KIAWAH PROPERTY v. Public Service

• Decision Date: 24 May 2004
• Docket Number: No. 25827.,25827.
• Citation: 597 S.E.2d 145,359 S.C. 105
• Court: South Carolina Supreme Court
• Parties: KIAWAH PROPERTY OWNERS GROUP, Appellant, v. The PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA; and Kiawah Island Utility Company, Inc., Respondents.

359 S.C. 105

597 S.E.2d 145

KIAWAH PROPERTY OWNERS GROUP, Appellant, v. The PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA; and Kiawah Island Utility Company, Inc., Respondents.

No. 25827.

Supreme Court of South Carolina.

Heard January 21, 2004.

Decided May 24, 2004.

Stephen L. Brown, Michael A. Molony and Lea Kerrison, all of Young, Clement, Rivers, and Tisdale, of Charleston, for Appellant.

Fred David Butler, of Columbia, for Respondent South Carolina Public Service Commission.

G. Trenholm Walker and Amanda R. Maybank, both of Pratt Thomas, Epting and Walker, of Charleston, for Respondent Kiawah Island Utility Company. Acting Chief Justice MOORE:

This matter arises from a utilities rate dispute between the Kiawah Island Utility Corporation (Utility) and the Kiawah Property Owners Group (KPOG). On appellate review, the circuit court judge found that the Public Service Commission's (PSC) approval of an increase of the Utility's rates and charges that would allow for an operating margin of 6.5% was supported by substantial evidence. We affirm.

FACTS

In 1996, the Utility, which is wholly owned by Kiawah Resort Associates (Developer), applied to the PSC for a rate increase that would increase its operating margin to 5.43%. The PSC approved a rate increase that allowed for only a 3.55% operating margin. On appeal, the circuit court judge upheld the rate increase, and this Court reversed and remanded, finding that the PSC order permitting the rate increase was unsupported by the evidence. Kiawah Prop. Owners Group v. Pub. Serv. Comm'n, 338 S.C. 92, 525 S.E.2d 863 (1999) (KPOG I). Upon remand, a subsequent PSC order, and an appeal to the circuit court, the matter was again appealed to this Court, resulting in the opinion finding that the subsequent PSC order was supported by the evidence. Kiawah Prop. Owners Group v. Pub. Serv. Comm'n, 357 S.C. 232, 593 S.E.2d 148 (2004), (KPOG II).

Upon this backdrop, another rate dispute began in 1999, when the Utility set out to raise its rates and charges to permit an operating margin of 9.5%. The PSC submitted an order, which was affirmed on appeal by the circuit court, authorizing a rate increase that would generate a 6.5% operating margin. KPOG has appealed the circuit court decision, raising the following issues for review:

I. Did the trial court err in finding that the PSC's decision to allow the Utility to set its operating margin at 6.5% was supported by the record?

II. Did the circuit court err in affirming the PSC's treatment of several of the Utility's fee assessments and other affiliated transactions?

III. Did the circuit court judge err in affirming the PSC's refusal to require the Developer and Utility to modify their cross-collateralized loan agreement with the bank?

IV. Did the circuit court err in refusing to require the PSC to stay this proceeding until this Court issued its opinion in KPOG II?

STANDARD OF REVIEW

The PSC is a government agency of limited power and jurisdiction, which is conferred either expressly or impliedly by the General Assembly. City of Camden v. South Carolina Pub. Serv. Comm'n, 283 S.C. 380, 382, 323 S.E.2d 519, 521 (1984). South Carolina Code Ann. § 58-5-210 (Supp.2003) grants the PSC the "power and jurisdiction to supervise and regulate the rates and services of every public utility in this State...."

The PSC should establish rates that will produce revenues for the utility "reasonably sufficient to assure the confidence in the financial soundness of the utility ... and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties." Bluefield Water Works and Improvement Co. v. Pub. Serv. Comm'n of West Virginia, 262 U.S. 679, 693, 43 S.Ct. 675, 679, 67 L.Ed. 1176 (1923).

The PSC is considered "the `expert' designated by the legislature to make policy determinations regarding utility rates; thus, the role of a court reviewing such decisions is very limited." Hamm v. South Carolina Public Service Comm'n, 289 S.C. 22, 344 S.E.2d 600 (1986); Patton v. South Carolina Pub. Serv. Comm'n, 280 S.C. 288, 312 S.E.2d 257 (1984). Therefore, the party challenging a PSC order must establish that (1) the PSC decision is not supported by substantial evidence and (2) the decision is clearly erroneous in light of the substantial evidence in the record. Patton, 280 S.C. at 291, 312 S.E.2d at 259; Greyhound Lines, Inc. v. South Carolina Pub. Serv. Comm'n, 274 S.C. 161, 262 S.E.2d 18 (1980).

ISSUE I

Did the trial court err in finding that the PSC's decision to allow the Utility to set its operating margin at 6.5% was supported by the record?

The Utility applied for a rate increase in 1999, requesting that the PSC allow it to charge rates sufficient to sustain a 9.5% operating margin. The PSC determined that a 6.5% operating margin was appropriate. KPOG asserts that the PSC's decision to set the Utility's operating margin at 6.5% is unsupported in the record. We disagree.

At the PSC hearing, the Utility's treasurer, Townsend Clarkson (Clarkson), testified that the application for a rate increase was prompted by (1) a 20.2% increase in the cost of water since the Utility's prior rate application; (2) the capital cost incurred to improve and maintain 45 miles of transmission lines; and (3) the fact that the Utility had operated at a net loss since 1995. In addition, PSC staff member Thomas Ellison (Ellison) testified that the Utility had an operating margin of negative 1.02% and recommended that PSC permit the Utility to raise rates to sustain an operating margin of 8.03%.

Based on this testimony, the PSC concluded that the Utility could raise its rates and charges to generate a 6.5% operating margin, up from the 3.55% margin that the PSC had approved in the Utility's prior rate application.

We hold that the PSC's decision to set the Utility's operating margin at 6.5% — a number much less than what the PSC staff recommended — was supported in the record by the testimony of Clarkson and Ellison.¹

ISSUE II

Did the circuit court err in affirming the PSC's treatment of several of the Utility's fee assessments and other affiliated transactions?

BUILDING INCENTIVE FEES

KPOG asserts that the trial court erred in affirming the PSC's determination that the Developer's building incentive fee, charged to owners of undeveloped property, should not be recognized by the Utility for ratemaking purposes. We disagree.

An evaluation of the building incentive fee requires (1) an analysis of the nature of the building incentive fee as compared to the "availability fee" and (2) an application of a recent opinion by this Court: Total Envtl. Solutions, Inc. v. South Carolina Pub. Serv. Comm'n, 351 S.C. 175, 568 S.E.2d 365 (2002).

KPOG argues that the building incentive fee — a $40 fee the Developer (who owns 100% of the Utility) assesses quarterly to all property owners of undeveloped property — does not differ from the "availability fee" — a $40 fee that the Developer formerly charged per quarter to property owners of undeveloped property once the water and sewer lines approached within 100 feet of their lot line until the property owner connected to the water and sewer system.

Historically, the PSC ruled that the "availability fees" would be recognized as a contribution by the parent-Developer to the subsidiary-Utility in aid of construction, which would be recorded on the Utility's balance sheet as an appreciation or improvement to an asset — a recognition that only affects the Utility's rate base.

In prior orders, the PSC found that (1) the "building incentive fee" charged by the Developer was instituted "for the same purpose as the former availability fee ...," and (2) the former "availability fee" was "now known as the `building incentive' fee." The PSC also determined in the prior orders that the proceeds from the building incentive fees should be recognized as a contribution by the Developer to the Utility in aid of construction, the same treatment given to the "availability fees."

In the present case, the PSC determined that, based on the evidence presented at the PSC hearing, the $40 quarterly building incentive fee would not be treated as a contribution by the Developer in aid of construction. At the hearing, Clarkson testified that the building incentive fee was "not collected to assure water and sewer availability but instead to encourage building houses on vacant lots."² The PSC refused to recognize the building incentive fees as contributions in aid of construction because KPOG failed to establish that building incentive fees were the same as the old "availability fees" and that "there was no proper methodology for characterizing building incentive fees." While we are skeptical of the PSC's historic inconsistent treatment of these fees, we agree that Clarkson's testimony supports the conclusion that the building incentive fees were not assessed to help subsidize the Utility's sewer and water infrastructure.³

In Total Envtl. Solutions, this Court concluded that the PSC lacks jurisdiction to regulate availability fees when there is no evidence that the utility received or directly benefited from the assessment. 351 S.C. at 180, 568 S.E.2d at 369. Since KPOG provided no evidence that the Utility directly benefited from the building incentive fee, we find that the circuit court correctly affirmed the PSC's decision to not recognize the fee as a contribution in aid of construction.

OTHER AFFILIATED...