Opinion ID: 2347721
Heading Depth: 1
Heading Rank: 9

Heading: Management and Service Fee

Text: General Waterworks Management and Service Company (Service Company), a wholly owned subsidiary of General, performs certain advisory and consultative functions for all of General's subsidiaries including the Companies. The Companies allege that the principal objective of such functions, which include cost surveillance and budget reviews, is to ensure that General's subsidiaries are operated in the most efficient manner possible. [32] The Service Company is a nonprofit corporation covering its costs through an annual management and service fee which the subsidiaries by contract agree to pay. The Companies sought to include the full amount of the fee in their operating and maintenance expenses, which expenses would be passed on to the ratepayer. The Commission found the expense unreasonable and set the fee at approximately two thirds of the Companies' request. The Companies allege that this figure is confiscatory. We disagree. The Commission's decision was forged from multiple findings of fact only one of which the Companies dispute. Before considering this controverted finding, we pause briefly to review the other uncontested subsidiary conclusions of the Commission, all of which are based upon undisputed testimony. These findings directly support the Commission's ultimate conclusion that the fee was unreasonable. The Commission found that the management and service fee is not charged on the basis of work performed or time spent on behalf of the Companies. Rather, the fee is primarily based upon some pro rata allocation among all of the subsidiaries, the precise formula being determined by the Service Company. Moreover, approximately one half of the income collected by the Service Company is paid over to I.U. as a service fee expense again using a method not based on time sheets or work product. Since the expenses that flow from the Companies to the Service Company and from the Service Company to I.U. are not based upon the accurate allocation of actual time or energy expended by management on the affairs of any particular corporation, the Commission found a great potential for abuse. It also found that the contracts entered into between the Companies and the Service Company were not arms-length transactions but were agreements which the Companies were required to accept. Because the Companies were captive subsidiaries, the Commission concluded that the Service Company had no incentive to charge competitive fees. The Commission also found that some of the expenses of the Service Company could not benefit the Companies, which expenses included advertising campaigns directed at General's electric utilities. In addition, there were certain charitable contributions and expenses which the Companies' witness could not explain. The only finding that the Companies dispute was the Commission decision to adopt Dr. Shipman's methodology for determining whether the expenses charged were unreasonable. Dr. Shipman compared the management and service expenses among the various water utilities in Maine on a per-customer basis. He found that seven investor-owned independent water companies, i. e., companies not operated in a holding-company structure, averaged $6.75/customer; eleven publicly owned water districts averaged $6.96/customer; eight Maine subsidiaries of Consumers Water Company (Consumers), a holding company similar to General, averaged $11.28/customer; and the nineteen Maine subsidiaries of General averaged $18.01/customer. Based upon these results, he recommended a fee of $10.00/customer believing that a reasonable rate would be one higher than the independents' and water districts' but lower than Consumers'. The Commission, while approving of his approach, set the fee at $11.50/customer. The Companies allege that Dr. Shipman's methodology was erroneous because such costs are not incurred by the Service Company on a per-customer basis. However, we know of no legal requirement that the Commission accept the Companies' method of bookkeeping in setting an appropriate service fee. Cf. Alabama-Tennessee Natural Gas Co. v. Federal Power Commission, 359 F.2d 318, 336 (5th Cir.), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966). Indeed, we fail to see how the Commission could fulfill its statutory duty of setting just and reasonable rates, 35 M.R.S.A. § 51, if it did not independently evaluate the costs upon which the rates are to be set. Other commissions have adopted a per-customer approach in evaluating the reasonableness of management and service fees. [33] Our Commission, in its reasoned judgment, also adopted a per-customer approach comparing General to other water utilities in Maine. We entirely approve of this approach as a permissible method for ensuring that General's customers were charged no more than the Service Company's services were reasonably worth. The Companies allege that even if this method is a permissible one, the Commission erred because its decision was based upon a comparison with the service fees of the independents and water districts both of whose fees are entirely non-comparable with that of the Service Company. Their position is that the Service Company's expense should be compared to that of Consumers, the other holding-company system in Maine, excluding the service expense of one of Consumers' subsidiaries, Camden & Rockland Water Co. It appears that Dr. Shipman in recommending a $10.00/customer fee was in large measure basing his conclusion on what the average Maine water consumer would be paying as a service expense. The Commission, on the other hand, in raising the fee to $11.50/customer set a figure comparable to, and in fact higher than, that of Consumers just as the Companies desired. That the Commission did not exclude one of Consumers' subsidiaries was eminently reasonable since this artificial manipulation serves no purpose other than to raise Consumers' fee to that of the Companies' request. In conclusion, we affirm both the Commission's finding that the service fee was unreasonable and the setting of an $11.50 per-customer expense.