STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA PUBLIC UTILITIES COMPANY, )

)

Petitioner, )

)

vs. ) DOAH CASE NO. 80-1850

) FPSC DOCKET NO. 800414-GU FLORIDA PUBLIC SERVICE COMMISSION,)

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Bearing Officer, R. L. Caleen, Jr., held a formal hearing in this case on December 2 1980, and January 9, 1981, in Orange City, Florida, end on December 23, 1980, in West Palm Beach, Florida.

APPEARANCES

For Petitioner: Daniel Downey, Esquire

Post Office Box 2345

West Palm Beach, Florida 33480

and

Jack T. Bridges, Esquire Post Office Drawer Z Sanford, Florida 32771

For Respondent: Marta M. Crowley, Esquire

Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

ISSUE

Whether Petitioner Florida Public Utility Company's application to increase its gas service rates should approved.

CONCLUSION and RECOMMENDATION

Petitioner's application should be granted to the extent of allowing it to file new tariff rates, consistent with the findings of fact, designed to generate additional gross revenues of $056,907. Such rates are fair, just, and reasonable, in accordance with Sections 306.041 and 366.06(1), Florida Statutes (Supp. 1980).

BACKGROUND

By application filed with the Respondent, Florida Public Service Commission ("COMMISSION"), on August 7, 1980, Petitioner, Florida Public Utilities Company ("COMPANY") , seeks to permanently increase its rates and charges for gas

service in Volusia, Seminole, and Palm Beach Counties. The COMPANY initially requested an increase of $724,983 in annual gross revenues representing a 15 percent return on equity and an overall rate of return of 9.12 percent.

By Order No. 9584 issued October 6, 1980, the COMMISSION suspended the proposed rate increase and authorized, under bond, an interim increase of

$282,940 in annual revenues; this resulted in a 6.68 percent rate increase for all customer classes of the COMPANY.

On October 7, 1980, the COMMISSION forwarded this case to the Division of Administrative Hearings for the conducting of a Section 120.57(1) hearing.

Final hearing was thereafter set for December 22 and 23, 1980, and January 9, 1981.

By Prehearing Stipulation filed on November 25, 1980, the parties stipulated to the COMPANY's:

1. Adjusted Rate Base

2. Operating Income

3. Revenue Expansion Factor

4. Capital Structure and Cost of Capital, including Return on Equity and Allow- able Return on Adjusted Rate Base.

   
   

   The parties stipulated that the following factual issues remained for determination at final hearing:

   
   

   1. Whether housing authority contracts should be combined with either resi- dential or general service rate or be part of uniform housing authority tariff rates.

   2. Whether the Petitioner-proposed declin- ing block rates should be adopted in

      lieu of Commission-suggested flat rates.

   3. Whether the application of the purchased gas adjustment should be excluded for

      therms not actually consumed under the minimum bill on the large volume rate. [This issue was settled by the parties at hearing.]

   4. Whether standby service is compensatory and properly allocated.

   5. Whether the connection charge is fully compensatory.

   6. Whether Petitioner's tariff rental rates 8, 9, and 10 are compensatory.

   7. What charges should he properly included in the customer charge.

   8. Whether the cost of service substantiates the level of rates.

   9. Whether the employee rates should be eliminated.

   10. The proper revenue allocation among rate classes and level of rates therein, in

light of the Petitioner's cost of service study.

At final hearing, the COMPANY called as its witnesses Darryl L. Troy and Gordon O. Jerauld; it offered into evidence Petitioner's Exhibit 1/ Nos. 1 through 5, inclusive, each of which was received. Tie COMMISSION called no witnesses and offered into evidence Respondent's Exhibit 1/ Nos. 1 through 2, inclusive, each of which was received. In addition, the following customers and members of the public presented testimony at the hearing held in Orange City on January 9, 1981:

Deidre Valene Tompkins James Henry Rose Charles A. Winchell Neola Stout

William Mirenda

At hearing, the COMMISSION requested, and the COMPANY agreed to submit date-filed exhibits containing: (1) a comparison of COMPANY investment in and Federal Housing Authority ("FHA") contribution to the gas systems serving each housing authority; (2) the differences between utilization of the proposed

declining block rate structure and a flat rate structure; and (3) a breakdown of rate case expenses incurred in this proceeding. Subsequently, the COMPANY timely submitted the requested late-filed exhibits which have been identified as Petitioner's Exhibit Nos. 6 through 8, respectively; they were admitted into evidence without objection or rebuttal by the COMMISSION.

At close of hearing, the Parties requested and were granted the opportunity to submit proposed findings of fact by January 23, 1981. It was also agreed that the recommended order would be submitted to the COMMISSION by February 6, 1981.

FINDINGS OF FACT

Based upon the stipulation of the parties and the evidence submitted at hearing, the following facts are determined:

I.

Stipulated or Uncontroverted Facts

1. Florida Public Utilities Company ("COMPANY") is a public utility which provides gas service to 29,700 customers in DeLand, Sanford, and eastern Palm Beach County, Florida. Its present base rates have been in effect since March 3, 1977, in accordance with COMMISSION Order No. 7629 entered in Docket No. 760469-GU. (Prehearing Stipulation.)

   
   

2. A test period is a rate-making device used to compute current levels of investment and income; In this proceeding, the appropriate test period is the 1979 calendar year. Rate base should be computed on the basis of a 13-month average. (Prehearing Stipulation.)

   
   

3. After reviewing the COMPANY's August 7, 1980, application to increase its rates, together with its books, records, and facilities, the COMMISSION proposed various adjustments to the COMPANY's submittal. The COMPANY'S acceptance of the COMMISSION's proposed adjustments results in the following schedules

   1. 13 MONTHS AVERAGE RATE BASE 12/31/79

      Rate Base Adjusted Per Company (P-3) $10,984,968 Commission Adjustments Accepted by

      Company:

      
      

      Common Plant-Other-Net of Accumulated Depreciation (118,250)

      
      

      Common Plant-General Office Building

      Net of Accumulated Depreciation (23,056)

      
      

      1/8th Operating and Maintenance Expense Allowance (617)

      
      

      20 Percent Income Tax Lag		(3,683)
      Adjusted Rate Base		$10,839,645
      Additional Company Adjustment:
      Increase in Rate Base Expense (P-8; Uncontroverted by Commission)
      1/8th Working Capital	Allowance	$ 159
      20 Percent Income Tax	Lag	124
      Adjusted Rate Base		$10,839,645

      
      

      (B) NET OPERATING INCOME 12/31/79

      Net Operating Income Adjusted per

      Company (P-3) 630,420

      
      

      Commission Adjustments Accepted by the Company:

      Unbilled Revenues	24,652	x	51.3	12,646
      Advertising-Non-Utility 7,239		x	51.3	3,714
      Miscellaneous Out of Period and Non-Utility Expenses 2,285 x 51.3				1,172
      Odorant Expense (4,590) x 51.3				(2,355)
      Property Taxes-Common Use Plant 3,253 x 51.3				1,669

      
      

      Depreciation Expense-

      3,237	x	51.3	1,661
      1,734	x	51.3	890

      Common Use Plant Other

      
      

      Depreciation Expense- General Office Building

      
      

      Adjusted Net operating income $649,817 Additional Company Adjustment:

      Increase in Rate Base Case Expense (P-8; Uncontroverted by the COMMISSION)

      
      

      Increase of $3,814 (Over Original Estimate of $10,000) Divided

      by Three Years = $1,271 x 51.3 percent $(652)

      
      

      Adjusted Net Operating Income $649,165

      
      

      1. CAPITAL STRUCTURE, COST OF CAPITAL, AND RATE OF RETURN

         
         

         12/31/79

         
         

         Common Equity	$ 8,709,710	37.69	15.00	5.65
         			percent	percent
         Preferred Stock	1,082,300	4.69	4.81	.23
         Long-Term Debt.	8,686,000	37.59	7.17	2.70
         Customer Deposits	1,511,612	6.54	8.00	.52
         Deferred Tax	3,000,000	12.98	-0-	-0-
         Investment Tax
         Credit	116,920	.51	-0-	-0-
         TOTAL	$23,106,542	100.00		9.10
         				percent

         
         

         The parties agree that utilizing a+1 percent range on equity, the allowed rate of return should be 8.73 - 9.48 percent, with a 9.10 percent mid-point.

         
         

      2. REVENUE EXPENSION FACTOR 12/31/79

         Revenue 100.000

         Less: COMMISSION Assessment (.125)

         Gross Receipts Tax	(1.500)
         Remainder	98.375
         State Income Tax (5 percent)	4.919
         Income Subject to Federal Income	Tax (46 perc)42.990
         Revenue Expansion Factor	51.338

         
         

      3. ADDITIONAL REVENUE REQUIREMENTS

      Adjusted Rate Base - Item (a) $10,839,645 Mid-Point of Recommended Return - Item (c) 9.10

      Net Operating Income		$ 986,408
      Adjusted Net Operating Income - Item	(b)	649,165
      Net Operating Income Deficiency		$ 337,243
      Expension Factor - Item (d)		.51338

      
      

      ADDITIONAL REVENUE REQUIREMENT $ 656,907

      
      

4. The rate-making factors depicted in (a) through (e), infra, are not disputed by the parties. Apart from the COMPANY'S proposed posthearing adjustment to rate case expense, they have been expressly agreed to by written stipulation. The COMPANY's $3,814 posthearing expense adjustment proposed by late-filed Exhibit No. P-8 was not opposed by the COMMISSION, and was reasonably anticipated by the parties. The original $10,000 rate case expense allocation was only an estimate and subject to final adjustment at the conclusion of hearing. Accordingly, the rate-making factors set out in (a) through (e),

   above--agreed to or uncontroverted by the parties--must be and are accepted as fact. In order to earn a fair and reasonable return on its rate base (net investment), the COMPANY must be allowed the opportunity to earn increased annual revenues of $656,907. (Testimony of Troy, Jerauld; R-1, P-1, P-2, P-3, P-4, P-8.)

   
   

   II.

   
   

   Quality of Service

   
   

5. In advance of each hearing, customers of the COMPANY received written notice that they would be given an opportunity to present complaints about the quality of the COMPANY's gas service. Although six customers testified about the quality or adequacy of the COMPANY's service. Thus, it is concluded that the quality of the COMPANY's gas service is adequate. (Testimony of Tompkins, Rose, Winchell, Stout, Mirenda.)

   
   

   III.

   
   

   Issues in Dispute: Rate Structure, Design, and Allocation

   
   

6. The parties dispute in this case centers on the rate structure design, and revenue allocation which should be approved by the COMMISSION in conjunction with this rate increase application. Each issue is addressed separately below.

   
   

   Treatment of Housing Authority Contracts

   
   

7. The COMPANY proposes to retain the various base rates it charges six housing authorities which operate eleven low-rent housing projects in West Palm Beach, Sanford, and DeLand. The rates were originally established by contract with the authorities; since FHA provided contributions toward the construction of the gas system serving the projects, ranging 28-120 percent of the total construction costs, the projects have paid lower rates than other customers. This level of construction contribution is higher than those made by other base gas rate for housing authority projects. (Testimony of Jerauld; P-6, R-2.)

   
   

8. However, the disparity between the base rates charged the various housing projects has not been adequately explained or justified by the COMPANY. The 1979 base rate range from $16.35/ Therm (projects no. 16-5, 16-5, and 72-1) to $25.15/Therm (project no. 16-1). The COMPANY attributes the different rates to different levels of gas usage and initial FHA contribution with this

   explanation: Project no. 16-1 is charged the highest base rate, yet it has neither the lowest level of contribution nor gas usage. Moreover, although the different housing authority rates were originally based on the COMPANY's net investment in constructing the systems, gas usage, operating expenses, taxes, and return, the COMPANY submitted no information showing the costs and rate of return attributed to each housing authority. Under such circumstances, it is determined that a uniform rate should be charged all housing authority customers. A single rate which is sufficient to produce revenue equal to that generated by this class during the test year will increase rates for one housing authority, and lower rates for two others. The uniform ratio will provide more equitable rate treatment of low-rent housing residents whose housing needs are subsidized by a common federal agency. (Testimony of Jerauld; P-5, P-6, R-2.) Declining Block Rates or Flat Rates

   
   

9. A declining block rate is one which, for successive increments of use, a different price is charged. Here the COMPANY proposes to retain its declining block rate structure (although with fewer blocks) which applies to general service, residential service, and large volume service customer classes. A flat rate structure is retained for its employee, standby, and housing authority classes. The COMMISSION, without presenting any affirmative evidence on this question, argues that a flat rate structure should be adopted because of the inconsistency which would result from having declining block rates for some customer classes and flat rates for others. (See, Proposed Recommended Order,

   p. 9.) But, if adequately justified, different rate treatment of different customer classes is permissible. In this case, the three classes which would retain flat rate treatment do not have wide fluctuations of customer use, as do the three classes which would receive declining block rate treatment. The COMPANY established that application of flat rates to those classes with fluctuating customer use would inequitably recover fixed costs from different levels of users within a class: small users within a class would pay less than their share of fixed utility costs, while large users would pay more than theirs. It is concluded that the proposed mix of flat and declining block rates is justifiable, fair, and reasonable. Moreover, the COMMISSION presented no evidence to support application of a flat rate structure to all customer classes. Neither was evidence presented to establish that the proposed declining block rate structure conflicts with conservation goals or encourages inefficient energy use. (Testimony of Jerauld; P-3, P-5, P-7.)

   
   

   Standby Service

   
   

10. The COMPANY's present tariff for the standby service class has a negative return of 9.82 percent. The proposed rate increase for this class will yield a return of 3.82 percent, is compensable, and properly allocated. (Testimony of Jerauld; P-5.)

    
    

    Connection Charge

    
    

11. The COMPANY proposes to raise the connecting and reconnecting charge to $8.00, the change of account charge to $3.00. Cost analysis shows that these increases are necessary to defray the actual costs associated with such services, and the COMMISSION agrees that they are warranted. (Testimony of Jerauld, Proposed Recommended Order, Paragraph L; P-5.)

    
    

    Appropriateness of Tariff Rental Rates

    
    

12. The COMPANY proposes no increases to Rate Schedules 8, 9, and 10. Since these schedules were closed to new rental agreements after March 1, 1975,

    and there were no customers on these schedules during the test year, they should be eliminated - from the COMPANY's tariffs. (Testimony of Jerauld; R-2.)

    
    

    Customer Charges

    
    

13. The customer charge should recover minimum costs unrelated to the use of gas. These costs include accounting, administrative, and general expenses. The charge should also provide a return, together with depreciation on the plant invest- ment attributable to servicing a specific customer, e.g. service line, meter, and regulator. The COMPANY has included these costs in the following proposed customer charges:

    
    

    RATE PROPOSED CUSTOMER CHARGE

    
    

    General Service $ 4.00

    Residential Service	3.50
    Large Volume	13.00
    Interruptible	-0-
    Standby	30.00

    
    

    The COMMISSION presented no affirmative evidence to overcome or negate the effect of the COMPANY's presentation. In its proposed findings of fact, the COMMISSION suggests approval of an alternative schedule of customer charges; but the evidence offered in support of the schedule is insubstantial and unpersuasive. (Testimony of Jerauld, COMMISSION Proposed Recommended Order, Paragraph I; P-5.)

    
    

    Cost of Service and Rate Design

    
    

14. The COMPANY performed a cost of service study to determine the appropriate allocation of rate increases among the various customer rate classes. The study showed that four classes-- outdoor lighting (Rate No. 2) , residential service (Rote No. 3) employee service (Rate No. 4), and standby service (Rate No. 7)-- had negative rates of return during the test year. The COMPANY proposes rate increases to those classes sufficient to achieve a positive rate of return; it proposes increases to general service (Rate No. 1) and barge volume (Rate No. 5) in order to retain a reasonable balance between rates and prevent customers from switching classes for more favorable rate's.

    No increase is proposed for interruptible service (Rate No. 6) because tie study showed that that class was yielding an ample rate of return--101.64 percent. No increase is proposed for the housing authority class because it also yields a sufficient return. (Testimony of Jerauld; P-5.

    
    

15. With the exception of the rate increase proposed for the employee service (Rate No. 4), it is found that the proposed allocation of revenue and rate increases among rate classes are fair, reasonable, and supported by the costs of providing service to the affected classes. 2/ In its proposed findings of fact, the COMMISSION suggests an alternative revenue allocation schedule and rate design. However, the fixing of rates is a complex process requiring the consideration of numerous factors and the exercise of professional judgment; the process is neither ministerial, nor mechanical. The affirmative schedule proposed by the COMMISSION was not presented at hearing or subject to cross-examination by the COMPANY. Lacking evidentiary support in the record, it must be rejected. (Testimony of Jerauld; P-5.)

    Employee Service Rate

    
    

16. The COMPANY offers employees a special gas service rate lower than that charged other residential customers. It considers it a benefit for employees and an inducement to them to use gas in their homes. Thirty-one percent of the eligible employees receive the benefit of this special rate. The COMPANY experienced a negative return of 2.79 percent from this class during the test year; a 23.16 percent rate increase is proposed, resulting in a positive rate of return of .84 percent. (Testimony of Jerauld; P-5, R-2.)

    
    

17. The favorable rate offered employees (Rate No. 4) is unrelated to the cost of providing them gas service. It, admittedly, represents a COMPANY personnel decision; it is not supported by cost of service analysis or any other acceptable rate-making methodology. When viewed as a form of compensation, almost two-thirds of the eligible employees have not realized its benefit. It is found that this special rate for employees--subsidized by other rate-payers-- is unfair, unreasonable, and unsubstantiated by the costs of service. It represents a departure from the rate-making methodology used by the COMPANY in setting its other rates, and should be eliminated. (Testimony of Jerauld; P-5, R-2.)

    
    

    Base Gas Cost

    
    

18. The COMPANY proposed tariffs which do not reflect the increase in purchased gas cost since its last rate case. It assumed that the current purchased gas adjustment ("PGA") , on a per therm basis, could be added to the proposed tariffs, as it has been to the existing tariffs. Due to substantial increases in the cost of gas, the COMPANY does not oppose rolling the existing PGA into the base rates. Accordingly, the COMPANY should adjust its base roles pursuant to the PGA in effect at the time of final COMMISSION action in this case. The COMMISSION's suggestion in its proposed findings of fact of a .20 per therm PGA roll-in to the proposed tariffs is unsupported by the evidence of record and must be rejected. (Testimony of Jerauld, COMMISSION Proposed Recommend Order, Paragraph ii; P-5.

    
    

    Extension of Housing Authority Rates to Other Customers

    
    

19. Customers testified in favor of extending the lower housing authority gas service rates to other low-income persons residing outside the designated housing authority projects. Many low-income and elderly persons on limited fixed incomes residing within the service area do not live in housing projects; it is as burdensome for them to pay rising energy prices as it is for those living in government subsidized housing. However, the lower rate granted to housing authority residents is based on major FHA contributions to construction of the gas systems which serve them; it is not based on the limited financial resources of the customers. To extend housing authority rates to those customers who have not made comparable contributions to construction would force customers in other classes to subsidize preferential rates. To impose such a burden on other classes would be unfair, unreasonable, and discriminatory. (Testimony of Tompkins, Rose; P-5.)

    
    

    CONCLUSIONS OF LAW

    
    

20. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. Section 120.57(1), Florida Statutes.- -

21 The COMMISSION is required to fix fair, just, and reasonable rates which may be charged and collected by a public utility, such as the COMPANY. Section 366.06(1), Florida Statutes (Supp. 1980) . In fixing such rates, the COMMISSION is authorized to consider various rate-making elements, including rate base or the utility's net investment in property used and useful in providing utility service to the public, adequacy of service, cost of providing such service, and a reasonable rate of return. Sections 366.06(1), 366.041(1), supra. In fixing fair, just, and reasonable rates for each customer class, the COMMISSION is required to consider, if practicable:

" the cost of providing service to the class, as well as the rate history, value of service, and experience of the utility; the consumption and load characteristics of

the various classes of customers; and public acceptance of rate structures." Section 366.06(1), Florida Statutes (Supp. 1980).

It is concluded that the COMPANY has sustained its burden to support and justify its application for rate increase and is entitled to rate increases sufficient to allow it an opportunity to generate additional annual gross revenues of

$656,907. Such additional revenues will allow it a fair and reasonable rate of return on its rate base pursuant to Sections 366.041 and 366.06(1), supra.

1. The tariff rates, as accepted or modified in the findings of fact above, are fair, just, reasonable, and constitute proper application of the statutory rate-making criteria, supra.

   
   

2. The parties' proposed findings of fact not incorporated herein are rejected as unsupported by the evidence, or as irrelevant and unnecessary to the issues presented.

RECOMMENDATION

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

That the Florida Public Utilities Company's application for rate increase be granted to the extent of allowing it to file new tariff rates, in the manner outlined above, designed to generate additional annual gross revenues of

$656,907.

DONE AND ORDERED this 6th day of February, 1981, in Tallahassee, Florida.

R. L. CALEEN, JR. 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 6th day of February, 1981.

ENDNOTES

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

2/ The COMPANY belatedly proposed an increase in connection and change of account charges, infra, without indicating which rates would be reduced due to the additional revenue. Accordingly, the proposed rate increases should be Uniformly reduced an amount sufficient to offset the revenue resulting from increased connection and change of account charges.

COPIES FURNISHED:

Daniel Downey, Esquire Post Office Box 2345 Beach, Florida 33480

Jack T. Bridges, Esquire Post Office Drawer Z Sanford, Florida 32771

Marta M. Crowley, Esquire Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Docket for Case No: 80-001850

Orders for Case No: 80-001850