In re Waikoloa Sanitary Sewer Co., Inc.

• Decision Date: 29 December 2005
• Docket Number: No. 25087.,25087.
• Citation: 125 P.3d 484
• Parties: In the Matter of the Application of WAIKOLOA SANITARY SEWER COMPANY, INC., dba West Hawai`i Sewer Company, for Approval of Rate Increases and Revised Rate Schedules.
• Court: Hawaii Supreme Court

125 P.3d 484

In the Matter of the Application of WAIKOLOA SANITARY SEWER COMPANY, INC., dba West Hawai`i Sewer Company, for Approval of Rate Increases and Revised Rate Schedules.

No. 25087.

Supreme Court of Hawai`i.

December 29, 2005.

Alan M. Oshima and Lawrence M. Reifurth (Oshima Chun Fong & Chung), Honolulu, on the briefs, for applicant-appellant.

Michael Azama, on the briefs, for appellee State of Hawai`i Public Utilities Commission.

Laureen K.K. Wong, Honolulu, and John E. Cole, on the briefs, for appellee Division of Consumer Advocacy, Department of Commerce and Consumer Affairs.

MOON, C.J., LEVINSON, NAKAYAMA, ACOBA, and DUFFY, JJ.

Opinion of the Court by ACOBA, J.

We hold, in this appeal by Applicant-Appellant Waikoloa Sanitary Sewer Company, Inc., dba West Hawaii Sewer Company (Appellant) that (1) because the filed-rate doctrine applies to the Contributions in aid of construction (CIAC) payments provision of the tariff filed by Appellant with Appellee Public Utilities Commission of the State of Hawai`i (Commission), "contributions" collected by Appellant were nonrefundable under the terms of the tariff; (2) the use of CIAC funds by Appellant did not violate the terms of the tariff on file with the Commission; (3) the plain language of the tariff presents no conflict as to Appellant's use of Net Operating Losses (NOL) funds to offset its tax liabilities; and (4) Appellant failed to timely raise the issue of miscalculation of its Test Year income taxes before the Commission. Therefore, (1) Decision and Order No. 19223 (decision and order) issued by the Commission on February 27, 2002, directing Appellant to refund contributions and (2) Order No. 19294 (order) issued by the Commission on April 10, 2002 denying Appellant's motion for reconsideration of the decision and order are reversed and Appellant's appeal of the miscalculation issue is dismissed.

I.

Appellant appeals from the decision and order and the order. The decision and order approved Appellant's request for a general rate increase and directed Appellant to refund $681,400 to the "contributors"¹ to Appellant's CIAC funds from 1987 to 1996. In the proceeding before the Commission, Appellee Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawai`i (the Consumer Advocate) disputed Appellant's position on the treatment of CIAC funds for income tax purposes and the application of the tax gross-up method.²

II.

Appellant is a public utility that provides wastewater collection and treatment service to residences, condominiums, commercial establishments, and public facilities located at Waikoloa Village on the island of Hawai`i. The facts concerning CIAC funds are as follows.

Prior to 1987, section 118(b) of the Internal Revenue Code (IRC) provided that CIAC funds received by public utilities were not included in the taxable income of such public utilities, and therefore, were not subject to taxation. IRC § 118(b) (1986).

Effective December 22, 1984, Appellant's "Rules and Regulations, Description of Service Area and Sewer Rate Schedules" were published as tariff rules with the Commission. These rules did not include any references or instructions as to CIAC funds.

On January 1, 1987, the Tax Reform Act of 1986 (Tax Reform Act) took effect and repealed IRC § 118(b). As a result, CIAC funds were subjected to income taxes and treated as taxable income in the year received.

On May 1, 1990, Appellant filed a "Notice of Revisions to its Rules and Regulations" (notice) with the Commission. This notice proposed Rule XI as "[a] new rule requiring [CIAC] from developer and commercial applicants for service ... to help [Appellant] pay for the cost of expanding the capacity of its water system to serve such applicants." The notice described Rule XI as follows:

Proposed Rule XI is particularly important to the continued viability of [Appellant]. This Rule calls for developers, builders and commercial applicants to pay a [CIAC] to cover the cost of capacity expansions necessary to provide service to new or substantially expanded developments, subdivisions, and commercial facilities. It is common industry practice for water and sewer utilities to require developers and commercial applicants to contribute the cost of adding water and sewer system facilities. This enables the utilities to raise and/or repay the funds necessary to develop the new facilities, while ensuring that existing customers will not be burdened with the costs of adding facilities to serve new customers. The amount of the proposed contribution was established based on a study conducted by [Appellant's] staff, with assistance from R.M. Towill Corporation. In general, the proposed contribution represents the anticipated cost of constructing new facilities to serve future customers, including the income taxes payable on contributions.

(Emphases added.)

The study proposing the amount of CIAC was attached to Appellant's notice as Exhibit E. Entitled "[Appellant's] Sewage Treatment Facility Development Program and Calculation of CIAC Fee," Exhibit E first explained that, "[a]s yet, [Appellant] has not established a [CIAC] program ... in order to provide the required capital for additional sewage treatment facilities needed to meet expected future demand. This report summarizes efforts to establish an appropriate CIAC for [Appellant]." Exhibit E then stated that "[a] CIAC fee is a non-refundable fee charged to developers for the cost of expanding capacity in the utility company to service new demand." (Emphasis added.) Exhibit E listed four components to the CIAC fee, including "Sewage Treatment Plant Capacity, Primary Collection, Income Taxes, and Financing," and "attributed $2.25 [per] gallon to the [i]ncome [t]ax [c]omponent." (Emphases added.) Lastly, Exhibit E "concluded that a fee of $9.50 [per] gallon was `the fee which minimized financing charges over time and did not build cash reserves in [Appellant].'"

III.

On July 5, 1990, Appellant's proposed Rule XI labeled as "WSSC Tariff No. 1" became effective as a tariff.³ Section 1 of Rule XI provided that "[a]s a condition of receiving service or substantially increasing sewage outflow volume from new or substantially modified facilities, developer and commercial applicants shall be required to pay a non-refundable [CIAC] to [Appellant]." (Emphasis added.) Section 2 of Rule XI generally described the uses of CIAC payments. It states in relevant part:

2. [CIAC] payments are used by the Company to install or pay for new or expanded sewage treatment plant facilities required to serve such applicants or consumers, including:

(a) Construction of new primary collection main extensions;

(b) Construction of new percolation ponds and injection wells;

(c) Construction of new primary collection system or improvements to increase the capacity or efficiency of the existing primary collection system;

(d) Preparation, engineering and design work necessary to the construction of new sewer treatment facilities; and

(e) Related improvements intended to increase the capacity, efficiency or quality of the primary sewer system (see Exhibit C, Description of the System).

(Emphases added.) Section 6 of Rule XI specified that "[t]he amount of the [CIAC] shall be $9.50 per gallon of estimated daily sewage discharge [(EDSD)] from the premises." (Emphasis added.)

IV.

On April 13, 1992, the Commission initiated Docket No. 7287, "Instituting a Proceeding to Examine the Gross-Up of [CIAC] and Customer Advances to Include Federal Income Taxes." The Commission opened this docket, "on its own motion, to examine... whether a public utility should be required to gross-up CIAC ... to include federal income tax requirements." On February 11, 1993, the Commission conducted an evidentiary hearing in Docket No. 7287 and "admitted all filed submissions into evidence."

V.

In 1996, the Small Business Job Protection Act amended IRC § 118. Under this Act, "CIAC funds received by an affected utility after June 12, 1996, were no longer subject to income taxation."⁴ Between January 1, 1987 and June 12, 1996 (time period), Appellant collected approximately $1,930,444 in CIAC funds from the developers. An estimated $732,990 of these funds represented the portion for income taxes payable. During this time period, Appellant reported negative taxable income in all but two years and remitted a lesser amount, approximately $51,590, to the taxing authorities for CIAC payments received. Due to its reported NOL, which fully offset any taxable income in the given year, Appellant was not required to pay any income taxes for the other years.

In accord with the Small Business Job Protection Act, Appellant filed a revised Rule XI with the Commission. The revised Rule XI retained the language of Sections 1 and 2, but amended the language of Section 6 to provide that "[t]he amount of the [CIAC] shall be $7.25 per gallon of [EDSD] from the premises." After June 12, 1996, no income taxes were collected as part of CIAC funds. The revised Rule XI became effective on August 12, 1996.

VI.

On January 19, 2001, Appellant filed an application with the Commission, pursuant to Hawai`i Revised Statutes (HRS) § 269-16(b) (Supp.2004),⁵ requesting approval for, inter alia, a wastewater treatment rate increase and rate schedule revision based on the 2001 calendar test year. On January 30, 2001, Appellant filed an amended application. The Consumer Advocate filed its initial statement with the Commission on February 9, 2001, and did not object to the completeness of Appellant's application as amended.

By letter dated September 21, 2001, and signed jointly, Appellant and the Consumer Advocate agreed to (1) waive the evidentiary hearing before the Commission; (2) file a partial stipulation in lieu of the hearing, on the issues they had resolved; (3) file simultaneous briefs addressing any remaining issues in dispute; and (4) an award of interim rates to Appel...