Petition — Ohio Suburban Water Co. v. Public Utilities Commission

) JUL 2 8 1989

_ 80 a 230 "MICHAEL RODAK, JR,

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

OHIO SUBURBAN WATER COMPANY

Petitioner,

vs.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE

STATE OF OHIO

GEORGE C. McCONNAUGHEY

DAVID C. STRADLEY

COUNSEL OF RECORD

McConnaughey, Stradley, Mone & Moul

100 East Broad Street

Columbus, Ohio 43215

(614)461-6060

ATTORNEYS FOR PETITIONER,

Ohio Suburban Water Company

MIDWEST LAW PRINTERS AND PUBLISHERS, INC., Columbus, Ohio 43216

QUESTION PRESENTED

Given the fact that a public utility purchased property

in an arm’s length transaction, which property when pur-

chased became a part of such utility’s rate base upon which

the utility lawfully earned income, does the passage some

eleven (11) years later of a state statute prohibiting the

earning of income on such property constitute a confis-

cation of property without due process of law?

INDEX

Page

SUES 6/06 6. o oieibin ia bcos KN s duals wialeier 1

I ie hs Ws -e'e: ko 0 $10 bie» 0 d0'n's © ote ate 2

QUEST IEW PERNT IED, 66 ccc ccc ees cetinnnce 2

CONSTITUTIONAL PROVISION INVOLVED ...... 2

STATEMENT OF THE CASE.............200000. 2

REASONS FOR GRANTING THE WRIT........... 4

ey kk ao ke'sc sce cn ope cie o¥.s5 6

CERTIFICATE OF SERVICE.................... 7

ee, Abin igo a 64 MM 0,0 OGd 4/0 6/8 8% 8

INDEX TO APPENDIX

Ohio Suburban Water Co. v. Pub. Util. Comm.

SE 8 Re eee 8

Entry to The Supreme Court of Ohio denying

ED os oe ob eb one bees 16

Opinion and Order of the Public Utilities

Commission of Ohio, Case No. 77-1512-WS-AIR,

Ec

TABLE OF AUTHORITIES

Cases: Page

In re Marion Water Co. (1973), Pub. Util. Comm.

of Ohio, 98 P.U.R. 3d 280 at 286............... 3

Missouri, ex rel. S.W. Bell Tel. Co. v. Public

Service Comm., (1923), 262 U.S. 276, 290........ 5

Constitutional Provision:

United States Constitution, Amendment XIV, 51..... 2

Judicial Code:

28, United States Constitution, §1257(3)........... 2

Statutes - Ohio:

FA. BA OG Be OO ob ag v5.6 Hh 90 Fekete Owe’s 3

Ohio Revised Code Chapter 4909 ...............4.. 3

Ohio Revised Code 5 4909.15 (A) (1)............44. 3

Ohio Revised Code ee. SC CO SOC EEE 4

Ohio Revised Code s 4909.05

| 4 FO i PON 9 4

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1980

NO.

OHIO SUBURBAN WATER COMPANY

| Petitioner,

Vs.

THE PUBLIC UTILITIES COMMISSION OF OHIO,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE

STATE OF OHIO

Petitioner, Ohio Suburban Water Company, respect-

fully prays that a writ of certiorari issue to review the

judgment of the Supreme Court of the State of Ohio (the

“Court below’’), in the case of Ohio Suburban Water

Company v. Pub. Util. Comm., which affirmed a decision

of the respondent Public Utilities Commission of Ohio

(the “PUC”’).

OPINIONS BELOW

The Entry of the PUC which was affirmed by the Court

below is not reported and is printed in the Appendix

hereto at Page 17. The opinion of the Court below, print-

ed in the Appendix hereto at Page 8 is reported as Ohio

Suburban Water Company v. Pub. Util. Comm., 62 Ohio

St. 2d 17, 402 N.E. 2d 539 (1980). The order of the

2

Court below denying rehearing is not reported and is

printed in the Appendix hereto at Page 16.

JURISDICTION

The Ohio Supreme Court’s decision herein was enter-

ed on April 2, 1980, and its order denying rehearing was

entered on May 1, 1980. The jurisdiction of this Court is

invoked under 28 U.S.C. 5 1257(3).

QUESTION PRESENTED

Given the fact that a public utility purchased property

in an arm’s length transaction, which property when pur-

chased became a part of such utility’s rate base upon which

the utility lawfully earned income, does the passage some

eleven (11) years later of a state statute prohibiting the

earning of income on such property constitute a confis-

cation of property without due process of law?

CONSTITUTIONAL PROVISION INVOLVED

Fourteenth Amendment, United States Constitution,

s1: “. .. nor shall any State deprive any person of life,

liberty, or property, without due process of law. .. ”

STATEMENT OF THE CASE

In 1965, Ohio Suburban Water Company (Ohio

Suburban) purchased, with the approval of the PUC, the

net plant of another water company, Huber Utilities, Inc.;a

large portion of the plant owned by the seller prior to

such sale consisted of water and sewer mains constructed

between 1956 and 1964, and paid for by Huber Homes,

3

Inc., a real estate developer and the parent company of

Huber Utilities, and “‘contributed”’ by the parent to the

subsidiary. Such contributions are not uncommon in the

water utility industry and are recorded by utilities as

Contributions In Aid Of Construction (“CIAC”). At the

time of the 1965 sale to Ohio Suburban, the selling com-

pany had recorded CIAC in the amount of $2,787,789

out of a total recorded net plant of $3,867,118, which

net plant was purchased by Ohio Suburban for the sum

of $2,800,000.

There is no relationship between the selling utility

and Ohio Suburban other than that of “buyer and seller”’,

and the transaction was completely at arms’ length.

Prior to September 1, 1976, the law of Ohio was:

[I]f property is “owned’”’ by the utility

and “‘used and useful” for the service of

the public, it must be included in the

valuation or rate base without regard

to the manner in which the property

was acquired. In re Marion Water Co.

(1973, Pub. Util. Comm. of Ohio), 98

P.U.R. 3d 280 at 286.

In its 1965 authorization of the proposed sale and

purchase, the PUC ordered the entire net plant (except

for $8,373 determined by the PUC to be CIAC) purchas-

ed by Ohio Suburban to be recorded as “Utility Plant’’,

on which Ohio Suburban earned a lawful return until

the passage by the Ohio Legislature in 1976, of Am. Sub.

Senate Bill 94, Ohio’s new rate base law. The passage of

this new legislation changed Ohio to an “original cost”

utility state, and the legislation was codified in Ohio

Revised Code Chapter 4909. Ohio Revised Code s 4909.

15 (A) (1) establishes that a utility’s rate base, upon

which it may earn income, shall be valued (as to the prop-

erty in question) as determined by the following pertin-

4

ent portion of Ohio Revised Code s 4909.05:

(E) The original cost of ... property...

[ which ] shall be the cost . . . to the per-

son that first dedicated the property to

the public use . . . (emphasis added)

The PUC in its opinion and Order of March 8, 1979,

found that property belonging to Ohio Suburban that

had originally cost $2,779,416, had no cost to Huber

Utilities, Inc., the utility that first dedicated the proper-

ty, and, having had no cost to such dedicating utility,

could not be part of any utility’s rate base subsequent to

the passage of Ohio Revised Code s 4909.05 (E), regard-

less of how acquired.

The federal constitutional question was raised at the

earliest opportunity before the PUC, and is commented

on by the PUC in its Opinion and Order (Appendix 25),

and before the Ohio Supreme Court and is acknowledged

by the Court in the first paragraph of its per curiam opin-

ion (Appendix 10); the federal question was thus timely

and properly raised.

REASONS FOR GRANTING THE WRIT

In its Opinion and Order, the PUC stated:

It does appear to us that the application

of Section 4909.05 (E), Revised Code

to an arms’ length sale of assets between

utilities produces an unconstitutional and

an inequitable result. However, this Com-

mission as an administrative agency, is with-

out jurisdiction to determine the constitu-

5

tionality of a statute.

(Appendix 25)

The Ohio Supreme Court completely ignored this

point of constitutional law in its opinion, stating as the

sole reason for its decision:

It is not disputed that the instant property

was donated to Huber Utilities prior to

appellant’s purchase of the assets of that

company and that this property was received

as Contributions in Aid of Construction [ by

Huber Utilities].

(Appendix 12)

The fact that Ohio Suburban paid $2,800,000 for the

property was a fact studiously ignored by the Ohio Su-

preme Court, although correctly quoting the law that it

is “the investment of the shareholder which comprises

the rate base,” thus quoting Justice Brandeis in Missouri,

ex rel. S.W. Bell Tel. Co. v. Public Service Comm., (1923),

262 U.S. 276, 290 as follows:

The thing devoted by the investor to the

public use is *** capital embarked in the

enterprise. Upon the capital so invested the

Federal Constitution guarantees to the util-

ity the opportunity to earn a fair return.

(emphasis added)

If Ohio Suburban, the “investor” in the instant case,

is denied by the legislature the opportunity to earn any

return on its property, which it lawfully purchased and

upon which under the law it could earn any income, then

the legislature had passed legislation which is unconsti-

tutional when applied to the facts in this proceeding.

6

This confiscation of the right to earn an income from

nearly all of Ohio Suburban’s investment of $2,800,000

was recognized by the PUC, and the PUC was careful to

explain that it could not pass on constitutional questions.

For whatever reasons, the Ohio Supreme Court decided

to tacitly permit such confiscation rather to upset Ohio’s

new rate base law.

It is submitted that it is in the public interest that

confiscation of property not be allowed to stand.

CONCLUSION

For the foregoing reasons, a writ of certiorari should

issue to review the judgment of the Supreme Court of

Ohio.

Respectfully submitted,

George C. McConnaughey

David C. Stradley

McConnaughey, Stradley,

Mone & Moul

100 East Broad Street

Columbus, Ohio 43215

Attorneys for Petitioner,

Ohio Suburban Water Company

7

CERTIFICATE OF SERVICE

I hereby certify that three copies of the foregoing

Petition For A Writ Of Certiorari To The Supreme Court

Of The State Of Ohio were sent by United States first

class mail, postage prepaid, to counsel representing the

parties to this proceeding this a5* day of uly, 1980.

David C. Stradley

8

OHIO SUBURBAN WATER COMPANY, APPELLANT,

v.

PUBLIC UTILITIES COMMISSION OF OHIO,

APPELLEE.

[ Cite as Ohio Suburban Water Co. v. Pub. Util. Comm.

(1980), 62 Ohio St. 2d 17.]

Public Utilities Commission — Water service companies —

Rate increase — Calculation of rate base — Contributions

in Aid Of Construction — R.C. 4909.05 (E), construed

— Rate of return determined, how.

(No. 79-880 — Decided April 2, 1980.)

APPEAL from the Public Utilities Commission.

Appellant, Ohio Suburban Water Company, is an

Ohio corporation engaged in the business of providing

water and sewer services to approximately 10,600 custo-

mers in Montgomery County. Appellant is a wholly own-

ed subsidiary of the Consolidated Water Company, locat-

ed in Florida, a company owned by GAC Utilities, Inc.

On May 3, 1965, appellant filed an application and

proposed accounting entries with the Public Utilities

Commission, seeking approval of the acquisition of Huber

Utilities, Inc., a utility company owned by Huber Homes,

Inc., a land development company. Appellant’s proposed

purchase price was $2,800,000, and included property

owned by Huber Utilities which, as of December 31,

1964, was recorded on the books of Huber Utilities as

amounting to $3,867,118.03. Of the property owned by

Huber Utilities as of that date, $2,787,788.96 was re-

flected on its books as property donated to the company

from other parties and as Contributions in Aid of Con-

9

struction (CIAC). Of the total CIAC received by Huber

Utilities as of December 31, 1964, all but $8,373 repre-

sented cash or property contributed to that company by

its parent corporation, Huber Homes. In its accounting

entries submitted for commission approval in relation to

the acquisition of Huber Utilities, appellant carried over

as CIAC only $8,373 of the total CIAC reflected on the

books of Huber Utilities as of December 31, 1964. On

August 18, 1965, appellant’s accounting entries and pro-

posed acquisition of Huber Utilities were approved by

the commission.

On May 12, 1978, appellant filed an application with

the commission seeking a permanent increase in its rates

for water and sewer services delivered to its jurisdiction-

al customers. Subsequent to an investigation of the appli-

cation by the commission’s staff, the commission con-

ducted hearings on January 9, 10, and 11, 1979, and en-

tered its opinion and order in the matter on March 8,

1979. In calculating the value of the property includable

in appellant’s rate base for purposes of determining a

fair and reasonable rate of return, the commission assign-

ed a zero value to the property which appellant had

carried over from the purchase of Huber Utilities and

which had been recorded by Huber Utilities as CLAC.

Tk. commission’s finding in this regard was predicated

upon its staff report, which indicated that Huber Util-

ities, under the provisions of R.C. 4909.05(E), was

“the person that first dedicated the property to the pub-

lic use,” and therefore the property had to be valued at

its original cost to Huber Utilities, which was zero. The

staff’s conclusion was bolstered by the testimony of two

witnesses who appeared on appellant’s behalf and who in-

dicated that it was Huber Utiltites and not its parent

company, Huber Homes, that first dedicated the property

in ques.ion to the public use.

10

With respect to the appropriate rate of return, the

commission adopted its staff’s recommendation of 9.26

percent to 9.57 percent, which was based upon a cost of

capital analysis of the consolidated capital structure

of appellant’s parent company, the Consolidated Water

Company. In its application before the commission,

appellant had sought a rate of return of 11.76 percent

based upon an evaluation of its own capital structure.

Notwithstanding the commission’s preference for the

methodology employed by its staff in computing the ap-

propriate rate of return, it was the comm‘*ssion’s finding

that a decrease in appellant’s existing rate of return of

11.57 percent was not warranted in this cause, because

“falny difference in net operating income between the

adjusted test year and the pro forma income (under

rates which provide a 9.57 % return) would certainly be

eroded by the continuing high rate of inflation experi-

enced in the last eight months” since the end of the test

vear.

Appellant filed an application for rehearing on April

9, 1979, alleging various errors in the opinion and order

of the commission. On May 2, 1979, appellant’s applica-

tion for rehearing was denied.

This cause is now before this court upon an appeal as

a matter of right.

Messrs. McConnaughey, Stradley, Mone & Maul, Mr.

George C. McConnaughey and Mr. David C. Stradley,

for appellant.

Mr. William J. Brown, attorney general, Mr. Marvin

I. Resnick and Mr. Jonathan L. Heller, for appellee.

Per Curiam. Appellant’s initial challenge is founded

upon the commission’s determination to exclude from

appellant’s rate base the property which Huber Utilities

11

received from Huber Homes as CIAC. Under statutory

law existing prior to the enactment of Am. Sub. S.B. No.

94 (136 Ohio Laws 202), effective September 1, 1976,

this property was includable in the rate base. Appellant

contends that the exclusion, under the instant circum-

stances, amounts to an unconstitutional confiscation of

its property in violation of the Fourteenth Amendment

to the United States Constitution and Sections 1, 16 and

19 of the Constitution of Ohio.

This court recently addressed a similar argument in

Ohio Utilities Co. v. Pub. Util. Comm. (1979), 58 Ohio

St. 2d 153, 389 N.E. 2d 483. In that case, the utility

company received as CIAC substantial quantities of cash

and property from development companies owned by the

individuals who also held the utility company’s stock.

These contributions were apparently made prior to the

enactment of Am. Sub. S.B. No. 94, and prior to the sale

of the utility’s stock to another company in 1973.

Thereafter, when the General Assembly replaced the re-

production cost new less depreciation method of determ-

ining the valuation of rate base property with the or-

iginal cost method valuation set forth by Am. Sub. S.B.

No. 94, the utility challenged the commission’s subse-

quent exclusion of it’s CIAC from its rate base under the

provisions of R.C. 4909.05 (1) and (J).

In deciding that the implementation of the General

Assembly’s original cost valuation procedure did not

contravene constitutional guarantees of due process,

this court recognized that regulation in some instances

may diminish the value of the property controlled, but

concluded that the presence of this aspect of regulation

does not amount to an unconstitutional taking of that

property. As indicated in that cause, the rationale for the

exclusion of Contribution in Aid of Construction from

the value of property upon which a rate of return is guar-

12

anteed by the Constitution is the well-settled principle

in utility law that it is “ the investment of the share-

holder which comprises the rate base,” and “not con-

tributions of others.” Ohio Utilities Co. v. Pub. Util.

Comm., supra, at page 161, citing Missouri, ex rel. S. W.

Bell Tel. Cc., v. Public Service Comm. (1923), 262 U.S.

276, 290 (Justice Brandeis dissenting); Cincinnati v. Pub.

Util. Comm. (1954), 161 Ohio St. 2d 395, 119 N.E. 2d

619. It is not disputed that the instant property was

donated to Huber Utilities prior to appellant’s purchase

of the assets of that company and that this property was

received as Contributions in Aid of Construction.

Appellant argues also that it was Huber Homes which

first dedicated the subject property to “the public use,”

not Huber Utilities, and therefore the value to be ascrib-

ed to the property for purposes of inclusion in appellant’s

rate base was its original cost to Huber Homes. However,

the commission determined that Huber Utilities first

dedicated the property in question. This conclusion was

based in part upon the recommendation of the staff in

its report to the commission, and upon the testimony of

appellant’s witnesses who indicated that it was Huber

Utilities which dedicated or devoted the property to the

public use. We are not persuaded that the commission’s

interpretation of this record should be disturbed. Cleve-

land Elec. Illuminating Co. v. Pub. Util. Comm. (1975),

42 Ohio St. 2d 403, 330 N.E. 2d 1, certiorari denied,

423 U.S. 986.

Appellant urges further that the commission’s use of

the consolidated capital structure of appellant’s parent

utility, in calculating a fair and reasonable rate of return

on appellant’s rate base, contravenes the provisions of

13

R.C. 4909.15 (D) (2) (a). *

In determining an appropriate rate of return under

the provisions of R.C. 4909.15, the commission is af-

forded a wide degree of discretion in calculating the cost

of capital of the utility whose rates are to be fixed. Bab-

bit v. Pub. Util. Comm. (1979), 59 Ohio St. 2d 81, 391

N.E. 2d 1376. The provisions of R.C. 4909.15 (A) and

(D) do not prevent the Public Utilities Commissicn from

assessing the consolidated capital structure of a utility’s

parent company in order to determine a fair and reason-

able rate of return, if the capital structure of the parent

company more reasonably reflects the subsidiary utility’s

actual cost of capital for rate-making purposes. Ohio

Water Service v. Pub. Util. Comm. (1980), 61 Ohio St.

2d 308, N.E. 2d- ; Babbit v. Pub. Util. Comm.,

supra; cf. Franklin Co. Welfare Rights Org. v. Pub. Util.

Com». (1978), 55 Ohio St. 2d 1, 12-13, 377 N.E. 2d

990.

The reasonableness of the commission’s action in

determining the cost of capital herein by reference to the

consolidated capital structure of appellant’s parent com-

pany, is set forth in the commission’s order and decision

in this cause:

* R.C. 4909.15 (D) provides, in part, that the commission,

upon concluding that any rate, fare, or charge for services rendered

is unreasonable or unjust, shall:

** (2) With due regard to all such other matters as are proper,

according to the facts in each case,

** (a) Including a fair and reasonable rate of return determined

by the commission with reference to a cost of debt equal to the

actual embedded cost of debt of such public utility,

“ (b) *** fix and determined the just and reasonable rate ***

to be *** charged *** for the *** rendition of the

service ***,”

(Emphasis added. )

14

“The staff recommended a rate of return range of

9.26% to 9.57% based upon the consolidated capital

structure of the appellant’s parent, Consolidated Water

Company. Randy G. Farrar, Financial Analyst with the

Staff, ‘testified that the cost of capital could not be strict-

ly applied only to the subsidiary (Ohio Suburban) be-

cause investors demand a required return which is de-

pendent upon the risk and uncertainty conditions facing

the entire company, not just the subsidiary ***. He be-

lieved that efficient capital budgeting by the parent

company requires that the parent devote resources to

the various productive activities up to the point where

the expected return on the marginal dollar invested in

each activity is equal to the cost of capital of the con-

solidated entity. In such a case, Mr. Farrar felt that no

distinction could be made between the parent company

and the subsidiary. The Staff computed the cost of long

term debt in the consolidated capital structure of the

parent at 8.47% and the cost of perferred stock at 6.19%

2 kk

“é

*** [W]e cannot ignore the relationship between

the applicant and its parent. Although we recognize that

Ohio Suburban does issue its own debt, we are persuaded

by the argument of the Staff that the debt investor is not

blind to the apparent subsidiary relationship and the fact

that substantial portions of Ohio Suburban’s capital

comes from its parent ***, The fact that Consolidated

made advances in September, 1977 to Ohio Suburban to

pay off its short term debt and a $625,000 of capital con-

tribution in December negates the proposition that Ohio

Suburban is financially independent of its parent ***.”

15

The order of the commission is neither unreasonable

nor unlawful and is affirmed.

Order affirmed.

CELEBREZZE, C.J., HERBERT, W. BROWN, P.

BROWN, SWEENEY, LOCHER and HOLMES, Ju.,

concur.

16

THE SUPREME COURT OF THE STATE OF OHIO

THE STATE OF OHIO, 1980 TERM

City of Columbus.

To wit: May 1, 1980

Ohio Suburban Water Company,

Appellant,

US. No. 79 - 880

Public Utilities Commission, REHEARING

of Ohio,

Appellee.

It is ordered by the court that rehearing in this case is

denied.

I, THOMAS L. STARTZMAN, of Clerk the Supreme

Court of the State of Ohio, do hereby certify that the

foregoing entry was correctly copied from the records

of said Court, to wit, from Journal No. Page

IN WITNESS WHEREOF,

I have hereunto subscribed

my name and affixed the

seal of the Supreme Court

this 1st day of May 1980.

THOMAS L. STARTZ-

MAN Clerk.

By /s/ illegible Deputy.

17

BEFORE

THE PUBLIC UTILITIES COMMISSION OF OHIO

In the Matter of the Application _)

of Ohio Suburban Water Company )

for an increase in the Rates to be ) Case No.

Charged and Collected for Water ) 77-1512-WS-AIR

and Sewer Services.

OPINION AND ORDER

The Commission, coming now to consider the above-

entitled application filed pursuant to Section 4909.18,

Revised Code; the exhibits filed with the application;

the Staff Report of Investigation issued pursuant to

Section 4909.19, Revised Code; the testimony and ex-

hibits introduced into evidence at the public hearings

held on January 9, 10, and 11, 1979; and having ap-

pointed its Attorney Examiner Stephen M. Howard

pursuant to Section 4901.18, Revised Code, to conduct

a public hearing and to certify the record directly to the

Commission; and being otherwise fully advised in the

premises and in compliance with Section 4903.09,

Revised Code, hereby issues its Opinion and Order.

APPEARANCES:

Messrs. George, Greek, King, McMahon and Mc-

Connaughey, 100 East Broad Street, Columbus, Ohio

43215, by Mr. Charles R. Petree II, Mr. George C. Mc-

Connaughey, and Mr. David C. Stradley, on behalf of

the applicant, Ohio Suburban Water Company.

Mr. William J. Brown, Attorney General, by Mr.

John W. Rudduck and Mr. Jonathan L. Heller, Assistant

Attorneys General, 180 East Broad Street, Columbus,

Ohio 43215, on behalf of the Staff of the Public Utili-

18

ties Commission of Ohio.

HISTORY OF THE PROCEEDINGS:

The Ohio Suburban Water Company (hereinafter

referred to as Ohio Suburban or the applicant) is an

Ohio corporation engaged in the business of providing

water and sewer service to approximately 10,600 cus-

tomers in the Huber Heights Subdivision in Mont-

gomery County, Ohio. The applicant is wholly owned

by Consolidated Water Company of Miami, Florida,

which in turn is 99% owned by GAC Utilities, Inc.,

a subsidiary of GAC, Inc. Ohio Suburban is a public

utility, a water-works company and a sewage dis-

posal company within the definition of Sections 4905.02,

4905.03 (A) (8), and 4905.03 (A) (14), Revised Code,

and as such, is subject to the jurisdiction of the Com-

mission pursuant to Sections 4905.04, 4905.05, and

4905.06, Revised Code.

On December 23, 1977, the applicant filed a notice

with this Commission of its intent to file an application

for an increase in rates for both water and sewer ser-

vices. Ohio Suburban proposed a test period beginning

July 1, 1977 and ending June 30, 1978 with a date

certain of December 31, 1977. By its January 11, 1978

Entry in this matter, the Commission approved the pro-

posed test year and date certain. On May 12, 1978, the

applicant submitted an application to the Commission

seeking authority to increase its rates. The current rates

for both water and sewer services were authorized by

Order of this Commission on January 18, 1977 in Case

Nos. 75-741-WW-AIR and 75-1122-WS-AIR, and be-

came effective February 17, 1977. The application,

as filed May 12, 1978, was not accepted for filing for

purposes of Sections 4909.17, 4909.19, and 4909.42,

19

Revised Code, because it did not comply with the Com-

mission’s Standard Filing Requirements. On June 6,

1978, the applicant submitted supplemental schedules

S-1 and S-2 and copies of its working papers which, in

conjunction with the May 12, 1978 filing, complied

with the Commission’s Standard Filing Requirements.

The Commission accepted the application of Ohio Sub-

urban for a change in water and sewer utility rates to

be charged and collected as of June 6, 1978.

A Staff Report of Investigation was filed on October

20, 1978 and was served pursuant to Section 4909.19,

Revised Code. The applicant timely filed its objections

to the Staff Report on November 20, 1978. In addition

to the direct testimony of Mr. James Wittenmyer, Mr.

Robert B. Gordon and Mr. William C. Hoelke which was

filed on May 12, 1978, Ohio Suburban also filed the di-

rect testimony of Mr. Lyle D. Sullivan and the rebuttal

testimony of Messrs. Wittenmyer, Gordon, and Hoelke

on December 21, 1978.

The applicant complied with the notice and pub-

lication requirements of Sections 4909.18 and 4909.19,

Revised Code (Applicant’s Exhibit II). Ohio Suburban

has also complied with the Commission’s Entry of Nov-

ember 29, 1978 by causing a notice of the hearing to be

published in a newspaper of general circulation in Mont-

gomery County, Ohio at least fifteen days prior to the

hearing date (Applicant’s Ex. III). Hearings in this mat-

ter were held at the offices of the Commission on Janu-

ary 9, 10, and 11, 1979. This case is now before the

Commission for final order.

20

COMMISSION REVIEW AND DISCUSSION:

The Ohio Suburban Water Company provides

water and sewer service to approximately 10,600 cus-

tomers in the Huber Heights Division of Montgomery

County, Ohio. The application covers the applicant’s

entire service area. The present rates were authorized

by the Commission’s January 18, 1977 Order in Case

No. 75-741-WW-AIR and 75-1122-WS-AIR. The pro-

posed rates, when applied to the test year actual sales

volume, would generate additional gross revenues of

approximately $486,230 or an increase of 29%.

Rate Base

Both the applicant and the Staff submitted exhibits

and testimony in support of the total value of its pro-

perty actually used and useful in providing water ser-

vice. The findings of the parties can be summarized as

follows: :

Applicant Staff

Plant in Service $11,993,463 $11,979,462

Less: Reserve for

Accumulated

Depreciation 1,678,552 585,462

Net Plant in Service 10,314,911 11,394,129

Plus: Construction

Work in Pro-

gress 75,740 78,546

Plus: Working Capital -0- -0-

21

Less: Contributions

in Aid of

Construction 3,482,979 6,262,345

Less: Other Items 18,136 -Q-

Total Company Rate

Base 6,889,536 5,210,280

The parties stipulated that the Staff figure for “Plant

in Service” represented the original cost of the used and

useful total plant in service without regard to the source

of funding (Tr. III, 67-68).

22

The major issue in this case involves the valuation to

be ascribed to certain property purchased by Ohio Sub-

urban from Huber Utilities, Inc. in 1965. The Commis-

sion approved the sale and the accounting entries effect-

ing this sale in its August 18, 1965 Order in Case Nos.

33,138 and 33,139 (Applicant’s Ex. IX, Appendix RBG

1). The net property plant and equipment (which was

sold to Ohio Suburban) was booked at $3,867,118.03

by Huber Utilities, but the December 31, 1964 balance

sheet of Huber Utilities reflected that it had received

Contributions In Aid of Construction of $2,787,788.96

(Staff Ex. 2, Appendix A). Ohio Suburban paid $2.8

million for substantially all of Huber Utilities assets in

1965. In the Staff Report, the Staff alleged that the or-

iginal accounting entries setting up Ohio Suburban’s

general ledger accounts were in error (Staff Ex. 1, p. 19).

However, at the hearing, the Assistant Attorney Gerneral

indicated in his opening remarks that the Staff’s position

on the issue was based upon Section 4909.15 (E), Revis-

ed Code (Tr. I, 10-11). That statute requires the Commis-

sion to value all kinds and classes of property other than

land at the original cost to the first person who dedicated

the property to public use. The Staff’s argument is simply

that Huber Utilities, Inc. was the “person who first dedi-

cated the property to public use” and therefore the pro-

perty in question should be valued at the original cost to

Huber Utilities. Since the balance sheet referred to

above indicates that the property in question was donat-

ed to Huber Utilities, the Staff believes that Section

4909.05 (E), Revised Code requires a zero value assigned

to that property. Ohio Suburban did not attempt to de-

termine the original cost of the property or who actually

paid for the property (Tr. I, 93-94). The applicant argued

that it should be entitled to earn a return on that

$3,867,118.03 which represented the booked value of

the property by Huber Utilities in 1964 and the Staff

23

maintained that Ohio Suburban should only be permitted

to earn a return on the noncontributed property or ap-

proximately $1 million of the property which was sold

to Ohio Suburban.

The Company and the Staff both take the position

that Section 4909.05 (I), Revised Code does not apply

to this particular set of facts because Ohio Suburban it-

self was not the donee of the donated or contributed

property (Company Brief p. 6 and Staff Reply Brief,

p. 6). The “contributed property issue” in In re Ohio

Utilities Company, Case No. 77-1073-WS-COI, Opinion

and Order dated May 18, 1978, was decided based on an

analysis of Section 4909.05 (I), Revised Code. However,

this fact does not necessarily mean that this case is totally

dissimiliar from In re Ohio Utilities Company, supra.

In the Ohio Utilities case, the Davis family held all of the

stock of the Ohio Utilities and also owned or controlled

land development companies which contributed property

to Ohio Utilities from 1962 to 1973. The Davis family

sold their stock in 1973 to Citizens Utilities of Arizona,

but the name of the utility company still remained Ohio

Utilities. As a result, a certain dollar amount was exclud-

ed from the rate base of Ohio Utilities pursuant to Sec-

tion 4909.05 (I), Revised Code because Ohio Utilities

received contributions in aid of construction. In this case,

Huber Construction and others donated property to

Huber Utilities between 1956 and 1965. Huber Utilities

then sold its assets to Ohio Suburban in 1965. Therefore,

the Commission looks to Section 4909.05 (E), Revised

Code, in this case, and not Section 4909.05 (I), Revised

Code.

Ohio Suburban made several arguments as to why it

felt the Staff position should not be adopted. First, the

24

applicant maintained that the Commission should be

estopped from excluding the $2,779,416 from the rate

because it (the Commission) had approved the transfer

and the accounting entries effecting such transfer in

its August 18, 1965 Order and Ohio Suburban and its

creditors had relied on such order. The applicant alleged

that by approving the accounting entries which showed

only $8,373 to be recorded in Contributions In Aid of

Construction, the “stigma of contributed property”

was removed (Applicant’s Brief, p. 4). It was also pointed

out that paragraph 10 of Account 271 of the Uniform

System of Accounts for Class A and B Water Utilities

does permit the credits to Account 271 to be transferred

to surplus or any other account with the approval of the

commission, which was obtained by the August 18, 1965

Order. This Commission observes that in that 1965 Or-

der, we specifically indicated that “nothing herein shall

be binding upon this Commission in any future proceed-

ing involving rates or service’ (Applicant’s Ex. [X, Ap-

pendix RGB 1, p. 5 of 6). We also did not prescribe the

Uniform System of Accounts until early 1971 (Tr. III,

85), but more importantly, the Uniform System of Ac-

counts must yield to any statute (Section 4909.05 (E),

Revised Code in this case).

Ohio Suburban also argued that the Staff’s assump-

tion that Huber Utilities was the first person which dedi-

cated the property to public use was not supported on

the record (Applicant’s Reply Brief, p. 6). The Company

felt that it was Huber Construction, Inc. (the parent of

Huber Utilities, Inc.) and not Huber Utilities which first

dedicated the property in question to public use (Appli-

cant’s Reply Brief, pp. 7-8). This is not consistent with

the testimony of the applicant’s witnesses. Both Mr.

Gordon and Mr. Hoelke apparently believed that it was

Huber Utilities which first dedicated the property to

25

public use (Tr. I, 83-84 and Applicant’s Ex. IV, p. 19).

Further, the Company’s argument here was based on lan-

guage contained in the transfer agreement between Huber

Construction and Huber Utilities in 1956. However,

Appendix C to Staff Exhibit 2 showed that other builders

besides Huber Construction contributed property to

Huber Utilities. (This Appendix was a copy of page 18

of the December 31, 1964 Annual Report of Huber

Utilities. )

The applicant also alleges that if the Staff interpreta-

tion of Section 4909.05 (E), Revised Code were correct,

then the statute results in an unconstitutional confisca-

tior..of Ohio Suburban’s property (Applicant’s Brief,

pp. 7-10). As indicated above, Ohio Suburban paid only

$2.8 million for property which was booked at approx-

imately $3.8 million by Huber Utilities in 1964. We ap-

proved this sale in our August 18, 1965 Order in Case

Nos. 33.138 and 33.139 and specifically found that the

value of the transferred property was not less that $2.8

million. It does appear to us that the application of Sec-

tion 4909.05 (E), Revised Code to an arms’ length sale

of assets between utilities produces an unconstitutional

and an inequitable result. However, this Commission, as

an administrative agency, is without jurisdiction to de-

termine the constituitonality of a statute. See Herrick

v. Kosydar (1975) 44 Ohio St. 2d 128, 130. We must

proceed under the assumption that a statute is consti-

tutional. See East Ohio Gas v. Pub. Util. Comm. (1940)

137 Ohio St. 225, 238-239. We are compelled to con-

clude that the Staff properly ascribed a zero value to

that property which was contributed to Huber Utilities

and sold to Ohio Suburban pursuant to Section 4909.05

(E), Revised Code.

26

Consistent with that finding, we also agree with

Staff’s adjustment to the depreciation reserve. As the

Commission noted in In re Ohio Utilities Company, Case

No. 77-1073-WS-COI, Opinion and Order of May 18,

1978 at page 14, “the proper and adequate reserve for

depreciation is one that reflects depreciation on only that

property which is included in the rate base.” The Staff

revised its schedules by excluding from depreciation

reserve that portion of the accrued depreciation which

is attributable to the contributed property (Staff Ex.

2, pp. 9-10). See also the discussion of depreciation ex-

pense on page 7 of this Opinion and Order.

The applicant originally excluded $18,136 represent-

ing portions of four parcels of land (Coey, Hull, Miami-

Erie Canal, and Hamiel) from its rate base. See Appli-

cant’s Ex. 1, Schedule B-2.7. The reason for this ex-

clusion, as set forth on Schedule B-2.7, was that in the

last rate case (Case No. 75-741-WW-AIR) a portion of

the land was not considered to be useful. In its report,

the Staff made this same exclusion, indicating that

6.10% of the Coey parcel, 75% of both Hull parcels,

13.67% of the Miami-Erie Canal parcel and 30.40% of

the Hamiel parcel should be excluded from the rate base

(Staff Ex. 1, pp. 16-17). The Staff arrived at these per-

centages by applying that the minimum intrusion limit

recommended by the Ohio EPA of a 300 foot radius

(supra). The applicant filed objections to this exclusion.

In his rebuttal testimony, Mr. Wittenmyer stated that

these parcels were used and useful since that sat over an

aquifer and the wells were sunk in this aquifer (Appli-

cant’s Ex. VIII, pp. 2-3). The Staff moved to strike this

testimony of Mr. Wittenmyer as well as similar testimony

of Mr. Hoelke (Applicant’s Ex. X, pp. 11-12) because it

felt that it was an attempt to modify the original appli-

27

cation. (Tr. I, 31 and 110). The attorney examiner denied

the motions to strike. Mr. Kenneth Smith of the Staff

subsequently testified that in the rate case, the Staff ex-

cluded 75% of both Hull parcels, but chould have only

excluded 25% (Tr. III,81). In this case, the Staff continu-

ed the “error”. Mr.:Smith indicated that the Staff would

be willing to “reserve’’ this error by excluding only 25%

of the Hull properties and including that portion of the

Hamiel parcel which was previously excluded. The north

part of the Hamiel-Huber parcel has a main that runs

through it and therefore it is useful (Tr. III, 82). We

would agree with the Staff’s motion that the applicant

should not be permitted to modify its application by sub-

sequent testimony in this particular case. There is nothing

in the record to indicate that circumstances surrounding

these parcels had changed between the date the applica-

tion was filed and the hearing date. The Commission does

feel that the Company’s rate base should include those

revisions suggested by Mr. Smith.

The applicant did not file any objections to the

Staff’s Schedule 15 which was a depreciation reserve

summary nor did it take exception to the Staff recom-

mended depreciation accural rates set forth on Schedule

16 of the Staff Report. Ohio Suburban stipulated to the

Staff’s figures for Construction Work In Progress of

$78,546. The Commission finds that the Staff adjust-

ments to Account 332.1 (Treatment Equipment) and the

correction to Account 325.1 (Electrical Pumping Equip-

ment) are reasonable and will be adopted. All other dif-

ferences in the rate base area were resolved either by the

Company withdrawing an objection or the Staff with-

drawing a recommendation. We find that for purposes

of this case, the value of the applicant’s property used

and useful in providing water and sewer services to its

28

customers determined in accordance with Sections

4909.05 and 4909.15, Revised Code, is not less than

$5,210,280.

Revenues and Expenses

The applicant submitted exhibits and testimony

setting forth its determination of total operating revenues,

expenses, and income available for fixed charges during

the test year under its present and proposed rates. Ohio

Suburban’s calculations regarding its present rates may be

summarized as follows:

Operating Revenues $1,675,864

Operating Expenses 1,131,823

Income Available for Fixed Charges 544,046

Under the rates for service which the Company requests,

including adjustments, it submits that test year revenues,

expenses, and income available for fixed charges would

be as follows:

Operating Revenues $2,162,099

Operating Expenses 1,387,577

Income Available for Fixed Charges 774,522

The Staff investigated the matters set forth in the ap-

plication and related exhibits. It concluded that under

present rates, the applicant’s total operating revenues,

expenses, and income available for fixed charges during

the test year, including adjustments, are as follows:

Operating Revenues $1,670,580

Operating Expenses 1,068,100

Income Available for Fixed Charges 602,480

29

It should be noted here that the Staff’s Operating

Expenses figure is incorrect as the Staff deducted the

prior rate expense of $8850 twice. Further, the Fed-

eral Income Tax here here was computed at the old

rate of 48%. The Staff also concluded that under the pro-

posed rates of the applicant, the applicant’s total operat-

ing revenues, expenses, and income available for fixed

charges during the test year, including adjustments, are

as follows:

Operating Revenues $2,168,629

Operating Expenses 1,308,192

Income Available for Fixed Charges 860,437

The applicant has accepted the Staff figures for

revenues, under current and proposed rates as well as

the Staff’s adjustments for certain operating expenses

such as payroll expense, pension expense, postage ex-

pense, uncollectible accounts, and other taxes other than

income taxes (which is made up of property taxes, ex-

cise taxes, and payroll taxes). The difference between the

two positions appears to rest in the area of rate case

expense, depreciation expense, and the use of the de-

ferred tax credit.

Originally, both the Company and the Staff proposed

a $30,000 rate expense. However, the applicant recom-

mended that the rate case expense be amortized over two

years while the Staff advocated an amortization period

of three years. Additionally, the Company also added the

amount which was amortized in the last rate case of

$8850 (Applicant’s Ex. I, p. 4-5). The Staff proposed

excluding the unamortized rate case expenses incurred

in Case No. 75-741-WW-Air and 75-1122-WS-AIR.

30

On rebuttal, Mr Hoelke revised the applicant’s rate case

expense to $53,000. He stated that the Company had

materially underestinated its rate case expense because

this was its first filing under the revised standard filing

requirements (Applicant’s Exhibit X, p. 5). At the re-

quest of the Staff, Ohio Suburban filed updated informa-

tion on the actual or refined estimate to rate case ex-

penses after the hearing. According to that document,

the applicant had incurred $57,601 of actual rate case

expenses and $5,565 in estimated expenses making a

total of $63,166.

Although the Commission generally permits the in-

clusion of reasonable expenses incurred in the presenta-

tion of a particular rate proceeding, we have previously

held it to be inappropriate to impose the additional cost

of a rate proceeding upon ratepayers when the percentage

of increase in authorized gross revenues from the particu-

lar rate proceeding is very small. See In re Dayton

Power & Light Company, Case No 76-823-EL-AIR,

Opinion and Order dated July 22, 1977, at page 11.

In this case, we have determined that no additional

revenues need be authorized at this time. However, we

believe there is a significant distinction between the Day-

ton Power & Light case and this one. Even though the

applicant prevailed on most of the major issues in Dayton

Power & Light, the revenues collected under the rates

in effect at the time of the hearing did not vary substan-

tially from the revenues ultimately authorized by the

Commission in its Order in that case (Daytun Power &

Light, supra, pp. 3 and 11). Therefore, we concluded that

the application was prematurely filed. That is not the

situation here. Rate relief is being denied primarilarly

because the Commission does not accept the applicant’s

position on the major issue of this case (the proper val-

31

vation of property contributed to Huber Utilities, Inc.).

Had the applicant prevailed on this issue, rate relief

would have been granted. In addition, the applicant has

raided a legitimate question as to the constitutionality

of the application of Section 4909.15(E), Revised Code.

In view of these facts, we feel that a reasonable rate case

expense should be allowed and we will use the applicant’s

actual rate case expense of $57,601 and its estimated rate

case expense of $5,565 or a total of $63,166.

We do agree with the Staff’s position that the proper

period for amortization is three years. The record reflects

that applicant has applied for three rate increases in the

last 14 years (Tr. I, 107-108). Further, as this Commiss-

sion has noted before “in fixing an amortization period,

it is appropriate to look not only to the experience of

a particular applicant, but also to the experience of the

industry as a whole”. In re Columbus & Southern Ohio

Electric Company, Case No. 77-545-EL-AIR, Opinion

and Order dated March 31, 1978, at page 24. Mr. Smith

indicated that the experience of the Staff with other

water and sewer companies and smaller utilities is that

a three year period was an appropriate amortization

period (Tr. III, 78). We also find that the $8850 re-

presenting the amount of the rate case expense amortiz-

ed in the last rate case should be excluded in calculating

the instant rate case expense. We also stated in In re

Columbus & Southern Ohio Electric Company supra,

“it is far better to adopt an amortization period which

will minimize the risk that ratepayers will be subjected

to rates which have costs built into them that have al-

ready been recovered. The Commission found this con-

sideration to apply with equal force to expenses associat-

ed with prior cases which remain unrecovered.” We

comtinue to follow that philosphy in this case. There-

fore we find the appropriate rate case expense to be

$63,166 to be amortized over three years, or an annual

rate case expense of $21,055.

32

The applicant also objected to the Staff’s elimination

of the applicant’s depreciation expenses related to the

property which was assigned a zero cost as discussed

earlier. Mr. Hoelke believed that since such property

was used in providing service and so he proposed an in-

crease to the Staff’s recommended depreciatidn expense

of $84,751 and $76,460 for water and sewer operations,

respectively (Applicant’s Exhibit X, Schedules 1.1 and

1.2). He also felt that the purpose of depreciation ex-

pense is to create a fund for eventual replacement of the

property which the utility has in service. (Tr. I, 110).

Howevei, we have rejected the “fund theory” of deprecia-

tion in prior cases and continue to so hold in this case.

See Case No. 76-492-ST-AIR, In re Woodbran Realty

Corporation, Order on Rehearing dated June 21, 1978

and Case No. 77-1073-WS-COI, In re Ohio Utilities

Company, Opinion and Order dated May 18, 1978.

Rather we have held that the depreciation expense is

a mechanism whereby the cost of the consumption of

the revenue producing capability of an item is spread

out over its life (supra). Where the property in question

has been assigned a zero cost, then there are no costs

to be recovered. See Woodbran, Case No. 76-492-

ST-AIR, Order on Rehearing, June 21, 1978, at page 2.

We find that the Staff’s depreciation expense of $92,173

is proper. |

The Applicant alleged in its objections to the Staff

Report that if the Commission used Consolidated Water

Company’s capital structure in formulating a rate of re-

turn, then the “tax credit from parent” of $26,487

would be eliminated. There is no support given by Ohio

33

Suburban for this argument. We find that regardless of

the capital structure employed, the applicant will still

be able to utilize the tax credit from its parent.

In addition, we have computed the federal income

tax for the test year at 46% rate instead of the former

rate of 48%. In summary, the Commission finds that un-

der the present rates, the test year revenues, expenses

and income available for fixed charges are $1,670,580,

$1,067,578 and $603,002 respectively.

Rate of Return

The Commission notes that by dividing the income

available for fixed charges of $603,002 by the rate base

of $5,210,280, the resultant rate of return under current

rates is 11.57%. The applicant has recommended a rate

of return of 11.76% based upon the capital structure

of Ohio Suburban (Applicant’s Ex. VI, r. 7). Mr. Robert

Gordon, testifying on behalf of the applicant, indicated

that the embedded cost of long term debt to the appli-

cant was 8.83% as of December 31, 1977 (Applicant’s

Ex. I, Schedule D-4 and Applicant’s Ex. VI, p. 4). He

recommended a 14.5% rate of return on equity (Appli-

cant’s Ex. VI, p. 9). This was recommended because it

would allow the equity investors a dividend yield of 8%

at a 55% payout rate, would allow maintainance of a

55%/45% debt equity ratio, and would provide coverage

in a range of two times (supra). Mr. Gordon testifies

that he looked at these factors and then determined

what rate of return would be required in order to achieve

these results or goals (Tr. II, 9-11).

The Staff recommended a rate of return range of

9.26% to 9.57% based upon the consolidated capital

34

structure of the applicant’s parent, Consolidated Water

Company. Mr. Randy G. Fararr, Financial Analyst with

the Staff, testified that the cost of capital could not be

strictly applied only to the subsidiary (Ohio Suburban)

- because investors demand a required return which is

dependent upon the risk and uncertainty conditions

facing the entire company, not just the subsidiary (Staff

Exhibit 3, pp. 3-4). He believed that efficient capital

budgeting by the parent company requires that the par-

ent devote resources to the various productive activities

up to the point where the expected return on the mar-

ginal dollar invested in each activity is equal to the cost

of capital to the consolidated entity. In such a case, Mr.

Fararr felt that no distinction could be made between

the parent company and the subsidiary. The Staff com-

puted the cost of long term debt in the consolidated

capital structure of the parent at 8.47% and the cost

of preferred stock at 6.19% (Staff Exhibit 3, Table 3A

and 4A). It indicated that it could not make a direct

discounted cash flow analysis of the cost of equity be-

cause Consolidated Water Company has no commonly

traded stock (Staff Exhibit 1, p. 25). But Mr. Fararr

testified that he used a discounted cash flow method-

ology to determine the cost of equity faced by five other

water companies who were competing in the equity

marketplace (Staff Exhibit 3, p.7). These five other water

companies were not chosen because they were identical

to Consolidated and therefore one could equate their

cost of equity with that of Consolidated (Staff Exhibit

3, p.8). Rather, they were chosen because they would

be competing with the parent of the applicant for equity

dollars and therefore the cost of equity would be similar

(supra). The Staff’s recommended rate of return for the

equity component was 11.5% to 12.5 % (Staff Exhibit

3, p. 10). |

35

We are adopting the Staff’s recommended rate of

return for two reasons. First, the Company’s method-

ology for determining its rate of return is unreasonable.

Mr. Gordon indicated that he looked at a number of

factors including coverage, dividends, the dividend pay-

out ratio, and the desired debt-equity ratio and then de-

termined what rate of return was necessary to achieve

the desired results (Tr. II, 10-11). This “actual earnings

requirements” methodology of determining the rate

of return has been previously rejected by the Supreme

Court of Ohio in City of Cleveland et. al. v. Public Util-

ities Commission of Ohio, (1956) 164 Ohio St. 442,

444, Secondly, we cannot ignore the relationship be-

tween the applicant and its parent. Although we recog-

nize that Ohio Suburban does issue its own debt, we are

persuaded by argument of the Staff that the debt invest-

or is not blind to the apparent subsidiary relationship

and the fact that substantial portions of Ohio Suburban’s

capital comes from its parent (Tr. III, 40-41). The fact

that Consolidated made advances in September, 1977 to

Ohio Suburban to pay off its short term debt and a

$625,000 of capital contribution in December negates

the proposition that Ohio Suburban is financially in-

dependent of its parent (Applicant’s Ex. VI, and Ex.

VI, p. 3 and Ex. IX, p. 11). Even two of the four wit-

nesses for the applicant were not employed by Ohio

Suburban, but rather were employed by Consolidated’s

parent (Applicant’s Ex. V, p. 1 and XV, p. 1). Therefore,

we find that the Staff’s recommended rate of return of

9.57% is reasonable.

However, we do not feel that a decrease in rates is

warranted in this case. The difference between the ad-

justed test year revenues and the pro forma revenues

36

required to give a rate of return of 9.57% is relatively

small. It must be noted that the end of the test year and

the date certain were over eight and 14 months ago,

respectively. Any difference in net operating income be-

tween the adjusted test year and the pro forma income

(under rates which would provide a 9.57% return) would

certainly be eroded by the continuing high rate of infla-

tion experienced in the last eight months. For this reason,

the Commission does not feel that a rate decrease is justi-

fied.

Rates and Tariffs

There is no evidence indicating that the applicant’s

current rate designs for both water and sewer services

are unreasonable and therefore we find that such rate

designs should remain unchanged.

The Staff proposed a change in the wording of the

applicant’s tariffs with respect to the filing and approval

of a contract between the Company and. customers

whose charge for water and sewer service is not based

upon consumption measured by meter (irregular custo-

mers). The changes are set forth on page 36 of Staff

Exhibit 1. No objection was filed to this reeommenda-

tion, therefore this Commission directs to file revised

tariffs incorporating this change.

The applicant’s current tariff provides that a five per

cent charge be assessed to the net bill if payment is not

made within 14 calendar days after the bill is mailed.

The Staff proposed that this grace period be extended

from 14 days to 20 days because it believed that the pro-

posed net payment period did not allow for the estab-

lishment of reasonable, regular customer payments in

response to rendered bills (Staff Ex. 1, p. 35).

37

Mr. James D. Wittenmyer, vice-president of Ohio

Suburban, testified that most of the Company’s custo-

mers experience no difficulty in making payments with-

in the 14 day time limit (Applicant’s Ex. IV, p. 7 and Tr.

I, 44). He believed that extending the discount period

would not benefit the prompt paying customer but

would delay payments and increase write-offs for the

customers who are habitual late payers. He doubted that

the extension of time would decrease the number of late

bills (Tr. I, 46). Additionally, Mr. Wittenmyer felt that

a 20 day grace period would likely increase the overtime

labor expense because it would decrease the number of

bills before the next billing register (Tr. I, 58-59). Mr.

Wittenmyer pointed out that four branch banks and a

pharmacy in the Huber Heights area serve as collection

agencies for Ohio Suburban and that at least one of the

agencies is open after Ohio Suburban’s regular working

hours and on weekends (Tr. I, 70). He also testified that

the applicant serves an area adjacent to Wright Patterson

Air Force Base which has a heavy turnover in personnel

(Tr. I, 65). Ohio Suburban has a turnover in new or

changing customers of about 300 to 400 per month

(Tr. I, 65). Although the Commission recognizes that it

has extended the discounted pay period recently in Case

No, 78-141-WW-AIR, In re Country Club Utilities, Inc.,

Opinion and Order dated January 10, 1979 and Case No.

78-1068-WW-AIR, In re Walnutcreek Water Company,

Opinion and Order dated January 30, 1979, we must

observe that the factors such as additional the expenses

to be incurred, the presence of collection agencies, and

the relatively high customer turnover rate of 3% - 4%

per month present in this case were not present in those

cases cited above. We see no need to change the tariffs

in this area at this time.

At the hearing, the Staff modified its original posi-

38

tion and stated that it was reasonable for the applicant

to install a meter, at its option, for construction of resi-

dential homes or buildings which take from six months

to a year to complete (Tr. II, 34). The Commission finds

the request of the applicant to be reasonable and there-

fore directs the Company to file proposed tariffs which

provide for such optional installation of meters for con-

struction of residentiai dwelling projects which take

from six months to a year to complete when the Com-

pany has reason to believe that water is being used for

other than construction purposes.

Other Staff Recommendations

The Staff made five recommendations on pages

20-21 of its Staff Report in an attempt to facilitate

future rate proceedings. We have reviewed these recom-

mendations and find them to be reasonable and well

made. Therefore, this Commission directs the applicant

to (1) use existing depreciation accrual rates as ordered in

Case Nos. 75-741-WW-AIR and 75-1122-WS-AIR ex-

cept that a composite rate of 1.07% be used for Account

343.1, Water Mains, and 1.14% to be used for Account

343.2, Sewer Mains; (2) adjust plant in service records in

accordance with the Staff audit filings, on a timely basis;

(3) continue to maintain a pertetual inventory system for

Account 346.1, Meters; (4) maintain the work order

system for Account 391.3, Office Furniture and tag all

property units. We note that the applicant objected only

to the fourth recommendation, but no evidence was

presented showing why such a recommendation was not

reasonable.

39

FINDINGS OF FACT:

(1)

(2)

(3)

(4)

(5)

(6)

The value of the applicant’s property used and

useful for the rendition of water and sewer

service, determined in accordance with Sections

4909.05 and 4909.15, Revised Code as of the

date certain of December 31, 1977 is not less

than $5,210,280.

For the twelve month period ending June 30,

1978 the test year in this proceeding, the

revenues, expenses and income available for

fixed charges realized by the applicant under

its existing rate schedule $1,670,580, $1,067,578

and $603,002, respectively.

The net annual compensation of $603,002

represents an 11.57 per cent rate of return on

the rate base of $5,210,280.

A rate of return of 11.57 per cent is not insuf-

ficient to provide the applicant with reasonable

compensation for the water and sewer service

it provides its customers.

The applicant’s present tariffs regarding the

filing of contracts between the applicant and

irregular customers should be withdrawn and

cancelled. }

The applicant should submit new tariffs with

respect to the filing of contracts between the

applicant and irregular customers and the

optional installation of meters during construc-

(7)

40

tion of residential buildings as discussed in this

Opinion and Order.

The Staff made five recommendations in an

attempt to facilitate future rate case proceed-

ings.

CONCLUSIONS OF LAW:

(1)

(2)

(3)

(4)

(9)

The application was filed pursuant to, and this

Commission has jurisdiction thereof, under

the provisions of Sections 4909.17, 4909.18,

and 4909.19, Revised Code, further, the appli-

cant has complied with the requirements in

those sections.

The Staff investigation has been conducted and

the Staff Report has been filed and served, in

accordance with the requirements of Section

4909.19. Revised Code.

A public hearing was held pursuant to Section

4909.19, Revised Code, and legal notice was

properly published.

The existing rates and charges are not insuf-

ficient to provide the applicant with adequate

net compensation aid return on its property

used and useful in furnishing water service.

The applicant should be authorized to cancel

and withdraw its presently effective tariffs

respecting the filing of contracts between the

applicant and irregular customers.

41

(6) The applicant should file proposed tariffs con-

sistent with the language contained on page 36

of Staff Exhibit 1 respecting the filing contracts

between the applicant and irregular customers

and with respect to the optional installation

of meters for construction of residential dwel-

ling projects which take from six months to a

year to complete when the Company has reason

to believe that water is being used for other

than construction purposes.

(7) The applicant should implement the five recom-

mendations which were discussed in the Section

of this Opinion and Order entitled ‘Other Staff

Recommendations”.

ORDER:

It is therefore,

ORDERED, That the application of Ohio Suburban

Water Company for authority to increase the rates to be

charged and collected for water and sewer services be

denied. It is, further,

ORDERED, That the applicant file in final form

three (3) complete printed copies of the tariff schedule

sheets consistent with the findings respecting the filing

of contracts between the applicant and irregular custo-

mers and the optional installation of meters on con-

struction of residential building projects which take be-

tween six months to a year to complete when the Com-

pany has reason to believe that water is being used for

other than construction purposes. It is, further.

42

ORDERED, That the applicant cancel and withdraw

its superseded tariffs. It is, further,

ORDERED, That the new tariffs shall become ef-

fective immediately upon Commission approval by entry.

It is, further.

ORDERED, That the applicant implement all recom-

mendations adopted by the Commission in the Section

of this Opinion and Order entitled “Other Staff Recom-

mendations’’. It is, further,

ORDERED, That all objections and motions not

specifically discussed within this Opinion and Order be

rendered moot, be overruled and denied. It is, further,

ORDERED, That a copy of this Opinion and Order

be served upon all parties of record.

THE PUBLIC UTILITIES COMMISSION

OF OHIO

/s/ illegible Chairman

/s/ illegible Commissioners

Entered in the Journal

March 8, 1979

A True Copy

/s/ David M. Polk

Secretary