         FIRST DISTRICT COURT OF APPEAL
                STATE OF FLORIDA
                 _____________________________

                         No. 1D17-4425
                 _____________________________

THE CITIZENS OF THE STATE OF
FLORIDA, THROUGH THE FLORIDA
OFFICE OF PUBLIC COUNSEL,

    Appellant,

    v.

FLORIDA PUBLIC SERVICE
COMMISSION; UTILITIES, INC. OF
FLORIDA; SUMMERTREE WATER
ALLIANCE; ANNE MARIE RYAN;
and SEMINOLE COUNTY,
FLORIDA,

    Appellees.
                 _____________________________


On appeal from the Florida Public Service Commission.

                         March 13, 2019

MAKAR, J.,

     This appeal involves a challenge to the Florida Public Service
Commission’s approval, in part, of requested increases in water
and wastewater rates sought by Utilities, Inc. of Florida (UIF) for
its consolidated operations in Florida, which consist of twenty-
seven individual merged systems.
                                 I.

     The Office of Public Counsel (OPC), which provides legal
representation on behalf of the citizens of the State of Florida in
utility cases before the Florida Public Service Commission, 1 raises
three issues: (a) whether the Commission violated due process by
amending UIF’s requested utility plant additions in the rebuttal
stage of the proceeding and admitting exhibits offered by its staff
over OPC’s objection; (b) whether the Commission’s analysis of the
Sandalhaven and Lusi wastewater systems departed from the
standards for “used and useful” analysis set forth in section
367.081(2)(a) 2. a., b., c., Florida Statutes; and (c) whether the
Commission erred by imposing quality of service penalties on
individual systems within UIF’s consolidated system despite
establishing uniform rates for the twenty-seven systems under
UIF’s control.

                                 A.

    The gravamen of OPC’s due process claim is that allowing UIF
to modify the parameters of its requested pro forma plant
additions, thereby increasing the overall cost of the total project,
was improper during the rebuttal phase of the proceedings. UIF
counters that its expert, Patrick C. Flynn, testified in response to
matters raised by an OPC witness, and that updated cost
estimates are to be expected during the rate-setting process.

     A review of the voluminous record reveals no due process
violation involving consideration of the pro formas. Adequate
notice and opportunity to contest UIF’s evidence and its expert as
to the pro forma adjustments were afforded, including discovery,
depositions, and cross-examination at the hearing. OPC’s motion

    1 See § 350.061, Fla. Stat. (2018); see Citizens of Fla. v. Mayo,
333 So. 2d 1, 6 (Fla. 1976) (“[OPC] was created with the realization
that the citizens of the state cannot adequately represent
themselves in utility matters, and that the rate-setting function of
the Commission is best performed when those who will pay utility
rates are represented in an adversary proceeding by counsel at
least as skilled as counsel for the utility company.”).

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to strike Flynn’s testimony and its reconsideration motion were
denied via written orders containing reasonable grounds for each
ruling. And no claim is made alleging that inadequate time was
allocated (OPC did not seek a continuance). The fact that plant
additions exceeded the estimates of those initially sought via the
pro formas can be explained by updated forecasting estimates,
which are continually subject to revision based on current and
expected market conditions. The Commission says its practice is to
consider updated pro forma cost information that utilities provide,
even during rebuttal, which is acceptable if OPC and other
participants in the hearing are given a reasonable opportunity to
object and be heard. Our review of the record leads us to conclude
that due process was afforded as to the pro formas.

     OPC also claims a denial of due process because Commission
staff failed to act in a neutral manner when it entered evidence
provided by its staff that favored UIF over OPC’s objection. OPC
correctly points out that it is not the Commission’s or its staff’s
responsibility to assist a utility in meeting the utility’s burden of
proof. That said, the Commission notes that its staff routinely
cross-examines utility witnesses as part of the rate-making
process to ensure completeness and accuracy, and that none of its
staff, who were involved as witnesses in the case, were allowed to
advise commissioners or participate in writing recommendations
for the Commission to consider.

     Members of a regulatory body’s staff can have direct
involvement in an adversarial proceeding so long as sufficient
safeguards are in place to ensure compliance with due process
standards. Substantial reliance on and deference to staff is
commonplace in the regulatory world and is generally lawful in
rate-making proceedings. See S. Fla. Nat. Gas Co. v. Pub. Serv.
Comm'n, 534 So. 2d 695, 698 (Fla. 1988) (“We find that the
commission is clearly authorized to utilize its staff to test the
validity, credibility, and competence of the evidence presented in
support of an increase.”); Legal Envtl. Assistance Found., Inc. v.
Clark, 668 So. 2d 982, 986 (Fla. 1996) (“Commission may use its
staff to evaluate the evidence presented in this goal-setting
procedure.”). In Clark, for example, the Commission’s staff
“participated during the hearings by cross-examining witnesses


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and entering items into evidence,” which was held to be
permissible under due process principles. 668 So. 2d at 984.

      The “Commission's discretion in its use of staff is not
absolute,” id. at 985, and has its limits limited under the state due
process clause. Art. I, § 9, Fla. Const. (“No person shall be deprived
of life, liberty or property without due process of law . . . “). For
example, in Cherry Communications, Inc. v. Deason, 652 So. 2d
803, 805 (Fla. 1995), as revised on denial of reh'g, (Apr. 20, 1995),
our supreme court held that it was a due process violation where
a Commission staff attorney who prosecuted a license revocation
proceeding was allowed to meet with the Commission during
deliberations and provide post-hearing legal advice. The same staff
attorney who played the “role of prosecutor” by cross-examining
witnesses, raising legal objections, and arguing against the
interests of the telecommunications company “assumed the role of
advisor to the Commission, which was now supposedly
deliberating as an ‘impartial’ adjudicatory body.” Id. This dual role
caused the adjudicatory process to be compromised, such that “the
playing field appears to have been tilted when the prosecutor was
invited into the deliberations and his advice was acted upon.” Id.
at 805. The revocation order was vacated and a new hearing
ordered. Id.

     With these cases in mind, our review of the record fails to
show that the involvement of the Commission’s staff in the rate-
making process in this proceeding amounted to a due process
violation. From OPC’s vantage point, it may have appeared that
staff was exceeding their role, but the caselaw just discussed gives
the Commission much leeway in rate-making cases to use its staff
in the evidentiary process as was done here. Moreover, a
distinction is made between rate-making proceedings and
adjudicatory proceedings involving revocation of licenses. See
Cherry, 652 So. 2d at 804 (noting that South Florida Natural Gas
“involved the Commission's exercise of its rate-setting authority
rather than its quasi-judicial disciplinary authority.”). We
recognize that great solicitude is paid to due process in the
adjudicatory setting where the Commission plays a quasi-judicial
role, but that doesn’t mean the Commission’s discretion is
unlimited in rate-making proceedings, only that it is given broader
latitude. We are not confronted with a situation where a regulatory

                                  4
body has abdicated its responsibility to, or been “captured” by, its
staff to such an extent that its regulatory role has been
compromised. Thomas O. McGarity, The Internal Structure of EPA
Rulemaking, 54 LAW & CONTEMP. PROBS. 57, 111 n. 133 (1991)
(“Staff capture . . . occurs when a politically appointed official
becomes so immersed in day-to-day briefings by the agency's
professional staff that he or she loses his or her objectivity (or
perhaps ideology) and begins to view the world from the staff's
perspective.”). Rather, the record in this case shows that the staff’s
involvement falls within acceptable constitutional limits such that
the requirement of due process was met.

                                 B.

    Next, OPC claims that the Commission erred in its “used and
useful” methodology by including pre-paid connections for future
potential development as part of the rate-making process.
Developers pre-pay for the right to connect to the systems at some
unspecified future date, if ever. The specific question is whether
pre-paid connections are statutorily permitted such that they
become “used and useful” for inclusion in a utility’s rate base.
Secondarily, OPC says that the Commission has not adequately
explained its decision to include pre-paid connections in this case.

      As this Court has stated, a “regulated utility is entitled to an
opportunity to earn a fair rate of return on its ‘rate base’—the
capital prudently invested in the utility's facilities that ‘are used
and useful in the public service.’” Palm Coast Util. Corp. v. State,
Fla. Pub. Serv. Com'n, 742 So. 2d 482, 484 (Fla. 1st DCA 1999)
(quoting section 367.081(2)(a), Fla. Stat. 1995). The Commission
has much discretion is deciding the factors upon which it relies in
determining whether a component of a water/wastewater system
is deemed “used and useful” under the statutory framework. Id.
(“[I]ts determination of the applicable ‘used and useful’
considerations should be given great weight since such
considerations are infused with policy considerations for which the
Commission has special responsibility and expertise.”). And it is
entitled to modify its “used and useful” policy so long as it is
“supported by expert testimony, documentary evidence or other
evidence appropriate to the nature of the issue involved.” Id. at
485.

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      The Commission’s discretion is limited, however, by the
language of statutory text and now by the constitutional
amendment that prohibits courts from deferring to an agency’s
interpretation of a statute. Art. V, § 21, Fla. Const. (“In
interpreting a state statute or rule, a state court or an officer
hearing an administrative action pursuant to general law may not
defer to an administrative agency's interpretation of such statute
or rule, and must instead interpret such statute or rule de novo.”).
In either case, review of the legal meaning of a statute is de novo;
it is our responsibility to say what the applicable law is. Marbury
v. Madison, 5 U.S. 137, 177 (1803).

     The Commission has included pre-paid connections as used
and useful in a handful of prior rate cases, but no court has passed
upon whether legal authority for doing so exists. OPC points out
that pre-paid connections and their use are not mentioned in the
applicable statutes or administrative rules and thereby are off-
limits. OPC also asserts that the Commission’s use of pre-paid
connections is limited by a 1999 revision to the “used and useful”
statute, which set temporal limits on the consideration of utility
property for rate-making purposes:

    2. For purposes of such [rate-making] proceedings, the
    commission shall consider utility property, including land
    acquired or facilities constructed or to be constructed
    within a reasonable time in the future, not to exceed 24
    months after the end of the historic base year used to set
    final rates unless a longer period is approved by the
    commission, to be used and useful in the public service,
    if:

         a. Such property is needed to serve current
    customers;

         b. Such property is needed to serve customers 5 years
    after the end of the test year used in the commission's final
    order on a rate request as provided in subsection (6) at a
    growth rate for equivalent residential connections not to
    exceed 5 percent per year; or


                                 6
         c. Such property is needed to serve customers more
    than 5 full years after the end of the test year used in the
    commission's final order on a rate request as provided in
    subsection (6) only to the extent that the utility presents
    clear and convincing evidence to justify such
    consideration.

§ 367.081(2)(a)2. a., b., c., Fla. Stat. (2018) (emphasis added). The
highlighted portions establish a schedule of permissible time
limits for when property can be deemed used and useful, ranging
from the needs of current customers to the needs of customers up
to five years after the end of test year (subject to a five percent
growth rate) to the needs of customers more than five full years
after the end of the test year (subject to a higher standard of proof).

     OPC claims this statute fails to give authority for the pre-paid
connections in this case because they represent only potential
future connections that would occur, if ever, at some unspecified
time perhaps beyond the statutory time limits. Indeed, a number
of pre-paid connections never came to fruition. Because pre-paid
connections lack a timeframe, they are speculative and contrary to
how section 367.081(2) was intended to apply temporally in rate
cases.

     The Commission counters that it has broad regulatory powers
and that it has specific authority in subsection (2)(a)2. b. for its
action, which for short we’ll term the “Five-Year/Five-Percent
Law”. According to the Commission, this subsection requires it “to
consider utility property as being used and useful in the public
service if such property is needed to serve customers 5 years after
the end of the test year at a growth rate for equivalent residential
connections not to exceed 5 percent per year.” It also points to Rule
25-30.432, Florida Administrative Code, entitled “Wastewater
Treatment Plant Used and Useful Calculations,” which
implements section 367.081(2) as additional authority. It says that
this administrative rule “provides that the Commission will
consider other factors in addition to the allowance for growth that
is addressed in” the Five-Year/Five-Percent Law. (Emphasis
added). Indeed, the rule does make mention of “other factors” as
follows:


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    In determining the used and useful amount, the
    Commission will also consider other factors such as the
    allowance for growth pursuant to Section 367.081(2)(a)
    2., F.S., infiltration and inflow, the extent to which the
    area served by the plant is built out, whether the
    permitted capacity differs from the design capacity,
    whether there are differences between the actual
    capacities of the individual components of the wastewater
    treatment plant and the permitted capacity of the plant,
    and whether flows have decreased due to conservation or
    a reduction in the number of customers.

Fla. Admin. Code Ann. r. 25-30.432 (2018) (emphases added). The
Commission asserts that its treatment of pre-paid connections is
“consistent” with the administrative rule “because it is within the
Commission’s discretion to determine what factors to consider
based on the evidence of the case.” Pre-paid connections are not
among the factors specified, but the Commission views the list as
non-exhaustive. Moreover, the Commission stresses that the
“question of what factors should be used in calculating used and
useful property is infused with policy considerations for which the
Commission has special responsibility.” The result is that the
Commission sees its authority to include pre-paid connections as
policy-driven based on its interpretation of its own rule, which says
that “other factors” will be considered and that pre-paid
connections is such a factor.

     We recognize that Commission decisions on certain matters
(such as percentages for used and useful purposes) are the type of
discretionary determinations upon which “reasonable minds may
differ,” and that it is the “prerogative” of the Commission to
evaluate and weigh the oftentimes conflicting evidence. Citizens of
State v. Fla. Pub. Serv. Comm'n, 488 So. 2d 112, 114 (Fla. 1st DCA
1986). The question, however, is what legal authority exists for the
Commission to consider pre-paid connections in determining what
is used and useful for rate-making purposes, a purely legal
question. The problem we have with the Commission’s answer is
that it is self-fulfilling: whatever the Commission views as an
important policy factor becomes, by fiat under its administrative
rule, a valid legal factor that it can apply as it sees fit. It sees the
phrase “other factors” in its administrative rule as a potentially

                                   8
limitless fount of regulatory power, even though the law the rule
purports to implement—section 367.081(2)—cannot be read to
support that expansive a result.

     Section 367.081(2) does not mention pre-paid connections or
similar items as part of the used and useful calculus, but it
establishes a relatively open-ended allocation of regulatory
authority to set rates and to include “operating expenses incurred
in the operation of all property used and useful in the public
service.” We read the statute to apply to pre-paid connections,
provided adequate proof is presented that pre-paid connections are
“property” that falls within the statutory strictures of section
367.081(2) and that one of the temporal restrictions in subsection
(2)(a) is met. As applied to this case, the Commission relies upon
the restrictions in subsection (2)(a)2. b., the Five-Year/Five-
Percent Law, which means that pre-paid connections must be
shown to be property “needed to serve customers 5 years after the
end of the test year,” and further that those connections be subject
to the grown rate limitation in that subsection.

     From the record, we are unable to determine the extent to
which the pre-paid connections at issue in this case fall within the
statutory limits of the Five-Year/Five-Percent Law (pre-paid
connections deemed necessary beyond five years are not part of the
analysis because of the Commission’s sole reliance on the Five-
Year/Five-Percent Law). Nor are we in a position to evaluate how
the five percent growth limitation is applied to permissible pre-
paid connections to prevent a double-counting of growth. For these
reasons, we remand the matter for further proceedings to
determine the extent to which the pre-paid connections in this case
meet the requirements of subsection (2)(a)2. b., the Five-Year/Five-
Percent Law.

                                C.

     Finally, OPC argues that the Commission erred by imposing
quality of service penalties on individual systems within UIF’s
consolidated system; it argues that the penalty statute doesn’t
speak to penalties on individual system within a consolidated
system and that penalties should be imposed on UIF’s system as a
whole, the effect of which would be to spread the financial benefit

                                 9
to all UIF customers and not just those served by the offending
systems. The Commission counters that, assuming the issue was
preserved (we conclude it was), it has always imposed penalties on
a system-specific basis, which is not inconsistent with the statutes
at issue.

     The first statute, section 367.111(2), says: “If the commission
finds that a utility has failed to provide its customers with water
or wastewater service that meets the standards promulgated by
the Department of Environmental Protection or the water
management districts, the commission may reduce the utility’s
return on equity until the standards are met.” § 367.111(2), Fla.
Stat. (emphasis added). The second, 367.0812(4), states:

    The commission may prescribe penalties for a utility’s
    failure to adequately resolve each quality of water service
    issue as required. Penalties may include penalties as
    provided in s. 367.161, a reduction of return on equity of
    up to 100 basis points, the denial of all or part of a rate
    increase for a utility’s system or part of a system if it
    determines that the quality of water service is less than
    satisfactory until the quality of water is found to be
    satisfactory, or revocation of the certificate of
    authorization pursuant to s. 367.072.

§ 367.0812(4), Fla. Stat. (emphasis added). Based upon these two
statutes, particularly the emphasized portions, we conclude that
the Commission does not exceed its statutory authority when it
imposes a financial penalty on a specific offending sub-utility
within a consolidated system of utilities; although section
367.11(2) uses only the phrase “a utility” and thereby could be
interpreted to mean a consolidated utility, it must be read in
conjunction with section 367.0812(4), which allows for penalties on
“part of a system” where the quality of water service is less than
satisfactory. Together, these statutes are most reasonably read to
allow for the type of utility-specific penalties meted out in this
proceeding. We read the statutes as providing discretion to the
Commission to impose targeted penalties “as required” under the
circumstances of each case. Finding no error, we affirm the
penalties.


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     Based on the foregoing, we affirm the Commission’s order
except as to that portion involving pre-paid connections, which we
REVERSE and REMAND for further proceedings consistent with this
decision.

OSTERHAUS and JAY, JJ., concur.

                 _____________________________

    Not final until disposition of any timely and
    authorized motion under Fla. R. App. P. 9.330 or
    9.331.
               _____________________________


James R. Kelly, Public Counsel, and Patricia Christensen and
Virginia Ponder, Associate Public Counsels, Tallahassee, for
Appellant.

Kathryn G.W. Cowdery, Senior Attorney, Keith C. Hetrick,
General Counsel, and Samantha M. Cibula, Attorney Supervisor,
Florida Public Service Commission, Tallahassee, and Martin S.
Friedman of Friedman & Friedman, P.A., Orlando, for Appellees.




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