96-003809RP Florida Waterworks Association, Inc. vs. Florida Public Service Commission Status: Closed DOAH Final Order on Monday, March 2, 1998.

Summary: The rule is an invalid exercise of delegated legislative authority due to lack of discernible standards and a lack of adequate analysis of economic impact.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA WATERWORKS ASSOCIATION, )

)

Petitioner, )

)

vs. ) Case No. 96-3809RP

)

FLORIDA PUBLIC SERVICE COMMISSION, )

)

Respondent. )

_____________________________________)

FLORIDA WATER SERVICES CORPORATION )

(formerly known as SOUTHERN STATES )

UTILITIES, INC.) )

)

Petitioner, )

)

vs. ) Case No. 96-3949RP

)

FLORIDA PUBLIC SERVICE COMMISSION, )

)

Respondent. )

_____________________________________)

FLORIDA WATERWORKS ASSOCIATION, )

)

Petitioner, )

)

vs. ) Case No. 97-3480RP

)

PUBLIC SERVICE COMMISSION )

)

Respondent, )

)

and )

)

OFFICE OF THE PUBLIC COUNSEL, )

)

Intervenor. )

_____________________________________)

FLORIDA WATER SERVICES CORPORATION, )

)

Petitioner, )

)

vs. ) Case No. 97-3481RP

)

PUBLIC SERVICE COMMISSION, )

)

Respondent, )

)

and )

)

OFFICE OF THE PUBLIC COUNSEL, )

)

Intervenor. )

_____________________________________)

FINAL ORDER

A formal administrative hearing was conducted in these

consolidated cases on December 8 through 12, December 17 and

December 22, 1997, in Tallahassee, Florida, before Don W. Davis,

an Administrative Law Judge of the Division of Administrative

Hearings.

APPEARANCES

For Petitioner Florida Water Services Corporation

("Florida Water"):

Kenneth A. Hoffman, Esquire

J. Stephen Menton, Esquire

Rutledge, Ecenia, Underwood,

Purnell and Hoffman, P.A.

Post Office Box 551

Tallahassee, Florida 32301

and

Matthew Feil, Esquire

Florida Water Services Corporation

1000 Color Place

Apopka, Florida 32301

For Petitioner Florida Waterworks Association

("FWA"):

Wayne L. Schiefelbein, Esquire

Gatlin, Scheifelbein and Cowdery

3301 Thomasville Road, Suite 300

Tallahassee, Florida 32312

For Res pondent Florida Public Service Commission

("PSC"):

Christiana T. Moore, Esquire

Mary Ann Helton, Esquire

Division of Appeals

Florida Public Service Commission

2540 Shumard Oak Boulevard

Tallahassee, Florida 32399-1850

For Intervenor Office of the Public Counsel

("OPC"):

Stephen C. Burgess, Esquire

Harold McLean, Esquire

Office of the Public Counsel

812 Claude Pepper Building

111 West Madison Street

Tallahassee, Florida 32399-1400

STATEMENT OF THE ISSUE

The issue in these consolidated cases is whether the PSC's

proposed rule 25-30.431, Florida Administrative Code, constitutes

an invalid exercise of delegated authority.

PRELIMINARY STATEMENT

In these proceedings, Petitioners have challenged a rule

proposed by the PSC which seeks to establish certain ratemaking

policies for water and wastewater utilities. An initial version

of the proposed rule (the "Initial Proposed Rule") was published

in the August 2, 1996 Florida Administrative Weekly, Volume 22,

No. 31, pages 4385-4386. Petitioners timely challenged the

Initial Proposed Rule and those challenges are pending as DOAH

Case Nos. 96-3809RP and 96-3949RP. 1

The challenges to the Initial Proposed Rule were abated

pending the results of a public hearing scheduled by the PSC for

December 10, 1996. After the public hearing, the PSC voted

during an agenda conference on June 10, 1997, to proceed with the

Initial Proposed Rule with a few changes. The modifications to

the Initial Proposed Rule were published by the PSC in a Notice

of Change which appeared in the July 3, 1997 Florida

Administrative Weekly, Volume 23, No. 27, pages 3335-3336.

Petitioners timely filed challenges to the modifications set

forth in the Notice of Change and those challenges are pending as

DOAH Case Nos. 97-3480RP and 97-3481RP. The challenges to the

modifications were consolidated with the challenges to the

Initial Proposed Rule for hearing and disposition. 2

At the hearing, the PSC presented testimony of five

employees: John Williams; Robert Crouch, an expert in PSC water

and sewer regulatory engineering; Marshall Willis, a Certified

Public Accountant (CPA) and expert in water and wastewater

regulatory accounting; Tom Ballinger; and Craig Hewitt, expert

economist specializing in the preparation of statements of

estimated regulatory costs and the analysis of proposed lower

cost regulatory alternatives. In addition, the PSC presented the

testimony of Kimberly Dismukes, an expert in water and wastewater

utility regulatory accounting, finance, rate regulation and rate

policy. The PSC offered nine exhibits into evidence, all of

which were admitted without objection except PSC Exhibit 8. That

exhibit was accepted as a report relied upon by PSC witness Craig

Hewitt, but the hearsay content of the report has been noted.

OPC did not present any witnesses or offer any e xhibits into

evidence.

Florida Water presented the testimony of nine witnesses:

Hal Wilkening, an expert in consumptive use permitting and water

resource planning; John Wehle of the St. John’s River Water

Management District, an expert in water supply policy; W. Scott

Burns of the South Florida Water Management District, an expert

in consumptive use permitting and water policy; Hugh Gower, a CPA

and expert in utility accounting and ratemaking; John Cirello,

Ph.D., President and CEO of Florida Water, expert in

environmental engineering, environmental science and the

planning, design, construction and permitting of water supply and

treatment and wastewater treatment and disposal facilities;

Forrest Ludsen; Bill Goucher, a registered professional engineer

and expert in water and wastewater facility planning, permitting

design and construction; J. Dennis Westrick, a registered

professional engineer, an expert in water and wastewater facility

design, planning, permitting and construction; and David York of

the Florida Department of Environmental Protection ("DEP"), an

expert in wastewater facility engineering and reuse. Florida

Water’s Exhibits 1 through 17 were accepted into evidence.

The FWA presented the testimony of four witnesses: Frank

Seidman, an expert in the preparation of water and sewer rate

applications, the analysis of electric, water and sewer revenue

requirements and rate applications, as well as PSC "used and

useful" policy including margin reserve and imputation policy;

Mike Acosta, an expert in planning, design, permitting, and

construction of water source, water and wastewater treatment and

wastewater disposal facilities; Gerald Hartman, an expert in

environmental engineering with special expertise in water

resources, water quality, wellfield design, water treatment

analysis and design, pumping system analysis and station design,

hydraulic analysis and pipeline design; and James Perry, a CPA

and expert in utility income taxation, utility accounting,

utility finance, and water and sewer utility planning for capital

expenditures. FWA Exhibits 1 through 23 were accepted into

evidence without objection.

A transcript of the proceedings has been filed. At the

conclusion of the hearing, the parties were granted leave to file

proposed final orders more than 10 days from the filing of the

transcript. Those post-hearing submissions have been reviewed in

the course of preparation of this final order.

FINDINGS OF FACT

A. General Ratemaking Principles

1. The PSC regulates those investor-owned wate r and

wastewater utilities in the state which are not subject to county

jurisdiction. Section 367.171, Florida Statutes. Currently, the

PSC regulates approximately 200 water utilities and 150

wastewater utilities in Florida.

2. The general framework for the setting of rates by public

utilities is set forth in the Florida Statutes. Section

367.081(2), Florida Statutes, directs the PSC to establish rates

for regulated utilities that are "just, reasonable and

compensatory and not unfairly discriminating."

Section 367.081(2)(a) requires the PSC to consider the cost of

providing service, which includes the utility’s working-capital

needs, depreciation and the expenses incurred "in the operation

of all property used and useful; and a fair return on the

investment of the utility that is used and useful in the public

service."

3. If a utility’s revenues are not sufficient to enable it

to recover its expenses and earn a reasonable rate of return on

its investment, it can file a rate case with the PSC. In such a

rate proceeding, a "test year" is proposed by the utility and,

upon approval by the PSC, is utilized to provide a 12-month

period of utility operations for purposes of analyzing the

reasonable rates for the period the new rates will be in effect. 3

4. The rate base reflects the portion of the prudent

investment of the utility which is factored into the

establishment of rates. The rate of return to be earned on

investment in rate base is factored into the final rates approved

for the utility.

5. The PSC does not currently have any rules delineating

how it will determine whether an investment made by a utility is

"used and useful in the public service," nor does the PSC have

any rules delineating how it will consider for ratemaking

purposes the investments necessary for a utility to comply with

environmental regulations.

6. Section 367.111, Florida Statutes, provides that "each

utility shall provide service to the area described in its

certificate of authorization within a reasonable time period."

This statute also provides that a utility must provide "safe,

efficient and sufficient service" in accordance with the

provisions of Chapters 403 and 373 which delineate the

environmental regulation and permitting responsibilities of the

DEP and the five water management districts (WMDs) in the state.

Accordingly, a utility’s statutory obligation to serve includes

the obligation to serve in accordance with the regulatory

requirements of the state environmental permitting agencies. A

utility must make investments to ensure its ability to meet the

requirements of the environmental agencies and to be ready to

timely serve future customers. A utility is entitled to recover

its investment necessary to meet its statutory obligations.

7. The PSC has developed a non-rule policy approach which

requires a delineation of the portion of an investment made by a

utility that is directly utilized to provide service to existing

customers. This portion of the investment is considered "used

and useful" and is included in the utility's rate base. 4 The

remainder of what is otherwise a prudent investment is deemed to

constitute "non-used and useful" plant. "Non-used and useful

plant" is not included in rate base. The PSC recognizes as "used

and useful" a "margin reserve" which is added to the rate base so

that a utility can earn on that portion of its investment that is

deemed to be necessary reserve capacity to meet the fluctuating

demands of existing customers and the anticipated demands of

future customers. 5

8. The PSC's "used and useful" approach results in the need

for a "margin reserve" if a utility is to have adequate capacity

to provide service as required. Nonetheless, whether to

recognize a margin reserve has been a recurring issue in

virtually every contested rate case since the late 1970's. OPC

has consistently objected to the recognition of any margin

reserve for water and wastewater utilities.

9. Also pertinent to this proceeding is the PSC's treatment

of Contributions-In-Aid-Of-Construction (CIAC) for water and

wastewater utilities. CIAC are cash or property donations or

payments to a utility company to defray or repay the cost of

constructing the utility system. 6 Some of the PSC's accounting

staff in the late 1970's and early 1980's advocated the policy of

offsetting a utility’s recovery of the cost of plant related to

reserve capacity with anticipated CIAC collections from future

customers. As a result, a non-rule policy of imputing

anticipated CIAC developed. This policy began sometime after the

PSC started applying a "margin reserve."

10. During the mid to late 1980's, most of the PSC

professional accounting staff came to recognize that imputing

CIAC as an offset to margin reserve essentially defeated the

purpose of recognizing a margin reserve. Since that time, there

has been little or no support among the professional accounting

staff of the PSC to continue the policy of imputing CIAC.

However, the PSC has continued its policy throughout the late

1980's up to the present with the exception of only one case.

11. An additional ratemaking concept relevant to this

proceeding is what is referred to as "AFPI." This acronym stands

for Allowance for Funds Prudently Invested. The PSC developed

AFPI as a cost recovery mechanism for non-used and useful plant.

The general purpose of an AFPI charge is to allow utilities to

recover the carrying charges such as depreciation and taxes on

its non-used and useful plant. However, AFPI has not worked as

intended. AFPI is based on estimated collections rather than

actual receipts. Therefore, whether a utility actually recovers

its investment is speculative and collection of AFPI charges is

uncertain at best.

B. Rule Development

12. Sometime in 1991, the PSC studied the issues of margin

reserve and the imputation of CIAC as part of an overall review

of its water and wastewater policies and rules. As part of that

analysis, the PSC staff recommended changing or discontinuing

some of the long-standing PSC policies including the policy of

imputing CIAC.

13. In 1995, the PSC conducted workshops on the issue of

margin reserve and the imputation of CIAC. During that

workshopping process, the PSC staff reached a general consensus

that the PSC's long-standing policies on margin reserve and the

imputation of CIAC needed to be re-evaluated and that the margin

reserve period should be extended.

14. In March 1996, when no specific steps to modify the

policies were forthcoming, the FWA filed a Petition To Initiate

Rulemaking in an effort to compel the PSC to adopt a rule that

included a presumptively valid five-year margin reserve period

without any imputation of CIAC.

15. The PSC voted to not accept the rule proposed by the

FWA and instead decided to publish the Initial Proposed Rule.

16. The Initial Proposed Rule, published in August 1996,

was intended to set forth the PSC's long standing non-rule

policies and simply "get the ball rolling."

17. The PSC conducted an evidentiary hearing on the Initial

Proposed Rule on December 10, 1996. Prior to that hearing,

extensive testimony was pre-filed with the PSC. All of the PSC

staff members who testified and submitted pre-filed comments as

part of the December 10, 1996 hearing recommended in favor of

modification of the long-standing policies. Extensive, unrefuted

expert testimony was presented regarding the problems with the

existing PSC policies and the detrimental impacts of those

policies.

18. After the December 10, 1996 hearing, a team of PSC

staff reviewed and analyzed the evidence. That team consisted of

accountants, engineers, rate specialists, tax experts, and other

personnel of the Division of Water and Wastewater of the PSC.

The team prepared a staff recommendation dated April 2, 1997,

which was intended to set forth a thorough, objective analysis of

the evidence presented, and included a consensus conclusion that

a rule should be adopted to provi de for a margin reserve period

of five years with no imputation of CIAC. None of the PSC staff

submitted a dissenting analysis or alternative recommendation to

the April 2, 1997 report.

19. The PSC did not accept the April 2, 1997 staff

recommendation. Instead, at a "decision conference" on June 10,

1997, where no further evidence was presented, the PSC voted to

proceed with the Initial Proposed Rule with a few modifications,

i.e., distribution systems were deleted and the imputation of

CIAC was reduced from 100 to 50 percent. These modifications

were published in the July 3 Notice of Change discussed in the

Preliminary Statement. As revised, the proposed rule would

continue the PSC's longstanding 18 month margin reserve policy

and would continue the imputation of CIAC, although it would be

at the rate of 50 percent rather than 100 percent.

C. Margin Reserve

20. Margin reserve is intended in part to provide a

recognition in rate base of the time necessary to install the

next economically feasible increment of plant capacity.

21. The concept of a "margin reserve" has been applied by

the PSC on a non-rule policy basis and has been a source of great

controversy for approximately two decades. While the PSC may

consider margin reserve periods of greater than 18 months, the

PSC has, with only a few exceptions, allowed only 18 months

whenever a margin reserve has been authorized. The identical

result in virtually every case despite wide factual differences

has led the industry to conclude that 18 months is a foregone

conclusion irrespective of the nature and extent of the evidence

presented. Moreover, with only one known exception, the PSC has

consistently imputed CIAC as an offset to a recognized margin

reserve. The proposed rule attempts to delineate the factors

which the PSC has purportedly considered for the last 20 years in

determining the appropriate margin reserve period.

22. The proposed rule defines "margin reserve" 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." The additional margin reserve

capacity is placed in the rate base because it is necessary to

meet the utility’s continuing statutory obligation to meet the

fluctuating and increased demands of existing customers as well

as the demand of future customers. The proposed rule also: (1)

applies a presumptively valid "margin reserve" period of 18

months in establishing the used and useful level of investment in

water source and treatment facilities and wastewater treatment

and effluent disposal facilities; and (2) reduces the margin

reserve investment by imputing 50 percent of the anticipated CIAC

collections expressed in terms of the number of Equivalent

Residential Connections (ERCs), which may be collected by the

utility over the authorized margin reserve period.

23. The consequences of not having adequate capacity

available to serve the fluctuating demands of existing customers

or to meet the demands of new customers as they are added to a

system can be very serious. Excess flows from a wastewater plant

can cause spillage and environmental damage with the potential of

adverse health effects. Lack of adequate reserve capacity also

renders a wastewater plant more vulnerable to "plant upsets" with

dire consequences from a health, as well as cost, standpoint.

Further, excess demands on a water plant can result in shutdowns.

D. Imputation of CIAC

24. A utility’s obligation to be ready to serve future

customers is ongoing. By the time any new customer comes online,

the utility has obligations with respect to the next group of

future customers.

25. Investment decisions by a utility must be made in

advance of future demand. Imputed CIAC is based on projected

collections that may never materialize. Thus, anticipated post-

test period contributions are being imputed into the test period.

Imputation of anticipated post-test year CIAC as an offset to

margin reserve can have the effect of eliminating some, if not

all, of the margin reserve recognized in rate base.

26. During the hearing before the PSC on December 10, 1996,

the only evidence presented regarding the imputation of CIAC was

the testimony of PSC staff and expert witnesses on behalf of the

industry who all opposed continuation of the imputation policy.

No evidence was presented in support of the policy.

27. The April 2, 1997 PSC staff recommendation concluded

that "Imputing CIAC reduces the allowed margin reserve [and] this

adjustment often eliminates any investment in margin reserve from

being counted in the allowed rate base amount." The report

quotes with approval numerous arguments presented as to why the

imputation policy was ill-advised and illogical and concludes

with a recommendation to adopt a rule that halts the long-

standing practice.

28. Despite the staff recommendation and without the

support of any additional evidence, the PSC voted to propose a

rule that would continue imputing CIAC against a recognized

margin reserve, although at a reduced rate of 50 percent.

29. At the hearing in these consolidated cases, the PSC

sought to justify the proposed rule’s imputation provisions

through the testimony of Kimberly Dismukes, a former OPC employee

and now a frequent witness on behalf of OPC, who has consistently

testified against the recognition of any margin reserve.

Dismukes’ opinion as to what is appropriate to include within the

margin reserve is not consistent with the definition of margin

reserve in the proposed rule.

30. Dismukes does not believe that the needs of future

customers should be included in a margin reserve. Her "matching

principle" justification for imputation of CIAC has been rejected

by all of the PSC professional staff who presented evidence in

this rule proceeding.

31. Dismukes has conducted no analysis to determine whether

any alternative method adequately allows a utility to recover on

the investments necessary to be ready to meet the demands of

future customers, and has admitted that if there is no such

mechanism, a utility would be precluded under the policy she

advocates from recovering and earning on its required

investments.

32. The only other justification offered in support of the

proposed rule’s imputation provisions is the suggestion that CIAC

could be taxable if not imputed. The prospect that CIAC could be

taxable if not imputed was raised in the early 1980's when the

policy was first developed. However, even before the imputation

practice began, the PSC had been recognizing margin reserves and

there were no tax decisions or opinions which found CIAC to be

taxable.

33. In approximately 1987, the tax law changed and any

potential argument about taxability became moot. Nonetheless,

the PSC continued its non-rule policy of imputing CIAC.

34. The tax laws changed again during the summer of 1996.

While there has been some suggestion that the changes in 1996

might result in the taxability of CIAC if there is no imputation,

there are no tax opinions or interpretations that indicate those

concerns are justified. Concerns about taxability were not noted

in the staff recommendation of April 2, 1997 (which recommended

against continuing the policy of imputing CIAC), even though the

staff recommendation was initialed by the tax expert for the PSC.

E. DEP and WMD Requirements for Water & Wastewater Facilities

35. As noted above, the PSC's enabling statute requires

water and wastewater utilities to comply with applicable DEP and

WMD statutes and regulations. See Section 367.111(2), Florida

Statutes. DEP regulates and has permitting authority over the

construction and operation of water supply and treatment and

wastewater treatment, reuse, and disposal facilities throughout

the state pursuant to part VI of Chapter 403, Florida Statutes.

Florida's five WMDs regulate and have permitting authority over

the uses of the water resources of the state pursuant to parts I

and II of Chapter 373, Florida Statutes.

36. DEP Rule 62-600.405, Florida Administrative Code,

mandates that utilities meet defined activity milestones for the

timely planning, design, permitting and construction of

expansions of wastewater treatment and effluent disposal/reuse

capacity. The rule dictates that a five-year minimum is needed

to fulfill the planning, design, permitting and construction of

wastewater treatment and effluent disposal/reuse capacity

expansions. Designed to insure that adequate treatment and

disposal capacity are available when needed, Rule 62-600.405 is a

pollution prevention measure. For purposes of the DEP rule, it

does not matter whether the flow levels which trigger the

activity milestones emanate from existing or new customers.

37. With regard to requiring specific planning horizons for

expansions of water facilities, DEP intends to develop a rule to

serve a purpose similar to Rule 62-600.405, Florida

Administrative Code. In the meantime, DEP examines water

facility capacity needs on a non-rule policy basis using similar

standards.

38. DEP is charged with administering a State Revolving

Loan Fund (SRLF) program whereby funds are loaned or granted to

utilities for the purpose of constructing water facility

improvements. DEP conditions fund eligibility on a cost-

effectiveness evaluation. In this regard, DEP has found that for

a water facility improvement to be cost-effective, the

improvement must have sufficient capacity to serve demand for no

less than 5 years into the future.

39. Wastewater facilities operating at the edge of capacity

are often at the edge of environmental compliance and public

health problems. Similarly, water facilities with insufficient

capacity also pose environmental compliance issues and risks to

the public health.

40. Recognizing that Florida's water resources are limited,

the Legislature directed Florida's WMDs to develop plans for

meeting the water supply needs of existing and future users over

the next 20 years. In formulating these plans, the WMDs assess

both the needs and sources of water over the required planning

horizon. The assessment of needs and sources and plan

formulation process has revealed that cooperative efforts by

multiple users, in conjunction with WMD programs, as well as

development of alternative water supplies, such as reuse, will be

necessary for future supply needs to be met without unacceptable

impacts on other users and natural systems. Future uses may not

be permitted or more expensive new sources of water will have to

be developed if proposed future uses are inconsistent with the

WMD's consumptive use permit criteria/water supply plans. The

WMD's permit criteria and supply plans are designed to achieve

long-term, cost-effective solutions to the state's supply needs

for existing and future users.

41. To receive a consumptive use permit, the permit

applicant must submit proposals and projections for its water

resource needs and the means and facilities for accessing the

source for the proposed permit duration.

42. Short-term planning for water supply needs has adverse

impacts on the utility, customers, and environment. Five years

is a base minimum for planning water supply needs.

43. Consumptive use permits of a long-term duration, i.e.

up to 20 years, are desirable and cost-effective for the user

because they provide certainty as to the availability of the

source and protection against potential competing uses and

changes in circumstance.

F. Reuse

44. "Reuse" refers to the application of reclaimed water in

accordance with DEP's rules for a beneficial purpose. "Reclaimed

water" refers to water that has received at least secondary

treatment and basic disinfection upon exiting a domestic

wastewater treatment facility. DEP Rule 62-610.200 (46) and

(49), Florida Administrative Code. "Reuse" and "effluent

disposal" are mutually exclusive terms under DEP's rules and

mutually exclusive categories for disposing of treated

wastewater. DEP Rule 62-610.810, Florida Administrative Code. 7

45. The promotion of reuse has been declared by the Florida

Legislature to be a state objective. Since water resources in

Florida are limited and much of Florida's supply sources of

cheap, readily available water h ave been or will be maximized,

reuse is a matter of significant concern to the state and its

environmental agencies. See Sections 373.016, 373.250, 403.064,

Florida Statutes.

46. Reuse projects require significant time and investment

to implement. DEP's reuse rules impose specific redundancy and

reliability requirements on the reuse facility's treatment unit

processes and application capabilities above and beyond what is

imposed for standard treatment and effluent disposal, thereby

increasing treatment and disposal costs.

47. A utility's ability to recover its reuse costs is

essential to promoting reuse; conversely, a utility's inability

to recover its reuse costs as a result of the restricted

application of margin reserve and “used and useful” adjustments

is a disincentive to reuse.

48. In 1989, the Legislature passed Chapter 89-324, Laws of

Florida, creating Section 403.064, Florida Statutes. Subsection

(6) of that law provided, "Pursuant to Chapter 367, the Florida

Public Service Commission shall allow entities which implement

reuse projects to recover the full cost of such facilities

through their rate structure." In 1994, the Legislature passed

Chapter 94-243, Laws of Florida, amending Section 403.064,

Florida Statutes. Subsection (6) was moved to Subsection (10)

and amended as follows:

(10) Pursuant to chapter 367, the Florida

Public Service Commission shall allow

entities under its jurisdiction which conduct

studies or implement reuse projects ,

including but not limited to, any study

required by s. 403.064(2) or facilities used

for reliab ility purposes for a reclaimed

water reuse system, to recover the full ,

prudently incurred cost of such studies and

facilities through their rate structure.

(emphasis supplied.)

This 1994 legislation also created a new Section 367.0817(3),

Florida Statutes, providing, "All prudent costs of a reuse

project shall be recovered in rates."

49. The legislative history contained in the April 25,

1994, House Staff Report for Ch. 94-243 clearly identifies the

cost deprivation which would be worked by the PSC's used and

useful practices as an issue the law was designed to address:

Previously, recovery of [reuse] costs (which

do not necessarily benefit present customers

of the utility, i.e., "used and useful in the

public service") might have arguably been

denied by the commission.

50. Cognizant of the incentive posed by full cost recovery,

the WMDs and DEP supported development of the foregoing

legislation in part to specifically require 100 percent used and

useful treatment for reuse projects.

51. The PSC does not have a current policy on reuse

projects even though Section 403.064(10), Florida Statutes, was

enacted in 1989 and directed the PSC to allow utilities to

recover the cost of reuse facilities in their rates.

52. The PSC has adopted rules which define reuse and

reclaimed water in a manner consistent with DEP's definitions.

However, the PSC continues to apply its "used and useful" and

"margin reserve" policies to all water source, water treatment,

wastewater treatment and wastewater disposal investments,

including wastewater facilities that are classified as reuse by

DEP.

53. The proposed rule would treat reuse facilities the same

as effluent disposal or any other water or wastewater facility

and would apply the PSC's margin reserve and imputation policies

to such reuse facilities. This approach will deprive utilities

of full cost recovery for reuse projects.

G. The Proposed Rule is Not Suppo rted by Competent,

Substantial Evidence

54. The PSC's “used and useful policies” in conjunction

with the proposed rule overlook the cost analysis involved in

sizing new plant increments and actually creates incentives to

build in smaller increments rather than increments that take

advantage of economies of scale.

55. Construction in the water and wastewater industry is

often dependent upon threshold and standard sizing. The proposed

rule fails to take into account the economies of scale involved

in the sizing of new plant increments and penalizes utilities for

sizing their plants based upon economies of scale.

56. Adding plant increments in smaller sizes results in

duplication of planning, engineering, permitting, and other

administrative and operational startup costs.

57. Sizing facilities with larger reserve capacity so as to

take advantage of economies of scale provide a safeguard for

meeting environmental standards, reduces overhead costs, and

provides for long-term cost containment.

58. The financial disincentives created by the PSC's used

and useful and margin reserve policies make it economically

illogical for a utility to add plant in increments that are sized

to take advantage of economies of scale. As a result, the PSC's

regulations are resulting in higher cost to customers in both the

short and long term.

59. The presumptively valid 18-month margin reserve period

set forth in the proposed rule is a continuation of the non-rule

policy followed by the PSC for approximately the last 20 years.

The selection of the presumptively valid 18-month margin reserve

period was not based upon any serious or recent analysis of the

time and effort involved in the planning, design, permitting,

construction and testing of new plant increments.

60. The 18-month margin reserve period set forth in the

proposed rule is a perpetuation of a policy that was developed

during the late 1970's during a time when the permitting

requirements and environmental regulations were significantly

different. The 18-month margin reserve period is inconsistent

with the planning horizons utilized in determining concurrency

requirements for purposes of the state's growth management laws.

There is no credible evidence that 18 months is an appropriate

staging increment for water or wastewater facilities. Its

appearance in the proposed rule is the result of long-standing

historical practices rather than any analysis or evidence. Under

the current permitting and regulatory requirements, the time

frame for bringing a new water facility online ranges from three

to ten years and would typically take between three and one-half

to five or six years. This time frame does not include

construction delays or other possible problems.

61. During the last several years, many environmental

permitting agencies have expressed concerns that the PSC's cost

recovery policies are not consistent with what is required of

utilities by the environmental permitting agencies. Even so,

there has been no updated analysis by the PSC in terms of what is

involved in the planning, design, permitting, and construction

aspects of having reserve capacity available and no analysis of

the impacts of the PSC’s policies on the long-range planning and

long-term costs to utilities and their customers.

62. The minimum planning requirements imposed by the

environmental agencies were developed subsequent to the time that

the PSC developed its non-rule policies on margin reserve and

imputation of CIAC. The overwhelming evidence demonstrated that

those long-standing PSC policies conceived 15 years ago are ill-

advised in view of the changes facing the water and wastewater

industry.

63. DEP and WMD regulations and permitting criteria have

changed significantly since the development of the PSC's non-rule

policy regarding an 18-month margin reserve and CIAC imputation.

The evidence indicates that the PSC has been slow to recognize

the existence and significance of environmental requirements

imposed on utilities, including DEP Rule 62-600.405, Florida

Administrative Code. These regulatory changes have impacted the

time necessary to plan, design, permit, and construct water and

wastewater facilities.

64. Because of the way the PSC's margin reserve and “used

and useful” determinations influence utilities' planning and

plant-sizing decisions, the policies are inconsistent with the

public interest determinations contained within DEP's regulatory

requirements, (Rule 62-600.405, Florida Administrative Code in

particular), and inconsistent with WMD-determined measures needed

to sustain viable long-term water supply for the utilities.

65. Eighteen months of reserve capacity is insufficient to

insure environmental compliance and protection of public health.

66. The proposed rule does not clearly delineate what a

utility must demonstrate or what standard will be utilized in

determining whether a margin reserve period of other than 18

months should be approved.

67. As established at hearing, water in Florida has been

underpriced. Both water and wastewater are unavoidably an

increasing cost industry. The policies of the PSC with respect

to the water and wastewater industry were developed at a time

when water was readily available, cheap, and viewed as virtually

endless. In addition, the policies regarding wastewater were

developed at a time when the environmental regulations were much

less stringent and there were virtually no organized efforts to

reuse water.

68. None of the PSC’s professional staff assigned to look

at the evidence presented in the rule development process

believed that continuation of the 18-month margin reserve period

was appropriate. The shortest margin reserve term that any PSC

professional felt was appropriate was three years. The PSC's

coordinator for the rule development process, John Williams,

testified that, in his professional opinion, a five-year period

was appropriate. This conclusion was the consensus opinion

reflected in the April 2, 1997 staff recommendation.

69. The inadequacy of the 18-month margin reserve per iod is

exacerbated by the perpetuation of the PSC’s long-standing non-

rule policy of imputing CIAC as an offset to a recognized margin

reserve.

70. The Revised Proposed Rule calls for the imputation of

only 50 percent of CIAC as opposed to the 100 percent called for

in the Initial Proposed Rule. This reduction was intended to

respond to some of the complaints voiced by the utilities.

However, the selection of 50 percent as opposed to 100 percent

was not based upon any analysis or study. Imputing 50 percent of

CIAC will, in many instances, still obliterate any margin reserve

that is recognized. Even 50 percent imputation is inconsistent

with the purposes of recognizing a margin reserve and fails to

take into account the continuing obligation of a utility to be

available to serve.

71. The imputation of potential post-test year collections

of CIAC against the margin reserve precludes a utility from the

opportunity to earn a return on the margin reserve investment

included in rate base. Moreover, the imputation of CIAC can

create incentives for a utility to keep its investment in reserve

capacity at a minimum.

72. The decision to codify the long-standing non-rule

policies of the PSC was made without any serious analysis of the

long-term consequences to utilities or customers. It was made

despite the recommendation to change the long-standing policy--a

recommendation of most of the staff who looked at the issue.

73. The PSC acknowledged at hearing that utilities should

be encouraged to undertake planning that recognizes conservation,

environmental protection, and economies of scale. The persuasive

evidence in this case established that the proposed rule is

contrary to those goals.

74. Adoption of the proposed rule will lead utilities to

build plants in small uneconomical increments that will strain

the ability of utilities to comply with environmental

regulations. The ability of PSC regulated utilities to compete

for scarce new water resources and develop alternative water

resources will be jeopardized. It will also contravene the

legislative mandate that reuse be encouraged. Finally,

implementation of the proposed rule could preclude utilities from

the opportunity to earn a return of the investments they must

make to meet their statutory obligations. In summary, as

established by the evidence presented at hearing, the proposed

rule is arbitrary and capricious in that there is no competent

evidence to support it, and it is contrary to the legislative

direction to the PSC to allow utilities to recover the full costs

of reused facilities in their rate base.

H. EIS

75. At the time the Initial Proposed Rule was published,

the 1996 amendments to the Administrative Procedure Act, Chapter

120, Florida Statutes ("APA"), had not gone into effect.

Accordingly, the PSC prepared an economic impact statement (EIS)

under the earlier version of the APA.

76. The EIS analyzed the impacts of the proposed rule based

upon how much money the PSC would save in rate cases from not

having to litigate the margin reserve issue in every case. 8 The

EIS did not analyze the impact on customers and did not analyze

the impact of the policies embodied in the proposed rule on

utilities. Furthermore, the EIS did not analyze the impact of

adopting the proposed rule on the environmental permitting

agencies.

77. The Revised Proposed Rule was published on August 2,

1996. Within 21 days after the publication of the Revised

Proposed Rule, Florida Water submitted a proposed lower cost

regulatory alternative in accordance with the provisions of the

1996 amendments to the APA. The proposed lower cost regulatory

alternative called for a margin reserve of five years with no

imputation of CIAC. Florida Water contended that the adoption of

that proposed lower cost regulatory alternative would

significantly reduce the cost to utilities, the cost to the

permitting agencies and the long-term cost to customers.

78. The PSC did not conduct any serious economic analysis

of the differences between adopting the proposed rule as opposed

to the proposed lower cost regulatory alternative.

79. The PSC prepared a document entitled Revised Statement

of Estimated Regulatory Costs (the "Revised SERC") which was

intended to comply with the requirements of the 1996 APA

amendments.

80. No analysis has been done as to the extra permitting

costs incurred by the agencies, cost to the utilities, or cost to

customers as a result of the 18-month margin reserve period in

contrast with a longer period. The evidence established that

costs to the permitting agencies would be reduced with a margin

reserve period of greater than 18 months.

CONCLUSIONS OF LAW

81. The Division of Administrative Hearings has

jurisdiction over the subject matter and the parties to this

proceeding pursuant to Section 120.56(2), Florida Statutes.

82. Any substantially affected person may seek an

administrative determination of the invalidity of a proposed rule

on the grounds that the proposed rule is an invalid exercise of

delegated legislative authority. See Section 120.56(2), Florida

Statutes.

83. The parties have stipulated to the standing of

Petitioners to challenge the proposed rule on the grounds set

forth in their petitions.

I. Burden of Proof

84. Under the Florida APA, Chapter 120, Florida Statutes,

an invalid exercise of delegated authority is defined as an:

[A]ction which goes beyond the powers,

functions and duties delegated by the

Legislature. A proposed rule is an invalid

exercise of delegated legislative authority

if any one or more of the following apply:

(a) The agency has materially failed to

follow the application rulemaking procedures

set forth in this Chapter.

(b) The agency has exceed its grant of

rulemaking authority, citation to which is

required by Section 120.54(3)(a)1.;

(c) The rule enlarges, modifies, or

contravenes the specific provisions of law

implemented, citation to which is required by

Section 120.54(3)(a)1.;

(d) The rule is vague, fails to establish

adequate standards for agency decisions, or

vests unbridled discretion in the agency; or

(e) The rule is arbitrary or capricious.

(f) The rule is not supported by competent

substantial evidence; or

(g) The rule imposes regulatory costs on the

regulated person, county, or city which could

be reduced by the adoption of less costly

alternatives that substantially accomplish

the statutory objectives.

Section 120.52(8), Florida Statutes.

85. Prior to the 1996 Amendments to the APA, a challenger

had the burden to show by a preponderance of the evidence that a

proposed rule contravened Section 120.52(8), Florida Statutes. 9

86. Under the 1996 APA Amendments, an agency proposing a

rule now has the burden of proof with respect to the issues

raised in the petitions. See Section 16 of Chapter 96-159, Laws

of Florida, codified at Section 120.56(2)(a), Florida Statutes.

87. Since Petitioners have invoked several of the

subsections of Section 120.52(8) in their various challenges, it

is appropriate to summarize how certain of these provisions have

been interpreted and applied.

88. In determining whether a rule is arbitrary or

capricious, the administrative law judge should determine whether

the agency; (1) has considered all the relevant factors; (2) has

given actual, good faith consideration to those factors; and (3)

has used reason rather than whim to progress from consideration

of these factors to its final decision. Adam Smith Enterprises,

Inc. v. Dept. Of Environmental Regulation , 553 So. 2d 1260 at

1274 n. 23.

89. A rule is impermissibly vague if its fails to establis h

adequate standards for agency decisions or is written in such a

way that persons of common intelligence must necessarily guess at

its meaning and differ as to its application. State v. Cummings ,

365 So. 2d 153 (Fla. 1978) (wildlife permit rules vague for

failing to define key words). 10

90. The 1996 APA Amendments retained the arbitrary and

capricious standard and added a new standard for declaring a rule

an invalid exercise of delegated authority. That standard is

included in subsection (f) of Section 120.52(8). Under that

provision, a rule is an invalid exercise of delegated authority

if it is not supported by competent substantial evidence. This

is a significant modification to the APA and all prior decisions

should be viewed in the context of this amendment. The agency

proposing a rule now has the burden of proof to demonstrate that

there is competent substantial evidence to support its rule. No

such evidence was presented in this case.

91. Under the pre 1996 version of the APA, an agency ha d

the implied authority to adopt criteria necessary to implement

its legislative mandates. See Department of Professional

Regulation, Board of Professional Engineers v. Florida Society of

Professional Land Surveyors , 475 So. 2d 939, 942 (Fla. 1st DCA

1985); see also General Telephone Company of Florida v. Marks ,

500 So. 2d 142 (Fla. 1986). An agency's interpretation only

needed to be within the range of possible interpretations of a

statute not necessarily the most desirable one. 11 Moorhead v.

Dept. of Professional Regulation , 503 So. 2d 1318, 1320 (Fla. 1st

DCA 1987); Florida Waterworks Association v. Florida Public

Service Commission , 473 So. 2d 237, 240 (Fla. 1st DCA 1985). The

1996 Amendments clearly modified some of these concepts. In any

event, an agency's interpretation must always be consistent with

the statute.

92. There are many general statutory construction

principles which have not been given effect by the PSC. For

example, "the provisions of statutes enacted in the public

interest should be construed liberally in favor of the public."

Department of Environmental Regulation v. Goldring , 477 So. 2d

532, 532 (Fla. 1985); Dept. of State v. Hamilton , 388 So. 2d 561

(Fla. 1980). In this regard, it should be noted that Chapter 367

directs consideration of the long-term interest of utility

customers, not just the short-term needs of existing customers.

93. Section 120.52(8)(d), Florida Statutes requires an

agency to establish adequate standards for decisions in its rule;

failure to do so renders the rule invalid. Even a broad grant of

rulemaking authority does not insulate from challenge an agency's

rules that confer unbridled discretion.

"An administrative rule which creates

discretion not articulated in the statute it

implements must specify the basis on which

the discretion is to be exercised.

Otherwise, the 'lack of . . . standards . . .

for the exercise of discretion vested under

the . . . rule renders it incapable of

understanding . . . and incapable of

application in a manner susceptible of

review' . . . an agency rule that confers

standardless discretion insulates agency

action from judicial scrutiny."

Cortes v. State Bd. of Regents , 655 So. 2d 132, 138 (Fla. 1st DCA

1995) citing Staten v. Couch , 507 So. 2d 702 (Fla. 1st DCA 1987).

94. The proposed rule in this case fails to give utilities

adequate notice of what they must prove to obtain a margin

reserve period of more than 18 months. Because utilities must

make investment decisions before knowing what the PSC will

approve, utilities are likely to run the risk of investing in

large increments thereby exacerbating many of the problems

discussed in the Findings of Fact.

95. Appellate courts have recognized that "considerable -

if not extraordinary - deference" should be given to an agency's

exercise of delegated discretion in respect to technical and

scientific matters. 12

96. Admittedly, the role of an administrative law judge in

a rule challenge proceeding is not to substitute his judgment for

that of the agency. Nonetheless, Chapter 120, Florida Statutes,

imposes requirements on an agency's rulemaking which are properly

the focus of this proceeding.

[T]he statutory construction must be a

permissible one and the agency cannot

implement any conceivable construction of a

statute...irrespective of how strained or

ingenuously reliant on implied authority it

might be.

State Bd. Of Optometry v. Florida Soc'y of Ophthalmology , 538 So.

2d 878, 885 (Fla. 1st DCA 1988), rev. denied , 542 So. 2d 1333

(Fla. 1989).

97. The deferen ce granted an agency's interpretation was

not absolute even under the pre-1996 APA.

Florida law clearly mandates that rules

cannot enlarge, modify or contravene the

provisions of a statute. State, Dept of

Business Regulation v. Salvation Limited,

Inc. , 452 So. 2d 65 (Fla. 1st DCA 1984). The

rulemaking process cannot be used to make

legal that for which there was no authority

in the first place. Great American Banks,

Inc. v. Division of Admin. Hearings , 412 So.

2d 373 (Fla. 1st DCA 1981);

Dept. of Natural Resources v. Wingfield Dev. Co. , 581 So. 2d 193,

at 197-98 (Fla. 1st DCA 1991). 13

98. An agency's rule cannot be contrary to or enlarge a

provision of a statute, particularly the statute cited as the law

implemented, "no matter how admirable the goal may be." 14

J. Rulemaking Authority and Statutory Framework

99. In order to resolve the challenges to the proposed and

existing rules in this case, it is necessary to consider the

nature and scope of the PSC's rulemaking authority and the

legislative goals embodied in the organic statute under which the

PSC operates.

100. The basic components of ratemaking for water and

wastewater utilities are found in Section 367.081, Florida

Statutes.

101. Section 367.111(2), Florida Statutes, charges the PSC

with insuring that utilities provide safe, efficient and

sufficient service in accordance with the environmental

regulations and reasonable engineering standards. The evidence

in this case established that the policies embodied in the

proposed rule will inhibit utilities from building new plant in

increments that are the most cost efficient and most desirable

from an engineering standpoint. In fact, the proposed rule

creates incentives for utilities to design and construct

facilities in the smallest possible increments necessary to meet

only immediate demand. Rather than encouraging the sizing of

plant increments based upon sound engineering practices and long-

term cost considerations, adoption of the proposed rule would

result in utilities expanding in smaller, less cost efficient

increments that will increase the risk of health and

environmental problems and require utilities to engage in a

continuous cycle of construction and rate cases in order to

address reasonably foreseeable growth. Moreover, the proposed

rule would handcuff the ability of utilities to participate in

the process of developing alternative supplies of water which the

state critically needs.

102. The PSC must treat capital improvements required by

governmental regulations as having been made "in the public

interest," and the PSC must at least consider such improvements

for "used and useful" treatment. Section 367.081(2)(a), Florida

Statutes; Florida Cities Water Co. v. Fla. Pub. Serv. Comm'n. ,

No. 96-3812 (Fla. 1st DCA January 12, 1998).

103. A utility is entitled to recover its costs of

providing safe, efficient, and sufficient service as prescribed

by part VI of chapter 403 and parts I and II of chapter 373,

consistent with the approved engineering design and proper

operation of water/wastewater facilities in the public interest

as required by Section 367.111(2), Florida Statutes, Florida

Cities v. FPSC , supra . In developing the proposed rule, the PSC

failed to provide a mechanism for full-cost recovery of capital

improvements required by governmental regulations. Such

expansions could include plant expansions consistent with DEP

Rule 62-600.405, Florida Administrative Code, and water supply

projects required pursuant to WMD water supply permits or plans.

While there may be methods other than full "used and useful"

treatment for a utility to recover its investments in capital

improvements, the evidence in this case established that the

PSC's existing alternatives are inadequate and, when combined

with the proposed rule, would serve in many instances to preclude

a utility from earning and recovering on the investments it is

obligated to make in the public interest.

104. The evidence established that AFPI does not work as

intended and does not allow full recovery of non-"used and

useful" costs. Accordingly, the proposed rule improperly fails

to provide a way for a utility to recover the costs for capital

improvements required by governmental regulations and made in the

public interest. The proposed rule is neither supported by

competent substantial evidence nor consistent with the law

implemented; it is therefore an invalid exercise of delegated

legislative authority. Section 120.52(8), Florida Statutes.

105. The artificially short margin reserve period included

in the proposed rule would deprive utilities of investment and

facilities prudently planned and economically sized. While the

PSC contends that the proposed rule permits a utility to present

evidence justifying a longer margin reserve period, it is

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.

106. Nowhere in Chapter 367, Florida Statutes, is

distinction made between existing and future customers. Instead

Chapter 367, Florida Statutes, directs the PSC to consider the

long term impact to customers, not just the impact to existing

customers. The testimony in this case established that, in the

long term, the PSC’s proposed rule will cost customers more than

the proposed lower cost regulatory alternative submitted by

Florida Water.

K. Reuse

107. As supported by the plain and ordinary meaning, as

well as statement of legislative intent, Sections 403.064(10) and

367.0817(3), Florida Statutes, require the PSC to allow utilities

to "recover the full, prudently incurred cost" of reuse studies

and reuse facilities through rates, not through AFPI or any other

cost recovery mechanism. 15 No ambiguity in these statutory

provisions exists. No rule of statutory construction supports a

different interpretation. The legislature first directed the PSC

to allow full cost recovery for reuse facilities in 1989. See

Section 7 of Chapter 89-324, Laws of Florida. To treat reuse

facilities the same as other effluent disposal facilities for

“used and useful” or ratemaking purposes under Section

367.081(2), Florida Statutes, defeats the stated purpose of the

specific statutory language on reuse, rendering the reuse

provisions superfluous and meaningless. Ellis v. State , 622 So.

2d 991, 1002 (Fla. 1995) (statutes should not be construed to

render them meaningless); see also , Christo v. State, Dept. of

Banking and Finance , 649 So. 2d 318, 321 (Fla. 1st DCA), rev .

den . 660 So. 2d 712 (Fla. 1995) (more specific statute covering

particular subject is controlling over statutory provision

covering same subject in more general terms).

108. The proposed rule would have the unlawful effect of

denying a utility recovery of its reuse costs through rates,

contrary to Sections 403.064(10) and 367.0817(3), Florida

Statutes. The PSC general grant of rulemaking authority in

Section 367.121(1)(f), Florida Statutes, does not empower it to

adopt a rule that would apply a cost recovery mechanism, i.e.

"margin reserve," to all wastewater treatment facilities

including reuse facilities when that mechanism fails to allow the

full cost recovery mandated by the legislature. The PSC has thus

exceeded its grant of rulemaking authority, and the proposed rule

is an invalid exercise of delegated legislative authority.

Section 120.52(8), Florida Statutes.

109. The rulemaking provisions of the APA provide affected

parties with an opportunity to require an agency to demonstrate

that its rules are a valid exercise of delegated legislative

authority. In this case under the 1996 version of the APA, the

PSC has the burden of proof to demonstrate that the proposed rule

at issue is not an invalid exercise of delegated authority.

Based upon all of the evidence presented in the case, the PSC has

failed to meet that burden.

L. EIS

110. The PSC's economic analysis of the proposed rule and

the proposed lower cost regulatory alternative of Florida Water

do not meet the requirements of Section 120.541, Florida

Statutes, and constitutes a material failure to follow the

applicable rulemaking procedures under 120.52(8)(a), Florida

Statutes.

DISPOSITION

Proposed 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.

Jurisdiction is retained in this matter solely for consideration

of the issue of attorney fees in a subsequent proceeding to be

initiated by Petitioners.

DONE AND ORDERED this 2nd day of March, 1998, in

Tallahassee, Leon County, Florida.

_______ ____________________________

DON W. DAVIS

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone] SUNCOM 278-9675

Fax Filing [phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 2nd day of March, 1998.

ENDNOTES

1 / The challenges to the Initial Proposed Rule were consolidated

by order dated September 4, 1996.

2 / Because the Initial Proposed Rule was not withdrawn, the

challenges to the Initial Proposed Rule were not dismissed. For

purposes of this proceeding, the "proposed rule" consists of the

Initial Proposed Rule as modified by the July 3, 1997 Notice of

Change. Where necessary to separately identify the modifications

set forth in the July 3, 1997 Notice of Change, that publication

will be referred to as the "Revised Proposed Rule."

3 / A test year may be based upon a historical test year with

various adjustments to make it reasonably representative of

expected operations or it can be based upon a projected test

year.

4 / In making its "used and useful" calculations, the PSC first

determines if an investment in total was prudent. Assuming that

it was, the PSC then takes the dollars reflected by the

investment and applies a "used and useful" calculation to

determine how much of the prudent investment will serve existing

customers. This calculation is made by determining a percentage

of the demand of the customers to total capacity during the test

year and applying the percentage so derived to the prudent

investment.

5 / As discussed in Section H below, the PSCs "margin reserve"

and "used and useful" concepts as applied to water and wastewater

utilities are unique. The PSC does not make a similar

delineation of investment currently utilized for existing

customers in the rate making for electric or gas utilities even

though the statues are remarkable similar.

6 / CIAC can include contributions from developers, government

grants and impact fees from customers.

7 / Under DEP Rule Chapter 62-600.610 there are six basic

categories of reuse, including one referred to as public access

reuse systems, which are permitted under part III of that

chapter.

8 / Such litigation has been prompted because of OPC's consistent

position in every contested rate case that no margin reserve

period should be recognized. As a consequence, the PSC has been

obligated to make extensive findings in each of those cases

explaining why a margin reserve period has been recognized. The

EIS simply noted that the PSC would save money by adopting this

rule and not having to litigate in every case whether or not a

margin reserve is necessary.

9 / See Agrico Chemical Co. v. Dept. of Environmental Regulation ,

365 So. 2d 759 (1st DCA 1978); Cert. denied sub nom , Askew v.

Agrico Chemical Co. , 376 So. 2d 74; Adam Smith Enterprises, Inc.

v. Dept. of Environmental Regulation , 553 So. 2d 1260 (Fla. 1st

DCA 1989); see also , Department of Labor and Employment Security

v. Bradley , 636 So. 2d 802, 807 (Fla. 1st DCA 1994).

10 / The principle enunciated in Cummings , supra , i.e., that a

rule is impermissibly vague if it "either forbids or requires the

doing of an act in terms so vague that men of common intelligence

must necessarily guess at its meaning and differ as to its

application," has been applied to rules in several recent

decisions. See Witmer v. Department of Business and Professional

Regulation , 662 So. 2d 1299, 1302 (Fla. 4th DCA 1995), quoting ,

Bouters v. State , 659 So. 2d 235, 238 (Fla. 1995), cert. denied. ,

— U.S. --, 116 S.Ct. 245, 133 L.Ed.2d 171 (1995). See also

Department of Health and Rehabilitative Services v. Health Care

and Ret. Corp. , 593 So. 2d 539 (Fla. 1st DCA 1992).

11 / Some old decisions have held that when an agency interprets

a statute through rulemaking, the presumption of correctness is

stronger. See Dept of Administration v. Nelson , 424 So. 2d 852,

858 (Fla. 1st DCA 1983); Dept. of Health and Rehabilitative

Services v. Framat Realty , 407 So. 2d 238, 241 (Fla. 1st DCA

1981). These decisions do not vitiate the statutory grounds for

challenging a rule. Furthermore, it should be noted that these

decisions predate the legislative directive that “no agency shall

have authority to adopt a rule only because it is reasonably

related...” See Sections 120.52(8)(g), and 120.536(1), Florida

Statutes.

12 / See Island Harbor Beach Club, Ltd. v. Department of Natural

Resources , 495 So. 2d 209, 223-224 (Fla. 1st DCA 1986), rev.

denied , 503 So. 2d 327 (1987). St. Joseph Land and Development

Co. v. Florida Department of Natural Resources , 596 So. 2d 137

(Fla. 1st DCA 1992), rev. denied , 604 So. 2d 487 (Fla. 1992),

Florida Hospital Association v. Health Care Cost Containment

Board , 593 So. 2d 1137 (Fla. 1st DCA 1992).

13 / See also Booker Creek Preservation, Inc. v. Southwest

Florida Water Management District , 534 So. 2d 419 (Fla. 5th DCA

1988) rev. denied , 542 So. 2d 1334 (Fla. 1989); Department of

Business Regulation v. Salvation Ltd., Inc. , 452 So. 2d 65 (Fla.

1st DCA 1984).

14 / Capeletti Bros. V. Department of Transportation , 499 So. 2d

855, 857 (Fla. 1st DCA 1986) rev. denied , 509 So. 2d 1117 (Fla.

1987); See also Department of Health and Rehabilitative Services

v. Florida Psychiatric Society, Inc. , 382 So. 2d 1280 (Fla. 1st

DCA 1980).

15 / Indeed, the PSC has ruled that the term "rates" does not

include the term "AFPI." In Re: Application for Rate Increase

and Increase in Service Availability Changes by Southern States

Utilities , 97 F.P.S.C. 1:542, 544.

COPIES FURNISHED:

Wayne L. Schiefelbein, Esquire

Gatlin, Schiefelbein and Cowdery

1709-D Mahan Drive

Tallahassee, Florida 32308

Rob Vandiver, Esquire

David E. Smith, Esquire

Christiana Moore, Esquire

Florida Public Service Commission

2540 Shumard Oak Boulevard

Tallahassee, Florida 32399-0850

Kenneth A. Hoffman, Esquire

Rutledge, Ecenia, Underwood Purnell

and Hoffman, P.A.

Post Office Box 551

Tallahassee, Florida 32302-0551

Brian P. Armstrong, Esquire

Mathew Feil, Esquire

Florida Water Services Corporation

1000 Color Place

Apopka, Florida 32703

Blanca Bayo, Director of Records

Public Service Commission

2540 Shumard Oak Boulevard

Tallahassee, Florida 32399-0850

Rob Vandiver, Esquire

Public Service Commission

2540 Shumard Oak Boulevard

Tallahassee, Florida 32399-0850

William D. Talbott, Executive Director

Public Service Commission

2540 Shumard Oak Boulevard

Tallahassee, Florida 32399-0850

Carroll Webb, Executive Director

Joint Administrative Procedure Committee

120 Holland Building

Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code

The Elliott Building

Tallahassee, Florida 32399-0250

NOTICE OF RIGHT TO APPEAL

A party who is adversely affected by this Final Order is entitled

to judicial review pursuant to Section 120.68, Florida Statutes.

Review proceedings are governed by the Florida Rules of Appellate

Procedure. Such proceedings are commenced by filing one copy of

the notice of appeal with the Agency Clerk of the Division of

Administrative Hearings and a second copy, accompanied by filing

fees prescribed by law, with the District Court of Appeal, First

District, or with the District Court of Appeal in the Appellate

District where the party resides. The notice of appeal must be

filed within 30 days of rendition of the order to be reviewed.