Marco Island Utilities, a Div. of Deltona Utilities, Inc. v. Public Service Com'n, 87-2116
| Citation | 566 So.2d 1325 |
| Decision Date | 28 August 1990 |
| Docket Number | No. 87-2116,87-2116 |
| Parties | 15 Fla. L. Weekly D2176 MARCO ISLAND UTILITIES, A DIVISION OF DELTONA UTILITIES, INC., Appellant, and Citizens of the State of Florida, Appellee/Cross-Appellant, v. The PUBLIC SERVICE COMMISSION, Appellee. |
| Court | Court of Appeal of Florida (US) |
Gilbert C. Betz of Mancilla & Betz, Coral Gables, for appellant Marco Island Utilities.
Jack Shreve, Public Counsel, and Stephen C. Burgess, Deputy Public Counsel, Tallahassee, for appellee/cross-appellant Citizens of State of Fla.
Susan F. Clark, Gen. Counsel, Harold A. McLean, Associate Gen. Counsel (on brief), and William H. Harrold, Associate Gen. Counsel, Tallahassee, for appellee Public Service Com'n.
We review by appeal two orders of the Florida Public Service Commission that denied in part the request by Marco Island Utilities for an increase in the rates charged for providing water and sewer services. Order No. 17600, issued after a full evidentiary hearing, granted MIU some relief in respect to its rates but declined to include in the cost base the actual interest cost of 16.1% for the $30,000,000 long-term financing arranged by MIU and its parent organization, and instead allowed MIU only 14.25% interest on such indebtedness. Order No. 18476, entered on the motions for rehearing, granted MIU some additional relief but reaffirmed the ruling on long-term interest costs. MIU's sole point on appeal contends that the ruling allowing only 14.25% for interest cost is not supported by competent, substantial evidence and is contrary to law. The Office of the Public Counsel, having been permitted to intervene in the proceedings below on behalf of the Citizens of the State of Florida, cross-appeals this ruling, arguing that competent, substantial evidence will support only a reasonable and prudent interest cost of 11% to 11.5%. Finding error in the Commission's ruling, we reverse on the Utility's point on appeal and remand for further proceedings. We affirm the issue raised on the Citizens' cross-appeal.
The material facts relevant to this single issue are relatively simple and for the most part undisputed. Marco Island Utilities furnishes water and sewer facilities and services to customers on Marco Island in Collier County. It is a division of Deltona Utilities, Inc., a subsidiary of Deltona Corporation. Deltona Utilities also operates a number of other utility companies around the state. In 1985 MIU applied for a rate increase based on a number of changed factors, including significant capital investments made in the recent past and large capital investment needed in the near future in order to provide necessary quality service to its customers, construct improvements required by regulatory agencies, and meet its existing debt obligation. The Commission required MIU to use a test year ending March 31, 1985.
Regarding the debt obligation, the record establishes that during 1984 MIU and other operating divisions of Deltona Utilities entered into a first mortgage bond-financing transaction in the amount of $30,000,000. The primary purpose of this transaction was to retire an existing $18,000,000 indebtedness that was then overdue and in default, and also to provide additional working capital for necessary capital expenditures. The bond financing was for a term of ten (10) years, commencing in December 1984, at 15.5%. Adding an additional 0.6% for cost of obtaining this financing, the total actual cost amounted to 16.1% annually, and this amount was confirmed and recommended as allowable by the Commission staff. The financing was arranged in the summer of 1984 with a consortium of insurance companies, who in turn had issued to various investors guaranteed income securities that could not be prepaid by the insurance companies. Accordingly, the bond financing included provisions restricting prepayment and retirement of the debt to an involuntary conversion of Deltona Utilities (e.g., condemnation, Act of God, destruction of property, etc.), and imposing a prepayment penalty of 15.5% if retired during the first year and thereafter declining by approximately 1.55% annually. The bonds also included restrictions that would preclude MIU and Deltona Utilities from voluntarily prepaying the indebtedness without the consent of the bondholders and even such consent prepayment would activate the prepayment penalty provisions. Donald McNelley, vice-president and treasurer of Deltona Corporation, described the transaction in considerable detail and explained the critical circumstances that required this refinancing in 1984. He agreed, however, that without the restrictions, refinancing could be achieved currently at about 11% to 11.5% annual interest, and this was consistent with the testimony of other witnesses before the Commission.
In Order No. 17600, the Commission made the following findings of fact in respect to the cost of capital:
Taking into account closing costs, the utility states that the cost of debt should be the cost rate for the first mortgage bonds, or 16.10%. The OPC states that a reasonable interest rate can be calculated by averaging the prime rate, 8 1/2% over the thirteen months from November 1985 through November 1986 and adding 2 1/2%--resulting in a cost rate of 11%.
Our review of the evidence shows that Deltona Utilities, Inc., on December 1, 1984, entered into a first mortgage bond financing in the amount of $30,000,000. The financing was at 15.5% for a term of ten years, but the effective cost rate was 16.1% when the cost of placing the debt was included. Although the parent company guaranteed the debt, the financing is a debt of the utility group.
The utility presented evidence that showed that it was not allowed to refinance the debt without obtaining the agreement of the bondholders, and any such refinancing would incur a substantial penalty. Although it is fairly standard policy to require a penalty for refinancing, we do not think it is proper or appropriate for the utility to enter into an agreement which allows refinancing only with the consent of the bond holders. Therefore, we will not accept this restriction, and we will treat the utility as if it could refinance the debt.
Also, we note that the original financing was the prime rate plus 2.50%, plus approximately .60% for issuance costs. Further, we note that the prime rate, as of December 1, 1984, was 11.25%. Therefore, if the utility had refinanced the debt at that time, an appropriate cost of debt would have been the prime rate of 11.25%, plus the spread of 2.5%, plus the cost of issuance of approximately .50%. Therefore, instead of using the inflated cost of debt of 16.1%, we believe the more appropriate cost rate for debt is 14.25%.
[Emphasis added.] The Commission used this 14.25% interest rate in calculating allowable cost of capital in the utility's rate base. Ruling on MIU's application for rehearing, the Commission ruled in part in Order No. 18476:
For issue No. 1, the utility argued that the Commission had made a mistake when it did not allow the actual cost of the first mortgage bonds. However, a review of the evidence and Order No. 17600 shows that this Commission found that it was neither proper nor appropriate for the utility to enter into an agreement which allows refinancing only with the consent of the bondholders. We also found in Order No. 17600 that it would have been proper to refinance as of December 1, 1984, when the prime rate had dropped to 11.25%. Therefore, the utility's cost of debt was correctly calculated to be 14.25% when the spread of 2.5% and the cost of issuance were added to the prime rate, and no mistake has been made.
[Emphasis added.]
It appears, therefore, that the Commission made two interrelated rulings that must be discussed on this appeal. First, we address the findings that it was not proper or appropriate for the MIU to have agreed to the restriction on retirement except with the consent of the bondholders, and that the debt would be treated as if it could have been refinanced December 1, 1984. Second, we address whether it was permissible for the Commission to settle upon the 14.25% interest rate in its rate-base calculations.
The Commission relies on the following provision in section 367.081(3), Florida Statutes (1985):
The Commission, in fixing rates, may determine the prudent cost of providing service during the period of time the rates will be in effect following the entry of a final order relating to the rate request of the utility and may use such costs to determine the revenue requirements that will allow the utility to earn a fair rate of return on its rate base.
[Emphasis added.] This statutory authority, the Commission contends, empowers it to pass on whether the utility acted prudently in entering into the bond financing with the restriction requiring bondholder consent....
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