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
The Issue Whether a permit to convert previously permitted percolation ponds to a land application, reclaimed water, spray and drip irrigation system should be granted to Respondent, Destin Water Users, Inc.
Findings Of Fact The City of Destin, Florida is located on a sandy strip of land which lies between the Gulf of Mexico to the south and the Choctawhatchee Bay to the north. This strip of land generally consists of rapidly percolating soil. Importantly, the strip of land has a breakline running through it which functions similar to the Continental Divide of North America in determining the direction of flow of any water located on either side of the divide. In this case, the breakline causes water to flow either north or south depending on which side of the breakline the water is located. DWU provides water and sewer treatment to residents and businesses located in the City of Destin, Florida. In order to provide its sewer service, DWU operates a waste water treatment plant along with several wastewater percolation ponds and wastewater spray and drip irrigation systems. Sometime in 1991, DWU entered into a lease agreement with a third party in which DWU would permit the third party to construct a golf course on a thirty acre site which currently contains four of DWU's percolation ponds. The four percolation ponds, which are the subject of this proceeding are located off U.S. Highway 98 in Destin, Florida. The northern boundary of the subject site is the southern boundary of the property in which Petitioners' have an interest. After construction of the golf course, DWU plans to continue to dispose of treated wastewater at the site by using a dual irrigation system consisting of a sprinkler system for spray irrigation and a series of underground plastic pipes for slow drip irrigation. DWU desired to create a dual use for the 30 acre site in order to generate more income from the property and still be able to dispose of wastewater on the property. In order to accomplish its goal, DWU was required to obtain a permit for the planned conversion of the percolation ponds to a land application, reclaimed water, spray and drip irrigation system. Because a spray and drip irrigation system would be put into place, DWU would be required to provide additional nutrient and BOD removal before water is put on the property. DWU clearly has the capability and experience required to provide additional nutrient and BOD removal. Also because a spray and drip irrigation system would be substituted for the percolation ponds the maximum quantity of effluent to be applied to the property would be reduced to 1.58 gallons per day under the proposed permit. The location of the percolation ponds and consequently the proposed spray and drip irrigation system is a superior site for effluent disposal because of the sandy soil, high elevation relative to the property surrounding the site, and the high permeability rate of the soil. The ponds have been in existence for approximately ten years, and have operated under a permit which allows a maximum average of 1.65 million gallons of wastewater a day to be applied to the ponds' 30 acre site. Indeed, when the ponds were originally permitted approximately ten years ago all of the various factors affecting flow rates were reduced to calculations to determine the amount of effluent which could safely be placed on the percolation ponds' site to insure complete and continual compliance with Department requirements. To date, all of the effluent currently being applied to the percolation ponds meets the Department's standards when it leaves the percolation pond property and there have not been any violations of the operating permit or any other statutes, or rules for the subject percolation ponds during the history of their operation. Similarly, the design calculations for the proposed conversion to the spray and drip irrigation system on the proposed golf course show that the water quality will continue to meet the Department's standards when it leaves the property. The pond site is surrounded by eight monitoring wells. These wells measure the level of any contaminants which may seep into the groundwater and also measure any changes in groundwater levels. The monitoring wells are a requirement of the percolation ponds' permit to insure compliance, with state water quality standards and to insure that the percolation ponds are not adversely affecting any off-site property. DWU has submitted quarterly reports of the readings from these monitoring wells, as required by law, to the Department. The wells will remain in place should the property be converted to a golf course with a spray and drip irrigation wastewater disposal system. A portion of the monitoring wells which encircle the percolation ponds lie along the northern boundary of the percolation ponds, which is the southern boundary of Petitioners' property. Petitioners submitted the testimony of two lay witnesses in an attempt to establish a causal relationship between the percolation ponds and flooding in and around the percolation pond area. Petitioners' witness, Bud Sharon, testified that he saw water on property located immediately to the south of DWU's percolation ponds which he had previously owned. The water Mr. Sharon saw was a continuous stream of water running down the side of his property. The stream of water developed after the ponds had been built. However, this witness was not qualified to render any expert opinions correlating the presence of any water on his property to any activities on DWU's percolation ponds. Most importantly, the evidence showed that the ponds were not in continuous use by DWU and at times were dry while Mr. Sharon's stream was continuous. This fact alone leads to the conclusion that the stream of water Mr. Sharon testified about was caused by factors not attributable to the percolation ponds. Additionally, analysis of the water found upon this witness' property was determined to be free from any contaminants and did not pose any health risks. Finally, the evidence demonstrated that with improved storm water control throughout the general area the stream has abated. Dale Whitney was also proffered by petitioners and presented lay testimony regarding his observations of water in the vicinity of the percolation ponds. This witness testified that he saw water emanating from the berm which forms the southern boundary of the DWU percolation ponds. However, it was established during cross-examination that this witness did not know whether the DWU percolation ponds were in use at the time or when they had previously been in use. This witness also admitted under cross-examination that he was not qualified through experience, training or otherwise to opine about the source of water which he observed or whether it was in any way attributable to the percolation ponds. Additionally, the evidence showed that Mr. Whitney's observations occurred shortly after a heavy rain and during a particularly wet time of the year. In short, the water seen by Mr. Whitney more than likely was the result of storm water control in the area with rainwater percolating out of the berm. The evidence was insufficient to show that effluent from the percolation ponds was leaking through the berm. On the other hand, the empirical data from the monitoring wells surrounding the percolation ponds demonstrates that the breakline for the area is north of the percolation ponds' site and is on Petitioners' property. The groundwater at the subject site flows in a southerly direction to the Gulf of Mexico. The data from the monitoring wells also indicates that the wastewater stays in the groundwater and does not emanate to the surface and cause flooding. Similarly, there was no competent substantial evidence that the subject site caused any flooding at any time to the Petitioners' property. Indeed the historical data gathered from the percolation ponds' site demonstrates that water on that site runs away from Petitioners' property. In short, Petitioners failed to offer any plausible basis for inferring that water on the percolation ponds' site could flow uphill over the breakline and cause either flooding or raised nutrient levels on Petitioners' property. 1/ Moreover, for the past ten years during which the percolation ponds have been in existence, all effluent contaminant levels have been well within compliance with all Department rules. Moreover, Petitioners presented no substantial credible evidence, either testimonial or documentary, concerning any water sample analyses in support of their allegations regarding water borne contaminants emanating from the percolation ponds onto their property; and no substantial credible evidence in any way materially controverting the engineering information submitted by DWU in its application or the determinations made by the Department in its analyses and approval of DWU's application. Clearly, the actual performance of the percolation ponds over the past ten years establishes that the site will perform in accordance with the Department's rules should the proposed conversion be allowed. Additionally, given DWU's full compliance with all of the Department's rules relative to the performance and function of the percolation ponds over the past ten years, as well as compliance on DWU's use of its currently existing reclaimed water reuse systems and the fact that the conversion proposal meets the Department's water quality and design criteria requirements for reclaimed water use, reasonable assurances that DWU will continue to comply with all the Department's rules should the proposed conversion be allowed have been given and the permit should be granted.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is recommended that the Florida Department of Environmental Regulation enter a final order issuing permit application number DC46-199969 to Destin Water Users, Inc. RECOMMENDED this 3rd day of August, 1992, at Tallahassee, Florida. DIANE CLEAVINGER, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 3rd day of August, 1992.
Findings Of Fact Quality of Service During the test year Petitioner provided sewer service to an average of 533 multi-family customers, nine residential customers and two general service customers. Foxmoor Condominium Association, Inc., a customer of Petitioner, has indicated its willingness to cooperate with the utility in its attempt to obtain a copy of the water bill for the condominium from Lee County, which provides the water service. This information will enable the utility to utilize a base facility charge type of rate structure. Evidence of record indicates that Petitioner is in compliance with regulations of the Florida Department of Environmental Regulation, although the utility, through testimony, acknowledged the existence of a consent order between DER and the utility, whereby certain changes should take place regarding the utility operations. The evidence in the record, therefore, supports a finding that the utility's sewer service is presently satisfactory. Rate Base A rate base of $170,087 suggested by PSC staff was acceptable to the utility (see Tr. 84-87). In accepting the rate base figure, the utility did not abandon its request that certain overheads be capitalized and added to rate base. However, necessary information to accomplish this was not timely filed, and, rather than delay this proceeding for presentation and audit, it was agreed that this issue be left open for a future rate case proceeding (see Tr. 20, 21, 41). The complete rate base schedule is attached as Schedule No. 1. Net Operating Income After eliciting the testimony of the various witnesses and considering the various stipulations between the parties, the sole issue remaining in dispute in this proceeding was the appropriate level of compensation for the chief executive officer of the utility. The utility had requested a salary of $13,000 per year. However, based upon the fact that the chief executive officer was actually paid only $3,400 during the test year, that figure is determined to be the appropriate amount of compensation to be allowed in this proceeding. Upon reaching that conclusion the appropriate amount of gross annual revenues is $63,133 (see Schedule No. 2, attached) Cost of Capital The utility had 100 percent debt at a cost of 10.59 percent (see Exhibit R-4), a figure which the utility agreed to as the accepted cost of capital finding for the purposes of this rate case proceeding only (see Tr. 79). Revenue Requirement As indicated in Schedule No. 2, the revenue requirement for the sewer system is $63,133. The revenues produce an overall rate of return of 10.59 percent on sewer rate base. Accordingly, the utility should file revised tariff pages containing rates designed to produce the above-noted amount of gross revenues. Rate Structure The evidence in this proceeding establishes the utility has been improperly billing some customers, and that the utility should be required to make refunds (see Tr. 65). The utility has agreed to make the refunds requested (see Exhibit 3-R). Petitioner's master metered, multi-family customers should be billed on a base facility charge type rate structure. Residential customers should be billed on a flat rate basis because of the relatively small number of these customers during the test period, and because of the difficulty of obtaining information concerning the water consumption due to the fact that water service is provided by the county.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That the application of Old Bridge Utilities, Inc. be granted and the utility be authorized to file revised tariff pages, containing rates designed to produce gross annual sewer revenues of $63,133; That the utility be required to utilize the rate structure described in the body of this Recommended Order; That the issue of capitalization of overhead be left open for resolution in a future proceeding; That the rate refunding-bond, filed by the utility, be returned for cancellation, and That the refunds reflected in the attached schedules discussed herein be made. DONE and ORDERED this 7th day of April, 1981, in Tallahassee, Florida. WILLIAM E. WILLIAMS 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 7th day of April, 1981. COPIES FURNISHED: William H. Harrold, Esquire Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 William E. Sundstrom, Esquire Myers, Kaplan, Levinson, Kenin & Richards 1020 East Lafayette Street Tallahassee, Florida 32301 Karl L. Johnson, Esquire Nuckolls, Parsons, Johnson and Fernandez 2701 Cleveland Avenue Fort Myers, Florida 33902 ================================================================= AGENCY FINAL ORDER ================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION In re: Application of OLD BRIDGE DOAH CASE NO. 80-1577 UTILITIES, INC. for a rate DOCKET NO. 790677-S increase to its sewer customers ORDER NO. 1-10152 in Lee County, Florida. ISSUED: 7-21-81 / The following Commissioners participated in the disposition of this matter: JOSEPH P. CRESSE, CHAIRMAN JOHN R. MARKS, III SUSAN W. LEISNER Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, WILLIAM E. WILLIAMS, held a public hearing on January 15, 1981, in Fort Myers, Florida, on the application of Old Bridge Utilities, Inc. for a rate increase to its sewer customers in Lee County, Florida. The Division of Administrative Hearings assigned Case No. 80-1577 to the above-noted docket. APPEARANCES: WILLIAM E. SUNDSTROM Attorney at Law Myers, Kaplan, Levinson, Kenin & Richards 1020 East Lafayette Street Tallahassee, Florida 32301 On behalf of Petitioner, Old Bridge Utilities, Inc. KARL L. JOHNSON Attorney at Law Nuckolls, Parsons, Johnson and Fernandez 2701 Cleveland Avenue Fort Myers, Florida 33902 On behalf of Intervenor, Foxmoor Condominium Association. WILLIAM H. HARROLD Attorney at Law 101 East Gaines Street Tallahassee, Florida 32301 On behalf of the staff of the Florida Public Service Commission and the public generally. The Hearing Officer's Recommended Order was entered on April 7, 1981. The time for filing exceptions thereto has expired and no exceptions have been filed. After considering all of the evidence in the record, we now enter our order.
Findings Of Fact The Petition herein was filed by Petitioner with PERC on February 14, 1975. (Hearing Officer's Exhibit 1). The hearing in this cause was, scheduled by notice dated May 23, 1975. (Hearing Officer's Exhibit 2). The City of Port St. Joe, Florida, is a Public Employer within the meaning of Florida Statutes, Section 447,002(2). (Stipulation TR 6). The Laborers' Local Union No. 1306 is an employee organization within the meaning of Florida Statutes, Section 447.002(10). (Stipulation, TR 6). There is no contractual bar to hold an election in this case. (Stipulation, TR 6, 7). There is no pertinent bargaining history which affects this matter. (Stipulation, TR 7). PERC has previously concluded that the Petitioner is a duly registered employee organization (See: Hearing Officer Exhibit 3). No evidence was offered at the hearing to rebut the administrative determination previously made by PERC. PERC has previously concluded that the Petitioner filed the requisite showing of interest with its petition (Hearing Officer's Exhibit 4). No evidence was presented to rebut the administrative determination. Petitioner and the Public Employer stipulated and agreed that all employees of the City of Port St. Joe employed at the hospital, or in the Fire and Police Departments should be excluded from any unit ultimately certified. The parties further stipulated that Mr. Brook, the City Clerk-Auditor, and Mr. R. F. Simon, Manager of the Waste Water Treatment Plant, should be excluded from the unit; and, that Mr. Joe Badger, the Janitor at City Hall, who is not identified in the proposed unit designations, should be included within the unit. (Stipulation TR 10, 11). The City of Port St. Joe operates under a city commission form of government with a mayor and four commissioners. The, City has approximately 80 to 85 employees. The functions of government are not rigidly departmentalized in Port St. Joe. The, largest City Department is the Water and Waste Water Treatment Plant. This department is headed by a manager, Mr. R. E. Simon, who answers to the City Commission. Approximately 40 of the city's employees are in this department. The city's other two departments are more vaguely defined. There is a department concerned with parks and Cemeteries, and Water and Sewers, which employs approximately 20 persons; and a department concerned with Roads and streets, garbage and Trash Collection, and Warehouse and Garage, which employs approximately 18 - 20 persons. Each of these latter two departments is headed by the City Auditor-Clerk, Charles W. Brock. Mr. Brock answers to the City Commission. (TR 12-14, 29, 34-35). The Public Employer argued that all city employee other than those employed at the hospitals or in the Police or Fire Departments should be included within an appropriate unit. Only the manager of the Water and Waste Water Treatment Plant, and the City Auditor-Clerk would be excluded. Petitioner asserts that Supervisory employees and clerical employees should be excluded from the unit. Petitioner would exclude from the unit persons who fill the following positions: Assistant Manager of the Waste Water Treatment Plant; Work Superintendent of the Department concerned with streets and Highways, Trash and Garbage Collection, and Garage and Warehouse; Work Superintendent of the Department concerned with Water and Sewers, parks and Cemeteries; Leadmen or Chiefs at the Waste Water Treatment plant; Chief Mechanic; Chief of Instrumentation and Electric; Chief Operator; Chief of the Laboratory; Chief of Sewer Collection; The Inventory and Warehouse Clerk; and the city's seven clerical employees The Public Employer would include the persons holding these positions within the unit. The present Assistant Manager of the Waste Water Treatment Plant is Curtis Lane. Mr. Lane answers directly to Mr. Simon, the Plant Manager. Mr. Lane is charged generally with carrying out the instructions of Mr. Simon, and he performs some supervisory functions based on these instructions. Mr. Lane does not have the authority to hire and fire other employees. He receives an hourly wage, and the same vacation, pension and insurance benefits as other employees receive. His hourly wage rate is higher than that of the other employees at the Waste Water Treatment plant. He wears the same uniform as the other employees. It does not appear that Mr. Lane exercises any significant budgetary role, nor that he would play any part in the collective bargaining process. (TR 14-16, 37-42). The present work Superintendent of the Department concerned with Streets and Highways, Trash and Garbage, and Garage and Warehouses is Dorton Hadden. Mr. Hadden reports directly to Mr. Brock. Mr. Hadden is charged with supervising the 18 to 20 employees in his department. He receives a salary while other employees are compensated on an hourly rate. He does receive the same insurance, vacation, and pension benefits that other employees receive. Mr. Hadden wears the same uniform as other employees in his department. It does not appear that Mr. Hadden has any significant budgetary role, nor any significant role in the collective bargaining process. (TR 16-18, 31-35, 47, 49). The present work Superintendent of the department concerned with Water and Sewers and Parks and Cemeteries is G. L. Scott. Mr. Scott supervises 10 to 12 employees. He answers directly to Mr. Brock. Mr. Scott is paid a salary while all other employees of his department, except one, are paid at an hourly rate. He receives the same insurance, vacation, and pension benefits as other employees. Mr. Scott wears the same uniform as other employees in his department. It does not appear that Mr. Scott has any significant budgetary role, nor any significant role in the collective bargaining process. (TR 18-20, 42-45). Other positions within the Waste Water Treatment Plant Department about which there is a dispute as to inclusions within the bargaining unit are the leadmen or chiefs at the Waste Water Treatment Plant, the Chief Mechanic, the Chief of Instrumentation and Electric, the Chief Operator, Chief of the Laboratory, and Chief of Sewer Collection. These employees are charged with supervising specific aspects of the Waste Water Treatment Plant operation Each of these employees answers to Mr. Simon. Each is compensated at an hourly rate of pay, which is generally higher than that of other employees at the plant. They wear the same uniform and have the same insurance, vacation, and pension benefits as other employees. It does not appear that these employees perform a significant budgetary role, nor play a significant role in the collective bargaining process. (TR 20-24, 59-69). The Inventory and Warehouse Clerk at the Waste Water Treatment Plant is George Padgett. Mr. Padgett answers to Mr. Simon. He is charged generally with maintaining the inventory at the warehouse. He is paid on the same wage scale, and receives the same insurance, vacation, and pension benefits as other employees. He wears the same uniform as other employees. It does not appear that Mr. Padgett exercises any significant budgetary role, nor that he has any significant role to play in the collective bargaining process. (TR 24-26, 47- 49). The Public Employers clerical employees are supervised either by Mr. Brock or by Mr. Simon. These employees do not work directly with other employees in the unit described in the Petition. They are paid on the same wage scale, and receive the same insurance, vacation, and pension benefits as the other employees. It does not appear that these employees play any significant budgetary role, nor that they will have any significant role in the collective bargaining process. (TR 26-29,49-56). ENTERED this 12th day of August, 1975 in Tallahassee, Florida. G. STEVEN PFEIFFER, Hearing Officer Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304 (904) 488-9675
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.
The Issue Whether the application of Petitioner Florida Cities Water Company, to increase the ratios it charges customers for water service in Lee County should be granted. CONCLUSIONS and RECOMMENDATION Conclusions: Factors pertinent to ratemaking and enumerated in Section 367.081, Florida Statutes, have been considered in this pro- ceeding. The Petitioner utility has not justified use of "year-end" rate base; those adjustments which it has supported with a preponderance of evidence have been accepted, those lacking sufficient eviden- tiary support have been rejected. Peti- tioner's application for rate increase should be granted to the extent provided in this Recommended Order; the resulting rates are just, reasonable, compensatory, and not unjustly discriminatory. Recommendation: That the Commission recalculate adjusted rate base, operating income, and the result- ing additional and total gross revenues in a manner consistent with this Recommended Order, and that Petitioner be authorized to file new rates structured on the Base facility charge concept designed to generate the addi- tional and total annual gross revenues so specified.
Findings Of Fact Based upon the evidence presented at hearing, the following facts are determined: I. The Application By its application, the UTILITY seeks authority to increase its rates sufficiently to generate additional annual gross revenues of $1,483,300. It attributes the need for increased revenues to extensive additions recently made to its water plant pursuant to COMMISSION Order No. 6209 entered in Docket 74176-W. The UTILITY claims that the increased investment and higher operating expenses associated with such plant additions effectively reduce its rate of return to 4.2 percent; it asserts that the requested additional revenues are necessary to allow it to earn a fair and reasonable rate of return of 12 percent. (Testimony of Reeves, Cardey; P-2, P-8.) II. Rate Base There are three issues involving the proper determination of rate base in this case: (1) whether "year-end", rather than "average" rate base should be used, (2) whether an Allowance for Funds Used During Construction (AFUDC) for post-test period additions allowed in rate base is proper, and (3) whether connection fees collected from 1969 to 1973 should be recorded as Contributions in Aid of Construction (CIAC) "Year-end" v. "Average Rate Base In determining rate base, absent extraordinary or emergency conditions or situations, "average" rather than "year- end" investment during the test period should be used. City of Miami v. Florida Public Service Commission, 208 So.2d (Fla. 1968). The Florida Supreme Court has suggested that average investment "should not be departed from except in the most unusual and extraordinary situations where not to do so would result in rates too low as to be confiscatory to the utility." Id. at 258. Year-end investment may be used only when a utility is experiencing extraordinary growth. Citizens v. Hawkins, 356 So.2d 254 (Fla. 1978). The UTILITY has not established that it meets the standard for utilization of "year-end" rate base, i.e. , that it has experienced unusual and extraordinary growth. Its customer growth rate averaged 8.2 percent for the last seven years, with a 10.56 percent gain during the test year. This growth rate has been experienced by many other Florida utilities of similar size and is neither extraordinary nor unusual. Neither is the UTILITY's growth extraordinary when measured in terms of water sold. Between 1975 and 1979, its growth in water sales averaged approximately 11 per- cent, in 1980--6 percent. In terms of plant growth, the UTILITY averaged 19.37 percent over the last seven years; the growth rate for 1979 was 12.03 percent. However, in 3980, its investment in gross plant grew at a 33 percent rate. The UTILITY's growth rate was repeatedly described as "substantial" by its consultant, K. R. Cardey, but substantial growth does not equate to extraordinary or unusual growth as defined by the Florida Supreme Court. Furthermore, the UTILITY did not establish that failure to use "year-end" rate base would reduce its rates to a confiscatory level. See, City of Miami, supra. It follows that "average" investment during the test period is the proper method to utilize in determining rates in this case. (Testimony of Cardey, Deterding.) Appropriateness of Allowance for Funds Used During Construction (AFUDC) After the test period, the UTILITY completed five major additions to its plant, all of which were required by previous order of the COMMISSION. (Order No. 6209, Docket 74176-W.) The COMMISSION agrees that, since it required these post-test period additions, they should be included in rate base at full weight. Since these additions, which total $5,966,569, were under construction during the test period, the COMMISSION contends they should be recorded as Construction Work in Progress (CWIP). The UTILITY agrees that these additions should be included in rate base but seeks to include, as well , an AFUDC allowance in the amount of $326,422.2 AFUDC represents interest that was capitalized on each of these additions while they were under construction during and after the test period. Since these additions are already included in rate base at full weight, the inclusion of AFUDC in rate base would allow the UTILITY to duplicate earnings on its investment. Such a result would be unreasonable, improper, and should not be allowed. (Testimony of Reeves, Deterding; P-1, P-3, P-10, R-2.) Connection Fees: CIAC or Revenue From 1969 through 1973, the UTILITY operated under the regulatory jurisdiction of Lee County, not the COMMISSION. During those years, it was the UTILITY's practice and policy to record connection fees, which totaled $226,582, as revenue, not CIAC. Since connection fees are ordinarily considered CIAC, the COMMISSION proposes to adjust CIAC by $226,582. (Testimony of Deterding, Cardey; P-8, R-2.) Contributions in Aid of Construction are defined as monies used to offset the acquisition, improvement, or construction cost of utility property used to provide service to the public. Section 367.081(2), Florida Statutes (1980). The UTILITY's consultant testified that connection fees collected and credited to revenue by the UTILITY during 1971, 1972, and 1973, totaling $176,773, were "not used to offset the improvements or construction costs of the [UTILITY's] property. (P-8, p. 6.) The COMMISSION, on cross-examination, did not question the accuracy or impeach the credibility of this statement; neither did it present any evidence to controvert or rebut the UTILITY's assertion as to how the connection fees were used. The only evidence on the question presented by the COMMISSION consisted of its accountant's conclusion: "During the years from 1969 to 1973, Florida Cities Water Company recorded many tap-in fees collected as revenue. These should properly be recorded as contributions in aid to construction. This adjustment [of $226,582] adds these contributions." p. 5.)(Testimony of Deterding, Cardey; P-8, R-2.) In its Proposed Recommended Order, the COMMISSION asserts that the UTILITY has the burden of showing: (1) the correctness of collecting funds normally authorized for service availability and using them for another purpose, and (2) the exact manner in which the funds were used. (Proposed Recommended Order, p. 6.) However, there was no evidence in the record to show that the UTILITY's treatment of connection fees during 1971 through 1973, was incorrect or violative of Lee County's regulatory standards. Neither is there any evidence to show that the connection fees collected in those years were used as contributions in aid of construction, i.e., to offset acquisition, improvement, or construction costs. The only evidence presented as to how those fees were actually used was that of the UTILITY's consultant; he testified that those funds were used only to defray operation and other expenses associated with the new customers. This evidence was sufficient to shift to the COMMISSION the burden of presenting evidence on the question or discrediting the evidence presented by the UTILITY. The COMMISSION did neither. It is found, therefore, that the $176,773, representing connection fees collected between 1971 and 1973, do not constitute CIAC, the UTILITY's testimony in this regard being persuasive. (Testimony of Cardey, Deterding; P-8, R-2.) However, as to the years 1969 through 1970, the UTILITY presented no evidence that the $48,809 in connection fees collected during that time were used only for operating and maintenance expenses and not to offset acquisition, improvement, or construction costs. In the absence of such evidence, the COMMISSION testimony that connection fees should ordinarily be treated as CIAC is persuasive. The connection fees collected during 1969 and 1970, calculated to be $49,809, are therefore properly included as CIAC. (Testimony of Deterding, Cardey; P-8, R-2.) In light of the above findings and the absence of disagreement concerning other adjustments proposed by the COMMISSION, the elements of the UTILITY's adjusted rate base are: RATE BASE Test Year Ended March 31, 1980 Utility Plat in Service $ 11,178,094 Construction Work in Progress 5,966,569 3/ Accumulated Appreciation (626, 160) CIAC,(Net of Amortization) (3,041,747) 4/ Advances for Construction (111,567) AFUDC (326,422) 5/ Working Capital Allowance 146,911 Materials and Supplies 117,450 Income Tax Lay [To be calculated based on additional gross revenues rec- opmended herein.] RATE BASE [To be determined upon recalculation.] In order to determine the adjusted rate base which should be utilized, Income Tax Lag requires recalculation in a manner consistent with the above findings and Section III below. (Testimony of Cardey, Deterding; P-1, P-3, P-8, P-10, R- 2.) III. Operating Income Operating Expense: Water Royalty Charge In calculating operating income for the test year, the UTILITY included $18,577 as an operating expense attributed to a $.03 per gallon royalty charge it paid an affiliate for water pumped from the Green Meadows well field. The UTILITY operates this water field on a 21-acre site and has easements to locate 26 wells. It pays no other cost for the water. The COMMISSION disputes the reasonableness of this charge because it is not an arms-length transaction, and the UTILITY has not explained the basis of the $.03 charge, the cost to the affiliate of the land involved and its subsequent sales price (the affiliate reserving the water use rights) , and the identity of the present owner. The COMMISSION's accountant testified that reasonableness of the charge could be determined by analyzing the costs of the rental of the land based on the original cost of the property to the affiliate. In response, the UTILITY established that the $18,577 expense is less than it would cost tide UTILITY, in terms of annual revenue requirements, to purchase the land involved. But the UTILITY failed to address the cost of renting the property, based on the affiliate's acquisition costs, or furnish information necessary to make such a determination. The COMMISSION is entitled to clearly scrutinize the expenses claimed by a utility and require that their reasonableness be shown. Tide UTILITY did not adequately explain or support the reasonableness of its claimed royalty expense, and it should therefore be disallowed. (Testimony of Reeves, Deterding; P-6, R-2.) Depreciation and Taxes: Adjustments Attributable to Post-Test Period Plant Additions The parties disagree on whether adjustments should be made to test year operating expenses to reflect increases in depreciation and taxes due to the five post-test year plant additions completed subsequent to the test period. The evidence is uncontroverted that these plant additions, including the Green Meadows water treatment plant and related facilities, were required by prior COMMISSION order and that they were necessary to provide service to existing customers of the UTILITY. The parties have also agreed that the full cost of these additions should be included in rate base, at full weight. The operating expenses of the UTILITY during the test year should be adjusted as was rate base, for known and no net changes in order to reflect conditions which will prevail when the rates become effective. The UTILITY's 2.1 percent composite depreciation rate should thus be applied against the new plant additions, and tide resulting depreciation expense included in the cost of providing service. Similarly, taxes (other than income) on the $5,960,569 worth of plant additions are known and eminent, are a cost of providing service, and should be included as an adjustment to test year taxes. The COMMISSION presented no policy or factual justification or explanation for its opposition to these adjustments to test year operating expenses. It does not contend that these expenses are other than known and eminent, attributable to the government-ordered plant additions, and will be part of the cost of providing service during the period the new rates will be in effect. The UTILITY's evidence in support of these adjustments is therefore persuasive. (Testimony of Cardey, Deterding; P-1, P-8, P-10, R-2.) Similarly, the UTILITY contended that test year income tax should be adjusted to reflect changes in revenue, operating expenses, depreciation, taxes, and interest expenses attributed to operation of the new plant addition. The COMMISSION offered no reason or explanation why such an income tax adjustment should not be made; changes in income tax due to the operation of the plant additions are known and eminent, and should be allowed as adjustments to test year expenses in order to adequately represent the UTILITY's future costs of service. However, due to the findings herein relating to use of "average rate base, the AFUDC allowance, treatment of connection fees previously collected, the water royalty charge, depreciation, and taxes, the income tax adjustment proposed by the UTILITY requires recalculation. (Testimony of Cardey, Deterding; P-1, P-0, P-10, R-2.) In light of the above findings, and the UTILITY's lack of opposition to other adjustments proposed by the COMMISSION, the known elements of adjusted operating income are: operating revenues of $2,419,437 and operating expense (operation) of $1,175,291. In order to determine adjusted operating income which should be used in this case, depreciation, taxes other than income, and income taxes require recalculation consistent with the findings contained in Sections II and III, infra. (Testimony of Cardey, Deterding; P-1, P-8, P-10, R- 2.) IV. Capital Structure, Cost of Capital, and Rate of Return The parties agree that UTILITY's capital structure and cost of capital are as follows: CAPITALIZATION COMPOSITE WEIGHT Rate 15 pct. 16 pct. Long-Term Debt 49.33 pct. 10.68 pct. 5.27 pct. 5.27 pct. Equity Capital 41.25 15-18 6.19 6.60 Subtotal 90.58 pct. 11.46 pct. 11.87 Deferred Federal Income Taxes 4.74 pct. -0- -0- -0- Customer Deposits .90 8.00 .07 .07 subtotal 96.22 Investment Tax Credit 3.79 pct. Average 11.53 .45 pct. 11.94 pct. .45 TOTAL 100.00 pct. 11.98 pct. 12.39 pct. They are also in agreement that a 12 percent return on the UTILITY's rate base, including a 15-16 percent return on equity, is a fair and reasonable rate of return. (COMMISSION's Proposed Recommended Order, p. 7; P-8, P-5.) V. Additional Required Revenues In order to determine the additional gross revenues which the UTILITY should file rates designed to generate, the authorized operating income should be computed by multiplying 12 percent times the adjusted rate base computed pursuant to Paragraph 10 above. The UTILITY should then be authorized to earn additional gross revenues equivalent to thee difference between the authorized operating income and the adjusted test year operating income computed pursuant to Paragraph 14 above. VI. Rate Structure and Rates The UTILITY proposes, with the COMMISSION's concurrence, that its new rates be structured in accordance with the Base Facility Charge Rate Design (BFC) and that the 25 percent surcharge currently imposed on general service customers be eliminated. The new BFC rate structure design contains a customer charge and a gallonage charge, both of which are directly related to the cost of providing the service. The customer charge assures that all customers pay their pro rata share of certain fixed and operating costs of the UTILITY which are not related to the amount of water used by the customer. The gallonage charge is based on the actual amounts of water used. With implementation of the base facility charge system, the UTILITY should lower its current $20 charge for reconnections during working hours to $10; similarly, its current $25 charge for reconnection after working hours should be reduced to $15. These lower charges are sufficient to cover the costs associated with the service rendered. The UTILITY also proposes various increases in its service availability, or connection charges. These increases, based on increased construction costs, will be used to finance additional facilities and stabilize rates to existing customers. The BFC rate design system proposed by the UTILITY is fair, reasonable, and nondiscriminatory. In light of the foregoing, it is unnecessary to consider the "alternative" rate structure which was presented to the COMMISSION staff on the day of hearing. With such time constraints, meaningful review of the "alternative" rate structure proposal was not possible. (Testimony of Byrd, Collier; R-1, R-3.) VII. Adequacy of Service Customer testimony criticized the 25 percent surcharge currently Imposed on general service customers, and the magnitude of the requested rate increase. Several customers complained of the quality of the water supplied. Under the proposed rate structure, tide surcharge on general service customers will be eliminated. While several customers complained of sediment in their drinking water, testimony established that the new Green Meadows softening plant should help alleviate that problem. The water supplied by the UTILITY meets all regulatory and health standards of the Health Department and the Florida Department of Environmental Regulation. The UTILITY is currently under no citation for violation of any regulatory standards. It is found that the quality of the water service offered by the UTILITY is adequate. (Testimony of Collier, Reeves, Customers; P-7.) VIII. Franchise Fees The UTILITY has collected $395,000 in "franchise fees" for Lee County, but has not paid them to the county due to questions surrounding the legality of the franchise fee. Neither have the funds been placed in a special escrow account pending resolution of this controversy. The UTILITY should ensure that such franchise fees are deposited in a special interest-bearing escrow account, and take steps to ensure that this controversy is resolved without further delay. (Testimony of Cardey; Late-filed Exhibit P-12.)
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That the COMMISSION recalculate adjusted rate base, operating income, and the resulting additional and total gross revenues in a manner consistent with this Recommended Orders and that Petitioner be authorized to file new rates structured on the base facility charge concept designed to generate the additional and total annual gross revenues so specified. DONE AND ENTERED this 27th day of February, 1981, in Tallahassee, Florida. R. L. CALEEN, JR. Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 27th day of February, 1981.
Findings Of Fact Cooper City Utilities, Inc. provides water and sewer service to its customers in Broward County, Florida, under the jurisdiction of the Commission pursuant to Chapter 367, Florida Statutes. The company was incorporated in 1973. All of the outstanding stock of the utility was owned by Moses Hornstein until his death on October 28, 1979, when ownership thereof became vested in the estate of Moses Hornstein, deceased. The personal representatives of this estate are Gertrude Hornstein, S. Lawrence Hornstein, and Judith A. Goldman. Gertrude Hornstein serves as president of Cooper City Utilities, Paul B. Anton as vice president, and Lawrence Lukin as secretary. Quality of Service At the hearing, a representative of the Broward County Health Department testified concerning the quality of service. Although some customer complaints had been received, there are no outstanding citations against Cooper City Utilities, Inc., and the quality of the utility's service will be improved when its new lime-softening plant, under construction, is completed in approximately August, 1980. The investigation by the Commission's staff engineer did not reveal any outstanding citations against either the water or sewer treatment facilities. Accordingly, on the basis of the entire record, the evidence supports a finding that the utility is in compliance with all state standards, and that the quality of its water and sewer service is satisfactory. Rate Base and Operating Statement Between the time in July when public hearings commenced, and September 24 when the hearings concluded, the utility abandoned its position on several matters which had been in dispute, leaving only two controverted subjects for resolution. These two remaining areas of disagreement are, (1) the cost of money [because of a pending petition for approval of additional financing (Docket No. 800562-WS)], and (2) the expense for an additional field laborer hired subsequent to the test year, which the utility seeks to have included as a pro forma expense. Based on the stipulation of the parties, the following schedule sets forth the rate base of Cooker City Utilities (Exhibit 15): Water Sewer Utility plant in service $2,331,137 $3,723,347 Plant held for future use (47,989) (166,375) Accumulated depreciation (286,651) (460,297) CIAC (net of amortization) (1,322,487) (2,302,707) Working capital allowance 51,083 37,680 Rate Base $ 725,093 831,648 Based on the stipulation of parties, prior to any consideration of the allowance of any expense for the laborer hired subsequent to the test year, the following schedule sets forth the utility's operating statement (Exhibit 15): Water Sewer Operating Revenues $ 368,562 $ 489,886 Operating Expenses: Operation 346,916 232,406 Maintenance 61,750 69,030 Depreciation 22,447 25,543 Amortization -0- -0- Taxes other than income 55,853 75,043 Other expenses -0- -0- Income taxes -0- -0- Total Operating Expenses $ 486,566 $ 402,022 Operating Income (Loss) $ (118,404) 87,864 5. On the matter of allowance of sufficient revenue to cover the cost of one additional laborer hired after the test year, the estimated annual expense is approximately $7,240. However, to the extent that this employee was hired due to an increase in the number of customers subsequent to the test year, or due to plant capacity not used and useful, it is not a proper pro forma adjustment. Without an affirmative showing that the laborer was necessary during the test year for existing customers, the adjustment should be disallowed, and there is insufficient evidence in this record to support such a finding. On the issue of cost of money, during the test year the utility's capital structure was composed of one hundred percent debt at a stated cost of ten percent. In Docket No. 800562-WS the company seeks Commission authority to borrow an additional sum of $450,000, and it plans to amend this application to include authority to borrow $400,000 more in order to make refunds to customers in compliance with a Commission order which was upheld in Cooper City Utilities, Inc. v. Mann (Fla. Sup. Ct. Case No. 58,047, September 12, 1980). However, the utility's proposed debt has not yet been approved by the Commission, and will not be incurred until some time in the future, if approved. In these circumstances, it is not appropriate to take the cost of new debt into consideration in determining cost of capital in this rate case. The evidence in the record supports a ten percent cost of capital. The earned rate of return for the water system is a negative 16.33 percent. The earned rate of return for the sewer system is 10.57 percent. Therefore, the utility's water rates should be increased, and its sewer rates should be decreased, to achieve an overall ten percent rate of return. Accordingly, the annual revenue requirement for the water system is $564,370, which amounts to an annual revenue increase of $195,808. The annual revenue requirement for the sewer system is $485,067, which amounts to an annual revenue decrease of $4,819. Rate Structure The present rates of Cooper City Utilities are structured in the conventional manner, consisting of a minimum gallonage charge and a one-step excess rate over the minimum. The utility proposes. rates with the same basic structure, but with changes in the minimum charge and the minimum gallonage allowance. However, the Commission has consistently taken the position that any rate that requires customers to pay for a minimum number of gallons, whether used or not, is discriminatory. Invariably, a base facilities type of rate structure has been required to be implemented in these circumstances. Under the base facilities charge, each customer pays a pro-rata share of the related facilities cost necessary to provide service, and in addition, pays only the cost of providing the service actually consumed under the gallonage charge. The evidence in this record supports the implementation of the base facilities charge form of rate structure. Under its tariff, Cooper City Utilities is authorized to charge guaranteed revenues in an amount equal to the minimum rate for water service and the applicable rate for sewer service for each equivalent residential connection to be served for a period of one calendar year in advance. Under the base facilities charge type of rate structure, the utility should be authorized to collect guaranteed revenues solely in the amount of the base facilities charge.
Recommendation Based upon the findings of fact and conclusions of law set forth above, it is RECOMMENDED that the application of Cooper City Utilities, Inc., 3201 Griffin Road, Suite 106, Fort Lauderdale, Florida, 33312, be granted for the water system and denied for the sewer system, and that the utility be authorized to file revised tariff pages, containing rates designed to produce annual gross revenues of $564,370 for its water system and $485,067 for its sewer system. It is further RECOMMENDED that the utility be required to implement a base facility charge type of rate structure. It is further RECOMMENDED that the utility be required to make appropriate refunds to its sewer customers in amounts to be approved by the Commission. It is further RECOMMENDED that the rate-refunding bond filed in this docket be maintained until the utility has accomplished the refunds indicated above. THIS RECOMMENDED ORDER entered on this 18th day of November, 1980, in Tallahassee, Florida. WILLIAM B. THOMAS 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 18th day of November, 1980. COPIES FURNISHED: Andrew T. Lavin, Esquire Post Office Box 650 Hollywood, Florida 33022 Sam Spector, Esquire Post Office Box 82 Tallahassee, Florida 32302 James L. Ade and William A. Van Nortwick, Esquires Post Office Box 59 Jacksonville, Florida 32201 John W. McWhirter, Jr., Esquire Post Office Box 2150 Tampa, Florida 33601 Alan F. Ruf, Esquire 2801 East Oakland Park Boulevard Fort Lauderdale, Florida 33306 William H. Harrold, Esquire Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 ================================================================= AGENCY FINAL ORDER ================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION In re: Application of Cooper City DOCKET NO. 800415-WS (CR) Utilities, Inc. for a rate increase ORDER NO. 9699 to its water and sewer customers in DOAH CASE NO. 80-1188 Broward County, Florida. ISSUED: 12-16-80 / The following Commissioners participated in the disposition of this matter: WILLIAM T. MAYO GERALD L. GUNTER JOSEPH P. CRESSE JOHN R. MARKS, III Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, William B. Thomas, held public hearings in this matter on July 16 and 17, and on September 23 and 24, 1980, in Cooper City, Florida. The Division of Administrative Hearings assigned Case No. 80-1188 to the above-noted docket. APPEARANCES: Andrew T. Lavin, Esquire Post Office Box 650 Hollywood, Florida 33022 and Sam Spector, Esquire Post Office Box 82 Tallahassee, Florida 32302 for the Petitioner, Cooper City Utilities, Inc. James L. Ade and William A. Van Nortwick, Esquires Post Office Box 59 Jacksonville, Florida 32201 for PCH Corporation Intervenor in opposition. John W. McWhirter, Jr., Esquire Post Office Box 2150 Tampa, Florida 33601 and Alan F. Ruf, Esquire 2801 East Oakland Park Boulevard Fort Lauderdale, Florida 33306 for the City of Cooper City, Florida, Intervenor in opposition. William H. Harrold, Esquire Florida Public Service Commission 101 E. Gaines Street Tallahassee, Florida 32301 for the Respondent, Florida Public Service Commission and the public generally. The Hearing Officer's Recommended Order was entered on November 18, 1980. The time for filing exceptions thereto has expired and no exceptions have been filed. After considering all the evidence in the record, we now enter our order.
Findings Of Fact Service At the end of the test year (calendar year 1978), the utility provided water service to approximately 203 customers located in the Country Estates Subdivision in Holiday, Pasco County, Florida. The system was connected to the Pasco Water Authority (PWA) in June, 1977, and approximately 80 percent of the water sold to its customers is derived from that source. The utility has no further growth potential inasmuch as it is presently operating at full capacity. Two customers testified at the hearing. One was dissatisfied with the requirement that Valmont be connected to the PWA, and complained of a sulfur- type odor emanating from the system. The other complained of excess water pressure and salt water intrusion in the water, both of which began after the connection of the system to the PWA pipeline. Notwithstanding the above complaints, the utility is now meeting all State Standards for water quality, quantity and pressure. The few complaints previously lodged with regulatory agencies have been expeditiously resolved. Rate Base The utility has proposed an average water rate base in the amount of $20,295 (Exhibit No. 6). This figure is derived by taking the balance in plant in service as reflected on the books of the utility, subtracting accumulated depreciation and contributions in aid of construction, and adding a working capital allowance. The following schedule portrays the appropriate rate base to be used herein. Valmont, Inc. Average Water Rate Base Year Ending December 31, 1978 Utility Plant in Service $42,385 Accumulated Depreciation (11,534) CIAC (Net of amortization) (14,215) Working Capital Allowance 3,767 Rate Base $20,295 Operating Income The utility reflects a per books operating loss for the test year of $3,156 (Exhibit No. 7). After including changes in the level of various expenses and the additional revenues sought herein ($10,305), the utility's proposed adjusted operating income is $2,638. The Commission agrees with the computations presented by the utility, and this amount should be accepted. The following schedule depicts the pro forma operating income of the utility for calendar year 1978. Valmont, Inc. Operating Income Year Ended December 31, 1978 Operating Revenues $34,911 Operating Expenses: Operation 29,397 Maintenance 736 Depreciation 516 Misc. Taxes 1,084 Income Taxes 540 Total Expenses 32,283 Operating Income $ 2,638 Cost of Capital The capital structure of the utility is composed of 100 percent common equity. The Commission advocates a cost rate of 13 percent be assigned to equity based upon a regression analysis of interest rates since 1946. The utility agrees this is an appropriate cost of capital, and it should be used in determining the revenue requirements of the utility. Revenue Requirements Based upon a 13 percent overall cost of capital, the utility should be entitled to increase its water revenues by $10,305 on an annual basis in order to achieve that return. Rate Design The utility presently has three customer classifications for water service: residential, general service and commercial. However, it has no customers receiving service under the general service category. The billing structure for each of the three classifications is based upon a minimum charge, depending on the size of the motor, and an excess charge for each 1000 gallons used thereafter. The base facilities charge advocated by the Commission is superior to the rate design presently used. Under this type of structure, a minimum charge will be assessed to recover the fixed or base costs of providing service, such as depreciation, taxes, insurance and a portion of billing and collecting expenses. Thereafter, a variable charge will be made for the gallons actually consumed. Because this type of rate structure offers greater control to the customer as to the amount of his bill, and allocates costs in a more equitable manner, it should be adopted.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that respondent Valmont, Inc. be authorized to file new tariffs to be approved by the Public Service Commission that will generate $10,305 in additional annual gross revenues for its water operations. It is further RECOMMENDED that the utility file appropriate tariff sheets in conformity with the Rate Design portion of this Order. This Recommended Order entered on this 9th day of December, 1980, in Tallahassee, Florida. DONALD R. ALEXANDER 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 10th day of December, 1980. COPIES FURNISHED: Marta M. Crowley, Esquire 101 East Gaines Street Tallahassee, Florida 32301 William E. Sundstrom, Esquire Suite 103, 1020 East Lafayette Street Tallahassee, Florida 32301
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 utility serves 547 water customers and 528 sewer customers in a subdivision known as University Shores. Southern commenced operating these systems in June, 1978, purchased them from University Shores Utilities, Inc. in September, 1978, and applied to the Commission for a transfer, which application was approved November 1, 1978, by Order 8550. The rates for service by these systems were granted by Order 6822 on August 6, 1975. Notwithstanding customer complaints of the quality of the water service (smell, taste, excess chlorine, sediment and no-noticed interruptions), the systems are in compliance with governmental standards. No customer complaints had been made to regulatory agencies, and the utility had handled only five for 1979 and to date in 1980. Due to a large increase in number of customers, a year end, rather than average, test year is appropriate; and the facilities are used and useful. Petitioner's rate bases are computed as follows: WATER SEWER Year end test year plant $526,737 $957,176 Construction Work in Progress 2,500 -0- Acquisition adjustment (net of amortization) (41,490) (78,300) Accumulated depreciation (67,172) (128,393) CIAC (net of amortization) (186,470) (489,438) Working Capital 5,476 6,386 Income tax lag (2,951) (4,225) $236,630 $263,214 The following capital structure and rate of return is that agreed to by the Petitioner and Respondent prior to intervention by the customers: 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 percent The above rate bases and rate of return provide an authorized constructed net operating income from water service of $22,523 and from sewer service of $30,059. Although the return on water service is only 9.52, the revenue is limited to that in the application. This results in the following constructed statement of operations for year ended June 30, 1979: WATER SEWER Operating Revenue $94,550 $117,814 Operating Expense Operation 41,853 49,838 Maintenance 1,950 1,244 Depreciation 5,964 7,451 Amortization (860) (1,598) Taxes, other than income 8,363 9,726 Income taxes 14,757 21,124 TOTAL $ 72,027 $ 87,785 Net Operating Income $ 22,523 $ 30,059 Rate Base $236,630 $263,214 Rate of Return 9.52 11.42 percent It is noted that the above revenue requirement is more than the interim authorized revenue of $68,841 for water and $81,720 for sewer. The staff proposed that the rate structure should be changed from the present block structure for 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 on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Southern States Utilities, Inc., University Shores Division, be granted and that the utility he 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 $94,550 for water service and $117,814 for sewer service. It is further RECOMMENDED that the refund bend be returned to utility. DONE and ORDERED this 25th day of November, 1980, in Tallahassee, Florida. H. E. SMITHERS Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: R. M. C. Rose, Esquire 1020 East Lafayette Street Tallahassee, Florida 32301 William H. Harrold, Esquire Florida Public Service Commission 101 East Gaines Street - Fletcher Bldg. Tallahassee, Florida 32301 Jack Shreve, Esquire Stephen C. Burgess, Esquire Benjamin H. Dickens, Jr., Esquire Office of Public Counsel Holland Building - Room 4 Tallahassee, Florida 32301 Steve Tribble, Clerk Florida Public Service Commission 101 East Gaines Street - Fletcher Bldg. Tallahassee, Florida 32301 Robert T. Mann, Chairman Public Service Commission 101 East Gaines Street - Fletcher Bldg. Tallahassee, Florida 32301
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant facts are found: Petitioner GDU is a wholly-owned subsidiary of General Development Corporation and has eight operating divisions. At the end of the 1979 test year, the petitioner's Port Malabar Division had 3,899 water connections and 3,760 sewer connections. At the end of July, 1981, the system was serving 4,852 water customers and 4,332 sewer customers. During the test year, petitioner's Port Malabar water system consisted of 16 shallow wells, 47 miles of distribution and transmission lines, and a three million gallon per day lime softening treatment plant with two storage facilities. The sewer system consisted of 17 lift stations, about 44 miles of collection and force mains and a treatment plant-rated at two million gallons per day. During the test year, 28 employees were assigned to the water and sewer operations. At the time of the August hearing, petitioner had 34 employees. Quality of Service The water and sewer service customers of petitioner who testified at the hearing were primarily concerned about the magnitude of the proposed rate increase and its impact upon persons with fixed incomes. Many customers testified that they were satisfied with the water and sewer service provided to them. The few complaints voiced about service included odor from a new lift station, the high mineral content of the water, water lost during construction projects, interruptions in service without notice, and, on occasion, dirty water. Petitioner maintains a customer service and local billing office in the Port Malabar area. It is the customary practice of petitioner to give its customers advance notice of any interruption in service. Water utilized for construction purposes is metered and billed to the individual contractors. The odor problem from the recently installed lift station has been resolved. Petitioner has an ongoing program for monitoring water quality and compliance with state and federal water quality standards. All drinking water requirements and standards for sewage treatment plant effluent have been complied with by petitioner. Petitioner presently has 3 sewage treatment plant operators and is attempting to secure one more operator to meet the Department of Environmental Regulation's requirement of four. Used and Useful The term "used and useful" is a ratemaking term to establish that portion of investment upon which a utility is entitled to earn a return. Facilities which are used and useful are those used to serve present customers, with a reasonable reserve added for future customers. A knowledge of engineering principles is necessary to perform a used and useful analysis. The used and useful analysis performed by petitioner resulted in a determination that the water treatment plant is 100 percent used and useful. The methodology utilized was to take the maximum day's water production during the test year and add an allowance for 18 months' growth based on an average of the prior three years growth rates. The actual growth rate of 953 water customers between the end of the test year and July, 1981, a 24.4 percent increase, closely matched the increase used in petitioner's calculations. The eighteen month period is representative of the period of time required for a utility to design, receive approval, complete construction and place the facility in usage. The utility's methodology made no allowance for fire demand and thus the results are conservative. Using a similar methodology, the PSC engineering expert also found the water plant to be 100 percent used and useful. The Office of Public Counsel's accounting expert determined that the petitioner's water plant was only 81 percent used and useful. His methodology utilized a peak day flow different than that utilized by petitioner for the reasons that he felt it was more representative of actual customer demand and did not reflect excess water loss. This witness also felt that the use of the marginal reserve or growth factor resulted in the inclusion of plant associated with future customers and allowed the utility to over-recover its depreciation expenses. Petitioner's used and useful analysis of water distribution mains resulted in the determination that $162,501 should be deemed held for future use and therefore excluded from rate base. For purposes of this calculation, petitioner utilized as-built plans and excluded those mains in sparsely settled areas unless they fronted on an occupied lot or on a fire hydrant located within 500 feet of an occupied lot. The PSC expert witness determined that the water distribution system was 100 percent used and useful. The OPC's witness determined that the used and useful portion of the water distribution system was 80.96 percent. His analysis was apparently based on the actual billings during the test year as compared to the total potential connections. By averaging the average daily flow and the average maximum flow days, and then adding an eighteen month allowance for future growth, the petitioner determined that the sewage treatment plant was 60.5 percent used and useful. Maximum flow days are more significant than average days from an engineering design perspective, and thus petitioner's calculations are quite conservative. The PSC witness determined that the sewage treatment plant was 100 percent used and useful. Based upon average daily flow and making no allowance for growth, the OPC's witness determined that the sewer plant was only 40 percent used and useful. His rationale for using the average daily flow was not adequately explained. Comparing the actual connections plus an eighteen month allowance for growth to potential connections, petitioner determined that the sewage collection and distribution mains are 100 percent used and useful. The PSC witness agreed. The witness for the OPC calculated the sewage collection line system as being only 73.4 percent used and useful, apparently giving no weight to a growth allowance. Water Loss Petitioner calculates its unaccounted for water loss at 9 percent, though a little over 1 percent is due to meter slippage because of mechanical design. Petitioner's meters are read on a monthly basis and are calibrated by a private firm once a year for the water meters and twice a year for the sewer meters. A range for water loss between 10 percent and 15 percent is considered reasonable in the industry. Pointing to the facts that many Florida water utilities have water losses at 5 percent or lower and that petitioner's own water losses were less in 1980, the OPC witness felt that the unaccounted for water should be calculated at a 5 percent rate. Construction Work in Progress A portion of the assets carried on the petitioner's books as construction work in progress (CWIP) were actually completed, paid for, in service and generating revenues during the test year. These assets--$246,9l6 of water mains and $1,053,476 of sewer mains--were reflected as CWIP because the bookkeeping process of classifying them to the proper plant accounts had not been completed. The assets were subjected to the petitioner's used and useful analysis, and they should be reclassified as utility plant in service. A utility is entitled to recover the cost of carrying its construction program. The two alternative methods of recovery are to allow the average balance of CWIP to be included in rate base or to allow the interest or other return on the construction balances to be capitalized as part of the cost of the asset and amortized over its useful life. This latter method is referred to as allowance for funds used during construction (AFUDC). If AFUDC is not added to the rate base and if the amount of construction is reasonable based upon engineering standards, CWIP should be includable in rate base. Over the long run, this method is less costly to customers than charging AFUDC. Petitioner did not charge AFUDC on the assets claimed as CWIP and the amounts claimed were less than in previous years and met the standard of reasonableness. The witness for the OPC was of the opinion that CWIP should be excluded from rate base because the assets benefited the utility rather than the current customers, and current ratepayers should not be required to finance the utility's investments. He further felt that if these funds were included in rate base, the result would be a mismatch between rate base and the utility's income statement. Contributions-in-Aid-of-Construction Petitioner has properly excluded from its rate base those moneys which represent CIAC. However, it has included in rate base accumulated depreciation on CIAC. Petitioner has done this by adding back to rate base that portion of total accumulated depreciation associated with CIAC after subtracting both total accumulated depreciation and CIAC from plant in service. The PSC method reaches the same result by subtracting from plant in service both total accumulated depreciation and net CIAC (CIAC less accumulated depreciation on CIAC). If the depreciation expense on contributed property has already been included as an above-the-line expense and re- covered through rates, accumulated depreciation corresponding to such expenses should be removed from rate base. Petitioner has never recovered depreciation on contributed property as an expense for ratemaking purposes. Working Capital An allowance for working capital should be included in rate base. Petitioner utilized the formula approach for calculating its working capital needs. This methodology is recognized by PSC rule and is a simplistic, rule-of- thumb approach. It is calculated by taking one-eighth or 12 1/2 percent of the utility's annual operation and maintenance expenses. It does not reflect some items which provide a source of working capital and it does not necessarily measure the actual working capital requirements or investment of any particular company, The result obtained from using the formula approach must be reduced by an amount for federal income tax lag. The balance sheet approach to determine working capital requirements is generally preferred by the PSC staff and its use is urged by the Office of Public Counsel in this proceeding. This method involves deducting current liabilities from current assets to determine the amount of funds the utility has currently available to meet its working capital needs. The balance sheet approach more accurately addresses the specific working capital variables of the company to which it is applied. The PSC's accounting witness recommended use of the formula approach in this case because of the absence of a staff audit of the petitioner's balance sheet, In actuality, the difference in terms of dollars between the two approaches, as calculated by the petitioner and the OPC, is an immaterial amount. On cross-examination and rebuttal, the intervenor's calculation of working capital requirements by use of the balance sheet approach was shown to be incorrect and the result obtained was therefore understated. Federal Income Tax Petitioner GDU is a wholly-owned subsidiary of General Development Corporation which is a wholly-owned subsidiary of GDV, Inc. GDU files its federal income tax returns as part of the consolidated group which contains no other public utilities. Using this subsidiary approach, each member of the group computes its tax liability as if it were a freestanding company. Petitioner computed its federal income tax liability at the full statutory rate of 46 percent. While the petitioner's actual capital structure is almost 100 percent equity, its tax was computed by recognizing its parent company's capital structure. Petitioner did not contribute any tax losses that could be used by the group on its consolidated return. A certified public accountant with the PSC staff agreed with the petitioner's use of the subsidiary approach and the 46 percent statutory rate for calculation of petitioner's federal income tax expense. During the 1979 test year, the consolidated group actually paid taxes to the Internal Revenue Service at less than the 46 percent statutory rate. This was the result of losses at the parent company level. The witness for the OPC was of the opinion that the petitioner's tax expense should be calculated so as to recognize the actual tax expense of the corporation as a whole and that only those taxes which are eventually flowed through to the Internal Revenue Service should be claimed. He would calculate petitioner's effective tax rate by use of a "payout ratio" methodology which involves adjusting the statutory rate by the ratio of taxes actually paid to the IRS to the total taxes paid by all subsidiaries. Depreciation Rate On the basis of an estimation of the average service lives for each of its primary plant accounts, petitioner has calculated an overall depreciation rate of 3.43 percent for water assets and 3.11 percent for sewer assets. This component method of depreciation has been used by petitioner for over twenty years. In estimating the service lives of its assets, petitioner relied upon its experience with its own water and sewer assets in Florida and recognized that such assets are affected by Florida's high temperatures and humidity levels and the flat topography. The composite 2.5 percent depreciation rate customarily utilized by the PSC assumes a forty year service life of assets. In actuality, petitioner has retired two of its wells in less than twenty years and most of its meters have been replaced. The service lives used by petitioner are comparable with other depreciation data from the PSC, a National Association of Regulatory Utility Commissioner's (NARUC) survey and a Texas Public Service Commission survey on average service lives. The petitioner's witnesses were of the opinion that the 2.5 percent rate or forty year composite service life is not appropriate because it does not consider the unique physical characteristics of water and sewer systems in Florida. The OPC urges the application of the 2.5 percent overall depreciation rate on the basis that petitioner did not produce sufficient evidence that a change from Commission policy was necessary. Inflation Adjustment Petitioner proposes to adjust certain operating and maintenance expenses upward by 8.3 percent as an allowance for the effect of inflation on those expenses. No adjustment is proposed for those items which were the subject of other adjustments or for those items not expected to increase directly with inflation. The figure of 8.3 percent was derived from a three- year average of percentage increases in the Consumer Price Index (CPI) from 1976 through 1979. The CPI is a "market basket" approach to measuring inflation on the average consumer, and includes such items as foodstuffs and home mortgages. Based upon its 1980 expense figures and discounting increases in expenses attributable to growth in customers, petitioner experienced a 10 percent inflationary increase for water operations and a 9 percent increase for sewer operations for 1980 over 1979. Since at least 1976, petitioner has never earned its authorized rate of return, primarily due to the effects of inflation. The PSC staff has not audited the petitioner's 1980 expense figures. Such figures have been audited by an outside CPA firm for financial purposes, but not for regulatory purposes. The 10 percent and 9 percent increases in water and in sewer operations measure only increased costs and do not account for increased revenues. Pursuant to a 1980 amendment to Chapter 367, Florida Statutes, public utilities are now entitled to automatically adjust their major categories of operating costs incurred during the previous calendar year by applying a price increase or decrease index to those costs. Section 367.081(4)(a), Florida Statutes. The PSC has established an 8.99 percent index for application by utilities in 1981. Highland Shores/Knecht Road Adjustments It is anticipated that the City of Palm Bay will purchase petitioner's water distribution system serving one commercial and 54 residential customers in the Highland Shores subdivision and 8 customers on Knecht Road. Petitioner eliminated certain amounts from its revenues, variable expenses and rate base to reflect this transaction, but did not adjust non-variable fixed costs which would not be affected by loss of these customers. Adjustments were made to chemical and electrical expenses and depreciation and property taxes associated with the plant serving those areas. No adjustments were made to payroll or other labor expenses. Petitioner presented evidence that the loss of those customers would not reduce personnel requirements or labor costs. The witness for the OPC proposed across-the-board adjustments for all operating and maintenance expenses based upon percentages of consumption and usage figures associated with these areas. Cost of Capital In actuality, the capital structure of petitioner consists almost entirely of equity invested in the utility by its parent, General Development Corporation. With adjustments for funds not available to petitioner, petitioner used its parent's capital structure in performing its cost of money analysis since the ultimate source of its equity funding consists of a mixture of debt and equity at the parent company level. All parties agreed that the proper capital structure to use in this case is that of petitioner's parent, General Development Corporation. Employing a discounted cash flow method and a risk premium analysis, petitioner has determined tat its cost of equity capital ranges from 18.06 percent to 22.32 percent, with a midpoint of 20.19 percent. Under the discounted cash flow method, the five year annual growth rates of ten water utilities were averaged and added to the average dividend yield for those utilities, to obtain an 18.06 percent return on equity. Under the risk premium analysis, petitioner analyzed utility debt costs by considering the current costs and yields of bonds, and then added a 4 percent risk premium to reflect the higher yield associated with equity as compared to debt. This analysis resulted in equity ranges between 20.59 percent and 22.32 percent. These figures are comparable to the combination of dividend yield and price appreciation of the Fortune 500 companies. The OPC witness concluded that a reasonable return on equity for petitioner would be between 14 percent and 14.5 percent. In measuring this cost of equity for petitioner, the comparable earnings method and a discounted cash flow method was employed. The former method involves an observation of the equity returns achieved by companies of comparable risks. Mr. Parcell examined the earnings of unregulated companies and large public utilities. His discounted cash flow method combined dividend yield and growth in retained earnings for nine water companies. The petitioner presented evidence that its current cost of debt is 15.3 percent instead of the 10.89 percent originally indicated in its application. Rate Case Expenses Petitioner originally estimated its rate case expenses at $25,000 based upon the assumption that there were only two issues in dispute between the utility and the PSC staff and that the proceedings could be handled by in-house personnel. Following the intervention of the Office of Public Counsel, the corresponding increase in the number of issues to be litigaged and the six additional days of actual hearing, petitioner is claiming that rate case expenses are $105,787. This figure is based upon the hourly rates of various professionals and the actual expenses incurred for the hearings. Petitioner expects the rates which will result from these proceedings to be in effect for no more than two years. This is consistent with petitioner's past history. Petitioner therefore seeks to amortize its rate case expenses over a two-year period and to divide them equally between the water and sewer operations. The OPC presented testimony expressing the opinion that the expenses claimed by petitioner in this proceeding were unreasonable and entirely out of line. It was pointed out that the expenses requested amount to about 20 percent of the total proposed revenue increase. It is contended that the hourly rates charged by petitioner's witnesses are excessive and that it was unreasonable to engage more than one witness per issue in a case of this magnitude. The hourly rates charged by the OPC's witnesses were set pursuant to an annual contract between those witnesses and the Office of Public Counsel. The OPC also believes that rate case expenses should be amortized over a three to five year period to properly take into account the newly enacted automatic pass-through provisions of Chapter 367, Florida Statutes, which should increase the time between rate cases. One witness testifying for the OPC did not feel that rate case expenses should be recovered at all through rates. The PSC staff witness did not feel that the rate case expenses claimed by petitioner were excessive when compared with other utilities of similar size.
Recommendation Based upon the findings of fact and conclusions of law recited above, it is RECOMMENDED that the issues in dispute in this proceeding be resolved as follows: That the quality of water and sewer service provided by petitioner to its customers be found satisfactory; That 100 percent of petitioner's water treatment plant, 60.5 percent of its sewage treatment plant and 100 percent of its sewage collection and distribution system be found to be used and useful in the public service and that $162,501 attributable to petitioner's water distribution lines be excluded from rate base; That petitioner's water loss of 9 percent is not excessive; That those assets in service during the test year carried on the utility's books as construction work in progress be transferred to utility plant in service and the remaining amount of CWIP proposed by petitioner for inclusion in rate base is reasonable; That accumulated depreciation on contributions-in-aid-of-construction not be excluded from petitioner's rate base; That the formula approach utilized by petitioner in determining its working capital requirements is appropriate in this case; That the petitioner's federal tax expenses be calculated at the 46 percent statutory rate; That the composite rates of depreciation of 3.11 percent on petitioner's sewer division and 3.43 percent on its water division be adopted; That petitioner's proposed 8.3 percent inflation adjustment for certain operation and maintenance expenses be rejected; That the adjustments proposed by petitioner for loss of its Highland Shores/Knecht Road customers are appropriate; That the capital structure of General Development Corporation be utilized to determine petitioner's cost of capital; that petitioner's cost of debt is 15.3 percent and that petitioner's cost of equity is 18.06 percent; and That rate case expenses in the amount of $105,787 are reasonable. Respectfully submitted and entered this 8th day of December, 1981, in Tallahassee, Florida. DIANE D. TREMOR Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 8th day of December, 1981. COPIES FURNISHED: Gary P. Sams, Esquire and Richard D. Melson, Esquire Hopping, Boyd, Green & Sams Suite 420 Lewis State Bank Building Tallahassee, Florida 32301 Nancy H. Roen, Esquire General Development Utilities, Inc. 1111 South Bayshore Drive Miami, Florida 33131 Gregory J. Krasovsky, Esquire Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 Jack Shreve, Esquire Stephen C. Burgess, Esquire and Suzanne S. Brownless, Esquire Room 4, Holland Building Tallahassee, Florida 32301 Steve Tribble, Clerk Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301
