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In re Petition of Missouri-American Water Co.

Court of Appeals of Missouri, Western District, Third Division

November 19, 2019

IN THE MATTER OF THE PETITION OF MISSOURI-AMERICAN WATER COMPANY FOR APPROVAL TO ESTABLISH AN INFRASTRUCTURE SYSTEM REPLACEMENT SURCHARGE (ISRS), Appellant,
v.
PUBLIC SERVICE COMMISSION OF MISSOURI, Respondent.

          Appeal from the Public Service Commission

          Before Alok Ahuja, Presiding Judge, Gary D. Witt, Judge, and Anthony Rex Gabbert, Judge.

          Anthony Rex Gabbert, Judge.

         Missouri-American Water Company ("MAWC") appeals the Public Service Commission of Missouri's (Commission) order approving the company's Infrastructure System Replacement Surcharge for the MAWC's eligible infrastructure projects for the period from January 1, 2018, through September 30, 2018. MAWC asserts two points on appeal that the Commission did not find in MAWC's favor. First, MAWC contends the Commission erred in concluding that sufficient evidence was not presented to demonstrate that a deferred tax asset was incurred in 2018, arguing the Commission's order is unreasonable and arbitrary because it jeopardizes MAWC's eligibility to utilize accelerated depreciation and is not supported by substantial and competent evidence on the whole record as to the impact of the eligible infrastructure system replacements. Second, MAWC contends that the Commission erred in issuing an order not reflecting the deferred tax asset identified by MAWC, and the order is unlawful because it focused on MAWC as a whole and failed to recognize the accumulated deferred income taxes specifically associated with the eligible infrastructure system replacements as required by Section 393.1000[1]. We affirm.

         Factual Background and Procedural History

         MAWC is a "public utility" and "water corporation" pursuant to Section 386.020 and is subject to the jurisdiction and supervision of the Commission as provided by law. MAWC serves retail water customers throughout the state, including the majority of St. Louis County. MAWC is wholly owned by its parent company American Water Works. The Commission is the state agency responsible for the regulation of public utilities, including water corporations, in Missouri. § 386.250.1.

         Water corporations are permitted to recover eligible infrastructure system replacement costs outside of a general rate case through an Infrastructure System Replacement Surcharge (ISRS) on customer bills.

[A]n approved ISRS can be collected only for three years at the most, at which point it then terminates (unless a new rate case is pending). Thereafter, the [utility] has to file revised rate schedules to reset the ISRS to zero upon resolution of a general rate case. [§ 393.1006.6(1)]. The [utility] may then seek to establish a new ISRS by filing a petition pursuant to section [393.1003].
Collectively, the ISRS statutes permit the [utility] to make single-issue rate increases between general rate cases in order to timely recover its costs for certain government-mandated infrastructure projects without the time and expense required to prepare and file a general rate case, while, at the same time, limiting the collection of the ISRS surcharge to three years to prevent its unlimited use outside of a general rate case.

In re Laclede Gas Co., 417 S.W.3d 815, 821-822 (Mo. App. 2014). MAWC's most recent general rate case, NO-WR-2017-0285, resulted in the establishment of new rates which became effective May 2018. Because issues surrounding MAWC's previous ISRS were addressed and incorporated into that general rate case, the previous ISRS was reset to zero.

         On August 20, 2018, MAWC filed "MAWC's Petition to Establish an Infrastructure System Replacement Surcharge & Motion for Approval of Customer Notice" with the Commission. Therein, MAWC requested an ISRS for its St. Louis County service territory to recover eligible costs incurred for infrastructure system replacements made during the period from January 1, 2018, through September 30, 2018. This was MAWC's first ISRS filing since MAWC's general rate case NO-WR-2017-0285. MAWC attached supporting information to its petition including documentation identifying the type of addition, utility account, work order description, addition amount, depreciation rate, accumulated depreciation, and depreciation expense. MAWC's supporting documentation also contained a proposed amount for accumulated deferred income tax. In that calculation, MAWC included what it characterized as a deferred tax asset relating to an assumed net operating loss (NOL) for 2018 in the amount of $9, 577, 697.

         The Commission directed Commission Staff (Staff) to examine MAWC's application and submit a report/recommendation in accordance with Sections 393.1000 to 393.1006. On October 19, 2018, Staff submitted a recommendation regarding MAWC's application. Staff recommended removing the deferred tax asset from MAWC's ISRS calculation because it was not an NOL resulting from the 2018 ISRS period. Staff's recommended removal of the deferred tax asset resulted in a reduction of $866, 917 to the MAWC's recoverable ISRS costs; Staff's recommended ISRS revenue requirement was $6, 377, 959. MAWC objected to Staff's recommendation. Whether an NOL existed and, if so, what impact it had on the ISRS was MAWC's only disagreement with Staff's recommendations.

         After review, the Commission made factual findings which included: 1) Only costs directly associated with the qualifying ISRS plant that became in-service during the nine months of the 2018 ISRS Period should be reflected in ISRS rates, 2) An NOL results when a utility does not have enough taxable income to utilize all of the tax deductions to which it would otherwise be entitled. The amount of the unused deductions is the NOL. An NOL is a tax return adjustment and not a regulatory item, 3) MAWC has an NOL carryover from prior years, 4) No net amount of net operating loss has been generated for income tax purposes by MAWC on an aggregate basis since January 1, 2018, the beginning of the 2018 ISRS Period, 5) IRS Private Letter Rulings cited by MAWC address time periods in which the utility in question was generating NOL amounts, 6) MAWC did not generate any NOL in the 2018 ISRS Period, 7) MAWC projects it will be able to reflect all of its net accelerated depreciation benefits associated with ISRS plant additions on its books during the next two years without the need to record any new offsetting NOL amount, 8) MAWC's NOL as of December 31, 2017, is reflected in MAWC's base rates as a result of MAWC's last general rate case, and 9) A taxpayer cannot utilize an NOL carryforward amount from a prior tax year without first exhausting all of the deductions available for the current tax year.

         The Commission concluded MAWC had not provided evidence to support that it would generate an NOL in 2018, and the evidence showed MAWC was generating more revenue for 2018 than expenses qualifying for deductions. The Commission found that MAWC would be utilizing prior NOL carryovers to offset its taxable income in 2018 and 2019, but would not be generating a new NOL. The Commission found that, because MAWC was expected to have taxable income in 2018, it was reasonable to conclude that MAWC would not be generating an NOL during the 2018 ISRS Period at issue. The Commission concluded, "In short, although the ISRS statute requires recognition of ADIT [accumulated deferred income taxes], which might include reflection of an NOL, we cannot allow MAWC to reduce its ADIT balance to reflect an NOL that does not exist." The Commission found that, since there was not an NOL in the 2018 ISRS Period, the question of whether an NOL was associated with the proposed ISRS was moot. The Commission concluded MAWC had complied with the requirements of the applicable ISRS statutes to authorize use of an ISRS, however, the recovery should not include an NOL; consequently, MAWC would be permitted to establish an ISRS to recover ISRS surcharges in the amount of $6, 377, 959.

         MAWC filed a timely application for rehearing which was denied. This appeal follows.

         Standard of Review

         Pursuant to section 386.510, the appellate standard of review of a Public Service Commission order is two-pronged: first, the reviewing court must determine whether the Commission's order is lawful; second, the court must determine whether the order is reasonable. Matter of Missouri-American Water Company, 516 S.W.3d 823, 827 (Mo. banc 2003) (internal citations omitted). We presume the Commission's order is valid, and the appellant has the burden of proving that the order is unlawful or unreasonable. Id. We review questions of law de novo. Id. An order is lawful if statutory authority for its issuance exits. Id. An order is reasonable if supported by substantial, competent evidence on the whole record and is not arbitrary, capricious, or an abuse of discretion. Id. "We consider the evidence, along with all reasonable supporting inferences, in the light most favorable to the Commission's order." State ex rel. Public Counsel v. Missouri Public Service Com'n, 289 S.W.3d 240, 246-247 (Mo. App. W.D. 2009). If the evidence supports two conflicting conclusions, we defer to the Commission's factual findings. Id. Pursuant to Section 386.430, the burden of proof is on the party seeking to set aside the Commission's order to show by clear and satisfactory evidence that the order is unlawful or unreasonable.

         Point I

         In its first point on appeal, MAWC contends the Commission erred in concluding sufficient evidence was not presented to demonstrate that an NOL was incurred by MAWC in 2018. MAWC argues this error resulted in an unreasonable, arbitrary order because it jeopardizes MAWC's eligibility to utilize accelerated depreciation and is not supported by substantial and competent evidence on the whole record as to the impact of the eligible infrastructure system replacements.

         We find that, the majority of MAWC's argument in Point I focuses not on evidence supporting that an NOL was incurred in 2018 but, rather, the potential impact to MAWC and customers of the failure of the Commission to include, pursuant to Section 393.1000, an NOL in its calculations. We find these arguments ...


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