the leverage formula, the appropriate weighted cost of capital for the respondent utility is 10.44 percent.

   
   

5. A rate of return on investment of 4 percent, as suggested by the petitioner, is not reasonable or appropriate in today's market place. A totally riskless investment would render a return from 8 percent (short-term) to 11 percent (long-term).

   
   

   Quality of Service

   
   

6. The respondent utility's plant facilities were inspected by a PSC engineer. The utility has two wells, a primary well and an auxiliary or backup well. The auxiliary well was found to contain a small amount of dissolved iron. This well is not used as a primary water source, but is used only for fires, etc. Both wells comply with the Department of Environmental Regulation's (DER) water quality standards and requirements. Neither the water nor the sewer plants operated by the utility are under citation by the DER, and there are no outstanding corrective orders against these plants. The water tank is "blown out" twice a month and all pipes utilized by the utility are of PVC material.

   
   

7. Three customers testified that they had problems with the quality of water and service provided by the utility. On occasion, they have found the water coming into their homes to be greatly discolored. Rust spots or stains have been observed on sidewalks and driveways and water pressure has varied. Ms. Holland has experienced problems with her laundry, primarily with white articles of clothing turning a yellow color after a period of time. She has also noticed a "pesticide smell" in her water, and now buys bottled water for consumption by her family.

   
   

8. The caretaker for the respondent's water and sewer system, who spends six days a week in Valencia Terrace, has heard no complaints from the residents regarding service or quality of water.

   
   

   CONCLUSIONS OF LAW

   
   

9. A utility is entitled to earn a fair return on its investment in property used and useful in the public service. Section 367.081(2), Florida Statutes. Inasmuch as this utility is entirely owned and financed by the First Savings and Loan Association of Lake County, it is appropriate to utilize the capital structure of that institution, as adjusted to more closely approximate the capital structure of a utility, in determining the proper rate of return which the utility is entitled to earn on its investment. The evidence adduced at the hearing establishes that by utilizing the adjusted capital structure of the parent company and applying the leverage formula currently applied to all water and sewer companies by the Public Service Commission, an appropriate overall rate of return for the respondent utility is 10.44 percent. Petitioner offered no competent or substantial evidence to the contrary.

   
   

10. A utility is required to provide "safe, efficient and sufficient service" to its customers in conformity with applicable laws and regulations. Section 367.111(2), Florida Statutes. In this case, the evidence was undisputed that the utility's water and sewer operations presently comply with all Department of Environmental Regulation standards and criteria for water and sewer service, and that there are no citations or corrective orders pending against the utility's water and sewer systems. While there were some customer complaints at the hearing regarding the color, smell and consistency of pressure

of the water, it does not appear that any such complaints have been officially reported to any governmental body for testing or verification. It is concluded that the utility is in conformity and compliance with all applicable laws and regulations concerning the adequacy and quality of its water and sewer service, and that no adverse consequences should be imposed upon it for the quality of services it provides.

RECOMMENDATION

Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that a Final Order be entered finding that

1. an overall return on investment in the amount of 10.44 percent is reasonable and appropriate;

   
   

2. the quality of water and sewer services provided by the utility to its customers is safe, efficient and sufficient; and

   
   

3. the respondent utility be authorized to increase its rates for water and sewer services in accordance with the PSC's Notice of Proposed Agency Action.

RESPECTFULLY SUBMITTED and ENTERED this 15th day of March, 1983, in Tallahassee, Florida.

DIANE D. TREMOR

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 15th day of March, 1983.

COPIES FURNISHED:

Fredric W. Holland 1619 Sailfish Avenue

Leesburg, Florida 32748

M. Roberta Christ, Esquire Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Paul K. Mueller

Lake County Service Corporation Post Office Box 420

Leesburg, Florida 32748

Steve Tribble, Clerk Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Joseph P. Cresse, Chairman Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Docket for Case No: 82-002654

Orders for Case No: 82-002654