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Analysis: Utility overearned for 4 years

A Times study shows Florida Water Services' water utility earnings for 1996, 1997, 1999 and 2000 exceeded what a state commission deemed fair.

By JENNIFER FARRELL, Times Staff Writer
© St. Petersburg Times
published March 3, 2002


With roughly 28,250 customers, Florida Water Services' Spring Hill water system is among the most profitable in the company's statewide utility network.

It has been so profitable, in fact, that in at least four of the past six years, water earnings have far exceeded the amount deemed fair by the state Public Service Commission.

A surge in customers, combined with persistent drought conditions, provided a recipe for handsome profits. At one point, returns on the water system topped 28 percent.

An analysis by the St. Petersburg Times shows that from 1996 to 2000, Florida Water's Spring Hill water utility brought in more than $4.6-million above what the Public Service Commission authorized as a fair rate systemwide.

But the company's good fortune was not entirely market driven.

Much of it can be directly attributed to the Hernando County Commission, which has not used its authority to rein in the utility's earnings.

Instead, Florida Water has been allowed to overearn on its water utility, generating hefty returns that could be used to subsidize other endeavors, including its less profitable sewer service in Spring Hill, which serves 6,733 customers.

County officials contend this approach made sense in light of ongoing court battles with Florida Water, which resulted in successive settlement agreements that cut rates and capped them through 2004.

Now, however, as Hernando County considers a plan to buy the utility, Florida Water's long history of generous earnings could help drive up the asking price.

County Commissioners were surprised about the differences between the company's local water and sewer earnings.

"I'm amazed they're getting that rate of return," said Commissioner Betty Whitehouse. "Obviously, that's not equitable."

Commissioner Diane Rowden said the matter needs to be examined in detail as the county mulls its options for buying the utility.

"Obviously, I'm not an expert in figuring out these rates of return," she said. "It certainly does bring a lot of questions that I need to be getting the answers to."

County assumes new role

In 1994, commissioners decided to take over regulatory authority from the Public Service Commission after utility customers in Spring Hill complained a statewide uniform rate structure imposed two years earlier was forcing them to subsidize less profitable systems in other parts of the Florida Water network.

As court challenges delayed the county's official regulatory takeover, the Spring Hill water system grew more profitable.

In 1996, Florida Water reported earning a 28.78 percent rate of return on its investment for the Spring Hill water system, or more than 17 percentage points above the rate deemed fair by the Public Service Commission.

Florida Water reported earning 11.23 percent on its investment in the Spring Hill sewer system that year, putting profits just below the Public Service Commission's authorized rate of 11.38 percent.

At the end of 1997, the year Hernando County assumed full regulatory authority, Florida Water reported a roughly 10 percentage-point drop in its return on the water utility and a 4 percentage-point dip in the sewer returns. That same year, the county reached a settlement with the utility that restored rates to 1991 levels, but allowed for cost-of-living increases.

In 1998, revenues dropped again, partially as a result of rains from La Nina, leaving both the water and sewer systems in Spring Hill below the Public Service Commission's authorized 11.88 percent rate that year.

But in 1999, reported earnings on the water utility leaped by 8.5 percentage points to 19.03 percent, followed by 16.73 percent in 2000, the most recent year for which statistics are available. Meanwhile, earnings on the sewer system continued to fall, with 4.53 percent reported in 1999 and 3.34 percent in 2000.

For all but one year, then, since the county took over regulation, the company's reported earnings on the Spring Hill water utility far exceeded what the Public Service Commission authorized elsewhere in the network, while the sewer system came in consistently below what was considered fair.

Between 1996 and 2000, earnings on the Spring Hill sewer utility came in more than $4.1-million below the rate authorized by the Public Service Commission.

But when the 1997 settlement expired, the county chose not to flex its regulatory muscle.

Instead of setting new rates for both systems that would guarantee a fair return on water and sewer utilities, the county opted to extend the agreement for three more years, reducing rates further and keeping them steady through 2004, with allowances for cost-of-living increases.

Bruce Snow, a Brooksville lawyer hired by the county to negotiate the settlement, said the arrangement amounted to a good compromise with Florida Water.

"They tried to earn a lot more on the water," he said, adding later: "This was a good way to put an end to a decade of litigation."

Representatives of Florida Water declined to comment for this story.

County commissioners who were contacted last week were surprised to learn of the company's continued high rates of return on the water system.

"Why didn't I know that?" asked Commissioner Chris Kingsley. "I would see that as an opportunity to reduce rates."

Commission Chairwoman Nancy Robinson also said she was unaware of the numbers.

"Interesting. Very interesting," she said. "If the county ever did any contractual arrangement again, that would certainly be an element I'd want to look at."

A final agreement

The county's utility regulation and franchise director, Chuck Lewis, said he recognized immediately that the Spring Hill water returns were too high when he was hired by the county in 1999 after leaving his job at Florida Water.

But Lewis said talks on the most recent settlement dragged on too long.

"We started negotiations in July 1999, and for whatever reason it took till November 2000," he said. "I was very frustrated."

In the end, he said, the final agreement served the best interests of the county and its residents because it ended an ongoing court battle favorably while keeping rates low.

"It got complicated," he said of the search for a solution.

Lewis said restricting the company's earnings on the water system would have involved making adjustments for weather and tax issues and likely would have meant large legal bills.

Meanwhile, he said, if water rates had been cut by the county, Florida Water would certainly have sought to raise sewer rates. And with fewer customers to make up the difference, sewer bills would have spiked dramatically, compared with a relatively small savings for individual water customers, Lewis said.

In the end, water and sewer earnings in Spring Hill should be considered together, Lewis said.

"They were overearning (on water)," he said. "But weighted together, they're still right around 11 (percent). You have to look at both sides and weigh them."

Asked about whether that amounts to a subsidy from water customers to their neighbors who also get sewer service, Lewis said: "Yeah, it is, but the rates are absurdly low."

Even considering the systems' earnings together, however, an analysis by the Times shows the Spring Hill water utility's overearnings outpaced the sewer's underearnings by more than $541,600 between 1996 and 2000.

'Inappropriate subsidy'

Low rates are not a justification for allowing a water system's earnings to offset lower profits on the sewer side, said Mike Twomey, founder and president of the nonprofit Florida Utility Watch Inc.

"That's an inappropriate subsidy because they're two different bodies of people," he said. "Quite simply, the customers that are water only shouldn't pay any rates that subsidize the sewer operations."

Twomey, a lawyer in Tallahassee, formerly represented Hernando County and Spring Hill residents during the fight against statewide uniform rates.

He said the current settlement, in effect since April, guarantees that Spring Hill residents are still paying some measure of subsidies because local water rates earn too-high profits for Florida Water.

"They're excessive in any sense," said Twomey. "No matter how you cut it, the water rates should have been reduced."

Looking ahead

Snow, the Brooksville lawyer, declined to characterize the arrangement as a subsidy.

Because of the settlements he helped negotiate, individual water customers have seen their rates frozen at early-'90s levels. Growth is the reason Florida Water is earning more, Snow said.

"I don't know if I'd view it as a subsidy," he said. "It may be that class of users may be paying more than another class of customers." Snow said fluctuation in earnings is the nature of the business.

"You're never, each year, going to have it completely level," he said. "There's an accordion effect. Over time, it evens out."

But Whitehouse said she doesn't necessarily agree with the explanation from Snow and Lewis.

"I think what they feel may be appropriate is not necessarily what John Q. Public who is paying the bill is going to feel is fair," she said. "They really don't feel they should be subsidizing anybody else, and rightly so."

Last year, 33,329 Spring Hill households got soaked by a ruling from the 1st District Court of Appeal, which found there was no way to force Florida Water to repay them for being overcharged in the early 1990s by an average of $151.72, which ended up subsidizing water users elsewhere.

Whitehouse said the issue of internal subsidies in Spring Hill raises questions about how the county would proceed after a potential purchase of the system. Currently, rates differ between the county's existing utility and Florida Water's Spring Hill system.

Should commissioners impose uniform rates countywide or allow the utilities to operate independently?

"I think those are dilemmas that if we were to purchase Florida Water, we're really going to think long and hard about," said Whitehouse.

Rowden said the matter also brings up questions about the financial implications of buying Florida Water. She faulted the administration for not providing commissioners with the "nuts and bolts," information needed to make an informed decision.

"This whole water issue has been quite a learning experience for me," she said. "It seems like sometimes they just want to treat us like mushrooms. And we all know what makes mushrooms grow."

Whitehouse said the board needs to examine Florida Water's historical earnings as it prepares to make a decision on a possible sale offer.

"They have done very well, haven't they?" she asked. "We should have such luck."

-- Jennifer Farrell covers Spring Hill and can be reached at 848-1432. Send e-mail to farrell@sptimes.com.

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