PHILADELPHIA SUBURBAN WATER v. PUC

• Decision Date: 21 October 2002
• Citation: 808 A.2d 1044
• Parties: PHILADELPHIA SUBURBAN WATER COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.
• Court: Pennsylvania Commonwealth Court

808 A.2d 1044

PHILADELPHIA SUBURBAN WATER COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

Commonwealth Court of Pennsylvania.

Argued March 13, 2002.

Decided October 21, 2002.

Daniel Clearfield, Harrisburg, for petitioner.

Stanley E. Brown, Harrisburg, for respondent.

John S. Carnes, Jr., West Chester, for amicus curiae, The City of Coatesville Authority and The City of Coatesville.

John J. Gallagher, Harrisburg, for amicus curiae, PA American Water Co.

BEFORE: COLINS, President Judge, and McGINLEY, Judge, SMITH-RIBNER, Judge, PELLEGRINI, Judge, FRIEDMAN, Judge, COHN, Judge, and LEAVITT, Judge.

OPINION BY Judge LEAVITT.

Philadelphia Suburban Water Company (Suburban Water) petitions for review of an adjudication of the Pennsylvania Public Utility Commission (PUC or Commissioners) approving several agreements by which the City of Coatesville Authority (Authority) sold its water system to the Pennsylvania-American Water Company (Pennsylvania-American).¹ Specifically, Suburban Water challenges the PUC's approval of an Asset Purchase Agreement (Agreement) that obligates Pennsylvania-American to make an annual contribution, in perpetuity, to the Coatesville Economic Development Fund in an amount exactly equal to the annual rates paid by the City of Coatesville (Coatesville) to Pennsylvania-American for fire hydrant service. Suburban Water contends that this arrangement effects free water service to Coatesville and, further, that free service deviates unlawfully from Pennsylvania-American's approved tariff and discriminates against municipalities that pay the utility's approved tariff for their fire hydrant service. We agree and reverse the PUC's approval of this provision of the Agreement.

HISTORY OF THE CASE

In 1998, Coatesville announced that it would accept bids for the acquisition of its waterworks system, stating that the bid had to include free fire hydrant service to Coatesville, in perpetuity, as a non-negotiable term.² Suburban Water, a putative bidder, sought a declaratory order from the PUC on the question of whether Coatesville's non-negotiable bid term was lawful under the Public Utility Code. The PUC heard the case and on October 1, 1999, entered an order that did not directly address the validity of the bid term. Instead, it simply recited the law, stating that: (1) the acquisition of Coatesville's water system must be reviewed and approved by the PUC, and (2) the utility chosen as purchaser must "charge rates that are consistent with its approved tariff rate."

On February 9, 2000, having been selected as the winning bidder, Pennsylvania-American submitted an application to the PUC requesting approval of the proposed acquisition. Attached to its application was the Agreement, which provided that Pennsylvania-American would pay Coatesville $37,000,000 for its water system and, inter alia, would give Coatesville free fire hydrant service in perpetuity (Free Service Covenant). In response, protests were filed by the Office of Consumer Advocate (OCA), the Office of Trial Staff (OTS) and Suburban Water. All protestants asserted that the Free Service Covenant violated the Public Utility Code as well as the PUC's October 1, 1999 declaratory order. Hearings were conducted on Pennsylvania-American's application and the protests it generated. After the evidentiary portion of the proceeding, but prior to the submission of briefs, the Agreement was amended (Amendment), by which Pennsylvania-American reached a settlement with some, but not all, of the protestants. The Amendment deleted the Free Service Covenant from the Agreement and replaced it with a new provision by which: (1) Pennsylvania-American agreed to bill Coatesville for the hydrant service as provided in Pennsylvania-American's tariff; (2) Coatesville agreed to pay Pennsylvania-American the invoiced amount; and (3) Pennsylvania-American agreed to make an annual contribution to the Coatesville Economic Development Fund in an amount equal to Coatesville's annual charge for fire hydrant service. In addition, Pennsylvania-American agreed to use "shareholder funds," rather than "ratepayer funds," to make these contributions. The question of whether the Agreement, as revised by the Amendment, satisfied the Public Utility Code was briefed by Suburban Water, Pennsylvania-American and Coatesville.

On January 19, 2001, the Administrative Law Judge, Louis G. Cocheres (ALJ), issued an Initial Decision recommending that Pennsylvania-American's acquisition of the Coatesville waterworks system be approved, subject to certain amendments to the Agreement. Specifically, he recommended deletion of both the Free Service Covenant and the Amendment for the reason that they violated the Public Utility Code. The ALJ concluded that the Amendment did not cure the deficiencies of the Free Service Covenant, reasoning as follows:

[T]he City is still receiving free hydrant service. And free hydrant service continues to contradict PAWC's tariff and the Declaratory Order. Any attempt by PAWC to characterize the changes set forth in the Amendment as a "charge and contribution" format is nothing more than an untenable form over substance argument.

R.R. 288a.

Pennsylvania-American and Coatesville filed exceptions to the ALJ's Initial Decision, and Suburban Water responded to them. On February 13, 2001, the Commissioners, in a 4-1 vote, rejected the ALJ's recommendation to delete the Amendment and, instead, approved it subject to the establishment of a tracking mechanism designed to ensure that only shareholder funds would be used to make the annual payments to Coatesville's Economic Development Fund. Commissioner Terrance J. Fitzpatrick, in dissent, concluded that the Amendment was illegal, noting that the Public Utility Code prohibits Pennsylvania-American from "directly or indirectly" charging any rate other than that in its scheduled tariff.

On September 4, 2001, approximately six months after it sought this Court's review of the PUC's decision in this case, Suburban Water, along with the Borough of Chalfont (Chalfont), submitted an application to the PUC seeking approval of Suburban Water's acquisition of Chalfont's water system. As part of this transaction, Suburban Water agreed that it would not charge Chalfont for fire hydrant service for three years, but after this grace period, Suburban Water would charge Chalfont a gradually increasing hydrant service charge until the charge equaled Suburban Water's tariff for hydrant service. After a hearing, on October 25, 2001, the PUC approved the transaction between Suburban Water and Chalfont.

Suburban Water seeks to have this Court reverse the PUC's approval of the Agreement to the extent it includes either the Free Service Covenant or Amendment. The heart of Suburban Water's challenge is that the Amendment violates two provisions of the Public Utility Code, i.e., the Section 1303 prohibition against a utility charging any rate other than that specified in its tariff and the Section 1304 prohibition against establishing unreasonable differences between classes of service. 66 Pa.C.S. §§ 1303, 1304. In addition to defending its approval of the Amendment on its merits, the PUC argues that Suburban Water is judicially estopped from pursuing its appeal because Suburban Water's contract for the purchase of Chalfont's water system includes a provision for free hydrant service. Pennsylvania-American and Coatesville have intervened in this appeal to respond to Suburban Water and to support the PUC.

SECTION 1303 OF THE PUBLIC UTILITY CODE

The Amendment was not the first choice of Pennsylvania-American and Coatesville. It was developed to meet the objections of the OTS, the OCA and Suburban Water to the Free Service Covenant. Whether the Amendment has transformed the Agreement from one that violates the Public Utility Code³ into one that satisfies it is the central issue before us. It cannot be resolved without evaluation of the Free Service Covenant, which, if valid, moots the objection to the Amendment.

The Free Service Covenant is one of the several covenants found in Article 3 of the Agreement. In relevant part, the Free Service Covenant provides as follows:

3.4 Special Covenants of PAWC for the Water System

PAWC hereby covenants and agrees to comply with the following special covenants relating to the Water System:

(a) Rates. At Closing, PAWC shall implement, in the area currently served by the Water System, CCA's water rates then in effect as of December 16, 1999. PAWC shall freeze said rates for a minimum of three (3) years following Closing during which time no other rates shall be charged in the area served by the Water System. PAWC shall have the option, at any time, to charge rates lower than CCA's water rates in effect as of December 16, 1999.

Nothing in this Section shall prevent PAWC from applying its rules and regulations regarding conditions of service after Closing.

(b) Municipal Service Credit. PAWC shall provide the City a one-time Ten Thousand Dollar ($10,000) credit for future water service.

The City shall not, at any time, be required to pay charges for public fire hydrants.

Agreement, Art. 3, Section 3.4 (emphasis added). R.R. 65a. Pennsylvania-American's approved tariff includes a charge for "public fire hydrants,"⁴ from which the "City," Coatesville, is excused. Indeed, it is excused from any future revision to the present charge. We consider the Free Service Covenant against the language of Section 1303 of the Public Utility Code, which states in relevant part as follows:

No public utility shall, directly or indirectly, by any device whatsoever, or in anywise, demand or receive from any person, corporation, or municipal corporation a greater or less rate for any service rendered or to be rendered by such public utility than that specified in the tariffs of such public utility applicable thereto. The rates specified in such tariffs shall be the lawful rates of

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