Marco Island Utilities v. Public Service Commission

Citations: 566 So. 2d 1325; 1990 Fla. App. LEXIS 6628; 1990 WL 126335Docket: No. 87-2116

Court: District Court of Appeal of Florida; August 28, 1990; Florida; State Appellate Court

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Two orders from the Florida Public Service Commission regarding Marco Island Utilities (MIU) are under review. Order No. 17600, following an evidentiary hearing, partially granted MIU a rate increase but denied inclusion of the actual interest cost of 16.1% for a $30 million long-term financing, allowing only 14.25%. Order No. 18476, issued after rehearing motions, provided additional relief but maintained the 14.25% interest ruling. MIU appeals this interest rate determination, claiming it lacks competent, substantial evidence and is contrary to law. The Office of the Public Counsel, representing Florida citizens, cross-appeals, asserting evidence supports a more reasonable interest rate of 11% to 11.5%.

The court identifies an error in the Commission’s ruling on MIU’s appeal and remands for further proceedings, while affirming the cross-appeal. MIU provides water and sewer services on Marco Island and is part of Deltona Utilities, which has multiple utility operations statewide. MIU requested a rate increase in 1985 due to significant past capital investments and future needs for service quality and regulatory compliance. The Commission mandated a test year ending March 31, 1985. 

MIU’s record shows a $30 million mortgage bond transaction in 1984 aimed at retiring an overdue $18 million debt and securing capital for necessary expenditures. The bond financing had a 10-year term at an actual cost of 16.1% (including fees), as confirmed by Commission staff. Restrictions in the bond agreement prohibited MIU from prepaying the debt without bondholder consent and imposed penalties for early retirement. Testimony indicated that, absent these restrictions, refinancing could have been achieved at 11% to 11.5%.

Order No. 17600 established findings regarding the cost of capital for Deltona Utilities, Inc. The utility claimed a cost of debt of 16.1%, reflecting the effective rate after including closing costs from a $30 million first mortgage bond financing at 15.5% for ten years. The Office of Public Counsel (OPC) proposed a cost rate of 11%, calculated by averaging the prime rate of 8.5% over a specific thirteen-month period and adding 2.5%. However, the Commission found that the utility's actual cost of debt should be 14.25%, derived from the prime rate of 11.25% as of December 1, 1984, plus the spread and issuance costs, rather than the inflated 16.1%.

The Commission rejected the utility's restriction on refinancing, which required bondholder consent and would incur penalties, asserting that such conditions were inappropriate. It ruled that the utility should be treated as if it could refinance the debt as of December 1, 1984. In a subsequent ruling, Order No. 18476, the Commission upheld its previous calculation of the cost of debt at 14.25%, indicating no mistake was made in its decision.

The Commission's authority to determine prudent costs for setting rates is derived from section 367.081(3) of the Florida Statutes, which allows for considerations of the utility's actions in financing. The Commission argued that the bondholder penalty restricted the utility's ability to secure more favorable financing options later available.

Financing was available in the 11% to 11.5% range, but the utility did not justify the necessity or desirability of a prepayment penalty and restriction. The evidence indicated that the utility locked in an excessive interest rate during a period of high rates. The Commission found 14.25% to be a reasonable interest rate based on evidence showing the cost of debt was 16.1%, while another expert suggested 11%. The Commission emphasized its duty to determine reasonable costs based on conflicting evidence and referenced prior rulings establishing that the burden lies with MIU to prove the Commission’s order was invalid or unsupported. The Commission is responsible for evaluating expert testimony and assigning weight to conflicting opinions but must also adhere strictly to established facts rather than assumptions. It cannot overlook expenses that will impact future rates, regardless of their inclusion in the test year’s methodology. Any decision must be based on competent, substantial evidence, as mere opinions on proper rates are insufficient. The Commission’s approach to using actual costs of debt was appropriate, but selecting unsupported debt ratios was not. Regarding the provision requiring bondholders' consent before calling bonds, evidence from witnesses McNelley and Larkin provided insight into the propriety of this provision, noting that while some debt instruments in the early '80s included such restrictions, others typically allowed for recall.

No evidence was presented to show that bondholder-consent provisions were disallowed by Commission rules or policies, nor was there any indication that Deltona Utilities acted improperly in including such provisions in their mortgage bonds. In the summer of 1984, Deltona Utilities faced a default on $18,000,000 of debt and was compelled to replace it quickly due to a temporary extension from the lender. The interest on this debt fluctuated significantly, as it was set at 2% above prime, which had exceeded 20% in previous years. To achieve more stability in interest costs, Deltona Utilities pursued fixed-interest financing, finding the mortgage bond transaction most favorable.

The Commission's assertion that it could treat the utility as if it could refinance without bondholder consent contradicts the facts, as the bonds could not be recalled for up to 10 years without such consent and a prepayment penalty. Therefore, the Commission was required to acknowledge the validity of the consent provision and evaluate the bond-financing transaction as fixed, without renegotiation options for a lower interest rate.

Regarding the Commission’s decision to use a 14.25% interest rate based on a December 1, 1984 refinancing, three witnesses provided testimony. Larkin believed there was no prepayment penalty and that refinancing could occur anytime, suggesting an allowable interest rate of 11%. Quesada calculated the bond debt financing cost at 16.1%, while McNelley noted that the initial agreed rate was 15.5% based on a 13% prime rate plus 2.5%. He indicated that refinancing would only be feasible if the effective interest rate fell significantly below 11%, explaining why the utilities had not sought bondholder consent to refinance. Overall, the critical issue was the timing of the rate-making, and the Commission's choice of December 1, 1984, as the effective refinancing date is not supported by the evidence presented.

Undisputed evidence indicates that Deltona Utilities finalized mortgage bond financing terms in August 1984, locking in an interest rate of 15.5%, which was 2.5% above the prime rate of 13% at that time. All witnesses agreed that this financing was reasonable, and there was no testimony suggesting it was imprudent to enter into such an agreement under the prevailing conditions. The financing terms became fixed in August 1984, and the utility was obligated to pay a 16.1% actual cost of financing for ten years from December 1984, with no evidence indicating bondholders would agree to refinancing without a penalty.

The Commission's suggestion of a reasonable refinancing rate of 14.25% was based on incorrect assumptions, as the critical refinancing date was established as August 1984. The Citizens' cross-appeal, advocating for a prudent interest rate of 11-11.5%, relied on the false premise that the financing documents lacked prepayment penalty provisions or bondholder consent requirements. Therefore, their argument was rejected. The court affirmed in part, reversed in part, and remanded the case to the Commission for further proceedings, confirming the Commission's factual findings regarding the bond provisions and their implications.