Utilities Serv. of South Carolina Inc. v. the South Carolina Office of Regulatory Staff

• Decision Date: 28 March 2011
• Docket Number: No. 26952.,26952.
• Citation: 392 S.C. 96,708 S.E.2d 755
• Parties: UTILITIES SERVICES OF SOUTH CAROLINA, INC., Appellant,v.The SOUTH CAROLINA OFFICE OF REGULATORY STAFF, Respondent.
• Court: South Carolina Supreme Court

392 S.C. 96

708 S.E.2d 755

UTILITIES SERVICES OF SOUTH CAROLINA, INC., Appellant,

v.The SOUTH CAROLINA OFFICE OF REGULATORY STAFF, Respondent.

No. 26952.

Supreme Court of South Carolina.

Heard Nov. 4, 2010.Decided March 28, 2011.

Mitchell Willoughby, John M. S. Hoefer, and Benjamin P. Mustian, all of Willoughby & Hoefer, of Columbia, for Appellant.Florence P. Belser, Jeffrey M. Nelson, and Nanette S. Edwards, all of Columbia, for Respondent.Justice KITTREDGE.

This appeal from the denial of an application for a rate increase presents us with several questions about the proper role of the Public Service Commission (“PSC”) following 2004 statutory amendments altering the structure and operation of the PSC. Of particular significance are the respective roles and responsibilities of the PSC and the Office of Regulatory Staff (“ORS”), which was created by the 2004 amendments. We hold the PSC retains its fundamental role as fact-finder. In this case, the PSC acted well within its rights in requesting additional information regarding Appellant's expenditures, even when those expenditures were not initially challenged by ORS. Nevertheless, because we find the PSC's evaluation of Appellant's rate application was affected by several errors of law, we reverse and remand for further proceedings.¹

I.

Appellant Utilities Services of South Carolina, Inc. (“Utility”) was established in 2002 as a wholly owned subsidiary of Utilities, Inc. (“UI”). Utility supplies water to over 6,800 customers in eighty-one South Carolina neighborhoods and wastewater services to over 370 customers in four neighborhoods. In some of these neighborhoods, Utility supplies water that it purchases in bulk from other water systems. Customers in these neighborhoods are known as “distribution-only” customers.

In January 2006, the PSC approved an increase to Utility's rates. This rate schedule distinguished between regular residential customers and distribution-only customers. Distribution-only customers were charged a basic facilities charge, a “commodity charge” that varied based on usage, and a pro rata portion of the cost to Utility for its purchase of bulk water. The regular residential customers were charged a basic facilities charge and a higher commodity charge.

In August 2007, Utility again applied for a rate increase. Utility requested the PSC use the “rate of return on rate base” ² method to determine the reasonableness of its proposed rates. Utility claimed it had invested three million dollars in “plant additions” ³ since its previous rate case, resulting in a rate base of approximately 9.7 million dollars.⁴ To achieve its desired rate of return on rate base, Utility requested an increase to the basic facilities charge and to the commodity charge for both regular residential and distribution-only customers.

The PSC held public hearings regarding the 2007 application in York, Anderson, and Richland Counties. At the public hearings, Utility customers from seven neighborhoods testified to various problems with the quality of their water. The main complaints were that Utility's water tasted and/or smelled bad, caused damage to fixtures and appliances, and did not adequately clean clothes. One customer testified she had received notice from Utility that the water system in her neighborhood contained elevated levels of lead. Several customers testified that, because of the poor quality of Utility's water, they invested in water softeners and water filters or drank bottled water.

In light of these concerns, one customer questioned the fairness of Utility's request for an increase to its basic facilities charge. She noted that, because the basic facilities charge was a flat rate charge, Utility's revenues would increase even if its customers avoided using its water.

In addition, customers from eleven neighborhoods testified they had not seen any capital improvements and/or improvements in water quality since the last rate increase. In fact, one customer testified the quality of Utility's water service had declined.

Bruce T. Haas, regional director of operations for UI, testified that Utility has a “capital improvements program” and “ongoing operational programs such as routine testing and periodic water main flushing to improve water quality.” Haas listed the types of capital improvements Utility had made since it acquired its water systems in 2002, but he did not specify which of these improvements had occurred since the last rate increase.

The PSC asked Haas whether Utility planned any capital improvements in the neighborhoods the customers complained about. Haas was able to name some programs in one neighborhood, but he did not provide specific information about any other neighborhood. Rather, he reiterated the general types of upgrades Utility had implemented “since [it] took over,” and stated Utility upgraded “nearly every single facility that [it] had.” ⁵

In addition to its questions regarding capital improvements, the PSC asked Utility about the reasonableness of payments Utility made to its affiliate, Bio–Tech. Bio–Tech is a wholly owned subsidiary of UI that provides sludge hauling services, wastewater plant maintenance, and construction services. A Utility witness testified that Bio–Tech charged the same price to all of its customers, regardless of whether they were affiliates. Thus, she contended, Bio–Tech's prices were market rates. However, she was unable to provide the PSC with information about whether Utility had compared Bio–Tech's prices to the prices of Bio–Tech's competitors.

Representatives of ORS then testified, and they verified that Utility had made at least some capital improvements following its last rate case. However, ORS also suggested several adjustments to Utility's figures. Thus, ORS recommended the PSC find Utility had a rate base of 9.14 million dollars.⁶

The PSC denied Utility's application for a rate increase. It found the customer complaints “raise[d] questions as to where the capital improvements and on-going operations programs testified to by the Company witness were implemented, and whether they were effective.” It concluded that “[w]ithout more specificity on the part of the Company,” it could not “credit the Company with the capital improvements and on-going operations that it purports to have made.” Moreover, it found that because Utility “failed to identify for the most part where the [claimed] expenditures were made, or how such expenditures contributed to improved service[,]” it could not determine whether those expenditures “were appropriate and whether [they] justified the imposition of a rate increase.” In addition, the PSC found Utility “failed to provide required information regarding affiliate transactions with ... Bio–Tech.” Utility appeals.

II.

The PSC's ratemaking decisions are entitled to deference, and will be affirmed if supported by substantial evidence. S.C. Energy Users Comm. v. S.C. Public Service Comm'n, 388 S.C. 486, 490, 697 S.E.2d 587, 589 (2010). “Substantial evidence is relevant evidence that, considering the record as a whole, a reasonable mind would accept to support an administrative agency's action.” Porter v. S.C. Public Service Comm'n, 333 S.C. 12, 20, 507 S.E.2d 328, 332 (1998). “We will not substitute our judgment for that of the PSC where there is room for a difference of intelligent opinion.” Kiawah Property Owners Group v. Public Service Comm'n of S.C., 357 S.C. 232, 237, 593 S.E.2d 148, 151 (2004). However, we “may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the [PSC's] findings, inferences, conclusions, or decisions are: ... (b) in excess of the statutory authority of the agency; (c) made upon unlawful procedure; [or] (d) affected by other error of law.” S.C.Code Ann. § 1–23–380(5) (2005 & Supp.2010).

III.

A fundamental question presented by both Utility and ORS is this: can the PSC determine that a regulated utility has failed to meet its burden to prove expenditures when ORS has not challenged the expenditures? The answer to this question requires us to examine the nature of the PSC.

Prior to 2004, the PSC was empowered to “supervise and regulate the rates and service of every public utility ... and to fix just and reasonable standards, classifications, regulations, practices and measurements of service to be furnished, imposed or observed and followed by every public utility in this State.” S.C.Code Ann. § 58–3–140 (1976). In addition, the PSC was empowered to “upon its own motion, institute an inquiry into any subject matter within its jurisdiction.” S.C.Code Ann. § 58–5–280 (1976). The PSC could request detailed reports from any public utility regarding its “business affairs or any matter pertaining thereto” and conduct “examination[s] of the books, papers, accounts and records” of utilities if “necessary to procure the information required.” S.C.Code Ann. § 58–3–190 (1976); S.C.Code Ann. § 58–3–210 (1976). When a utility sought to change its rates, the PSC could “make such investigations as in its opinion the public interest require[d].” S.C.Code Ann. § 58–5–250 (1976). The PSC could “employ ... technical, administrative or clerical staff or other aid” to assist in carrying out these duties. S.C.Code Ann. § 58–3–60 (1976). In short, the PSC performed both investigative and adjudicative functions.

In 2004, the General Assembly eliminated the PSC from the roles of investigator and auditor, and it reassigned these roles to a newly-created agency, ORS. S.C.Code Ann. § 58–3–60(D) (1976 & Supp.2010) (“The commission shall not inspect, audit, or examine public utilities. The inspection, auditing, and examination of public utilities is solely the responsibility of the Office of Regulatory Staff.”). ORS now has the power to review and investigate rate applications, and to make recommendations to the PSC. See S.C.Code Ann. § 58–4–50(A)(1) (Supp.2010). ORS also has the duty to “represent the...