Maine Water Co. v. Public Utilities Com'n

• Decision Date: 02 October 1984
• Parties: MAINE WATER COMPANY v. PUBLIC UTILITIES COMMISSION.
• Court: Maine Supreme Court

Page 443

482 A.2d 443

MAINE WATER COMPANY v. PUBLIC UTILITIES COMMISSION.

Supreme Judicial Court of Maine.

Argued June 22, 1984.

Decided Oct. 2, 1984.

Drummond, Woodsum, Plimpton & MacMahon, P.A. by Thomas H. Allen (orally), Mary Esposito Kane, Portland, for Maine Water Co.

Roger A. Putnam, Portland; Morgan, Lewis & Bockius, Thomas P. Gadsden, Alan L. Reed, Philadelphia, Pa., for amicus curiae, Natural Assoc. of Water Companies.

William E. Furber (orally), Joseph G. Donahue, Beth A. Nagusky, Peter G. Ballou, Augusta, for Public Utilities Com'n.

Murray, Plumb & Murray by Peter L. Murray (orally) David E. Currier, Portland, for Town of Wiscasset.

Jonathan C. Hull (orally), Damariscotta, for Towns of Newcastle and Damariscotta.

Before McKUSICK, C.J., and NICHOLS, ROBERTS, WATHEN, GLASSMAN and SCOLNIK, JJ.

McKUSICK, Chief Justice.

On April 22, 1983, Maine Water Company, pursuant to 35 M.R.S.A. § 64 (1978), filed requests with the Public Utilities Commission to increase rates in its five separate divisions serving the communities of Wiscasset, Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland. ¹ The requested rate increases varied from 10.4% in Damariscotta-Newcastle to 33.0% in Wiscasset. In its January 23, 1984, decision in the consolidated cases, the Commission denied the Company any overall rate increase, solely for the reason of the gain realized by the Company on the earlier sales in 1980 and 1983 of its Newport and Wilton divisions; but the Commission did authorize the Company to reallocate its total revenue requirement among its five divisions. After granting a motion to reopen, the Commission, on March 23, 1984, again denied any rate increase for the same reason. The Company sought timely review of the March 23 order by filing both an appeal pursuant to 35 M.R.S.A. § 303 (1978) and a complaint under 35 M.R.S.A. § 305 (1978). The Town of Wiscasset and the Towns of Damariscotta and Newcastle, intervenors before the Commission, filed section 303 cross-appeals.

By revised tariffs filed on March 27, 1984, the Company sought to make the rates of each of its five divisions correspond to that division's cost of service as found by the Commission, resulting in increased rates in Wiscasset and in generally reduced rates in the other four divisions. By supplemental order dated May 11, 1984, the Commission disapproved any rate increase in Wiscasset because it believed the Wiscasset water was of such poor quality that it was worth no more than the existing rates; but the Commission at the same time authorized the Company to recover the revenues lost in Wiscasset from its other four divisions. The Company filed a section 305 complaint seeking review of the May 11 order. Thereafter, to comply with the May 11 order, the Company filed a further revised set of tariffs, which the Commission approved by its order of May 30, 1984. From that last order the Company filed a section 303 appeal and intervenors filed cross-appeals. Subsequently, by order of this court, all of the appeals, complaints, and cross-appeals were consolidated.

We hold that the Commission erred in applying the gain on the Newport and Wilton sales to offset the rate increases that it otherwise would have allowed for the future in the remaining five divisions of the Company. We also hold that the Commission erred in shifting part of the cost of service in the Wiscasset division to the ratepayers in Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland. Finally, we deny all of the cross-appeals.

I. Revenue Requirements

A. Sale of the Newport and Wilton divisions

Maine Water Company is the corporate product of the consolidation in the early 1970s of seven separate water companies, serving seven separate Maine communities: Newport, Wilton, Wiscasset, Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland. Since its creation by consolidation, Maine Water Company has operated in seven (and more recently six and then five) separate divisions corresponding to the previously separate companies. Each division constitutes a complete and geographically independent water system, serving its own distinct group of customers. The divisions do not have any common source of water supply or any other physical interconnection of any sort.

Even though the Company is incorporated as a single legal entity, for all significant ratemaking purposes each division and its ratepayers are treated separate and apart from the other divisions and their ratepayers. The customers in each division pay rates determined by that division's particular cost of service. When Maine Water initiated the instant rate case, it filed with the Commission a separate rate request for each division and the Commission gave each divisional proceeding its own separate docket number. The percentage increase in rates sought by the Company varied considerably from division to division. For each division the Commission undertook to establish--and did establish--separate revenue, rate base, and expense data. Although the Commission determined the Company's overall revenue requirement, that figure was arrived at merely by aggregating the cost of service previously determined individually for the five separate divisions. We understand that this practice of individually determining the rates in each division has been consistently followed in the past. Historically, as the Commission found, "[r]atepayers are ... charged according to tariffs which reflect the costs attributable to each division."

In 1980 the Company sold its Newport division, and in 1983 its Wilton division, to water districts created to take over and continue water service to the customers in the operating territories of those two divisions. Those sales resulted in completely transferring both the assets and the customers of those divisions to the newly formed Newport and Wilton Water Districts. The Company realized an aggregate pre-tax gain from the two sales of $1,012,473, the amount by which the sales proceeds exceeded the net book cost of the transferred assets.

Notwithstanding the divisional organization of Maine Water Company, the Commission in the case at bar treated the gain on the sale of the Newport and Wilton divisions as available to offset in part the future water rates that otherwise would be charged customers in the remaining five divisions. Although it did not order a rate reduction for the remaining customers, the Commission did use the Newport/Wilton gain as the reason, and the only reason, for denying rate increases that the Commission's own analysis of cost of service in the remaining divisions demonstrated were otherwise necessary. In effect, the Commission "flowed through," see New England Telephone & Telegraph Co. v. Public Utilities Commission, 470 A.2d 772, 776 n. 6 (Me.1984), a portion of the Newport/Wilton gain to the benefit of the ratepayers in the Company's five other divisions. ² In explaining its flow-through decision in its opinion of January 27, 1984, the Commission downplayed the significance of the divisional aspect of the Company. Of first importance to the Commission was its view that since Maine Water Company is a single company, the ratepayers of all divisions should be responsible for its financial well-being. The Commission made the Company's aggregate revenue requirement the focus of these rate proceedings, and the Commission characterized the allocation of rate base and expenses among the divisions as one of merely "rate design." The Commission found it "inescapable" that "[a]s a matter of law ... the risk of loss and the financial burden of any one division are borne by the ratepayers of all divisions." The Commission set up a hypothetical construct by which if the Newport and Wilton sales had produced a loss to the Company, the ratepayers still served by the Company in different divisions would be required to make up that loss through increased rates in the future. Therefore, the Commission reasoned, those same ratepayers should receive the benefit of any gain on the sale of the separate divisions.

We conclude that in the special circumstances here presented, that ruling of the Commission cannot survive appellate review. Initially we note that the properties that Maine Water Company has devoted to a public utility service are privately owned by the Company, not by its customers. See Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23, 31-32, 46 S.Ct. 363, 366, 70 L.Ed. 808 (1926). "Customers pay for service, not for the property used to render it." Id. at 32, 46 S.Ct. at 366. In New York Telephone, the United States Supreme Court went on to say By paying bills for service [customers] do not acquire any interest, legal or equitable, in the property used for their convenience or in the funds of the company.

Id. From that comprehensive and unqualified statement, however, subsequent judicial authority, including our own, has carved out a well-defined exception. See Casco Bay Lines v. Public Utilities Commission, 390 A.2d 483 (Me.1978). The courts have come to recognize that in certain circumstances customers "by paying bills for service" do indeed acquire in the property of the privately-owned utility an equitable interest that is entitled to consideration in ratemaking. In the instant case we are called upon to examine the limits of the exception to the New York Telephone principle. In particular, we must address the question of which customers acquire for ratemaking purposes an equitable interest in what property of the utility company.

Courts have held that public utility customers have an equitable claim to draw benefit in ratemaking from the gain realized in the utility company's sale of property as to which those customers have reimbursed the company for its investment or have borne the risk of a sale at a loss. Thus, the continuing customers of a utility that sells at a gain depreciable property that had previously served those same...