FLORIDA PUBLIC SERV. v. FLORIDA WATERWORKS, 98-1280.

• Decision Date: 10 May 1999
• Docket Number: No. 98-1280.,98-1280.
• Citation: 731 So.2d 836
• Parties: FLORIDA PUBLIC SERVICE COMMISSION and Citizens of the State of Florida, Appellants, v. FLORIDA WATERWORKS ASSOCIATION and Florida Water Services Corporation, Appellees.
• Court: Florida District Court of Appeals

731 So.2d 836

FLORIDA PUBLIC SERVICE COMMISSION and Citizens of the State of Florida, Appellants, v. FLORIDA WATERWORKS ASSOCIATION and Florida Water Services Corporation, Appellees.

No. 98-1280.

District Court of Appeal of Florida, First District.

May 10, 1999.

Robert D. Vandiver; General Counsel; Christiana T. Moore, Associate General Counsel, Public Service Commission, Tallahassee, for Appellant Florida Public Service Commission.

Jack Shreve, Public Counsel; Stephen C. Burgess, Deputy Public Counsel, Office of Public Counsel, Tallahassee, for Appellant Citizens of the State of Florida.

B. Kenneth Gatlin and Wayne L. Schiefelbein of Ruden, McClosky, Smith, Schuster & Russell, P.A., Tallahassee, for Appellee Florida Waterworks Association.

Kenneth A. Hoffman and J. Stephen Menton of Rutledge, Ecenia, Underwood, Purnell & Hoffman, P.A., Tallahassee; Matthew Feil, Florida Water Services Corporation, Apopka; and Arthur J. England, Jr., of Greenberg Traurig, P.A., Miami, for Appellee Florida Water Services Corporation.

BENTON, J.

The Florida Public Service Commission and the Citizens of the State of Florida by and through the Office of Public Counsel appeal a final administrative order invalidating the Public Service Commission's proposed rule 25-30.431. An administrative law judge declared the proposed rule invalid on multiple grounds. We reverse.

Invoking section 120.54(5), Florida Statutes (1995), the Florida Waterworks Association (FWA) petitioned the Public Service Commission (PSC) to initiate rulemaking. As a result, the PSC published notice of rulemaking on August 2, 1996, proposing to adopt a rule on margin reserves which differed in two major particulars from the proposal on the subject FWA had attached to its petition to initiate rulemaking.

FWA then challenged the PSC's proposed rule by filing a petition for determination of invalidity of proposed rule under section 120.54(4), Florida Statutes (1995). On August 23, 1996, Florida Water Services Corporation (as it is now known) filed its own petition for determination of invalidity of proposed rule.

Simultaneously Florida Water Services Corporation (FWSC) submitted what was in effect a copy of the FWA proposal, which it denominated a "proposed lower cost regulatory alternative to the proposed rule." Responding in a revised statement of regulatory cost, the PSC took the position that the alternative did not facilitate just, reasonable, and compensatory rates, and did not therefore "substantially accomplish the objectives of the law being implemented." § 120.541(1)(a), Fla. Stat. (1997).

In due course, the PSC held a rulemaking hearing in which FWA, FWSC, other utilities, the Office of Public Counsel (OPC), the Department of Environmental Protection (DEP), and PSC staff participated. Apparently because of presentations made at the rulemaking hearing, the PSC published a notice of change reflecting changes in the proposed rule regarding the treatment of contributions-in-aid-of-construction in relation to margin reserves. Although the changes the PSC proposed worked in their favor, FWA and FWSC filed new petitions for determination of invalidity of proposed rule addressed to the proposed rule as changed.

All challenges to the proposed rule were consolidated for hearing before an administrative law judge, who found that "[p]roposed Rule 25-30.431, Florida Administrative Code is an invalid exercise of delegated legislative authority and may not be utilized by the PSC for its stated regulatory purposes." A wide-ranging final order concluded that (1) the PSC's revised statement of estimated regulatory costs did not meet the requirements of section 120.541 and was so deficient as to be a material failure to follow rulemaking procedures under section 120.52(8)(a); (2) the proposed rule made it "impossible for a utility to determine the nature and extent of the presentation necessary to obtain a margin reserve period of longer than 18 months"; (3) the proposed rule contravened the statute it was implementing by failing to provide a means for utilities to recover costs expended on projects required by governmental regulations; (4) the proposed rule denied the utility full recovery of reuse costs through rates; and (5) no competent substantial evidence supported the proposed rule.

Margin Reserves And Contributions-In-Aid-Of-Construction

A margin reserve reflects the extent to which a utility's investment in property available for future use—although not being used to serve current rate payers—is deemed used and useful in the public service and treated as investment on which a utility is entitled to earn a fair rate of return from current rates. The Legislature has directed the PSC to

fix rates which are just, reasonable, compensatory, and not unfairly discriminatory. In every such proceeding, the commission shall consider ... the cost of providing the service, which shall include, but not be limited to, debt interest; the requirements of the utility for working capital; maintenance, depreciation, tax, and operating expenses incurred in the operation of all property used and useful in the public service; and a fair return on the investment of the utility in property used and useful in the public service. However, the commission shall not allow the inclusion of contributions-in-aid-of-construction in the rate base of any utility during a rate proceeding; and accumulated depreciation on such contributions-in-aid-of-construction shall not be used to reduce the rate base, nor shall depreciation on such contributed assets be considered a cost of providing utility service. The commission shall also 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, not to exceed, unless extended by the commission, 24 months from the end of the historical test period used to set final rates.

§ 367.081(2)(a), Fla. Stat. (1997) (emphasis supplied). We noted in Rolling Oaks Utilities v. Florida Public Service Commission, 533 So.2d 770, 773 (Fla. 1st DCA 1988):

Although the Commission does not have a formal rule or policy requiring a utility to maintain a reserve capacity, in given cases it makes an adjustment to a utility's rate base which, in a sense, rewards the utility for its investment in plant capacity which the utility has readily available, but not currently in use. By allowing a margin reserve increment to the rate base, the Commission permits the utility to charge its existing customers a portion of the cost necessary to have service available for future customers.

As future customers requiring new connections come on line, they are required to pay service availability fees which may be capitalized, in whole or in part, as contributions-in-aid-of-construction.

"Contribution-in-aid-of-construction" means any amount or item of money, services, or property received by a utility, from any person or governmental authority, any portion of which is provided at no cost to the utility, which represents a donation or contribution to the capital of the utility, and which is used to offset the acquisition, improvement, or construction costs of the utility property, facilities, or equipment used to provide utility services.

§ 367.021(3), Fla. Stat. (1997). When a utility's rate base includes a margin reserve and contributions-in-aid-of-construction accompany new connections, the utility's own investment in anticipation of the new customers' need for service is supplanted by the new customers' contributions-in-aid-of-construction each time a new customer connects to the system. Incrementally these contributions-in-aid-of-construction replace the utility's own original investment in reserve capacity.

"Moneys received as contributions-in-aid-of-construction cannot be included `in the rate base of any utility during a rate proceeding.' § 367.081(2)(a), Fla. Stat. (1997). See Florida Waterworks Ass'n v. Florida Public Serv. Comm'n, 473 So.2d 237, 243 (Fla. 1st DCA 1985)." Southern States Utils. v. Florida Pub. Serv. Comm'n, 714 So.2d 1046, 1057 (Fla. 1st DCA 1998). Consistently since the statute was amended to disallow contributions-in-aid-of-construction in rate base, Ch. 80-99, § 10, at 383, Laws of Fla., the PSC has interpreted section 367.081 to require that margin reserves be decreased by the imputation of contributions-in-aid-of-construction. See, e.g., In re Application of Marion Oaks Utils., 86 F.P.S.C. 10:403, 10:406 (1986); In re Application of Twin County Util. Co., 85 F.P.S.C. 5:149, 5:152 (1985).

The Proposed Rule

As changed, the rule the PSC proposed to adopt would authorize immediate imputation of only fifty percent (instead of one hundred percent as the PSC originally proposed) of projected contributions-in-aid-of-construction against the margin reserve. The proposed rule would also engender a rebuttable presumption that an eighteen-month margin reserve period is appropriate. Proposed rule 25-30.431 reads:

(1) "Margin reserve" is defined as the amount of plant capacity needed to preserve and protect the ability of utility facilities to serve existing and future customers in an economically feasible manner that will preclude a deterioration in quality of service and prevent adverse environmental and health effects.

(2) "Margin reserve period" is defined as the time period needed to install the next economically feasible increment of plant capacity.

(3) Margin reserve is an acknowledged component of the used and useful rate base determination that when requested and justified shall be included in rate cases filed pursuant to section 367.081, Florida Statutes.

(4) Unless otherwise justified, the margin reserve period for water source and treatment facilities will be 18 months. In determining whether another margin reserve period is justified, the Commission shall consider the rate of growth in the number of equivalent residential connections (ERCs)

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