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In re Application of Laclede Gas Company to Change its Infrastructure System Replacement Surcharge in its Missouri Gas Energy Service Territory

Court of Appeals of Missouri, Western District, Second Division

November 19, 2019

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

          APPEAL FROM THE PUBLIC SERVICE COMMISSION

          Before Thomas H. Newton, P.J. Anthony Rex Gabbert, and Thomas N. Chapman, JJ.

          Thomas N. Chapman, Judge.

         The Office of Public Counsel and Spire Missouri, Inc. appeal from the Report and Order on Remand entered by the Public Service Commission. In its sole point on appeal, the Office of Public Counsel argues that the Public Service Commission erred in finding that it did not have statutory authority to order Spire Missouri, Inc. to issue refunds of ineligible infrastructure system replacement surcharges. In its three points on appeal, Spire Missouri, Inc. argues that the Public Service Commission erred in disallowing $3, 110, 787 in infrastructure system replacement surcharges. We affirm in part, reverse in part, and remand for further proceedings.

         Parties & Regulatory Background

         The Public Service Commission (PSC) is a Missouri agency responsible for regulating the conduct of utility providers. See § 386.250.[1] "The Commission employs technical experts [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." Missouri-Am. Water Co.'s Request for Auth. to Implement a Gen. Rate Increase for Water & Sewer Serv. Provided in Missouri Serv. Areas v. Office of Pub. Counsel, 526 S.W.3d 253, 256 (Mo. App. W.D. 2017). The Office of Public Counsel (OPC) is separate from the PSC and Staff; it is authorized by statute to "represent and protect the interests of the public in any proceeding before or appeal from the public service commission[.]" See § 386.710. Spire Missouri, Inc. (Spire) is a "gas corporation" and "public utility" as those terms are statutorily defined. See § 386.020(18), (43). Spire provides gas services to two service areas, Spire East and Spire West.[2]

         At issue in this case is Spire's collection of certain infrastructure system replacement surcharges (ISRS). In 2003, "[t]he Legislature created ISRS to allow for single-issue ratemaking so that gas corporations could recover the costs associated with certain government-mandated infrastructure replacement projects outside a general ratemaking case." Laclede Gas Co. to Change its Infrastructure Sys. Replacement Surcharge in its Laclede Gas Serv. Territory v. Office of the Pub. Counsel, 523 S.W.3d 27, 30 (Mo. App. W.D. 2017) (citing §§ 393.1009, 393.1012, 393.1015). Under § 393.1012.1,

a gas corporation providing gas service may file a petition and proposed rate schedules with the commission to establish or change ISRS rate schedules that will allow for the adjustment of the gas corporation's rates and charges to provide for the recovery of costs for eligible infrastructure system replacements.… An ISRS and any future changes thereto shall be calculated and implemented in accordance with the provisions of sections 393.1009 to 393.1015. ISRS revenues shall be subject to a refund based upon a finding and order of the commission to the extent provided in subsections 5 and 8 of section 393.1009.

Section 393.1009(5)(a) allows for ISRS recovery of costs associated with "[g]as utility plant projects," consisting of "[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[.]" Thus, the ISRS statutes "provide a method, outside of a formal rate case, for a gas corporation to recover the cost of certain government-mandated infrastructure system replacement projects via a petition to establish or change an ISRS." In re Laclede Gas Co., 417 S.W.3d 815, 818 (Mo. App. W.D. 2014); see also § 393.1009, et seq.

         Procedural & Factual Background

         The case presently before us was the subject of a previous appeal. See Matter of Application of Laclede Gas Co. to Change Its Infrastructure Sys. Replacement Surcharge in Its Missouri Gas Energy Serv. Territory v. Office of Pub. Counsel, 539 S.W.3d 835 (Mo. App. W.D. 2017).[3] There, we summarized the factual background of that appeal (and the present one) as follows:

This case arises from [Spire's] current programs for replacing cast iron and unprotected steel gas mains and service lines. Beginning in 2011, [Spire] 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, [Spire] 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 [Spire]. Relevant to this appeal, the OPC objected to [Spire'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.

Spire I, 539 S.W.3d at 837.

         In Spire I, we began by noting that Spire was attempting to recover (through ISRS surcharges) the costs of replacing plastic mains and service lines that were not in a worn out or deteriorated condition. Id. at 839. We held that the costs of replacing plastic components that were not worn out or deteriorated were not eligible for ISRS recovery. Id. at 841. The Court therefore "reverse[d] the Commission's Report and Order as it relate[d] to the inclusion of the replacement costs of the plastic components in the ISRS rate schedules," and "remanded [the case] for further proceedings consistent with this opinion." Id. The parties' motions for rehearing and transfer to the Missouri Supreme Court were denied, and our mandate issued on March 7, 2018. Before conducting any hearings on remand, the PSC approved new general rates for Spire and the previously effective ISRS that formed the basis of the first appeal was reset to zero. The new rates went into effect on April 19, 2018.

         On remand, the PSC directed the parties to file briefing as to how to proceed in light of this Court's opinion and mandate in Spire I. After initial briefing by the parties, the PSC held oral arguments on August 9, 2018. At the hearing, Spire argued that its method of entirely replacing neighborhood systems (including the plastic portions that were not worn out or deteriorated) resulted in a cost savings to ratepayers as compared with a program that would replace only steel and cast iron facilities while attempting to reuse the existing plastic components. In other words, because its replacement of ISRS-ineligible plastic components did not generate any added costs, no refund was warranted. Staff argued that Spire had overcollected millions of dollars through its replacement of ISRS-ineligible plastic components and that a refund of those amounts was appropriate under both Missouri statutory law and the PSC's own rules. The OPC similarly argued that Spire should be required to issue a refund (although its calculation of the refund amount differed slightly from Staff's).

         On August 15, 2018, the PSC entered an Order providing that additional evidence would be necessary to resolve the issues raised by this Court's first opinion and mandate. It scheduled an evidentiary hearing for August 27 and August 28, 2018. At the hearing, Spire presented expert testimony from its own employees. Spire's witnesses testified that the company's practice of replacing existing plastic pipe (rather than incorporating it into new systems) had the effect of saving its customers money. Specifically, Spire's Vice President of Operations and Services, Craig Hoeferlin, testified that the company analyzed nine replacement projects selected by OPC itself (and another project chosen by Spire) and determined that the company's method of replacing existing plastic facilities resulted in a net savings of $230, 000 to ratepayers when compared with a method that attempted to reuse those components. Spire's Director of Health, Safety, and Environment, Mark Lauber, testified "that the retirement of plastic facilities as part of the Company's cast iron and bare steel main replacement programs served to reduce rather than increase the costs incurred for these programs and thus the amounts included in the Company's ISRS filings." He opined that the company's replacement of plastic components (as opposed to an approach that sought to reuse those components) had saved its customers millions of dollars.

         The OPC and Staff proffered evidence from their own experts indicating that Spire had improperly charged ratepayers for the cost of removing plastic components that were not deteriorated or worn out and contended that, in accordance with our opinion in the first appeal, the company should be required to issue a refund. Kim Bolin, a Utility Regulatory Auditor for the PSC, testified that after this Court issued its opinion in the first appeal, Spire Missouri provided Staff with all work order authorizations for projects totaling over $25, 000 (except for blanket work orders). After analyzing these projects, Staff decided the refund amount owed to Spire's customers using the following methodology: for each project (1) Staff calculated the feet of main and service lines replaced and retired, (2) determined the percentage of retired pipe that consisted of plastic, and (3) multiplied that percentage times the total cost of the project. Using this calculus, PSC Staff concluded that Spire had over-collected $3, 110, 787 in 2016 and owed its ratepayers a refund in that amount.

         Bolin maintained that the percentage-based model was the only method Staff could devise to adhere to this Court's earlier holding that Spire could not legally recover ISRS surcharges attributable to removing plastics that were not worn out or deteriorated. Staff elicited further testimony from David Sommerer, Manager of the PSC's Procurement Analysis Department. Sommerer acknowledged that Staff's percentage-based method was "imperfect," but did not fully accept Spire's position that it had, in the aggregate, saved its customers money by virtue of its practice of bypassing and replacing plastic components instead of incorporating them into the new systems. He testified to further complications occasioned by Spire's systematic replacement program:

Q. Is it conceivable that the Company's "systematic" replacement approach has ended up replacing main that had already been replaced under its previous "piecemeal" or block by block approach?
A. Yes. It is possible that the Company has previously requested ISRS recovery of the cost of inserting this relatively new plastic main under the "piecemeal" approach 10 years ago, while re-replacing it in its post-2012 entire cast iron system replacement approach. This is important to know to understand whether the replacement program is actually incorporating many incidental patches or what is being replaced includes much longer segments of previously "replaced" cast iron using plastic inserts.
[A]lthough I am not an attorney, my understanding of the Court of Appeals' direction is to establish instances where plastic mains and services were not worn out or deteriorated. Upon identifying those situations, the ISRS would then need to be reduced by those replacement costs.

         The OPC's experts testified that insofar as Spire's ISRS application sought recovery of costs attributable to removing and replacing ineligible plastic facilities, the entire application was non-compliant with the ISRS statute and thus the entire ISRS amount would need to be refunded. Alternatively, the OPC calculated Spire's ISRS costs attributable to replacing ineligible plastics using the same percentage-based method utilized by Staff, albeit while relying upon far fewer work orders. In its post-hearing brief, the OPC acknowledged that Staff's calculation was based upon more extensive data and conceded that the PSC would be justified in ordering Spire to refund the amount calculated by Staff.

         Following the evidentiary hearing and briefing by the parties, the PSC issued its Report and Order on Remand (Remand Order). In its Remand Order, the PSC found that "Staff's witnesses provided credible testimony on the correct methodology for determining the costs of ineligible plastic pipe replacements, and Staff's evidence on this issue was the best evidence presented at the hearing." The PSC observed that Spire had not determined whether any of the pipe it was replacing was worn out or deteriorated and concluded that it was attempting to recover ISRS costs for the replacement of ineligible components. In addition, it found Spire did not provide information necessary "to determine whether any plastic pipe being replaced was incidental to and required to be replaced in conjunction with the replacement of other worn out or deteriorated components." The PSC acknowledged Spire's argument that its neighborhood replacement program saved its customers money when compared with a piecemeal approach that sought to reuse existing plastic components, but found that Spire had adduced insufficient evidence to support this contention. Specifically, it referred to Spire's analysis of ten work orders which purported to show a net cost savings produced by its systematic neighborhood replacement program. It ruled that Spire had submitted "far too few work orders" to support its position that analysis of all of the relevant projects would have yielded the same result (no added costs). It therefore accepted Staff's calculation and determined that Spire had collected ineligible ISRS costs in the amount of $3, 110, 787.

         The PSC concluded, however, that it did not have authority to order Spire to issue a refund to its customers because this Court had not specifically instructed it to do so in Spire I. It noted that the Court had not issued such a specific directive even though the OPC had requested a refund instruction multiple times in its appellate briefing. It further ruled that the challenged ISRS was no longer in effect (because of an intervening general rate case commenced by Spire) and that ISRS tariffs generally cannot be corrected retroactively.

         The OPC filed a timely appeal and Spire also appeals.

         Discussion

         Pursuant to § 386.510, we review the PSC's Remand Order solely to determine whether it is lawful and reasonable. "Where ratemaking is at issue, determinations by the Commission are favored by a presumption of validity." In Matter of Kansas City Power & Light Co.'s Request for Auth. to Implement a Gen. Rate Increase for Elec. Serv. v. Missouri Pub. Serv. Comm'n, 509 S.W.3d 757, 765 (Mo. App. W.D. 2016).

"The lawfulness of the [Commission's] order is determined by 'whether statutory authority for its issuance exists, and all legal issues are reviewed de novo.' " In re Verified Application & Petition of Liberty Energy (Midstates) Corp., 464 S.W.3d 520, 524 (Mo. banc 2015). If we find the Commission's order is unlawful, we need not reach the issue of the reasonableness of the Commission's order. Id. If we find the Commission's order is lawful, then we must determine whether the Commission's order is reasonable. Id. "The [Commission's] order is determined to be reasonable when 'the order is supported by substantial, competent ...

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