Opinion ID: 2355085
Heading Depth: 2
Heading Rank: 1

Heading: Sale of the Newport and Wilton divisions

Text: Maine Water Company is the corporate product of the consolidation in the early 1970s of seven separate water companies, serving seven separate Maine communities: Newport, Wilton, Wiscasset, Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland. Since its creation by consolidation, Maine Water Company has operated in seven (and more recently six and then five) separate divisions corresponding to the previously separate companies. Each division constitutes a complete and geographically independent water system, serving its own distinct group of customers. The divisions do not have any common source of water supply or any other physical interconnection of any sort. Even though the Company is incorporated as a single legal entity, for all significant ratemaking purposes each division and its ratepayers are treated separate and apart from the other divisions and their ratepayers. The customers in each division pay rates determined by that division's particular cost of service. When Maine Water initiated the instant rate case, it filed with the Commission a separate rate request for each division and the Commission gave each divisional proceeding its own separate docket number. The percentage increase in rates sought by the Company varied considerably from division to division. For each division the Commission undertook to establish  and did establish  separate revenue, rate base, and expense data. Although the Commission determined the Company's overall revenue requirement, that figure was arrived at merely by aggregating the cost of service previously determined individually for the five separate divisions. We understand that this practice of individually determining the rates in each division has been consistently followed in the past. Historically, as the Commission found, [r]atepayers are . . . charged according to tariffs which reflect the costs attributable to each division. In 1980 the Company sold its Newport division, and in 1983 its Wilton division, to water districts created to take over and continue water service to the customers in the operating territories of those two divisions. Those sales resulted in completely transferring both the assets and the customers of those divisions to the newly formed Newport and Wilton Water Districts. The Company realized an aggregate pre-tax gain from the two sales of $1,012,473, the amount by which the sales proceeds exceeded the net book cost of the transferred assets. Notwithstanding the divisional organization of Maine Water Company, the Commission in the case at bar treated the gain on the sale of the Newport and Wilton divisions as available to offset in part the future water rates that otherwise would be charged customers in the remaining five divisions. Although it did not order a rate reduction for the remaining customers, the Commission did use the Newport/Wilton gain as the reason, and the only reason, for denying rate increases that the Commission's own analysis of cost of service in the remaining divisions demonstrated were otherwise necessary. In effect, the Commission flowed through, see New England Telephone & Telegraph Co. v. Public Utilities Commission, 470 A.2d 772, 776 n. 6 (Me.1984), a portion of the Newport/Wilton gain to the benefit of the ratepayers in the Company's five other divisions. [2] In explaining its flow-through decision in its opinion of January 27, 1984, the Commission downplayed the significance of the divisional aspect of the Company. Of first importance to the Commission was its view that since Maine Water Company is a single company, the ratepayers of all divisions should be responsible for its financial well-being. The Commission made the Company's aggregate revenue requirement the focus of these rate proceedings, and the Commission characterized the allocation of rate base and expenses among the divisions as one of merely rate design. The Commission found it inescapable that [a]s a matter of law ... the risk of loss and the financial burden of any one division are borne by the ratepayers of all divisions. The Commission set up a hypothetical construct by which if the Newport and Wilton sales had produced a loss to the Company, the ratepayers still served by the Company in different divisions would be required to make up that loss through increased rates in the future. Therefore, the Commission reasoned, those same ratepayers should receive the benefit of any gain on the sale of the separate divisions. We conclude that in the special circumstances here presented, that ruling of the Commission cannot survive appellate review. Initially we note that the properties that Maine Water Company has devoted to a public utility service are privately owned by the Company, not by its customers. See Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23, 31-32, 46 S.Ct. 363, 366, 70 L.Ed. 808 (1926). Customers pay for service, not for the property used to render it. Id. at 32, 46 S.Ct. at 366. In New York Telephone, the United States Supreme Court went on to say: By paying bills for service [customers] do not acquire any interest, legal or equitable, in the property used for their convenience or in the funds of the company. Id. From that comprehensive and unqualified statement, however, subsequent judicial authority, including our own, has carved out a well-defined exception. See Casco Bay Lines v. Public Utilities Commission, 390 A.2d 483 (Me.1978). The courts have come to recognize that in certain circumstances customers by paying bills for service do indeed acquire in the property of the privately-owned utility an equitable interest that is entitled to consideration in ratemaking. In the instant case we are called upon to examine the limits of the exception to the New York Telephone principle. In particular, we must address the question of which customers acquire for ratemaking purposes an equitable interest in what property of the utility company. Courts have held that public utility customers have an equitable claim to draw benefit in ratemaking from the gain realized in the utility company's sale of property as to which those customers have reimbursed the company for its investment or have borne the risk of a sale at a loss. Thus, the continuing customers of a utility that sells at a gain depreciable property that had previously served those same customers have a right to have that gain applied to reduce their future rates. In Casco Bay Lines v. Public Utilities Commission , a regulated ferry company sold at a gain three of its vessels that had previously been devoted to serving its transportation customers in its single franchise area centered on Portland. The Law Court affirmed the Commission's application of that gain to reduce depreciation expense for purposes of fixing future rates to be paid by the same body of continuing customers. See 390 A.2d at 489-90. We found that the gain realized on selling the three ferry boats reflected excessive depreciation payments, which it was entirely reasonable to redistribute ... to the ratepayers by means of future reductions in Casco's depreciation expense. Id. at 489. We also noted that when a utility sells [depreciable] [3] property at a loss it is generally allowed to amortize such loss as an expense to be recovered from its ratepayers. Id. at 490 (emphasis in original). We concluded: It is only equitable that the ratepayers who bear the cost of depreciation and maintenance on the property and the burden of a sale at a loss, should be entitled to benefits from the sale of such property at a gain. Id. Accord In re Revision of Rates Filed by Plainfield-Union Water Co., 57 N.J.Super. 158, 176-77, 154 A.2d 201, 211 (1959). In contrast to Casco Bay Lines stands the line of court decisions involving the sale by a utility company of property as to which the continuing body of customers has not reimbursed the company for the acquisition cost or borne any risk of sale at a loss. On those facts, no reason exists for departing from the New York Telephone principle, and with near unanimity the courts find that the continuing customers have no equitable claim upon the gain from sale of such assets. The typical case involves the sale of land, that is, nondepreciable property, as to which the customers through their rates have not reimbursed the company for its investment therein. See Pennsylvania Gas & Water Co. v. Public Utility Commission, 72 Pa. Cmwlth. 331, 456 A.2d 1126, 1137-38 (1983) (the shareholders contributed the capital from which the land was purchased and bore the risk of any decline in the value of the land); Washington Public Interest Organization v. Public Service Commission, 446 A.2d 28 (D.C.App.1982); Boise Water Corp. v. Public Utilities Commission, 99 Idaho 158, 161-62, 578 P.2d 1089, 1092-93 (1978); City of Lexington v. Lexington Water Co., 458 S.W.2d 778 (Ky. App.1970). The Commission's heavy  and almost exclusive  reliance upon the out-of-the-ordinary case of Democratic Central Committee v. Washington Metropolitan Area Transit Commission, 485 F.2d 786 (D.C.Cir.1973), is misplaced in the context of the case at bar. As the Pennsylvania appellate court, in rejecting Democratic Central Committee as precedent for awarding gain from sale of land to ratepayers, has said of the distinguishing features of that case: [T]he transit utility acquired a transit system pursuant to an act of Congress at a cost $10 million less than the original cost. In addition, rate-payers paid for the acquisition of capital assets, a function usually performed by shareholders. Absent any regulatory accounting rule, at the time of the sale, the D.C. Court was forced to rely upon equity to prevent the shareholders from realizing an unwarranted windfall. Philadelphia Suburban Water Co. v. Public Utility Commission, 58 Pa.Cmwlth. 272, 427 A.2d 1244, 1247 (1981); see also Boise Water Corp., 99 Idaho at 162, 578 P.2d at 1093 ( Democratic Central Committee is a unique case). When we apply the principles of the foregoing court cases to the facts of the present appeal, we conclude that the ratepayers of Wiscasset, Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland have no rationally supportable claim to any flow-through of the benefit of the gain the Company realized in selling its Newport and Wilton properties. On the precedent of Casco Bay Lines, the ratepayers in the communities of Newport and Wilton might have some prima facie claim to the gain to the extent the properties in each of those divisions were depreciable. At least as to those depreciable assets the Newport/Wilton ratepayers bore the cost of depreciation and maintenance, as well as the risk that individual assets might be sold to a third party at a loss. Those ratepayers, however, through their newly organized public water districts bargained, presumably at arms length, to pay the appreciated prices for the assets. There undoubtedly existed a number of practical reasons why the water districts were willing to pay more than net book cost for the Newport and Wilton divisions of Maine Water Company. Cf. Kittery Electric Light Co. v. Assessors of the Town of Kittery, 219 A.2d 728, 735-37 (Me.1966) (tax valuation not limited to net book cost). Even if there were some way of flowing through the Company's gain on the Newport/Wilton sales to the Newport/Wilton ratepayers  as there is not  neither they nor any persons representing them are suggesting that they have preserved any right to benefit from that gain in a transaction in which they were in effect on the other side from the Company. The ratepayers in the five remaining divisions do not stand vis-a-vis the Newport/Wilton gain in any position at all comparable to that of Casco Bay Lines' ratepayers vis-a-vis that company's gain on the sale of three ferry boats. Maine Water's present customers have never paid any rates that have reflected any depreciation expense on the water systems in Newport and Wilton. Over the years the rates of each of those transferred divisions have been separately set to cover its individual cost of service, including the particular depreciation expense associated with its particular assets. Furthermore, Maine Water's present remaining ratepayers never have borne any risk of loss on the Newport and Wilton properties. We can give little or no weight to the Commission's hypothetical, bootstrapping declaration that it would have imposed a Newport/Wilton loss upon the ratepayers of the other divisions. To back up that declaration, the Commission sets forth no reasoning, and cites no authority, independent of the reasoning and authority it uses to support its decision to flow through the gain. Such a cross-subsidization runs counter to the separate treatment historically given the Maine Water divisions for ratemaking purposes and is antagonistic to a basic goal of ratemaking to protect one class of customers from paying the costs attributable to another class. El Paso Electric Co. v. Federal Energy Regulatory Commission, 667 F.2d 462, 468 (5th Cir.1982) (stand-alone principle used in fixing rates of customers under different state and federal jurisdictions). [4] We, however, need not decide the abstract question whether the Company could recoup a loss incurred on the Newport and Wilton assets through higher rates charged customers in the other five divisions. That eventuality at all times was and still is too remote, for both practical and legal reasons, to provide any justification for the Commission's giving the benefit of the Newport/Wilton gain to those other customers. In sum, as to any of the Newport and Wilton properties, whether depreciable or nondepreciable, the reasons that led this court to approve flow-through to the customers of Casco Bay Lines of gain realized from sale of three boats serving those same customers are totally absent. Our conclusion is supported by the only case authority of which we are aware that is factually on all fours with the case at bar. A decision last year of the Missouri Public Service Commission [5] involved exactly the same factual pattern as we have here: sale by a gas utility of one of its geographically distinct and unintegrated operating divisions, with the concomitant transfer of customers, to another operating utility. See Re Associated Natural Gas Co., 55 P.U.R. 4th 702 (Mo.P.S.C.1983). The Missouri commission rejected a strong contention on behalf of the ratepayers of the remaining divisions of Associated Natural Gas Company that the gain from that company's sale of its entire Kennett division to the City of Kennett be applied to reduce their future rates. The Associated Natural Gas decision followed the precedent of Matter of Missouri Cities Water Co., Cases Nos. WR-83-14 and SR-83-15 (Mo.P.S.C. May 2, 1983), in which the Missouri commission considered at length and rejected the same arguments pressed now before this court. It is true that the Missouri Uniform System of Accounts provided for below the line treatment of gain or loss [w]hen utility plant constituting an operating unit or system is sold, conveyed, or transferred to another [utility] by sale, merger, consolidation, or otherwise. Id. at 18. The Missouri commission, however, noted that it was not bound by that accounting rule in deciding the pending issue, and based its decision upon a full canvass of the relevant legal arguments and policy considerations, as well as upon that rule. [6] See id. at 24-25. Accordingly, the Missouri cases provide worthy precedent for the case at bar. Our Maine Commission fell into error by refusing to recognize the critical difference between 1) the sale of isolated items of property in the course of a continuing utility operation and 2) the sale of a complete, independent utility division along with a transfer of that division's customers. The first is a normal and in many cases routine feature of the operation of a utility business; the second constitutes a partial liquidation of the utility corporation. The appellees concede, as they must, that upon a complete liquidation of Maine Water Company its shareholders would suffer or acquire whatever loss or gain resulted from the liquidation. The sale of the Newport and Wilton divisions constitutes a pro tanto liquidation of Maine Water Company's assets and business. On the basis of both reason and applicable legal authority, we reverse the Commission's ruling that the gain realized by Maine Water Company in selling its Newport and Wilton divisions must be applied to reduce the rates the Company may charge in the future in Wiscasset, Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland.