Sarasota County v. Tamaron Utilities, Inc., s. 82-1594

• Citation: 429 So.2d 322
• Decision Date: 23 February 1983
• Docket Number: 82-1744,Nos. 82-1594,s. 82-1594
• Parties: SARASOTA COUNTY, a political subdivision of the State of Florida, Tamaron Homeowners Association, Inc., Jacob and Gladys G. Gwynne, and Theodore and Lula I. Wildman, Appellants, v. TAMARON UTILITIES, INC., Appellee.
• Court: Court of Appeal of Florida (US)

Page 322

429 So.2d 322

SARASOTA COUNTY, a political subdivision of the State of Florida, Tamaron Homeowners Association, Inc Jacob and Gladys G. Gwynne, and Theodore and Lula I. Wildman, Appellants, v. TAMARON UTILITIES, INC., Appellee.

Nos. 82-1594, 82-1744.

District Court of Appeal of Florida Second District.

February 23, 1983.

As Clarified on Denial of Rehearings April 6, 1983.

Richard E. Nelson of Nelson, Hesse, Cyril, Smith, Widman & Herb, Sarasota, for appellant, Sarasota County.

Daniel Joy, Sarasota, for appellants, Tamaron Homeowners Association, the Gwynnes and the Wildmans.

M. Joseph Lieb, Jr. of Syprett, Meshad, Resnick & Lieb, P.A., Sarasota, for appellee.

CAMPBELL, Judge.

In this petition for common law certiorari, we consider the question of whether a county ordinance which prohibits treatment of depreciation on property contributed to a utility as an operating expense deprives a utility of its property without due process in violation of article I, section 9, Florida Constitution (1980), and the fourteenth amendment to the United States Constitution.

Tamaron Utilities is a franchised public utility operating in Sarasota County. U.S. Homes, Inc., the parent company of Tamaron Utilities, built the subdivision now served by Tamaron and also provided the initial utility service.

Tamaron applied to the Sarasota County Commission for a rate adjustment. Its application included a figure of $23,500 listed as a general and administrative expense under the subcategory "reserve contingency account." Tamaron explained that this figure represented the annual amount of depreciation taken on property contributed to it, commonly referred to as "CIAC" property or property contributed in aid of construction. The county commission's own rate consultant did not include a similar provision covering depreciation on property contributed to the utility in his report directed to Tamaron's application.

The county refused to allow Tamaron to utilize the depreciation on contributed property as an operating expense, citing section 8(e) of County Ordinance No. 80-62, which specifically excludes reimbursement of depreciation on contributed property as an operating expense.

Tamaron then petitioned the circuit court seeking review of the commission's decision. The court struck section 8(e) of the ordinance as violative of the due process rights secured to Tamaron by the state and federal constitutions. The court also found that violations of procedural due process and equal protection occurred during the rate hearing.

The Tamaron Homeowners Association and certain affected individuals then intervened and sought a rehearing which the circuit court denied. The homeowners and the county appealed, and this court then elected to treat that appeal as a petition for common law certiorari. We have jurisdiction pursuant to article V, section 4(b)(3), Florida Constitution (1972), and rule 9.030(b)(2)(B), Florida Rules of Appellate Procedure.

Before discussing the specific legal issue presented here, an identification and explanation of terms important in the utility rate-making process is extremely helpful.

(a) Rate Base. The Florida Supreme Court defined rate base in State v. Hawkins, 364 So.2d 723 (Fla.1978), as representing "the utility property which provides the services for which rates are charged." 364 So.2d at 724. It is usually established by utilizing one of three primary or major methods of calculation.

The first method is original cost, defined by the Federal Power Commission as the cost of the utility plant to the person first devoting it to public use. There are several variations of this method. For example, the prudent investment method values the plant at the cost of the original investment if prudently made, see City of Miami v. Florida Public Service Commission, 208 So.2d 249 (Fla.1968), while the historical cost variation is an estimate of the prudent investment and is used when the real cost figures are unavailable. The second method examines the fair value of the utility's property at the time of the rate inquiry and when the property is in public service. The third method uses the reproduction cost of the existing plant. 64 Am.Jur.2d Public Utilities § 138 (1972).

Neither the United States nor the Florida Constitutions require that any specific method be used to determine the rate base so long as the method does not create an unreasonable or confiscatory rate. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). Most states, including Florida, calculate the rate base using the original cost method. Westwood Lake, Inc. v. Dade County, 264 So.2d 7 (Fla.1972); General Telephone Co. v. Carter, 115 So.2d 554 (Fla.1959); Jacksonville Gas Corp. v. Florida Railroad & Public Utilities Commission, 50 So.2d 887 (Fla.), cert. denied, 342 U.S. 820, 72 S.Ct. 38, 96 L.Ed. 620 (1951). But see Tampa Electric Co. v. Watson, 146 Fla. 695, 1 So.2d 739 (1941). Sarasota County Ordinance No. 80-62 by its provisions uses the original cost method for determining rate base.

(b) Rate of Return. The court in Hawkins defined rate of return as the "percentage figure which is applied to the rate base in order to establish a reasonable return for the utility's investors." 364 So.2d at 724. A public utility is, of course, entitled to a fair rate of return on invested capital. Gulf Power Co. v. Bevis, 289 So.2d 401 (Fla.1974). Such a return inures to the benefit of the utility's investors and helps maintain the utility's financial integrity. Federal Power Commission v. Hope Natural Gas Co.; Gulf Power Co. v. Bevis, 296 So.2d 482 (Fla.1974). Additionally, a utility must be allowed to earn a rate of return sufficient to meet operating expenses. Village of Virginia Gardens v. Haven Water Co., 91 So.2d 181 (Fla.1956).

In United Telephone Co. v. Mann, 403 So.2d 962 (Fla.1981), the court explained the method used by the Public Service Commission in calculating a rate of return:

The method of calculating a rate of return is primarily based upon calculating the cost of investment capital. There are three main sources of investment capital: debt, preferred stock and common stock. The cost of the first two sources can be mathematically derived whereas the cost of common stock is a matter of economic judgment. Each of these costs expressed in terms of percentage is then multiplied by that particular source's capitalization ratio to achieve a weighted average. The sum of these weighted averages is the rate of return. After this figure is reached, the commission can make further adjustments to account for such things as accretion, attrition, inflation and management efficiency.

403 So.2d at 966. See also Application of St. Joseph Telephone & Telegraph Co., 19 Fla.Supp. 150 (Fla.R.R. & P.U.C.1962). Tamaron Utilities claims that its investment capital was all CIAC property, and, therefore, it has no rate base upon which to set a rate of return so as to recoup any investment. The county's rate consultant agrees with this assertion in his report.

(c) Contributed Property or Contributions in Aid of Construction Property (CIAC). Because a public utility is entitled to a rate of return based only on invested capital, property outside the company's debt and equity capital structure is excluded. Hawkins; Westwood. Such contributions include the construction of facilities for the utility by a developer, as well as connection fees paid by customers moving into the development. Application of Tamarac Utilities, Inc., 45 Fla.Supp. 164 (Fla.P.U.C.1977). Though not expressly applicable here, section 367.081(2), Florida Statutes (1981), contains a detailed description of CIAC property that is helpful:

any amount or item of money, services, or property received by a utility, from any person or governmental agency, 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 utilized to offset the acquisition, improvement, or construction costs of the utility's property, facilities, or equipment used to provide utility services to the public.

Here, there are connection fees as well as property contributed by the developer. Both properly form a part in any calculation of CIAC property.

(d) Operating Expenses. All legitimate expenses incurred by a utility during a test or pro forma year may be recouped. After the rate base is determined, operating expenses, along with taxes, are subtracted from the gross revenue to yield net operating income. This net return will then reveal whether the rate of return is sufficient or whether it is confiscatory.

Operating expenses may be classified via bookkeeping entry in any number of desired headings and subheadings in accordance with generally accepted accounting principles. On an income statement, depreciation expense is usually an allowable inclusion under the heading of general expenses. P. Fess & R. Niswonger, Accounting Principles (13th ed. 1981). Tamaron carries under the heading "general and administrative" expenses an item called "reserve contingency account." It contends that the amount in this account, $23,500, is an amount nearly equal to depreciation taken on CIAC property. The utility also has an additional heading "depreciation expense on noncontributed property" which, along with the reserve fund and other operating expenses and taxes, is subtracted from the gross revenue to obtain the net operating income, in this case, a negative figure. In contrast, the county's rate consultant includes depreciation on noncontributed property under the category "other expenses," but under operating expenses he includes neither a reserve account nor a depreciation expense account for CIAC property.

(e) Depreciation. Depreciation is, of course, a term used to describe the gradual physical and functional decline of property used in business for the production of income. Fess &...