City of Alexandria v. State Corp. Comm'n

• Decision Date: 30 August 2018
• Docket Number: Record No. 171428
• Parties: CITY OF ALEXANDRIA, et al. v. STATE CORPORATION COMMISSION, et al.
• Court: Virginia Supreme Court

296 Va. 79

818 S.E.2d 33

CITY OF ALEXANDRIA, et al.

v.STATE CORPORATION COMMISSION, et al.

Record No. 171428

Supreme Court of Virginia.

AUGUST 30, 2018

Andrew R. McRoberts (Nicole S. Cheuk ; James L. Banks, Jr., City Attorney; Karen Snow, Assistant City Attorney; Sands Anderson, on briefs), Richmond, for appellants.

John F. Dudley, Counsel to the Commission (K. Beth Clowers, Associate General Counsel, on brief), for appellee State Corporation Commission.

Lonnie D. Nunley, III (Timothy E. Biller ; Hunton & Williams, on brief), Richmond, for appellee Virginia- American Water Company.

Amicus Curiae: Aqua Virginia, Inc. (John K. Byrum, Jr. ; Woods Rogers, Richmond, on brief), in support of appellees.

PRESENT: Lemons, C.J., Mims, McClanahan, Powell, Kelsey, and McCullough, JJ., and Russell, S.J.

OPINION BY JUSTICE D. ARTHUR KELSEY

The City of Alexandria and the City of Hopewell ("Cities") appeal from an order of the State Corporation Commission ("SCC" or "Commission") that approved a new surcharge for Virginia-American Water Company ("VAWC" or "Company"). On appeal, the Cities argue that the SCC had no statutory authority to approve the new surcharge and that, even if it did, the evidence was insufficient to justify the SCC’s approval. We disagree on both counts and affirm.

I.

A. VAWC’S RATE APPLICATION

In 2014, VAWC and two other water utilities filed a petition requesting that the SCC establish rules pursuant to which a water utility could apply for the establishment of a water and wastewater infrastructure surcharge ("WWISC"). The City of Alexandria participated in that proceeding. See Virginia Am. Water Co. , Case No. PUE-2014-00066, 2015 Va. PUC LEXIS 668, at *2 (S.C.C. Sept. 9, 2015) ("Rulemaking Order").

The SCC decided not to implement the requested rule but stated in its Rulemaking Order that "the need for such investment, along with the appropriate recovery thereof, can be reasonably addressed on a case-by-case basis wherein the Commission and interested parties may consider the specific circumstances attendant to each utility." Id. at *6-7. In reaching this conclusion, the SCC stated that it was not ruling on the "appropriateness of various rate design mechanisms that may be utilized in association with new infrastructure investment." Id. at *7.

In 2015, VAWC filed an application with the SCC for a general increase in water rates. VAWC requested a rate increase, claiming increased capital investment costs, decreased water sales, and a diminished rate of return on common equity ("ROE"). VAWC sought to increase rates to produce an additional $8.69 million of revenue, representing an 18.42% increase in test-year revenues based on a 10.75% ROE. The proposed increase would be divided among VAWC’s five operating districts, effective April 1, 2016.¹

In its application, VAWC also sought approval and implementation of a WWISC to allow VAWC to better plan for and timely recover costs of necessary investment in replacing aging infrastructure and other investments in its system that do not generate additional revenue.

B. THE SCC RECORD

1. VAWC’s Evidence

A hearing examiner convened a public hearing to receive evidence on VAWC’s application. Along with several other entities, the Cities participated fully in the hearing. The record shows that VAWC owns and operates "a water distribution system consisting of approximately 734 miles of water main, ranging in size from under two to 36 inches, as well as services, meters, hydrants, water treatment plants, pumping stations, storage tanks and water testing equipment." 3 J.A. at 1306. VAWC also "owns, operates and maintains a wastewater system consisting primarily of approximately 181 miles of sewer main, 101 miles of sewer laterals[,] and wastewater treatment plants." Id. at 1306-07.

VAWC organized its water and wastewater systems into five operating districts: The "Alexandria District serves the City of Alexandria and parts of Fairfax ... and Arlington Count[ies]." Id. at 1307. The "Hopewell District serves the City of Hopewell, and parts of Prince George County." Id. The "Eastern District serves 18 subdivisions through 18 distinct public water systems in" Westmoreland, Northumberland, Lancaster, Essex, and King William Counties. Id. The Prince William water and wastewater districts serve "the Dale City community in Prince William County." Id.

VAWC constructed its systems over time with different types of materials. Older water systems, like the one in Alexandria started in 1850, include "very old pit-cast pipe, centrifugal cast iron pipe, cast iron cement lined pipe, asbestos cement pipe, PVC, reinforced concrete and ductile iron pipe." Id. at 1283. "Ductile iron pipe is a newer" and more flexible "pipe material that VAWC started to install around 1970." Id. Given its relative inflexibility, "the older cast iron pipe" corrodes over time and "fails more often." Id. A significant portion of VAWC’s water and wastewater infrastructure has begun to reach the end of its useful life.

VAWC’s engineering manager testified that, although VAWC "has made and continues to make investments in" replacing aging infrastructure, "the amount of main replaced cannot keep up with the amount of main requiring replacement in the coming decades." Id. at 1294. VAWC’s "mains that have been installed over the past 115 years will need to be replaced over the next 85 years to ensure that the system is" properly maintained. Id. at 1295. At the current rate, "the estimated time frame for total replacement of [the Company’s] mains is over 430 years, or 345 years longer than the average life expectancy of these facilities." Id. at 1296. The engineering manager opined that, if the SCC approved the WWISC, VAWC’s capital replacement program would "operate more effectively" and would likely avoid "the additional costs associated with infrastructure failures or main breaks." Id. at 1301. He also stated that the WWISC would fund the total main replacement plan and reduce its duration "to an average of 139 years," with the "long-term goal ... to reduce the time frame for total replacement to 100 years." Id. at 1296.

Another engineering manager for VAWC pointed out that "VAWC’s water main replacement rate for 2014 was 0.32%." Id. at 1283-84. At that rate, "the average pipe in VAWC’s network would have to continue in service for nearly 300 years." Id. at 1284. The first engineering manager explained further that VAWC planned to focus "its replacement efforts in the Alexandria and Eastern Districts." Id. at 1298. Alexandria in particular "has the largest inventory of cast iron pipe in need of replacement," "a significant inventory of pipe" six inches or less in diameter, and "the highest average main break frequency rate of all the Districts with 33 breaks per 100 miles of pipe." Id. "In Alexandria, 63% of mains are cast iron," and these "mains account for 94% of the main breaks in that District." Id.

VAWC’s president testified that "the major drivers of the Company’s need for rate relief" in this case were VAWC’s "ongoing capital investment" in infrastructure and "revenue loss arising from declining [water] usage." Id. at 1117. He said that VAWC had increased its utility plant investment by $53 million "since the last general rate case" and had continued to make investment in infrastructure. Id. VAWC needed the WWISC, he contended, to replace aging infrastructure on an accelerated basis and reach a "100-year main replacement schedule"—"or 1% annually"—which would permit VAWC to timely recover the costs of these non-revenue producing investments.² Id. at 1129.

A manager in VAWC’s Mid-Atlantic Division explained that a utility typically must file a general rate case to recover its investment in replacing aging infrastructure but "may only include investment that is ‘reasonably predicted to occur’ through the end of the rate year." Id. at 1198. He explained that this approach created a "limited and insufficient horizon for replacement of aging infrastructure." Id. VAWC considered infrastructure replacement to be a non-revenue producing investment "because it [did] not add additional customers" or "increase sales." Id. at 1199. He stated that VAWC proposed the WWISC because of this "regulatory lag" present in the traditional ratemaking process. 4 id. at 1924.³

The division manager further opined that the WWISC would accelerate infrastructure replacement in a more orderly way and increase capital infusion while mitigating against periodic spikes in the base rate. Otherwise, timely recovery for infrastructure improvements would require filing more base-rate cases, which "would result in larger and more frequent base rate increases" if they were successful. 3 id. at 1238-39. But a WWISC would "allow the Company to better plan for, more consistently fund, and more gradually incorporate into customers’ bills, the costs associated with these types of investment." Id. at 1239. Under VAWC’s requested WWISC, the SCC would have to approve the initial charge and any adjustments to the charge could not already be included in the calculation of the company’s base rates and would relate only to non-revenue-producing infrastructure. See id. at 1201-03. The proposed WWISC could also include conditions safeguarding the public interest such as SCC approval of annual updates to the rate, audits, and annual reconciliation of the difference between revenues and costs. Id.

The division manager projected that the Company would spend $44,508,091 in necessary expenditures for "WWISC-eligible infrastructure" between 2017 and 2020. Id. at 1236. Of that amount, the Company would spend $28,543,600 to replace water and wastewater distribution mains. See id. Compared to the period from 2012 to 2015, these expenditures represented a 46% increase in capital investment for WWISC-eligible infrastructure and a 98% increase in planned replacement of distribution mains. Id. Based on "the projected calendar-year 2017 WWISC-expenditure levels, the typical residential...