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In re Application of Rate Increase Request for Liberty Utilities (Missouri Water), LLC

Court of Appeals of Missouri, Western District, First Division

November 19, 2019


          Appeal from the Missouri Public Service Commission

          Before Edward R. Ardini, Jr., Presiding Judge, and Mark D. Pfeiffer and Cynthia L. Martin, Judges.

          Mark D. Pfeiffer, Judge.

         Orange Lake Country Club, Inc. ("Orange Lake") and Silverleaf Resorts, Inc. ("Silverleaf") appeal from the Report and Order of the Missouri Public Service Commission ("PSC") approving water and sewer utility rate increases for Liberty Utilities (Missouri Water) LLC ("Liberty"). We affirm.

         Factual and Procedural Background [1]

         The Missouri General Assembly created the PSC to serve as the state administrative agency authorized to regulate public utilities, including water corporations and sewer corporations, operating within Missouri. § 386.040;[2] § 386.250(3), (4). The PSC employs an independent technical advisory staff ("Staff") whose duty is to render advice and assistance to the PSC commissioners and administrative law judges on technical matters within their areas of expertise that may arise during the course of proceedings before the PSC. § 386.135.4. The Office of Public Counsel ("OPC") represents and protects the interests of the public in any proceeding before or appeal from the PSC. § 386.710.1(2).

         Liberty is a public utility, water corporation, and sewer corporation, as those terms are defined in section 386.020(43), (59), and (49), subject to regulation by the PSC as provided in Chapters 386 and 393. Liberty provides water service to approximately 2, 000 connections in Cape Girardeau, Franklin, Jefferson, McDonald, Stone, and Taney counties in Missouri, and provides sewer service to approximately 400 connections in Cape Girardeau, Franklin, Jefferson, Stone, and Taney counties in Missouri.

         Silverleaf was the developer and manager of three vacation ownership resort properties, one in each of Taney County, Stone County, and Jefferson County, Missouri. Silverleaf was a property owner at each of the three resorts and was a party to a water and sewer service agreement with Liberty. Silverleaf and Orange Lake were affiliate entities. Orange Lake was the successor developer and manager for each of the homeowner associations representing 36, 686 individual timeshare vacation property owners[3] at the three resorts served by Liberty.

         On December 15, 2017, Liberty filed a letter with the PSC pursuant to 4 CSR 240-3.050 Small Utility Rate Case Procedure (Nov. 30, 2015) ("SURP"), requesting a $995, 844 increase in its annual water system operating revenues and a $196, 617 increase in its annual sewer system operating revenues. On December 19, 2017, the PSC opened two cases, WR-2018-0170 and SR-2018-0171, and Staff filed a "Small Utility Rate Case Timeline" pertaining to the processing of Liberty's revenue increase request. Liberty moved to consolidate the two cases pursuant to 4 CSR 240-2.110(3) (Nov. 30, 2015) as they involved related questions of law and fact. The PSC granted Liberty's motion and ordered consolidation of the cases. Pursuant to 4 CSR 240-2.075 (Nov. 30, 2015), Orange Lake and Silverleaf (collectively, "Orange Lake") filed a joint motion to intervene, which the PSC granted.

         On February 8, 2018, pursuant to 4 CSR-2.080, Orange Lake filed a motion to dismiss, or in the alternative, to order Liberty to file a tariff pursuant to section 393.140(11). Orange Lake argued that Liberty did not fit the profile of a small utility that SURP was designed to benefit and should be ordered to pursue its proposed rate increases by filing a tariff under the traditional statutory "file and suspend" procedure of section 393.140(11). While Liberty argued that it qualified for SURP because it had fewer than 8, 000 customers, Orange Lake contended that the 36, 686 timeshare owners were water and sewer customers within the meaning of 4 CSR 240-3.010(7) (Apr. 30, 2008). On the other hand, Staff calculated the number of customers by the number of meters served by a utility, and based on Staff's calculation, Liberty served 2, 364 customers (counting water and sewer customers separately). On April 4, 2018, the PSC issued its order denying Orange Lake's motion to dismiss, finding that Orange Lake was Liberty's customer as Orange Lake was financially responsible to the utility while the individual timeshare customers were separately responsible to the resort for utility services and maintenance fees and that Liberty met the requirement of having less than 8, 000 customers to avail itself of SURP.

         On May 24, 2018, Staff filed a Partial Disposition Agreement and Request for Evidentiary Hearing ("Partial Disposition Agreement"). Staff, Liberty, and OPC reached agreement on some of the issues raised by Liberty's rate increase request and requested an evidentiary hearing on certain unresolved issues, including return on equity and capital structure. On June 13, 2018, the PSC issued a procedural schedule, setting the dates to pre-file direct, rebuttal, and surrebuttal testimony; designating August 3, 2018, as the last day to request discovery; and scheduling the evidentiary hearing for August 15-17, 2018.

         On July 30, 2018, Staff filed a motion to strike portions of the pre-filed rebuttal testimony of Orange Lake's expert witness, Mr. Stannard, for improperly including content from Staff's settlement offer provided during the rate case process. By an August 2, 2018 order, the PSC granted Staff's motion to strike portions of Mr. Stannard's rebuttal testimony referencing Staff's settlement offer.

         On August 3, 2018, Liberty and Staff filed a Non-Unanimous Stipulation and Agreement ("Stipulation"), in which they agreed and recommended, exclusive of rate case expense, that the total overall annual revenue requirement for Liberty's water system operations was $1, 690, 117, representing an increase of $818, 800 (a 92.4% increase over rate revenues authorized by current tariffs), and that, exclusive of rate case expense, the total overall annual revenue requirement for Liberty's sewer system operations was $455, 163, representing an increase of $196, 782 (a 75.8% increase over rate revenues authorized by current tariffs). The parties agreed that Liberty would file proposed compliance tariffs comporting with the terms of the Stipulation at an agreed-upon rate design.

         An evidentiary hearing was conducted on August 16, 2018. The PSC issued its Report and Order on October 24, 2018, with an effective date of November 3, 2018. The PSC found that Liberty's evidence failed to sustain its burden that its originally requested increase of $995, 844 in annual water system operating revenues and $196, 617 in annual sewer revenues was just and reasonable. However, the PSC found that Liberty did produce sufficient evidence to support that its requested rate increase of $818, 800 for water operations and $196, 782 for sewer operations in its joint position statement was just and reasonable. On November 5, 2018, Liberty filed compliance tariffs with an effective date of December 5, 2018, to comply with the Report and Order. The PSC approved Liberty's compliance tariffs by order on November 28, 2018, with an effective date of December 8, 2018. On January 9, 2019, the PSC issued its order denying Orange Lake's application for rehearing.

         Orange Lake timely appealed.

         Standard of Review

         "Pursuant to section 386.510, the appellate standard of review of a [PSC] order is two-pronged: first, the reviewing court must determine whether the [PSC]'s order is lawful; and second, the court must determine whether the order is reasonable." Petition of Mo.-Am. Water Co. for Approval to Change its Infrastructure Sys. Replacement Surcharge v. Office of Pub. Counsel, 516 S.W.3d 823, 827 (Mo. banc 2017) (internal quotation marks omitted). "The PSC's order is presumed valid, and the appellant has the burden of proving that the order is unlawful or unreasonable." Id. The lawfulness of an order is determined by whether the PSC had statutory authority to issue the order. Id. We review the issue of statutory authorization or lawfulness de novo. Id.

         A reasonableness challenge is an argument that the PSC's Report and Order "is not supported by substantial, competent evidence on the whole record; is arbitrary or capricious; or constitutes an abuse of discretion." Mo.-Am. Water Co.'s Request for Auth. to Implement a Gen. Rate Increase for Water & Sewer Serv. Provided in Mo. Serv. Areas v. Office of Pub. Counsel, 526 S.W.3d 253, 265-66 (Mo. App. W.D. 2017).


         Point I

         In Orange Lake's first point, it asserts that the PSC erred in permitting Liberty to initiate a rate case by sending a letter rather than filing a tariff. Specifically, Orange Lake contends that the SURP, which authorized such a procedure, is unlawful in that it is not authorized by and conflicts with the PSC's enabling statutes.[4] Orange Lake argues that the only mechanism for a utility to request a rate change is through the file-and-suspend procedure set forth in section 393.150.1.

         "As a creature of statute, the Commission only has the power granted to it by the Legislature and may only act in a manner directed by the Legislature or otherwise authorized by necessary or reasonable implication." Staff of Mo. Pub. Serv. Comm'n v. Consol. Pub. Water Supply Dist. C-1 of Jefferson Cty., Mo., 474 S.W.3d 643, 649 (Mo. App. W.D. 2015) (internal quotation marks omitted). "The [PSC's] statutory authority is primarily expressed in Chapters 386 and 393." Id.

         The PSC has the statutory authority to regulate all public utilities in Missouri, including water and sewer corporations like Liberty. § 386.250(3), (4), (5). This includes the authority to "determine and prescribe the just and reasonable rates and charges" for public utility services. § 393.140(5). The PSC also has the statutory authority to adopt rules governing, among other things, practice and procedure. § 386.410.1.

         The PSC adopted the rule at issue in this case, 4 CSR 240-3.050 Small Utility Rate Case Procedure (Apr. 30, 2008), effective May 30, 2008, for the purpose of "provid[ing] procedures whereby certain small utilities may request increases in their overall annual operating revenues, without complying with the rules pertaining to general rate cases set forth elsewhere in this chapter."[5] The stated authorities under which the PSC filed the rule were sections 386.040 RSMo 2000 (PSC established), 386.250 RSMo 2000 (PSC jurisdiction), 393.140 RSMo 2000 (PSC's general powers in respect to gas, water, electricity, and sewer services), 393.290 RSMo 2000 (PSC's powers relating to other utilities made applicable to heating companies), and 393.291 RSMo Supp. 2007 (steam heating companies permitted to file under small company rate procedure promulgated by PSC). As in the prior iterations of the rule, 4 CSR 240-3.050(2) (Apr. 30, 2008) provided:

A small utility may initiate a rate case by filing a letter requesting an increase in its overall annual operating revenues with the secretary of the commission. A utility filing such a request shall specify the amount of the revenue increase that it is seeking, but shall not submit any proposed tariff revisions with the request.

         The Missouri Supreme Court has recognized that there are alternative procedures for utilities to initiate rate increase proceedings. In State ex rel. Jackson County v. Public Service Commission, 532 S.W.2d 20 (Mo. banc 1975), the PSC issued a Report and Order authorizing an electric utility company to increase its electric rates. Id. at 21. Electricity consumers filed a petition in the circuit court seeking review of the PSC's order and a motion for reversal of the new rates. Id. In their motion, the consumers asserted that the rate increase initiated by the "file and suspend" method[6] and authorized by the PSC was a nullity because a rate increase could only be considered under the "complaint" method.[7] Id. at 23. The circuit court granted the motion for relief, and the PSC appealed. Id. at 21. The Missouri Supreme Court rejected the circuit court's conclusion that the "complaint" method was the exclusive means for utilities to initiate rate increase proceedings and held that electric rate increases could be initiated by either the "file and suspend" method or under the "complaint" method. Id. at 28-29. As our Supreme Court observed, "the experience in Missouri now covers over sixty years and the 'file' method has been accepted and consistently used throughout that time-absent the precise attack now made." Id. at 28. The court further noted "[e]ither procedure authorizes and, in fact, contemplates that the [PSC] will protect not only the rights of the consuming public but also the financial integrity of the utilities-by public hearings, where proper."[8] Id. at 29.

         Like the "file and suspend" method and the "complaint" method, the experience in Missouri with the small company rate increase procedure now covers decades of use, and the "letter" method has also "been accepted and consistently used throughout that time." Id. at 28. The General Assembly recognized the utility of SURP in the context of the PSC ordering a capable public utility to acquire a ...

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