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

Heading: Determination of Rates within the Five Divisions: Wiscasset Water Quality Issue

Text: The record before the Commission reveals substantial problems with the quality of the public water available in Wiscasset. Although it meets all health standards prescribed by the Department of Human Services, the Wiscasset water has a bad taste, odor, and color, and the Commission found that it causes excessive deterioration of water-using appliances. Many customers have found it necessary or desirable to seek out other sources of drinking water or to install their own private filters. A separate water quality proceeding brought in 1982 by a group of dissatisfied Wiscasset customers is still pending before the Commission. Wiscasset's quality problem arises from the serious shortcomings of that division's source of supply in Ward Brook. A search for a new water supply failed to come up with an economically feasible alternative. [11] As a consequence, the efforts of the Company, as well as of the Commission, have now turned to enhanced treatment of the Ward Brook water. Finding a solution to Wiscasset's water quality problem, coming as it does from the fact there are available only limited sources of supply within a feasible distance of the village, is made still more difficult by the small number of customers (only about 330) available to bear the cost of either a new supply source or an additional treatment facility. By its order of May 11, 1984, the Commission refused to allow any increase in the water rates of the Wiscasset division, even though by its prior determinations the cost of service (and therefore revenue requirement) within that division exceeded the revenue produced by its existing rates. As a matter of rate design that excess cost of service in Wiscasset should, the Commission held, be put over onto the ratepayers of the other divisions. For that shift of a burden from Wiscasset customers to those in other towns, the Commission gave as its reasons that Wiscasset customers should not be charged more for water than that water was reasonably worth and that in any event the Company was not being penalized because the Commission was not requiring it to reduce its rates in Damariscotta-Newcastle, Freeport, Kezar Falls, and Oakland to reflect the lower cost of service there. In its final order of May 30, 1984, the Commission summarized its decision that is now here on review: As indicated in the May 11 Order, our decision not to increase rates in Wiscasset was intended to reflect value of service as an element of rate design. We further indicated in that Order that we would not prevent the Company from recovering the resulting revenue loss from other divisions. As the Commission's brief before us points out, the Commission did not find that the inferior water of Wiscasset represented a default by the Company in its service obligation necessitating a reduction in Maine Water's total revenue entitlement as a penalty to the Company and its shareholders. [12] On the contrary, the Commission found that the Company's efforts to improve water quality in Wiscasset had been reasonable. The Commission used the value of service test in justification for its transferring part of Wiscasset's cost of service to the customers of the other communities that happen to be served by the same utility corporation. The Commission's May 11 order specifically rejected any intention of penalizing Maine Water Company for the inferior quality of Wiscasset's public water, thus emphasizing its use of the value of service concept solely to justify authorizing the Company to charge water rates in each of its other four divisions to produce revenues in excess of that division's cost of service. That decision is erroneous as a matter of law. [13] It violates the fundamental objective in utility ratemaking . . . that customers who benefit from a service should bear the costs of providing that service. Alabama Gas Corp. v. Alabama Public Service Commission, 425 So.2d 430, 438 (Ala.1982). That decision also contravenes the corollary to that fundamental objective, which calls upon the ratemaking process to avoid cross-subsidization, 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). As pointed out in El Paso, those basic principles date back to Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819 (1898), which declared that one class of customers should be neither burdened by the losses from other service nor benefited from its profits. See also New England Telephone & Telegraph Co., 470 A.2d at 782 (it is important that ... as nearly as possible, the same ratepayers who are charged for a service will receive the benefit therefrom); Federal Power Commission v. United Gas Pipe Line Co., 386 U.S. 237, 243, 87 S.Ct. 1003, 1007, 18 L.Ed.2d 18 (1967) (commission must match taxes with customers of region bearing that tax); City of Fort Smith v. Arkansas Public Service Commission, 278 Ark. 521, 525, 648 S.W.2d 40, 41-42 (1983) (municipal fees and taxes imposed on a utility should be borne by customers from that municipality); Midwest Gas Users Association v. State Corporation Commission, 3 Kan. App.2d 376, 391, 595 P.2d 735, 746 (1979) (`The touchstone of public utility law is the rule that one class of consumers shall not be burdened with costs created by another class'). In contrast to the complex integrated utility systems usually involved in rate cases that apply those basic principles, the fact situation is here very simple. Each of Maine Water Company's five divisions is physically and operationally independent. Each division's costs are readily identifiable, and in fact have been identified by the Commission. Thus, this court is not faced, as was, for example, the court in El Paso, 667 F.2d at 468, with applying a standalone principle, by which each jurisdictional class of customers is treated as if it were a separate utility system. Each division of Maine Water Company is already that separate system, and the basic ratemaking principles are immediately and directly relevant and, we believe, controlling. Our conclusion is not changed by labelling the present question, as did the Commission, as one of rate design or structure. The result is exactly the same if one analyzes the question as one of designing such rates throughout Maine Water Company as will produce the Company's total revenue entitlement based on its total cost of service. Professor Bonbright states that, in addition to recovery of the utility's total revenue requirement, the primary objectives of a sound rate design are twofold: (1) the fair-cost-apportionment objective, which invokes the principle that the burden of meeting total revenue requirements must be distributed fairly among the beneficiaries of the service and (2) the optimum-use or consumer-rationing objective, under which the rates are designed to discourage the wasteful use of public utility services while promoting all use that is economically justified in view of the relationships between costs incurred and benefits received. J. Bonbright, Principles of Public Utility Rates 292 (1961) (emphasis in original). Since a utility's total revenue requirements are determined by its aggregate cost of service, logic suggests that in fairness the individual rate paid by one class or group of customers should be commensurate with its contribution to the utility's total costs. Cost-of-service pricing also comports with Bonbright's consumerrationing objective. Id. at 295. It is true that value of service has played some part in fixing rates in some types of regulated industries, such as railroads and telephone companies. See P. Garfield & W. Lovejoy, Public Utility Economics 142-45 (1964). But it has distinct limitations and has been the subject of criticism. See Lander, Public Utility Rate Design: The Cost of Service Method of Pricing, 19 St. Louis U.L.J. 36, 44-46 (1974). [14] In any event, the reasons for departing from the otherwise nearly universal cost-of-service pricing in some particular situations does not exist in a water utility rate case where the rate design task involves merely the apportionment of the water company's total revenue requirement among its five separate divisions. This is clearly so here since the total revenue requirement of Maine Water Company is simply the sum of the revenue requirements of its five divisions operating independently of one another in five separate communities. We can find no precedent elsewhere to support the use of value of service as an excuse for allocating part of the cost of service of one water system to the customers of other independent water systems owned and operated by the same corporation. The lack of such precedent is perhaps not surprising. It is inherently unfair to impose upon the ratepayers of those other water systems costs that they do not contribute to or benefit from. The shifting of part of Wiscasset's cost of service to the other four divisions was also invalid as an undue or unreasonable preference for Wiscasset and an undue or unreasonable prejudice to the other divisions. Both are prohibited and declared unlawful by 35 M.R.S.A. § 102 (Pamph. 1983-1984). [15] Section 102, it is true, prohibits only undue or unreasonable preference or prejudice. See Gifford v. Central Maine Power Co., 217 A.2d 200 (Me.1966). In Gifford, both the Public Utilities Commission and this court, in the energy circumstances of that day, found that cost benefits to all customers justified an electric utility's promotional allowances designed to increase residential use of electricity. In the case at bar, value of service [16] provides no comparable justification for the discrimination worked among Maine Water's divisions. The fact that Wiscasset suffers from a serious and costly problem in acquiring an adequate public water supply does not make any less undue or unreasonable a rate design whereby Wiscasset customers pay less than their cost of service, while as a Commission-authorized offset customers in the other Maine Water communities are required to pay more than their cost of service. Cf. Citizens Action Coalition of Indiana, Inc. v. Public Service Co. of Indiana, 450 N.E.2d 98 (Ind.App.1983) (reduced lifeline rates for specific income or demographic groups violate statutory prohibition of unreasonable discrimination); Mountain States Legal Foundation v. Public Utilities Commission, 197 Colo. 56, 590 P.2d 495 (1979) (discounted gas rates for low-income elderly and low-income disabled, with revenue loss recovered by higher rates on all other customers, prohibited by antidiscrimination statute). But see American Hoechest Corp. v. Department of Public Utilities, 379 Mass. 408, 399 N.E.2d 1 (1980) (approval of short-term experiment with lifeline pricing based in part on expected cost-related results). In conclusion, in the circumstances of this case, the Commission erred by using a value of service rationale to depart from fixing rates in each of the five divisions of Maine Water Company at the cost of rendering service in that division. The entry is: Orders of the Public Utilities Commission in its consolidated Dockets Nos. 83-105 (Oakland), 83-107 (Wiscasset), 83-108 (Freeport), 83-109 (Damariscotta-Newcastle), and 83-110 (Kezar Falls) reversed insofar as they relate to the Newport/Wilton issue and the Wiscasset water quality issue; otherwise affirmed. Remanded for further proceedings consistent with the opinion herein. All concurring.