Rankin Utility Co., Inc. v. Mississippi Public Service Com'n

• Decision Date: 14 August 1991
• Docket Number: No. 90-CC-0744,90-CC-0744
• Parties: , Util. L. Rep. P 26,102 RANKIN UTILITY COMPANY, INC. v. MISSISSIPPI PUBLIC SERVICE COMMISSION.
• Court: Mississippi Supreme Court

Page 705

585 So.2d 705

127 P.U.R.4th 191, Util. L. Rep. P 26,102

RANKIN UTILITY COMPANY, INC. v. MISSISSIPPI PUBLIC SERVICE COMMISSION.

No. 90-CC-0744.

Supreme Court of Mississippi.

Aug. 14, 1991.

Harold D. Miller, Jr., Butler Snow Firm, Jackson, for appellant.

Wm. Bruce McKinley, Jackson, for appellee.

Before HAWKINS, P.J., and PRATHER and McRAE, JJ.

McRAE, Justice, for the Court:

This is an appeal from a December, 1987, ruling of the Public Service Commission (hereinafter PSC or Commission), wherein the PSC unanimously overruled its 1986 decision by ordering a reduction of the water and sewer rates of Rankin Utility Company, Inc., (hereinafter Rankin Utility or Utility). Appeal was then taken to the Chancery Court of Rankin County, which affirmed the PSC's order. Rankin Utility appeals to this Court citing seven (7) assignments of error. We affirm the decisions of the lower court and the PSC and address only the dispositive issues.

I.

A.

Rankin Utility is one of five subsidiaries of Castlewoods Land Development Corporation ¹ (hereinafter Castlewoods) and provides water and sewage services to its parent corporation Castlewoods Subdivision. The Commission held that Rankin Utility had failed to enforce its own tariffs against its corporate affiliates, as required by law, and, as a result, the capital costs of the Utility and its existing customers were greatly increased. Further, Rankin Utility Company had invested capital in water distribution facilities sufficient to serve 701 customers ² and in production and storage facilities sufficient to serve some 2,400 customers. The Commission found the system installed by Rankin Utility was sized to be a future benefit to the private land developers affiliated with Rankin Utility Company, who have avoided payment of contributions to the construction, lawfully owed by them to the Utility, which would have benefitted the Utility's ratepayers.

Larry Edwards, president of Rankin Utility Company, testified that when he and Zach Hederman, Jr., acquired Rankin Utility in September, 1983, its water system was under a quasi-moratorium on new connections by the Board of Health due to low water pressure. Although Rankin Utility upgraded an existing well and constructed an additional well, low water pressure remained a problem at Castlewoods.

B.

In 1986, in proceedings U-4828 before the PSC, Rankin Utility asked for an increase in its water and sewer rates. As a result of the proceedings, the Public Service Commission Staff (hereinafter staff) and the Utility entered a stipulation proposing a substantial rate increase which the PSC approved effective October, 1986. To alleviate the low water pressure problem, the Utility began to explore the purchase of an overhead storage facility, but decided to put their plans on hold pending the outcome of the 1986 proceeding. Rankin Utility maintains that it purchased and installed the $360,000 overhead water tank because the Commission ordered it to do so in its 1986 order. The order read in pertinent part as follows:

The Commission finds that the Rankin Utility Company should be required to construct and place into operation the two hundred and fifty thousand (250,000) gallon water tower reflected in the Company's filing and that the same shall be done prior to the expiration of twelve (12) months from the date of this order for the use and service of customers in the certificated area.

The staff admitted they had made an error during the 1986 proceedings because it failed to notice that Rankin Utility had neither received nor demanded any offsetting contributions from the developer. Additionally, the staff contended that in 1986 it was unaware that the Utility had failed to follow its service extension policy. Rule 12(C) of the Commission's Service Rules requires each Utility to adopt an appropriate service extension tariff, (also known as a Service Extension Policy) which would govern the conditions upon which a Utility could extend service to newly-developed areas within its certificated area. The staff maintained that pursuant to the Utility's own tariffs they were required to demand and receive from the developer, contributions in aid of construction. In support of the staff's position, PSC's Chief Accountant Leon Browning testified that the developer and Utility failed to follow the service extension policy.

The PSC's Opinion and Order reflected that when management acquired the Utility in September, 1983, the number of customers and the capital investment and rate base was as follows:

Number of Customers Rate Base Rate Base Investment Per Customer

430 $493,384.43 $1,147.40

By 1987 the per customer investment was as follows:

Number of Customers Rate Base Rate Base Investment Per Customer

596 $1,310,436.00 $2,198.71

Additional findings included the following:

By 1987 the Utility had increased its rate base by 165%, but the number of customers it served had only increased by 38%. The utility had also "bought and paid for" facilities to serve another 105 lots that were developed but unsold by the developer. The utility had created production and storage facilities that were adequate to meet the needs of over two thousand four hundred (2,400) customers. The evidence indicated that the private developer in this area intended to eventually develop between two thousand (2,000) and twenty four hundred (2,400) lots. Based upon past growth rates it is obvious that it would be many years before the area was fully developed yet the utility had, with one exception, never demanded nor received a single dime of contribution in aid of construction.

On cross-examination, Browning stated that he did not believe that the complete expense of the water tank should be included in the current rate base because its capacity exceeded that which was needed at the present time. He determined this after reviewing the rules and regulations of the Board of Health, talking to the Board of Health engineers, talking to the PSC's engineer, and reviewing the service extension policy. His view of the service extension policy was that as the system is extended in the future, the new lot owners, or someone, should pay by way of contribution not only for the pipe in the system that is extended, but also for part of the water system.

Edwards did not agree with Browning's interpretation of the service extension policy. He testified:

My interpretation of that service extension policy would deal with isolated cases where the cost of providing service was uneconomically beneficial to the utility company. If perchance you had someone within our certificated area whose request for service was several miles from our existing services, that would be the time that that policy would be implemented. I do not interpret it to say that the utility company cannot, under its own management decisions, decide to increase the system utilizing its own funds for the potential profits to be made from the additional customers utilizing the system. That is our interpretation. That is what we have operated under since we acquired the system, and I think, as Mr. Browning has pointed out in his testimony, it appears to be that that was used by prior management.

He stated that there was only one situation where Rankin Utility charged contribution in aid of construction: the elementary school at Northwest Rankin Attendance Center. Rankin Utility argued that in 1986 Rankin Utility showed the Commission information which established that the utility company was absorbing extension costs and not charging contributions in aid of construction.

Public witnesses testified that after the 1986 rates took effect, it was not unusual to have $100 sewage and water bills, whereas, prior to the 1986 order, the residents of Castlewoods paid anywhere from $6.50 to $7.50 for their sewage and water.

II.

In August, 1987, the PSC opened a case styled An Inquiry into the Appropriateness of Rates and Charges of Rankin Utility Company in the Rendering of Water and Sewer Service in Rankin County, Mississippi Styled U-5042. In its Opinion and Order of December 23, 1987, the PSC unanimously overturned its 1986 decision by ordering a reduction in rates as follows:

Having found that the company's rate base is improperly overstated by virtue of its failure to adhere to its own service extension policy, the Commission is required to decide the type and amount of rate base adjustment that should be ordered. The company protests that the Staff's adjustments, if followed, will prevent them from ever recovering a portion of their investment since they claim that the opportunity to collect a contribution in aid of construction from the developer for lots sold to date is gone forever. This argument strikes us as somewhat disingenuous in light of the fact that the developer is not some unrelated third party but is rather the utility's corporate alter ego. However, in an attempt to insure that no unfairness results the Commission will order an adjustment to rate base that is slightly different than that recommended by the Staff in its direct testimony. Instead, the Commission will adopt the recommendation of Witness B. Leon Browning in his rebuttal testimony. This proposal allows the company to recover through rate base the cost of production and storage investment necessary to serve all present customers plus all developed but unsold lots. The balance of the investment can and should be recovered from the developer who still has the opportunity to expense those costs into the sale of future lots. The specific calculations necessary to do this are to be found in the testimony of Staff Witness B. Leon Browning in his rebuttal testimony which we hereby specifically accept and adopt.

On appeal to Rankin County Chancery Court, the Chancellor affirmed the 1987 order and in the findings of fact and conclusions of law, stated as follows:

The Commission's 1987 order was not based on any change of fact or...