Providence Water Supply Bd. v. Malachowski

• Decision Date: 03 May 1993
• Docket Number: No. 92-242-M,92-242-M
• Parties: PROVIDENCE WATER SUPPLY BOARD v. James MALACHOWSKI, in his capacity as Chairman of the Public Utilities Commission. P.
• Court: Rhode Island Supreme Court

Page 305

624 A.2d 305

PROVIDENCE WATER SUPPLY BOARD v. James MALACHOWSKI, in his capacity as Chairman of the Public Utilities Commission.

No. 92-242-M.P.

Supreme Court of Rhode Island.

May 3, 1993.

William J. McGair, Providence, for plaintiff.

John Spirito, Public Utilities Com'n, Francis X. Flaherty, Wynn & Wynn, Providence, Julio Mazzoli, Asst. Atty. Gen., Paul Roberti, Special Asst. Atty. Gen., for defendant.

OPINION

FAY, Chief Justice.

This case is before us pursuant to a statutory petition for certiorari filed by the Providence Water Supply Board (PWSB) in accordance with G.L.1956 (1990 Reenactment) § 39-5-1. The petition seeks to review a decision and order of the Public Utilities Commission (commission) issued in docket No.2022. After careful review of the record we affirm the order of the commission.

On August 1, 1991, the PWSB filed a surcharge tariff pursuant to G.L.1956 (1990 Reenactment) § 39-3-11.1. The proposed surcharge was designed to collect $5,020,927.56 to reimburse the city of Providence (city) for advances it made to the PWSB from November 14, 1988, to March 31, 1991. The PWSB entered into a promissory note under which it agreed to repay this amount to the city. The proposed surcharge was assessed on all retail and wholesale PWSB customers at the rate of eight cents per one hundred cubic feet of water billed commencing September 1, 1991. These figures represented a rate increase of approximately 15 percent for a residential customer utilizing 150,000 gallons of water per year. The surcharge proposal provided that the new rates should be applied retroactively. ¹

In docket No.2022 the commission did not approve the PWSB's surcharge request. It approved a lower surcharge. In addition the commission limited the amount the PWSB had to repay to the city and ordered that the balance of the surcharge be used to fund specific accounts. The PWSB seeks reversal of these rulings.

The issues in this case involve the scope of the commission's authority under § 39-3-11.1 to regulate the ability of a municipal water utility to borrow from its municipality. Section 39-3-11.1 governs proposed rate changes filed by a municipally owned water utility that are based solely upon reimbursement to the city or town for loans previously issued to the utility under existing contracts.

A review of the regulatory process to this point will help clarify the issues before us. The PWSB filed a request for rate relief with the commission on February 5, 1988, docket No.1900. In that filing the PWSB sought to increase its revenue requirements, the result of which would be a corresponding increase in its rates. The commission had nine months to render a final decision on the rate request. During that time it conducted lengthy public hearings. The commission subsequently rejected the PWSB's request. It instead authorized a reduced increase in total revenue requirements and segregated three accounts from the PWSB's general funding. The revenue-requirement amount represents the PWSB's approved cost of doing business.

When the commission's rate decision was issued in docket No.1900, it became incumbent upon the PWSB to construct rate tariffs that would realize the revenue required to operate the PWSB. After the tariffs were prepared, they were filed with the commission and approved.

I PUBLIC UTILITIES COMMISSION HEARING ON DOCKET NO.2022

On August 1, 1991, the PWSB filed a $5 million retroactive surcharge with the commission. In docket No.2022 the commission conducted public hearings on the reasonableness of the proposed surcharge. On February 24, 1992, the commission initiated docket No.2044 to review the overall financial condition of the PWSB since March 31, 1991. Both dockets were consolidated for the hearings.

The PWSB offered three witnesses in support of its surcharge filing. Richard Rafanovic, PWSB chief engineer and general manager, testified that the surcharge amount was required to correct an imbalance in the PWSB budget that was caused by a revenue shortfall. He further testified that the loans from the city would be paid back with interest at the rate of 7.5 percent.

Mark Abrahams (Abrahams), a consultant, testified that his function was to compile evidence to support the amount of the PWSB's surcharge-filing request. He apprised the commission that the surcharge request included $425,927 for working capital needed by the PWSB during the borrowing period. Abrahams summarized that the surcharge is necessary because the PWSB did not receive sufficient operating revenue to meet its expenditure obligations. His findings showed that expenditures during the surcharge period were consistent with the cost of service authorized in the last rate case, docket No.1900.

Walter Edge, Jr. (Edge), an accountant, testified that the PWSB had not received the expected revenues approved in docket No.1900 and that its financial problems were not caused by overspending. He believed the primary reason for the revenue shortfall was the PWSB's improper calculation of customer-service-charge revenues. He explained that the PWSB passed up $1 million in revenues because its consultants had failed to calculate accurately rate-year revenues. That error resulted in four and one-half months of lost revenues that were approved in docket No.1900. Edge also stated that the same PWSB consultants had inadvertently double counted revenues anticipated from customer charges and that meter sales had fallen short of the consultants' estimates. In addition he testified that another $500,000 was unaccounted for because the PWSB "quit looking for additional errors."

The Division of Public Utilities and Carriers (division) offered one witness in opposition to the PWSB's surcharge request. Thomas Catlin (Catlin), an economic consultant, reviewed the PWSB's proposed surcharge. His findings covered the cause of the shortfall, the proposed surcharge mechanism, and the proposed interest rate. He agreed with Edge that the revenue shortfall was caused by the four and one-half month lag in implementing the rate increase and errors in calculating service-charge revenues.

Catlin objected to the 7.5 percent interest rate on the city's loan. He determined that a 6 percent interest rate accurately reflected the city's cost of borrowing money at the time the PWSB entered into the promissory note with the city. Similarly the division also rejected the PWSB's proposal to pass along to ratepayers a $425,927 working-capital expense. The division maintained that this expense was expressly denied by the commission in docket No.1900 and should be similarly rejected in docket No.2022.

On April 24, 1992, the commission issued its report and order on the retroactive surcharge. The commission addressed the revenue shortfall and several areas of fiscal irresponsibility that had undermined its regulatory oversight. The commission found that the PWSB violated certain requirements mandated under docket No.1900, had fiscally mismanaged itself, and was solely responsible for its own revenue deficiencies.

The commission agreed with Edge that PWSB's revenue shortfall was "mind boggling." It found that the shortfall was the consequence of consultants' errors and the failure of PWSB board members and management to discern these errors when docket No.1900 was presented to the commission. The PWSB had waited almost three years to call this matter to the attention of the commission.

The focal point of the commission's decision was the undisputed violations of docket No.1900. The commission concluded that since November 14, 1988, the PWSB had "managed its finances with reckless disregard for economic reality." In docket No.1900 the commission authorized over $8 million for operations and maintenance expenses. In addition the commission had mandated nearly $4 million for three restricted accounts that were segregated from the PWSB's general funds. During the borrowing period the PWSB violated the agreement reached in docket No.1900. The PWSB exceeded its authorized operations and maintenance account by $5,454,175, and it underfunded the three restricted accounts by $3,537,745. The commission opined that the PWSB applied funds earmarked for restricted accounts toward an unauthorized increase in its operations and management budget. It made matters worse during this period by increasing its total staff by 21 percent and by providing significant raises to its employees.

The commission found that the PWSB had intentionally disregarded its regulatory oversight in two respects. In docket No.1900 the commission expressly rejected the PWSB's request to fund a $245,285 working-capital account. The PWSB subsequently borrowed a working-capital amount of $425,927 from the city and included this amount in its surcharge request. Finally, the PWSB executed a promissory note with the city to legitimize its overspending. The note was executed without the permission of the division and contained several defects. See § 39-3-15.

The commission ordered various measures to control the PWSB's financial misfeasance. It denied most of the $5 million surcharge sought by the PWSB to reimburse the city. Instead it authorized a surcharge of $4,595,000 at the rate of eight cents per one hundred cubic feet of water billed commencing September 1, 1991. It limited the amount to be paid to the city as remuneration for the PWSB borrowing to $1,346,449 without interest and eliminated the working-capital amount. The commission remained committed to the capital improvements authorized in docket No.1900 and found that the surcharge would be better spent replenishing the PWSB's restricted capital-improvements account. It ordered the balance of the surcharge to be used to fund the other two restricted accounts. It provided that the PWSB may repay the balance of the note to the city from savings through more efficient operations. To facilitate compliance, the commission subjected the PWSB to more rigorous...