Findings Of Fact Quality of Service At the end of the test year (calendar year 1979), the utility provided water and sewer service to approximately 2,577 customers, most of whom reside in two mobile home parks. Of that number, seven testified at the hearing. Two were concerned with the magnitude of the increase sought by the utility, one complained of an odor emanating from the sewage treatment plant, and the remainder described the water as being discolored and having a bad taste. There were no complaints about poor water pressure or interruptions in service. At present, there are no citations or corrective orders with regard to the utility's water plant. Its sewage treatment facility is being operated pursuant to a temporary operating permit granted by the Florida Department of Environmental Regulation. The effluent from the sewage treatment facility is meeting all applicable standards. Rate Base Petitioner has proposed an average water rate base of $311,028 and a year-end sewer rate base of $426,373 (Exhibit No. 4). However, it proposes to include in water rate base additional costs associated with the construction of a water storage tank. This increases the utility's proposed average water rate base to $376,118. The Commission urges a number of adjustments to rate base which collectively have the effect of reducing the amounts proposed by the utility. These adjustments affect plant in service, construction work in progress, accumulated depreciation and working capital allowance, and should be accepted. First, a reduction in water plant and an increase in sewer plant are required to correct certain costs recorded in the wrong system account. It is also necessary to increase water plant and sewer plant to reflect the capitalization of certain costs that were improperly expensed. Second, the proposed inclusion in rate base of costs associated with the (1) automatic switching for chlorine feed and chlorine scale, (2) chlorine emergency repair kit, and (3) a 500,000 gallon concrete storage tank is improper because these expenditures are substantially beyond the scope of the test period and are not "required by (a) duly authorized governmental authority." Section 367.081(2), Florida Statutes. Third, because of the adjustment to plant in service, it is also necessary to adjust accumulated depreciation. Finally, revisions to the operation and maintenance expenses discussed hereinafter necessitate a mechanical adjustment to the utility's working capital allowance. The following schedules portray the adjusted rate bases for water and sewer operations, and a brief description of each of the adjustments made in arriving at those amounts. Ferncrest Utilities, Inc. Average Water Rate Base Year Ended December 31, 1979 COMPANY ADJUSTMENTS ADJUSTED BALANCES Utility Plant in Service $ 625,030 (1) $ 625,030 Construction Work in Progress 209,985 (200,375) (2)9,610 Accum. Depreciation (95,911) - (3) (95,911) CIAC (376,191) - (376,191) Working Capital Allowance 13,205 (244)(4) 12,961 Income Tax Lag -0- (234) (234) Adjusted Rate Base $ 376,118 $ 175,265 During the hearing, the utility revised its rate base exhibit to reflect the changes in plant in service discussed in the main body of this order (Exhibit No. 4). Accordingly, no adjustment is shown on the schedule. Reduces construction work in progress by eliminating the expected costs associated with the automatic switchings for chlorine feed and chlorine scale, chlorine emergency repair kit, and a 500,000 gallon concrete storage tank. During the hearing, the utility agreed with the change in accumulated depreciation occasioned by the revisions in plant in service in item (1)(Exhibit No. 4). Therefore, no adjustment is shown on this schedule. Restates the working capital allowance to reflect one-eighth of operation and maintenance expenses. Ferncrest Utilities, Inc. Year End Sewer Rate Base Year Ended December 31, 1979 COMPANY ADJUSTMENTS ADJUSTED BALANCES Utility Plant in Service $1,373,224 - (1) $1,373,224 Construction work in Progress 2,285 (2,285)(2) -0- Accum. Depreciation (180,902) - (180,902) CIAC (780,457) - (780,457) Working Capital Allowance 12,223 (428)(3) 11,795 Income Tax Lag -0- (603) (603) Adjusted Rate Base $ 426,373 $ 423,057 The utility revised its rate base exhibit during the hearing in accordance with the plant in service adjustments discussed above (Exhibit No. 4). Accordingly, no adjustment is reflected on the schedule. Reduces construction work in progress by eliminating those expected costs associated with the automatic switchings for chlorine feed and chlorine scale and a chlorine emergency repair kit. Restates the working capital allowance to reflect one-eighth of operation and maintenance expenses. Net Operating Income On Exhibit No. 13, the utility shows an operating loss of $39,241 for its water operations and an Operating loss of $14,857 for its sewer operations for calendar year 1979. The utility then adjusts its results of operations by including the additional revenues required to earn a fair rate of return, and additional operating and maintenance expenses that it contends should be recognized. As adjusted, Ferncrest portrays an operating income of $54,236 and $61,483 for its water and sewer operations respectively. Certain adjustments are required, however, which affect revenue, operation expense, maintenance expense, depreciation expense, taxes other than income and income taxes. Revenues must first be reduced to reflect only that amount which is being recommended hereinafter. Operation expense should be restated to (1) reflect the expenses in the proper system account, (2) show the proper accrual, (3) remove expenses that should be capitalized, (4) recognize additional expenses not reflected in test year operations, and (5) correct improper amortization periods and pro forma adjustments. Maintenance expense must necessarily be corrected to transfer out charges improperly recorded therein. Depreciation expense should be recalculated using an average depreciable base for water operations and a year-end depreciable base for sewer operations in accordance with the rate bases used above. Finally, an adjustment to gross receipts taxes and income taxes is required to conform such taxes to the appropriate amount of revenues being recommended herein. The adjusted operating incomes of the utility and a description of the adjustments made in arriving at those amounts are shown on the following schedule. FERNCREST UTILITIES, INC., Operating Income - Water Year Ended December 31, 1979 ADJUSTED COMPANY ADJUSTMENTS BALANCE Operating Revenues Operating Expenses: 178,221 (33,349) (1) $144,872 Operation $ 98,298 (2) 98,298 Maintenance 7,342 (1,957) (3) 5,385 Depreciation 3,367 - (4) 3,367 Taxes other than Income 12,211 (833) (5) 11,378 Income Taxes 2,766 (1,595) (6) 1,171 Total Operating Expenses $ 123,985 119,599 Operating Income $ 54,236 $ 25,273 Revenues are adjusted downward to reflect only that amount being recommended herein. The utility has agreed to utilize the amount of operation expenses reflected above (Exhibit No. 13) . Therefore, no adjustment is shown on the schedule. Reduces maintenance expense by eliminating the pro forma annual cost of motor maintenance, and amortizing certain repairs over a 3-year period (Exhibit No. 15, Schedule 1; Exhibit No. 17, Schedule B) Because the utility has agreed to the revision of depreciation expense stated above, the actual adjustment is not reflected on the schedule (Exhibit No. 13). Restates gross receipts taxes owed by the utility to conform with the recommended revenue increase (Exhibit No. 13) Conforms income taxes with increase in revenues. Ferncrest Utilities, Inc. Operating Income - Sewer Year Ended December 31, 1979 ADJUSTED COMPANY ADJUSTMENTS BALANCE Operating Revenues $ 181,672 (4,109) (1) $ 177,563 Operating Expenses Operation 90,312 (273) (2) 90,039 Maintenance 7,474 (3,150) (3) 4,324 Depreciation 7,478 - 7,478 Taxes other than Income 11,006 (102) (4) 11,704 Income Taxes 3,119 (105) (5) 3,014 Total Operating Expenses 120,109 116,559 Operating Income $ 61,493 $ 61 004 Adjusts revenues to reflect the actual amount being recommended heroin (Exhibit No. 13) Reduces operation expenses by using a 2-year amortization period for recalibration of a motor in lieu of charging all expenses to test year operations alone, and reclassifying STP deodorant costs to A/C 704 (Exhibit No. 15, Schedule 2). Revises maintenance expense by eliminating the pro forma annual cost of motor maintenance (Exhibit No. 17, Schedule A) Adjusts taxes other than income to reflect the appropriate amount of gross receipts taxes related to the recommended increase in revenues (Exhibit No. 13). Conforms income taxes with increase in revenues. COST OF CAPITAL The utility's application reflects it had a deficit in its equity accounts and no outstanding long-term debt as of the end of the test period. It did have approximately $600()00 in short-term debt which it characterized as "demand monies." It intends to roll over the short-term debt by borrowing $600,000 from The Dania Bank at 14 percent interest rate. The utility's capital structure would then consist of 100 percent debt at a cost rate of 14 percent. It was this return that was initially used by the utility in developing its revenue requirements. However, Commission approval is required in order to consummate that loan agreement. Such approval was denied by Order No. 9539, dated September 15, 19-30, in Docket No. 800577-US. On reconsideration the Commission approved the application by Order No. 9665, dated November 26, 1900, provided the utility use $120,000 of the proceeds as cumulative preferred stock. Accordingly, the pro forma capital structure will consist of 16.65 percent equity and 83.15 percent long term debt, By agreement of the parties, a cost rate of 14 percent should be assigned to the debt component and a 16 percent cost rate assigned to equity. The overall resulting cost of capital is 14.42 percent, and that rate should be used in determining the utility's revenue requirements. REVENUE REQUIREMENTS Given the above cost of capital, a grant of $68,540 in additional annual water revenues and $83,663 in additional annual sewer revenues should enable Ferncrest to earn a fair return on its utility operations. RATE STRUCTURE Residential water customers are now assessed a minimum monthly charge which includes a minimum number of gallons and a one-sept excess rate over that minimum gallonage. A declining block type of rate structure is used for general service water customers. Residential sewer customers with 5/8" x 3/4" meters pay a flat rate each month irrespective of usage, while those with larger meter sizes have the same structure as do residential water customers. General service sewer rates are based upon a declining block rate structure. The base facilities charge advocated by the Commission is superior to the rate designs 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 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. During the test year, a $5.50 fee was collected from approximately 50 customers per month who did not pay their bills in a timely fashion. This revenue ($3,300 on an annual basis) should be treated as miscellaneous revenue in designing the new rates. The utility reguests approval of a new tariff provision that governs the use of oversized lines and facilities constructed for developers (Exhibit No. 10) This provision is necessary in order to prescribe the deposit requirements for main extensions, and should be approved. The utility owns and operates a sewage collection and sewage treatment system which provides sewage treatment and disposal services to an adjacent travel park. As a result of this discharge, Ferncrest incurs chemical costs that exceed its applicable tariff rates. It proposes to amend its tariff to permit the recovery of such costs from the travel park (Exhibit No. 1) . Without this provision, the general body of ratepayers would be required to subsidize a portion of the operations. Accordingly, it should be accepted. The Commission proposes that language be added to the tariff which states: "During the period that service is not being furnished to the premises, a monthly standby charge equivalent to the base facility charge will be made. If service is terminated and resumed at the same address to the same customer within twelve months from the date of termination, an amount equal to the base facility charge for the period of the service termination will be collected as a condition precedent to the restoration of service." This change is necessary in order for the utility to recoup the fixed costs incurred in maintaining service to the customers, and it should be incorporated into the tariff. Finally, because an average rate base has been used for water operations and a year-end rate base for sewer operations, rate allocations for the systems should be based upon average and year-end customers and consumption respectively.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Ferncrest Utilities, Inc. be granted in part and that the utility be authorized to file new tariffs to be approved by the Florida Public Service Commission that will generate $68,540 and $83,663 in additional annual gross revenues for the utility's water and sewer operations. It is further RECOMMENDED that the utility file appropriate tariff sheets in conformity with the Rate Structure portion of this Order. It is further RECOMMENDED that the bond or letter of credit filed by the utility be returned for cancellation. This Recommended Order entered on this 12th day of December, 1980, in Tallahassee, Florida. DONALD R. ALEXANDER Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 12th day of December, 1980. COPIES FURNISHED: R.M.C. Rose, Esquire Suite 103, 1020 E. Lafayette Street Tallahassee, Florida 32301 Jerome L. Hall, Esquire Suite 304, 200 S.E. 6th Street Fort Lauderdale, Florida 33301 Marta M. Crowley, Esquire 101 East Gaines Street Tallahassee, Florida 32301
Findings Of Fact Pursuant to its authority to regulate water and sewer rates, charges and rate structures embodied in Chapters 367, Florida Statutes, and 25-30, Florida Administrative Code, the Public Service Commission entered Orders numbered 16971 and 17058, which adopted specific guidelines and conditions for utilities to implement certain income tax impact charges for contributions-in-aid- of-construction ("CIAC gross-up charges"). (See Orders numbered 20409, p.3; 16971, p.2-4; and 17058). One of these conditions requires that utilities submit appropriate tariff sheets (rates and charges sheets) for the Commission's approval prior to implementation of the CIAC gross-up charge. CIAC is the payment or contribution of cash or property to a utility from a customer or entity seeking service from that utility in order to secure the provision of such services or to reserve it for a future time. The Internal Revenue Code of 1986 changed the treatment of CIAC from being non-taxable to being taxable as income. A CIAC gross-up charge is a method by which a utility can recover that tax expense, represented by the income tax assessed against collected CIAC, through approved rates and charges to customers. The amount of CIAC tax impact funds collected by a utility is not itself treated as CIAC for rate-making purposes. The Respondent, St. Johns North Utility Corp., collected gross-up charges which were not authorized by its filed and approved tariff schedules (rate schedules), and without securing the requisite approval from the Commission. (See Orders numbered 20409 and 20762). The Commission was made aware of the charging of unauthorized CIAC gross-up charges by the Utility Respondent when a developer, Fruit Cove Limited, communicated with the Commission concerning its doubts about utility service being available for one of its subdivisions, when required, from the Respondent. Fruit Cove Limited had paid CIAC gross-up charges to St. Johns. On June 3, 1988, the Commission, through its staff, contacted Mr. Joseph E. Warren, the General Manager for the Respondent, and explained the Commission's requirements regarding the requisite pre-approval of the charging of CIAC gross-up charges. Mr. Warren agreed to file a written request for authorization to implement such charges. No request was filed, despite repeated admonitions and solicitations by the Commission and its staff and a lengthy opportunity to comply. Finally, Order No. 20409 was issued by the Commission on December 5, 1988, requiring the Utility to file a written request for authorization to implement CIAC gross-up charges within thirty (30) days of that Order. A written request was not timely filed, however. The Utility finally filed its written request for approval of these charges on September 5, 1989. The accompanying tariff sheets representing such charges were ultimately filed in response to Orders numbered 16971 and 20409, and Show Cause Order No. 20762. They became effective on September 15, 1989. The Commission, through its staff, also made repeated inquiries to the Utility regarding certain service availability charges and practices, initially by letter of July 29, 1988. The Utility was allowed until August 19, 1988 to make the requested responses. The letter was addressed to Mr. Joseph Warren at the Utility's mailing address of record. The Utility, however, did not provide written responses to the comments and questions by the Commission, despite repeated assurances that it would do so. Order No. 20409, issued on December 5, 1988, required the Utility to provide the full written responses to the July 29, 1988 letter within thirty (30) days of the date of that Order. The responses were not timely made. Order No. 20762 was issued on February 17, 1989, requiring the Utility to show cause in writing on or before March 13, 1989 why it should not be fined up to $5,000.00 per day, in accordance with the Commission's penalty authority, for failure to comply with the provisions of Order No. 20409, regarding the necessity for written responses to the Commission's specified questions and the submission of a written request to implement the CIAC gross-up charges referenced above. The first item in the Commission's July 29, 1988 letter to the Utility had requested the Utility to seek approval, including submission of proposed rate tariff sheets for authorization to implement the CIAC tax impact charge referenced above. That item was responded to on September 5, 1989, more than eight months after the deadline set by Order No. 20409. The second item in the Commission's July 29, 1988 letter to the Utility had requested the Utility to provide the names and addresses of financial institutions in which gross-up charge funds were being retained. That item was responded to as requested. The third item in the Commission's July 29, 1988 letter to the Utility had requested the Utility to provide a listing of all gross-up monies received from each contributor. No response was ever provided by the Respondent. The significance of the information requested by the Commission is that it would provide identity of the individuals who were entitled to a refund of the unauthorized CIAC gross-up charges collected by the Utility, as provided in Order No. 20762. The fourth item in the Commission's July 29, 1988 letter to the Utility had requested the Utility to provide a copy of all current developer agreements. That item was responded to within the deadline set by Order No. 20409. The fifth item in the Commission's July 29, 1988 letter to the Utility had requested the Utility to file revised tariff sheets indicating the actual legal description of the Utility's certificated service territory. No response was ever provided. Order No. 20762 was ultimately issued on February 17, 1989 imposing a $5,000.00 fine on the Utility for serving outside of its authorized service area. Order No. 20409 requested the Utility to indicate to the Commission whether, with regard to the developer agreement between the Respondent and Fruit Cove Limited, the charges listed in the various paragraphs of that agreement would, upon completion of the real estate development involved, be adjusted to reflect actual utility service costs incurred. No response to that request was ever provided by the Utility. Additionally, in that Order, the Commission requested information concerning a so- called "step tank", which was referenced in paragraphs 12C and 13D of the developer agreement with Fruit Cove Limited. That request, in Order No. 20409, was never responded to. A certain fee was charged for installation of the step tank by the Utility to Fruit Cove Limited, and no response was given to the Commission's inquiry as to why that fee was omitted from the Utility's approved tariff on file with the Commission. The significance of the requested information was that the omission of the step tank installation fee from the Utility's tariff of rates and charges could cause the developer agreement to constitute a "special service availability agreement", which can only be approved in advance by the Commission. It is not a matter, approval of which has been delegated by the Commission to its staff members. The Order referenced last above also requested an explanation for why a meter installation fee, referred to in that same developer agreement, does not include a "curb stop" or a meter box. This information is significant because it is necessary in order for the Commission to determine whether the charge involved is reasonable. A cost breakdown for the meter installation, including the various hardware components and other charges, was necessary and was not provided by the Utility. Additional information concerning the area of service availability, required to be provided to the commission by Order No. 20409, included the requirement that approval be obtained from the Commission for the CIAC gross-up charge in the developer agreement with Fruit Cove Limited. As stated above, that approval was not requested in writing, as required by the Order, for more than eight months after the deadline set by that Order. By Order No. 20762, St. Johns was fined $5,000.00 for three separate violations of the statutes and rules, and the Orders enumerating them, for a total of $15,000.00. The Utility was fined for serving outside of its authorized service territory, for collecting unauthorized CIAC gross- up charges, and for failing to file its developer agreements with the Commission as required by law. The developer agreements were only submitted after repeated efforts by the Commission's staff which culminated in Order No. 20409 and which were either unresponded to or not properly responded to by the Utility. Additionally, by Order No. 21559, issued on July 17, 1989, St. Johns was fined $5,000.00 for failure to file an application for an extension of its territory as required by Order No. 20409. In the meantime, by Order No. 22342, issued on December 26, 1989, the Commission approved a transfer of the Utility's assets from St. Johns to Jacksonville Suburban Utilities Corporation ("Jacksonville Suburban"). That Order did not authorize transfer of the liabilities of the Respondent to Jacksonville Suburban. The Order specifies that St. Johns, and not Jacksonville Suburban, will remain liable for the previously imposed refund obligations and fines. Only in the event that there remained sales proceeds in excess of the certain debt of St. Johns owed to its institutional lender would funds from the Jacksonville Suburban sale be applied toward payment of the refund and fines found to be due and owing by the above-cited Orders, by way of escrow or otherwise. Any excess proceeds, absent Order No. 22342, were to be paid to St. Johns. Order No. 22342 does not make Jacksonville Suburban liable for the refund and fines at issue. It is speculative whether there will be any sales proceeds available from the sale, after payment of the debt, to be applied toward the refund and fines. The sales price was made dependent upon establishment of the Utility's "rate base" amount, to be established in that transfer proceeding at a point in time after entry of Order No. 22342. That Order, however, specifically preserves the liability of St. Johns for the refund and fines and does not provide for the extinguishment of such liability in the event that the sales proceeds prove to be insufficient to pay them.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses, and the pleadings and arguments of the parties, it is therefore, RECOMMENDED that St. Johns be assessed a penalty of $5,000.00 for knowingly and willfully failing to comply with Order No. 20409. DONE AND ENTERED this 13th day of June, 1990, in Tallahassee, Leon County, Florida. Hearings Hearings 1990. P. MICHAEL RUFF Hearing Officer Division of Administrative The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative this 14th day of June, APPENDIX TO RECOMMENDED ORDER Petitioner's Proposed Findings of Fact 1.-24. Accepted. Respondent's Proposed Findings of Fact. (Respondent filed no proposed Findings of Fact) Copies furnished to: David Schwartz, Esq. Florida Public Service Commission Legal Division 101 E. Gaines Street Tallahassee, FL 32399-0850 Joseph E. Warren, Esq. 1930 San Marco Boulevard Suite 200 Jacksonville, FL 32207 Mr. Steve Tribble Director of Records and Recording Florida Public Service Commission 101 E. Gaines Street Tallahassee, FL 32399-0850 Mr. David Swafford Executive Director Florida Public Service Commission 101 E. Gaines Street, Room 116 Tallahassee, FL 32399-0850 Susan Clark, Esq. General Counsel Florida Public Service Commission 101 E. Gaines Street, Room 212 Tallahassee, FL 32399-0850
Findings Of Fact Respondent is a state agency whose primary purpose is to provide an adequate supply of potable water to the Florida Keys. To this end, it has acquired or constructed well fields, treatment plants, transmission pipelines, pumping stations, distribution pipelines, and other related facilities. Because of its exaggerated linear service area of 130 miles, it incurs high capital and operating costs. Chapter 76-441, Laws of Florida, Respondent's enabling act, confers upon Respondent the authority to impose the subject System Development Fee. Respondent imposed the subject System Development Fee, which is an impact fee, in December 1974. Respondent's Rule 48-3.002(1) expressed the purposes of the System Development Fee as follows: The System Development Fee is an impact fee charged to new and existing customers who modify, add or construct facilities which impose a potential increased demand on the water system. This fee is charged in order to equitably adjust the fiscal burden of a new pipeline and expanded or improved appurtenant facilities between existing customers and new water users. All system development fees are allocated to the direct and indirect costs of capital improvements made necessary by actual and expected increased demand on the water system. The term "unit" is a commonly accepted concept in the public utility industry, and impact fees are often assessed on a per "unit" basis. Respondent's Rule 48-3.002(5)(b) provides for the assessment of the System Development Fee on a per unit basis and provides, in pertinent part, as follows: 5. (b) Where the premises served consists of single or multiple commercial units, the System Development Fee shall be assessed based on each individual unit. In those cases where the individual unit will require a meter size that exceeds a 5/8" meter to properly support the unit, the System Development Fee shall be based on the meter size required to serve that unit, whether individually metered or not. ... The term "unit", as used in Respondent's System Development Fee Rule is a technical term, but it is defined by Respondent's Rule 48-2.001(19) as follows: (19) "Unit" A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential use. The number of units existing in a multiple unit service operation are to be determined in accordance with Rule 48-2.007(1)(c), which provides, in pertinent part, as follows: ... The number of units, whether residential or commercial, will normally be determined according to applicable city or county occupational licenses, building permits, or plans of the subject structure. In cases of discrepancy or inconsistency in definition, or interpretation, the following Florida Keys Aqueduct Authority definition will control: A unit is a commercial or residential module consisting of one or more rooms with either appurtenant or common bathroom facilities and used for a single commercial purpose or single residential purpose. Respondent grandfathers in units that were in existence prior to December 1974 when the System Development Fee was first enacted. A System Development Fee is not imposed on any unit that was in existence prior to December 1974. Of the 376 improved campsites that presently exist at Petitioners' campground, 279 were improved prior to 1974. Consequently, only the 97 campsites improved after the enactment of the System Development Fee are at issue in this proceeding. Respondent is concerned with the potential use of a unit because it must be prepared to respond to that potential use. Once a customer has paid the System Development Fee for a unit, the owner of the unit can transfer the unit without the purchaser having to pay an additional System Development Fee regardless of the use the purchaser intends to make of the unit. Respondent has consistently applied the System Development Fee charges on a per unit basis for the purposes stated in its Rule 48-3.002(1). The per unit charge was $600 when first enacted in 1974, was increased to $1,500 in 1984, and was increased to its present level of $2,000 in 1986. A widely publicized amnesty program was in effect from August 1, 1984 through October 1, 1984, during which customers who had added units to their property without reporting same to Respondent could report the units during the amnesty program and pay the System Development Fee on an installment basis. Customers were advised that after the amnesty program closed, the System Development Fee would be based on rates in effect at the time an unreported unit was discovered, not at the rate the unreported unit was constructed. This policy serves to encourage Respondent's customers to promptly report newly added "units", and the policy produces fees commensurate with the expenses to be incurred by Respondent after it learns of the new units. Petitioner George W. Eager is the owner of approximately 30 acres of real property located west of U.S. 1 at Key Largo, Florida. Mr. Eager purchased the subject property in 1969, sold it in 1974, and reacquired it in 1975 by a deed given in lieu of foreclosure. This property is located within the area served by Respondent. Petitioner Calusa Camp Resort, Inc., a closely held Florida corporation whose stock is owned by Mr. Eager and his two children, operates a campground on this real property. In addition to the 376 campsites, the campground contains a grocery store, a marina, laundry facilities, bathrooms and showers, a swimming pool, a sewage treatment plant, and a sewage pumping station. The marina was not in operation at the time of the formal hearing. Petitioners hold the two business licenses they are required to have by Monroe County. One business license is for the operation of the campground while the other one is for the operation of the grocery store. Petitioners secured all pertinent building permits during the course of the improvement of the campground. Mr. Eager opened the campground in 1969, at which time he entered into a contract for services with Respondent. Mr. Eager constructed a private water system as part of the improvements to his real property. This private water system was connected to Respondent's water transmission system in 1969, and a one inch master meter was installed at that point of delivery. This one inch master meter has served Petitioners' property at all times pertinent to this proceeding. Mr. Eager entered into a new contract for services with Respondent in 1975. This contract did not indicate that Mr. Eager's property was considered a multiple unit operation and it did not indicate in the space available the number of units to be served. By a provision in this contract, Respondent reserved the right to change its rules and regulations and the rates for use of water from time to time. In 1976, Mr. Eager entered into another contract for services with Respondent for the provision of water to a swimming pool that he had constructed. This contract did not indicate that Mr. Eager's property was considered a multiple unit operation and it did not indicate in the space available the number of units to be served. Of the thirty acres owned by Mr. Eager, approximately twenty acres are west of the access road that divides the property and approximately ten acres are east of the road. Prior to 1974, Mr. Eager developed 279 individual campsites on eighteen of the acres west of the access road. These campsites had water, electrical, and sewer hookups for recreational vehicles and could accommodate all types of camping. A grocery store, bathrooms and showers, laundry facilities, and recreational facilities were also located on these eighteen acres. The remaining two acres west of the access road were reserved as the site for the marina. Prior to 1974, the ten acres east of the access road was used for open camping, but individual campsites were not designated. Water was made available to the campers who used this area through approximately 32 spigots spaced throughout the area and the other campground facilities were available to them. The ten-acre open area would accommodate up to 125 campsites. Since the enactment of the Systems Development Fee, Petitioners converted the ten-acre open camping area into 97 campsites with each campsite having water, electrical, and sewer hookups. This development, completed in 1983, organized the camping in the ten-acre area, but it did not increase the number of potential campers in the ten-acre area over the 1974 level. This development did, however, change the type camping that could be accommodated in this area. Prior to the development, the area could not accommodate camping in large vehicles such as motorhomes and recreational vehicles. After the development, the campsites were improved to accommodate all types of camping. None of the campsites are permanently improved with any structures or rooms and Petitioner does not rent campsites with accommodations on them. Persons renting the campsites provide their own method of camping, whether it be by car, truck, motorhome, travel trailer, tent, or otherwise. In 1983, Petitioners requested that the size of the water meter serving his property be increased from one inch to two inches. At that time, Respondent's staff suspected that Petitioners may have modified the campgrounds so as to have triggered the System Development Fee. Consequently, Mary Castellano, Respondent's Policy & Procedure Coordinator wrote a letter of inquiry to Petitioners' attorney. This letter, dated May 2, 1983, provided, in pertinent part, as follows: The material submitted by you last March 2, 1983, has been reviewed. Although a planned layout of the campground was provided from 1969 showing a plan to develop 279 camp and trailer spaces, what is required, prior to approval of a change to a larger meter, is some type of proof showing the number of camp and trailer spaces in existence and actually served prior to June 13, 1974, and certification regarding the actual number of camp and trailer spaces in existence today. If those two numbers are the same, no system development fee will be assessed and Mr. Eager's request for a 2" meter will be honored upon payment of additional deposit, new service charge and tapping fee. However, if there were less camp and trailer spaces in 1974 actually in existence then than there are at the present time, then additional system development fees will be assessed on a per space basis for the difference. Ms. Castellano's letter of May 2, 1983, accurately stated Respondent's interpretation of its rule imposing the System Development Fee. The information requested by this letter was not forthcoming, and Petitioners did not pursue the request to change the master meter from one inch to two inch again until 1989. Respondent's staff did not pursue whether Petitioners owed a System Development Fee until the issue was again raised in 1989. The water bills sent by Respondent to Petitioners up until April 1989 reflected that Petitioners had been classified as a "single unit commercial" account. In April 1989, the billing reflected that Petitioners were classified as a "multiple unit commercial" account. Because Petitioners' private water system is located on private property, Respondent's staff could not discover any undeclared units except by conducting an appropriate inspection. In 1989 Respondent's staff conducted such an inspection of Petitioners' campground and determined that Petitioners had added 97 campsites, that each campsite was a "unit" within the meaning of Respondent's rules, and that a system development fee of $2,000 was due for each site. This was the first time that Respondent had inspected the property and was the first time that Respondent knew that Petitioners had improved the 97 campsites. Respondent does not routinely inspect all private water systems or keep an up-to-date count of all units within its service area because of the costs of gathering such information. On April 26, 1989, Mary Castellano, who was still employed by Respondent, but whose title had been changed to Director of Policy Administration, wrote Petitioners a letter which provided, in pertinent part, as follows: Of the 376 spaces/units currently existing, the Authority accepts the documentation submitted to establish that 279 spaces/units existed prior to June 1974, for which no System Development Fees are due. However, the following fees are assessed and due for the remaining 97 spaces/units: System Development Fee ($2,000 x 97 Units) $194,000.00 Deposit ($75 x 97 Units) 7,275.00 Service Charge ($15 x 97 Units) 1,455.00 $202,730.00* *Plus Tapping Fee * * * 4. The Authority will require the execution of a Restrictive Covenant since a potential for future expansion exists. Petitioners thereafter filed a timely request for formal hearing after Respondent's Board of Directors upheld the assessment of the System Development Fee at a duly called meeting.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Respondent enter a final order which upholds the assessment against Petitioners of the System Development Fee based on the improvement of the 97 campsites since 1974. DONE AND ENTERED this 30th day of July, 1990, in Tallahassee, Leon County, Florida. CLAUDE B. ARRINGTON Hearing Officer The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 904/488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of July, 1990. COPIES FURNISHED: Gus H. Crowell, Esquire Tittle & Tittle, P.A. P. O. Drawer 535 Tavernier, Florida 33070 Floyd A. Hennen, Esquire Florida Keys Aqueduct Authority Post Office Box 1239 Key West, Florida 33040 Patty Woodworth, Director Planning & Budgeting Executive Office of the Governor The Capitol, PL-05 Tallahassee, Florida 32399-0001 APPENDIX TO THE RECOMMENDED ORDER IN CASE NO. 89-5620 The following rulings are made on the proposed findings of fact submitted by Petitioner: The proposed findings of fact in paragraph 1 as being subordinate to the findings made or as being unnecessary to the conclusions reached. The proposed findings of fact in paragraphs 2-10, 12, 14, and 18-21 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 11 are adopted in part by the Recommended Order and are rejected in part as being unsubstantiated by the evidence. While it was established that one corporation operated the campground, it was not established that no additional business purpose exists at the property. The property contains, in addition to the subject campsites, a grocery store, a marina, laundry facilities, and a sewage pumping station that is available to non-campers. The proposed findings of fact in paragraph 13 are rejected as being conclusions of law. The proposed findings of fact in paragraphs 15 and 16 are rejected as being subordinate to the findings made. The proposed findings of fact in paragraphs 17 and 23 are rejected as being unnecessary to the conclusions reached. The findings of fact contained in the first three sentences of paragraph 23 are adopted in material part. The findings of fact contained in the final sentence of paragraph 23 are rejected as being unsubstantiated by the evidence. The following rulings are made on the proposed findings of fact submitted on behalf of Respondent. The paragraphs contained in the findings of fact section of Respondent's Proposed Recommended Order have been numbered 1-13 for convenience. The proposed findings of fact in paragraphs 1, 3, 6, 7, 12, and 13 are adopted in material part by the Recommended Order. The proposed findings of fact in paragraph 2 are adopted in part by the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The examples given by Respondent were not incorporated as a finding of fact because the examples used are not analogous to the facts of this case. The proposed findings of fact in paragraph 4 are rejected as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 5 are adopted in part by the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 8 are adopted in part by of the Recommended Order and are rejected in part as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 9 are rejected as being recitation of testimony or as being subordinate to the findings made. The proposed findings of fact in paragraph 10 are adopted in part by the Recommended Order and are rejected in part as being recitation of testimony or as being unnecessary to the conclusions reached. The proposed findings of fact in paragraph 11 are adopted in material part by the Recommended Order with the exception of the findings of fact contained in the final sentence of the paragraph, which are rejected as being unnecessary to the conclusions reached.
The Issue The issue in this case is whether the Department of Insurance acted according to the requirements of law in reviewing submissions of vendors responding to the Department's request for proposals for provision of licensure and examination services.
Findings Of Fact The Department of Insurance is the state agency responsible for licensure and regulation of insurance agents in Florida pursuant to the Insurance Field Representative Licensing Procedures Law set forth at Chapter 626, Florida Statutes. Persons seeking to become licensed by the Department are required to take and pass an examination. Insurance Testing Corporation (ITC) develops and administers insurance licensure examinations in other states. Assessment Systems Incorporated (ASI) develops and administers insurance licensure examinations in other states. Since 1990, the Department has contracted with the University of South Florida (USF) for exam administration. The contract was to expire on September 30, 1994. It has been twice extended and is currently set to expire on September 30, 1996. The parties have standing to participate in this proceeding. On December 29, 1995, the Department of Insurance issued a Request for Proposal Number 95/96-07 (RFP) seeking the provision of testing development and administration services. The RFP was prepared through a collaborative effort within the Department. In issuing the RFP, the Department intended to broaden the level of services obtained from a contracted vendor and to take advantage of the expertise of companies already in the business of regulatory examination provision. The Department issued an RFP to permit vendors to generate their own programs for licensure and examination programs. The alternative, an Invitation to Bid, would have required vendors to bid on a program designed by the Department. The RFP provided that the contract between the Department and the successful vendor would consist of the RFP, addenda and amendments to the RFP, and the successful vendor's proposal. The RFP also provided that Department reserved the right to negotiate with the selected contractor, to waive minor irregularities and to reject all submissions. The RFP provided a schedule and deadlines as follows: submission of questions and requests for clarification by vendors, January 15, 1996; the preproposal conference with vendors, January 22, 1996; submission of proposals, February 12, 1996; oral presentations by vendors, February 19, 1996; and posting of the intended award, February 23, 1996. There was no protest to the RFP's specifications. Submissions were received from five vendors. The RFP evaluation panel scheduled separate oral presentations by the five vendors submitting proposals. The purpose of oral presentations was to permit the vendors to present their proposals and to respond to questions from the evaluation committee. The first thirty minutes of each one-hour presentation were reserved for the vendor presentation; the second thirty minutes were reserved for questions from the evaluation panel to vendor representatives. Vendors were not invited to and did not attend the oral presentations of other vendors. For reasons discussed herein, ITC's proposal was deemed non-responsive and was not evaluated. After completion of oral presentations, the evaluation panel independently reviewed and scored the proposals (other than ITC's) and submitted the scores to the Department's purchasing office. The purchasing office opened and scored the vendors cost proposals, then calculated the vendors' total scores. Of the proposals which were evaluated, ASI's received the highest total score of 134.5 points. The second highest score, 115 points, was received by USF. The Department posted a Notice of Intended Award to ASI on February 23, 1996. On February 23, 1996, ITC contacted the Department purchasing director and requested a copy of the ASI proposal. At that time, ITC was advised that a notice of protest would be due on February 28, 1996. ITC filed a Notice of Protest on February 28, 1996. ITC filed a formal protest on March 8. 1996. Although the State of Florida insurance licensure tests are currently administered by USF, the Department retains ownership of the questions ("test items") used in the examination. Upon the expiration of the contract with USF, all test items are to be returned to the Department. The test items used in Florida insurance exams are developed by employees of the Department with experience in the subject matter being tested. Test items have been revised and updated by USF according to psychometric principles. The Department desires to continue ownership of the "Florida bank" of test items. Section 2.1B of the RFP, "EXAMINATION DEVELOPMENT," states: The Department currently retains ownership of all test items in use for existing exams. The Department shall maintain exclusive owner- ship of the items developed, item bank(s), examinations, and all related materials deve- loped for use in fulfilling the requirements of this RFP. The Contractor will be respons- ible for continued development and maintenance of an item bank for use in preparing the examinations.... Section 2.2 of the RFP, "Related Requirements and Information," states: Use of any test items owned by the Department or developed to fulfill obligations resulting from a contract entered into as a result of this RFP for any purpose other than those covered by said contract is prohibited with- out advance written authorization by the De- partment. Any violation of this provision will result in immediate cancellation of the contract and/or legal actions against the contractor. Vendors were allowed to submit questions and requests for clarification by January 15, 1996. At the preproposal conference, an addendum to the RFP was issued which included the Department's responses to vendor requests for clarification. All potential vendors received the addendum. As did other vendors, ITC submitted question and requests for clarification. ITC question Number 8 states: The Department claims ownership of all existing test questions and requires owner- ship of all items, examinations, and related materials used in the Florida tests. This requirement precludes the use of previously developed, calibrated, and validated banks of items owned by the major providers of insur- ance license examinations. It thus requires the development and maintenance of a completely separate bank of test questions for Florida. This can be done only at considerable expense, which must be reflected in the test fees. Is it truly the Department position that all questions used in Florida insurance tests will be or become the property of the Depart- ment? Is this a negotiable item? The Department's response to ITC's question Number 8 states: The desire of the Department to retain owner- ship of its test items does not preclude the use of previously developed, calibrated and validated banks of items. Subject to the approval of the Department, the selected vendor may use test items it has already de- veloped as long as the subject/line of auth- ority listings for Florida are adhered to and are in accordance with Florida law and administrative rules. It is the Department's position that all items currently owned by the Department or developed for the Department in fulfillment of services requested through this RFP, re- main the property of the Department. This is not a negotiable item. ITC question Number 22 states: Will the Department grant the contractor the right to use test items owned by the Depart- ment in other states where it has testing contracts. If so, what guarantees will the Department offer that the Department will treat these questions as confidential material in the future, when they are used in other states. The Department's response to ITC's question Number 22 states: Yes, the Department will grant the vendor authority to use test items owned by the Department in other states where it has testing contracts. However, some agreement would have to be reached regarding the vendor's liability and responsibility should any test item become compromised as a result of such use. The question relating to the Department offering a guarantee that it will treat such questions as confidential when they are in use in other states is not understood. Obviously, the Department would not want to compromise its own test items. By February 12, 1996, the deadline for submission of proposals, five vendors had submitted responses to the RFP, including ITC, ASI and USF. On the question of test item creation, ITC's proposal states: Generally, we provide the entire bank of questions that are used in the tests of a state we serve. Florida is unusual in providing a bank of questions to start with. Our approach to questions for the Florida tests will follow three tracks. First, we will use the questions in the current Florida tests. Second, we will identify those ques- tions in our own bank that are appropriate for use in Florida. Third, we will write additional questions where shortages are identified in the banks, or to cover add- itional topics in the study manuals. ITC's proposal further states, "ITC staff will write and develop all of the new test questions. We will not rely upon Department staff or the Florida insurance industry...to write any of the new questions required for your tests." On the question of test item ownership, ITC's proposal states: Since you currently own a bank of test ques- tions, we understand that you will want to own a bank of test questions when a contract you may establish with us comes to an end. We currently own our bank of questions and would not want to relinquish ownership to that bank as a result of contracting with Florida. Therefore, our proposal is to divide the bank ownership according to four criteria: (1) Ownership of questions in the original Florida bank will remain with Florida; (2) ownership of questions in ITC's bank as of contracting will remain with ITC; (3) owner- ship of ITC-developed questions that are Florida specific and not applicable to other states will be assigned to Florida; (4) ownership of ITC-developed questions that are applicable to other states will remain with ITC. Florida questions that are materially revised by ITC will be considered ITC questions. During the ITC oral presentation, the evaluation panel sought clarification of ITC's position on test item ownership. ITC indicated that its position was as set forth in the proposal. The issue of test item ownership was the central question discussed at ITC's oral presentation. Essentially, the ITC proposal provides that at the close of any potential contract period, the Department will own the questions it currently owns and only those ITC-developed questions that are specific to Florida and to no other state. Further, under the proposal, ITC would be able to "materially revise" any question in the current Florida test item bank and claim ownership of the revised question. Neither ITC's proposal nor its oral presentation provided reliable information as to what would constitute a "material revision" of a test item. After the oral presentations were concluded, the evaluation panel and Department purchasing personnel determined that the ITC proposal did not comply with RFP's requirement related to test item ownership. The ITC proposal was disqualified and was not evaluated by the panel. The evidence fails to establish that the Department acted improperly in disqualifying the ITC proposal. The evidence establishes that the ITC proposal fails to meet the requirements of the RFP relating to ownership of test items, and was properly disqualified from further evaluation. As set forth in the RFP, the Department requires "exclusive ownership of the items developed, item bank(s), examinations, and all related materials developed for use" in providing examination and licensure services to the Department. RFP Addendum Number 1 clearly states "the Department's position that all items currently owned by the Department or developed for the Department in fulfillment of services requested through this RFP, remain the property of the Department" and further states that the item is not negotiable. The purpose of the Department's insistence on ownership of test items is to assure that, at the conclusion of the contract period, the Department will own the questions which have been prepared by the successful vendor for use in Florida exams. ITC's proposal fails to provide the Department with test item ownership as specifically required by the RFP and addendum. ITC asserts that on the question of test item ownership, its proposal is essentially the same as the proposal submitted by ASI. The evidence fails to support the assertion. ASI's proposal states: ASI acknowledges that the Department currently owns all examination items in use for existing exams. Furthermore, the Depart- ment will also retain ownership of all items developed for use in Florida examinations. Unlike the ITC proposal, the ASI proposal clearly states that the Department will own all items developed for use on the Florida exam. Items developed for the Florida exam will be owned by the Department, whether or not the items are applicable to other states. ITC asserts that the inclusion of cost information within the body of the RFP warrants disqualification of the ASI proposal. The evidence fails to support the assertion. Each vendor was evaluated on compliance with Florida Certified Minority Business Enterprise (CMBE) contracting goals. Evaluation points were awarded if a vendor established that CMBE firms would receive at least 10 percent of the contract award. Section 2.4 of the RFP, "Proposal Form and Content," provides instructions on how to structure a vendor proposal and states: ...ATTENTION IS CALLED TO SECTION 1.8. ANY REFERENCE TO COST IN PARAGRAPHS (A) THROUGH (G) BELOW MAY DISQUALIFY THAT PROPOSAL. Paragraphs (A) through (G) include items related to technical portions of vendor proposals. Section 1.8 addresses copies of proposals and states, "[c]ost proposals must be labelled as such and be submitted in a separate envelope." ASI's proposal included the following statement: ...ASI has signed a Letter of Agreement with Stallion Properties Management of Tallahassee to provide certain real estate and property management services specifically related to the Department's RFP and this Proposal. In total, it is estimated that ASI's Letter of Agreement with Stallion Properties Management will provide a total income of approximately $600,000.00 to Stallion over the term of ASI's three year contract with the Department. This project income to Stallion represents ten percent of the total projected income that ASI will earn should we be awarded the Department's contract. The requirement for submission of sealed cost proposals is intended to assure that the technical review of proposals is not influenced by cost factors. Other than to note compliance with the CMBE goal, the members of the evaluation panel did not extrapolate the ASI disclosure to determine the total ASI cost proposal. There is no evidence that the ASI disclosure affected the panel's evaluation of the proposal. Had the ASI technical proposal included its total cost proposal, evaluation panel members would have referred the issue to the Department's purchasing office. Apparently because the panel members did not note the inclusion of the CMBE total and did not extrapolate cost information based on the CMBE disclosure, the members did not refer the matter to purchasing. Because no other vendor included cost information within the technical portion of the proposals, there was no comparative cost information available for evaluation until the cost proposals were opened by Department purchasing personnel. Cost proposals were reviewed after the evaluation of technical factors was completed. ITC asserts that ASI's proposal modification after the proposals had been opened and during the oral presentation warrants rejection of ASI's proposal. The evidence fails to support the assertion. Section 2.1L of the RFP, "COLLECTION AND REMITTANCE OF FEES," states: The Department requires the collection of certain fees from applicants for services related to the licensure and examination process. It is intended that the Contractor collect these fees, as necessary and appropri- ate, and remit these fees daily (exclusive of weekends and State of Florida holidays) in a manner acceptable to the Department. It is intended that the Contractor retain its fee for services as provided for in the contract and remit the balance to the Department as appropriate. The Department is currently not prepared to accept electronic funds transfers in this area, however, it is interested in proposals which could accommodate such tran- sactions during the contract period. The Department contemplates technological enhance- ments in the Receipt's database within the contract period, however it is unable to specify the details of such at this time. Contractor must be able to accommodate such technological changes and enhancements. If any invoices are required to be submitted by the contractor to the Department, they must be submitted in a manner acceptable to the Department and in detail sufficient for a pre- audit and postaudit thereof. The Contractor shall have a system which maintains certain data, as specified by the Department, related to its activities in this area. The Department had indicated that a vendor could collect the total fee, deduct the vendor service charge, and remit the balance of the fee to the Department. Prior to the preproposal conference, ITC submitted a question (Number 21) seeking information on how fees were to be conveyed to the Department. In Addendum Number 1, the Department indicated that a response to the question would be provided in a second addendum to be issued after the preproposal conference. In the second addendum, the Department's response to ITC's question Number 21 states: The Department intends for the vendor to receive, on behalf of the Department, certain fees currently paid by licensure applicants and/or exam candidates. These fees may be paid by personal check, certified check or money order. Cash cannot be accepted. All checks or money orders must be made payable to the Florida Department of Insurance and must be deposited by the vendor into a state concentration account (with Barnett Bank) or a clearing fund in the name of the Department. The Department will assist in establishing these accounts. The Department will require a daily accounting of all monies collected and/or deposited. This information must be in the format prescribed by the Department. This information must be transmitted via an automated system compatible with the Department's existing information systems in this area. The vendor will be required to submit in- voices to the Department for services rendered on a monthly basis. Such invoices must be in sufficient detail for pre-audit and post-audit purposes and be in a format prescribed by the Department. The Department's response in addendum Number 2 specifically noted that the Department's position had changed. ASI's proposal states: Fees will be collected on the day of examina- tion and/or license issuance. This method will eliminate late payment processing. We will collect examination fees payable to ASI. This will minimize reconciliation tasks for the Department, and will allow accounting efforts to focus on those fees collected on behalf of the Department. Application re- venues will be shared with the vendor, based on prices stipulated in the price proposal and associated processing volumes. Appli- cation and fingerprinting fees will be collected via checks made payable to the Department. ASI will provide a reconcilia- tion of these fees, and daily deposits will be made to the Department's account. ASI will invoice the Department for its applica- tion screening services on a monthly basis. ASI's proposal further states: As part of the standard project planning process, [ASI will work side-by-side with the Department to identify specific requirements to be included in the implementation plan, including fee collection procedures], de- tailed invoice requirements, and the most appropriate method to transmit detailed tran- saction information to the Department.... [emphasis supplied] The proposed fee collection process suggested by ASI is inconsistent with applicable Florida law and does not follow the procedure set out by the Department in Addendum Number 2. Section 2.4 of the RFP, "Proposal Form and Content," subsection (C) "Work Plan" states: Describe in narrative form your plan for accom- plishing the work described....Modifications of requirements of this RFP are permitted, however, reasons for changes should be fully explained and justified. " At the oral presentation, and prior to evaluation of the proposals, the evaluation panel advised ASI that the fee collection proposal was not legally appropriate. ASI representatives indicated that they were attempting to provide an improved fee reconciliation process and were not aware that Florida law prohibited their fee collection plan. ASI utilizes the two-check fee payment system in some of the states where ASI administers licensing exams. At the oral presentation, ASI representatives assured that, as specifically stated in the proposal, ASI was committed to working with the Department "...to identify specific requirements to be included in the implementation plan, including fee collection procedures...." ASI representatives stated that the fee collection procedure desired by the Department would be accomplished within the costs set forth in the proposal. Although ASI's fee collection procedure does not follow the method suggested in the RFP, such does not warrant rejection of the ASI proposal. As stated in the RFP, ASI's modification of the RFP requirement was permitted where the reasons for changes were fully explained and justified. ITC implies that ASI can't provide the services offered in the ASI proposal within the fee and cost structure set forth in the response to the RFP. There is no credible evidence supporting the implication.
Recommendation Based on the foregoing, it is hereby RECOMMENDED that the Department of Insurance enter a Final Order DISMISSING the case and awarding the contract to Assessment Systems, Incorporated. DONE and ENTERED this 21st day of May, 1996 in Tallahassee, Florida. WILLIAM F. QUATTLEBAUM, 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 21st day of May, 1996. APPENDIX TO RECOMMENDED ORDER, CASE NO. 96-1330BID To comply with the requirements of Section 120.59(2), Florida Statutes, the following constitute rulings on proposed findings of facts submitted by the parties. Petitioner The Petitioner's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: 6. Rejected, not supported by the weight of the evidence. Rejected, subordinate. Rejected, not supported by the weight of the evidence. Rejected, comment on testimony is not finding of fact. Rejected, unnecessary. The ITC proposal is not responsive to the Department's requirement of test item ownership. 12-13. Rejected, contrary to the weight of the evidence. Rejected, immaterial. Rejected, subordinate. Rejected, not supported by the weight of the evidence. 22. Rejected, subordinate. 23-24. Rejected, unnecessary. Rejected, subordinate. Rejected, unnecessary. Rejected, not supported by the weight of the evidence. Respondent The Respondent's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: 2. Rejected, subordinate. 3-5. Rejected, unnecessary. 7-8. Rejected, unnecessary. 14. Rejected, irrelevant. 20-23. Rejected, unnecessary. 34-37. Rejected, cumulative. 48-59. Rejected, cumulative. 61-62. Rejected, irrelevant. 63-69. Rejected, cumulative. Rejected, unnecessary. Rejected, cumulative. 83. Rejected, cumulative. 96. Rejected, unnecessary. Intervenor ASI Intervenor ASI's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: Rejected, unnecessary. Intervenor USF Intervenor USF's proposed findings of fact are accepted as modified and incorporated in the Recommended Order except as follows: 20-21. Rejected, unnecessary. Rejected, subordinate. Rejected, subordinate. Rejected, unnecessary. Rejected as to use of phrase "final offer;" the ASI RFP specifically committed to working with the Department on fee collection procedures. Rejected, unnecessary. 45. Rejected, subordinate. 50. Rejected, unnecessary. COPIES FURNISHED: Bill Nelson State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Dan Sumner, General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, Florida 32399-0300 Carl D. Motes, Esquire Maguire, Voorhis and Wells, P.A. 2804 Remington Green Circle, Suite 4 Tallahassee, Florida 32317-2429 Frank Fernandez, Esquire Thomas Valentine, Esquire Department of Insurance Division of Legal Services 612 Larson Building Tallahassee, Florida 32399-0333 William B. Graham, Esquire Richard N. Sox, Jr., Esquire Bateman and Graham, P.A. 300 East Park Avenue Tallahassee, Florida 32301 Regina L. DeIulio, Esquire Office of the General Counsel University of South Florida 4202 East Fowler Avenue, ADM 250 Tampa, Florida 33620-6250
The Issue Whether, and to what extent, petitioner should be authorized to increase the water and sewer rates it charges its customers.
Findings Of Fact I. The Utility and its Application The Utility, a wholly owned subsidiary of Gulfstream Land and Development Corporation, owns and operates water and sewer systems serving residents of "Jacaranda Community," a development located within the city limits of Plantation, Florida. The Utility's water treatment plant uses a lime- softening process; its sewage treatment plant uses a contact stabilization mode. During the test year ending September 30, 1980, the Utility supplied water service to an average of 3,162 residential, 662 general service, and 14 private fire-line customers; during the same period it supplied sewer service to an average of 3,162 residential and 276 general service customers. By its February 5, 1981, application, the Utility alleged that it was authorized a rate of return of 9.87 percent, yet during the test year it earned only a 7.20 percent rate of return on its water rate base, and a 6.58 percent return on its sewer rate base. It proposed new rates which would generate $1,271,841 in water operating revenues and $1,381,401 in sewer operating revenues--constituting a rate of return of not less than 12.42 percent. (Testimony of Fabelo; Petitioner's application dated January 30, 1981, R-4.) II. The Elements of Rate-Making In setting utility rates, the Commission must determine: (1) rate base; 2/ (2) the cost of providing the service, including debt interest, working capital, maintenance, depreciation, tax, and operating expenses; (3) a fair return on the rate base; and (4) the quality of service provided. If the Utility is providing service of acceptable quality, it is entitled to rates which will produce revenues sufficient to cover its reasonable costs of operation and allow it an opportunity to earn a fair return on its rate base. There are three major issues in this case: two involve the determination of rate base and the other involves whether several Utility expenditures should be expensed or capitalized. These issues are addressed below with the the appropriate rate-making element. Rate Base The two issues involving rate base are: (1) what portion of the Utility's sewer treatment plant is used and useful in the public service; and what method should be used to calculate working capital allowance. Used and Useful Plant A public utility is entitled to a return only on Utility property which is "used and useful in the public service." 3/ At hearing, the Utility contended that 100 percent of its sewage treatment plant was used and useful; the Commission contended that the correct figure was 76 percent. 4/ The Utility's contention is accepted as more credible because it is based on a professional engineering analysis of actual wastewater flows through the sewage treatment plant during the test year and eight months thereafter. In contrast, the Commission's contention is based on application of a formula which relates total rated capacity of a plant to the number of Equivalent Residential Connections 5/ ("ERCs") it is capable of serving. Here, actual must prevail over theoretical fact. The Utility's sewage treatment plant has a rated capacity of 2.5 million gallons per day ("MGD"). During the test year, average daily flows, calculated monthly, fluctuated between 63.6 percent and 75.2 percent of the rated capacity; the average three-day peak flow, calculated monthly, ranged from 73.2 percent to 86.4 percent of capacity; and one-day peak flows ranged from 74.4 percent to 87.2 percent of capacity. During the eight months following the test year, sewage flow steadily increased. The greatest flow was during February, a relatively dry month; average daily flow was 2.20 MGD, 88 percent of rated capacity; the average three-day peak flow was 98.8 percent of capacity; and the peak flow day was 100.4 percent of capacity. If, on that peak flow day, the plant had only 76 percent of its present capacity, sewage would have overflowed the plant. The parties agree 6/ that a margin of reserve or allowance for growth of approximately 24 percent should be used in calculating the Utility's used and useful plant; they also agree that the Utility's future growth in ERCs is expected to range from 700 to 800 ERCs a year. The Commission argues that the 24 percent growth allowance should be added to average ERCs during the test year, and not to actual February, 1981, flows. This argument is unpersuasive. The test year period is a tool for predicting conditions which will exist during the period in which the new rates will be effective; rates are set prospectively, for the future--not the past. Thus, rates must take into account known changes and conditions occurring subsequent to the test year in order to accurately reflect conditions expected for the future. Here, the Utility's actual sewage flows indicate that 100 percent of its existing plant is used and useful and necessary to satisfy the immediate and anticipated future needs of its customers. In an attempt to rebut or overcome the effect of the sewage plant's actual flow conditions, the Commission contends that the sewage system is experiencing ground water infiltration of sufficient magnitude to cast doubt on the use of total flow figures. However, the infiltration does not exceed the amount which is ordinarily planned for in constructing sewage treatment plants. Infiltration which will continue to take place--despite the Utility's best efforts to ameliorate it--cannot be separated from the wastewater stream. Since the plant must be capable of handling the combined flow, including infiltration, total flow figures must be considered. The Commission also contends that the system is not 100 percent used and useful because it can serve more connections. This contention is inconsistent with the acknowledged requirement that a sewage treatment plant must be capable of accepting increased sewage flows reasonably anticipated in the near future. That is the purpose of including an allowance for growth in the used and useful calculation. Lastly, the Commission contends that the Utility's failure to consult with Department of Environmental Regulation officials about future plant expansion is inconsistent with its 100 percent used and useful claim. But the Utility, recognizing its present limits and future needs, has actively pursued an interlocal agreement which will allow it to pump approximately 700,000 GPD to Broward County's regional sewage facility. The agreement is in its final stages and approval is eminent. (Testimony of Ring, Farina, Walden; P-1, p-2, R-1.) Cash Working Capital Allowance Cash working capital is the amount of investors' supplied cash needed to operate a utility during the interval between rendition of service and receipt of payment from the customers. By including it in rate base, a utility is allowed to earn a return on this portion of its investment. A utility's working capital requirements may be calculated by using: a standardized formula; (2) the utility's balance sheet; or (3) a lead-lag study. Until June, 1981, the Commission routinely used the formula approach; working capital was calculated by multiplying 12.5 percent (equivalent to one- eighth of a year) times the utility's annual adjusted operations and maintenance expenses. This method is also facilitated by Commission Rule 25- 10.176(2)(a)2.g., Florida Administrative Code which requires that water and sewer rate adjustment applications include a schedule showing: g. Allowance for working capital (1/8 of annual operations and maintenance expenses for the test year.) Id. In this case--consistent with the Commission's rule and custom--the Utility seeks a working capital allowance derived by using the standard Commission formula. However, the Commission seeks to use, instead, the balance sheet approach--an approach which it contends is more precise than the standard formula and results in a closer correlation between the Utility's rate base and its capital structure. The Commission's contention is accepted as persuasive. Under the balance sheet method, working capital allowance is the difference between a utility's current assets and current liabilities. Thus, the working capital component of rate base is derived, by simple adjustments, from a utility's balance sheet; it originates in the balance sheet's capital structure, just as do the other components of rate base. In comparison, the formula approach originates from a utility's income statement, i.e., one-eighth of its annual operating and maintenance expenses. The one-eighth factor equates to a 45-day lag--a period of time assumed to cover the lapse between the rendering of service and payment by the customer. But this assumption, while generally useful, may not accurately depict the working capital requirement of a given utility. In this case, the balance sheet approach is a more precise method for determining the Utility's working capital requirements. The Utility poses two objections to calculating working capital allowance by the balance sheet method: (1) it deviates from the Commission's prior practice in water and sewer rate cases, and (2) it may result in a negative allowance when a utility has insufficient cash to pay its current bills; thus a utility in greatest need of working capital would receive the least allowance. As to the objection that the balance sheet method represents a departure from past practice, the Commission has flexibility to expand, refine, and alter its policy through individual case decisions provided its action is explained and justified by record evidence. 7/ The Commission has not, by rule, limited that flexibility. Rule 25-10.176(2)(a)2.g. only requires applicants for rate adjustments to show their working capital requirements by applying the formula method; it does not preclude the Commission or utilities from using an alternative method more suitable to the facts of a given case. For example, it is generally recognized that, if a lead-lag study is conducted, it will prevail over the formula method. The Utility's second objection (that a cash-poor utility receives a lesser working capital allowance), is based on a hypothetical case and has no application to the facts here; the Utility has sufficient current assets and the balance sheet method results in a positive working capital allowance. This finding in favor of the balance sheet method is based on the evidence presented; its effect is thus necessarily limited to this case. Should the Commission--in future cases--advocate the balance sheet method, as opposed to the formula method, it must again explain and justify its position, insofar as possible, by conventional proof. 8/ Unless its policy is adopted by rule, an agency must repeatedly establish and defend it. 9/ The other components of the Utility's rate base, as adjusted, are not in dispute. Water and sewer rate base are therefore $3,369,160 and $4,099,887, respectively, and are depicted below: RATE BASE Test Year Ending September 30, 1900 Water Sewer Utility Plant in Service $5,919,833 $9,210,212 Utility Plant Held for Future Use (145,384) (644,429) Construction Work in Progress 265,300 -0- Accumulated Depreciation (616,835) (954,300) Contributions in Aid of Construction--Net (2,293,690) (3,579,118) Working Capital Allowance 39,936 59,522 Materials and Supplies -0- -0- TOTAL $3,369,160 $4,099,887 (Testimony of Davis, Asmus; P-6, R-2, R-3.) Net Operating Income The Commission opposes several operation, maintenance, and depreciation expenses which the Utility proposes to include in the test year statement of operations. The Hardy Gross Analysis The Hardy Cross Analysis is a computer analysis of the entire water distribution system. It indicates loss of pressure, balances water flows, and determines residual pressure at the end points of the system. It is a useful and necessary informational tool in designing additions to water distribution systems: it allows the designer to properly size new pipes added to the system. Growth, such as that experienced by the Utility, requires that such an analysis be updated at least once a year. The parties do not dispute the value of such an analysis, its cost, or the necessity for its actual updating. They dispute only who should bear the cost: the existing rate-payers or the developers which require and benefit from the continued expansion of the water system. It is concluded that the recurring cost of updating the Hardy Cross Analysis should be borne by developers, and, indirectly, the future customers who are the primary beneficiaries of the annual updating; without the growth associated with new developments, the annual updating of the Hardy Gross Analysis would be unnecessary. It would be unfair to require existing customers to pay for services--through higher rates--which they do not require and from which they receive no significant benefit. (Testimony of Farina, Walden.) Review of City of Plantation Utility Standards In 1969, the City of Plantation, where the Utility's water and sewer systems are located, enacted an ordinance containing detailed technical standards governing the construction of water and sewer systems. Historical experience has indicated that the standards incorporated in the ordinance require annual review, and periodic revision; the Utility's participation in that process is reasonably necessary to its continued efficient operation. A necessary expense of $1,000 should be allowed and charged as an operation expense to each system--water and sewer. (Testimony of Farina.) Diesel Fuel On June 16, 1980--during the last quarter of the test year--the Utility installed two auxiliary power units which utilize diesel fuel. Since the two power units were not in service during the entire test year, the Utility seeks to annualize the cost of the diesel fuel consumed during the 3 1/2-month period and include it as a recurring operating expense. 10/ The Commission opposes annualizing the fuel costs on the ground that sufficient documentation was not presented by the Utility to justify the actual consumption of fuel by the power units and establish that such consumption represented normal operation of the Utility, i.e., that it is reasonably expected that such annual consumption will repeatedly occur in the future. The Commission's contention is accepted as persuasive. The Utility has the burden of supporting its claimed expenses with adequate documentation. 11/ Here, no evidence was presented to establish the actual periods of operation of the auxiliary generators or the conditions under which they were used; nor were rated consumption of fuel figures supplied. The alternate treatment suggested by the Commission--amortize initial diesel fuel fill-up cost over three years, placing one-third of it in expense and adding the other two-thirds to materials and supplies 12/ --is a reasonable method of treating the fuel expenditures. (Testimony of Davis, Walden, Asmus; R-2, R-3.) Amortization of Legal Expense Relating to Proposed CIAC Rules The Utility contends that the Commission is contemplating further CIAC 13/ rule making thus necessitating the expenditure of recurring legal expenses in the total amount of $778. However, although the Commission is now considering the adoption of CIAC rules, recurring revisions in the future are not reasonably expected. In the last ten years, the Commission has had one rule docket pertaining to CIAC rule making. Amortization of this expense is therefore unjustified. (Testimony of Davis.) Adjustment for Increased Chemical Costs Because of escalating costs of chemicals, the Utility proposes to adjust the water and sewer chemicals account by applying June, 1981, prices to the quantity of chemicals consumed during the test year. The Commission opposes the proposed adjustment, contending that the Utility's new lime-feeding equipment will result in lower lime costs. The Utility's adjustments 14/ are accepted as credible; since a new Zeolite treatment plant will soon be coming on-line, it is reasonably expected that lime requirements, associated with the water-softening process, will--if anything--increase. (Testimony of Farina, Davis, Asmus; R-6.) Maintenance Expenses: Amortization of Post Test-Year Gearbox Repairs The Utility proposes to include in sewer maintenance expense amortization of the cost of a gearbox repair incurred subsequent to the test year. The Commission proposes to amortize--for three to five years--all major repairs incurred during the test year. The Utility has not amortized such extraordinary repairs during each of the last five years; it contends that such historical amortization is necessary to arrive at a representative figure for extraordinary repair on an on-going basis, that the Commission cannot begin--for the first time--to amortize such repairs during the test year. The Utility proposes to simply adjust sewer maintenance expense by $3,386--an admittedly rough estimate. The Utility's accountant admits: It would be a lot more exact to go back five years and apply it [amortization of extraordinary repairs] down the line. . .but that's very time-consuming. (Tr. 192.) It is undisputed that the Utility--to properly account for extraordinary maintenance repairs--should amortize such expenses through the expected life of the repairs. The Utility has not done so to repairs incurred during the last five years. The substitution of an "estimate" of expected future repair costs for a preferable and more exact accounting method is unacceptable and should be rejected. (Testimony of Davis, Asmus.) Depreciation Expense The finding, infra, paragraph A(1) that the Utility's sewer plant is 100 percent used and useful necessarily requires an adjustment to the Commission's proposed depreciation expense. The adjustment increases depreciation, for sewer operations, by $11,897. (Testimony of Asmus; R-6.) The net operating income which a utility should be allowed the opportunity to earn is reached by multiplying rate base by a fair rate of return. 15/ Operating expense and taxes (income and gross receipts tax) are then added to net operating income to calculate gross revenue requirements. In this case, the Utility's net operating income should be $414,743 from water operations and $504,696 from sewer operations. Before gross revenue requirements can be determined, operating expense and taxes should be recalculated consistent with the above findings; such recalculation should be conducted by the Commission, verified by the Utility, and included as part of the Commission's final order entered in this proceeding. Rate Structure, Allocation, and Rate Design The Utility's present rates are structured in accordance with what is commonly referred to as the base facility rate design. The purpose of this design is to require customers to pay their pro rata share of the Utility's cost of providing the service. It is objectively determined and results in an equitable and consistent distribution of the costs involved. Both parties agree that the new rates should also be structured in accordance with the base facility rate design. However, the new rates should eliminate the present 25 percent rate differential between commercial and residential rates--a differential that has not been justified and which the Utility no longer seeks to impose. Motorola, Inc., a large industrial customer of the Utility, requested more favorable rate treatment because of the large volume of water it consumes. However, insufficient cost of service information was submitted to justify a "volume discount." A cost of service study is necessary to accurately allocate costs of service among customer classes. (Testimony of Fabulo, Asmus; R-4.) Quality of Service Several customers complained that the Utility's water had offensive color and taste. Eight complaints were filed with the Broward County Health Department during 1980. However, the preponderance of evidence establishes that the Utility's water and sewer systems are in compliance with local and state standards. Neither system is under any citation or enforcement action instituted by a regulatory agency. The quality of the water and sewer service provided is, therefore, determined to be satisfactory. (Testimony of Farina, Walden; P-11)
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That the Utility be authorized to file rate tariffs consistent with the provisions of this Recommended Order. DONE AND RECOMMENDED this 21st day of August, 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 21st day of August, 1981.
Findings Of Fact Petitioner is a special taxing district providing fire protection and rescue services to the residents of the Estero area of Lee County. The fire station is located at 20241 Tamiami Trail, Estero, Florida. Petitioner employs 14 employees, including administrative staff and firefighters. The firefighters work 24 hours straight and then are off-duty for 48 hours. Two to four employees work each shift. Firefighting requires a fast response. Thus, Petitioner requires that on-duty firefighters remain at the station for their entire 24-hour shift, unless they are out fighting fires or performing rescue duties. The fire station contains an 8' x 13' bedroom with six mattresses located on three bunk beds. On-duty firefighters are allowed to bring pillows and sheets so they can sleep at the station while on duty. There are no dressers in the room, which contains small lockers that the firefighters may use to store a change of clothes. Petitioner provides kitchen facilities at the fire station and well water. The well water is used for washing equipment, taking showers, and flushing the toilet. The well water is not used for any other purposes, nor is it used by any other persons. Petitioner provides bottled water for drinking and cooking. All of the firefighters have residences apart from the fire station and within a reasonable commuting distance from the fire station. No firefighter has ever lived at the station. Petitioner does not charge, or reduce the pay of, the firefighters for their use of the limited sleeping facilities. Petitioner lawfully does not treat the use of the limited sleeping facilities by firefighters as gross income for the purposes of withholding federal income tax or making social security contributions. By letter dated July 18, 1995, Respondent informed Petitioner that the fire station's water system is a limited use community water system because the sleeping facilities constituted rental residences, as defined by Rule 10D- 4.024(21), Florida Administrative Code. Respondent advised Petitioner that it was therefore required to obtain a permit. As noted in the following section, the statute authorizes Respondent to regulate as limited use community public water systems those systems serving a certain number of "rental residences." The statute does not define "rental residence." In Rule 10D-4.024(21), Respondent defines a "rental residence" as follows: a dwelling unit, a structure or part of a structure that is rented for use, or furnished with or without rent as an incident of employ- ment, for use as a home, residence, sleeping place by one or more persons, a mobile home rented by a tenant. This term does not apply to facilities offering transient residency such as public lodging establishments. This term includes other facilities where residency or detention is incidental to the provision of medical, geriatric, educational, counseling, religious, or similar services. Respondent equated a "rental residence" with a "dwelling unit" when it based its definition of "rental residence" on the statutory definition of "dwelling unit" in Chapter 83, Part II, Florida Statutes, which is the Florida Residential Landlord and Tenant Act. A "dwelling unit" is a "residence." The American Heritage dictionary defines a "dwelling" as "a place to live in; residence; abode." Similarly, the same dictionary's first definition of "residence" is "the place in which one lives; a dwelling; an abode." But the statutory definition qualifies "residential" with "rental." The word "rental" requires consideration of the nature of the relationship of the occupant to the dwelling and its owner. Obviously, the Florida Residential Landlord and Tenant Act addresses rental transactions, but it does not do so in the definition of "dwelling unit." Other provisions of the Act describe the kind of activity that must take place for a person to be considered a tenant renting a dwelling unit. Most importantly, Section 83.43(6) defines "rent" as "periodic payments due the landlord from the tenant for occupancy under a rental agreement " The facts of this case present a revealing illustration of the distinction between a "residence" or "dwelling unit," on the one hand, and a "rental residence," on the other hand. There is no rental relationship between the occupants of the sleeping quarters at the fire station and the residence or dwelling itself. The firefighters do not pay, directly or indirectly, for these beds or the rooms in which the beds are located. Their employer legitimately does not include the value of the use of these sleeping quarters in the compensation paid to the firefighters. The firefighters have residences within commuting distance of the fire station and use the meager sleeping quarters and kitchen facilities only because they are required to spend long hours continuously at the fire station.
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 Upon consideration of the oral and documentary evidence adduced at the hearing, as well as facts stipulated to by the parties, the following relevant facts are found: Central Corporation, formerly known as TFC Teleservices Corporation, is a provider of alternative operator services (AOS). An AOS provider provides operator assisted long distance telecommunications services to various entities including hotels, motels, universities, hospitals and private pay telephone providers. This new AOS telecommunication industry emerged after 1984 when AT&T ceased paying commissions to hotels for toll-traffic from guests and when the Federal Communications Commission authorized privately-owned pay phones. There are currently nine AOS providers in Florida. Central is authorized by Certificate Number 1528, issued by the PSC on November 21, 1986, to operate as an interexchange carrier within the State of Florida. Central currently operates in Florida under an approved tariff on file with the PSC, which tariff became effective on September 15, 1987, and authorizes Central to charge certain amounts for its services. Prior to the challenged action, the PSC never placed any conditions upon Central's approved tariffed rates. Interexchange companies (IXCs) are companies which provide long distance telephone services. They are certificated by the PSC on a statewide basis and engage in competition with each other. Such competition, along with the PSC's fitness screening and approval of tariffed rates, is considered adequate to protect the public. Consequently, the PSC does not regulate the rates of IXCs, at least minor IXCs including AOS providers. The PSC does not set rate levels for minor IXCs and does not set an authorized rate of return on equity for minor IXCs. Indeed, in accordance with Section 364.337, Florida Statutes, which authorizes the PSC to exempt from the requirements of Chapter 364 a telephone company which is in competition with or duplicates the services of another telephone company, the PSC has placed AOS providers under the separate rules and regulations pertaining to IXCs, which are not rate base regulated. The PSC has never established for any minor IXC a rate base or an authorized or required rate of return. Local exchange telephone companies (LECs) serve a franchised monopoly area. The LEC agrees to provide service indiscriminately to the public without competition, and, in return, the PSC guarantees the LEC the opportunity to earn a fair rate of return designed to emulate what might be achieved in a competitive market. The PSC sets rate bases and rate levels for LECs, and authorizes the rate of return on equity. In other words, unlike IXCs, LECs are rate base regulated utilities. LECs and/or the PSC may initiate rate relief or rate decrease proceedings. Interim relief is often necessary and is authorized by statute and case law due to the regulatory lag time pending the conclusion of the proceedings. Such interim rate relief or interim rate decreases are done on an individual case-by-case basis and are based upon the financial condition of the particular LEC. The PSC has never provided interim rate relief or interim rate decreases on an industry-wide basis. It has set a "generic" rate cap, establishing a 25 cent local call rate for privately-owned pay phones, but that was done on a prospective basis. The PSC has never imposed an industry-wide rate cap, with a requirement to hold subject to refund monies in excess of that cap. At the request of PSC staff, the PSC opened, on December 18, 1987, Docket Number 871394-TP styled "In re: Review of Requirements Appropriate for Alternative Operator Services provided from Public Telephones." This was designated as a "generic" proceeding, and emanated from numerous complaints the PSC had received from end users (i.e., guests of hotels and motels, hospital patients and pay telephone users) who had been charged for alternative operator services. The nature of the complaints included end users being charged for AOS without being aware of using the service, lack of prior knowledge of the rates being charged, inability to use the services of their preferred IXC and inability to access the LEC operator. The most significant complaint, however, was the excessive rate being charged by some AOS providers. The evidence demonstrates that the intrastate long distance rates charged by Central are considerably higher than the rates charged by Southern Bell, an LEC. Central entered an appearance in Docket No. 871394-TP on December 30, 1987. At an Agenda Conference held on February 2, 1988, the PSC voted on various recommendations of its staff. As pertinent to this proceeding, the PSC voted to set an expedited hearing to be held as soon as practicable to determine whether AOS are in the public interest and various other issues concerning the provision of AOS. The PSC also voted to require all AOS providers to place all revenues subject to refund that are generated by charges in excess of the AT&T rate for a comparable call. This vote exceeded the staff's recommendation, which did not include a "hold subject to refund" requirement. At an Agenda Conference held on February 16, 1988, the PSC voted to reconsider the rate cap applicable to AOS providers and to hold the Order reflecting their February 2nd vote pending such reconsideration. At its Agenda Conference held on March 15, 1988, the PSC reconsidered and raised the rate cap amount from the AT&T rate for a comparable call to the LEC rate for a comparable call, thereby decreasing the amount of revenues that AOS providers must hold subject to refund. The action taken on March 15, 1988, was embodied in written Order No. 19095 issued on April 4, 1988. This Order is entitled "Order Setting for Hearing the Issue of Whether Alternative Operator Services are in the Public Interest and Placing Revenues Subject to Refund ..." The remainder of the title relates to "proposed agency action" concerning other requirements for AOS providers, which are not challenged in this proceeding. Order No. 19095 declares that paragraph 7, which requires AOS providers to hold subject to refund all charges collected in excess of the approved rate, is effective February 2, 1988. The Order further recites "We are cognizant of the serious impact this action may have on AOS providers and their customers. However, it is our view that we must take immediate and effective action to remedy the abusive situation we perceive exists at this time. It is in consideration of these conflicting concerns that we have chosen the least drastic action available. This action does not require AOS providers to immediately stop charging current rates. It does not suspend or revoke any certificates of public convenience and necessity. It does not levy any fines or penalties. It merely places revenues subject to refund to allow for the return of these monies if it is subsequently decided that they were generated from inappropriate charges." Although not embodied within the terms of Order No. 19095, the parties stipulated that the hearing to determine public interest is scheduled for August 9-12, 1988. Central requested the PSC to hold an evidentiary hearing prior to making the rate cap take effect, but this request was denied. The rate cap requirement and the disposition of the revenues held by AOS providers pursuant to Order No. 19095 are issues to be determined at the hearing to be held August 9- 12, 1988. The rate cap requirement set forth in Order No. 19095 applies to all AOS providers operating in Florida. Central's current tariff authorizes Central to charge more than the rate cap specified in Order No. 19095. Prior to Order No. 19095, there was no rate cap on AOS providers. Regardless of whether the PSC ultimately orders a refund, the "hold subject to refund" requirement which became effective on February 2, 1988, has immediate and significant adverse impacts upon Central. Central is a relatively new company and must use the revenue it generates on a daily basis. Prior to Order No. 19095, Central was able to rely on the unconditional use of revenues it receives under its approved Florida tariff. If Central continues to charge its current tariffed rates, it will have to set aside the difference between what it bills and the rate cap, place it in escrow and will not be able to utilize those funds. It is estimated that the revenues Central might have to refund if it continues to charge its current rates would between $1.2 and $1.7 million. Nonrecoverable commissions and the cost of a actually making the refund would increase the potential cost of the refund. If Central were to reduce its rates to the LEC rate, it would lose a substantial amount of revenue and does not know where it can make up that loss. Even if this option were chosen today, Central would still have to determine to whom it provided services since February 2, 1988, and what the potential refund would be. Additional staffing and/or computer equipment would be necessary to keep track of prior users and charges. A third option is for Central to withdraw from Florida intrastate operations pending the outcome and conclusions of the August PSC proceedings. Central operates in many states. While its Florida business makes up only 8 to 10 percent of its intrastate revenues, some 40 percent of Central's entire business originates at Florida properties. If Central were to cease paying commissions on intrastate revenues, its intrastate business originating from Florida would go to its competitors. While Central has made the decision not to do business in certain states due to those state's methods of rate regulation, such decisions were made on a prospective basis. Other immediate and adverse impacts upon Central include the administrative costs and burdens associated with separate bookkeeping for its Florida operations, as well as separate books within Florida to segregate the difference between the rate cap and its tariffed rates. Central has already experienced delays in loan financing. Lenders want to wait and see what the PSC does with AOS providers. The valuation of the company is affected due to money taken out of the revenue stream and placed in escrow. Central's financial statement must reflect the contingent liability of potential refunds and full disclosure must be made to the Federal Communication Commission.
The Issue Whether, and to what extent, Magnolia Valley Services, Inc., should be allowed to increase its water and sewer service rates.
Findings Of Fact Based on the evidence presented at hearing, the following facts are determined: I. The Application By application filed on August 14, 1980, APPLICANT sought authority to increase its water and sewer rates, on an interim and permanent basis, in amounts sufficient to produce $60,847 in annual gross water revenues, and $100,768 in sewer revenues. By Order No. 9571 dated September 30, 1980, the COMMISSION authorized an interim sewer revenue increase, under bond, of $8,205, and denied an interim increase in water revenues. The COMMISSION has approved APPLICANT's use of a test year ending December 31, 1979. At hearing, the APPLICANT amended its application by reducing its requested water revenues to $50,287, and increasing requested sewer revenues to $101,522. (Testimony of Gregg, Prehearing Statement; P-4.) II. Depreciation Rate Depreciation is a method of allocating the cost of fixed assets to their estimated useful life. As an above-the-line operating expense, it affects a utility's net operating income; by its impact on accumulated depreciation of plant-in-service and accumulated amortization of contributions-in-aid-of- construction, it also effects calculation of rate base. (Testimony of Walker, Gregg; P-3, R-1.) The COMMISSION has promulgated no rules as guidelines which establish generally, or in particular, the useful life of utility assets or the method by which their depreciation should be calculated. In practice, however, it has allowed utilities to apply a straight-line 2.5 percent depreciation rate and a 40-year useful life to all depreciable assets. Any deviation from this 2.5 percent across-the-board rate must be justified by the utility. (Testimony of Heiker.) Here, the APPLICANT proposes depreciation rates which vary according to the estimated useful life of the plant or equipment involved. In contends that its shorter estimates of useful life of specific assets reflect reality and actual experience more accurately than an across-the-board 40-year life standard. For example, rate meters are routinely replaced on a 20-year basis and lack of reserve capacity and changing voltages have substantially reduced the expected life of electrical motors and equipment. The APPLICANT's estimates of useful life were established by the opinion of a utility consultant and engineer whose qualifications went unchallenged by the COMMISSION; no competent evidence was offered to discredit or rebut his conclusions. The COMMISSION's engineer candidly admitted that depreciation "is really a nebulous thing," (Tr. 64) and declined to assert that the APPLICANT's depreciation schedules were erroneous. (Tr. 69.) The COMMISSION disputed the APPLICANT's depreciation schedules by referring to an unpublished 1973 staff memorandum retained at the agency's offices and not produced at hearing. That memorandum purportedly adopted 1973 depreciation rates developed by the American Water Works Association. Upon motion of APPLICANT, testimony concerning the contents of that memorandum was subsequently stricken. The COMMISSION engineer also testified that he was unfamiliar, even generally, with how the American Water Works Association's depreciation rates were derived. In light of the quality of the evidence presented of record, the APPLICANT's depreciation rates (including estimated useful life) are accepted as persuasive. (Testimony of Heiker, Gregg; P-1, P-3.) III. Attrition Allowance The APPLICANT seeks to include in operating expenses an attrition allowance of $1,992 for water and $8,161 for sewer operations based on alleged attrition it experienced between 1975 and 1979. It defines attrition as increased annual expenses which cannot be recovered at the time they are incurred. The COMMISSION opposes the requested attrition allowance on the grounds that: (1) the attrition study performed by the APPLICANT is unreliable, and (2) that the recent enactment of Section 367.081(4), Florida Statutes (Supp. 1980), which allows the passing through of certain increased expenses to customers, eliminates the need for a special attrition allowance. (Testimony of Gregg, Walker; P-2.) The COMMISSION's position is well taken. First, a major portion of the cost increases experienced by the APPLICANT in the past will be able to be passed through to its customers pursuant to Section 367.081, Florida Statutes (Supp. 1980). 2/ Those costs include increased power costs and ad valorem taxes. The APPLICANT responds that Section 367.081(4), supra, will not enable it to fully recover increasing expenses when they occur because rates may be adjusted, based on increased operating costs, not more than twice a year. Section 367.081(4)(e), supra. However, this new law should be implemented before it is pronounced inadequate to fulfill its purpose. Experience may show that major costs increase sporadically, or at predictable cycles, which facilitate carefully timed rate increases under Section 367.081(4), and that two such increases a year may prove fully adequate. (Testimony of Gregg, Walker; P- 2, R-1.) Secondly, the attrition study (P-2) submitted by the APPLICANT does not reasonably justify, or provide a reliable basis for projecting an attrition rate into the future. The 1975-1979 historical cost increases have not occurred at a constant rate. The 1979 increase in water operation costs was less than one- half of the average increase experienced between 1975 and 1979; in sewer operations, the 1979 cost increases were less than one-third of the four-year average. Moreover, a major factor in increased sewer costs was the 1978 conversion to a spray irrigation, total retention, sewage treatment system. Since this system meets the 1983 federal Clean Water Act standard of no- discharge, it is unlikely that increased operational costs relating to treatment changes will continue to occur. In short, the 1975-1979 historical cost increases of APPLICANT have been sporadic and do not support an assumption that they will continue to occur at the same rate. To include an attrition allowance based on such an assumption would be unwarranted. (Testimony of Gregg, Walker; P-2, R-1.) IV. Allowance of an Undocumented Operating Charge The APPLICANT proposed a $600 sewer expense item which was opposed by the COMMISSION because of lack of documentation. In response, the APPLICANT submitted--immediately prior to hearing--a cancelled check in the amount of $1,000. The discrepancy between the two amounts remains unexplained. Such action falls short of providing adequate documentation, and the proposed $600 sewer expense item must therefore be rejected. See, 25-10.77, FAC. V. Elements of Ratemaking and Applicant's Gross Revenue Requirements The parties agree: (1) that 14.5 percent is a fair and reasonable rate of return on rate base and reflects the actual cost of capital to APPLICANT; that the new rates should be designed in accordance with the base facility design concept, and that the quality of APPLICANT's water and sewer service is satisfactory. The remaining elements of ratemaking--rate base and net operating income--are not in dispute, and are depicted below: 3/ RATE BASE Test Year Ended 12/31/79 Water Sewer Plant in Service Accumulated $269,887 $511,200 Depreciation $(37,384) 4/ $(54,685) Net Plant $232,503 $456,515 Contributions in Aid of Construction (179,251) (360,055) Accumulated Amortization 22,421 Net Contributions in Aid of 4/ 41,231 4/ Construction (156,830) (318,824) Working Capital 3,515 7,082 TOTAL $ 79,188 $144,773 OPERATING STATEMENT Test Year Ended 12/31/79 Water Sewer Operating Revenues $53,300 $72,608 Operating Expenses: Operations 25,552 45,353 Depreciation 3,848 5/ 4,876 5/ Maintenance 2,572 6/ 11,306 6/ Amortization 1,439 Taxes Other Than Income 4,654 7/ 8,338 7/ TOTAL Operating Expenses $36,626 $71,312 Net Operating Income$16,674 $ 1,296 By applying a 14.5 percent rate of return against a rate base Of $79,188 for water and $144,773 for sewer, it is concluded that the APPLICANT should be allowed an opportunity to earn a return, or net operating income of $11,482 for water and $20,992 for sewer. Annual gross revenues of $48,108 (water) and $92,304 (sewer) are required to produce such a return--resulting in a net annual reduction of water revenues of $5,192 and a net increase of $19,696 in sewer revenues. VI. Interruption of Service Treatment Without Advance Notice Although the overall quality of its service has been adequate, infra, the APPLICANT has unnecessarily inconvenienced customers by interrupting water service without advance notice. These interruptions were planned in advance and not made on an emergency basis. The APPLICANT failed to adequately explain or excuse its failure to give timely notice. (Testimony of Pepper.)
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That Magnolia Valley Services, Inc., be authorized to file new rates structured on the base facility charge concept and designed to generate gross annual revenues of $48,108 for water operations and $92,304 for sewer operations, based on the average number of customers served during the test year. It is further RECOMMENDED that the utility be directed to strictly comply in the future with Section 25-10.56, Florida Administrative Code, by giving advance notice of service interruptions which are not emergency in nature. DONE AND ORDERED this 1st day of April, 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 1st day of April, 1981.
The Issue The issue in this case is the amount of attorney's fees and costs Petitioner, Florida Cities Water Company, should be awarded pursuant to Section 120.595(5), Florida Statutes (Supp. 1996).
Findings Of Fact The Parties. Petitioner, Florida Cities Water Company (hereinafter referred to as "Florida Cities"), is a utility providing water and wastewater service to two communities in Florida. Respondent, the Florida Public Service Commission (hereinafter referred to as the "PSC"), has exclusive jurisdiction over water and wastewater service utility providers in Florida, including the determination of rates that utility providers may charge for their services. Section 367.011, Florida Statutes (1995). Florida Cities' 1992 Approved Rate. In arriving at an allowable rate which a water and wastewater service utility may charge, the PSC must determine, among other things, the amount of a utility's plant that is considered "used and useful." Section 367.081(2)(a), Florida Statutes (1995). In determining the amount of Florida Cities' plant that was considered "used and useful" in 1992, the PSC determined the amount of investment costs in its North Fort Myers, Florida, plant which was potentially recoverable. Recoverable costs are limited to those expenditures which are considered to be for the public benefit. Florida Cities' recoverable costs as of 1992 were determined to total $6,343,868.00. The amount of Florida Cities' recoverable costs was then multiplied by a fraction, the numerator of which was the average daily flow of the plant (calculated on a peak month basis) and the denominator of which was the capacity of the plant (this fraction is hereinafter referred to as the "Capacity Ratio"). In 1992, the average daily flow of the plant on a peak month basis was determined to be in excess of 1.0 million gallons per day (hereinafter referred to as "MGD"), and the capacity of the plant was determined to be 1.0 MGD. Therefore, the Capacity Ratio was determined to be 100 percent and Florida Cities' recoverable costs of $6,343,868.00 was determined to be 100 percent "used and useful." Florida Cities' "rate base" for 1992 was, therefore, determined to be $6,343,868.00. Florida Cities' 1995 Application for Rate Increase and the PSC's Reduction of Rate Base. Subsequent to the determination of Florida Cities' rate base and its approved utility rates in 1992, Florida Cities was required by the Florida Department of Environmental Protection (then known as the Florida Department of Environmental Regulation)(hereinafter referred to as "DEP"), to expand its North Fort Myers plant. As a result of DEP's action, Florida Cities incurred additional plant costs of approximately 1.6 million dollars. As a consequence of having incurred additional plant costs, Florida Cities requested that the PSC treat the additional costs, plus other costs incurred by Florida Cities since 1992, as recoverable costs and as an addition to its rate base. Florida Cities' application was filed in 1995. After consideration of Florida Cities' application for rate increase, the PSC issued a Notice of Proposed Agency Action Order Granting Final Rates and Charges on November 2, 1995. In this order the PSC essentially determined that all additional plant expansion costs incurred by Florida Cities constituted recoverable costs. The PSC also determined that Florida Cities' Capacity Ratio was 100 percent and, therefore, all of its recoverable costs was treated as "used and useful." The decision of the PSC resulted in an increase of Florida Cities' utility rate of approximately 17.89 percent. The proposed decision of the PSC was, however, challenged and proceeded to hearing before the PSC. On September 10, 1996, the PSC entered a Final Order Denying Application for Increased Wastewater Rates, Reducing Rates, Requiring Refund and Requiring Reports (hereinafter referred to as the "PSC Final Order"). In the PSC Final Order, the PSC treated all of the 1.6 million dollars in costs associated with the expansion of the plant required by the DEP as recoverable costs. The PSC, however, reduced the Capacity Formula to 65.9 percent. This resulted in a reduction in Florida Cities' rate base of approximately 2.4 million dollars. The reduction in the Capacity Formula to 65.9 percent was caused, in part, by the manner in which the PSC determined the numerator of the Capacity Formula. The PSC modified the manner in which it calculated the numerator of the Capacity Formula: Instead of using the average daily flow calculated on a peak month basis, it used the average daily flow calculted on an annual basis (to which it added a "reserve" of 4.58 percent) . . . . The reduction in the Capacity Formula from 1992 to 1995 was also caused by the plant capacity figure used by the PSC. The PSC used a permitted capacity of 1.5 MGD instead of the actually designed and built capacity of 1.25 MGD. Florida Cities had urged use of the 1.25 MGD actual capacity figure. As a result of the PSC's conclusion that only 65.9 percent of the amount of recoverable costs was used and useful, Florida Cities' rate base was reduced to $5,525,915.00, a decrease of Florida Cities' used and useful plant as determined in 1992 of over $800,000.00. Although the PSC included the additional costs incurred by Florida Cities in order to comply with DEP regulations, the PSC's use of a Capacity Ratio of 65.9 percent to determine the amount of the recoverable costs considered used and useful had a net effect of disallowing approximately 2.4 million dollars in proposed rate base (1.6 million dollars incurred to meet DEP regulations plus the $800,000.00 reduction of 1992 rate base). Florida Cities' Appeal of the PSC's Final Order. Florida Cities appealed the PSC Final Order to the District Court of Appeal, First District (hereinafter referred to as the "First District Court"). Florida Cities Water Company v. Florida Public Service Commission, 23 Fla. L. Weekly D238 (Fla. 1st DCA January 12, 1998). On appeal, Florida Cities raised two grounds for reversal of the PSC's Final Order: The Capacity Ratio used by the PSC to determine the amount of its recoverable costs which was considered used and useful was flawed. Florida Cities urged the First District Court to increase its Capacity Ratio to 100 percent; and The PSC should have included all costs Florida Cities had incurred in order to comply with DEP regulations as part of its rate base without regard to the Capacity Ratio. Florida Cities argued that the 1.6 million dollars it had incurred to comply with DEP regulations should be included as part of its rate base without regard to what the Capacity Ratio was determined to be. Florida Cities' challenge to the Capacity Ratio used by the PSC was based upon two alleged errors: The PSC's use of permitted capacity of 1.5 MGD was improper. Florida Cities argued that the PSC should have used actual plant capacity of 1.25 MGD; and The method elected by the PSC to determine the average daily flow of the plant was a novel and unexplained deviation from past PSC policies. Florida Cities argued that the PSC should have continued to determine average daily flows based upon a peak month basis rather than an annual basis. As to the 1.6 million dollars in costs Florida Cities sought to have included in its rate base, Florida Cities' two arguments were alternative theories advanced to support the same end: 100 percent inclusion of the 1.6 million dollars it had incurred as a result of meeting DEP regulations. While the two arguments were interrelated with regard to the starting point (it had spent 1.6 million dollars on plant) and the result Florida Cities was attempting to achieve (inclusion of 1.6 million dollars in rate base), the two arguments involved different methods of reaching the desired result: (a) direct inclusion; or (b) inclusion through an increase in the Capacity Ratio. As to the remaining $800,000.00 reduction in Florida Cities' rate base, only one of the arguments raised by Florida Cities applied to this amount: the argument that the Capacity Ratio utilized by the PSC was flawed. The First District Court's Decision. The First District Court agreed with Florida Cities' contention that the Capacity Ratio used by the PSC was flawed. The First District Court found that both the calculation of the numerator and the denominator of the Capacity Ratio by the PSC was in error. With regard to the numerator, the First District Court concluded that the PSC's determination of average daily flows by using annual flows constituted a shift in agency policy which was "'unsupported by expert testimony, documentary opinion, or other evidence appropriate to the nature of the issue involved.'" The First District Court remanded the matter to the PSC to "give a reasonable explanation, if it can, supported by record evidence (which all parties must have an opportunity to address) as to why average daily flow in the peak month was ignored." With regard to the denominator, the First District Court opined that "no competent evidence of any substance supports the PSC's determination" of plant capacity. The First District Court concluded that the denominator should be 1.25 MGD. The First District Court rejected Florida Cities' contention that amounts it had expended to comply with DEP regulations should be included in its rate base without regard to the Capacity Ratio. The First District Court concluded that the 1.6 million dollars spent to comply with DEP regulations could be included in rate base "only to the extent the improvements they effect or the facilities to which they relate are 'used and useful in the public service.'" The ultimate impact of the First District Court's decision depends upon what action the PSC takes on remand with regard to determine the appropriate numerator for the Capacity Formula. The PSC issued an Order of Remand on April 14, 1998. In the Order of Remand, the PSC indicated its position that the decision of the First District Court regarding flows was "an invitation" to take additional testimony and evidence on the issue. The PSC, therefore, reopened the record and scheduled a second evidentiary hearing to determine how average daily flows should be calculated. Florida Cities filed a Motion to Stay the PSC's second evidentiary hearing, pending resolution of an appeal of the PSC Order of Remand. Until a final determination is made concerning the intent of the First District Court in remanding the matter to the PSC, it cannot be absolutely concluded what the "result obtained" in this case will be. The parties have, however, assumed for purposes of the matter that the Capacity Ratio should be approximately 98.6 percent. That is the best "result" which can be obtained by Florida Cities in this matter. Florida Cities' Motion for Attorney's Fees. As part of its appeal, Florida Cities also filed a Motion for Attorney's Fees. Florida Cities sought an award of attorney's fees pursuant to Section 120.595(5), Florida Statutes (Supp. 1996). In particular, Florida Cities requested that the First District Court: Grant attorneys [sic] fees to Appellant for this appeal; Remand this case to the Division of Administrative Hearings to determine attorneys fees; and Grant such other relief as the Court may deem appropriate. The First District Court entered the following order on Florida Cities' Motion for Attorney's Fees: The motion by appellant for attorney's fee is granted. If the parties are unable to agree on an amount of attorney's fees, the question should be referred to the Division of Administrative Hearings. The Parties' Effort to Agree. Florida Cities submitted copies of invoices to the PSC documenting the attorney's fees and costs incurred by it in connection with the appeal of the PSC's Final Order. Florida Cities proposed several findings of fact, which are hereby accepted by reference, relating to the manner in which it determined attorney's fees and costs. Those findings of fact include paragraphs 27 through and including 32. The PSC reviewed the invoice copies submitted by Florida Cities and stipulated and agreed that the number of hours and the hourly rates attributable to the appeal of the PSC Final Order were reasonable. The parties stipulated that the total amount of attorney's fees and costs incurred by Florida Cities on the appeal of the PSC Final Order amounted to $74,648.14. On March 18, 1998, the PSC and Florida Cities filed a Joint Petition for Resolution of Attorney's Fees with the Division of Administrative Hearings. The parties stipulated in the joint petition that they had negotiated in good faith but were unable to agree on the amount of attorney's fees which should be paid to Florida Cities. The parties stipulated and agreed that $74,648.14 is the appropriate lodestar figure. The parties were unable to agree, however, whether the lodestar figure should be adjusted in light of the "results obtained" by Florida Cities on appeal. Therefore, consistent with the order of remand from the First District Court, the matter was referred to the Division of Administrative Hearings for the limited purpose of determining whether the agreed upon lodestar figure of $74,648.14 should be reduced based upon the "results obtained" by Florida Cities on appeal. The "Result Obtained" on Appeal. On appeal, Florida Cities argued that it was entitled to a total increase in its rate base of approximately 2.4 million dollars: (a) the 1.6 million dollars it expended to comply with DEP regulations; and (b) the $800,000.00 reduction in rate base which resulted from the PSC's modification of the Capacity Ratio. In effect, Florida Cities argued that it should be allowed to treat 100 percent of its recoverable costs as its rate base. As a result of the First District Court's decision and assuming a Capacity Ratio of 98.6 percent will be achieved, Florida Cities was successful on appeal in increasing its rate base by approximately 2.2 million dollars. Of this amount, approximately $879,000.00 was attributable to the First District Court's conclusion that the PSC had used the incorrect plant capacity. The remaining 1.3 million dollars was attributable to the First District Court's conclusion that the methodology used by the PSC to determine average annual daily flows was a policy change which was unsupported by the record. Had Florida Cities succeeded on both issues it raised on appeal, it would not have resulted in any appreciable increase in Florida Cities' rate base over the increase in rate base allowed by the First District Court. A utility plant cannot be treated as used and useful in excess of 100 percent of its costs. The two issues Florida Cities raised on appeal, at least as to the 1.6 million dollars it was required to expend to meet DEP regulations, were alternative theories for achieving the same result: total inclusion of the 1.6 million dollars in its rate base. Florida Cities contended that the 1.6 million dollars should have been included directly in its rate base because it was required to make the expenditure by a government agency. In the alternative, it argued that the Capacity Ratio used to determine the amount of recoverable costs considered used and useful should have been increased to 100 percent. This alternative argument would also have resulted in inclusion of the 1.6 million dollars in its rate base. Regardless of which argument was accepted by the First District Court or whether the First District Court had accepted both arguments, Florida Cities could not have achieved any substantially greater result than it did. As to the remaining $800,000.00 reduction in 1992 rate base, Florida Cities' argument concerning the direct inclusion of amounts required to be expended to comply with DEP regulations did not relate to this amount. Only Florida Cities' two-pronged argument concerning the Capacity Ratio supported Florida Cities' argument that its rate base should be increased by this amount. Florida Cities' arguments concerning this amount was successful. I. The Consequences of Florida Cities' Failure to Prevail on All Issues. Had Florida Cities prevailed in its contention that costs incurred as the result of meeting government requirements should be included directly in rate base, such a decision would have had significant consequences to most, if not all, utilities in Florida. Such a decision would also have probably had an impact on future rates approved for Florida Cities. Having failed to prevail on this issue, however, prevented the application of this theory by other utilities in Florida to the determination of their rate bases and to the determination of the appropriate rate base for Florida Cities in the future. The loss of the benefit to other utilities and Florida Cities in future rate cases, which would have occurred had Florida Cities prevailed, did not have any impact on the "results obtained" by Florida Cities in the immediate proceedings. While the failure of the argument and the avoidance of the impact on rate-making, which would have resulted had Florida Cities prevailed, was of great consequence to the PSC, the rejection of the argument by the First District Court did not reduce the result Florida Cities hoped to have obtained on appeal. J. Attorney's Fees and Costs of Proceedings Before the Division of Administrative Hearings. Florida Cities incurred attorney's fees and costs in the instant proceeding before the Division of Administrative Hearings. Florida Cities has sought recovery of those fees and costs. The parties have not agreed upon the appropriateness of the inclusion of such fees and costs. Mr. Schiefelbein acted as lead counsel during the attorney's fees phase of this matter. As of April 23, 1998, four days before the hearing before the Division of Administrative Hearings, Florida Cities had incurred the following attorney's fees during the attorney's fees phase of this matter: Attorney Hourly Rate Total Fees Mr. Schiefelbein $150.00 $6,135.00 Mr. Gatlin $175.00 490.00 Ms. Cowdery $150.00 37.50 Total $6,662.50 It was estimated that an additional 22 hours of Mr. Shiefelbein's time would result in an additional $3,300.00 of fees attributable to completion of the attorney's fees phase of this proceeding "through a Final Order of the Administrative Law Judge." This estimate was based upon 4 hours for witness preparation, 4 hours for other hearing preparation, 4 hours to attend the hearing, and 10 hours for review of the hearing transcript and submittal of a proposed order. The hourly rate charged by counsel for Florida Cities for the attorney's fees phase of this proceeding was reasonable and a combined total of 66 hours to complete this phase of the proceeding was a reasonable number of hours to pursue this matter. Mr. Melson, an expert witness for Florida Cities in this proceeding, charged $220.00 per hour for his preparation for and attendance at the hearing before the Division of Administrative Hearings. Mr. Melson spent 2.6 hours preparing for the hearing and 2.5 hours attending the hearing. Mr. Melson's fee amounted to $1,122.00. Mr. Seidman, another expert witness for Florida Cities, charged an hourly rate of $90.00 and spent 20.75 hours in preparing for and attending the hearing. It was stipulated that Mr. Seidman's total fee of $1,867.50 was reasonable. Although Florida Cities did not argue that all fees and costs incurred by it during the attorney's fees phase of this proceeding should be recovered, it did seek recovery of the foregoing fees and costs. Those fees and costs totaled $12,952.00.
