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 Whether Petitioner's application to increase its water and sewer rates to its customers in Palm Beach County should be granted; and Whether Petitioner failed to comply with Florida Public Service Commission Orders Nos. 0924 and 8382 directing Petitioner to comply with information submission requirements in connection with its application for rate increase. CONCLUSIONS and RECOMMENDATION Petitioner's rate increase request should he granted in accordance with the findings in this recommended order. Such rates are just, reasonable, not unjustly discriminatory and consistent with Section 367.081, Florida Statutes (Supp. 1980) Commission Orders No. 8924 and 0382 did not, by their terms, direct Petitioner to comply with minimum filing requirements by a date certain. Therefore, Petitioner's lengthy and unexcused delay in complying with such requirements does not constitute a violation of the Orders.
Findings Of Fact Background In May, 1978, Petitioner, Mangonia Park Utility Company ("UTILITY"), filed with the Respondent, Florida Public Service Commission ("COMMISSION"), applications to increase, on an interim basis, its sewer and water rates to its customers in Palm Beach County, Florida. By Order Nos. 8924 and 8382, issued on June 21 and July 7, 1978, respectively, the COMMISSION suspended the proposed rates, approved interim water and sewer rate increases, found that the UTILITY's application did not comply with the COMMISSION's minimum filing requirements, and acknowledged the UTILITY's statement that it would file an application which meets filing requirements by September 1, 1979. Between November, 1979, and April, 1980, the UTILITY supplied additional information but did not fully comply with the minimum filing requirements. On May 15, 1980, the COMMISSION issued an Order requiring the UTILITY to show cause why the interim rates should not be repealed and monetary penalties imposed for the UTILITY's alleged failure to comply with Order Nos. 8924 and 8382. The question of the UTILITY's compliance with those Orders was set to be heard in conjunction with its rate increase application. It was not until May 29, 1980 that the UTILITY submitted a completed application and complied with the minimum filing requirements. On November 5, 1980, the COMMISSION forwarded this case to the Division of Administrative Hearings for the assignment of a Hearing Officer to conduct a formal Section 120.57 hearing. This case was then set to be heard on January 21, 1981. At hearing, the UTILITY called Philip D. Mitchell and Boyd D. Ellis as its witnesses and offered Petitioner's Exhibits No. 1 through 6 into evidence. On February 16, 1981, the COMMISSION timely submitted its proposed findings of fact and conclusions of law. (Testimony of Willis, Ellis, P-2, R-1). II Rate Increase Application The UTILITY owns and operates water treatment facilities consisting of three wells, two pumps, a lime softening unit, and two storage tanks. Since April, 1979, the City of Riviera Beach has provided treatment to the UTILITY's sewage. The UTILITY's sewage facilities now consist of a master lift station, pumps, and sewage lines. The approved test period for this rate proceeding is the twelve months prior to June 30, 1979. During the test year, the UTILITY provided water service to 113 residential customers, 49 general service customers, and one multiple dwelling customer; it provided sewer service to 75 residential customers, 47 general service customers, and one multiple dwelling customer. As a result of its analysis of the UTILITY's application, together with its books and facilities, the COMMISSION proposed various adjustments, almost all of which were accepted and agreed to by the UTILITY. At hearing, issues involving the UTILITY's request for pro forma salary adjustments and recovery for income tax liability were eliminated when it withdrew its request. The only factual issue which remains concerning the requested rate increase is the useful life and depreciation rate which should be applied to the UTILITY's plant and equipment. Useful Life and Depreciation Rate The COMMISSION contends the standard 40-year useful life with a 2.5 percent depreciation rate is appropriate; the UTILITY contends that such a depreciation rate does not take into account changing technology and obsolescence, and that a 25 to 30-year useful life with a 3.3 to 4 percent depreciation rate is more appropriate. The UTILITY acknowledged that the determination of useful life of utility equipment required engineering judgment. However, it presented no testimony by a qualified engineer on the subject. Its evidence consisted solely of its accountant's long- standing "conceptual objection" to use of a 40-year useful life for utility plants. The only competent and credible evidence on the question was presented by the COMMISSION. Its qualified engineer testified that he conducted an on-site independent study of the UTILITY plant and concluded that, in this instance, a 40-year useful life, with a 2.5 percent depreciation rate, was appropriate. In view of the foregoing, it is determined that a 40-year useful life, with a 2.5 percent depreciation rate, should be applied against the UTILITY's plant. (Testimony of Mitchell, Munt). Having thus determined the appropriate depreciation rate for use in this case, the parties have agreed to the following rate- making factors: Rate Base The adjusted test year rate base for the UTILITY's water system is $210,799; the rate base for its sewer system is $65,151. Both are calculated below: RATE BASE TEST YEAR ENDED 06/30/79 WATER SEWER Utility Plant in Service $ 386,611 $ 287,939 Plant Held For Future Use -0- (3,750) Acquisition Adjustment 18,990 -0- Accumulated Depreciation (42,485) (28,541) Amortization of Acquisition Adjustment (4,600) -0- Contribution in Aid of Construction (Net of Amort.) (154,349) (203,069) Working Capital Allowance 6,632 12,572 Income Tax Lag -0- -0- Rate Base 210,799 65,151 (Testimony of Willis, Mitchell, R-3) Net Operating Income The UTILITY's adjusted operating income for the test year - a $15,673 loss (water) and a $46,837 loss (sewer) - together with its rate of return, are depicted below: OPERATING STATEMENT TEST YEAR ENDED 06/30/79 WATER SEWER Operating Revenues $ 46,441 $ 60,192 Operating Expenses Operation 43,759 94,572 Maintenance 9,297 6,002 Depreciation (sic) 4,716 993 Amortization 541 -0- Taxes Other Than Income 3,801 5,462 Income Taxes -0- -0- Total Operating Expenses 62,114 107,029 Operating Income $(15,673) $(46,837) Rate of Return (7.44 perct) (Testimony of Willis, Mitchell, R-3) Capital Structure and Cost of Capital (71.89 perct) The UTILITY's capital structure, and weighted cost of capital, are as follows: COST OF CAPITAL COMPONENT RATIO COST RATE WEIGHTED COST Long-Term Debt Customer Deposits 99 perct 9.84 perct 1 perct 8.00 perct 9.74 perct .08 perct 100 perct 9.82 perct (Testimony of Mitchell, Clinger, R-5) Rate of Return Based on its cost of capital, the parties have agreed that percent constitutes a fair rate of return on the UTILITY's rate base. The UTILITY has a deficit in common stock equity; a return on negative investment is inappropriate. (Testimony of Mitchell, Clinger, (sic), R-5) Rate Structure The UTILITY's current water rates are conventionally structured using a minimum monthly charge which includes a minimum number of gallons and a one-step excess rate over that minimum; its residential and general service sewer rates are structured using a flat rate. The parties agree that the rates should be revised in accordance with what is known as the base facility charge (BFC) rate design. The purpose of this design is to recover the costs of providing service to each particular customer. Its monthly charges consists of two components: A base charge which covers expenses not related to actual water use, such as depreciation, billing and collecting, property taxes, debt interest, maintenance, etc., and a gallonage charge based on the allocated costs associated with pumping, treating and delivering the water to the customer. Sewer rates are similarly structured and directly related to actual water consumption. The BFC rate design structure equitably distributes the fixed and variable costs of providing service to customers and allows them to exercise greater control over the rates which they pay. In implementing the BFC rate design, the COMMISSION makes two specific recommendations which are not opposed by the UTILITY, are reasonable, and should be followed: (1) that public fire hydrants not be charged, and (2) that the monthly charge for private fire lines be one-third of the BFC charge for the particular sized connection. (Testimony of Taylor, R-4A) Required Revenue In order to be allowed the opportunity to earn a 9.82 percent return on its rate base, the UTILITY should file rates which generate annual gross revenue at $83,747 for the water system and $114,792 for the sewer system. This revenue should produce net operating revenue of $20,700 and $6,398, respectively. (Testimony of Mitchell, Willis, R-3) III Alleged Violation of Commission Order Nos. 8924 and 8382 The COMMISSION contends that the UTILITY violated Order Nos. 8924 and 8382 by its failure to comply with minimum filing requirements until May 29, 1980. For such violations, the COMMISSION seeks to impose a penalty of $200. The orders in question do not explicitly direct or order the UTILITY to file an application which complies with the minimum filing requirements by a date certain. Consequently, the UTILITY's lengthy and unexcused delay in complying with such requirements does not constitute a violation of or refusal to comply with the orders in question. (Testimony of Mitchell, Willis, R-1)
Findings Of Fact Cooper City Utilities, Inc. provides water and sewer service to its customers in Broward County, Florida, under the jurisdiction of the Commission pursuant to Chapter 367, Florida Statutes. The company was incorporated in 1973. All of the outstanding stock of the utility was owned by Moses Hornstein until his death on October 28, 1979, when ownership thereof became vested in the estate of Moses Hornstein, deceased. The personal representatives of this estate are Gertrude Hornstein, S. Lawrence Hornstein, and Judith A. Goldman. Gertrude Hornstein serves as president of Cooper City Utilities, Paul B. Anton as vice president, and Lawrence Lukin as secretary. Quality of Service At the hearing, a representative of the Broward County Health Department testified concerning the quality of service. Although some customer complaints had been received, there are no outstanding citations against Cooper City Utilities, Inc., and the quality of the utility's service will be improved when its new lime-softening plant, under construction, is completed in approximately August, 1980. The investigation by the Commission's staff engineer did not reveal any outstanding citations against either the water or sewer treatment facilities. Accordingly, on the basis of the entire record, the evidence supports a finding that the utility is in compliance with all state standards, and that the quality of its water and sewer service is satisfactory. Rate Base and Operating Statement Between the time in July when public hearings commenced, and September 24 when the hearings concluded, the utility abandoned its position on several matters which had been in dispute, leaving only two controverted subjects for resolution. These two remaining areas of disagreement are, (1) the cost of money [because of a pending petition for approval of additional financing (Docket No. 800562-WS)], and (2) the expense for an additional field laborer hired subsequent to the test year, which the utility seeks to have included as a pro forma expense. Based on the stipulation of the parties, the following schedule sets forth the rate base of Cooker City Utilities (Exhibit 15): Water Sewer Utility plant in service $2,331,137 $3,723,347 Plant held for future use (47,989) (166,375) Accumulated depreciation (286,651) (460,297) CIAC (net of amortization) (1,322,487) (2,302,707) Working capital allowance 51,083 37,680 Rate Base $ 725,093 831,648 Based on the stipulation of parties, prior to any consideration of the allowance of any expense for the laborer hired subsequent to the test year, the following schedule sets forth the utility's operating statement (Exhibit 15): Water Sewer Operating Revenues $ 368,562 $ 489,886 Operating Expenses: Operation 346,916 232,406 Maintenance 61,750 69,030 Depreciation 22,447 25,543 Amortization -0- -0- Taxes other than income 55,853 75,043 Other expenses -0- -0- Income taxes -0- -0- Total Operating Expenses $ 486,566 $ 402,022 Operating Income (Loss) $ (118,404) 87,864 5. On the matter of allowance of sufficient revenue to cover the cost of one additional laborer hired after the test year, the estimated annual expense is approximately $7,240. However, to the extent that this employee was hired due to an increase in the number of customers subsequent to the test year, or due to plant capacity not used and useful, it is not a proper pro forma adjustment. Without an affirmative showing that the laborer was necessary during the test year for existing customers, the adjustment should be disallowed, and there is insufficient evidence in this record to support such a finding. On the issue of cost of money, during the test year the utility's capital structure was composed of one hundred percent debt at a stated cost of ten percent. In Docket No. 800562-WS the company seeks Commission authority to borrow an additional sum of $450,000, and it plans to amend this application to include authority to borrow $400,000 more in order to make refunds to customers in compliance with a Commission order which was upheld in Cooper City Utilities, Inc. v. Mann (Fla. Sup. Ct. Case No. 58,047, September 12, 1980). However, the utility's proposed debt has not yet been approved by the Commission, and will not be incurred until some time in the future, if approved. In these circumstances, it is not appropriate to take the cost of new debt into consideration in determining cost of capital in this rate case. The evidence in the record supports a ten percent cost of capital. The earned rate of return for the water system is a negative 16.33 percent. The earned rate of return for the sewer system is 10.57 percent. Therefore, the utility's water rates should be increased, and its sewer rates should be decreased, to achieve an overall ten percent rate of return. Accordingly, the annual revenue requirement for the water system is $564,370, which amounts to an annual revenue increase of $195,808. The annual revenue requirement for the sewer system is $485,067, which amounts to an annual revenue decrease of $4,819. Rate Structure The present rates of Cooper City Utilities are structured in the conventional manner, consisting of a minimum gallonage charge and a one-step excess rate over the minimum. The utility proposes. rates with the same basic structure, but with changes in the minimum charge and the minimum gallonage allowance. However, the Commission has consistently taken the position that any rate that requires customers to pay for a minimum number of gallons, whether used or not, is discriminatory. Invariably, a base facilities type of rate structure has been required to be implemented in these circumstances. Under the base facilities charge, each customer pays a pro-rata share of the related facilities cost necessary to provide service, and in addition, pays only the cost of providing the service actually consumed under the gallonage charge. The evidence in this record supports the implementation of the base facilities charge form of rate structure. Under its tariff, Cooper City Utilities is authorized to charge guaranteed revenues in an amount equal to the minimum rate for water service and the applicable rate for sewer service for each equivalent residential connection to be served for a period of one calendar year in advance. Under the base facilities charge type of rate structure, the utility should be authorized to collect guaranteed revenues solely in the amount of the base facilities charge.
Recommendation Based upon the findings of fact and conclusions of law set forth above, it is RECOMMENDED that the application of Cooper City Utilities, Inc., 3201 Griffin Road, Suite 106, Fort Lauderdale, Florida, 33312, be granted for the water system and denied for the sewer system, and that the utility be authorized to file revised tariff pages, containing rates designed to produce annual gross revenues of $564,370 for its water system and $485,067 for its sewer system. It is further RECOMMENDED that the utility be required to implement a base facility charge type of rate structure. It is further RECOMMENDED that the utility be required to make appropriate refunds to its sewer customers in amounts to be approved by the Commission. It is further RECOMMENDED that the rate-refunding bond filed in this docket be maintained until the utility has accomplished the refunds indicated above. THIS RECOMMENDED ORDER entered on this 18th day of November, 1980, in Tallahassee, Florida. WILLIAM B. THOMAS Hearing Officer Division of Administrative Hearings 101 Collins Building Tallahassee, Florida 32301 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 18th day of November, 1980. COPIES FURNISHED: Andrew T. Lavin, Esquire Post Office Box 650 Hollywood, Florida 33022 Sam Spector, Esquire Post Office Box 82 Tallahassee, Florida 32302 James L. Ade and William A. Van Nortwick, Esquires Post Office Box 59 Jacksonville, Florida 32201 John W. McWhirter, Jr., Esquire Post Office Box 2150 Tampa, Florida 33601 Alan F. Ruf, Esquire 2801 East Oakland Park Boulevard Fort Lauderdale, Florida 33306 William H. Harrold, Esquire Florida Public Service Commission 101 East Gaines Street Tallahassee, Florida 32301 ================================================================= AGENCY FINAL ORDER ================================================================= BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION In re: Application of Cooper City DOCKET NO. 800415-WS (CR) Utilities, Inc. for a rate increase ORDER NO. 9699 to its water and sewer customers in DOAH CASE NO. 80-1188 Broward County, Florida. ISSUED: 12-16-80 / The following Commissioners participated in the disposition of this matter: WILLIAM T. MAYO GERALD L. GUNTER JOSEPH P. CRESSE JOHN R. MARKS, III Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, William B. Thomas, held public hearings in this matter on July 16 and 17, and on September 23 and 24, 1980, in Cooper City, Florida. The Division of Administrative Hearings assigned Case No. 80-1188 to the above-noted docket. APPEARANCES: Andrew T. Lavin, Esquire Post Office Box 650 Hollywood, Florida 33022 and Sam Spector, Esquire Post Office Box 82 Tallahassee, Florida 32302 for the Petitioner, Cooper City Utilities, Inc. James L. Ade and William A. Van Nortwick, Esquires Post Office Box 59 Jacksonville, Florida 32201 for PCH Corporation Intervenor in opposition. John W. McWhirter, Jr., Esquire Post Office Box 2150 Tampa, Florida 33601 and Alan F. Ruf, Esquire 2801 East Oakland Park Boulevard Fort Lauderdale, Florida 33306 for the City of Cooper City, Florida, Intervenor in opposition. William H. Harrold, Esquire Florida Public Service Commission 101 E. Gaines Street Tallahassee, Florida 32301 for the Respondent, Florida Public Service Commission and the public generally. The Hearing Officer's Recommended Order was entered on November 18, 1980. The time for filing exceptions thereto has expired and no exceptions have been filed. After considering all the evidence in the record, we now enter our order.
Findings Of Fact Quality of Service There were no customers of the utility present at the public hearing, except for the Department of the Navy. As a result, there is no public testimony in the record relating to the quality of the water and sewer service provided by the utility. However, a representative of the Department of Environmental Regulation and an engineer from the Public Service Commission agree that the utility's water treatment meets all relevant quality standards, and its sewage treatment is within acceptable limits. Nevertheless, there exist problems of infiltration into the company's sewage lines which have resulted in variations in its level of treatment efficiency. The Department of the Navy acknowledges that some of these infiltration problems originate at the Navy housing facility, and the Navy asserts that corrective measures will be undertaken. In the meantime, the Navy contends that the sewage flows from its housing facility have been underestimated, resulting in an overstatement of revenue to the utility. However, there is insufficient specific evidence in the record to support a finding of fact resolving this issue. Since the variations in the utility's sewage treatment efficiency are within acceptable levels, the Company's wastewater treatment is found to be satisfactory. Rate Base By its exhibits, the utility has alleged its adjusted rate base to be $59,401 for water and $87,134 for sewer. Public Service Commission adjustments reduce and correctly state the water rate base to be $19,356 and the sewer rate base to be $65,552. The utility contests the removal of $16,530 from sewer rate base as a contribution in aid of construction (CIAC). This amount is the difference between the $155,000 paid by the Duval County School Board to a partnership consisting of the utility's partners and others, and the $138,170 recorded on the books of the utility. It contends the $16,330 represents a contractor's profit to one of the former partners of utility, but this amount is properly recordable as CIAC and should be removed from rate base. Other adjustments are either not contested, or make no material difference in the utility's revenue requirements, and should be accepted. The accompanying schedules 1 and 3 detail the rate base for both water and sewer with appropriate explanations for the adjustments. Cost of Capital Representatives from the utility and from the Public Service Commission presented evidence on the issue of cost of capital. The major area of disagreement relates to the company's capital structure. The Commission contends that the utility is 100 percent debt, while the utility asserts the capital structure to be 52.97 percent equity and 47.03 percent debt. The Commission's contention is based on the annual reports filed by the utility wherein a deficit is reported in the equity account. The utility, however, has made several adjustments to the investment shown in the annual reports which it alleges increase equity from a deficit of $39,804 to a positive amount of $92,727. The first adjustment made by the utility is in the amount of $22,700 to make the amount of investment equal to rate base, in accordance with principles of double entry bookkeeping. However, because revenue requirements of public utilities are based on used and useful plant in service rather than on total assets, it is not uncommon for the rate base to be different in amount from the total capitalization. Thus, this adjustment is unnecessary and improper. The utility's second adjustment increases the amount of investment by $39,464 as the Unrecovered Cost of Abandonment of Utility Plant. The plant to which this adjustment refers was abandoned, and because of the hazards presented by the abandoned structure, it was disassembled and scrapped. The unrecovered costs were written off for tax purposes, but were not written off for regulatory purposes. This amount should be treated as any other loss, and the adjustment to increase investment should be disallowed. When a utility has recovered the cost of a loss due to abandonment through a write off against income, the placement of the amount of the investment in the capital account results in accounting twice for the loss. The third adjustment involves an amount of $57,067 representing loans procured by the utility's partners from a financial institution. Although these loans were made directly to the partners, the proceeds were used by the utility and the company services the debt. The utility contends that these funds are equity, and it has increased the investment account by the amount thereof. However, the intent of the parties to the transaction was that the funds borrowed by the partners were loaned to the utility, not invested in it. Accordingly, the utility's adjustment is improper; the amount of the loan should be considered as debt in the utility's capital structure; and it should be allowed to earn the embedded cost of this debt, but not an equity return on the amount thereof. In summary, since this utility's equity account has a deficit balance, the appropriate capital structure is 100 percent debt. The cost of this debt is its embedded cost, estimated to be 11.75 percent overall, and the weighted cost is 10.21 percent, as shown in the following table. CAPITAL STRUCTURE COMPONENT PERCENT OF AMOUNT CAPITAL COST RATE WEIGHTED COST Mortgage Note $36,593 20.9 8.00 2.312 Loans Outstanding 48,162 38.0 9.69 3.681 Proposed Note 41,870 33.1 12.76 (est) 4.220 TOTAL $126,625 100.0 10.213 perc. These "Amounts" are the non-current portion of the debt. Operating Statements The accompanying schedules 2 and 4 detail the operating statements for both water and sewer, with appropriate adjustments. The utility contests the Commission's disallowance of depreciation on its proforma plant acquisition. However, the plant has not yet been constructed. Thus, although the proforma plant adjustments have been agreed to, depreciation expense thereon cannot be allowed. The utility further challenges a Commission adjustment disallowing depreciation expense on contributed assets. This adjustment is proper and should be allowed. The utility also contends that it should be allowed income taxes, asserting that an unincorporated proprietorship is entitled to the same income tax expense as a corporation, and that the related income taxes do not have to be paid, merely accrued. However, the purpose of the income tax accounts in the NARUC Uniform System of Accounts is to allow entities which pay income accounts in which to record them. There is no provision in the uniform system for recordation of a nonexistent expense. Since the utility admits that the partnership has paid no income taxes, the disallowance is proper. Finally, the utility contests what it claims is disallowance by the Commission of all its proposed amortization of abandoned plant. However, the exhibits reflect that the Commission increased the amount of amortization expense from $2,790 to $3,284 for water, and from $3,016 to $6,468 for sewer, to allow for amortization of the abandoned plant. Revenue requirements The application of a 10.21 percent rate of return to the adjusted rate base for both water and sewer requires that the utility receive gross annual revenues of $33,752 for water and $81,432 for sewer. These revenues represent increases of $9,381 and $23,446 for water and for sewer, respectively. See Schedules 2 and 4 attached). Rate structure The utility provides water service to an average of 67 residential customers, 12 general service customers and 11 multi-dwelling customers (Average 346 Units). It provides sewer service to an average of 26 residential customers, 12 general service customers and 4 multi-dwelling customers (Average 645 Units). The present residential water rates are structured to provide for a minimum quarterly charge, which includes a minimum number of gallons, and a one- step excess rate over that minimum. The proposed rates follow the same basic structure. The present general service water rates are structured in the same manner, except that the rates for this classification are approximately 25 percent higher than residential. The proposed rates follow the same basic structure. The present multi-dwelling water rates are structured in compliance with the provisions of the old Rule 25-10.75, Florida Administrative Code, which provided that the rate for master metered multiple dwelling structures should be 66 2/3 percent of the minimum residential rate, with an equal minimum gallonage allowance included within the unit minimum charge. The total number of gallons to be included within the minimum gallonage allowance was determined by the number of units served, with excess gallons over the cumulative allowance to be billed at the excess residential rate. The proposed races follow the same basic structure for determining the minimum gallonage allowance and excess gallonage over the minimum allowance. The proposed minimum charge per unit has been structured approximately 25 percent higher than the proposed minimum unit charge for residential service. The proposed excess rate has been structured at the same level as general service, which is approximately 25 percent higher than the residential service rate. Any rate structure that requires a customer to pay for a minimum number of gallons, whether those gallons are used or not, is discriminatory. Over 27 percent of this utility's basic residential customers did not use as much as the minimum gallonage allowance during the test year. The average number of gallons consumed in the gallon brackets below the minimum allowance bracket was 3,197 gallons per customer per quarter. A rate structure that requires the general service customers to pay a higher rate than the other classifications of service is also discriminatory. Since the Cost of Service to Multiple Dwelling Structures Rule 25- 10.75, Florida Administrative Code, was repealed by Commission Order No. 7590, issued January 18, 1977 in Docket No. 760744-Rule, it has been the practice of the Public Service Commission to structure this type customer in the general service classification, and to structure water rates under the Base Facility Charge form of rate design. The basic concept of this type rate design is to determine a base charge whose foundation is based on the associated costs of providing service to each type customer. The charge covers associated costs such as transmission and distribution facility maintenance expenses, depreciation, property taxes, property insurance, an allocated portion of customer accounts expenses, etc. The amount of the charge is determined by an equivalent residential connection formula using the standard meter size as the base. There are not any gallons included within the frame of the Base Facility Charge. The second structure is to determine the appropriate charge for the water delivered to the customer. This charge would cover related costs such as pumping expenses; treatment expenses, an allocated portion of customer accounts expenses, etc. The primary reasoning supporting this type structure is that each customer pays a prorata share of the related facility costs necessary to provide service, and thereafter the customer pays for only the actual number of gallons consumed under the gallonage charge. The present residential sewer rates are structured in the manner of a quarterly flat-rate charge for all residential customers. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above that minimum. The present general service sewer rates are structured so that a percentage factor is applied to the water bill to determine the sewer charge. The rates for this classification are structured approximately 25 percent higher than residential. The proposed rates are structured with a minimum charge, which includes a minimum number of gallons and an excess rate above the minimum. The proposed rates are structured approximately 25 percent higher than residential. The present multi-dwelling sewer rates are structured in compliance with the provisions of the old Rule 25- 10.75, Florida Administrative Code, which provided that the rate for sewer service to multiple dwelling units should be 66 2/3 percent of the basic charge for sewer service to single residential units. The proposed rates are structured with a minimum charge for each unit, which includes a minimum number of gallons, and an excess rate over the minimum. The minimum charge per unit and the excess rate are structured approximately 25 percent higher than residential. Since the repeal of Rule 25-10.75, Florida Administrative Code, it has been the practice of the Public Service Commission to structure this type customer in the general service classification of customers, and to structure sewer rates under the Base Facility Charge form of rate design. This should be implemented by the utility for both water rates and sewer rates. The utility has been misapplying its schedule of rates for the commercial sewer classification of service. The schedule calls for 250 percent of the water bill with a minimum charge of $0.15 monthly ($24.45 quarterly). However, the utility has been billing its commercial sewer customers 250 percent of the water bill plus the minimum charge. This amounted to an overcharge to this customer classification of approximately $1190 during the test period. The utility should be required to make the appropriate refund to each commercial sewer customer, and the amount of this overcharge has been removed from test year revenues on the attached schedule 4. The utility is collecting a meter installation charge of $200, and a charge of $246 for each connection to the sewer system, without any apparent tariff authority. Further, the charges made for customer reconnect after disconnection for nonpayment are not adequate to cover the associated costs of this service. An investigation docket should be opened to consider the appropriateness of the meter installation charge, and to receive evidence of actual costs of service restoration. Finally, insufficient facts were presented to support a finding relative to the validity of the utility's sewer service contract with the Navy or the compatibility of the charges for sewer service to the Navy with the utility's tariff. These issues should be revisited during the course of the investigation docket. However, the utility's practice of requiring customer deposits when service is billed in advance should be discontinued.
Recommendation Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the application of Buccaneer Service Company, 1665 Selva Marina Drive, Atlantic Beach, Florida 32233, be granted in part, and that the utility be authorized to receive gross annual water revenue of $33,752, and gross annual sewer revenue of $81,423, by rates to be approved by the Public Service Commission. It is further RECOMMENDED that the utility be required to adopt a Base Facility charge form of rate design for both water and sewer rates, and to make appropriate changes in its tariff. It is further RECOMMENDED that the utility be required to refund to each commercial sewer customer a prorata portion of the total amount of overcharges collected since the beginning of the test year. It is further RECOMMENDED that an investigation docket be opened for the purpose of making further inquiry into the appropriateness of the utility's meter installation charge, to receive evidence of actual costs of service restoration, and to determine the validity of the utility's contract for sewer service with the Navy and the appropriate rate to be charged for this service. And it is further RECOMMENDED that the utility be required to discontinue the practice of collecting customer deposits for service which is billed in advance. THIS RECOMMENDED ORDER entered on this 6th day of August, 1980. WILLIAM B. THOMAS, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact Based upon the evidence presented, the following facts are determined: The UTILITY is owned by Florida Land Company, a Florida corporation, which is a wholly owned subsidiary of The Continental Group, Inc., a New York corporation. In 1975, the UTILITY constructed a water and sewage treatment system to serve a residential and commercial development known as Greenwood Lakes. The UTILITY's water and sewer rates and charges have not changed since the COMMISSION's approval of initial tariffs in 1976. (Testimony of Crosby; P.E. 1.) I. Elements of Ratemaking In fixing the water and sewer rates to be charged by a public utility, the COMMISSION must consider: (1) the value and quality of the service, (2) the utility's rate base, (3) the cost of providing the service, and (4) a fair return on the utility's rate base. Section 367.081(2), Florida Statutes (1979). Each element is addressed separately below. Quality of Service The UTILITY's water supply is provided by two deep wells with a total capacity, based on present pumps, of 2.376 million gallons per day. Treatment is provided by aeration and chlorination. The water system operates under an operating permit issued by the Department of Environmental Regulation. Water samples and reports are made monthly, and the water system presently meets all drinking water standards of the Department. (Testimony of Crosby, Heiker; R.E. 1.) The UTILITY's sewage treatment system consists of a .10 million gallon per day package plant; treatment consists of extended aeration followed by gravity flow to evapo-percolation ponds providing on-site disposal. It operates under an operation permit issued by the Department of Environmental Regulation, and complies with Department's sewage collection and treatment standards. (Testimony of Crosby.) Rate Base Rate base consists of the UTILITY property that is used and useful in providing the service for which rates are charged. In its application, the UTILITY proposed a rate base; after review, the COMMISSION suggested several adjustments, which are not opposed by the UTILITY. Use of a year-end test year is appropriate because of the extraordinary growth experienced by the UTILITY during 1979. For the test year ending December 3l, 1979, the UTILITY's adjusted water rate base is $135,977; the adjusted sewer rate base is $131,764. They are calculated as follows: RATE BASE Test Year Ending December 31, 1979 WATER SEWER Utility Plant in Service $190,969 $225,722 Construction Work in Progress 1,214 4,297 Accumulated Depreciation 18,920 2/ 14,801 2/ Contribution in Aid of Construction (CIAC)-Net of Amortization -48,831 -86,458 Working Capital Allowance 3,030 3,198 Income Tax Lag -0- - 194 RATE BASE $135,977 $131,764 (Testimony of Lowe; P.E. 1, 2, 3, R.E. 3.) Operating Statement The following Operating Statement reflects the UTILITY's revenue earned, costs of operation, and not-operating income during the test year. It shows that the UTILITY suffered a loss of $26,429 in its water operations and a loss of $19,101 in its sewer operations. OPERATING STATEMENT Test Year Ending December WATER 31 , 1979 SEWER Operating Revenues: $10,172 Operating Expenses: Operatic 25,314 $14,365 22,436 Maintenance -0- -0- Depreciation 18,199 10,132 Amortization -0- -0- Taxes Other Than Income 1,088 898 Other Expenses -0- -0- Income Taxes -0- -0- TOTAL OPERATING EXPENSES $44,601 $33,466 Operating Income ($26,429) (Testimony of Lowe; P.E. 1, 2, 3, R.E. 3.) ($19,101) The UTILITY requests an annual water revenue increase of $36,154, and a sewer revenue increase of $31,715, which would produce gross annual revenue of $54,326, and $46,080, respectively. The adjusted Operating Statement, constructed to reflect this additional requested revenue, is as follows: CONSTRUCTED OPERATING STATEMENT Test Year Ending December 31, 1979 WATER SEWER Operating Revenues: Operating Expenses: $54,326 $46,080 Operation 30,634 25,580 Maintenance -0- -0- Depreciation 3,812 2/ 3,436 2/ Amortization -0- -0- Taxes Other Than Income 2,280 1,941 Other Expenses -0- -0- Income Taxes 1,424 968 TOTAL OPERATING EXPENSES $38,150 $31,925 Operating Income $16,176 $14,155 Rate Base $135,977 $131,704 Rate of Return 11.90 percent 10.74 percent (Testimony of Lowe; P.E. 1, 2, 3, R.E. 3.) Rate of Return The capital structure of the UTILITY is as follows: AMOUNT PERCENT TO TOTAL Debt 4/ $1,450,000 60.90 Customer deposits 6,389 .27 Common Equity 924,550 30.83 TOTAL $2,380,947 100.00 The proposed annual gross water revenues of $54,326, and sewer revenues of $46,080 will allow the UTILITY to earn a rate of return of 11.90 percent on its water rate base, and 10.74 percent on its sewer rate base. With debt service costs now in excess of 12.50 percent, the return on equity will be nominal; however, there is no evidence that this will cause the UTILITY's service to suffer. (Testimony of Smith; P.E. 6.) II. Capitalization of Interest on Non-Used and Useful Equipment The UTILITY's plant is larger than necessary to serve its present customers. In its application, the UTILITY seeks COMMISSION approval to capitalize its interest costs on that portion of the UTILITY's plant which is non-used and useful, and excluded from rate base. Capitalization will allow the UTILITY to recover its interest expenses over the useful life of the property involved. The COMMISSION has previously allowed capitalization of interest under similar circumstances, Docket No. 760054-WS, Application of North Orlando Water and Sewer Corporation, Order No. 7455, dated October 4, 1976. Here, the UTILITY's request is reasonable, concurred in by the COMMISSION, and should be granted. (Testimony of NewIon, Cooke, Lowe; P.E. .) III. Rate Structure The UTILITY currently uses a conventional two-tier rate structure. A base facility charge (BFC) rate structure is a more equitable method of distributing costs associated with providing a utility service. Under a BFC structure, customers pay a base charge which covers their pro-rata share of the UTILITY's fixed costs, and a gallonage charge which covers the costs of pumping, treating, and distributing the actual water gallonage used. Such a structure would require the UTILITY to alter its current customer service policy to insure that the base charge is paid during temporary discontinuances of service. (Testimony of Washington.)
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That the UTILITY's application for increased sewer rates and charges be granted and that it be authorized to file revised tariff pages containing rates designed in accordance with the base facility charge concept to produce gross annual water revenues of $54,326 and annual sewer revenues of $46,080; That the UTILITY be required to notify each customer of any rate increase authorized, explaining the reasons for such increase. A letter of explanation should be submitted to the COMMISSION for prior approval; That the UTILITY be allowed to retain all interim revenues collected pursuant to COMMISSION Order No. 9416 and cancel the rate refunding bond previously submitted; and That the UTILITY be allowed to capitalize interest on non-used and useful equipment which is excluded from rate base. DONE AND ENTERED this 5th day of December, 1980, in Tallahassee, Florida. R. L. CALEEN, JR. Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact The Petitioner is a wholly owned subsidiary of Queens Cove Properties, Inc. Mr. Alex B. Cardenas is president of the parent development company as well as the utility. The water system was constructed for the sole purpose of providing water to purchasers of lots in the Queens Cove subdivision. However, the Petitioner obtained certification as a public utility to serve the general area in the belief that it was required to do so. See Section 367.031, Florida Statutes. Lots in this subdivision have sold for $15,000 to $24,000, which includes undifferentiated amounts for availability of water service. The water service is part of a "bundle of rights" which the purchaser obtains with his lot. (e.g. bridge, roads, underground utilities). In addition, existing lot owners have purchased the "bundle of rights" separately from their land (where Queens Cove was not the original property seller) at prices ranging from $4,000 to $8,000. Again, the charge for water service availability was not differentiated from other rights. At the time of the second hearing, the utility had 45 connections--42 single family residences, one developer's office, one model home, and an irrigation outlet. Ten customers testified (five by adoption) at these hearings as to service problems. The water treatment plant is of the reverse osmosis type. This system is complex and costly to maintain, but is useful where as here the raw water contains a high level of natural impurities. The utility has not properly maintained this system and water taste, smell and clarity are generally poor. The customers also experience frequent periods of very low water pressure. Furthermore, they are unable to contact the utility when outages occur after business hours since there is no emergency phone number provided. The testimony of a Department of Environmental Regulation (DER) representative also established that chlorine residuals are not properly maintained and a high coliform reading in June, 1980, will require monitoring by DER. Thus, overall service is unsatisfactory and must be improved before the Petitioner is allowed to receive a return on its investment. See Section 367.081(2), Florida Statutes, which requires the Commission to consider service in setting rates. Profits earned by a utility with service deficiencies such as these would normally be placed in escrow until the problems were corrected. Here, however, the utility does not seek to earn a return on its investment, but only to break even. In addition, there was no competent, substantial evidence adduced by either Petitioner or Respondent to demonstrate what the utility's investment is. Therefore, rate base cannot be determined in this proceeding, and consequently no return can be established. Appendix one hereto details Petitioner's test year expenses as set out in its rate application, with adjustments to correct erroneous entries and to delete or reduce expenses which were not shown to be reasonable and prudent. No controversy exists with the exception of allowances for plant manager compensation, office rent and rate case expense. The Petitioner's request for an annual manager's salary of $20,000 was not supported by the evidence. No salary is currently paid for this function, nor is a plant manager as such required or utilized. Rather, the limited functions of a plant manager can be handled by one of the full time maintenance or administrative employees. This procedure is consistent with management practices in other small, developer-owned water utilities. Such delegation does not, however, relieve the owner from his duty to hire qualified personnel and provide adequate resources. A separate allowance for office rent is not justified. The Petitioner has no office in the immediate area but uses the owner-developer's office in Stuart. There is no need for a separate office under the present organizational structure, and therefore no expense for this item should be authorized. Evidence on rate case expense (attorney and accountant fees) was submitted by post-hearing pleadings pursuant to agreement of the parties. The Petitioner seeks $9,702 rate case expense, amortized over three years, or $3,234 annually. The Respondent proposes to allow $6,000 amortized over five years, or $1,200 annually. As with other expenses, the amount authorized will be paid by customers and any portion disallowed will be borne by the owner of the utility. The rate case expense sought here is $215 per customer, which far exceeds the average water/sewer utility rate case expense of $6.92 per customer. A substantial portion of these expenses were incurred as a result of Petitioner's failure to keep adequate records and its initial decision to proceed without counsel. Therefore, the reduction of authorized expenses to $6,000 proposed by Respondent is appropriate. However, Petitioner's proposed three-year amortization period better represents industry experience and is consistent with current Commission policy. Therefore, the rate case expense authorized is $6,000 amortized over three years, or $2,000 annually. The Petitioner currently bills its customers on a monthly basis using a minimum gallonage charge. This rate design neither encourages conservation of water nor accurately reflects the cost of providing service. Therefore, the utility should be required to adopt the base facility charge rate structure. This charge includes a fixed amount for the customer's share of the utility's fixed costs, as well as a gallonage charge to represent the variable expenses associated with water consumption. Petitioner requested authority to increase its tap-in or meter installation fee from $100 to $200. This increase was authorized on an interim (escrow) basis by Order 9140. The utility has now withdrawn its request for the increase and should return the escrowed amounts to all customers who have paid the $200. In addition, Petitioner should be required to pay interest on customer deposits at the rate of 6 percent prior to July 1, 1980, and 8 percent after that date. See Section 25-10.72, Florida Administrative Code. Since no interest on deposits has ever been paid, the credit must be retroactive to the date of each customer's deposit. Proposed findings of fact were submitted by the Petitioner and the Public Service Commission. To the extent these proposed findings have not been adopted herein or are inconsistent with the above findings, they have been specifically rejected as irrelevant or not supported by the evidence.
Recommendation Based on tide foregoing findings of fact and conclusions of law, it is RECOMMENDED that the petition of Island Services, Inc. be granted in part, and that Petitioner be authorized to file new rates structured on the base facility charge concept, designed to generate gross water revenue of $12,823 annually, based on the average number of customers served during the test year. It is further RECOMMENDED that Petitioner be required to refund $100 to all customers who have paid the interim $200 water connection charge and that its tariff be amended to show that $100 is the authorized charge for this service. It is further RECOMMENDED that Petitioner pay interest on deposits at the annual rate of 6 percent through June 30, 1980, and at 8 percent thereafter, with such payments retroactive to the dates of deposit. DONE and ORDERED this 6th day of August, 1980, in Tallahassee, Florida. R. T. CARPENTER, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675 COPIES FURNISHED: R. M. C. Rose, Esquire 1020 East Lafayette Street Tallahassee, Florida 32301 Marta M. Crowley, Esquire Florida Public Service Commission Fletcher Building, 101 E. Gaines St. Tallahassee, Florida 32301 Douglas E. Gonano, Esquire Citizens Federal Building Suite 200 1600 South Federal Highway Fort Pierce, Florida 33450
The Issue Whether Petitioner's application to increaseits water and sewer rates to its customers in Seminole County should be granted.
Findings Of Fact Based upon the evidence presented at hearing, including consideration of the demeanor and credibility of witnesses, the following facts are determined: I. Application and Retroactive Implementation of Interim Rate Increase By its application, the UTILITY, seeks to increase its water revenue to $158,890, and its sewer revenue to $83,830, by increasing service rates to its customers in Winter Springs, Seminole County, Florida. During the test year ending September 30, 1979, the UTILITY suffered combined losses from its water and sewer operation of $420,692. This is the first rate increase requested by the UTILITY since its inception in 1973. On April 24, 1980, the COMMISSION issued Order No. 9344 which suspended the UTILITY's proposed rate increases but granted it an interim increase under bond. The UTILITY was directed to file revised tariff pages containing residential and general service rates which would allow it to earn total annual gross revenue for water service of $139,277 and total annual gross revenues for sewer service of $83,830. The Order also stated: ". . .that the rate increase contained herein shall become effective for all bills on or after thirty (30) days after the date of this order. . . (Testimony of Blair, Fabelo; P.E. 1, 2, R.E. 3.) The UTILITY implemented the interim rate increase, within its normal billing cycle, on the June 2, 1980, water and sewer service bills. However, these bills were based on meter readings taken on May 10, 1980, for service provided from April 10 to May 10, 1980. Thus, the UTILITY increased its rates to its customers fourteen (14) days prior to April 24, 1980, the effective date of the COMMISSION's order authorizing such increase. The UTILITY's action was, however, taken in good faith, and based on a COMMISSION staff member's representation that the interim rates could properly be included in the June billing. The amount of revenues received from the interim rate increase and collected prior to the effective date of Order No. 9344 is approximately $8,700. (Testimony of Fabelo, Blair; P.E. 1, R.E. 3.) However innocently imposed, the UTILITY's action constitutes improper retroactive ratemaking. The UTILITY should refund to customers of record during the period in question their pro-rata share of revenues collected by the retroactive rate increase. The amount of each refund will depend on the amount of water consumed and paid for during the period of retroactive rates-- approximately April 10 through April 24, 1980. The UTILITY may minimize costs by distributing the refunds as separately itemized credits on its regular service bills. (Testimony of Fabelo; R.E. 3.) II. Factors Relevant to Ratemaking In determining whether a rate increase is justified, the COMMISSION must consider several factors, including (1) quality of service, (2) rate base, (3) a fair rate of return on the utility's investment, and (4) operation and maintenance expenses; each is separately addressed below. (Testimony of Asmus, Lowe.) III. Quality of Service During 1979, several customers of the UTILITY experienced occasional low water pressure in their homes. It is likely that these water pressure problems were caused by fluctuating amounts of electricity supplied the UTILITY by Florida Power Corporation. The UTILITY has recently installed an electronic control panel and Florida Power has installed a direct transmission line to the UTILITY in order to prevent this from reoccurring in the future. Several times during 1980, the UTILITY had its water service interrupted due to a cable-TV company cutting its water lines while laying cable; repairs, however, were quickly made. Few customer complaints have been made to regulatory agencies concerning the quality of the water and sewer service provided by the UTILITY: one complaint on water service was made to the Florida Department of Environmental Regulation in 1979, and subsequently determined to he unfounded; no complaints were made to the Department concerning sewer service. Although several customers testified that the water sometimes caused irritation, tests show that the water meets Florida and federal safe drinking water standards. The sewage treatment provided by the UTILITY also complies with state and federal requirements. The water and sewer service is, therefore, determined to he of satisfactory quality. (Testimony of Blair, Bostwick, Customers.) IV. Rate Base A regulated utility is entitled to an opportunity to earn a fair rate of return on its investment in plants and facilities which are used and useful in providing water and sewer service to the public. The utility investment is referred to as "rate base". Here, the average water and sewer rate base for the UTILITY's test year ending September 30, 1979, is calculated as follows: AVERAGE RATE BASE WATER SEWER Utility Plant in Service $847,287 2/ $1,218,363 Utility Plant held for Future Use (271,153) (608,476) Accumulated Depreciation (82,099) (97,306) Contributions in Aid of Construction (183,749) 3/ (178,456) 3/ (CIAC)--Net Allowance for Working Capital 11,983 4/ 11,851 TOTAL RATE BASE $322,627 $ 354,433 (Testimony of Blair, Asmus, Heiker, Lowe; Respondent's Proposed Findings of Fact and Conclusions of Law, Pg. 3; P.E. 4, R.E. 2.) V. Rate of Return A fair rate of return is the percentage factor that, when multiplied by the rate base, produces revenue that will pay the costs of capital--interest on debt to lenders, and return on equity to stockholders. In this case, after considering the UTILITY's capital structure and that of its parent company, Gulfstream Land and Development Corporation, the parties stipulated that a fair rate of return is determined to be 12.40 percent, and is calculated: COST OF CAPITAL Test Year Ending September 30, 1979 COMPONENT RATIO COST RATE WEIGHTED COST Common Equity 33.3 percent 15.50 percent 5.16 percent Long-Term Debt 53.0 13.67 7.24 Cost-Free Capital 13.7 -0- -0- TOTAL 100.0 percent Midpoint 12.40 percent (Testimony of Lowe, Asmus; Joint Stipulation of Parties, Joint Exhibit 2; P.E. 10.) VI. Operations and Maintenance Expenses The adjusted operation and maintenance expenses, including depreciation and taxes, of the UTILITY for the test year are set out below: CONSTRUCTED STATEMENT OF OPERATIONS Test Year Ending September 30, 1979 WATER SEWER Operating Revenues: $160,531 5/ $83,830 5/ Operating Expenses: Operation 84,275 6/ 90,480 7/ Maintenance 11,586 4,324 Depreciation 12,219 16,014 Taxes Other than Income Tax 7,330 8/ 4,581 8/ Provision for Income Taxes 9,786 9/ -0- TOTAL EXPENSES $125,196 $115,399 Operating Income (Loss): $35,334 ($31,569) (Testimony of Asmus, Lowe; COMMISSION's Proposed Findings of Fact; P.E. 10, R.E. 1.) The depreciation expense indicated above includes an adjustment of $2,015 (water) and $6,788 (sewer) proposed by the UTILITY as a result of a rate base adjustment which properly reclassified plant balances to their proper month. The UTILITY had inadvertently posted plant additions to a year-end entry, rather than to the months the additions were completed. At hearing, the COMMISSION agreed to the rate base adjustment and agreed, "in principle", to the UTILITY's proposed correlative adjustment to depreciation expense. However, in its posthearing Proposed Findings of Fact, the COMMISSION's counsel disputed the UTILITY's adjustment, and offered a substitute adjustment: ". . .However, in actual calculation, the. . . [COMMISSION] disagrees. The utility's adjustment does not consider used and useful as applied to the expense. In addition, the. . . [UTILITY's] adjustment includes expense on pro-forma plant. The. . .[COMMISSION's] calculation considers these adjustments. (Pg. 4, Paragraph D.) Because factual issues are difficult to resolve by posthearing submittal, evidence should be presented at hearing, where it is subject to cross- examination and rebuttal. At hearing, the COMMISSION did not object to the depreciation expense adjustment presented by the UTILITY; neither did it cross- examine to elicit the method used for its calculation nor move for a continuance based on surprise or inability to adequately verify the UTILITY's figures. Rather, it chose to defer examination of and rebuttal to the UTILITY's evidence until after the conclusion of hearing. Under such circumstances, the COMMISSION's posthearing submittal is insufficient to overcome the competent evidence adduced by the UTILITY. (Testimony of Asmus, Lowe; Respondent's Proposed Findings of Fact, Pg. 3, 4; P.E. 10.) VII. Tariff Modifications By its application, the UTILITY also requested COMMISSION approval of proposed water and sewer tariff modifications. By stipulation of the parties, the following modifications to the UTILITY's tariffs are warranted: The initial connection charge and reconnect charge on delinquent accounts is TEN AND NO/100 DOLLARS ($10.00) during working hours and FIFTEEN AND NO/100 DOLLARS ($15.00) after working hours. Customer deposit shall be FIFTY AND NO/100 DOLLARS ($50.00) for both water and sewer service and TWENTY-FIVE AND NO/100 DOLLARS ($25.00) for either water service alone or sewer service alone. Customer deposits may be increased to the foregoing sums on delinquent accounts after giving thirty (30) days' written notice, which notice shall be separate and apart from any bill for service. (Testimony of Fabelo; Prehearing Stipulation; P.E. 1, R.E. 3.) VIII. Rates The UTILITY seeks, and the COMMISSION recommends approval of these specific rates and charges: WATER RATES RESIDENTIAL RATES Base facility charge per month based on meter sizes for zero consumption. METER SIZE 5/8" x 3/4" $ 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 Gallonage Charge-Per 1,000 gallons .75 General Service Base Facility charge per month based on meter sizes for zero consumption. METER SIZE 5/8" x 3/4" $ 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 3" 80.00 4" 125.00 Gallonage Charge-Per 1,000 gallons .75 SEWER RATES RESIDENTIAL RATES Base facility charge per month $ 5.00 First 10,000 gallons-Per 1,000 gallons .75 Over 10,000 gallons-Monthly flat rate 12.50 General Service Base facility charge per month based on motor size for zero consumption. METER SIZE 5/8" x 3/4" 5.00 1" 12.50 1-1/2" 25.00 2" 40.00 3" 80.00 4" 125.00 Gallonage Charge-Per 1,000 gallons .75 These requested rates are structured using a base facility charge (BFC) rate design. This rate design requires customers to pay: (1) their pro-rata share of the UTILITY's fixed facility costs, and (2) a charge for pumping, treating, and delivering the actual water gallonage consumed, by 1,000 gallon increments; it equally distributes the costs of providing utility service and the COMMISSION encourages its use. (Testimony of Fabelo; Respondent's Proposed Findings of Fact; P.E. 1, P.E. 3.) These rates proposed by the UTILITY will generate water revenues of $158,890 and sewer revenues of $58,865, which provide a rate of return on water rate base of 10.52 percent, and a zero return on sewer rate base. Combined water and sewer operations will earn a rate of return of .35 percent, whereas a fair rate of return in this case has been stipulated to be 12.40 percent. Although the proposed rates will not provide the UTILITY with a fair return, the quality of its present water and sewer service will not suffer, or be decreased in any manner. (Testimony of Blair, Asmus; P.E. 10.)
Conclusions The water and sewer rate increases and tariff modifications requested by Petitioner are just, reasonable, not unjustly discriminatory, and should be granted. Although the rates will provide less than a fair return, it has not been shown that Petitioner's service will suffer. Petitioner's collection of interim rate increases from its customers prior to the effective date of Order No. 9344 violates Section 367.081(1), Florida Statutes (1979); all revenue so collected should be refunded to its customers. Revised tariff pages should be filed, a letter explaining the rate increases should be sent to Petitioner's customers, and the Petitioner's letter of credit, returned.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED: That the UTILITY's application for approval of the rates specified in Paragraph 11, infra, be granted; That the UTILITY be required to submit, for COMMISSION approval, revised tariff pages containing the new rates and rate structure; That the UTILITY be required to send to its customers a letter, approved in form by the COMMISSION, explaining the rate increases and reasons therefore; That the irrevocable letter of intent drawn on the Pan American Bank, dated May 3, 1980, be returned to the UTILITY and the bank releaned thereafter; That the tariff modifications contained in Paragraph 10, infra, be approved; and That the UTILITY be required to expeditiously refund to its customers the interim rate increases collected prior to the effective date of PSC Order No. 9344. DONE AND ENTERED this 24th day of November, 1980, in Tallahassee, Florida. R. L. CALEEN, JR. Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact The Petitioner is a wholly owned subsidiary of Florida Land Company which is, in turn, a wholly owned subsidiary of the Continental Group, Inc., a New York corporation. The parent developer companies are providing and will continue to provide the required financial backing. The Utility served 421 primarily residential customers at the end of 1979, the test year agreed to by the parties. This was the first rate proceeding involving the Utility since it was established in 1975. Service The Utility is providing satisfactory water and sewer service. There were no service complaints presented at the public hearing by the customers, nor were there any citations or corrective orders outstanding. Rate Base The Utility experienced rapid growth during the 1976 - 1979 period, increasing the number of customers served from 62 to 421. Therefore, year end rate base rather than average rate base should be utilized. 1/ The water and sewer rate bases are $155,920 and $179,360 respectively. These amounts are based on the computations detailed below and incorporate proposed Commission adjustments to which the utility stipulated. In addition, reductions to plant in service and construction work in progress (CWIP) were made by the Utility to reflect excess plant capacity which is of no benefit to current customers. The Utility replaced its reverse osmosis water treatment plant with a lime softening system in 1979. The new facility will be somewhat more expensive to operate but will improve water quality and fire flow (pressure). Because of the reverse osmosis water treatment plant retirement, the $3,615 in building and $34,541 in treatment plant assets remaining on the Utility books should be removed. This is a total adjustment to Utility Plant in Service of $38,156. A further reduction in both water and sewer rate base is needed to adjust the working capital allowance to the standard authorization, which is one-eighth of operation and maintenance expenses. The proper amounts to he authorized in these accounts are $5,338 water and $2,931 sewer. TEST YEAR PER UTILITY UTILITY ADJ. TEST ADJ. TO YEAR PER COMM. ADJ. & CORRECT. TO UTILITY ADJ. UTILITY TEST YEAR EXHIBIT BALANCE TEST YEAR $820376. $-551059. $269317. $-38156. $231161. 57866. -57866. 0. 0. 0. -18841. 17155. -1686. 0. -1686. -238419. 159526. -78893. 0. -78893. Water Rate Base Plant in Svc. C.W.I.P. Accum. Depr. C.I.A.C. Net of Amort. Working Capital Allowance 4755. 1421. 6176. -838. 5338. Income Tax Lag 0. 0. 0. 0. 0. Rate Base $625737. $-430823. $194914. $-38994. $155920. Sewer Rate Base UTILITY COMM. ADJ. TEST UTILITY ADJ. TEST & CORRECT. YEAR PER ADJ. TO YEAR PER TO UTILITY ADJ. UTILITY TEST YEAR EXHIBIT BALANCE TEST YEAR Plant in Svc. $591945. $-205690. $386255. $0. $386255. C.W.I.P. 77919. -77919. 0. 0. 0. Accum. Depr. -2815. 2551. -264. 0. -264. C.I.A.C. Net of Amort. -321611. 112049. -209562. 0. -209562. Working Capital Allowance 2558. 401. 2959. -28. 2931. Income Tax Lag 0. 0. 0. 0. 0. Rate Base $347996. $-168608. $179388. $-28. $179360. Operating Revenues The Utility is seeking water revenue of $41,429 and sewer revenue of $35,550. Computations and adjustments in support of these amounts along with test year expenses are detailed below. Because of the extraordinary expenses associated with replacement of the water treatment plant, it would not be appropriate to utilize test year data to determine operating costs. Therefore, a projected or pro forma operating expense of $42,789 removing replacement expenses is proper. A further adjustment to water operations is required to eliminate $1,987 of depreciation expense on contributed property as not authorized by current law. 2/ In addition, the useful life of various items of equipment should be increased to periods of 20 to 40 years. These extended depreciation periods are based on an engineering study which the Utility does not challenge. Finally, the requested revenue increase of $27,432 and the associated gross receipts tax of $686 are reversed to show test year operating results. The requested sewer revenue increase of $19,413 and gross receipts tax of $485 are also reversed on the sewer operating statement to show test year operating results. As with the water plant, depreciation on contributed sewer plant is disallowed, reducing depreciation by $5,261. Water Operating Statement UTILITY COMM. ADJ. TEST UTILITY ADJ. TEST & CORRECT. YEAR PER ADJ. TO YEAR PER TO UTILITY ADJ. UTILITY TEST YEAR EXHIBIT BALANCE TEST YEAR $ 14006. $ 27423. $ 41429. $-27423. $ 14006. 38039. 11368. 49407. -6678. 42789. 0. 0. 0. 0. 0. 6325. 3762. 10087. -5525. 4562. 0. 0. 0. 0. 0. 1979. 500. 2479. -686. 1793. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. Oper. Revenues Oper. Expenses Operation Maintenance Depreciation Amortization Taxes Other Than Income Other Expenses Income Taxes UTILITY COMM. ADJ. TEST UTILITY ADJ. TEST & CORRECT. YEAR PER ADJ. TO YEAR PER TO UTILITY ADJ. UTILITY TEST YEAR EXHIBIT BALANCE TEST YEAR Total Operating Expenses $46343. $15630. $61975. $-12889 $49084. Oper. Income -32337. 11793. -20544. -14534. -35078. Rate Base $ 825737. $ 194914. $ 155920. Rate of Return -5.17 pct. -16.54 pct. -22.50 pct. Oper. Sewer Operating Statement UTILITY COMM. ADJ. TEST UTILITY ADJ. TEST & CORRECT. YEAR PER ADJ. TO YEAR PER TO UTILITY ADJ. UTILITY TEST YEAR EXHIBIT BALANCE TEST YEAR Revenues $16137. $19413. $35550. $-19413. $16137. Oper. Expenses Operation 20462. 3208. 23670. -233. 23437. Maintenance 0. 0. 0. 0. 0. Depreciation 619. 9060. 9679. -5261. 4418. Amortization 0. 0. 0. 0. 0. Taxes Other Than Income 1747. 630. 2377. -485. 1892. Other Expenses 0. 0. 0. 0. 0. Income Taxes 0. 0. 0. 0. 0. Total Operating Expenses $22828. $12898. $35726. $-5979. $29747. Oper. Income $-6691. $6515. $-176. $-13434. $-13610. Rate Base $847996. $179388. $179360. Rate of Return -1.92 pct. -10. pct. -7.59 pct. Capitalization Debt $ 555,624. 60.96 percent Customer Deposits 6,195. .68 The capitalization of the Utility is as follows: Amount Percent to Total Common Equity 349,627. 38.36 $ 911,446. 100.00 percent Rate Design Both parties seek adoption of a base facility charge rate structure. This rate design provides a fixed charge to each customer served computed on that customer's share of fixed operating costs. The second element of the base facility charge represents the variable cost of water actually used. This rate design provides an equitable method of allocating service costs and has been adopted in virtually all recent water and sewer rate proceedings. The base facility charge should also be utilized where there is a temporary discontinuance of service. The Commission proposes a tariff revision incorporating a monthly standby charge equal to the base facility charge. Again, this method allocates the Utility's readiness to serve costs equitably among both active and temporarily inactive customers.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the petition of Sugar Mill Utility Company be granted in part, and that Petitioner be authorized to file new rates structured on the base facility charge concept, designed to generate gross water revenue of $41,429 annually, and gross sewer revenue of $35,550 annually, based on the number of customers served at the end of the test year. It is further RECOMMENDED that the Petitioner be permitted to retain interim revenues collected pursuant to Respondent's Order No. 9392, and that tie rate refunding bond requirement of said order be cancelled. DONE and ENTERED this 20th day of November, 1980, in Tallahassee, Leon County, Florida. R. T. CARPENTER, Hearing Officer Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301 (904) 488-9675
Findings Of Fact In light of the aforementioned stipulations entered into by the parties, the parties agreed that the only remaining disputed issue was the quality of service being provided by Petitioner. In this connection, the record establishes that Petitioner operates nine water systems in Duval County, one of which is known as the "Milmar Plant." Water furnished through this plant has, in the past, violated applicable regulatory standards with regard to high iron levels and corrosivity, to such an extent that the system was the subject of a Corrective Order entered by the Duval County Public Health Division of the Department of Health and Rehabilitative Services in 1980. However, as a result of Petitioner's agreement to connect to the City of Jacksonville water system, these problems should be alleviated when the switch-over and connection are accomplished. Accordingly, as a condition to approval of the requested rate increase, Petitioner should be required to complete the switch-over and connection to the City of Jacksonville water system prior to the entry of a Final Order granting the requested rate increase.
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.
