STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

GREENWOOD LAKES UTILITY )

COMPANY, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 80-1521

)

FLORIDA PUBLIC SERVICE )

COMMISSION, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to Notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, R. L. Caleen, Jr., held a formal hearing in this case on October 16, 1980, in Winter Park, Florida.

APPEARANCES

For Petitioner: James B. Barnes, Esquire

Post Office Box 44

Winter Park, Florida 32790

For Respondent: Michael B. Twomey, Esquire

101 East Gaines Street Tallahassee, Florida 32301

Issue Presented

Whether Petitioner's application to increase its water and sewer rates and charges to its customers in Seminole County should be granted.

Conclusions and Recommendation

The water and sewer rate increases sought by petitioner are just, reasonable, not unjustly discriminatory, and should be granted; however, the Petitioner's rate structure should be redesigned in accordance with the base facility charge concept. The Commission should also authorize the utility to capitalize interest attributable to non-used and useful plant which is excluded from rate base.

Background

On May 15, 1980, Petitioner, Greenwood Lakes Utility Company, Inc. ("UTILITY"), filed with the Respondent, Florida Public Service Commission (COMMISSION"), an application for authority to increase its water and sewer rates and charges to its customers in Seminole County, Florida. On June 9, 1980, by Order No. 9416, the COMMISSION suspended the proposed rates filed by the UTILITY and authorized it to file interim rates which would allow it to

raise water revenues of $53,218, and sewer revenues of $46,080, subject to refund if found to be unreasonable by subsequent final order. The COMMISSION also ordered that a public hearing be held at which all interested parties would be given an opportunity to be heard.

On August 12, 1980, the COMMISSION clerk forwarded this case to the Division of Administrative Hearings. Final hearing was thereafter set for October 16 and l7, 1980.

By prehearing stipulation filed on October 8, 1980, the UTILITY agreed not to contest, for purposes of this case, the COMMISSION's (1) disallowance of depreciation on Contributions in Aid of Construction (CIAC), (2) determination of depreciation rates for the UTILITY's equipment, and (3) determination of rate base. The COMMISSION, for its part, stipulated to the use of a year end, as opposed to an average rate base, in view of the extraordinary growth experienced by the UTILITY. Both parties agreed that the only remaining issues of fact or law concerning the UTILITY's application were:

"(a) Whether the UTILITY will be allowed to capitalize interest on non-used and useful equipment;

1. What cost of debt and return on equity will the UTILITY be allowed;

2. What method will be used in computing adjustments to the operation and maintenance expense."

(Prehearing Stipulation, Pg. 4.)

However, at final hearing, the COMMISSION concurred in the UTILITY's request that interest be capitalized on non-used and useful equipment, and did not contest the rate of return sought by the UTILITY. (Tr. 146-147.) Neither did the parties dispute the method used in computing adjustments to operation and maintenance expense. For the most part, except for the testimony of a lone customer, the hearing consisted of the UTILITY presenting its application, with supporting schedules; the COMMISSION then followed with submittal of its accounting, engineering, and rate department staff reports.

William D. Connolly, Jr., a customer, testified as a member of the public.

James Clark, Dale Crosby, Thomas Smith, Stanley Horton, Louis Briley, James Newlon, and Archie Cooke testified on behalf of the UTILITY, and offered Petitioner's Exhibits 1/ 1 through 10, inclusive, each of which was received. Joseph Heiker, Alfred Washington, and Bill Lowe testified on behalf of the COMMISSION, and offered Respondent's Exhibits 1/ 1 through 3, inclusive, each of which was also received into evidence. At the conclusion of the hearing, the parties requested and were granted the Opportunity to submit proposed findings of fact and conclusions of law within 14 days from the filing of the transcript; their posthearing submissions were subsequently filed by November 21, 1980.

FINDINGS OF FACT

Based upon the evidence presented, the following facts are determined:

1. The UTILITY is owned by Florida Land Company, a Florida corporation, which is a wholly owned subsidiary of The Continental Group, Inc., a New York corporation. In 1975, the UTILITY constructed a water and sewage treatment system to serve a residential and commercial development known as Greenwood

   Lakes. The UTILITY's water and sewer rates and charges have not changed since the COMMISSION's approval of initial tariffs in 1976. (Testimony of Crosby;

   P.E. 1.)

   
   

   I.

   
   

   Elements of Ratemaking

   
   

2. In fixing the water and sewer rates to be charged by a public utility, the COMMISSION must consider: (1) the value and quality of the service, (2) the utility's rate base, (3) the cost of providing the service, and (4) a fair return on the utility's rate base. Section 367.081(2), Florida Statutes (1979). Each element is addressed separately below. Quality of Service

   
   

3. The UTILITY's water supply is provided by two deep wells with a total capacity, based on present pumps, of 2.376 million gallons per day. Treatment is provided by aeration and chlorination. The water system operates under an operating permit issued by the Department of Environmental Regulation. Water samples and reports are made monthly, and the water system presently meets all drinking water standards of the Department. (Testimony of Crosby, Heiker; R.E. 1.)

   
   

4. The UTILITY's sewage treatment system consists of a .10 million gallon per day package plant; treatment consists of extended aeration followed by gravity flow to evapo-percolation ponds providing on-site disposal. It operates under an operation permit issued by the Department of Environmental Regulation, and complies with Department's sewage collection and treatment standards. (Testimony of Crosby.)

   
   

   Rate Base

   
   

5. Rate base consists of the UTILITY property that is used and useful in providing the service for which rates are charged. In its application, the UTILITY proposed a rate base; after review, the COMMISSION suggested several adjustments, which are not opposed by the UTILITY. Use of a year-end test year is appropriate because of the extraordinary growth experienced by the UTILITY during 1979. For the test year ending December 3l, 1979, the UTILITY's adjusted water rate base is $135,977; the adjusted sewer rate base is $131,764. They are calculated as follows:

   
   

   RATE BASE

   
   

   Test Year Ending December 31, 1979

   
   

   WATER SEWER

   
   

   Utility Plant in

   Service $190,969 $225,722

   
   

   Construction Work

   in Progress 1,214 4,297

   Accumulated Depreciation 18,920 2/ 14,801 2/ Contribution in Aid of Construction

   (CIAC)-Net of

   Amortization -48,831 -86,458

   
   

   Working Capital	Allowance	3,030	3,198
   Income Tax Lag		-0-	- 194

   
   

   RATE BASE $135,977 $131,764

   
   

   (Testimony of Lowe; P.E. 1, 2, 3, R.E. 3.) Operating Statement

6. The following Operating Statement reflects the UTILITY's revenue earned, costs of operation, and not-operating income during the test year. It shows that the UTILITY suffered a loss of $26,429 in its water operations and a loss of $19,101 in its sewer operations.

   
   

   OPERATING STATEMENT

   
   

   Test Year Ending December WATER	31	,	1979	SEWER
   Operating Revenues: $10,172 Operating Expenses: Operatic 25,314				$14,365 22,436
   Maintenance -0-				-0-
   Depreciation 18,199				10,132
   Amortization -0-				-0-
   Taxes Other Than Income 1,088				898
   Other Expenses -0-				-0-
   Income Taxes -0-				-0-
   TOTAL OPERATING EXPENSES $44,601				$33,466
   Operating Income ($26,429) (Testimony of Lowe; P.E. 1, 2, 3, R.E.	3.)			($19,101)

   
   

7. The UTILITY requests an annual water revenue increase of $36,154, and a sewer revenue increase of $31,715, which would produce gross annual revenue of

   $54,326, and $46,080, respectively. The adjusted Operating Statement, constructed to reflect this additional requested revenue, is as follows:

   
   

   CONSTRUCTED OPERATING STATEMENT

   
   

   Test Year Ending December 31, 1979

   
   

   WATER SEWER

   Operating Revenues: Operating Expenses:	$54,326		$46,080
   Operation	30,634		25,580
   Maintenance	-0-		-0-
   Depreciation	3,812	2/	3,436	2/
   Amortization	-0-		-0-
   Taxes Other Than Income	2,280		1,941
   Other Expenses	-0-		-0-
   Income Taxes	1,424		968
   TOTAL OPERATING EXPENSES	$38,150		$31,925
   Operating	Income	$16,176	$14,155
   Rate	Base	$135,977	$131,704
   Rate	of Return	11.90 percent	10.74 percent

   
   

   (Testimony of Lowe; P.E. 1, 2, 3, R.E. 3.) Rate of Return

8. The capital structure of the UTILITY is as follows:

   
   

   AMOUNT PERCENT TO TOTAL

   Debt 4/ $1,450,000 60.90

   Customer deposits 6,389 .27

   Common Equity 924,550 30.83

   TOTAL $2,380,947 100.00

   
   

   The proposed annual gross water revenues of $54,326, and sewer revenues of

   $46,080 will allow the UTILITY to earn a rate of return of 11.90 percent on its water rate base, and 10.74 percent on its sewer rate base. With debt service costs now in excess of 12.50 percent, the return on equity will be nominal; however, there is no evidence that this will cause the UTILITY's service to suffer. (Testimony of Smith; P.E. 6.)

   
   

   II.

   
   

   Capitalization of Interest on Non-Used and Useful Equipment

9. The UTILITY's plant is larger than necessary to serve its present customers. In its application, the UTILITY seeks COMMISSION approval to capitalize its interest costs on that portion of the UTILITY's plant which is non-used and useful, and excluded from rate base. Capitalization will allow the UTILITY to recover its interest expenses over the useful life of the property involved. The COMMISSION has previously allowed capitalization of interest under similar circumstances, Docket No. 760054-WS, Application of North Orlando Water and Sewer Corporation, Order No. 7455, dated October 4, 1976. Here, the UTILITY's request is reasonable, concurred in by the COMMISSION, and should be granted. (Testimony of NewIon, Cooke, Lowe; P.E. .)

   
   

   III.

   
   

   Rate Structure

   
   

10. The UTILITY currently uses a conventional two-tier rate structure. A base facility charge (BFC) rate structure is a more equitable method of distributing costs associated with providing a utility service. Under a BFC structure, customers pay a base charge which covers their pro-rata share of the UTILITY's fixed costs, and a gallonage charge which covers the costs of pumping, treating, and distributing the actual water gallonage used. Such a structure would require the UTILITY to alter its current customer service policy to insure that the base charge is paid during temporary discontinuances of service. (Testimony of Washington.)

    
    

    CONCLUSIONS OF LAW

    
    

11. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. Section 120.57, Florida Statutes (1979).

    
    

12. Eight days prior to the hearing, the parties filed a pre-hearing stipulation indicating that there were three issues of fact or law which remained between them. However, at final hearing it became obvious that the UTILITY and the COMMISSION were in agreement on the rate relief which should be granted; as a result, no genuine issues of fact or law were presented. Hearings are warranted under Section 120.57(1) only when there are genuine issues of material fact, United States Service Industries-Florida v. State Department of Health and Rehabilitative Services, 385 So.2d 1147 (Fla. 1st DCA 1980). Such hearings are formal "trial-type hearings", McDonald v. Department of Banking and Finance, 346 So.2d 569, 578 (Fla. 1st DCA 1977), which are comparable to court proceedings in many ways. The Florida Bar v. Moses, 380 So.2d 412, 415 (Fla. 1980).

    
    

13. When the statutory prerequisite for Section 120.57(1) hearings--the existence of a material factual dispute between the parties--is absent, agencies may conduct informal proceedings under Section 120.57(2), which "will afford full relief faster and more conveniently." United States Service Industries, supra at 1148.

    
    

14. The COMMISSION may wish to consider developing a procedure which, in appropriate utility ratemaking cases, informs customers of its proposed agency action and provides them a "clear point of entry" to Section 120.57 proceedings. When such proceedings are not timely invoked by substantially affected persons, agency action can proceed without delay or unnecessary expense. The considerable legal and expert witness costs imposed by formal ratemaking

    proceedings--costs ultimately borne by the customer and taxpayer--could thereby be avoided.

    
    

15. The COMMISSION is empowered to fix, and approve, utility rates and charges which are just, reasonable, compensatory, and not unjustly discriminatory. Section 367.081(1), (2), Florida Statutes (1979) . In carrying out this responsibility, it is required to consider, among other things:

    
    

    ". . . 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 operation 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." Section 367.081(2), Florida Statutes (1979).

    
    

    In ratemaking proceedings, the utility bears the burden of establishing entitlement to the requested rate relief. See Sections 25-10.175(1) and 28- 6.08(3), Florida Administrative Code.

    
    

16. In this case, the UTILITY presented substantial and unrefuted evidence in support of its application to increase its rates sufficiently to produce gross annual water revenues of $54,326 and annual sewer revenues of $46,080.

    Its rates, provided they are redesigned in accordance with the base facility charge concept, are just, reasonable, not unjustly discriminatory, and comply with Section 367.081(2), Florida Statutes. It is also reasonable, and appropriate, that the COMMISSION, in accordance with its prior practice, allow the UTILITY to capitalize interest attributable to non-used and useful plant which is excluded from rate base.

    
    

17. Findings of fact submitted by the parties which are not incorporated herein are rejected as being unsupported by the evidence or irrelevant and unnecessary to the issues presented.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED:

1. That the UTILITY's application for increased sewer rates and charges be granted and that it be authorized to file revised tariff pages containing rates designed in accordance with the base facility charge concept to produce gross annual water revenues of $54,326 and annual sewer revenues of $46,080;

   
   

2. That the UTILITY be required to notify each customer of any rate increase authorized, explaining the reasons for such increase. A letter of explanation should be submitted to the COMMISSION for prior approval;

   
   

3. That the UTILITY be allowed to retain all interim revenues collected pursuant to COMMISSION Order No. 9416 and cancel the rate refunding bond previously submitted; and

4. That the UTILITY be allowed to capitalize interest on non-used and useful equipment which is excluded from rate base.

DONE AND ENTERED this 5th day of December, 1980, in Tallahassee, Florida.

R. L. CALEEN, JR. Hearing Officer

Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

ENDNOTES

1. / Petitioner's and Respondent's Exhibits will be referred to as "P.E. end R.R. ", respectively.

   
   

2. / Reflecting minor posthearing depreciation adjustment filed by the COMMISSION without objection by the UTILITY. (Tr. 124; Commission Proposed Findings of Fact.)

   
   

3. / Reflecting correction of R.R. 3 by the COMMISSION witness, without objection by UTILITY. (Tr. 125; Commission Proposed Findings of Fact.)

4/ Interest bearing advances accrue interest at the prime rate or 12.50 percent, whichever is lower.

COPIES FURNISHED:

James B. Barnes, Esquire Post Office Box 44

Winter Park, Florida 32790

Michael B. Twomey, Esquire Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Docket for Case No: 80-001521

Orders for Case No: 80-001521