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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1980
- **Citation:** 449 U.S. 876

## Text

) 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_0251%3A1. Public record. Not legal advice.