The Issue Whether Petitioner's application to increase its water and sewer rates to its customers in Palm Beach County should be granted; and Whether Petitioner failed to comply with Florida Public Service Commission Orders Nos. 0924 and 8382 directing Petitioner to comply with information submission requirements in connection with its application for rate increase. CONCLUSIONS and RECOMMENDATION Petitioner's rate increase request should he granted in accordance with the findings in this recommended order. Such rates are just, reasonable, not unjustly discriminatory and consistent with Section 367.081, Florida Statutes (Supp. 1980) Commission Orders No. 8924 and 0382 did not, by their terms, direct Petitioner to comply with minimum filing requirements by a date certain. Therefore, Petitioner's lengthy and unexcused delay in complying with such requirements does not constitute a violation of the Orders.
Findings Of Fact Background In May, 1978, Petitioner, Mangonia Park Utility Company ("UTILITY"), filed with the Respondent, Florida Public Service Commission ("COMMISSION"), applications to increase, on an interim basis, its sewer and water rates to its customers in Palm Beach County, Florida. By Order Nos. 8924 and 8382, issued on June 21 and July 7, 1978, respectively, the COMMISSION suspended the proposed rates, approved interim water and sewer rate increases, found that the UTILITY's application did not comply with the COMMISSION's minimum filing requirements, and acknowledged the UTILITY's statement that it would file an application which meets filing requirements by September 1, 1979. Between November, 1979, and April, 1980, the UTILITY supplied additional information but did not fully comply with the minimum filing requirements. On May 15, 1980, the COMMISSION issued an Order requiring the UTILITY to show cause why the interim rates should not be repealed and monetary penalties imposed for the UTILITY's alleged failure to comply with Order Nos. 8924 and 8382. The question of the UTILITY's compliance with those Orders was set to be heard in conjunction with its rate increase application. It was not until May 29, 1980 that the UTILITY submitted a completed application and complied with the minimum filing requirements. On November 5, 1980, the COMMISSION forwarded this case to the Division of Administrative Hearings for the assignment of a Hearing Officer to conduct a formal Section 120.57 hearing. This case was then set to be heard on January 21, 1981. At hearing, the UTILITY called Philip D. Mitchell and Boyd D. Ellis as its witnesses and offered Petitioner's Exhibits No. 1 through 6 into evidence. On February 16, 1981, the COMMISSION timely submitted its proposed findings of fact and conclusions of law. (Testimony of Willis, Ellis, P-2, R-1). II Rate Increase Application The UTILITY owns and operates water treatment facilities consisting of three wells, two pumps, a lime softening unit, and two storage tanks. Since April, 1979, the City of Riviera Beach has provided treatment to the UTILITY's sewage. The UTILITY's sewage facilities now consist of a master lift station, pumps, and sewage lines. The approved test period for this rate proceeding is the twelve months prior to June 30, 1979. During the test year, the UTILITY provided water service to 113 residential customers, 49 general service customers, and one multiple dwelling customer; it provided sewer service to 75 residential customers, 47 general service customers, and one multiple dwelling customer. As a result of its analysis of the UTILITY's application, together with its books and facilities, the COMMISSION proposed various adjustments, almost all of which were accepted and agreed to by the UTILITY. At hearing, issues involving the UTILITY's request for pro forma salary adjustments and recovery for income tax liability were eliminated when it withdrew its request. The only factual issue which remains concerning the requested rate increase is the useful life and depreciation rate which should be applied to the UTILITY's plant and equipment. Useful Life and Depreciation Rate The COMMISSION contends the standard 40-year useful life with a 2.5 percent depreciation rate is appropriate; the UTILITY contends that such a depreciation rate does not take into account changing technology and obsolescence, and that a 25 to 30-year useful life with a 3.3 to 4 percent depreciation rate is more appropriate. The UTILITY acknowledged that the determination of useful life of utility equipment required engineering judgment. However, it presented no testimony by a qualified engineer on the subject. Its evidence consisted solely of its accountant's long- standing "conceptual objection" to use of a 40-year useful life for utility plants. The only competent and credible evidence on the question was presented by the COMMISSION. Its qualified engineer testified that he conducted an on-site independent study of the UTILITY plant and concluded that, in this instance, a 40-year useful life, with a 2.5 percent depreciation rate, was appropriate. In view of the foregoing, it is determined that a 40-year useful life, with a 2.5 percent depreciation rate, should be applied against the UTILITY's plant. (Testimony of Mitchell, Munt). Having thus determined the appropriate depreciation rate for use in this case, the parties have agreed to the following rate- making factors: Rate Base The adjusted test year rate base for the UTILITY's water system is $210,799; the rate base for its sewer system is $65,151. Both are calculated below: RATE BASE TEST YEAR ENDED 06/30/79 WATER SEWER Utility Plant in Service $ 386,611 $ 287,939 Plant Held For Future Use -0- (3,750) Acquisition Adjustment 18,990 -0- Accumulated Depreciation (42,485) (28,541) Amortization of Acquisition Adjustment (4,600) -0- Contribution in Aid of Construction (Net of Amort.) (154,349) (203,069) Working Capital Allowance 6,632 12,572 Income Tax Lag -0- -0- Rate Base 210,799 65,151 (Testimony of Willis, Mitchell, R-3) Net Operating Income The UTILITY's adjusted operating income for the test year - a $15,673 loss (water) and a $46,837 loss (sewer) - together with its rate of return, are depicted below: OPERATING STATEMENT TEST YEAR ENDED 06/30/79 WATER SEWER Operating Revenues $ 46,441 $ 60,192 Operating Expenses Operation 43,759 94,572 Maintenance 9,297 6,002 Depreciation (sic) 4,716 993 Amortization 541 -0- Taxes Other Than Income 3,801 5,462 Income Taxes -0- -0- Total Operating Expenses 62,114 107,029 Operating Income $(15,673) $(46,837) Rate of Return (7.44 perct) (Testimony of Willis, Mitchell, R-3) Capital Structure and Cost of Capital (71.89 perct) The UTILITY's capital structure, and weighted cost of capital, are as follows: COST OF CAPITAL COMPONENT RATIO COST RATE WEIGHTED COST Long-Term Debt Customer Deposits 99 perct 9.84 perct 1 perct 8.00 perct 9.74 perct .08 perct 100 perct 9.82 perct (Testimony of Mitchell, Clinger, R-5) Rate of Return Based on its cost of capital, the parties have agreed that percent constitutes a fair rate of return on the UTILITY's rate base. The UTILITY has a deficit in common stock equity; a return on negative investment is inappropriate. (Testimony of Mitchell, Clinger, (sic), R-5) Rate Structure The UTILITY's current water rates are conventionally structured using a minimum monthly charge which includes a minimum number of gallons and a one-step excess rate over that minimum; its residential and general service sewer rates are structured using a flat rate. The parties agree that the rates should be revised in accordance with what is known as the base facility charge (BFC) rate design. The purpose of this design is to recover the costs of providing service to each particular customer. Its monthly charges consists of two components: A base charge which covers expenses not related to actual water use, such as depreciation, billing and collecting, property taxes, debt interest, maintenance, etc., and a gallonage charge based on the allocated costs associated with pumping, treating and delivering the water to the customer. Sewer rates are similarly structured and directly related to actual water consumption. The BFC rate design structure equitably distributes the fixed and variable costs of providing service to customers and allows them to exercise greater control over the rates which they pay. In implementing the BFC rate design, the COMMISSION makes two specific recommendations which are not opposed by the UTILITY, are reasonable, and should be followed: (1) that public fire hydrants not be charged, and (2) that the monthly charge for private fire lines be one-third of the BFC charge for the particular sized connection. (Testimony of Taylor, R-4A) Required Revenue In order to be allowed the opportunity to earn a 9.82 percent return on its rate base, the UTILITY should file rates which generate annual gross revenue at $83,747 for the water system and $114,792 for the sewer system. This revenue should produce net operating revenue of $20,700 and $6,398, respectively. (Testimony of Mitchell, Willis, R-3) III Alleged Violation of Commission Order Nos. 8924 and 8382 The COMMISSION contends that the UTILITY violated Order Nos. 8924 and 8382 by its failure to comply with minimum filing requirements until May 29, 1980. For such violations, the COMMISSION seeks to impose a penalty of $200. The orders in question do not explicitly direct or order the UTILITY to file an application which complies with the minimum filing requirements by a date certain. Consequently, the UTILITY's lengthy and unexcused delay in complying with such requirements does not constitute a violation of or refusal to comply with the orders in question. (Testimony of Mitchell, Willis, R-1)
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following facts relevant to the four issues presented for determination are found: WORKING CAPITAL In calculating debt and equity costs for the petitioner, it is appropriate to use the parent company's capital structure. Here, forty percent (40 percent) of the parent's capital structure is equity and sixty percent (60 percent) is debt. In order to support its operating and/or construction activities, the petitioner receives advances from its parent company, Utilities, Inc., a Delaware corporation, or from its subsidiary, Water Service Corporation. The petitioner has treated these advances as part of its equity structure since there is a cost to these funds to petitioner, in substance if not in form. If these funds do have a specific, identifiable cost in the test year ending December 31, 1979, such as interest, they are properly includable as part of petitioner's equity structure. Pursuant to an Agreement between petitioner and its parent, the monetary advances by petitioner's parent company or its subsidiary to support petitioner's operating and/or construction activities will bear interest at the end of each calendar quarter at the rate of prime plus one quarter of one percent per annum on the average advances outstanding during the quarter. (Petitioner's Exhibit 10). This is a known and identifiable cost, and therefore the position taken by the petitioner regarding working capital allowance is correct. The proper amount attributable as "working capital allowance" is $54,699 for the water rate base and $28,179 for the sewer rate base for the test year ending December 31, 1979. UNCOLLECTIBLE REVENUES For the years 1977, 1978, 1979 and 1980, the petitioner's bad debt expense averaged 1.2 percent of its total revenues. (Petitioner's Exhibit 9). The petitioner proposes a pro forma bad debt expense contending that the number of people who do not pay their bills remains essentially constant and that as rates increase, the dollars increase in relationship to the rates. In other words, petitioner proposes that the annual expense for uncollectible accounts should be increased by the same percentage that the test year dollars uncollected from customers who did not pay their bills relates to the amount of dollars which would be collected under the increased rate. The respondent's witness felt there had been no proof of the direct relationship between the increase in uncollectible accounts. In designing rates for the future, the amount of the customer's consumption of utility services during the test year are employed on the assumption that past consumption will represent future consumption. ACCUMULATED DEPRECIATION The petitioner has requested an adjustment in its depreciation rate from 2.0 to 2.86 percent, based on all facilities other than general plant. The respondent has concurred with this requested increase to 2.86 percent, but would apply that depreciation rate to the beginning of the 1979 test year, thereby treating the difference as a deduction in rate base. If the adjusted rate is applied to the expense side, it must also be applied to the investment side, according to respondent's accounting analyst. The petitioner feels that the depreciation expense should be treated as a reduction in rate base only to the extent that it has been allowed in previous rates and collected from the customers. The increased expense will not be collected until the year 1981. The effect of charging the increased depreciation back to the 1979 test year would mean a $9,732 reduction in the water rate base and an $8,540 reduction in the sewer rate base. RATE OF RETURN The petitioner and the respondent agree that petitioner's capital structure is composed of forty percent equity and sixty percent debt capital, and that the cost of debt is 9.63 percent, for a weighted cost of 5.78 percent. The petitioner feels that the appropriate return to be placed on equity capital is 19.63 percent, for a weighted cost of 7.89 percent and an overall 13.63 percent return on rate base. The respondent would place the cost rate for equity at 16 percent, for a weighted cost of 6.40 percent and an overall 12.18 percent return on rate base. The petitioner utilized three methods of calculation to arrive at its proposed rate of return on equity capital, and then averaged the three results. One such method was to create a hypothetical Ba rating and then add a risk factor of 4 percent, resulting in a cost of equity of 20.7 percent. A second method, utilizing a combination of dividend yield on listed water companies and a growth factor, resulted in a cost of equity capital of 18.72 percent. The third approach involved the addition of the 4 percent risk factor of equity over debt to the average yield outstanding for various water companies, resulting in a return of 18.4 percent, Considering an attrition allowance on equity capital of 1.2 percent, a 14.7 percent overall rate of return would be within the bounds of a reasonable rate of return. Utilizing a comparable earnings analysis of nonregulated and regulated utilities, including electric, gas and telephone as well as water and sewer utilities, and taking dividend yield rates and adding growth rates, respondent's financial analyst computed the reasonable range of the cost of equity for the Florida water and sewer industry to be between 14.25 and 16.25 percent. With the equity ratio being 40 percent, respondent's witness recommended a 16 percent return on equity, with permission to fluctuate plus or minus one percent. PUBLIC TESTIMONY Members of the public who testified at the hearing were concerned with increased charges for water and sewer service since many of them were on fixed and limited incomes. While one witness complained of mosquito larvae in a dish of water left over a weekend for a dog, other witnesses opined that they had received good service from the petitioner.
Conclusions In consideration of the above and the entire record, we make the following findings of fact and conclusions of law: Utilities, Inc. of Florida is a public utility subject to the jurisdiction of this Commission. The value of the Utility's rate base devoted to public service on which it is entitled to earn a fair return is $589,663 for its water division and $427,422 for its sewer division. The Company's adjusted net operating income for the test year was $18,847 and $24,405 for its water and sewer divisions, respectively. A range of 15 percent to 17 percent constitutes a fair and reasonable return on equity for Utilities, Inc. of Florida with rates to be set at the mid- point of 16 percent which gives an overall rate of return of 12.18 percent. The rates collected on an interim basis pursuant to Order Nos. 9446 and 9559 were lawful, just and reasonable and the revenues received thereunder should be retained by the Company. That the revised rates, as authorized herein constitute just, reasonable compensatory and not unfairly discriminatory rates within the meaning of Chapter 367, Florida Statutes. The use of a base facility charge rate structure eliminates discrimination against seasonal customers and encourages conservation and is appropriate for use in this docket. NOW, THEREFORE, IN CONSIDERATION THEREOF, it is ORDERED by the Florida Public Service Commission that each and every finding of fact and conclusion of law as expressed herein is approved. It is further ORDERED that Utilities, Inc. of Florida is hereby authorized to file rate schedules consistent herewith designed to generate gross annual revenues of $350,316 for the water system and $206,865 for the sewer system, which represent increases over the test year revenues of $85,007 and $41,335, respectively. It is further ORDERED that Utilities, Inc. of Florida will make refunds to its water customers consistent with the discussion in the body of this order. It is further ORDERED that the rates approved as a result of this Order shall be effective for consumption after the date of this order, but no bills will be rendered thereunder until after the filing and approval of revised tariff pages appropriate with this Order. It is further ORDERED that the Company include in each bill during the first billing cycle during which this increase is effective a bill stuffer explaining the nature of the increase, average level of increase, a summary of the tariff changes, and the reasons therefor. Said bill stuffer shall be submitted to the Commission's Water and Sewer Department for approval prior to implementation. By Order of the Florida Public Service Commission this 9th day of June , 1981. (SEAL) HDB Steve Tribble COMMISSION CLERK
Recommendation Based upon the findings of fact and conclusions of law recited herein, it is RECOMMENDED that the petitioner's application for a rate increase be granted as requested except for adjustments made for uncollectible debts or accounts. Respectfully submitted and entered this 5th day of March, 1981. 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 5th day of March, 1981. COPIES FURNISHED: R.M.C. Rose Myers, Kaplan, Levinson, Kevin and Richards Suite 103 1020 East Lafayette Street Tallahassee, Florida 32301 Harry D. Boswell Staff Counsel Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 Steve Tribble, Clerk Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 ================================================================= AGENCY FINAL ORDER ================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION In re: Application of UTILITIES, DOAH CASE NO. 80-1893 INC. OF FLORIDA for an increase DOCKET NO. 800395-WS(CR) in water and sewer rates in ORDER NO. 10049 Seminole and Orange Counties, ISSUED: 6-9-81 Florida. / The following Commissioners participated in the disposition of this matter: JOSEPH P. CRESSE, Chairman GERALD L. GUNTER JOHN R. MARKS, III KATIE NICHOLS Pursuant to notice, an administrative hearing was held before Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, on January 20, 1981, in Maitland, Florida. The Hearing Officer's Recommended Order was entered on March 5, 1981, and oral argument was held on May 11, 1981, on exceptions filed by the Commission staff. We now enter our order.
Findings Of Fact Quality of Service: Twelve customers testified at the hearing in opposition to the proposed rate increase. The major customer objection is the size of the increase sought. Other objections are directed at the utility's rate structure, and the required tie-in to the PWA pipeline. Some customers desire to have separate rates set for the two areas served by J. C. Utilities, Inc., (Timber Oaks and San Clemente East), and one customer objected to the taste and smell of the water being provided. Nevertheless, an engineer from the Florida Public Service Commission presented evidence that the utility is meeting all state standards and is not under citation by the Department of Environmental Regulation. On the basis of the entire record, the evidence supports a finding that the utility's water and sewer service is satisfactory. Used and Useful Plant in Service. The utility contends that 33.72 percent of its sewer plant is not used and useful in the public service, and has deleted this amount from its sewer rate base. The Florida Public Service Commission engineer agrees, based on the actual recorded flows of the sewer plant and the growth of the system. The water plant in service is 100 percent used and useful in the public service. Acquisition Adjustment: The utility calculated an addition to rate base of $17,370 for San Clemente East (net of 1978 amortization) for acquisition costs, and presented evidence to demonstrate that this acquisition is in the public interest. Based on the entire record, the evidence supports a finding that this acquisition benefits the customers of J. C. Utilities, Inc., and is in the public interest. Thus, the adjustment is warranted. Income tax expense: Several questions are raised in the area of income tax expense. These deal with whether to treat the utility as a separate entity or part of a group filing consolidated tax returns, the appropriate computation of state income taxes, and the effect the capital structure of the utility has on taxable income for ratemaking purposes. All of these questions except one address the ultimate dollar amount of tax expense. The exception addresses the appropriateness of the expense. Only if income taxes are determined to be appropriate can the dollar amount of such taxes be considered. When net operating income is equal to or less than interest expense, there is no taxable income. This is generally true whenever a company's capital structure consists largely of debt or of debt only. The capital structure of J. C. Utilities, Inc., is comprised entirely of debt, according to the company's financial statements. The annual report shows capital stock of $10, a deficit in retained earnings of $68,834, and additional paid-in capital of $490. The utility's financial witness verified that J. C. Utilities, Inc. has no externally financed debt and relies for funds on its parent, U.S. Homes Corporation. The application reflects that the company's capital structure consists of customer deposits (debt), and loans and advances from the parent company (debt). This evidence supports a finding that the utility's capital structure is 100 percent debt. Accordingly, there can be no allowance for either state or federal income taxes in making a determination of revenue requirements for this utility. (See Order No. 9256 in Docket No. 790027-W) and all questions relating to the dollar amount of income tax expense are irrelevant. Cost of capital: J. C. Utilities, Inc., is financed totally by its parent company, U.S. Homes Corporation. The application originally requested a rate of return of 11.5 percent. At the hearing, various witnesses for the utility suggested rates ranging from 13.2 percent to 25 percent. However, since the utility has no equity, no return on equity can be provided. In calculating an appropriate rate of return to be granted to the utility, the original cost of debt rate of 11 percent and the recently revised rate of 8 percent on customer deposits can be used. These cost of capital components and rates thereon yield a weighted average cost of capital of 11.32 percent. This rate is supported by the evidence, and should be granted. Depreciation on Contributed Property: Appropriate adjustments have been made to the utility's water rate base and sewer rate base, and operating statements, to reflect the practice of the Florida Public Service Commission to add back accumulated depreciation on contributed property in rate base, and remove these items from operating expense. These adjustments appear on the attached schedules. Rate Base and Operating Statements: The attached schedules 1 through 6 detail the utility's rate base for water, rate base for sewer, and the water and sewer operating statements. Appropriate explanations for the various adjustments also appear in these schedules. Construction water: During the test year, the utility did not bill for construction water in the months of January, February, and March. Starting in April construction water ,and line flushing was metered and billed to the various construction companies connected with the Timber Oaks development. During the final nine months of the year when the construction water was accounted for a total of 28,626,903 gallons were sold which generated $17,590 in water revenue. In order to estimate the unaccounted for construction water, the nine months billing can be annualized. This amounts to an additional 9,542,301 gallons, which increases test year revenue by $5,725. Rate Structure: In order to structure rates that will be fair to all customers, they must not only generate the approved revenue, but should also assure that all classes of customers share in the cost to provide service. The base facility type of rate structure establishes a monthly minimum service charge, which covers fixed costs such as depreciation, property taxes, and allocated portions of billing, collecting, and customer accounting expenses. Meter size is still used to determine the demand factor. After the base charge is established, a charge per 1,000 gallons is determined. This charge recovers costs related to transmission and treatment, and allocated portions of billing, collections, accounting expense, plant labor, etc. Customers then pay a gallonage charge based on use. This allows each customer some control over the amount paid for service. This form of rate structure should be used in setting rates for J. C. Utilities, Inc. Separate rate structures: J. C. Utilities, Inc. provides water service to the separate, unconnected systems serving San Clemente East and Timber Oaks. An appropriate rate structure should be established to provide separate water rates for San Clemente and Timber Oaks, so that the customers of each system pay rates to cover only the costs associated with these systems. P.W.A. surcharge: Because permanent rates are to be established, the utility should no longer be permitted to make a separate surcharge for PWA water purchased. This expense should be incorporated into the other costs of J. C. Utilities, Inc. Connection charges: In its application, the utility requested an increase in water and sewer connection charges. The company used the current number of customers served by the water system to arrive at the customer hydraulic share. The correct way to establish the hydraulic share is to divide the number of customers that can be served by the system into the cost of the water plant. However, there is other information needed in order to accurately and fairly set connection charges, which was not presented by the utility. Rather than deny the request for an increase in water and sewer connection fees, an investigation docket should be opened for the purpose of determining whether increases are warranted.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of J. C. Utilities, Inc., 2001 Ponderosa Avenue, Port Richey, Florida 33568, be granted in part, and that the utility be authorized to receive gross annual water revenues of $28,731 for San Clemente East, and $203,725 for Timber Oaks, and gross annual sewer revenue of $99,473, by rates to be approved by the Florida Public Service Commission. It is further RECOMMENDED that an acquisition adjustment of $17,370 be allowed for San Clemente East. It is further RECOMMENDED that the utility be required to implement a base facility charge in structuring its rates, in the manner set forth above. It is further RECOMMENDED that a separate investigation docket be opened for the purpose of resolving the matter of the utility's request for increased water and sewer connection charges. THIS RECOMMENDED ORDER entered on this 8th day of July, 1980, in Tallahassee, Florida. WILLIAM B. THOMAS Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 ================================================================= AGENCY FINAL ORDER ================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION In re: Application of J. C. DOCKET NO. 790399-WS (CR) Utilities, Inc. to amend its ORDER NO. 9808 rates and charges. ISSUED: 2-23-81 / DOAH CASE NO. 80-1184 The following Commissioners participated in the disposition of this matter: JOSEPH P. CRESSE, CHAIRMAN GERALD L. GUNTER JOHN R. MARKS, III KATIE NICHOLS Pursuant to Notice, an administrative hearing was held before William B. Thomas, Hearing Examiner with the Florida Public Service Commission, on May 6, 1980, in Port Richey, Florida, on the application of J. C. Utilities, Inc., for increased rates and charges for water and sewer service provided to its customers in Pasco County, pursuant to Section 367.081, Florida Statutes. On July 1, 1980, the matter was transferred to the Division of Administrative Hearings, but continues to be assigned to William B. Thomas, as DOAH Hearing Officer, for a recommended order. APPEARANCES: Jack H. Geller, Esquire, Suite 200, Clearwater professional Center, 600 Bypass Drive, Clearwater, Florida 33156, for J. C. Utilities, Inc., Petitioner. Samuel H Lewis, Esquire, 101 East Gaines Street, Tallahassee, Florida 32301, for the Florida public Service Commission and the public generally. The Hearing Officer's Recommended Order was filed on July 8, 1980. Timely exceptions to the Hearing Officer's recommended order were filed by the petitioner. Now after consideration of all of the evidence in the record, we enter our order.
Findings Of Fact Respondent is a state agency whose primary purpose is to provide an adequate supply of potable water to the Florida Keys. To this end, it has acquired or constructed well fields, treatment plants, transmission pipelines, pumping stations, distribution pipelines, and other related facilities. Because of its exaggerated linear service area of 130 miles, it incurs high capital and operating costs. Chapter 76-441, Laws of Florida, Respondent's enabling act, confers upon Respondent the authority to impose the subject System Development Fee. Respondent imposed the subject System Development Fee, which is an impact fee, in December 1974. Respondent's Rule 48-3.002(1) expressed the purposes of the System Development Fee as follows: The System Development Fee is an impact fee charged to new and existing customers who modify, add or construct facilities which impose a potential increased demand on the water system. This fee is charged in order to equitably adjust the fiscal burden of a new pipeline and expanded or improved appurtenant facilities between existing customers and new water users. All system development fees are allocated to the direct and indirect costs of capital improvements made necessary by actual and expected increased demand on the water system. The term "unit" is a commonly accepted concept in the public utility industry, and impact fees are often assessed on a per "unit" basis. Respondent's Rule 48-3.002(5)(b) provides for the assessment of the System Development Fee on a per unit basis and provides, in pertinent part, as follows: 5. (b) Where the premises served consists of single or multiple commercial units, the System Development Fee shall be assessed based on each individual unit. In those cases where the individual unit will require a meter size that exceeds a 5/8" meter to properly support the unit, the System Development Fee shall be based on the meter size required to serve that unit, whether individually metered or not. ... The term "unit", as used in Respondent's System Development Fee Rule is a technical term, but it is defined by Respondent's Rule 48-2.001(19) as follows: (19) "Unit" A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential use. The number of units existing in a multiple unit service operation are to be determined in accordance with Rule 48-2.007(1)(c), which provides, in pertinent part, as follows: ... The number of units, whether residential or commercial, will normally be determined according to applicable city or county occupational licenses, building permits, or plans of the subject structure. In cases of discrepancy or inconsistency in definition, or interpretation, the following Florida Keys Aqueduct Authority definition will control: A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential purpose. Respondent grandfathers in units that were in existence prior to December 1974 when the System Development Fee was first enacted. A System Development Fee is not imposed on any unit that was in existence prior to December 1974. Of the 376 improved campsites that presently exist at Petitioners' campground, 279 were improved prior to 1974. Consequently, only the 97 campsites improved after the enactment of the System Development Fee are at issue in this proceeding. Respondent is concerned with the potential use of a unit because it must be prepared to respond to that potential use. Once a customer has paid the System Development Fee for a unit, the owner of the unit can transfer the unit without the purchaser having to pay an additional System Development Fee regardless of the use the purchaser intends to make of the unit. Respondent has consistently applied the System Development Fee charges on a per unit basis for the purposes stated in its Rule 48-3.002(1). The per unit charge was $600 when first enacted in 1974, was increased to $1,500 in 1984, and was increased to its present level of $2,000 in 1986. A widely publicized amnesty program was in effect from August 1, 1984 through October 1, 1984, during which customers who had added units to their property without reporting same to Respondent could report the units during the amnesty program and pay the System Development Fee on an installment basis. Customers were advised that after the amnesty program closed, the System Development Fee would be based on rates in effect at the time an unreported unit was discovered, not at the rate the unreported unit was constructed. This policy serves to encourage Respondent's customers to promptly report newly added "units", and the policy produces fees commensurate with the expenses to be incurred by Respondent after it learns of the new units. Petitioner George W. Eager is the owner of approximately 30 acres of real property located west of U.S. 1 at Key Largo, Florida. Mr. Eager purchased the subject property in 1969, sold it in 1974, and reacquired it in 1975 by a deed given in lieu of foreclosure. This property is located within the area served by Respondent. Petitioner Calusa Camp Resort, Inc., a closely held Florida corporation whose stock is owned by Mr. Eager and his two children, operates a campground on this real property. In addition to the 376 campsites, the campground contains a grocery store, a marina, laundry facilities, bathrooms and showers, a swimming pool, a sewage treatment plant, and a sewage pumping station. The marina was not in operation at the time of the formal hearing. Petitioners hold the two business licenses they are required to have by Monroe County. One business license is for the operation of the campground while the other one is for the operation of the grocery store. Petitioners secured all pertinent building permits during the course of the improvement of the campground. Mr. Eager opened the campground in 1969, at which time he entered into a contract for services with Respondent. Mr. Eager constructed a private water system as part of the improvements to his real property. This private water system was connected to Respondent's water transmission system in 1969, and a one inch master meter was installed at that point of delivery. This one inch master meter has served Petitioners' property at all times pertinent to this proceeding. Mr. Eager entered into a new contract for services with Respondent in 1975. This contract did not indicate that Mr. Eager's property was considered a multiple unit operation and it did not indicate in the space available the number of units to be served. By a provision in this contract, Respondent reserved the right to change its rules and regulations and the rates for use of water from time to time. In 1976, Mr. Eager entered into another contract for services with Respondent for the provision of water to a swimming pool that he had constructed. This contract did not indicate that Mr. Eager's property was considered a multiple unit operation and it did not indicate in the space available the number of units to be served. Of the thirty acres owned by Mr. Eager, approximately twenty acres are west of the access road that divides the property and approximately ten acres are east of the road. Prior to 1974, Mr. Eager developed 279 individual campsites on eighteen of the acres west of the access road. These campsites had water, electrical, and sewer hookups for recreational vehicles and could accommodate all types of camping. A grocery store, bathrooms and showers, laundry facilities, and recreational facilities were also located on these eighteen acres. The remaining two acres west of the access road were reserved as the site for the marina. Prior to 1974, the ten acres east of the access road was used for open camping, but individual campsites were not designated. Water was made available to the campers who used this area through approximately 32 spigots spaced throughout the area and the other campground facilities were available to them. The ten-acre open area would accommodate up to 125 campsites. Since the enactment of the Systems Development Fee, Petitioners converted the ten-acre open camping area into 97 campsites with each campsite having water, electrical, and sewer hookups. This development, completed in 1983, organized the camping in the ten-acre area, but it did not increase the number of potential campers in the ten-acre area over the 1974 level. This development did, however, change the type camping that could be accommodated in this area. Prior to the development, the area could not accommodate camping in large vehicles such as motorhomes and recreational vehicles. After the development, the campsites were improved to accommodate all types of camping. None of the campsites are permanently improved with any structures or rooms and Petitioner does not rent campsites with accommodations on them. Persons renting the campsites provide their own method of camping, whether it be by car, truck, motorhome, travel trailer, tent, or otherwise. In 1983, Petitioners requested that the size of the water meter serving his property be increased from one inch to two inches. At that time, Respondent's staff suspected that Petitioners may have modified the campgrounds so as to have triggered the System Development Fee. Consequently, Mary Castellano, Respondent's Policy & Procedure Coordinator wrote a letter of inquiry to Petitioners' attorney. This letter, dated May 2, 1983, provided, in pertinent part, as follows: The material submitted by you last March 2, 1983, has been reviewed. Although a planned layout of the campground was provided from 1969 showing a plan to develop 279 camp and trailer spaces, what is required, prior to approval of a change to a larger meter, is some type of proof showing the number of camp and trailer spaces in existence and actually served prior to June 13, 1974, and certification regarding the actual number of camp and trailer spaces in existence today. If those two numbers are the same, no system development fee will be assessed and Mr. Eager's request for a 2" meter will be honored upon payment of additional deposit, new service charge and tapping fee. However, if there were less camp and trailer spaces in 1974 actually in existence then than there are at the present time, then additional system development fees will be assessed on a per space basis for the difference. Ms. Castellano's letter of May 2, 1983, accurately stated Respondent's interpretation of its rule imposing the System Development Fee. The information requested by this letter was not forthcoming, and Petitioners did not pursue the request to change the master meter from one inch to two inch again until 1989. Respondent's staff did not pursue whether Petitioners owed a System Development Fee until the issue was again raised in 1989. The water bills sent by Respondent to Petitioners up until April 1989 reflected that Petitioners had been classified as a "single unit commercial" account. In April 1989, the billing reflected that Petitioners were classified as a "multiple unit commercial" account. Because Petitioners' private water system is located on private property, Respondent's staff could not discover any undeclared units except by conducting an appropriate inspection. In 1989 Respondent's staff conducted such an inspection of Petitioners' campground and determined that Petitioners had added 97 campsites, that each campsite was a "unit" within the meaning of Respondent's rules, and that a system development fee of $2,000 was due for each site. This was the first time that Respondent had inspected the property and was the first time that Respondent knew that Petitioners had improved the 97 campsites. Respondent does not routinely inspect all private water systems or keep an up-to-date count of all units within its service area because of the costs of gathering such information. On April 26, 1989, Mary Castellano, who was still employed by Respondent, but whose title had been changed to Director of Policy Administration, wrote Petitioners a letter which provided, in pertinent part, as follows: Of the 376 spaces/units currently existing, the Authority accepts the documentation submitted to establish that 279 spaces/units existed prior to June 1974, for which no System Development Fees are due. However, the following fees are assessed and due for the remaining 97 spaces/units: System Development Fee ($2,000 x 97 Units) $194,000.00 Deposit ($75 x 97 Units) 7,275.00 Service Charge ($15 x 97 Units) 1,455.00 $202,730.00* *Plus Tapping Fee * * * 4. The Authority will require the execution of a Restrictive Covenant since a potential for future expansion exists. Petitioners thereafter filed a timely request for formal hearing after Respondent's Board of Directors upheld the assessment of the System Development Fee at a duly called meeting.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Respondent enter a final order which upholds the assessment against Petitioners of the System Development Fee based on the improvement of the 97 campsites since 1974. DONE AND ENTERED this 30th day of July, 1990, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 904/488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of July, 1990. COPIES FURNISHED: Gus H. Crowell, Esquire Tittle & Tittle, P.A. P. O. Drawer 535 Tavernier, Florida 33070 Floyd A. Hennen, Esquire Florida Keys Aqueduct Authority Post Office Box 1239 Key West, Florida 33040 Patty Woodworth, Director Planning & Budgeting Executive Office of the Governor The Capitol, PL-05 Tallahassee, Florida 32399-0001 APPENDIX TO THE RECOMMENDED ORDER IN CASE NO. 89-5620 The following rulings are made on the proposed findings of fact submitted by Petitioner: The proposed findings of fact in paragraph 1 as being subordinate to the findings made or as being unnecessary to the conclusions reached. The proposed findings of fact in paragraphs 2-10, 12, 14, and 18-21 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 11 are adopted in part by the Recommended Order and are rejected in part as being unsubstantiated by the evidence. While it was established that one corporation operated the campground, it was not established that no additional business purpose exists at the property. The property contains, in addition to the subject campsites, a grocery store, a marina, laundry facilities, and a sewage pumping station that is available to non-campers. The proposed findings of fact in paragraph 13 are rejected as being conclusions of law. The proposed findings of fact in paragraphs 15 and 16 are rejected as being subordinate to the findings made. The proposed findings of fact in paragraphs 17 and 23 are rejected as being unnecessary to the conclusions reached. The findings of fact contained in the first three sentences of paragraph 23 are adopted in material part. The findings of fact contained in the final sentence of paragraph 23 are rejected as being unsubstantiated by the evidence. The following rulings are made on the proposed findings of fact submitted on behalf of Respondent. The paragraphs contained in the findings of fact section of Respondent's Proposed Recommended Order have been numbered 1-13 for convenience. The proposed findings of fact in paragraphs 1, 3, 6, 7, 12, and 13 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 2 are adopted in part by the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The examples given by Respondent were not incorporated as a finding of fact because the examples used are not analogous to the facts of this case. The proposed findings of fact in paragraph 4 are rejected as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 5 are adopted in part by the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 8 are adopted in part by of the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 9 are rejected as being recitation of testimony or as being subordinate to the findings made. The proposed findings of fact in paragraph 10 are adopted in part by the Recommended Order and are rejected in part as being recitation of testimony or as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 11 are adopted in material part by the Recommended Order with the exception of the findings of fact contained in the final sentence of the paragraph, which are rejected as being unnecessary to the conclusions reached.
Findings Of Fact Quality of Service There were no customers of the utility present at the public hearing, except for the Department of the Navy. As a result, there is no public testimony in the record relating to the quality of the water and sewer service provided by the utility. However, a representative of the Department of Environmental Regulation and an engineer from the Public Service Commission agree that the utility's water treatment meets all relevant quality standards, and its sewage treatment is within acceptable limits. Nevertheless, there exist problems of infiltration into the company's sewage lines which have resulted in variations in its level of treatment efficiency. The Department of the Navy acknowledges that some of these infiltration problems originate at the Navy housing facility, and the Navy asserts that corrective measures will be undertaken. In the meantime, the Navy contends that the sewage flows from its housing facility have been underestimated, resulting in an overstatement of revenue to the utility. However, there is insufficient specific evidence in the record to support a finding of fact resolving this issue. Since the variations in the utility's sewage treatment efficiency are within acceptable levels, the Company's wastewater treatment is found to be satisfactory. Rate Base By its exhibits, the utility has alleged its adjusted rate base to be $59,401 for water and $87,134 for sewer. Public Service Commission adjustments reduce and correctly state the water rate base to be $19,356 and the sewer rate base to be $65,552. The utility contests the removal of $16,530 from sewer rate base as a contribution in aid of construction (CIAC). This amount is the difference between the $155,000 paid by the Duval County School Board to a partnership consisting of the utility's partners and others, and the $138,170 recorded on the books of the utility. It contends the $16,330 represents a contractor's profit to one of the former partners of utility, but this amount is properly recordable as CIAC and should be removed from rate base. Other adjustments are either not contested, or make no material difference in the utility's revenue requirements, and should be accepted. The accompanying schedules 1 and 3 detail the rate base for both water and sewer with appropriate explanations for the adjustments. Cost of Capital Representatives from the utility and from the Public Service Commission presented evidence on the issue of cost of capital. The major area of disagreement relates to the company's capital structure. The Commission contends that the utility is 100 percent debt, while the utility asserts the capital structure to be 52.97 percent equity and 47.03 percent debt. The Commission's contention is based on the annual reports filed by the utility wherein a deficit is reported in the equity account. The utility, however, has made several adjustments to the investment shown in the annual reports which it alleges increase equity from a deficit of $39,804 to a positive amount of $92,727. The first adjustment made by the utility is in the amount of $22,700 to make the amount of investment equal to rate base, in accordance with principles of double entry bookkeeping. However, because revenue requirements of public utilities are based on used and useful plant in service rather than on total assets, it is not uncommon for the rate base to be different in amount from the total capitalization. Thus, this adjustment is unnecessary and improper. The utility's second adjustment increases the amount of investment by $39,464 as the Unrecovered Cost of Abandonment of Utility Plant. The plant to which this adjustment refers was abandoned, and because of the hazards presented by the abandoned structure, it was disassembled and scrapped. The unrecovered costs were written off for tax purposes, but were not written off for regulatory purposes. This amount should be treated as any other loss, and the adjustment to increase investment should be disallowed. When a utility has recovered the cost of a loss due to abandonment through a write off against income, the placement of the amount of the investment in the capital account results in accounting twice for the loss. The third adjustment involves an amount of $57,067 representing loans procured by the utility's partners from a financial institution. Although these loans were made directly to the partners, the proceeds were used by the utility and the company services the debt. The utility contends that these funds are equity, and it has increased the investment account by the amount thereof. However, the intent of the parties to the transaction was that the funds borrowed by the partners were loaned to the utility, not invested in it. Accordingly, the utility's adjustment is improper; the amount of the loan should be considered as debt in the utility's capital structure; and it should be allowed to earn the embedded cost of this debt, but not an equity return on the amount thereof. In summary, since this utility's equity account has a deficit balance, the appropriate capital structure is 100 percent debt. The cost of this debt is its embedded cost, estimated to be 11.75 percent overall, and the weighted cost is 10.21 percent, as shown in the following table. CAPITAL STRUCTURE COMPONENT PERCENT OF AMOUNT CAPITAL COST RATE WEIGHTED COST Mortgage Note $36,593 20.9 8.00 2.312 Loans Outstanding 48,162 38.0 9.69 3.681 Proposed Note 41,870 33.1 12.76 (est) 4.220 TOTAL $126,625 100.0 10.213 perc. These "Amounts" are the non-current portion of the debt. Operating Statements The accompanying schedules 2 and 4 detail the operating statements for both water and sewer, with appropriate adjustments. The utility contests the Commission's disallowance of depreciation on its proforma plant acquisition. However, the plant has not yet been constructed. Thus, although the proforma plant adjustments have been agreed to, depreciation expense thereon cannot be allowed. The utility further challenges a Commission adjustment disallowing depreciation expense on contributed assets. This adjustment is proper and should be allowed. The utility also contends that it should be allowed income taxes, asserting that an unincorporated proprietorship is entitled to the same income tax expense as a corporation, and that the related income taxes do not have to be paid, merely accrued. However, the purpose of the income tax accounts in the NARUC Uniform System of Accounts is to allow entities which pay income accounts in which to record them. There is no provision in the uniform system for recordation of a nonexistent expense. Since the utility admits that the partnership has paid no income taxes, the disallowance is proper. Finally, the utility contests what it claims is disallowance by the Commission of all its proposed amortization of abandoned plant. However, the exhibits reflect that the Commission increased the amount of amortization expense from $2,790 to $3,284 for water, and from $3,016 to $6,468 for sewer, to allow for amortization of the abandoned plant. Revenue requirements The application of a 10.21 percent rate of return to the adjusted rate base for both water and sewer requires that the utility receive gross annual revenues of $33,752 for water and $81,432 for sewer. These revenues represent increases of $9,381 and $23,446 for water and for sewer, respectively. See Schedules 2 and 4 attached). Rate structure The utility provides water service to an average of 67 residential customers, 12 general service customers and 11 multi-dwelling customers (Average 346 Units). It provides sewer service to an average of 26 residential customers, 12 general service customers and 4 multi-dwelling customers (Average 645 Units). The present residential water rates are structured to provide for a minimum quarterly charge, which includes a minimum number of gallons, and a one- step excess rate over that minimum. The proposed rates follow the same basic structure. The present general service water rates are structured in the same manner, except that the rates for this classification are approximately 25 percent higher than residential. The proposed rates follow the same basic structure. The present multi-dwelling water rates are structured in compliance with the provisions of the old Rule 25-10.75, Florida Administrative Code, which provided that the rate for master metered multiple dwelling structures should be 66 2/3 percent of the minimum residential rate, with an equal minimum gallonage allowance included within the unit minimum charge. The total number of gallons to be included within the minimum gallonage allowance was determined by the number of units served, with excess gallons over the cumulative allowance to be billed at the excess residential rate. The proposed races follow the same basic structure for determining the minimum gallonage allowance and excess gallonage over the minimum allowance. The proposed minimum charge per unit has been structured approximately 25 percent higher than the proposed minimum unit charge for residential service. The proposed excess rate has been structured at the same level as general service, which is approximately 25 percent higher than the residential service rate. Any rate structure that requires a customer to pay for a minimum number of gallons, whether those gallons are used or not, is discriminatory. Over 27 percent of this utility's basic residential customers did not use as much as the minimum gallonage allowance during the test year. The average number of gallons consumed in the gallon brackets below the minimum allowance bracket was 3,197 gallons per customer per quarter. A rate structure that requires the general service customers to pay a higher rate than the other classifications of service is also discriminatory. Since the Cost of Service to Multiple Dwelling Structures Rule 25- 10.75, Florida Administrative Code, was repealed by Commission Order No. 7590, issued January 18, 1977 in Docket No. 760744-Rule, it has been the practice of the Public Service Commission to structure this type customer in the general service classification, and to structure water rates under the Base Facility Charge form of rate design. The basic concept of this type rate design is to determine a base charge whose foundation is based on the associated costs of providing service to each type customer. The charge covers associated costs such as transmission and distribution facility maintenance expenses, depreciation, property taxes, property insurance, an allocated portion of customer accounts expenses, etc. The amount of the charge is determined by an equivalent residential connection formula using the standard meter size as the base. There are not any gallons included within the frame of the Base Facility Charge. The second structure is to determine the appropriate charge for the water delivered to the customer. This charge would cover related costs such as pumping expenses; treatment expenses, an allocated portion of customer accounts expenses, etc. The primary reasoning supporting this type structure is that each customer pays a prorata share of the related facility costs necessary to provide service, and thereafter the customer pays for only the actual number of gallons consumed under the gallonage charge. The present residential sewer rates are structured in the manner of a quarterly flat-rate charge for all residential customers. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above that minimum. The present general service sewer rates are structured so that a percentage factor is applied to the water bill to determine the sewer charge. The rates for this classification are structured approximately 25 percent higher than residential. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above the minimum. The proposed rates are structured approximately 25 percent higher than residential. The present multi-dwelling sewer rates are structured in compliance with the provisions of the old Rule 25- 10.75, Florida Administrative Code, which provided that the rate for sewer service to multiple dwelling units should be 66 2/3 percent of the basic charge for sewer service to single residential units. The proposed rates are structured with a minimum charge for each unit, which includes a minimum number of gallons, and an excess rate over the minimum. The minimum charge per unit and the excess rate are structured approximately 25 percent higher than residential. Since the repeal of Rule 25-10.75, Florida Administrative Code, it has been the practice of the Public Service Commission to structure this type customer in the general service classification of customers, and to structure sewer rates under the Base Facility Charge form of rate design. This should be implemented by the utility for both water rates and sewer rates. The utility has been misapplying its schedule of rates for the commercial sewer classification of service. The schedule calls for 250 percent of the water bill with a minimum charge of $0.15 monthly ($24.45 quarterly). However, the utility has been billing its commercial sewer customers 250 percent of the water bill plus the minimum charge. This amounted to an overcharge to this customer classification of approximately $1190 during the test period. The utility should be required to make the appropriate refund to each commercial sewer customer, and the amount of this overcharge has been removed from test year revenues on the attached schedule 4. The utility is collecting a meter installation charge of $200, and a charge of $246 for each connection to the sewer system, without any apparent tariff authority. Further, the charges made for customer reconnect after disconnection for nonpayment are not adequate to cover the associated costs of this service. An investigation docket should be opened to consider the appropriateness of the meter installation charge, and to receive evidence of actual costs of service restoration. Finally, insufficient facts were presented to support a finding relative to the validity of the utility's sewer service contract with the Navy or the compatibility of the charges for sewer service to the Navy with the utility's tariff. These issues should be revisited during the course of the investigation docket. However, the utility's practice of requiring customer deposits when service is billed in advance should be discontinued.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Buccaneer Service Company, 1665 Selva Marina Drive, Atlantic Beach, Florida 32233, be granted in part, and that the utility be authorized to receive gross annual water revenue of $33,752, and gross annual sewer revenue of $81,423, by rates to be approved by the Public Service Commission. It is further RECOMMENDED that the utility be required to adopt a Base Facility charge form of rate design for both water and sewer rates, and to make appropriate changes in its tariff. It is further RECOMMENDED that the utility be required to refund to each commercial sewer customer a prorata portion of the total amount of overcharges collected since the beginning of the test year. It is further RECOMMENDED that an investigation docket be opened for the purpose of making further inquiry into the appropriateness of the utility's meter installation charge, to receive evidence of actual costs of service restoration, and to determine the validity of the utility's contract for sewer service with the Navy and the appropriate rate to be charged for this service. And it is further RECOMMENDED that the utility be required to discontinue the practice of collecting customer deposits for service which is billed in advance. THIS RECOMMENDED ORDER entered on this 6th day of August, 1980. WILLIAM B. THOMAS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact Respondent is a state agency whose primary purpose is to provide an adequate supply of potable water to the Florida Keys. To this end, it has acquired or constructed well fields, treatment plants, transmission pipelines, pumping stations, distribution pipelines, and other related facilities. Because of its exaggerated linear service area of 130 miles, it incurs high capital and operating costs. Chapter 76-441, Laws of Florida, Respondent's enabling act, confers upon Respondent the authority to impose the subject System Development Fee. Respondent imposed the subject System Development Fee, which is an impact fee, in December 1974. Respondent's Rule 48-3.002(1) expressed the purposes of the System Development Fee as follows: The System Development Fee is an impact fee charged to new and existing customers who modify, add or construct facilities which impose a potential increased demand on the water system. This fee is charged in order to equitably adjust the fiscal burden of a new pipeline and expanded or improved appurtenant facilities between existing customers and new water users. All system development fees are allocated to the direct and indirect costs of capital improvements made necessary by actual and expected increased demand on the water system. The term "unit" is a commonly accepted concept in the public utility industry, and impact fees are often assessed on a per "unit" basis. Respondent's Rule 48-3.002(5)(b) provides, in pertinent part, as follows: 5.(b) Where the premises served consists of single or multiple commercial units, the System Development Fee shall be assessed based on each individual unit. ... The term "unit", as used by Respondent is a technical term that is defined by Respondent's Rule 48-2.001(19) as follows: (19) "Unit" A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential use. The number of units existing in a structure containing multiple units should be determined in accordance with Rule 48-2.007(1)(c), which provides, in pertinent part, as follows: ... The number of units, whether residential or commercial, will normally be determined according to applicable city or county occupational licenses, building permits, or plans of the subject structure. In cases of discrepancy or inconsistency in definition, or interpretation, the following Florida Keys Aqueduct Authority definition will control: A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential purpose. Respondent is concerned with the potential use of a unit because its system must be designed by its engineers and constructed to respond to that potential use. The actual water consumption of any particular unit is not a primary consideration in determining the engineering requirements of Respondent's water system. Respondent has consistently applied the System Development Fee charges on a per unit basis for the purposes stated in its Rule 48-3.002(1). The "unit", as used by Respondent, provides a reasonable basis for Respondent to impose its System Development Fees. The per unit charge was $600 when first enacted in 1974, was increased to $1,500 in 1984, and was increased to its present level of $2,000 in 1986. A widely publicized amnesty program was in effect from August 1, 1984 through October 1, 1984, during which customers who had added units to their property without reporting same to Respondent could report the units and pay the System Development Fee on an installment basis. Customers were advised that after the amnesty program closed, the System Development Fee would be based on rates in effect at the time an unreported unit was discovered, not at the rate the unreported unit was constructed. This policy serves to encourage Respondent's customers to promptly report newly added "units", and the policy produces fees commensurate with the expenses to be incurred by Respondent after it learns of the new units. On April 11, 1978, Robert Ford, as owner, submitted an application for water services with Respondent for residential premises located at 1024 Eaton Street, Key West, Florida. The application, which was accepted by Respondent on April 11, 1978, contained the following provision: "Where System Development Charges are applied, all conditions apply as authorized in the Customer Service Policy Booklet". Petitioner changed the use of this property from residential to commercial during the time he owned the property. At the time he bought the property in 1975, it was a large, single family residence containing eight bedrooms. Mr. Ford changed the use of the property from a residence that housed a single family to a guest house that rented its rooms on a daily or weekly basis to tourists or other members of the public. He added four bedrooms to the eight bedrooms that existed when he purchased the premises so that a total of twelve guest rooms were available to rent. There were no substantial changes made to the plumbing system; no bathrooms were added and no water pipes were enlarged. No structural changes, other than the changing of the locks on the doors, were made by Mr. Ford to the eight bedrooms that existed when he purchased the property. There was no evidence that actual water consumption for the premises had increased because of the change in usage. Respondent first learned in the changes Mr. Ford made to the premises at 1024 Eaton Street in 1989. Thereafter, Respondent issued the subject System Development Charge based on its determination that Petitioner had added 11 units to the one existing unit, for a total of 12 units. The assessment was based on the rate of $2,000 per unit, the rate in effect at the time the changes were discovered. Petitioner agreed to pay the System Development Fee for the four bedrooms that he added to the residence. Petitioner did not contest the reasonableness of the fee currently being charged by Respondent ($2,000 per unit), but he did challenge the imposition of the current rate to the changes he made to the premises located at 1024 Eaton Street because those changes predated 1986, when the $2,000 per unit rate went into effect.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Respondent enter a final order which upholds the assessment against Petitioner of the System Development Fee based on 11 additional units at the rate of $2,000 per unit. DONE AND ENTERED this 1st day of February, 1991, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 904/488-9675 Filed with the Clerk of the Division of Administrative Hearings this 1st day of February, 1991. APPENDIX TO RECOMMENDED ORDER The following rulings are made on the proposed findings of fact submitted by Petitioner: The proposed findings of fact in paragraph 1-4 and 7-10 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 5 are rejected as being unsubstantiated by the evidence since four bedrooms were added to the premises. The proposed findings of fact in paragraph 6 are adopted in part by the Recommended Order. The proposed findings of fact relating to occupancy levels are rejected as being unsubstantiated by the evidence. The proposed findings of fact in paragraphs 12-14 and 16-17 are rejected as being unsubstantiated by the evidence and because of the failure to provide pertinent citations to the record as required by Rule 22I-6.031(3), Florida Administrative Code. The proposed findings of fact in paragraph 15 are rejected as being unnecessary to the conclusions reached, but are treated as a preliminary matter. The respective paragraphs in the Findings of Fact section of Respondent's Proposed Recommended Order were not numbered. For ease of reference, these paragraphs have been numbered 1-10 sequentially. The following rulings are made on the proposed findings of fact submitted on behalf of Respondent. The proposed findings of fact in paragraphs 1, 7 and 10 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 2 are adopted in part by the Recommended Order. The proposed findings of fact in the fifth and sixth sentences of paragraph 2 are rejected as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 3 are rejected as being unnecessary to the conclusions reached. The proposed findings of fact in paragraphs 4 and 9 are rejected as being subordinate to the findings made. The proposed findings of fact in paragraph 5 are adopted in part by the Recommended Order. The proposed findings of fact in the second sentence of paragraph 5 are rejected as being subordinate to the findings made. The proposed findings of fact in paragraph 6 are rejected as being unsubstantiated by the evidence. The proposed findings of fact in paragraph 8 are rejected as being an incomplete statement. COPIES FURNISHED: Joseph Galetti, Esquire 616 Whitehead Street Key West, Florida 33040 Robert T. Feldman, Esquire Feldman and Koenig, P.A. 417 Eaton Street Key West, Florida 33040 Floyd A. Hennen, Esquire General Counsel Florida Keys Aqueduct Authority 1100 Kennedy Drive Key West, Florida 33041-1239 Douglas M. Cook, Director Planning & Budgeting Executive Office of the Governor The Capitol Tallahassee, Florida 32399-0001
The Issue Whether Petitioner's application to increaseits water and sewer rates to its customers in Seminole County should be granted.
Findings Of Fact Based upon the evidence presented at hearing, including consideration of the demeanor and credibility of witnesses, the following facts are determined: I. Application and Retroactive Implementation of Interim Rate Increase By its application, the UTILITY, seeks to increase its water revenue to $158,890, and its sewer revenue to $83,830, by increasing service rates to its customers in Winter Springs, Seminole County, Florida. During the test year ending September 30, 1979, the UTILITY suffered combined losses from its water and sewer operation of $420,692. This is the first rate increase requested by the UTILITY since its inception in 1973. On April 24, 1980, the COMMISSION issued Order No. 9344 which suspended the UTILITY's proposed rate increases but granted it an interim increase under bond. The UTILITY was directed to file revised tariff pages containing residential and general service rates which would allow it to earn total annual gross revenue for water service of $139,277 and total annual gross revenues for sewer service of $83,830. The Order also stated: ". . .that the rate increase contained herein shall become effective for all bills on or after thirty (30) days after the date of this order. . . (Testimony of Blair, Fabelo; P.E. 1, 2, R.E. 3.) The UTILITY implemented the interim rate increase, within its normal billing cycle, on the June 2, 1980, water and sewer service bills. However, these bills were based on meter readings taken on May 10, 1980, for service provided from April 10 to May 10, 1980. Thus, the UTILITY increased its rates to its customers fourteen (14) days prior to April 24, 1980, the effective date of the COMMISSION's order authorizing such increase. The UTILITY's action was, however, taken in good faith, and based on a COMMISSION staff member's representation that the interim rates could properly be included in the June billing. The amount of revenues received from the interim rate increase and collected prior to the effective date of Order No. 9344 is approximately $8,700. (Testimony of Fabelo, Blair; P.E. 1, R.E. 3.) However innocently imposed, the UTILITY's action constitutes improper retroactive ratemaking. The UTILITY should refund to customers of record during the period in question their pro-rata share of revenues collected by the retroactive rate increase. The amount of each refund will depend on the amount of water consumed and paid for during the period of retroactive rates-- approximately April 10 through April 24, 1980. The UTILITY may minimize costs by distributing the refunds as separately itemized credits on its regular service bills. (Testimony of Fabelo; R.E. 3.) II. Factors Relevant to Ratemaking In determining whether a rate increase is justified, the COMMISSION must consider several factors, including (1) quality of service, (2) rate base, (3) a fair rate of return on the utility's investment, and (4) operation and maintenance expenses; each is separately addressed below. (Testimony of Asmus, Lowe.) III. Quality of Service During 1979, several customers of the UTILITY experienced occasional low water pressure in their homes. It is likely that these water pressure problems were caused by fluctuating amounts of electricity supplied the UTILITY by Florida Power Corporation. The UTILITY has recently installed an electronic control panel and Florida Power has installed a direct transmission line to the UTILITY in order to prevent this from reoccurring in the future. Several times during 1980, the UTILITY had its water service interrupted due to a cable-TV company cutting its water lines while laying cable; repairs, however, were quickly made. Few customer complaints have been made to regulatory agencies concerning the quality of the water and sewer service provided by the UTILITY: one complaint on water service was made to the Florida Department of Environmental Regulation in 1979, and subsequently determined to he unfounded; no complaints were made to the Department concerning sewer service. Although several customers testified that the water sometimes caused irritation, tests show that the water meets Florida and federal safe drinking water standards. The sewage treatment provided by the UTILITY also complies with state and federal requirements. The water and sewer service is, therefore, determined to he of satisfactory quality. (Testimony of Blair, Bostwick, Customers.) IV. Rate Base A regulated utility is entitled to an opportunity to earn a fair rate of return on its investment in plants and facilities which are used and useful in providing water and sewer service to the public. The utility investment is referred to as "rate base". Here, the average water and sewer rate base for the UTILITY's test year ending September 30, 1979, is calculated as follows: AVERAGE RATE BASE WATER SEWER Utility Plant in Service $847,287 2/ $1,218,363 Utility Plant held for Future Use (271,153) (608,476) Accumulated Depreciation (82,099) (97,306) Contributions in Aid of Construction (183,749) 3/ (178,456) 3/ (CIAC)--Net Allowance for Working Capital 11,983 4/ 11,851 TOTAL RATE BASE $322,627 $ 354,433 (Testimony of Blair, Asmus, Heiker, Lowe; Respondent's Proposed Findings of Fact and Conclusions of Law, Pg. 3; P.E. 4, R.E. 2.) V. Rate of Return A fair rate of return is the percentage factor that, when multiplied by the rate base, produces revenue that will pay the costs of capital--interest on debt to lenders, and return on equity to stockholders. In this case, after considering the UTILITY's capital structure and that of its parent company, Gulfstream Land and Development Corporation, the parties stipulated that a fair rate of return is determined to be 12.40 percent, and is calculated: COST OF CAPITAL Test Year Ending September 30, 1979 COMPONENT RATIO COST RATE WEIGHTED COST Common Equity 33.3 percent 15.50 percent 5.16 percent Long-Term Debt 53.0 13.67 7.24 Cost-Free Capital 13.7 -0- -0- TOTAL 100.0 percent Midpoint 12.40 percent (Testimony of Lowe, Asmus; Joint Stipulation of Parties, Joint Exhibit 2; P.E. 10.) VI. Operations and Maintenance Expenses The adjusted operation and maintenance expenses, including depreciation and taxes, of the UTILITY for the test year are set out below: CONSTRUCTED STATEMENT OF OPERATIONS Test Year Ending September 30, 1979 WATER SEWER Operating Revenues: $160,531 5/ $83,830 5/ Operating Expenses: Operation 84,275 6/ 90,480 7/ Maintenance 11,586 4,324 Depreciation 12,219 16,014 Taxes Other than Income Tax 7,330 8/ 4,581 8/ Provision for Income Taxes 9,786 9/ -0- TOTAL EXPENSES $125,196 $115,399 Operating Income (Loss): $35,334 ($31,569) (Testimony of Asmus, Lowe; COMMISSION's Proposed Findings of Fact; P.E. 10, R.E. 1.) The depreciation expense indicated above includes an adjustment of $2,015 (water) and $6,788 (sewer) proposed by the UTILITY as a result of a rate base adjustment which properly reclassified plant balances to their proper month. The UTILITY had inadvertently posted plant additions to a year-end entry, rather than to the months the additions were completed. At hearing, the COMMISSION agreed to the rate base adjustment and agreed, "in principle", to the UTILITY's proposed correlative adjustment to depreciation expense. However, in its posthearing Proposed Findings of Fact, the COMMISSION's counsel disputed the UTILITY's adjustment, and offered a substitute adjustment: ". . .However, in actual calculation, the. . . [COMMISSION] disagrees. The utility's adjustment does not consider used and useful as applied to the expense. In addition, the. . . [UTILITY's] adjustment includes expense on pro-forma plant. The. . .[COMMISSION's] calculation considers these adjustments. (Pg. 4, Paragraph D.) Because factual issues are difficult to resolve by posthearing submittal, evidence should be presented at hearing, where it is subject to cross- examination and rebuttal. At hearing, the COMMISSION did not object to the depreciation expense adjustment presented by the UTILITY; neither did it cross- examine to elicit the method used for its calculation nor move for a continuance based on surprise or inability to adequately verify the UTILITY's figures. Rather, it chose to defer examination of and rebuttal to the UTILITY's evidence until after the conclusion of hearing. Under such circumstances, the COMMISSION's posthearing submittal is insufficient to overcome the competent evidence adduced by the UTILITY. (Testimony of Asmus, Lowe; Respondent's Proposed Findings of Fact, Pg. 3, 4; P.E. 10.) VII. Tariff Modifications By its application, the UTILITY also requested COMMISSION approval of proposed water and sewer tariff modifications. By stipulation of the parties, the following modifications to the UTILITY's tariffs are warranted: The initial connection charge and reconnect charge on delinquent accounts is TEN AND NO/100 DOLLARS ($10.00) during working hours and FIFTEEN AND NO/100 DOLLARS ($15.00) after working hours. Customer deposit shall be FIFTY AND NO/100 DOLLARS ($50.00) for both water and sewer service and TWENTY-FIVE AND NO/100 DOLLARS ($25.00) for either water service alone or sewer service alone. Customer deposits may be increased to the foregoing sums on delinquent accounts after giving thirty (30) days' written notice, which notice shall be separate and apart from any bill for service. (Testimony of Fabelo; Prehearing Stipulation; P.E. 1, R.E. 3.) VIII. Rates The UTILITY seeks, and the COMMISSION recommends approval of these specific rates and charges: WATER RATES RESIDENTIAL RATES Base facility charge per month based on meter sizes for zero consumption. METER SIZE 5/8" x 3/4" $ 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 Gallonage Charge-Per 1,000 gallons .75 General Service Base Facility charge per month based on meter sizes for zero consumption. METER SIZE 5/8" x 3/4" $ 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 3" 80.00 4" 125.00 Gallonage Charge-Per 1,000 gallons .75 SEWER RATES RESIDENTIAL RATES Base facility charge per month $ 5.00 First 10,000 gallons-Per 1,000 gallons .75 Over 10,000 gallons-Monthly flat rate 12.50 General Service Base facility charge per month based on motor size for zero consumption. METER SIZE 5/8" x 3/4" 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 3" 80.00 4" 125.00 Gallonage Charge-Per 1,000 gallons .75 These requested rates are structured using a base facility charge (BFC) rate design. This rate design requires customers to pay: (1) their pro-rata share of the UTILITY's fixed facility costs, and (2) a charge for pumping, treating, and delivering the actual water gallonage consumed, by 1,000 gallon increments; it equally distributes the costs of providing utility service and the COMMISSION encourages its use. (Testimony of Fabelo; Respondent's Proposed Findings of Fact; P.E. 1, P.E. 3.) These rates proposed by the UTILITY will generate water revenues of $158,890 and sewer revenues of $58,865, which provide a rate of return on water rate base of 10.52 percent, and a zero return on sewer rate base. Combined water and sewer operations will earn a rate of return of .35 percent, whereas a fair rate of return in this case has been stipulated to be 12.40 percent. Although the proposed rates will not provide the UTILITY with a fair return, the quality of its present water and sewer service will not suffer, or be decreased in any manner. (Testimony of Blair, Asmus; P.E. 10.)
Conclusions The water and sewer rate increases and tariff modifications requested by Petitioner are just, reasonable, not unjustly discriminatory, and should be granted. Although the rates will provide less than a fair return, it has not been shown that Petitioner's service will suffer. Petitioner's collection of interim rate increases from its customers prior to the effective date of Order No. 9344 violates Section 367.081(1), Florida Statutes (1979); all revenue so collected should be refunded to its customers. Revised tariff pages should be filed, a letter explaining the rate increases should be sent to Petitioner's customers, and the Petitioner's letter of credit, returned.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That the UTILITY's application for approval of the rates specified in Paragraph 11, infra, be granted; That the UTILITY be required to submit, for COMMISSION approval, revised tariff pages containing the new rates and rate structure; That the UTILITY be required to send to its customers a letter, approved in form by the COMMISSION, explaining the rate increases and reasons therefore; That the irrevocable letter of intent drawn on the Pan American Bank, dated May 3, 1980, be returned to the UTILITY and the bank releaned thereafter; That the tariff modifications contained in Paragraph 10, infra, be approved; and That the UTILITY be required to expeditiously refund to its customers the interim rate increases collected prior to the effective date of PSC Order No. 9344. DONE AND ENTERED this 24th day of November, 1980, in Tallahassee, Florida. R. L. CALEEN, JR. Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact The Petitioner is a utility regulated by the Commission that is in the business of acquiring and operating water and sewer systems in Florida, principally in Central Florida. It now operates 39 systems, of which at least 30 water systems and 5 sewer systems are located in Orange, Lake and Seminole counties. In this case, the Central Florida Division has one water system in Lake County (Picciola Island) , two water systems in Orange County (Daetwyler Shores and Lake Conway), three water systems and one sewer system in Seminole County (Bretton Woods/Druid Hills, Dol Ray Manor, and both water and sewer in Chuluota; these systems serve 949 water customers and 98 sewer customers. Southern commenced operating these systems in the spring of 1978, purchased them from Central Florida Utilities, Inc. in October, 1978 and applied to the Commission for a transfer, which application is still pending. (Docket 780278- WS; Hearing Examiner's Recommended Order approving the transfer was filed January 29, 1979) Notwithstanding customer complaints of the quality of the water service (low or fluctuating pressure, excess chlorine, sediment, no noticed interruptions and lack of fire protection capabilities) and Southern's admission of the general disrepair of the systems at the time of the purchase, the systems are in compliance with governmental standards. The utility has spent $52,000 since the test year on repair and upgrading with another $87,000 necessary to complete the required projects, of which $25,000 is for governmentally mandated improvements to the Chuluota wastewater system. The Petitioner's use of the purchase price of $215,800 for the facilities involved in the seven systems as the amount of plant in service as of June 30, 1978, rather than Respondent's use of the 1977 annual reports of the prior owner, is appropriate because: it follows past FPSC decisions on this subject with respect to this utility; the purchase price was considerably less than FPSC's estimated replacement cost of over $800,000; the purchase was an arms-length transaction; the books of the prior owner were considered unreliable; and, following complete integration of operations with Petitioner's other systems in Lake, Orange and Seminole counties, the customers should obtain the best possible service at the lowest rates obtainable. Alternatively, the Utility is entitled to an acquisition adjustment that achieves the same rate base as using the purchase price. Petitioner's rate bases using a 12-month average, rather than the preferred 13-month average, are as follows: Water Sewer Average test year plant $178,305 $ 62,242 Mandated additions 25,000 Accumulated depreciation (1,833) (623) CIAC (net of amortization) (6,703) Working Capital 11,241 1,801 Income tax lag (776) (370) $180,234 $ 89,050 The capital structure and rate of return is as stipulated by the parties as follows: WEIGHTED TYPE AMOUNT RATIO COST COST Common Stock $1,882,055 60.44 14.0 percent 8.46 Long Term Debt 1,037,372 33.31 8.89 2.96 Cost Free 194,768 6.25 0 0 TOTAL $3,114,195 100.00 11.42 perc. Rate of Return The above rate bases and rate of return provide an authorized constructed net operating income from water service of $20,583 and from sewer service of $10,170. This results in the following constructed statement of operations for year ended June 30, 1979: Water Sewer Operating Revenue $122,993 $29,085 Operating Expense Operation 84,760 12,346 Maintenance 4,103 2,065 Depreciation 3,531 1,245 Taxes, other than income 6,138 1,409 Income taxes 3,878 1,850 Total $102,410 $18,915 Net Operating Income $ 20,583 $10,170 It is noted that the above revenue requirement is more than the interim authorized revenue of $97,184 for water and $17,640 for sewer. The staff proposed that the rate structure should be changed from the present block structure far water and flat rate for sewer to a base facility charge for both water and sewer. This concept is appropriate since it serves to conserve water and insures that each customer pays his fair share of the costs of providing service. No evidence opposing this type rate structure was presented.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Southern States Utilities, Inc., Central Florida Division, be granted and that the utility be authorized to file new tariffs to be approved by the Florida Public Service Commission that would have provided for the test year ending June 30, 1979 annual gross revenues of $122,993 for water service and $29,085 far sewer service. It is further RECOMMENDED that the utility be required to implement rates for fire protection service in Belle Isle and a base facility charge in structuring water and sewer rates. It is further RECOMMENDED that the refund bond be returned to utility. DONE and ORDERED this 24th day of October, 1980, in Tallahassee, Florida. H. E. SMITHERS Hearing Officer Division of Administrative Hearings Room 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 24th day of October, 1980. COPIES FURNISHED: Kenneth H. Myers, Esquire 1428 Brickell Avenue Miami, Florida 33131 William H. Harrold, Esquire 101 E. Gaines Street Tallahassee, Florida 32301 Sam Owens, Esquire 101 E. Washington Street Orlando, Florida 32801 Steve Tribble, Clerk Florida Public Service Commission 101 E. Gaines Street Tallahassee, Florida 32301 Robert T. Mann, Chairman Public Service Commission 101 E. Gaines Street Tallahassee, Florida 32301
Findings Of Fact Although numerous customers were present, four of them testified at the hearing. No service quality problems were described with regard to either water or sewer service. Indeed, several of the customers described water quality as being good or excellent. The primary concern of the customers was the magnitude of the proposed rate increase, although a number of then opined that some increase in rates may he necessary. Expert engineering witnesses presented by both the Comission and the Petitioner established that the Utility has not been cited by any local, state or federal agency for health or environmentally related violations. No corrective orders are in force either by the Department of Environmental Regulation, the Lee County Health Department, or the Public Service Commission. The water and sewer treatment exceeds all governmental quality standards extant. In order to enhance service quality, the company has constructed a one million gallon ground storage tank and has installed an additional high-service pump. All parties agree that the cost of these improvements should be added to the Utility's rate base for purposes of this proceeding. Rate Base The Utility propounded evidence alleging its proper water rate base to be $1,872,470.00 and the appropriate sewer rate base to be $1,917,931.00. In arriving at the Utility's net investment in property used in the public service (rate base), it is necessary to calculate the amount of contributions-in-aid-of-construction, which serve to decrease the Utility's investment. Normally, where there has been a previous rate case for a utility in which the utility's net investment would have been determined by the Commission, the calculation of the utility investment in a current rate case is generally competed by adding additions to plant-in-service and subtracting additional contributions-in-aid-of construction in order to arrive at the current net "return yielding" investment. In the instant proceeding, however, Lehigh has elected to take issue with the amount of contributions-in-aid-of-construction (CIAC) previously determined by the Commission in the last rate case. In that last case (Docket No. R-73384-WS), the amount of CIAC was determined by multiplying water connections by $350.00 and sewer connections by $400.00. (See Exhibits 10, 19 and 20) The Utility in the prior proceeding agreed with that method of calculation and, further, two land sales contracts in evidence show that a charge of $750.00 for "sales price of water and sewer" to purchasers of houses in the service area has been imposed by the Utility or its predecessor, Lehigh Corporation (development company), when the Utility was merely a division of the development company. Notwithstanding that prior position, the Utility in this proceeding has elected to attempt to prove its level of CIAC ab initio and has conducted a "Special CIAC Study" in an attempt to show that the amount of contributions is now substantially less than the amount it and the Commission agreed to be applicable in the last rate proceeding and that which the Commission maintains is germane to this proceeding. The Utility thus is alleging that the appropriate charge per connection for CIAC is $650.00 for a water and sewer connection as opposed to the Commission's contention that the figure should be $750.00 per connection. Although a developer's agreement with an affiliated company shows a water and sewer connection charge of $650.00, the testimony of a senior officer of the Utility establishes that there were a total of 1,308 such contracts indicating a sales price for water and sewer service of $750.00. The Utility contends that only $650.00 of the $750.00 charge in question was actually transferred to the utility company and that, therefore, the $650.00 is the appropriate amount to attribute to CIAC. There is no question, however, that with regard to these 1,308 land sales contracts, that $750.00 was actually collected from the lot purchasers involved as the sales price of water and sewer service. Thus, the actual amount of CIAC paid by those 1,308 customers was $750.00 each, for a total of $981,000.00 for water and sever service and that figure represents in its entirety contributions-in-aid-of-construction. The contracts for which the customers involved paid $750.00 for water and sewer service, were entered into in the latter 1960's and early 1970's. Prior to that time, the same type of contracts carried an amount of $650.00 for water and sewer and following the period of time when the fee was $750.00, the line item in the contract was changed so that there was no longer any separate item providing for "sales price of water and sewer." The water and sewer charge was thereafter included in the amount charged for "sales price of improvements." Thus, contrary to the position of Lehigh, because of the segregation of the items in the purchase price shown in these land sales contracts into separate figures for price and for the sales price of water and sewer service, there have been shown to be definite, proven amounts of contributions-in-aid-of-construction supported by company records. The remaining portion of the contributions attributable to the Utility and not represented by these contracts were contributed in the sum of $650.00 per connection, with which figure both parties agree. An additional issue regarding contributions and the "Special CIAC Study" concerns contributions recorded as income from the inception of the Utility operation until November 30, 1964. As demonstrated by Exhibit 12, the amount of contributions recorded as income equals $756,656.00. The Utility's own "Special CIAC Study" refers to contributions recorded as income and Lehigh received sums of money for the availability of water and sewer service in the early 1960's which it treated as income. During the early 1960's when the Utility was regulated by Lee County, the Lee County regulatory board allowed it and other water and sewer utilities to receive and record service availability fees as revenue. This was done in order to enhance the apparent financial posture of the utilities and therefore improve their credit status as an aid to financing improvements. There is no question that those fees during this time period were paid into the Utility or its predecessor for water and sewer service availability and hence should properly be accounted for as CIAC. It might be argued, as the Utility does, that if Lehigh declared the contributions it received to be revenues with the Internal Revenue Service, then the benefit of those contributions or the amount of revenue they represent to the Utility would be reduced by the amount of the resulting income tax, and that if they are now determined to be contributions instead of revenue that an additional detriment to the Utility would occur by the reduction by that amount of its rate base and, therefore, its dollar return. It should be pointed out, however, that because of the tax advantages of the Utility's demonstrated operating loss carry-overs and investment tax credits, as well as accelerated depreciation, all of which tax advantages this Utility has been able to employ, no actual income tax has been paid on such "revenue." Further, Lehigh is depreciating this $756,655.00 in assets in its returns to the Internal Revenue Service and is thereby recovering the costs of the assets. If the Utility is permitted to treat them for regulatory rate-making purposes as revenue instead of CIAC, then the effect would be to maintain rate base and return at a correspondingly higher level than if these amounts are determined to be CIAC, which would reduce rate base and thereby the net investment upon which a return could be earned for regulatory purposes. Thus, the appropriate amount of contributions-in-aid-of-construction for the water system as of the closing date of March 31, 1979, equals $1,057,000.00. The amount of contributions-in-aid-of-construction attributable to the sewer system as of that date equals $1,389,977.00. (Net of amortization). The detailed calculations and adjustments supportive of the above findings with regard to rate base are attached hereto and incorporated by reference herein as Schedules I, II and II. The first issue to be concerned with in calculating the operating expense basis for the revenue requirement is the cost of the above-referenced CIAC study. The Utility prepared this special CIAC study because of its fear that, in view of the Commission's decision in Tamarac Utilities, Inc. v. Hawkins, 354 So.2d 437, that it would not otherwise be able to meet its burden of proof on the issue of contributions and therefore would suffer a dismissal of the petition. In the Tamarac case, the Public Service Commission auditors encountered numerous problems resulting from a lack of primary data supporting the amount of contributions and the Commission issued an order allowing the Utility to provide clarifying evidence. When the Utility failed to satisfactorily perform this task, it ultimately suffered a dismissal of its petition and a refund of monies collected under interim rates. In this case, however, it has been demonstrated that there is no dearth of primary data or books and record supportive of the level of CIAC; nor has an order been issued requiring this Utility to provide such clarification or a "study" of its CIAC. Moreover, in the case of this utility, a previous rate case has been finalized wherein it was found by the Commission that there was a definite, specific level of contributions which were also consistent with those alleged by the petitioner in that proceeding. Thus, there is adequate primary data upon which a determination of CIAC can be computed in this proceeding without resort to a "Special CIAC Study" and the additional increment of rate case expense it represents. It should be further noted that even if the instant case involved a "Tamarac situation" where financial books and records were not adequate to properly document contributions-in-aid-of-construction that, in that event, if a CIAC study were made, then the proper rate-making treatment would be to amortize tile cost of that study over several years, since it is a large, nonrecurring expense in the Utility's operation, as opposed to allowing the entire expense to be written off (and charged to the customers through rates) based upon one year. The Utility has alleged that certain additional pro-forma adjustments to various expense items should be accomplished in order to arrive at the appropriate revenue which will support an adequate rate of return. Thus, the increased costs alleged for purchases of lime, chlorine and gasoline, depicted in the attached schedules incorporated herein, were undisputed, agreed to, are reasonable and therefore should be accepted. The alleged pro-forma cost for payroll is a mere estimate and not supported by competent, substantial evidence. Additionally, it was established by the Commission's accounting witness that certain rate case expenses arose from a prior rate case and therefore should be removed from consideration in arriving at revenue requirements for purposes of this proceeding. This adjustment was not contested, nor were similar adjustments to remove depreciation expense on construction work in progress, to remove depreciation expense on the contributed property, to remove unsupported property taxes, and to remove property tax as an expense and depreciation expense attributable to non-used and useful portions of the Utility's invested plant. None of these adjustments were disputed by the Utility. They are appropriate and reasonable and should be adopted. The Utility has also requested allowance of a $55.00 annual fire hydrant charge and a $10.00 charge for the initial commencement of service. The Utility submitted evidence (Exhibits 6 and 7) supportive of the actual number of water and sewer connections made during the test years as well as the costs upon which the initial commencement of service charge requested is based. The Commission did not dispute, therefore, the requested $10.00 charge for initial commencement of service and, inasmuch as the current $25.00 annual fire hydrant charge was established in the late 1960's and was shown to be no longer sufficient to cover costs, the Commission also did not dispute the increase in the annual fire hydrant charge from $25.00 to $55.00, which accordingly should be increased. Cost of Capital The Utility has requested a rate of return of 11.76 percent which includes an attrition allowance of .78 percent. There is no dispute as to the debt-equity ratios in the capital structure of the Utility. The common stock equity represents approximately 49.57 percent of the total capitalization. Long-term debt makes up 35.96 percent of capital and cost-free capital items make up 14.47 percent. The cost rate of the equity in the capital structure was established by the Commission's financial expert witness to be 14.5 percent or the midpoint in a range for companies and utility companies possessing a similar degree of risk to equity investors of 13.5 percent to 15.5 percent. The 14.5 percent cost of equity figure represents an accurate assessment of the opportunity costs of equity capital for such a company. The imbedded cost of long-term debt is 8.3 percent, which is a very advantageous rate to be enjoyed by such a company in today's money market and reflects a high degree of management efficiency on the part of the operation and management personnel of the petitioner. These two items, when combined with a zero cost factor shown to be appropriate for the cost-free capital items, results in a calculated rate of return of 10.35 percent, which does not take into account an attrition allowance due to inflation. The Utility advocated an attrition allowance equal to 10 percent of the weighted cost of equity capital to help offset the erosion in earnings caused by inflation. There can be little doubt that attrition of earnings due to significant inflation in costs of operation experienced by such companies is a very real factor. However, this record contains no substantial and competent evidence to demonstrate whether the utility wants coverage of capital attrition or attrition of its ability to cover operation and maintenance expenses nor which could justify the alleged 10 percent factor or any other quantification of attrition of earnings which may be experienced. Thus in the absence of a definitive establishment of the appropriate attrition factor, a cost of equity and a corresponding return on rate base in the midpoint of the range found above is appropriate. Thus, the proper return on rate base for this Utility has been shown to be 10.35 percent, which is within the range 9.85 percent to 10.84 percent. A summary of the cost of capital structure and weighted cost of capital calculation is depicted as follows: CALENDAR YEAR 1979 COMMON STOCK EQUITY RATIO 49.57 COST RATE 14.5 WEIGHTED COST 7.19 LONG TERM DEBT 35.96 8.8 3.16 COST FREE 14.47 -0- -0- 10.35 Floor CSE at 13.5 9.85 Ceiling CSE at 15.5 10.34 In summary, the required operating revenue for the Utility's water system should be $658,451.00 which results in an operating income of $211,407.00. The sewer system requires an annual, gross operating revenue of $475,629.00 in order to obtain a return or operating income of $130,017.00. The operating expenses and adjustments supportive of these figures are depicted in more detail in Schedules IV, V and VI attached hereto and incorporated by reference herein. The sewer revenue requirement found herein is less than the interim revenues authorized for sewer service, thus a refund is in order.
Recommendation In consideration of the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the application of Lehigh Utilities, Inc. be granted in part, and that the Utility be authorized to receive a gross annual water revenue of $658,451.00 and gross annual sewer revenue of $475,629.00 to be achieved by rates filed with and approved by the Public Service Commission. It is further RECOMMENDED that the Utility be required to file revised tariff pages containing rates designed to produce annual revenues in the above amounts. It is further RECOMMENDED that the Utility be required to refund the interim sewer revenues previously authorized in this proceeding which exceed those sewer revenues determined to be appropriate herein. It is further RECOMMENDED that the above refunds be accomplished within ninety (90) days. This Recommended Order entered this 13th day of October, 1980, in Tallahassee, Florida. P. MICHAEL RUFF Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 13th day of October, 1980. COPIES FURNISHED: R. M. C. Rose, Esquire 1020 East Lafayette Street Tallahassee, Florida 32301 William H. Harrold, Esquire 101 East Gaines Street Tallahassee, Florida 32301
Findings Of Fact Application 7500165 requested average withdrawal of water of 1,804,750 gallons per day from 4 wells located about a mile east of Highway 41 and a mile north of Apollo Beach. The four wells would be for irrigation of tomato crops on total acreage of 4 acres located in Hillsborough County (Exhibit 1, Testimony of Elsberry and Boatwright). Notice of hearing as to the application was published in a newspaper of general circulation in accordance with statute and rule (Exhibit 3). A letter of objection from Joseph S. Benham, Apollo Beach, Florida, dated November 19, 1975 was submitted to the Water Management District, wherein he expressed concern regarding water shortages and, although he does not seek to totally deny the application, is of the belief that the district must insure sufficient controls and management of irrigation activities so that resources are not wasted, water runoff to drainage ditches is eliminated and renewed justification is given each year for the withdrawal (Exhibit 2). A representative of the District staff established that there would be no violation of statutory or regulatory requirement for issuance of a consumptive water use permit in this case except as to the fact that potentiometric level of the applicant's property would be lowered below sea level as a result of withdrawal. It was agreed at the hearing that a period of thirty days should be granted both parties to formulate a stipulation as to control of runoff. An unsigned stipulation was received from the Water Management District by the hearing officer on March 1, 1976, which provided that the permit would be granted with the following stipulations: Runoff from the property will be limited to 25 percent of the quantity pumped and by December 31, 1980 shall be reduced to 16.5 percent of the quantity pumped. The District may at its own expense install metering devices for the purpose of monitoring runoff. The permittee will be notified in advance of such action. The Permit will expire on December 31, 1980. (Testimony of Boatwright, Exhibit 4).
Recommendation That application 8500165 submitted by Elsberry and Elsberry, Inc. Route 2, Box 70 Ruskin, Florida, for a consumptive water use permit be granted with the conditions as follow: Runoff from the property will be limited to 25 percent of the quantity pumped and by December 31, 1980 shall be reduced to 16.5 percent of the quantity pumped. The District may at its own expenseinstall metering devices for the purpose of monitoring runoff. The permittee will be notified in advance of such action. The Permit will expire on December 31, 1980. That the Board grant an exception to the provision of Rule 16J- 2.11(4)(e), F.A.C., for good cause shown. DONE and ENTERED this 15th day of March, 1976, in Tallahassee, Florida. THOMAS C. OLDHAM Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675 COPIES FURNISHED: Jay T. Ahern, Esquire Southwest Florida Water Management District Post Office Box 457 Brooksville, Florida 33512 Elsberry & Elsberry, Inc. Route 2, Box 70 Ruskin, Florida
