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In re Application of Spire Missouri Inc.

Court of Appeals of Missouri, Western District, Second Division

November 19, 2019


          Appeal from Public Service Commission

          Before Thomas H. Newton, Presiding Judge, Anthony Rex Gabbert, Judge, Thomas N. Chapman, Judge.

          Anthony Rex Gabbert, Judge.

         The Office of Public Counsel and Spire Missouri, Inc. appeal the Report and Order of the Public Service Commission of the State of Missouri. In three points on appeal, Spire Missouri, Inc. claims the Public Service Commission erred in disallowing $4, 100, 000 in Infrastructure System Replacement Surcharges. In one point on appeal, the Office of Public Counsel claims the Public Service Commission erred in allowing Spire to collect costs it incurred to replace cast iron and bare steel mains and service lines. The Commission's Report and Order is reversed and the case is remanded.

         Facts [1]

         The Public Service Commission of the State of Missouri ("PSC") is a state administrative agency that regulates public utilities. §§ 386.040; 386.250.[2] Spire Missouri, Inc. ("Spire")[3] is an investor-owned gas utility providing retail gas service to large portions of Missouri through its two operating units or divisions, Spire Missouri East and Spire Missouri West. Spire is a "gas corporation" and a "public utility" as defined in section 386.020. The Office of Public Counsel ("OPC") may represent and protect the interests of the public in any proceeding before or appeal from the PSC.

         On June 7, 2018, Spire filed an application and petitions with the PSC to change its Infrastructure System Replacement Surcharges ("ISRS") in its East and West service territories. Spire requested an adjustment to its ISRS rate schedules to recover costs incurred in connection with infrastructure system replacements made during the period that ran from October 1, 2017 through April 30, 2018, with pro forma ISRS costs updated through June 30, 2018. The PSC issued notice of the applications and provided an opportunity for interested persons to intervene. No intervention requests were submitted.

         On August 6, 2018, the Staff of the PSC ("Staff") filed its reports proposing a number of corrections and adjustment's to Spire's calculations. Staff recommended that the PSC reject the original tariff sheets and approve ISRS adjustments for Spire based on Staff's determination of the appropriate amount of ISRS revenues. Staff later provided corrections and information for the updated months of May and June 2018.

         On August 16, 2018, Spire filed a motion objecting to Staff's recommendations and requesting an evidentiary hearing. The OPC filed a motion to dismiss Spire's applications. The PSC held an evidentiary hearing on August 27, 2018.

         The PSC found the following in its Report and Order: The last general rate cases applicable to Spire were decided by the PSC by order issued on March 17, 2018, with new rates effective April 19, 2018. As part of those general rate cases, Spire's existing ISRS were reset to zero. The ISRS filings at issue in this case are Spire's first ISRS filings since the last general rate case.

         Sections 393.1009 through 393.1015 permit gas corporations to recover certain infrastructure system replacements costs outside of a formal rate case through a surcharge on its customers' bills. Historically, Spire has used a piecemeal approach to pipe replacement by replacing pipes when they were failing or about to fail. In 2010, Spire changed to what it contends is a more systematic and economical approach where it retires pipes in place and installs new plastic pipes often in a different location. The new location is more accessible and more efficient to maintain than the location of old pipes which were often under streets.

         Spire's current neighborhood replacement program replaces or retires in place and no longer uses cast iron, steel, and plastic pipes. Most of the cast iron pipes being replaced are over a hundred years old. Cast iron pipes are unsafe to use because they undergo a process called graphitization in which the iron leeches out making the pipe subject to cracking and leaking. The steel pipe being replaced is bare and not cathodically-protected so those pipes corrode relatively quickly and need to be replaced.

         Some of the plastic pipes that Spire replaced or retired in place are not worn out or in a deteriorated condition. Spire did not conduct a review to determine if that plastic pipe was worn out or deteriorated before replacing it. The polyethylene plastic pipe that Spire uses should last indefinitely. Spire's work order authorization sheets did not explain if a main or service line being replaced was worn out or deteriorated. Spire did not provide sufficient information for Staff 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. Spire has not attempted to calculate the amount of plastic pipe replaced that was worn out or in a deteriorated condition. Some of Spire's blanket work order involved replacing or repairing plastic pipes that were not worn out or deteriorated.

         In 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) ("2016 ISRS Case"), this court reversed the PSC's order that the plastic pipe was an integral component of the worn out and deteriorated cast iron and steel pipe and that the cost could be recovered through an increase to the existing ISRS surcharges. Based on the opinion in the 2016 ISRS Case, Staff developed a methodology to remove the cost of the replacement of ineligible plastic mains and service lines from Spire's ISRS cost recovery.

         The PSC found in its Report and Order that Staff witnesses provided credible testimony on the correct methodology for determining the cost of ineligible plastic pipe replacements and that Staff's evidence on this issue was the best evidence presented at the hearing. Staff made appropriate adjustments to Spire's ISRS request based on the plastic pipe replaced and calculated a revised ISRS revenue requirements ("Adjusted ISRS"). The Adjusted ISRS recommended by Staff resulted in Spire collecting ISRS revenues in the amount of $2, 607, 610 for its East service territory and $5, 411, 793 for its West service territory.

         These appeals by Spire and OPC follow. Spire seeks an additional $4, 100, 000 in ISRS revenues. OPC maintains the matter should be remanded with instructions to remove from the ISRS revenue awarded the cost incurred to replace cast iron and bare steel mains and service lines.

         Standard of Review

         "The Commission's Order will be affirmed if it is lawful and reasonable." Id. at 837. "The Commission's Order is lawful if it is authorized by statute, and our review of this issue is de novo." Id. at 838. "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. (internal quotation marks omitted). "The party appealing bears the burden of proving that the Commission's Order is unlawful or unreasonable." Id.

         Office of the Public Counsel - Point I

         In its sole point on appeal, the OPC claims the PSC erred in authorizing Spire to collect the costs it incurred to replace cast iron and bare steel mains and service lines. It claims the decision was not supported by substantial and competent evidence and is subject to review under section 386.510. The OPC maintains that Spire failed to present sufficient evidence to prove that the cast iron and based steel mains and service lines were "worn out or [] in [a] deteriorated condition" as required under the definition of "Gas utility plant projects" found in section 393.1009(5)(a).

         "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., 539 S.W.3d at 838 (internal quotation marks 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. "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. (citing §393.1009(5)). "Significant to this appeal, section 393.1009(5)(a) sets forth the ISRS-eligibility requirements for replacement projects." Id. "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[.]'" Id. (quoting § 393.1009(5)(a) (emphasis added)).

         "Section 393.1009(5)(a), supra, clearly sets forth two requirements for component replacements to be eligible for cost recovery under ISRS: (1) the replaced components must be installed to comply with state or federal safety requirements and (2) the existing facilities being replaced must be worn out or in a deteriorated condition." Id. "The definition of 'deteriorate' is 'to make inferior in quality or value,' 'to grow worse,' and 'become impaired in quality, state, or condition.'" In Matter of Verified Application & Petition of Liberty Energy (Midstates) Corp., 464 S.W.3d 520, 525 (Mo. banc 2015) (quoting WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 616 (1993)). "Clearly, this definition indicates that deterioration is a gradual process that happens over a period of time rather than an immediate event." Id. (holding that utility plant projects which were damaged by a third party's negligence are not eligible for an ISRS surcharge because such damage is not from structures being worn out or deteriorated). "[O]ur Supreme Court has found this requirement to be mandatory and has interpreted it narrowly." Laclede Gas Co., 539 S.W.3d at 839.

         Essentially, the OPC argues in this appeal that the evidence presented was that old pipes can become worn out or deteriorated and that many of the pipes at issue were old. It argues that no evidence was presented that the pipes at issue actually were worn out or deteriorated. Thus, the OPC concludes the statutory requirements for ISRS have not been satisfied.

         Craig Hoeferlin, Spire's Vice President of Operations Services, testified that blanket work orders[4] are designed to charge for routine situations where there is a leak or other problem with the facility that needs to be replaced. Instead of being a planned project, it is something Spire came across on something like a leak survey or a leak crawl. He testified that no review was conducted to determine if the plastic that was retired was worn out or deteriorated. Instead, "[a] review was done to determine what was the most efficient way to install the new system." Hoeferlin later testified blanket work orders are reviewed by engineering staff and accounting staff to make sure everything included would be covered by ISRS. He believed that all cast iron and all the steel was worn out and deteriorated. He stated that any time there is a leak in the structures that are bare steel and cast iron that by definition the structures are worn out and deteriorated.

         Hoeferlin also testified that "most" of the cast iron being replaced is over a hundred years old. He described a process called graphitization where the iron has leached out so the cast iron is mainly carbon. That makes it so the cast iron can crack very easily and that leads to leaks. The steel that Spire replaced was bare and unprotected and could corrode very easily. He testified that "unprotected steel does corrode relatively quickly, so that's why it needs to be replaced. Cast iron really doesn't corrode. It's a different type of corrosion. It's graphitization where the iron leaches out and then it becomes very brittle. So those two types of materials, for lack of a better term, do corrode, that's why they need to be replaced."

         Glenn Buck, Spire's Director of Regulatory and Finance, testified that facilities included in the blanket work orders are worn out or deteriorated. He defined worn out or deteriorated: "For purposes of my answer that means it is no longer in the safe established condition to provide service." It includes situations where a fitting gets loose. He did not do the analysis to determine what was replaced specifically under the blanket works orders, however. He left that to the engineers. He stated that ...

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