Florida Cities Water Co. v. State, 96-3812
| Decision Date | 12 January 1998 |
| Docket Number | No. 96-3812,96-3812 |
| Citation | 705 So.2d 620 |
| Parties | 23 Fla. L. Weekly D238 FLORIDA CITIES WATER COMPANY, Appellant, v. STATE of Florida, Florida Public Service Commission, Appellee. |
| Court | Florida District Court of Appeals |
B. Kenneth Gatlin and Kathryn G. W. Cowdery of Gatlin, Schiefelbein & Cowdery, Tallahassee, for Appellant.
Robert D. Vandiver, General Counsel; Diana W. Caldwell, Associate General Counsel of the Florida Public Service Commission, Tallahassee, for Appellee.
Martin S. Friedman, F. Marshall Deterding, and John L. Wharton of Rose, Sundstrom & Bentley, Tallahassee, for Amicus Curiae Florida Waterworks Association, Inc.
Jack Shreve, Public Counsel; Harold A. McLean, Associate Public Counsel, Office of the Florida Public Counsel, Tallahassee, for The Citizens of the State of Florida.
Florida Cities Water Company (Florida Cities) appeals a rate order in which the Public Service Commission (PSC) disallowed approximately 2.4 million dollars that Florida Cities sought to include in its rate base. Florida Cities contends that the PSC overstated the capacity of Florida Cities's North Fort Myers Advanced Wastewater Treatment Plant, then used a novel method--without explaining the shift in methodology--to determine that less than two-thirds (65.9 percent) of the total investment Florida Cities had made in the plant was "used and useful." § 367.081(2)(a), Fla. Stat. (1995). We find these contentions meritorious and reverse for further proceedings before the PSC. But we reject Florida Cities's additional contention that everything it invested to comply with environmental regulations must automatically be included in its rate base.
Florida Cities initiated an earlier ratemaking case in connection with the same wastewater treatment plant, which was assigned Docket No. 910756-SU. At issue in that docket was whether Florida Cities could increase its rate base to reflect moneys expended in upgrading its North Fort Myers plant to an advanced wastewater treatment facility. The upgrade took place in conformity with a consent order entered by the Florida Department of Environmental Regulation (DER). The PSC allowed all of the expenses incurred in upgrading the plant as additions to the rate base, and determined a total rate base of $6,343,868.
In Docket No. 910756-SU, the PSC concluded that the entirety of the advanced wastewater treatment plant was "used and useful," before deciding that all the money spent upgrading it should be included in the 1992 rate base. Preliminarily, the PSC determined that the plant's treatment capacity was one million gallons per day (1.0 MGD). As is customary, the PSC rated treatment capacity in terms of the average daily flow of wastewater over a year's time. Taking into account seasonal variations in demand, the PSC gauged the need for treatment capacity by calculating a peak month daily average flow. The PSC credited evidence that the average daily flow in peak months exceeded 1.0 MGD and concluded on that basis that no part of the plant represented excess capacity, i.e., that the plant was one hundred percent "used and useful."
On January 2, 1992, Florida Cities submitted a "capacity analysis report" to DER. In November of 1991, DER had informed Florida Cities that, because operating reports showed that the utility had exceeded its permitted capacity of 1.0 MGD in each of three consecutive months, Florida Administrative Code Rule 17-600.405 required Florida Cities to submit a capacity analysis report.
After reviewing Florida Cities's report, DER--to whose responsibilities the Florida Department of Environmental Protection (DEP) has since succeeded--informed Florida Cities that it needed to submit "documentation of timely planning, design and construction of needed expansions in accordance with Florida Administrative Code Rule 17-600.405(8)," now codified as Florida Administrative Code Rule 62-600.405(8).
Florida Cities furnished DEP the required documentation, and in September of 1993 applied for a construction permit to increase the North Fort Myers plant's treatment capacity to 1.5 MGD. DEP issued a construction permit authorizing the requested expansion on June 2, 1994. Before construction began, however, the utility directed the design engineers to scale back the project by reducing the design treatment capacity to 1.25 MGD, instead of the permitted 1.5 MGD originally contemplated.
In May of 1995, while construction was under way, Florida Cities filed an application for a rate increase, asking the PSC to include the costs of ongoing plant expansion and certain plant improvements in the rate base, raising the total rate base to $8,404,278. When the final numbers were in, the utility requested a $1,763,689 addition to the rate base, $1,611,673 of which was identified as the cost of expanding and upgrading to meet environmental regulatory requirements.
In due course, the PSC issued a Notice of Proposed Agency Action Order Granting Final Rates and Charges on November 2, 1995, reciting in effect that the plant expansion was one hundred per cent "used and useful" and proposing to include all of the construction costs in the rate base, which would have resulted in a rate increase of 17.89 percent. The Office of Public Counsel, as well as individual Florida Cities customers, challenged this proposed agency action and a hearing ensued.
Ultimately, the PSC entered the final order under review, reducing rather than increasing rates. In its final order, the PSC reduced the rate base by almost $800,000, leaving a rate base of $5,525,915. The PSC did not question the reasonableness of the plant expansion costs or of the amounts expended for improvements but, considering the expanded and improved plant as a whole, recalculated the "used and useful" portion of the plant as only 65.9 percent. This recalculation assumed the accuracy of the PSC's finding that the expanded plant's treatment capacity was the 1.5 MGD permitted, not the 1.25 MGD treatment capacity actually designed and built.
The PSC also changed the method it used to calculate a used and useful percentage. In the 1992 rate case, the PSC made the average daily flow calculated on a peak month basis the numerator of a fraction whose denominator was the plant's treatment capacity (stated in terms of average daily flow over a year's time.) Since the fraction was greater than one, the PSC did not reach the question of a margin reserve. In the present case, the PSC changed the way it arrived at the numerator: Instead of using the average daily flow calculated on a peak month basis, it used the average daily flow calculated on an annual basis (to which it added a "reserve" of 4.58 percent), so reducing the used and useful percentage (addition of the reserve notwithstanding).
We first consider Florida Cities's contention that the PSC was required to include in the rate base all moneys Florida Cities had to spend in order to comply with environmental regulations. We must decide whether capital expenditures that a utility makes in order to meet state (or federal) environmental (or other) governmental requirements 1 must ipso facto be included in the utility's rate base. Finding no controlling Florida precedent, we hold that the PSC must, in considering what to include 2 in the rate base, treat capital improvements required by governmental regulations as "in the public interest," § 367.081(2)(a), Fla. Stat. (1995), but that the PSC must add these expenditures to the rate base only to the extent the improvements they effect or the facilities to which they relate are "used and useful in the public service." Id.
"The commission shall ... consider the investment of the utility in land acquired or facilities constructed or to be constructed in the public interest within a reasonable time in the future ...." § 367.081(2)(a), Fla. Stat. (1995). Capital expenditures necessary to comply with governmental regulations must be "considered" because they are "in the public interest." But utilities are entitled to a fair return only "on the investment of the utility in property used and useful in the public service." Id. Capital expenditures not "used and useful" at present are properly excluded from the rate base, even though reasonably incurred in the public interest. While such expenditures are presumably a proper basis for an allowance for funds prudently invested, no such allowance was requested in the present case.
To require the PSC to add to the rate base any and all expenditures another governmental agency's regulations require a utility to make, without regard to whether the expenditures are "used and useful" for current customers, would in effect transfer ratemaking authority from the PSC to the governmental agency requiring the expenditures. Like the North Carolina Supreme Court, we reject such an approach.
While the opinions and criteria of the [North Carolina Department of Environmental Management (DEM) ], in terms of our environment, are indeed of great importance and should be considered by the Commission and even "accorded great weight" by any utility company management in the planning and operation of its business, the determination of what is required of a utility company or any company under law in terms of the environment is one thing, and the determination of what is required of a utility company under law in terms of rate base and ratemaking is quite another. The latter is the exclusive responsibility of the Utilities Commission.
....
Accordingly, we conclude that it was error for the Commission to arbitrarily or subserviently accept, in place of its own determination upon the evidence before it, the DEM's design criteria of 281,160 gallons per day as the actual plant capacity currently needed for service to existing customers ....
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