89-003259 Florida Public Service Commission vs. St. Johns North Utilities Corporation Status: Closed Recommended Order on Wednesday, June 13, 1990.

Summary: PSC has fine auth for repeated violations; util viol orders re. req to get permission to alter tariff & ciac charge structure; where assetsare sold

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA PUBLIC SERVICE COMMISSION, )

)

Petitioner, )

)

vs. ) CASE NO. 89-

3259

)

ST. JOHNS NORTH UTILITY CORP., )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

Pursuant to notice, this cause came on for formal

hearing before P. Michael Ruff, duly-designated Hearing

Officer, on February 12, 1990, in St. Augustine, Florida.

APPEARANCES

FOR PETITIONER: David C. Schwartz, Esq.

Florida Public Service Commission

Legal Division

101 E. Gaines Street

Tallahassee, FL 32399-0850

FOR RESPONDENT: Joseph E. Warren, Esq.

1930 San Marco Boulevard

Suite 200

Jacksonville, FL 32207

STATEMENT OF THE ISSUES

The issues in this cause concern whether the

Respondent, St. Johns North Utility Corp. ("St. Johns"),

knowingly or willfully failed to comply with Public Service

Commission Order No. 20409, requiring that entity to

respond to certain requests for information adopted in that

Order and to file a request for approval of the charging of

its customers for the income tax implication of

contributions-in-aid-of- construction ("CIAC"). That is,

the Commission takes the position that by that Order, the

utility was informed of the requirement to file a request

for permission from the Commission to charge customers so-

called CIAC "gross-up" charges and failed to do so. The

other issue to be considered, conjunctively, concerns

whether a penalty should be imposed against the Respondent

and, if warranted, in what amount.

PRELIMINARY STATEMENT

This cause arose upon the issuance of Public Service

Commission Order No. 20762, issued on February 17, 1989.

That Order required the Respondent, St. Johns North Utility

Corp. ("St. Johns, Utility"), to show cause in writing why

it should not be fined up to $5,000.00 per day for failure

to comply with the provisions of Order No. 20409. Order

No. 20409 had required a written response to certain

questions posed to the Utility by the Commission concerning

the existence and specifics of certain "developer

agreements" regarding the provision of utility services.

It also required that the Utility submit a written request

to implement so-called "CIAC gross-up charges". The

Utility responded to Order No. 20762 with a Motion for

Rehearing, Reconsideration and for Leave to Amend. That

Motion was denied by Order No. 21195. However, in

rendering that Order, the Commission also permitted the

Utility a Section 120..57, Florida Statutes, formal

proceeding in order to resolve the issues raised in the

show cause proceeding initiated by Order No. 20762,

concerning whether the Utility had willfully failed to

comply with Order No. 20409 and whether further penalties

should be assessed and imposed.

This cause came on for hearing as noticed. At the

hearing, the Commission presented the testimony of Jerrold

E. Chapdelaine. The Respondent presented the testimony of

C.E. Bohannon and Joseph E. Warren. The Petitioner adduced

five exhibits. Petitioner's Exhibits 1 through 4 were

admitted into evidence. Respondent's Exhibit 1 was admitted

into evidence.

At the conclusion of the proceeding, the parties

elected to order a transcript thereof and requested an

extended briefing schedule, which was approved. The

Commission submitted its proposed findings of fact and

conclusions of law on a timely basis, and those have been

specifically ruled upon in the Appendix attached hereto and

incorporated by reference herein, as well as in the

Recommended Order itself.

FINDINGS OF FACT

1. Pursuant to its authority to regulate water and

sewer rates, charges and rate structures embodied in

Chapters 367, Florida Statutes, and 25-30, Florida

Administrative Code, the Public Service Commission entered

Orders numbered 16971 and 17058, which adopted specific

guidelines and conditions for utilities to implement

certain income tax impact charges for contributions-in-aid-

of-construction ("CIAC gross-up charges"). (See Orders

numbered 20409, p.3; 16971, p.2-4; and 17058). One of

these conditions requires that utilities submit appropriate

tariff sheets (rates and charges sheets) for the

Commission's approval prior to implementation of the CIAC

gross-up charge.

2. CIAC is the payment or contribution of cash or

property to a utility from a customer or entity seeking

service from that utility in order to secure the provision

of such services or to reserve it for a future time. The

Internal Revenue Code of 1986 changed the treatment of CIAC

from being non-taxable to being taxable as income. A CIAC

gross-up charge is a method by which a utility can recover

that tax expense, represented by the income tax assessed

against collected CIAC, through approved rates and charges

to customers. The amount of CIAC tax impact funds

collected by a utility is not itself treated as CIAC for

rate-making purposes.

3. The Respondent, St. Johns North Utility Corp.,

collected gross-up charges which were not authorized by its

filed and approved tariff schedules (rate schedules), and

without securing the requisite approval from the

Commission. (See Orders numbered 20409 and 20762). The

Commission was made aware of the charging of unauthorized

CIAC gross-up charges by the Utility Respondent when a

developer, Fruit Cove Limited, communicated with the

Commission concerning its doubts about utility service

being available for one of its subdivisions, when required,

from the Respondent. Fruit Cove Limited had paid CIAC

gross-up charges to St. Johns. On June 3, 1988, the

Commission, through its staff, contacted Mr. Joseph E.

Warren, the General Manager for the Respondent, and

explained the Commission's requirements regarding the

requisite pre-approval of the charging of CIAC gross-up

charges. Mr. Warren agreed to file a written request for

authorization to implement such charges. No request was

filed, despite repeated admonitions and solicitations by

the Commission and its staff and a lengthy opportunity to

comply.

4. Finally, Order No. 20409 was issued by the

Commission on December 5, 1988, requiring the Utility to

file a written request for authorization to implement CIAC

gross-up charges within thirty (30) days of that Order. A

written request was not timely filed, however. The

Utility finally filed its written request for approval of

these charges on September 5, 1989. The accompanying

tariff sheets representing such charges were ultimately

filed in response to Orders numbered 16971 and 20409, and

Show Cause Order No. 20762. They became effective on

September 15, 1989.

5. The Commission, through its staff, also made

repeated inquiries to the Utility regarding certain service

availability charges and practices, initially by letter of

July 29, 1988. The Utility was allowed until August 19,

1988 to make the requested responses. The letter was

addressed to Mr. Joseph Warren at the Utility's mailing

address of record. The Utility, however, did not provide

written responses to the comments and questions by the

Commission, despite repeated assurances that it would do

so. Order No. 20409, issued on December 5, 1988, required

the Utility to provide the full written responses to the

July 29, 1988 letter within thirty (30) days of the date of

that Order. The responses were not timely made.

6. Order No. 20762 was issued on February 17, 1989,

requiring the Utility to show cause in writing on or before

March 13, 1989 why it should not be fined up to $5,000.00

per day, in accordance with the Commission's penalty

authority, for failure to comply with the provisions of

Order No. 20409, regarding the necessity for written

responses to the Commission's specified questions and the

submission of a written request to implement the CIAC

gross-up charges referenced above.

7. The first item in the Commission's July 29, 1988

letter to the Utility had requested the Utility to seek

approval, including submission of proposed rate tariff

sheets for authorization to implement the CIAC tax impact

charge referenced above. That item was responded to on

September 5, 1989, more than eight months after the

deadline set by Order No. 20409.

8. The second item in the Commission's July 29, 1988

letter to the Utility had requested the Utility to provide

the names and addresses of financial institutions in which

gross-up charge funds were being retained. That item was

responded to as requested.

9. The third item in the Commission's July 29, 1988

letter to the Utility had requested the Utility to provide

a listing of all gross-up monies received from each

contributor. No response was ever provided by the

Respondent. The significance of the information requested

by the Commission is that it would provide identity of the

individuals who were entitled to a refund of the

unauthorized CIAC gross-up charges collected by the

Utility, as provided in Order No. 20762.

10. The fourth item in the Commission's July 29, 1988

letter to the Utility had requested the Utility to provide

a copy of all current developer agreements. That item was

responded to within the deadline set by Order No. 20409.

11. The fifth item in the Commission's July 29, 1988

letter to the Utility had requested the Utility to file

revised tariff sheets indicating the actual legal

description of the Utility's certificated service

territory. No response was ever provided.

12. Order No. 20762 was ultimately issued on February

17, 1989 imposing a $5,000.00 fine on the Utility for

serving outside of its authorized service area.

13. Order No. 20409 requested the Utility to indicate

to the Commission whether, with regard to the developer

agreement between the Respondent and Fruit Cove Limited,

the charges listed in the various paragraphs of that

agreement would, upon completion of the real estate

development involved, be adjusted to reflect actual utility

service costs incurred. No response to that request was

ever provided by the Utility. Additionally, in that

Order, the Commission requested information concerning a

so- called "step tank", which was referenced in paragraphs

12C and 13D of the developer agreement with Fruit Cove

Limited. That request, in Order No. 20409, was never

responded to. A certain fee was charged for installation

of the step tank by the Utility to Fruit Cove Limited, and

no response was given to the Commission's inquiry as to why

that fee was omitted from the Utility's approved tariff on

file with the Commission. The significance of the

requested information was that the omission of the step

tank installation fee from the Utility's tariff of rates

and charges could cause the developer agreement to

constitute a "special service availability agreement",

which can only be approved in advance by the Commission.

It is not a matter, approval of which has been delegated by

the Commission to its staff members.

14. The Order referenced last above also requested an

explanation for why a meter installation fee, referred to

in that same developer agreement, does not include a "curb

stop" or a meter box. This information is significant

because it is necessary in order for the Commission to

determine whether the charge involved is reasonable. A

cost breakdown for the meter installation, including the

various hardware components and other charges, was

necessary and was not provided by the Utility.

15. Additional information concerning the area of

service availability, required to be provided to the

commission by Order No. 20409, included the requirement

that approval be obtained from the Commission for the CIAC

gross-up charge in the developer agreement with Fruit Cove

Limited. As stated above, that approval was not requested

in writing, as required by the Order, for more than eight

months after the deadline set by that Order.

16. By Order No. 20762, St. Johns was fined $5,000.00

for three separate violations of the statutes and rules,

and the Orders enumerating them, for a total of $15,000.00.

The Utility was fined for serving outside of its authorized

service territory, for collecting unauthorized CIAC gross-

up charges, and for failing to file its developer

agreements with the Commission as required by law. The

developer agreements were only submitted after repeated

efforts by the Commission's staff which culminated in Order

No. 20409 and which were either unresponded to or not

properly responded to by the Utility. Additionally, by

Order No. 21559, issued on July 17, 1989, St. Johns was

fined $5,000.00 for failure to file an application for an

extension of its territory as required by Order No. 20409.

17. In the meantime, by Order No. 22342, issued on

December 26, 1989, the Commission approved a transfer of

the Utility's assets from St. Johns to Jacksonville

Suburban Utilities Corporation ("Jacksonville Suburban").

That Order did not authorize transfer of the liabilities of

the Respondent to Jacksonville Suburban. The Order

specifies that St. Johns, and not Jacksonville Suburban,

will remain liable for the previously imposed refund

obligations and fines. Only in the event that there

remained sales proceeds in excess of the certain debt of

St. Johns owed to its institutional lender would funds from

the Jacksonville Suburban sale be applied toward payment of

the refund and fines found to be due and owing by the

above-cited Orders, by way of escrow or otherwise. Any

excess proceeds, absent Order No. 22342, were to be paid to

St. Johns. Order No. 22342 does not make Jacksonville

Suburban liable for the refund and fines at issue. It is

speculative whether there will be any sales proceeds

available from the sale, after payment of the debt, to be

applied toward the refund and fines. The sales price was

made dependent upon establishment of the Utility's "rate

base" amount, to be established in that transfer proceeding

at a point in time after entry of Order No. 22342. That

Order, however, specifically preserves the liability of St.

Johns for the refund and fines and does not provide for the

extinguishment of such liability in the event that the

sales proceeds prove to be insufficient to pay them.

CONCLUSIONS OF LAW

18. The Division of Administrative Hearings has

jurisdiction over the subject matter of and the parties to

this proceeding, by the authority of subsection 120.57(1),

Florida Statutes (1989).

19. Contributions-in-aid-of-construction ("CIAC")

mean any amount or item of money, services or property

received by the Utility, from any person, governmental

agency, or other entity, any portion of which is provided

at no cost to 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

service to the public. The term includes system capacity

charges, main extension charges, and customer connection

charges. See, Rule 25-30.515(3), Florida Administrative

Code.

20. On or after January 1, 1987, in accordance with

Commission Order Nos. 16971 and 17058, the Utility was

authorized to collect from developers and others who

transfer cash or property to a utility as CIAC, a "gross-up

charge", in an amount equal to the income tax impact

related to the CIAC contribution. Correspondingly, a

utility must submit appropriate tariff charge sheets for

Commission approval prior to implementation of the

assessment of CIAC gross-up charges, pursuant to Order No.

17058.

21. Pursuant to Rule 25-30.135(2), Florida

Administrative Code, no utility may modify or revise its

schedule of rates and charges ("tariff") until it files and

receives approval from the Commission for any such

modification or revision. Rule 25- 30.550(2), Florida

Administrative Code, in turn, requires that any special

service availability contract with real estate developer

entities, or other persons, shall be approved by the

Commission prior to becoming effective.

22. The evidence adduced by the Petitioner was

unrebutted in showing that St. Johns violated Order No.

20409 by not filing a request for authorization to

implement CIAC gross-up charges within the time set forth

in that Order. The Utility violated that Order by not

filing written responses to the questions and comments

incorporated in that Order within the time set forth by the

Order. The Utility's response to two out of eleven items

within the time limit set in that Order is not deemed to

constitute "substantial compliance" with Order No. 20409.

Indeed, there has been no showing that "substantial

compliance" is a doctrine relevant to this case. The Order

specified the particular responses required, and the

subject matter thereof, and set a time certain for such

responses, which were to be in writing. The Utility simply

failed to comply.

23. Likewise, there is no doubt that, in view of

repeated informal notification by the Commission through

letters from its staff, and by multiple orders by the

Commission as a part of its continuing efforts to procure

compliance by the Utility, the Utility was fully aware of

the requirements imposed upon it by the Commission through

its statutes and rules, enunciated in the above-cited

Orders, and was aware of the deadlines for submittal of the

required information. Thus, the violations of the statutes

and rules embodied in the above-cited Orders constitute

knowing and willful violations of those statutes. See,

Section 367.161(1), Florida Statutes (1987).

24. In light of the Respondent's actual knowledge of

the Commission's mandate in Order No. 20409, coupled with

its history of violations and lack of cooperation, even

after it knew of the specifics of what was required of it

by the Commission in the above factual regards; it must be

concluded that the Utility's failure to comply with Order

No. 20409 was knowing and willful even though it is

understood by the Hearing Officer that that willfulness

might have been tempered by financial impossibility.

25. Section 367.161(1), Florida Statutes (1987),

provides, in effect, that if any utility, by any authorized

officer, agent or employee knowingly refuses to comply

with, or willfully violates, any provision of Chapter 367,

Florida Statutes, which sets forth the Commission's

regulatory authority over water and sewer utilities, or

knowingly violates or refuses to comply with any lawful

rule or order of the Commission, the utility shall be

subject to a penalty for each such offense of not more than

$5,000.00. The Commission is authorized in those statutory

provisions to fix, impose and collect such a penalty.

Each day of such refusal or violation constitutes a

separate offense. It is further provided in that

subsection that each penalty constitutes a lien upon any

real and personal property held by the utility, enforceable

as a statutory lien pursuant to the provisions of Chapter

85, Florida Statutes.

26. The case of Deltona Corporation v. Florida Public

Service Commission, 220 So.2d 905, 908 (Fla. 1969), made it

clear that the Commission has authority to impose penalties

within the statutory limits authorized it, which are

sufficiently weighty as to insure compliance with its

orders. Commission Orders numbered 20137, 20781 and 20884

indicate that the Commission follows a policy of

considering a utility's compliance history in determining

to assess penalties and the amount thereof. A utility's

financial difficulties, particularly those which are

largely self-imposed, are not deemed to be grounds for

leniency in assessing penalties against a utility for

serious and repeated violations of statutes, rules or

orders the Commission has been charged with enforcing.

See, Order No. 20781 (p. 2).

27. Order No. 22342 provides that the Commission has

interpreted the provisions of Section 367.171, Florida

Statutes, generally to the effect that where assets of a

utility are transferred, as opposed to a transfer of stock

of the entity, that the transferor remains liable for

violations occurring before approval of the transfer by the

Commission.

28. Finally, when a utility becomes subject to

regulation by a county, all cases in which it was a party,

pending before the Commission, or in any court of appeal

from any order of the Commission, remain within the

jurisdiction of the Commission or the court until disposed

of in accordance with the law in effect on the day the case

was filed. See, Section 367.171(5), Florida Statutes

(1989).

29. Accordingly, there is no question concerning the

authority of the Commission to impose the fine sought in

this case; and the evidence establishes the knowing,

repeated and willful nature of the violations, albeit they

may have resulted in large part from the extreme financial

difficulty which the Utility experienced at times pertinent

hereto. There is no question that the evidence of the

Utility's repeated and knowing violations, coupled with the

Commission's repeated formal and informal efforts to obtain

compliance with its directives, justifies a significant

penalty in this instance.

RECOMMENDATION

Having considered the foregoing Findings of Fact,

Conclusions of Law, the evidence of record, the candor and

demeanor of the witnesses, and the pleadings and arguments

of the parties, it is therefore,

RECOMMENDED that St. Johns be assessed a penalty of

$5,000.00 for knowingly and willfully failing to comply

with Order No. 20409.

DONE AND ENTERED this __13th__ day of June, 1990, in

Tallahassee, Leon County, Florida.

_________________________

P. MICHAEL RUFF

Hearing Officer

Division of Administrative

Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative

Hearings

this __14th__ day of June,

1990.

APPENDIX TO RECOMMENDED ORDER

Petitioner's Proposed Findings of Fact 1.-24. Accepted.

Respondent's Proposed Findings of Fact.

(Respondent filed no proposed Findings of Fact)

Copies furnished to:

David Schwartz, Esq.

Florida Public Service Commission

Legal Division

101 E. Gaines Street

Tallahassee, FL 32399-0850

Joseph E. Warren, Esq.

1930 San Marco Boulevard

Suite 200

Jacksonville, FL 32207

Mr. Steve Tribble

Director of Records and Recording

Florida Public Service Commission

101 E. Gaines Street

Tallahassee, FL 32399-0850

Mr. David Swafford

Executive Director

Florida Public Service Commission

101 E. Gaines Street, Room 116

Tallahassee, FL 32399-0850

Susan Clark, Esq.

General Counsel

Florida Public Service Commission

101 E. Gaines Street, Room 212

Tallahassee, FL 32399-0850