Kaanapali Water Corp., Application of

• Decision Date: 01 March 1984
• Docket Number: No. 9267,9267
• Citation: 678 P.2d 584,5 Haw.App. 71
• Parties: In the Matter of the Application of KAANAPALI WATER CORPORATION, For Approval of Rate Increases and Revised Rate Schedules.
• Court: Hawaii Court of Appeals

Page 584

678 P.2d 584

5 Haw.App. 71

In the Matter of the Application of KAANAPALI WATER CORPORATION, For Approval of Rate Increases and Revised Rate Schedules.

No. 9267.

Intermediate Court of Appeals of Hawai'i.

March 1, 1984.

Syllabus by the Court

1. In an appeal from an administrative agency's decision, the appellate court's review is governed by the standards set forth in HRS § 91-14(g).

2. Under HRS § 91-14(g) in order for the reviewing court to revise or modify an agency's decision, it must find that appellant's substantial rights have been prejudiced.

3. Under HRS 91-14(g), conclusions of law are reviewable under subsections (1), (2), and (4); questions regarding procedural defects under subsection (3); findings of fact under subsection (5); and an agency's exercise of discretion under subsection (6).

4. In the review of an agency's decision, a presumption of validity is accorded to that decision when the agency has acted within its sphere of expertise, and one seeking to overturn an administrative agency's order bears the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.

5. Courts decline to consider the weight of evidence presented to an administrative agency or to review the agency's findings of fact by passing upon the credibility of witnesses or conflicts in testimony.

6. Where the evidence showed that a water system was constructed as a part of a real estate development by the developer and serviced its customers for a considerable time at non-compensatory rates, and the assets and operation of the water system are transferred at no cost to a wholly owned subsidiary at or near the completion of the development, and the initial tariff filed with the regulatory agency by the water company shows an increase in rates and charges of two or three times the prior unregulated rates and charges, the application by the Public Utilities Commission of the rebuttable factual presumption that the developer had been reimbursed the cost of those assets and the exclusion of their value from the water company's rate base as contributions in aid of construction was within its authority and was not arbitrary or unreasonable.

Robert E. Strand, Carlsmith, Carlsmith, Wichman & Case, Honolulu, for appellant, Kaanapali Water Corp. Ronald Shigekane, Deputy Atty. Gen., Honolulu, for Consumer Advocate, Dept. of Commerce & Consumer Affairs, State of Hawaii.

David W. Proudfoot, Case, Kay & Lynch, Honolulu, for appellee, Kaanapali Property Owners' Ass'n.

Paul S. Aoki, Ashford & Wriston, Honolulu, for appellee, Estate of James Campbell (appearance only).

Arthur K. Goto, Iwai, Motooka & Goto, Honolulu, for appellee, Kyo-ya Co., Ltd. (appearance only).

Before BURNS, C.J., HEEN, J., and BERTRAM T. KANBARA, Circuit Judge, in place of TANAKA, J., recused.

HEEN, Judge.

Appellant Kaanapali Water Corporation (Kaanapali) appeals from Decision and Order No. 7362 (Order) of the Public Utilities Commission (Commission) of the State of Hawaii, entered on December 16, 1982, and from the Commission's Decision and Order No. 7387, entered on January 10, 1983, which denied Kaanapali's motion for reconsideration. Kaanapali has not briefed or argued error in Decision and Order No. 7387, denying the motion for reconsideration.

The question on appeal is whether the Commission erred in refusing to allow Kaanapali to use the value of the facilities and equipment used in its water supply operation as its rate base. ¹ The refusal was based on the presumption that the facilities and equipment had already been paid for in the sales or leases of the lots within the Kaanapali resort complex developed by Kaanapali's parent corporation, Amfac, Inc. (Amfac). We find no reversible error and affirm.

The Consumer Advocate is a party to these proceedings by virtue of Hawaii Revised Statutes (HRS) § 269-51 (1976, as amended). By separate orders dated September 11, 1981, the Commission allowed the intervention of Kaanapali Property Owners Association and Kyo-ya Company, Ltd. By order dated October 2, 1981, the Commission allowed the intervention of the Trustees of the Estate of James Campbell. Although the Commission's Decision and the briefs state that the Sheraton Corp. was allowed to intervene, there is no order to that effect in the record.

Kaanapali was incorporated on November 27, 1978, as a wholly owned subsidiary of Amfac, Inc., for the purpose of taking over from Amfac the function of providing water service to the Kaanapali resort area of West Maui. Amfac began installing the facilities and equipment for its water supply system beginning in the late 1950s or early 1960s as a part of its development of the hotel-resort complex at Kaanapali. The first hotel began operation in 1962 and from that time until Kaanapali's incorporation water service was provided by Amfac through one of its divisions, Amfac Communities Maui. The water was obtained by way of an agreement with Pioneer Mill Company, another wholly owned subsidiary of Amfac, through Pioneer Mill's surface water system.

On June 9, 1980, Kaanapali obtained a certificate of public convenience and necessity from the Commission pursuant to HRS § 269-7.5 (1983 Supp.). Shortly after Kaanapali's certification, Amfac transferred all of the assets of its water operation, which it valued in excess of $2,640,000, to Kaanapali.

On June 30, 1981, Kaanapali applied to the Commission for approval of an increase to $1.86 per 1,000 gallons in the rate charged its consumers for the water service. At the time of the application, Kaanapali was charging $.53 per 1,000 for the first 25,000 gallons, and $.59 per 1,000 gallons thereafter. The application was amended on September 15, 1981, to request a rate of $1.84 per 1,000 gallons per customer per month.

In its application, Kaanapali described the property and equipment transferred from Amfac and used in its water operation, assessed its depreciated value as of July 1, 1981, as $2,348,034, and proposed that figure as its rate base. This value was amended on September 15, 1981, also, to $2,275,807.

Public hearings on the application were held on Maui. All parties later submitted written testimony and documentary evidence, and an evidentiary hearing was held by the Commission on March 22 and 23, 1982, where oral testimony was taken. After briefs were filed by all parties, the Commission rendered its Order No. 7362. Kaanapali filed a motion for reconsideration on December 27, 1982, which was denied by Order No. 7387. Notice of appeal was filed on January 31, 1983.

In its Order, the Commission cited its previous decisions of In re Waikoloa Water Company, Decision and Order No. 5667, entered May 23, 1979, and In re Hawaii Kai Community Services, Decision and Order No. 5922, entered November 5, 1979, in which the Commission held that the construction of a water system as part of a real estate development created a presumption that the developer had recouped its construction costs through the sale of the lots or lease rentals, or through other means in the commercial development. Those decisions held that the payments by the purchasers and lessees were contributions in aid of construction, and a transfer of the system to a wholly owned subsidiary of the developer, at no cost to the subsidiary, clearly demonstrated that the developer had been financially reimbursed for its construction costs.

The Commission noted that the New York Public Service Commission had adopted a policy statement embracing the same principles. ² On the basis of that policy and a number of legal decisions from other jurisdictions, the Commission then set forth the following salient characteristics, which are not exclusive, but which, if evident in a real estate development, give rise to the rebuttable factual presumption that a contribution in aid of construction was made by the lot owners or lessees unless rebutted by the applicant:

1. A water system built by the developers servicing a real estate development for a considerable period of time at a rate that is non-compensatory.

2. The formation of a wholly owned subsidiary or affiliate company when the development is complete or nearly complete and the assets and operation of the water system are transferred at no cost to the subsidiary or affiliate.

3. The initial tariff of the water company filed with the regulatory authority shows an increase in rates and charges of two of [sic] three times the prior unregulated rates and charges.

Decision and Order No. 7362, p. 27.

The Commission found:

Based on the foregoing and the record in this proceeding the Commission finds that [Kaanapali] did not make an investment in the plant prior to its certification and therefore is not entitled to a rate base in this proceeding. We find that the record shows that the [Kaanapali] plant was originally built by Amfac Inc. through its wholly owned development subsidiaries Amfac Communities Maui and its successor, Amfac Properties Corporation ("Amfac" herein). The Kaanapali water system was constructed sometime in the late 1950's or in the early 1960's to meet the water needs of the Kaanapali hotel-resort complex. The first hotel, the Sheraton Maui, opened in 1962. The water system was constructed and paid for by Amfac or its wholly owned subsidiary. Water and sewage operations were performed respectively by the water and sewage departments of Amfac. There is no dispute that Amfac has sold or leased properties in the Kaanapali development since its development [Kaanapali] was incorporated in 1978 because Act 72, SLH 1978, required a utility, other than a utility that had a franchise awarded by the State, to obtain a CPCN [certificate of public convenience and necessity] as a prerequisite to continued operation. The evidence shows that the water system and wells were transferred to [Kaanapali] on July 1, 1980 by Amfac Properties Corporation with no consideration paid...