State ex rel. Office of the Public Counsel v. Public Service Com'n of Missouri, WD
| Decision Date | 11 February 1997 |
| Docket Number | No. WD,WD |
| Citation | 938 S.W.2d 339 |
| Parties | STATE of Missouri, ex rel., OFFICE OF THE PUBLIC COUNSEL, Appellant, v. PUBLIC SERVICE COMMISSION OF MISSOURI, et al., Respondent, United Water Missouri, Inc., Intervenor, Respondent. 52366. |
| Court | Missouri Court of Appeals |
John B. Coffman, Government Counsel, Jefferson City, for Appellant Office of the Public Counsel.
James M. Fischer, Jefferson City, for Intervenor Appellant City of Jefferson City, MO.
Eric Witte, Government Counsel, for Respondent Public Service Commission.
Sondra B. Morgan, Jefferson City, for Intervenor Respondent United Water Missouri, Inc.
Before SMART, P.J., and SPINDEN and ELLIS, JJ.
A water utility sought judicial review of the Missouri Public Service Commission's 1 ("the Commission") Report and Order in a utility rate case. The Office of the Public Counsel 2 ("OPC") appeals from the circuit court's judgment affirming the Report and Order of the Commission. OPC contends that the circuit court erroneously affirmed the Commission's decision because the Commission's calculation of the rate impact of United Water Missouri, Inc.'s 3 ("the Company") contract with Public Water District No. 2 ("the District") failed to include certain variable costs incurred by the water company and was, thus, unlawful and unreasonable.
In 1977, the Company needed more storage facilities and a backup source of water. The Company faced two options: building its own storage tanks or leasing storage facilities from the District. On August 23, 1977, the Company entered a contract with the District wherein the Company was permitted to use all of the District's storage tanks and wells in exchange for the Company's agreement (1) to operate and maintain the tanks and wells; (2) to pay $2,000 per month to the District; and (3) to provide the District with all of its water needs. The term of the contract was twenty years. In 1990, the parties executed an addendum to the contract which extended the contract for three years and gave added responsibilities to the Company.
The Company submitted the original contract to the Commission before executing it. The Commission reviewed the contract and stated no objection to its execution. During the subsequent twelve years, the Company filed five rate cases, each resulting in an increase in rates for the Company. Each of these cases was resolved by settlement negotiated by the parties.
On December 15, 1989, the Company filed a rate case requesting $516,477 in additional revenue. This rate case was the first in which the Commission reviewed the rate-making treatment to be given the contract. OPC suggested the rate be reduced by $238,544, based upon its calculation of the revenue requirement of the Company had the Company built a storage tank in 1977, measured against the revenue requirement resulting from the Company's contract with the District. 4 The Commission found that the contract was imprudent because it did not contain a limit upon the Company's obligation to provide the District's water needs. 5 The Commission granted a rehearing on the issue of what particular adjustment to the Company's revenue requirement should be made as a result of the contract. On June 19, 1991, the Commission found that the proper downward revenue adjustment was $266,009 per year. The Commission further found that it would be inappropriate to allow the Company to fully recover the expense associated with the contract. The Company appealed the Commission's decision and this court affirmed the finding that the contract was imprudent, but remanded the issue of costs associated with the contract to the Commission. State ex rel. Capital City Water Co. v. Missouri Pub. Serv. Comm'n, 850 S.W.2d 903 (Mo.App.1993). The parties eventually settled the case.
On March 25, 1994, the Company filed tariffs with the Commission designed to increase the annual water service revenues by $523,606. After an evidentiary hearing, on February 8, 1995, the Commission issued its Report and Order (1) reaffirming the finding that the Company acted imprudently by executing the contract; and (2) finding that no adjustment to revenue was warranted because the benefits associated with the contract during the test year exceeded the costs of the contract during the same period. In concluding that no adjustment needed to be made, the Commission rejected the method it had used to calculate the contract adjustment in the prior rate case, and implemented a new "cost/benefit" method. The Commission rejected the proposed tariffs, but authorized the Company to file tariffs designed to increase gross revenues by $334,799. Both OPC and the Company filed petitions for review in the circuit court. On January 1, 1996, the circuit court affirmed the Report and Order of the Commission. On February 16, 1996, OPC filed its notice of appeal.
On appeal, OPC raises two interrelated points, both alleging that the circuit court erred in affirming the Commission's Report and Order because (1) the order was unlawful and unreasonable in that the Commission's calculation of the rate impact of the Company's contract with the District failed to include certain variable costs incurred by the Company to operate and maintain the wells; and (2) the order is unreasonable in that the "cost/benefit" method used to calculate the rate impact of the Company's contract with the District was implemented in a lopsided manner which recognized the value of well water consumed by the Company's customers as a "benefit" but failed to recognize the corresponding "cost" incurred by the Company to operate and maintain the wells. These points will be considered together.
This court reviews the decision of the Commission, not the judgment of the circuit court. State ex rel. City of St. Joseph v. Public Serv. Comm'n, 713 S.W.2d 593, 595 (Mo.App.1986). Judicial review of the Commission's order is limited to a determination of whether the order is lawful and reasonable. State ex rel. City of West Plains v. Public Serv. Comm'n, 310 S.W.2d 925, 933 (Mo. banc 1958). "[Q]uestions of lawfulness turn on whether the Commission's orders or decisions are statutorily authorized and questions of reasonableness turn on whether there is competent and substantial evidence upon the whole record to support them." State ex rel. Conner v. Public Serv. Comm'n, 703 S.W.2d 577, 579 (Mo.App.1986) . Where a decision of the Commission turns on purely factual issues, this court may not substitute its judgment for that of the Commission if the order is supported by competent and substantial evidence on the record as a whole. State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Serv. Comm'n, 585 S.W.2d 41, 47 (Mo. banc 1979). This court is allowed to determine whether, upon consideration of the evidence, the Commission could reasonably have reached the result that it did. Capital City Water Co., 850 S.W.2d at 912. The Commission's decision will be reversed if the action of the Commission was arbitrary, capricious and without reasonable basis. Id.
"Cost/Benefit" Analysis
In order to analyze the contract for ratemaking purposes, the Commission sought to quantify the benefits and costs that occurred as a result of the existence of the contract during the test year, which in this rate case was 1993. In the Report and Order, the Commission stated:
If the costs to the Company associated with the existence of the contract exceed the benefits that accrue to the Company, the Commission will make an adjustment to the Company's revenue requirement to compensate the Company's ratepayers for the excessive value transferred by the Company to the District. If, on the other hand, the benefits associated with the existence of the contract exceed the costs associated with the contract, the Commission will make no adjustment.
In order to weigh the benefits of the contract against the costs of the contract, the Commission assigned a value to the water that the Company transferred to the District storage facilities and a value to the water that the Company received back from the storage facilities. The water which was transferred from the Company to the District storage facilities constituted 100 percent Company-produced water, while the water which was transferred from the District wells to the Company consisted of a mixture of District-treated water from the wells ("District-produced water") and Company-treated water from the Missouri River ("Company-produced water"). The District-produced water cost less to produce than the Company-produced water. Thus, the Commission assigned a different value to each source of water. Furthermore, the Commission assigned a value to the benefit the Company received by not having to build additional storage. The Commission also considered the monthly payment of $2,000 that the Company was obligated to pay to the District pursuant to the contract.
The Commission first calculated the costs to the Company resulting from the contract by quantifying the cost associated with the Company-produced water delivered into the District storage facilities. During the 1993 test year period, the Company delivered 173,610 ccf 6 (129,860,280 gallons) of Company-produced water into the District storage facilities. The Commission calculated the value of Company-produced water to be $1.01 per ccf. 7 Multiplying 173,610 ccf by $1.01 per ccf, the Commission found the value of the Company-produced water transferred to the District storage facilities during the test year to be $175,346. Under the terms of the contract, the Company paid the District an additional $24,000 ($2,000 per month) in 19...
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