State v. Hawkins, 51772

Decision Date09 November 1978
Docket NumberNo. 51772,51772
Citation364 So.2d 723
PartiesThe Citizens of the STATE of Florida, Petitioners, v. Paula F. HAWKINS et al., Respondents. In re: Petition of HOLIDAY LAKE WATER SYSTEM, INC.
CourtFlorida Supreme Court

Larry Levy, Public Counsel and C. Earl Henderson, Associate Public Counsel, Tallahassee, for petitioners.

Raymond E. Vesterby, Tallahassee, for the Florida Public Service Commission.

Stanley M. Danek and R. M. C. Rose of Myers, Kaplan, Levinson & Kenin, Tallahassee, for Holiday Lake Water System, Inc.

James L. Ade and William A. Van Nortwick, Jr. of Martin, Ade, Birchfield & Johnson, Jacksonville, for General Waterworks Corporation Central Florida District, Jacksonville Suburban Utilities Corporation and Southern Utilities Company, amicus curiae.

SUNDBERG, Justice.

This cause is before us on petition for writ of certiorari to review a utility rate increase granted respondent Holiday Lake Water System, Inc. by the Florida Public Service Commission. We have jurisdiction pursuant to Article V, Section 3(b)(3), Florida Constitution, and Section 367.131, Florida Statutes (1977). The issue presented is whether the Commission departed from the essential requirements of law in utilizing an accounting method to determine rate base which adds back the accumulated depreciation attributable to contributions in aid of construction (CIAC).

On August 2, 1976, respondent Holiday Lake Water System, Inc. (Holiday) requested authority to increase its rates for sewer service. On September 1, 1976, the Commission entered Order Number 7409 suspending the proposed rate schedules and authorizing an interim increase in annual gross revenues from $106,459 to $189,656. Petitioners, acting through Public Counsel, were granted leave to intervene in the proceedings and filed Exceptions to the Examiner's Recommendations. On May 2, 1977, the Commission rendered Order Number 7798, granting an increase in rates sufficient to produce gross annual revenues of $219,344.

The process of setting public utility rates involves at least two essential elements: the utility's rate base and the rate of return. Rate base represents the utility property which provides the services for which rates are charged. The rate of return is a percentage figure which is applied to the rate base in order to establish a reasonable return for the utility's investors. When these two figures are multiplied the net operating income of the utility results. Operating expenses and income taxes are then added to the net operating income to calculate gross revenue. The actual rates charged the customers are determined in such a way as to allow the utility to collect this gross revenue.

In the instant case, approximately half of Holiday's capital is attributable to assets purchased with invested or borrowed capital and the other half to contributions in aid of construction. CIAC funds are collected from customers or developers to defray the expense of extending service to such new customers. Thus they represent capital outside of the utility's debt and equity capital structure. In calculating respondent's rate of return, the Commission determined the original cost of the utility's plant and subtracted the amount representing CIAC funds. The Commission also allowed respondent to claim as an operating expense depreciation upon facilities purchased from investment capital and CIAC funds. Neither of these practices is at issue in this case. What is contested by petitioners is the Commission's further practice of allowing the utility to add back into the computation of rate base a figure which represents that portion of previously deducted depreciation attributable to CIAC property. This is done because, in the Commission's words: "In order to arrive at an investment rate base, all influence of CIAC must be eliminated. To subtract CIAC and the depreciation on CIAC would amount to a double deduction." In re: Petition of Holiday Lake System, Inc., Docket Number 760555- S-CR, Order Number 7798, page 7 (Fla.Pub.Ser.Comm., 1977).

Petitioners assert that the Public Service Commission's accounting practice in determining rate base is inequitable, in that it returns a portion of contributions in aid of construction into the rate base, resulting in a windfall to the utility and unjust rates to its consumers. By allowing a return on property outside of the utility's capital investment structure the Commission exceeds its jurisdiction under Section 367.081(2), Florida Statutes (1975). Respondents counter by arguing that the Commission's accounting method eliminates all influence of CIAC in its rate base calculation and accurately reflects the real investment of a utility. Respondents also argue that the instant ratemaking proceeding resulted in just and reasonable utility rates, hence the actual accounting procedures need not be scrutinized under the "end result" doctrine. Westwood Lake, Inc. v. Dade County, 264 So.2d 7 (Fla.1972). For the following reasons, we accept petitioners' contentions.

It is the Public Service Commission's policy to include only utility investment in determining rate base. In re: Application of Florida Cities Water Company, Docket Number R-72153-WS, Order Number 5822, page 10 (Fla.Pub.Ser.Comm., 1973). Funds derived from contributions in aid of construction are not included, as they represent property acquired from the utility's customers and not from its debt and equity capital structure.

The Commission also properly allows the utility to include the accumulated depreciation of the facilities purchased from investment and CIAC funds in the rate base calculation. In this way the utility is provided with the cash necessary to replace the property as it wears out. Therefore, the total dollar amount of investment and CIAC property stays constant over time, as does the rate base. This is as it should be, since the ratepayers are paying for the cost of using up the equipment which provides services.

Section 367.081(2), Florida Statutes (1975), directs the Commission to "fix rates which are just, reasonable, compensatory, and not unjustly discriminatory," and to provide the utility with a "fair return on the utility's investment in property used and useful in the public service." We believe the Commission exceeds its authority under Section 367.081(2) and contravenes its own policy by adding back the accumulated depreciation of CIAC into the rate base calculation. This procedure reintroduces CIAC property into the rate base structure and results in a windfall to the utility, which earns a return on property other than its own, and unfairness to the ratepayers, who must pay higher rates in spite of their contributed capital.

A series of examples will clarify the Commission's error. Consider a utility with a $1,000,000 plant, with a 40-year life and a 21/2% Annual depreciation rate. Assume further that the plant was financed half by investment capital and half by CIAC. Initially, the utility's rate base will be $500,000, calculated as follows:

                Gross Utility Plant               $1,000,000
                  Less: Accumulated Depreciation     -0-
                                                  ----------
                Net Utility Plant                 $1,000,000
                  Less: CIAC                         500,000
                                                  ----------
                Rate Base                         $  500,000
                

Thus, the rate base equals the amount of debt and equity capital actually invested by the utility.

Now assume the utility is allowed to charge depreciation expense on the entire plant, including that portion funded by CIAC and, in turn, its rates are set by the Commission so as to recover this depreciation expense from the ratepayers. This is the procedure followed by the Florida Public Service Commission and is not disputed herein. After 20 years the utility's situation would be as follows:

                Gross Utility Plant               $1,000,000
                  Less: Accumulated Depreciation     500,000
                                                  ----------
                Net Utility Plant                 $  500,000
                

It is important to note that because the utility's rates were designed to recover depreciation expense, the utility will have received $500,000 in revenues over the expected life of the plant. If this cash is reinvested in the utility to improve or replace equipment, the value of the gross utility plant will rise and the proper calculation will look like this:

                Gross Utility Plant               $1,500,000
                  Less: Accumulated Depreciation     500,000
                                                  ----------
                Net Utility Plant                 $1,000,000
                  Less: CIAC                         500,000
                                                  ----------
                Rate Base                         $  500,000
                

Because the depreciation expense was reinvested in the utility, the rate base remains constant even though after 20 years the non-CIAC property has been fully used up.

Consider now the proper ratemaking treatment if the utility instead uses the cash to pay off its loans and to return the equity capital originally contributed by the owners. In this situation, after 20 years no invested capital would remain and the rate base would...

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8 cases
  • Sarasota County v. Tamaron Utilities, Inc., s. 82-1594
    • United States
    • Florida District Court of Appeals
    • February 23, 1983
    ...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 ......
  • Rolling Oaks Utilities, Inc. v. Florida Public Service Com'n, 87-1070
    • United States
    • Florida District Court of Appeals
    • July 13, 1988
    ...In other words, rate base represents "the utility property which provides the services for which rates are charged." State v. Hawkins, 364 So.2d 723, 724 (Fla.1978). The rate of return which a utility may earn on its investment "is a percentage figure which is applied to the rate base in or......
  • Tamaron Homeowners Ass'n, Inc. v. Tamaron Utilities, Inc.
    • United States
    • Florida Supreme Court
    • September 13, 1984
    ...examine the concept of adding back depreciation on contributed property to the rate base. We examined this concept in State v. Hawkins, 364 So.2d 723 (Fla. 1978), where the Public Service Commission calculated a utility's rate base by taking the total value of all the utility's property, su......
  • Citizens of State of Fla. v. Florida Public Service Com'n, AE-103
    • United States
    • Florida District Court of Appeals
    • January 14, 1983
    ...base an "add-back" of accumulated depreciation on contributions-in-aid-of-construction (CIAC), citing Citizens of the State of Florida v. Hawkins (Holiday Lakes), 364 So.2d 723 (Fla.1978). This contention has no merit. A similar argument was rejected in Citizens of the State of Florida v. F......
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