APPLICATION OF ST. JOE NATURAL GAS CO., INC.
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St. Joe Natural Gas Company sought a rate increase before the Florida Public Service Commission, claiming a return of only 2.64% on its rate base. The Commission adjusted the company's calculations, reduced the claimed rate base, and determined a proper return of 1.61%, but found this inadequate and authorized rates yielding a 7.4% return.
The PSC determined the proper rate base is $313,229 (not $371,784), the actual net operating income for the test year was $5,044 (not $9,823), yielding a 1.61% return. While the company's proposed rates yielding 9.10% are excessive, a 7.4% return is reasonable and necessary to allow the company to perform its functions and attract capital for expansion.
“the rate of return of 1.61% is too low to allow the company to attract the necessary capital in order to expand its operations and perform the obligations imposed on it as a public utility operating under the jurisdiction of this commission”
Establishes the Commission's standard for determining whether a rate of return is adequate for a utility to fulfill its public service obligations
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Join FLexlaw to unlock all legal intelligenceSt. Joe Natural Gas Company distributes natural gas in Port St. Joe under PSC jurisdiction. For the test year ending July 31, 1966, the company calcul…
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Pursuant to due notice, the commission held a public hearing on this matter in the City Hall, Port St. Joe, on December 13, 1966. Having fully considered the entire record, the commission now enters its order in this cause.
St. Joe Natural Gas Company, Inc. sells and distributes natural gas in the city of Port St. Joe. The company is under the jurisdiction of this commission, pursuant to chapter 366, Florida Statutes. By application in this docket the company alleges that it is not *52now receiving an adequate and reasonable rate of return, therefore, it proposes to increase the rates it charges for natural gas.
The company takes the position that the rate of return that it is now earning for the test year ending July 31, 1966 is 2.64%. Through the exhibits and testimony introduced in this proceeding, the company arrives at this figure as follows —
Plant in Service $ 384,682
Work in Progress 35
Materials and Supplies 7,931
Working Capital 6,789
Depreciation Reserve ( 27,653)
Total Rate Base $ 371,784
Net Operating Income $ 9,823
Rate of Return 2.64%
The commission has made a thorough and detailed study of the company’s position and the supporting exhibits and testimony and finds that certain adjustments are necessary in makng a determination of the correct rate base, operating income and rate of return. We have concluded that the plant in service set out in the above rate base is overstated in the amount of $52,894. This figure includes the following —
1. $903 — miscellaneous minor adjustments.
2. $1,052 — excess capitalization of office supplies.
3. $10,000 — this represents a re-evaluation of capital stock which the company proposed should be included in plant but failed to support with necessary testimony, evidence and legal authority.
4. $15,044 — excess capitalization of interest and overhead. Our analysis of company records revealed that excessive amounts of overhead and interest charges had been capitalized as a result of erroneous and arbitrary methods employed in estimating these items. We have, made this adjustment to eliminate the excesses.
5. $25,465 — represents house piping which the company capitalized and included in full amount in plant. The commission has not allowed the capitalization and inclusion in plant in other gas utility rate cases, but has allowed the item to be amortized. By this order the commission allows the applicant in this proceeding to amortize this item over a 10 year period.
*536. $430 — was included by the company in plant, but should be excluded because there is an error in capitalizing certain piping.
The materials and supplies are adjusted downward in the amount of $6,126. This figure represents the inclusion by the company of appliances which are not ordinarily included as' part of the rate base for rate making purposes. The company failed to show that it should be included in this particular case.
The working capital figure is adjusted downward $2,931, which represents a correction in the working capital calculation. The company took the position that working capital should be calculated on a 45 day basis' of all expenses including purchased gas. The commission has allowed and is allowing in this proceeding a figure based on a 15 day basis of purchased gas and 45 days for other operating expenses.
The depreciation reserve is adjusted downward in the amount of $3,396. This adjustment corresponds to the plant in service adjustment of $52,894 previously discussed. It is necessary to adjust both the accumulated effect on the reserve and the expense for the test year whenever the plant in service is adjusted. As developed on staff exhibit 12 and stated in the record, the company rates of depreciation were used in making the accumulated reserve and the test year expense corrections. The expense portion will be further considered later in this order.
The commission also makes certain adjustments in the net operating income as stated by the company. We arrive at a figure of $5,044 instead of that arrived at by the company in the amount of $9,823. The company’s income statement is as follows —
Under present rates —
Operating Revenues $ 76,758
Operating Revenue Deductions:
Cost of Purchased Gas 30,414
Operation and Maintenance Expense 19,735
Depreciation 12,625
Amortization of House Piping 883
Taxes other than Income Taxes 3,278
Income Taxes 0
Total Operating Revenue Deductions' $ 66,935
Net Utility Income $ 9,823
*54We adjust the cost of purchased gas by including an additional $300, which represents the discount which benefited the company during the test year, but which is not applicable to the test year and should therefore be adjusted in that amount. We add an additional $2,550 to the operation of maintenance expense, which represents in the main certain pro forma engineering and legal fees which the company is entitled to under the law and may claim. The depreciation item is reduced by $1,673, which is necessary in view of our adjustment to the plant. We include $2,483 for the amortization of the house piping which has been previously mentioned. We also allow an additional $1,119, which represents taxes other than income taxes, which should properly be included.
As mentioned with these adjustments, we conclude that the utility for the test year had. in fact a net operating income of $5,044. The rate base and rate of return as adjusted is as follows —
Adjusted —
Plant in Service $ 331,788
Work in Progress 35
Materials and Supplies 1,805
Working Capital 3,858
Depreciation Reserve ( 24,257)
Total Rate Base $ 313,229
Net Operating Income $ 5,044
Rate of Return 1.61%
The rates as proposed by the company would produce an operating income of $28,489 which results in a 9.10% rate of return. The commission finds that on the rate base which it has allowed in this proceeding the rate of return of 1.61% is too low to allow the company to attract the necessary capital in order to expand its operations and perform the obligations imposed on it as a public utility operating under the jurisdiction of this commission. We find, however, that the proposed rates, which would produce a rate of return of 9.10%, would be excessive and unreasonable.
In considering the needs of this company, we find that the rate of return of 7.4% is reasonable and would allow the company to properly perform its functions as a utility and to attract the necessary capital for needed expansion. This return represents an increase of net operating income of $18,135. When consideration is given to the tax effect, it represents a gross increase of operating income of $19,895.
*55It is therefore ordered that the applicant file with the commission within 20 days from the date of this order a schedule of rates which reflect a rate of return of 7.4% on the rate base allowed by the commission for the test year ending July 31, 1966.