King County Water Dist. No. 75 v. City of Seattle, 44579

• Decision Date: 06 April 1978
• Docket Number: No. 44579,44579
• Citation: 577 P.2d 567,89 Wn.2d 890
• Parties: KING COUNTY WATER DISTRICT NO. 75, a Municipal Corporation, Respondent and Cross Appellant, v. The CITY OF SEATTLE, a Municipal Corporation, and the Seattle Water Department, a subsidiary, Appellants.
• Court: Washington Supreme Court

Page 890

89 Wn.2d 890

577 P.2d 567

KING COUNTY WATER DISTRICT NO. 75, a Municipal Corporation Respondent and Cross Appellant, v. The CITY OF SEATTLE, a Municipal Corporation, and the Seattle Water Department, a subsidiary, Appellants.

No. 44579.

Supreme Court of Washington, En Banc.

April 6, 1978.

Douglas N. Jewett Corp. Counsel, Arthur T. Lane, Walter L. Williams, Asst. Corp. Counsels, Seattle, for petitioner.

Cartano, Botzer & Chapman, Frank W. Birkholz, John D. Cartano, Seattle, for respondent.

DOLLIVER, Associate Justice.

Defendant Seattle Water Department (Department) supplies water to two classes of customers both inside and outside the city limits, (1) retail customers to whom water is delivered directly, and (2) wholesale customers (purveyors) who purchase water for resale to their own customers. Plaintiff King County Water District No. 75 (District) is a wholesale customer.

The District brought this action challenging several elements of the rate structure which establishes the purchase price between purveyors and the Department: (1) The District's water storage capabilities substantially benefit the city and must be given consideration in the rate structure; (2) the Department used an excessive interest rate in computing expenses attributable to purveyors; (3) the City of Seattle's business and occupation tax imposed on the Department is wrongfully allocated to purveyors outside the city limits; and (4) the Department wrongfully allocated a major share of the construction costs of the Tolt River facility to purveyors.

The trial court found for the District on the first element and for the Department on the latter three. In awarding relief for the District's storage capabilities, the trial judge denied restitution for amounts previously paid to Seattle, and limited the effect of the judgment to prospective periods. The District challenged the limited relief granted. The City of Seattle and the Seattle Water Department appeal that portion of the judgment awarding relief to the District for its storage capabilities. The District cross-appeals the remaining issues. We reverse on issues 1 and 3 and affirm on 2 and 4. We concur with the prospective application of the judgment.

The Department's rate structure distinguishes between the two classes of customers and attempts to apportion costs. In 1969 and again in 1974, the Department employed independent consulting firms to undertake comprehensive cost of service studies for the entire system so as to allocate equitably the respective expenses attributable to purveyors and retailers. The first study was performed by the firm of Cornell, Howland, Hayes, Merryfield & Hill (Cornell) and the latter by R. W. Beck & Associates (Beck). Subsequent to receipt of each report, ordinances were enacted by the Seattle City Council increasing the rates of both classes of customers.

During the 1960's, the District, located totally outside Seattle, became a customer of the Department, and during the years 1968 through 1970 added 8 million gallons of storage capacity to its existing facilities at a cost of approximately $3,500,000, including interest and financing. The District claims this storage allows the Department to serve them with mains which are smaller and more economical than those necessary to serve other purveyors who, due to inadequate storage, require larger mains to meet peak day requirements.

I.

Did the lower court err in requiring the Department to give recognition to the District's storage capacities when establishing water rates for the District?

The trial court held the storage capabilities of the District to be of substantial benefit to the Department. Based on this finding, the trial judge concluded that to classify the District with purveyors who do not have sufficient storage capacities constitutes adverse discrimination and amounts to unjust and unreasonable rate making.

Defendant argues such classification is reasonable. It contends its duty to each purveyor is identical it must provide adequate facilities to meet each purveyor's peak day requirements. The Department asserts it serves the District with two 24-inch mains which are capable of delivering to the District a flow of 32 cubic feet per second (CFS) which equals the peak day requirements. It is undisputed two 24-inch mains will conduct water flow at the rate of 32 CFS. The Department further maintains the extra storage capacity is not required in order to meet the peak day requirements of the District.

One of the exhibits submitted to this court is the original Cornell report which includes a schematic diagram of the Department's water system. According to this sketch, there are two 24-inch mains which serve the District exclusively. One of these mains runs along Des Moines Way South and the other connects at the Crestview pumping station. The Department alleged at trial these mains have been serving the District since 1964.

The trial court's finding in regard to the two mains is ambiguous. However, no evidence contravening the existence of the two mains appears in the record. Plaintiff's brief recognizes the existence of both the Crestview and the Des Moines Way mains.

The District argues the two mains were "designed to serve not only Water District 75 but others." However, no evidence in support of this proposition was submitted to the trial court. The only evidence in the record regarding the mains is the Cornell map which indicates the mains serve the District exclusively. At trial, Mr. Philip M. Botch, witness for the District, stated, "the Des Moines Way pipeline which, I might say, serves Water District 75 in fact, I don't think that you have another customer on that line" indicating the District's knowledge that at least one of the mains serves it exclusively.

While the Department is required to meet the peak day requirements of its purveyors here 32 CFS each purveyor is required to provide enough storage to meet hourly fluctuations during the peak day. In the case of the District, the peak hourly demand is approximately 21/2 times the peak day requirement of 32 CFS.

At the time of trial, nearly 80 percent of the water supplied to other districts was to districts which have substantial storage capacity. Defendant Department has acted in a reasonable exercise of its legislative authority to correct any inequities which may exist in regard to purveyor storage capabilities and to encourage the construction by purveyors of adequate storage facilities to meet peak hourly demand. On September 9, 1975, the Seattle City Council adopted ordinance No. 104922 which provides, in pertinent part: (T)he Superintendent shall implement on July 1, 1977 a demand charge based on such water districts', municipalities' or associations' effective deficient water storage, as determined by the peak instantaneous flow rate, and the equivalent financing costs to provide storage. The proceeds from this demand charge shall be deposited in a separate fund for use in financing projects which serve the wholesale areas.

We conclude the Department fulfilled its duty to the District by installation of the two mains in 1964 which meet the peak day requirements of the District. The Department need not consider incidental benefits which inured to it when the District subsequently installed storage capabilities which reduced peak demands on the Department's water system. The rate charged the District is not unreasonable. See Port Orchard v. Kitsap County, 19 Wash.2d 59, 141 P.2d 150 (1943); Geneva Water Corp. v. Bellingham, 12 Wash.App. 856, 532 P.2d 1156 (1975).

II.

The District next contends the trial court erred in upholding the Department's inclusion of a 7 percent rate of return in water rate computations. The District contends the Department is limited to collection of the interest rate which is established as the historical cost of its capital. The District maintains the Department cannot charge in excess of 3.33 percent of the total plant investment as this represents its historical cost of capital.

In support of this contention, the District refers to numerous cases involving calculation of the cost of capital to a public utility wherein it was held the public utility was restricted to actual rather than replacement costs when establishing capital costs. The District has misinterpreted the Department's rate structure.

The Department establishes its water rates in accordance with the utility basis accounting method. This method requires determination of a rate base which is the value of the property on which the utility is entitled to earn a return. After the rate base is established, it is also necessary to fix a fair rate of return on the rate base.

One of the elements in establishing the rate base is the cost of capital. See Sun City Water Co. v. Arizona Corp. Comm'n, 26 Ariz.App. 304, 547 P.2d 1104 (1976). The cost of capital includes interest payments on debt and equity capital. Sun City Water Co. v. Arizona Corp. Comm'n, supra. However, the Department is not asserting its cost of capital is 7 percent. Instead, it claims it is entitled to a fair rate of return on its overall investment. Authority cited by the District does not address the issue of whether the Department is entitled to a return on its investment. Instead, the District addresses the issue of what interest rate is allowable in determining the cost of capital for purposes of arriving at the rate base.

Whether a public utility is entitled to a rate of return on its investment was discussed in Bluefield Water Works & Imp. Co. v. Public Serv. Comm'n, 262 U.S. 679, 692, 43 S.Ct. 675, 679, 67 L.Ed. 1176 (1923). The Court held:

A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business...