Sufficient evidence supported the State Corporation Commission’s determination that a requested pilot infrastructure surcharge was just and reasonable.
In 2015, the Virginia-American Water Company applied to the State Corporation Commission for a general increase in water rates, claiming increased capital investment costs, decreased water sales, and a diminished rate of return on common equity. The proposed increase would be divided among five operating districts. In its application, the Company also sought approval and implementation of a Water and Wastewater Infrastructure Surcharge to allow the Company to better plan for and timely recover costs of necessary investment in replacing aging infrastructure and other investments in its system that do not generate additional revenue.
At a public hearing, the Cities of Alexandria and Hopewell opposed the Surcharge, presenting numerous witnesses testifying to the effect that the Surcharge was unnecessary because the Company “has the ability to successfully invest in infrastructure replacement while … achieving appropriate returns” by filing a base-rate case.
The hearing examiner found that a three-year pilot Surcharge should be approved for the Company’s Alexandria District subject to certain safeguards and limitations. The Commission agreed and authorized the Company to apply to institute the Surcharge. The Commission emphasized that an Earnings Test should accompany the annual Commission review and found that “refunds should be made to ratepayers, with interest, to the extent [Surcharge] collections result in annual earnings above the rate of return on common equity of 9.25 percent approved.”
The Cities appealed on grounds that the Commission has no statutory authority to approve the Surcharge and, in the alternative, that the evidence was factually insufficient to justify the approval of the Surcharge.
Authority for approval
The Commission’s approval of the Surcharge does not offend any constitutional or statutory provision of Virginia law.
Code § 12.1-12 and § 56-235 are broadly written to authorize the Commission to set just and reasonable rates for public utilities, including water and wastewater companies, without limitation as to the type of rate mechanism set. Code § 56-235.2(A) requires only that when the Commission sets any rate, it must be satisfied that the utility has demonstrated that aggregate revenues earned will not exceed aggregate costs, plus a fair return.
If the Commission approved a rate while wholly ignoring the decision-making factors required by § 56-235.2, the court would declare the approval to be ultra vires. But here, the Commission did not ignore the governing statutory factors. The Company filed this case as a traditional rate case that included each of its five service districts. The Commission ultimately approved an increase in the Company’s base rate to recover additional annual revenues of $5.18 million and a temporary surcharge for the accelerated infrastructure replacement costs applicable to only one of the Company’s five districts.
The Commission’s review was not disconnected from its overall discretionary review of the Company’s request for an increase in its base rate. It analyzed all of the facts presented in the aggregate and in light of the statutory factors. This is particularly evident in the extensive qualifications that the Commission placed on the implementation of the Surcharge.
Perhaps the most significant is the Earnings Test, which takes into account all of the Alexandria District’s revenues from base rates and from the Surcharge to determine if the Company earned more than its approved rate of return for that district. Other qualifications – the 7.5 percent cap and the three-year period for the pilot Surcharge, the mechanisms for customer refunds, and the requirement of Commission approval for annual updates to the rate – further reinforce the Commission’s attention to the required statutory factors. The court finds nothing legally unprecedented about the Commission’s approval of the Surcharge.
The Cities compare the Commission’s statutory authority in this case to its authority to approve rate-adjustment clauses in its regulation of natural gas companies under the Steps to Advance Virginia’s Energy Plan Act (SAVE Act). This interpretive inference does not apply here for several reasons.
The Commission’s authority to approve rate-adjustment clauses comes from several broadly-worded statutes that delegate discretionary power to the Commission. Such a general statutory grant of authority is limited only by “clearly expressed” statutory language. Statutory grants of power in analogous contexts raise only a silent implication of such limitation. And in other regulatory contexts, the legislature has expressly limited the Commission’s ratemaking discretion by enacting specific requirements for approving rate-adjustment clauses. Each imposes various limitations, presupposing an underlying general regulatory power.
Sufficient evidence supports the Commission’s finding that the proposed Surcharge is “just and reasonable” under Code § 56-235.2.
Experts in support of and in opposition to the Surcharge testified to the deterioration of the current infrastructure and the need to replace it. The fact that the parties’ experts disagreed does not render the Commission’s findings contrary to the evidence. The Commission was entitled to afford more weight to testimony that current rates account only for investment reasonably predicted to occur before and during a utility’s rate year; that there is a “revenue-recognition lag” under the traditional ratemaking model; that filing more base-rate cases would result in larger and more frequent base rate increases if they were successful; and that a Surcharge would allow the company to better plan for, more consistently fund, and more gradually incorporate into customers’ bills, the costs associated with these types of investment.
Thus, the Surcharge meets the “just and reasonable” standard in § 56-235.2. This court cannot sit as a board of revision to substitute its judgment for that of matters within the province of the Commission.
City of Alexandria v. State Corp. Comm’n, Record No. 171428, Aug. 30, 2018. SCV (Kelsey), from SCC. VLW No. 018-6-064, 23 pp.