Petition of Quechee Service Co., Inc.

• Decision Date: 13 December 1996
• Docket Number: No. 95-047,95-047
• Citation: 690 A.2d 354,166 Vt. 50
• Parties: In re Petition of QUECHEE SERVICE COMPANY, INC. for a Certificate of Public Good and for Approval of Rates, Rules and Regulations.
• Court: Vermont Supreme Court

Page 354

690 A.2d 354

166 Vt. 50

In re Petition of QUECHEE SERVICE COMPANY, INC. for a

Certificate of Public Good and for Approval of

Rates, Rules and Regulations.

No. 95-047.

Supreme Court of Vermont.

Dec. 13, 1996.

James B. Anderson, Ryan Smith & Carbine, Ltd., Rutland, for appellant.

Michael Marks, Tarrant, Marks & Gillies, Montpelier, for appellee Quechee Lakes Landowners' Ass'n.

Geoffrey Commons, Special Counsel, Montpelier, for appellee Department of Public Service.

Before ALLEN, C.J., and GIBSON, DOOLEY, MORSE and JOHNSON, JJ.

JOHNSON, Justice.

In this case we review two orders of the Public Service Board concerning Quechee Service Company (QSC), a once-private sewer company that became subject to the jurisdiction of the Board following the adoption of 30 V.S.A. § 203(6) in 1993. In the first of the challenged orders the Board established an initial rate base and cost-of-service for QSC; in the second, the Board denied QSC a certificate of public good (CPG). On appeal, QSC contests each aspect of the Board's decision, claiming that the Board erred: (1) by reducing QSC's rate base to reflect the percentage of development costs recovered through lot sales and then further reducing QSC's rate base to account for depreciation; (2) by determining a cost-of-service that was less than QSC's annual out-of-pocket expenses for utility operations, and did not include certain expenses requested by QSC; and (3) by denying QSC a CPG based on acts that occurred before QSC was subject to regulation. In addition, QSC raises a number of constitutional claims, essentially arguing that the Board violated its due process rights by confiscating QSC's rate base and depriving QSC of its "vested property right" to operate a sewer plant in Vermont. We affirm the Board's order in all respects.

This case raises a combination of familiar issues and new questions. The unusual position of QSC, as a private utility with a twenty-year operating history that has now become subject to regulation by the Board as a public utility, complicates both the findings and decisions of the Board and our review of those decisions. Yet, although this case is complex, and in some ways novel, our standard of review remains the same. Public Service Board orders "enjoy a strong presumption of validity," and we will accept the Board's findings and conclusions "unless the appealing party demonstrates that they are clearly erroneous." In re Green Mountain Power Corp., 162 Vt. 378, 380, 648 A.2d 374, 376 (1994). Our deferential review of the Board's findings recognizes the special expertise of the Board in these matters. See In re East Ga. Cogeneration Ltd., 158 Vt. 525, 531, 614 A.2d 799, 803 (1992).

I. Background

The Quechee Lakes Subdivision is a resort community that was created in the late 1960s. The subdivision was developed by Quechee Lakes Corporation (QLC), which was required as a condition of its Master Plan to provide for off-site sewage disposal for all lots not suitable for on-site disposal. QLC formed QSC at some point in the late 1960s or early 1970s, to facilitate sewage disposal for the subdivision. QSC, QLC, and the Town of Hartford entered into an agreement in 1973 for the construction of a sewage treatment plant. QSC and QLC agreed to construct the plant, and to pay Hartford to operate it. QSC agreed to serve customers other than those living in the subdivision. In 1977 and 1982, QLC deeded the sewer facilities it constructed (including the plant, leach fields, mains, pumping stations, sewer easements and real estate) to QSC.

In 1979, David LaRoche and associates purchased the stock of QLC and its subsidiaries, including QSC, from CNA Financial for $480,000. From 1986 to 1989, LaRoche held all of QLC's stock, while the LaRoche Grantor Income Trust, of which LaRoche was trustee, held all the stock of QSC. In June 1989, the LaRoche Trust sold the stock of QSC, QLC, and the Quechee Water Company to NECO Enterprises, Inc., a Rhode Island holding company, for $6,500,000. During the first six months of 1989, LaRoche received dividends of $7,331,792 from QLC, QSC and affiliates. The dividends were not matched by earnings. The Quechee Companies showed losses of $1.48 million in 1988, and $551,841 during the first six months of 1989. LaRoche is also the President, Chief Executive, and majority shareholder of NECO (although his NECO stock is being held as collateral for overdue debts). In 1993, LaRoche was convicted of bank fraud in Rhode Island.

During this period, QSC's rates rose sharply. Purchasers of lots in the subdivision are required by deed to pay availability, connection and use fees to QSC if their lots are benefitted by and contiguous to a sewer main. Use fees are paid by those who are connected to the sewer system, while those holding empty lots pay availability fees. QSC's use fees increased more than 1000%, from $105 per year to $1092 per year, over the ten-year period from 1983 to 1993.

In 1993, the Legislature adopted 30 V.S.A. § 203(6), expanding the jurisdiction of the Public Service Board to include sewage companies servicing 750 or more "connections." 1993, No. 21, § 19. The next year the Legislature clarified the Board's jurisdiction and its intent by amending § 203(6) to cover sewage companies servicing 750 or more "household or dwelling units." 1993, No. 120 (Adj.Sess.). This amendment applied to all Board proceedings commencing on or after May 12, 1993, the effective date of the earlier act. Id. Because QSC services more than 750 households, it became subject to regulation by the Board as of that date.

Following extensive hearings, a hearing officer appointed by the Board recommended setting QSC's rate base at $1,004,696 and its cost of service at $528,879, and also recommended denying QSC a CPG. In its order issued on November 15, 1994, the Board largely adopted the findings of the hearing officer, but modified some calculations to establish a rate base of $224,665 and a cost of service of $398,154. As is more fully explained below, the Board, on remand from this Court to explain an apparent clerical error in the Board's calculations, further reduced QSC's rate base to $167,775 and its cost of service to $387,455. Finally, in an order dated December 30, 1994, the Board denied QSC a certificate of public good and required the sale of QSC's stock or assets. This appeal followed.

II. Rate Base Calculation

The rate base of a publicly regulated utility is a dollar amount representing the utility's net plant investment. The usual formula for calculating rate base is capital investment plus improvements minus depreciation. In re Towne Hill Water Co., 139 Vt. 72, 75, 422 A.2d 927, 928 (1980). After determining a utility's rate base, the Board determines rates for the utility that represent a fair rate of return on that investment. Green Mountain Power Corp., 162 Vt. at 381, 648 A.2d at 376.

Straightforward application of this formula to QSC is complicated, however, by the gaps and inconsistencies in QSC's financial records. QSC has not operated as a regulated utility for most of its twenty-year history. Neither the Board nor the parties had the benefit of the type of complete and careful financial records required of regulated utilities. Rather, the Board had the difficult task of calculating a rate base for a company with "fragmentary" financial records, "casual" financial connections with affiliates, and multiple changes of ownership. No audited financial statements were available for QSC, and few were available for its affiliates.

In the face of these obstacles, the Board attempted to apply the formula to achieve a just and reasonable result, based on the information available to it. Choosing a method to calculate rate base is a matter that is within the Board's expertise. In re Young's Community TV Corp., 141 Vt. 53, 56, 442 A.2d 1311, 1313 (1982); see also Duquesne Light Co. v. Barasch, 488 U.S. 299, 315-16, 109 S.Ct. 609, 619-20, 102 L.Ed.2d 646 (1989) (constitution does not compel single theory of ratemaking; within broad limits, states are free to decide what methodology best meets their needs in balancing interests of utility and public); Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333 (1944) (agency not bound to use of any single formula in determining rates; it is result reached, not method used, that is controlling). We will uphold the Board's determination unless it is shown to be clearly erroneous. Green Mountain Power Corp., 162 Vt. at 380, 648 A.2d at 376.

A. Methodology

In calculating QSC's rate base, the Board was concerned with crediting QSC's customers for both the depreciation of QSC's assets since construction, and for the contributions in aid of construction made by QSC customers. ¹ See id. at 383, 648 A.2d at 378 (once customers have returned portion of utility's investment, they should not be required to pay for that portion again). The Board's rate base calculation thus begins with the original cost, and reduces that amount by the percentage of the cost recovered through sales of lots. The unrecovered original cost is then depreciated. Finally, expenditures for additions subsequent to the original investment are added to the depreciated unrecovered original cost to yield QSC's rate base.

QSC's first objection to the Board's rate base calculation is the reduction based on the percentage of cost recovered through sales of lots. Although recognizing that its original cost must be reduced to some extent for customer contributions in aid of construction, QSC argues that those contributions should be calculated based solely on the connection fees paid by purchasers of lots in the subdivision to connect to the sewer system. The Board chose instead to calculate customer contributions using the percentage of QLC's development costs recovered through lot sales. That is, the Board assumed that each time QLC sold a lot, it recovered a...