Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Missouri-American Water Company's Request for Authority to Implement a General Rate Increase For Water and Sewer Service Provided In Missouri Service Areas

Court of Appeals of Missouri, Western District, Third Division

May 30, 2017

IN THE MATTER OF MISSOURI-AMERICAN WATER COMPANY'S REQUEST FOR AUTHORITY TO IMPLEMENT A GENERAL RATE INCREASE FOR WATER AND SEWER SERVICE PROVIDED IN MISSOURI SERVICE AREAS, Respondent,
v.
OFFICE OF PUBLIC COUNSEL, Appellant. MISSOURI PUBLIC SERVICE COMMISSION, Respondent,

         Appeal from the Public Service Commission

          Before Anthony Rex Gabbert, Presiding Judge, Victor C. Howard, Judge and Cynthia L. Martin, Judge.

          OPINION

          Cynthia L. Martin, Judge.

         The Office of Public Counsel ("OPC") appeals from the Public Service Commission's ("Commission") report and order that consolidated Missouri-American Water Company's ("MAWC") water systems into three districts for the purpose of setting rates. OPC argues on appeal that the Commission erred in two respects. First, OPC asserts that the Commission's report and order is unlawful in that its creation of three water districts violates the statutory prohibition against providing an undue or unreasonable preference, prejudice, or disadvantage to one locality of the state over another. Second, OPC claims that the Commission's report and order is unreasonable in that the Commission made six findings of fact that are not supported by the record. We affirm.

         Factual and Procedural History

         MAWC is a public utility and water corporation, as those terms are defined in section 386.020(43) and (59), [1] subject to regulation by the Commission as provided in Chapters 386 and 393. MAWC provides water service to nineteen distinct water systems, serving 459, 439 customers in the state. [2] MAWC's water systems are spread throughout the state so that none are physically interconnected.

         The Legislature created the Commission to serve as the state administrative agency responsible for the regulation of public utilities, including water corporations, in Missouri. Section 386.404; section 386.250(3). The Commission employs technical experts ("PSC Staff") who are responsible for representing the Commission and the State of Missouri in all Commission investigations, contested cases, and other proceeding unless PSC Staff timely files a notice of its intention not to participate. OPC is separate from the Commission and PSC Staff. Section 386.710 gives OPC the authority to represent and protect the interests of the public in any proceeding before the Commission or any appeal from an order by the Commission.

         On July 31, 2015, MAWC filed proposed tariff sheets seeking a revised rate to generate an additional $51 million in gross annual revenue. In addition to requesting a revised rate, MAWC asked the Commission to approve its proposal to combine its nineteen water systems into three water districts for the purpose of moving toward consolidated tariff pricing. MAWC's proposed tariff sheets had an effective date of August 30, 2015. The Commission suspended the proposed tariff sheets until June 28, 2016, so as to allow time to study the proposed tariff sheets and to determine if the rates resulting therefrom were just, reasonable, and in the public interest.

         The Commission received requests to intervene from: the Missouri Industrial Energy Consumers ("MIEC"); the Missouri Department of Economic Development --Division of Energy ("MO Division of Energy"); Triumph Foods, LLC; the City of Warrensburg, Missouri; the City of St. Joseph, Missouri; the City of Joplin, Missouri; Public Water Supply District Nos. 1 and 2 of Andrew County, Missouri; the City of Riverside, Missouri; the City of Brunswick, Missouri; Stonebridge Village Property Owners Association; and the Utility Workers Union of America Local 335. The Commission granted all requests to intervene.

         The Commission held public hearings across the state in January 2016. Following those public hearings, MAWC, PSC Staff, OPC, MIEC, and the MO Division of Energy submitted a non-unanimous stipulation and agreement to increase MAWC's revenue by $30.6 million to the Commission. No party objected to the non-unanimous stipulation and agreement. The Commission approved this non-unanimous stipulation and agreement as well as a second non-unanimous stipulation and agreement. An evidentiary hearing was held regarding the remaining issues on March 21-23, 2016.

         While the Commission heard evidence as to the remaining issues, the only issue that is relevant to this appeal was determining how to allocate the cost of providing service to the various water systems for the purpose of developing the rates that the customers served by those systems must pay. In other words, the Commission considered MAWC's request to consolidate its nineteen water systems into three water districts for the purpose of moving toward consolidated tariff pricing. MAWC's costs of service include those costs that can be directly assigned to a particular water system -- e.g., the cost of a treatment facility or the mains and pipes that service that system -- as well as costs that are applicable to every water system -- e.g., a customer call center, billing services, and other corporate services.

         The Commission took testimony about methods for allocating costs to water systems. First is district-specific pricing, which takes all of the costs of providing service to each individual water system and develops rates based upon that water system's cost of service. Under district-specific pricing, the customers in each water system pay a rate based only on the costs associated with providing service to that water system. Second is single-tariff pricing, in which all costs from the utility are combined and rates are developed on a utility-wide basis so that all customers pay the same rate based on the combined service costs of all water systems. Under single-tariff pricing, every customer in every water system operated by a particular water utility pays the same rate. District-specific pricing and single-tariff pricing are the extremes on the spectrum of possible methods of allocating service costs and determining rates. A third method for allocating costs is consolidated tariff pricing, in which several water systems are consolidated into a larger district for the purpose of allocating costs and determining rates. Under consolidated tariff pricing, all customers within a consolidated district pay the same rate based on the combined service costs of the water systems within that consolidated district. Effectively, consolidated tariff pricing implements single-tariff pricing amongst consolidated subsets of water systems operated by a particular water utility.

         In a 2000 rate case, the Commission directed MAWC to move away from its then-existing single-tariff pricing method toward district-specific pricing. By the time MAWC filed the instant proposed tariff sheets, MAWC's service costs were allocated amongst the various water systems it operated using a hybrid of both methods. The seven largest water systems MAWC operated had rates that were designed based on their respective cost of service (district-specific pricing). The remaining water systems MAWC operated were consolidated into "District 8, " which was then broken into additional sub-districts for the purpose of allocating costs and determining rates (single-tariff pricing).

         In 2010, the General Assembly enacted section 393.320, which addresses the acquisition of smaller water utilities by larger water utilities, and which directed a method whereby upon acquisition, the smaller utility would be consolidated into the larger utility for ratemaking purposes. Though the impetus for enactment of section 393.320 is not certain, the parties agree that earlier Commission directives to water utilities to move toward district-specific pricing (as had been the case with MAWC's 2000 rate case) were in direct opposition to the concept of consolidation for ratemaking purposes. And the parties agree that the Commission has been faced over the past several years with a flurry of failed or failing small water districts hampered by district-specific pricing, and unable to generate necessary revenues for essential infrastructure or regulatory compliance.

         For a variety of reasons, including that legislative encouragement of consolidation signaled by section 393.320, MAWC's July 2015 rate case proposed to consolidate its water systems into three districts based on the similarity of the level of rates paid by each water system. Under MAWC's proposal, the customers in each consolidated district would pay the same rate based on the collective costs of service for all of the water systems in the consolidated district.

         PSC Staff also proposed consolidating MAWC's water systems into three districts so that the customers in each district pay the costs of service associated to their district. PSC Staff's proposed consolidation was based on operational characteristics and geographical location. PSC Staff's District 1 is comprised of the water systems in east-central Missouri; District 2 is comprised of water systems in northwest Missouri; and District 3 is comprised of water systems in southwest and west-central Missouri. Each of the three districts proposed by PSC Staff include one large water system as an anchor so that costs of service within the district could be spread among a larger customer base. The water systems in each of the three districts proposed by PSC Staff share labor and management function as well as have similar sources for water, whether surface water, alluvial wells, or deep wells. MAWC did not oppose PSC Staff's proposed consolidation of the water systems into thee districts.

         In addition to MAWC's proposed three-district consolidation plan and PSC Staff's proposed three-district consolidation plan, the Commission had before it three other options for allocating costs to the water systems. OPC, MIEC, the City of Brunswick, the City of St. Joseph, and the City of Joplin filed a non-unanimous stipulation and agreement proposing to maintain MAWC's eight water districts with slight modifications. The City of Riverside proposed its own consolidation plan at the evidentiary hearing. Under the City of Riverside's plan, the City of St. Joseph and the City of Joplin would each remain in their own districts, but all other water systems would be consolidated into a single district. The final option before the Commission was to consolidate all of the water systems MAWC operated into a single district and employ single-tariff pricing.

         After hearing all of the evidence, the Commission issued its report and order ("Report and Order"), adopting PSC Staff's consolidation plan for MAWC's water systems. In reaching its decision, the Commission recognized that, while MAWC's water systems are spread across the state so that they are not physically interconnected, MAWC's "annual cost to serve a residential customer is fairly consistent across the existing districts." For most of MAWC's residential customers, the annual cost of service is $400 to $500. The most significant outliers are Platte County, where 5, 335 customers each have an annual cost of service totaling $1, 031.48, and Brunswick, where 330 customers each have an annual cost of service totaling $702.92. The similarity in the cost of providing service to MAWC customers exists from district to district because the cost of capital is the same for every water system. For instance, the cost of pipes, meters, and other supplies is the same for every water system operated by MAWC.

         The Commission found that "[c]onsolidation of water rates will help address some structural problems within the water industry." The water industry, unlike the electric and gas industries, is fragmented in that most of the water systems are classified as "small or very small, " which means that a water system serves between 25 and 3, 300 customers. MAWC has the same fragmentation problem in that, of its nineteen water systems, twelve serve less than 3, 300 customers. Fragmentation creates inefficiencies in that the cost of complying with state and federal regulations is inversely related to the number of customers in a water system. The fragmentation problem has resulted in small, privately owned water systems in receivership.

         The regulatory manager of the PSC Staff's water and sewer unit, James A. Busch ("Busch") testified as to how consolidated tariff pricing can alleviate the fragmentation problem found in the water industry. Busch opined: "If consolidated pricing allows for MAWC or other entities to acquire troubled systems to keep them out of receivership, then consolidated pricing is a favorable change that could provide benefit to Missouri citizens without any undue burden or cost." Busch explained:

[PSC] Staff spends a significant portion of its time speaking with owners and management of many water . . . utilities. This time includes entities that are currently providing service in Missouri, entities that have exited the water . . . business in Missouri, and entities that are interested in coming to Missouri. Through these interactions, Staff has been made aware that consolidated pricing is a major consideration in the decision to own and operate systems in Missouri and on whether or not to expand. It is [PSC] Staff's opinion, based on its years of experience, that a move toward further consolidation will send a positive signal to those companies.

         Busch opined that "[c]onsolidating rates helps to spread [the costs associated to environmental upgrades mandated by regulation] to a much larger customer base, which means that all MAWC customers and more Missouri citizens will have access to safe and adequate water at just and reasonable rates." The Commission found Busch's testimony on the effect of consolidated tariff pricing on struggling water systems credible.

         Further, the Commission found that consolidated tariff pricing would reduce administrative and regulatory costs. The Commission found that the costs of billing and collections would be reduced with the implementation of consolidated tariff pricing. According to the Commission, another benefit of consolidated tariff pricing would be reduced regulatory costs due to calculating fewer rates within a single rate case. The Commission also found that consolidated tariff pricing has the benefit of spreading the costs of large capital investments among all customers in a consolidated district, which will limit the shock when new infrastructure must be installed and making the cost of service more affordable for all.

         The Commission also recognized that consolidated tariff pricing carries with it the risk that MAWC will have an incentive to overbuild its water system to maximize shareholder profits. To address that concern, the Commission adopted the PSC Staff's five-year capital planning report proposal in which MAWC is required to report all capital improvement plans to the Commission by January 31 of each year. PSC Staff will have the ability to review MAWC's capital improvement plans and make recommendations. Further, all capital expenditures will be subject to full Commission review in MAWC's future rate cases.

         In adopting PSC Staff's three-district consolidation plan, the Commission's Report and Order rejected the argument that section 393.130 requires the use of district-specific pricing and forbids the use of single-tariff pricing or consolidated tariff pricing. Further, the Commission's Report and Order concluded that section 393.320, which establishes the procedure whereby a water utility serving more than 8, 000 customers attempting to acquire a water utility serving 8, 000 or less customers may establish a rate for the small system to be acquired, guided the Commission's decision to adopt PSC Staff's three-district consolidation plan. Section 393.320 "shows that the legislature is aware of the affordability problems faced by small water systems and allows those problems to be ameliorated by consolidation with a larger service area for ratemaking purposes." Thus, the legislature is not hostile to consolidated tariff pricing.

         After the Commission issued its Report and Order, OPC filed an application for rehearing, which the Commission denied. OPC appeals.

         Standard of Review

         Section 386.510 provides that we review the Commission's Report and Order to determine whether it is lawful and reasonable. Laclede Gas Co. v. Office of Pub. Counsel, No. WD79830, 2017 WL 1149140, at *3 (Mo. App. W.D. Mar. 28, 2017). The Commission's Report and Order has a presumption of validity so that the appellant bears the burden to prove by clear and satisfactory evidence that the order is unlawful or unreasonable. Section 386.430.

         The lawfulness of the Commission's Report and Order refers to "'whether statutory authority for its issuance exists.'" Laclede Gas Co., 2017 WL 1149140, at *3 (quoting In re Verified Application & Petition of Liberty Energy (Midstates) Corp., 464 S.W.3d 520, 524 (Mo. banc 2015)). All legal issues are reviewed de novo. Id. If we find that the Commission's Report and Order is unlawful, we need not reach the issue of reasonableness. Id. If, however, we find that the Commission's Report and Order is lawful, then we must consider whether it is reasonable. Id. "'The [Commission's] order is determined to be reasonable when the order is supported by substantial, competent evidence on the whole record; the decision is not arbitrary or capricious[;] or where the [Commission] has not abused its discretion.'" Id. (quoting Liberty Energy (Midstates) Corp., 464 S.W.3d at 524).

         Analysis

         OPC challenges both the lawfulness and the reasonableness of the Commission's Report and Order. In its first point on appeal, OPC argues that the Commission's Report and Order is unlawful in that it violates section 393.130's prohibition against providing an undue or unreasonable preference, advantage, prejudice, or disadvantage to one locality over another. In its second point on appeal, OPC asserts that the Commission's Report and Order is unreasonable in that six discrete findings are arbitrary and capricious, are against the weight of the evidence, are not supported by competent and substantial evidence, and constitute an abuse of the Commission's discretion. We discuss OPC's points on appeal separately.

         Point One: Lawfulness

         OPC's first point on appeal argues that the Commission's Report and Order is unlawful in that its adoption of the three-district consolidation plan proposed by the PSC Staff violates ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.