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In re Application of Laclede Gas Company to Change Its Infrastructure System

Court of Appeals of Missouri, Western District, Forth Division

November 21, 2017

IN THE MATTER OF THE APPLICATION OF LACLEDE GAS COMPANY TO CHANGE ITS INFRASTRUCTURE SYSTEM REPLACEMENT SURCHARGE IN ITS MISSOURI GAS ENERGY SERVICE TERRITORY AND IN THE MATTER OF THE APPLICATION OF LACLEDE GAS COMPANY TO CHANGE ITS INFRASTRUCTURE SYSTEM REPLACEMENT SURCHARGE IN ITS LACLEDE GAS SERVICE TERRITORY; PUBLIC SERVICE COMMISSION, Respondent,
v.
THE OFFICE OF PUBLIC COUNSEL, Appellant.

         APPEAL FROM THE PUBLIC SERVICE COMMISSION

          Before Mark D. Pfeiffer, Chief Judge, Gary D. Witt, Judge and Edward R. Ardini, Jr., Judge.

          EDWARD R. ARDINI, JR., JUDGE.

         The Office of the Public Counsel ("OPC") appeals from an order entered by the Missouri Public Service Commission ("Commission") granting Laclede Gas Company's ("Laclede") requests for increases to the Infrastructure System Replacement Surcharges ("ISRS") for its Laclede Gas and Missouri Gas Energy ("MGE") service territories. We reverse the Commission's order to the extent that it allowed cost recovery through adjustment to the ISRS rate schedules for the replacement of plastic components that were not in a worn out or deteriorated condition, and the case is remanded.

         FACTUAL AND PROCEDURAL HISTORY

         The Commission is a state administrative agency that regulates public utilities. §§ 386.040; 386.250.[1] The Commission's Staff acts separately and is a party to all cases before the Commission. In re Laclede Gas Co., 504 S.W.3d 852, 856 (Mo. App. W.D. 2016). The OPC represents the public in all proceedings before the Commission and all appeals of Commission orders. § 386.710. Laclede is a "gas corporation" and "public utility" as defined in section 386.020 and is engaged in the business of distributing and transporting natural gas to customers within its Laclede Gas service territory in eastern Missouri as well as in MGE's service territory in western Missouri. Laclede is subject to the jurisdiction of the Commission as provided in Chapters 386 and 393.

         This case arises from Laclede's current programs for replacing cast iron and unprotected steel gas mains and service lines. Beginning in 2011, Laclede abandoned a previous strategy of replacing only impaired gas mains and service lines and implemented a new approach focused on replacing entire neighborhood systems at one time, which in this case also involved moving its main lines to more convenient locations, changing system pressure, and moving or replacing service lines. On September 30, 2016, Laclede filed petitions with the Commission to recover costs associated with the replacement of these neighborhood systems through an increase to existing ISRS surcharges. The Commission Staff proposed particular adjustments, which were accepted by Laclede. Relevant to this appeal, the OPC objected to Laclede's effort to secure cost recovery through ISRS surcharges for costs associated with the replacement of plastic mains and service lines that were not in a worn out or deteriorated condition.

         After holding an evidentiary hearing, the Commission issued its Report and Order, which concluded that "the plastic pipe in this case was an integral component of the worn out and deteriorated cast iron and steel pipe" and thus "the cost of replacing it can be recovered" through an increase to Laclede's existing ISRS surcharges. The OPC appeals.

         STANDARD OF REVIEW

         The Commission's Order will be affirmed if it is lawful and reasonable. In re Liberty Energy (Midstates) Corp., 464 S.W.3d 520, 524 (Mo. banc 2015) (citations omitted). The Commission's Order is lawful if it is authorized by statute, and our review of this issue is de novo. Id. (citations omitted). The Commission's Order is reasonable if it "is supported by substantial, competent evidence on the whole record; the decision is not arbitrary or capricious; [and] where the [Commission] has not abused its discretion." Id. (citations omitted). The party appealing bears the burden of proving that the Commission's Order is unlawful or unreasonable. Id. (citations omitted).

         DISCUSSION

         Although single-issue ratemaking is generally prohibited, section 393.1012.1 authorizes a gas corporation to petition the Commission for an increase to its ISRS surcharge to recover the costs of "certain government-mandated infrastructure replacement projects outside a general ratemaking case." Laclede Gas Co. v. Office of the Pub. Counsel, 523 S.W.3d 27, 30 (Mo. App. W.D. 2017) (citations omitted). "Pursuant to section 393.1009(3), 'eligible infrastructure system replacements' [under section 393.1012.1 include] 'gas utility plant projects' that meet certain specific criteria." Id. (citation omitted). Eligible "gas utility plant projects" costs that may be recovered through an ISRS surcharge include: "(1) those costs associated with replacements; (2) those costs associated with improvements and enhancements that defer replacements; and (3) those costs associated with government-mandated relocations." Id.; § 393.1009(5).

         Significant to this appeal, section 393.1009(5)(a) sets forth the ISRS-eligibility requirements for replacement projects. Under that provision, cost recovery through an ISRS surcharge is available for "[m]ains, valves, service lines, regulator stations, vaults, and other pipeline system components installed to comply with state or federal safety requirements as replacements for existing facilities that have worn out or are in deteriorated condition[.]" § 393.1009(5)(a) (emphasis added). The OPC argues that the replacement costs of the plastic mains and service lines are not ISRS-eligible under this section because those components were not worn out or deteriorated and, additionally, their replacement was not done to comply with a government-mandated safety requirement.

         In response, Laclede and the Commission's Staff argue that the plastic mains and service lines were previously installed as "patches" to temporarily extend the life of larger neighborhood cast iron and unprotected steel systems, which the Commission found were worn out or deteriorated due to their age.[2] They also assert that the new neighborhood systems are safer. Thus, they argue, costs associated with replacing the entire neighborhood systems should be eligible for recovery under ISRS. The Commission agreed, concluding in its Order that "the plastic pipe in this case was an integral component of the worn out and ...


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