STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

LANDS, INC. OF RHINELANDER, )

)

Petitioner, )

)

vs. ) CASE NO. 80-1208

)

PUBLIC SERVICE COMMISSION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, an administrative hearing was held before P. Michael Ruff, Hearing Officer with the Florida Public Service Commission, on June 24, 1980, in Inverness, Florida on the application of Lands, Inc. of Rhinelander for increased water rates to its customers in Citrus County, Florida, pursuant to Section 367.081 of the Florida Statutes. On July 1, 1980, the cause was transferred to the Division of Administrative Hearings, hut continues to be assigned to P. Michael Ruff as a Hearing Officer of that Division, for a recommended order.

APPEARANCES

For Petitioner: C. J. Parker

Route 1, Box 425-B1

Floral City, Florida 32636

For Respondent: Arthur R. Shell, Jr., Esquire

Public Service Commission Legal Department

101 East Gaines Street Tallahassee, Florida 32304

By this application, Lands, Inc. of Rhinelander seeks authority to increase its water rates, based on a test year ended February 29, 1980. By Order No.

8455 the Public Service Commission instituted interim rates to be charged after the utility installed water meters. At the close of the test year, the utility had twelve months experience under these metered rates and received $2,805.00 in annual operating revenue for that test year. The utility seeks an increase in revenue alleging substantial increases in operating expenses for such items as electric power purchased, chlorine, operation and maintenance expenses, materials, transportation and other items. The utility therefore alleges a requirement for an increase in its annual operating revenue in the amount of

$3,571.00 over that received for the test year. Revenue in this amount would yield a 10.36 percent rate of return on the utility's rate base of $13,143.00.

ISSUES

The issues to be determined are whether the water service provided by Lands, Inc. of Rhinelander meets all pertinent quality standards of the Public

Service Commission and the Department of Environmental Regulation, the establishment of an appropriate rate structure for the utility, and a determination of the amount of revenue which will be lost, reasonable and compensatory, but not unfairly discriminatory, pursuant to Section 367.081 of the Florida Statutes.

FINDINGS OF FACT

Quality of Service

1. Two customers of the utility, a representative of the utility, as well as a Public Service Commission engineer, testified regarding the quality of water service provided. Water quality meets all pertinent regulatory standards; however, the public witnesses have experienced problems with low pressure during peak usage periods of the day. This intermittent problem with insufficient water pressure will soon be alleviated by the installation and operation of an additional supply well. Thus, the company's water production, treatment and delivery efficiency complies with all regulatory standards and is found to be satisfactory.

   
   

   Rate Base

   
   

2. The utility alleged a valuation of $15,552.00 for its plant in service "used and useful" in serving the customers. Adjustments to that figure to allow for accumulated depreciation, contributions-in-aid-of-construction, accumulated depreciation on contributions-in-aid-of-construction, a working capital allowance, as well as an allowance for income tax lag established the correct rate base for the water system, upon which a rate of return may be earned, to be

   $13,143.00. The adjustments supportive of that figure appear in more detail in Schedule I attached hereto and incorporated by reference herein. The utility ultimately agreed with that figure for rate base. It is appropriate and should be accepted.

   
   

   Cost of Capital

   
   

3. Representatives from the Public Service Commission presented evidence on the issue of cost of capital. The utility presented no independent evidence on this issue but agreed with the position espoused by the Public Service Commission. Lands, Inc. of Rhinelander is the parent company of which the utility is a division, and consequently the capital structure of the parent company was appropriately employed. The capitalization consists of 56.58 percent debt and 43.42 percent equity, with a debt cost rate of 7 percent. The cost rate or appropriate return ascribed to the equity portion of the capital structure is 14.75 percent. Employment of this capital structure then results in a calculated weighted cost of capital or return on rate base of 10.36 percent. No evidence was offered in opposition to this demonstrated capital structure nor the ultimate rate of return on rate base derived therefrom. Thus, the use of this capital structure in this proceeding and the resultant return on the utility's rate base is appropriate and should be allowed.

   
   

   Revenue Requirement

   
   

4. Schedule II, attached hereto and incorporated by reference herein, details the various operation and maintenance expenses, such as chlorine, electric power purchased, salaries and administrative expenses and others, as well as depreciation on invested plant, taxes other than income, and income taxes, for a total actual operating expense of $5,014.00. In order to achieve

   the appropriate 10.36 percent rate of return on rate base, a net operating income of $1,362.00 is required. Accordingly, the sum of the two figures demonstrates that a total annual operating revenue for the utility of $6,376.00 is necessary. This revenue figure represents an increase of $3,571.00 over the test year revenue actually received by the utility ($27,805.00), and which resulted in an operating loss posture for that test year. The above figures and calculations were essentially uncontroverted by the utility.

   
   

   Rate Structure

   
   

5. At the time of the initial petition in this cause, the customers of the utility were unmetered and were charged a flat rate for water service. The Public Service Commission thereafter entered Order No. 8455 on August 29, 1979, ordering installation of water meters and implementation of a base facility charge rate design. In order to allow the Commission to obtain data on metered rates over a twelve-month time span, the utility also agreed to waive the eight- month time period during which a decision should be entered in the cause pursuant to Chapter 367.081(5), Florida Statutes. The meters were installed on March 1, 1979, thus the utility has in excess of a year's experience operating under the interim and metered rates.

   
   

6. The rates thus put into effect for the test period produced annual revenues at the rate of $2,805.85. During this test period, the utility supplied water to an average of 46 single family residential customers and all customers are metered. Approximately 28 percent of all customers billed are seasonal, so that a substantial portion of their bills are for zero consumption.

   
   

7. The interim rates were structured using the base facility charge (BFC) rate design. The rationale for this type of rate design is to establish a monthly charge whose foundation is based on the actual fixed cost of providing service to the residential customer. Such a charge provides coverage for expenses such as depreciation, an allocated portion of billing and collecting expense, property taxes, debt interest, maintenance of mains and services, etc. The amount of the charge is determined by an "equivalent residential connection" (ERC) formula, using a standard five-eights inch by three-quarter inch meter as the basis. There is no charge for gallonage consumed included in the framework of this base charge. The second portion of this type of rate structure is designed to establish a charge for the pumping, treating and delivery of the water to the customer. Thus, this additional charge would cover associated costs such as pumping expenses, treatment expenses, the unallocated portion of billing and collecting expenses, meter reading expenses, and other varying costs. The basic reason for such a charge is that each customer will thus pay his prorata share of the related facility cost necessary to provide service and then would pay for only the gallons actually consumed under the gallonage portion of the charge. This design helps alleviate the discriminatory charge problem associated with part-time residents, since such residents are required to pay their prorated share of the cost of providing service. Such an approach is an important factor in this utility's rate design since a substantial number of the customers are seasonal or part-time residents. The base facility charge rate design should thus be continued in the permanent rates.

   
   

8. The utility is presently collecting a $30.00 per year "standing fee" for vacant lots. The Commission has in the past allowed the utility to collect this type of fee up to the amount of the actual meter installation charge.

   Thus, when a customer taps into the system, the meter installation charge is the difference between the charge and the fees previously collected for the vacant lot. The utility has requested increased meter installation charges. The

   present meter installation fees include the cost of the meter, the meter box, the labor and the cost of tapping into the water main. Such service availability charges should be divided into a meter installation fee and a tap fee. The meter installation fee would be in a fixed dollar amount representing the average cost incurred by the utility to install the meter, meter box, and the associated labor. (Rule 25-10(17), Florida Administrative Code.) The tap fee would then be the actual cost to the utility of tapping into the water main and extending the service pipeline from the main to the customer's installation. (Rule 25-10(22), Florida Administrative Code.) The Public Service Commission has agreed to the utility's request for the increased service availability charges and they should be allowed, separated into separate charges for meter installation and tapping fees.

   
   

   CONCLUSIONS OF LAW

   
   

9. Section 367.081(2) of the Florida Statutes requires that the Public Service Commission fix rates which are just, reasonable, compensatory and not unfairly discriminatory; and that the Commission consider the value and quality of service provided, the cost of providing the service, including debt interest, working capital requirements, maintenance, depreciation, tax and operating expenses incurred in the operation of all property used and useful in the public service. In consideration of the substantial, competent evidence in the record, the foregoing Findings of Fact, and the above statutory criteria, it is concluded as follows:

1. The quality of water service provided by the utility meets all state regulatory standards.

   
   

2. The utility's adjusted rate base for water is $13,143.00.

   
   

3. The utility's capital structure consists of 43.42 percent equity and

   56.58 percent debt and the overall weighted cost of capital is 10.36 percent with a corresponding rate of return on the equity portion of the utility capital of 14.75 percent.

   
   

4. The gross annual revenue requirement for water is $6,376.00, which revenue represents a gross increase of annual revenue of $3,571.00.

   
   

5. The base facility charge type of rate design will result in rates which are just, reasonable, compensatory, and not unfairly discriminatory.

   
   

6. Pursuant to Rule 25-10(17) and Rule 25-10(22), Florida Administrative Code, service availability charges should be increased and separated into two parts, a meter installation fee, representing the average cost to the utility for installing meters, and a tap fee, representing the actual cost to the utility of tapping into its water transmission mains.

RECOMMENDATION

Accordingly, in consideration of the foregoing Findings of Fact and Conclusions of Law, it is

RECOMMENDED:

That the application of Lands, Inc. of Rhinelander, Route 1, Box 425-B1, Floral City, Florida 32636, be GRANTED and that that utility be authorized to receive gross annual revenues for its water service of $6,376.00, to be achieved

by rates filed with and approved by the Public Service Commission. It is further

RECOMMENDED:

That the utility be required to adopt a base facility charge concept of rate design for its water rates and to make concomitant changes in its tariff. It is further

RECOMMENDED:

That service availability charges be increased and separated into two portions, a meter installation fee and a tap fee, with the meter installation fee to be a fixed amount representing the average cost incurred by the utility to install meters, meter boxes and attendant labor. The tap fee should he the actual cost to the utility of tapping into the water main in extending the service line from the main to the customer's residential installation.

DONE and ENTERED this 3rd day of September, 1980, in Tallahassee, Florida.

P. MICHAEL RUFF, 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 3rd day of September, 1980.

COPIES FURNISHED:

C. J. Parker

Route 1, Box 425-B1

Floral City, Florida 32636

Arthur R. Shell, Jr., Esquire Public Service Commission Legal Department

101 East Gaines Street Tallahassee, Florida 32304

Docket for Case No: 80-001208

Orders for Case No: 80-001208