THE COURAGE OF DECISIONS

Recently, I came across this Chinese proverb:

"A wise man makes his own decisions; an ignorant man follows public opinion."

Over the years of my practice, I have seen both municipal-owned and investor-owned water and wastewater utilities which have declined, or deferred, to make needed rate increase decisions.

Proper rate-making principles require that rates be set to recover the full costs of service to serve the different classes of users receiving service.

Obviously, most customers generally do not favor rate increases. Public opinion frequently is that any proposed increase in rates is to be opposed, no matter what the causes may be for the increase. In response, frequently utility management-whether a city council or corporate board of directors-seeks ways to appease that public opinion by declining or postponing a rate increase decision.

Increases in costs of service can be driven by various factors, including increases in operating cost, particularly for labor, chemicals, and energy; debt service and reserve requirements; increasing environmental regulatory expense, such as compliance with new standards and testing demands; and infrastructure replacement or upgrade projects.

Given such cost drivers, how do some utility managements avoid charging rates sufficient to recover increased costs of service? Sometimes, municipal utilities have used general municipal funds or reserve funds to subsidize increased operating costs or have deferred maintenance or infrastructure projects. At times, investor utilities have deferred filing with their regulatory commission for rate increases, absorbing the resulting lower earnings or also deferring maintenance or infrastructure projects.

Such decision inaction in response to perceived public opinion can adversely affect the financial health of the utility and its quality of service. Further, when management may finally decide to raise rates, an increase of huge proportions may be required-an unpopular step to say the least. I have seen rate increases of 100% proposed because management deferred making rational cost of service decisions in the ordinary course of operations.

A wise utility management will make its own rate decisions based on cost of service principles and at regular intervals, such as every two or three years. Such a rate protocol facilitates the utility's financial health and ability to provide good service and mitigates impacts on customers.

USEPA ANNOUNCES NEW DRINKING WATER REGULATORY "STRATEGY"

This month, USEPA announced what it characterizes as a new regulatory strategy for drinking water. It will focus on four points:

1. Address potential contaminants as groups of similar contaminants, rather than one at a time.

2. Foster development of new, efficient drinking water treatment technologies.

3. Use regulatory authority under multiple statutes to protect drinking water sources of supply. Examples of such statutes include the Federal Insecticide, Fungicide, Rodenticide Act and the Toxic Substance Control Act.

4. Partner with the states to share more complete data from monitoring at public water supplies.

Some contaminants in drinking water are naturally occurring, such as iron, manganese and radium found in ground water. Other contaminants may be pollutants discharged to ground water or surface water by human activities, such as pesticides and fertilizer nitrates. Disinfection by-products are the result of chlorination at a treatment facility.

The federal Safe Drinking Water Act, administered by USEPA, places on water utilities the burden to remove contaminants from drinking water sources of supply even if they are caused by polluters' discharge to ground water or surface water. For example, utilities must remove nitrates in river water supplies although caused by fertilizer runoff from farm fields.

The necessity to treat water to remove contaminants caused by others, of course, imposes additional costs on water utilities--costs which ultimately must be paid by customers in higher rates. Most of USEPA's new "strategy" would seem to be things that it should have been doing all along. However, perhaps the most encouraging point is its proposal to use its authority under other statutes to possibly control contamination caused by others.

DIFFERENT CASE, DIFFERENT RESULT ?

While some have said that the Law is a seamless web, at times it may look like a seemless web. In my post for January 17, 2010, I discussed a recent opinion of the Illinois Appellate Court for the Second District in The Village of Deerfield v. Commonwealth Edison Company. That case involved claims for recovery of damages allegedly resulting from power outages. The Court applied the doctrine of primary jurisdiction to refer the issues of quality of service to the Illinois Commerce Commission, while retaining jurisdiction over the damage claims which were stayed pending the Commission adjudication of the service issues.

Now, the Illinois Appellate Court for the First District has declined to follow the Deerfield decision in a similar case and has reached an apparent different conclusion. Sheffler v. Commonwealth Edison Company, No. 1-09-0849 (1st Dist. February 26, 2010).

Residents sued for damages allegedly resulting from power outages during storms. They alleged, among other things, that Edison failed to have infrastructure to prevent controllable outages and failed to respond on a timely manner to outages. They recited alleged damages such as spoiled food and water damage to walls, furniture, appliances, etc.

The Court noted that the Illinois Commerce Commission has general supervision over regulated public utilities and exclusive jurisdiction over claims that rates are excessive or unjustly discriminatory. The Court then found that the complaint seeks an adjudication of Edison's level of service and response to outages, issues properly within Commission, not Court, jurisdiction. The Court said that the complaint pertains to rates because it concerns claims that Edison allegedly provided inadequate or unreliable service, that the level of service and restoration efforts were substandard. The Court noted that rates were involved because the Commission could find that the rates were excessive for the service provided or may need to be increased to provide levels of service sought by the complainants.

The Court expressly declined to follow the Second District Appellate Court in the Deerfield case for the reason that it found, in Sheffler, that the complaint implicates rates, which are within the exclusive jurisdiction of the Commission. Thus, the Court upheld dismissal of the court case.

Generally, the decisions of one District Appellate Court are not binding on an Appellate Court in another District. At some point in time, the Illinois Supreme Court may have the opportunity to resolve differing Appellate Court decisions.

However, one may question whether the different conclusions reached in the Deerfield and Sheffler cases actually are a difference. In either case, the matter is to be referred to the Commerce Commission for adjudication of service issues. If the Commission were to find that service is satisfactory or conclude the service claims were without merit, claims for damages likely would be moot in either case, assuming the Commission decision would be upheld on any appeal.

Public Utilities Law Lite

The practice of public utilities law is serious business, involving elements of accounting and engineering as well as some unique legal principles. Some observers may even find water law to be rather "dry." However, to the contrary, i would like to share some lighter moments from my experience.

My first trial experience occurred as a young associate brief case carrier for my senior partner in a case involving zoning for a large water storage tank. During the hearings, he kept interrupting the judge. Finally, the judge said: "one more interruption, and I will hold you in contempt and send you to jail." My partner turned to me and exclaimed: "take over."

The local manager of a wastewater utility client was very proud of his treatment plant and the sludge it produced. One day, he came to my office with a potato that had been grown using the dried sludge as fertilizer. It was huge and weighed two pounds on the mailroom scale. It fed a family of four.

On another occasion, the manager guided me on a tour of his treatment plant. He showed me a forest of tomato plants growing in the sludge drying beds. He explained to a wide-eyed greenhorn that tomato seeds are a complete pass-through.

I was involved in a hotly contested rate hearing for a water utility. During the testimony of my client's witnesses, the hearing officer was writing feverishly on his legal pad. I felt warm and fuzzy inside, thinking we were getting our points across. During a break, I passed by the hearing officer's desk, and could not help noticing his legal pad. All I saw was a page of doodles.

I was arguing an appeal before the Appellate Court in a case involving whether the treated effluent from a wastewater treatment facility was polluting a small creek. It is common for justices to interrupt counsel with probing questions, which sometimes derail the attorney's arguments. On this occasion, I was rolling along when suddenly one of the justices interrupted me. "How did the creek get its name?", he asked. We speculated on that for several minutes before I could get back to my issues. (We won the appeal, with the name still unsettled).

In rate cases, I always like to spend time with my witnesses preparing for the hearings. A group of witnesses from outside the state flew into Illinois for this purpose. As I patiently waited for them in a hotel conference room, I learned that they instead immediately had gone to their rooms to watch the day's episode of "General Hospital."

Early in my career, I learned a very important legal principle: never visit a wastewater treatment facility in a wool suit. I always like to see a facility that is the subject of a proceeding, as it aids in understanding the facts and issues. In my first case involving wastewater, I made such a visit. Unfortunately, all my suits were made of wool. The manager of the facility opined that a well run plant smells "earthy." I was not prepared to be that "earthy" and retired my wool suit.

TO LITIGATE OR TO SETTLE, THAT IS THE QUESTION

In my prior post, I discussed a challenge facing a utility's lawyer in litigation- whether to cross-examine an adverse witness. Along similar lines, water and wastewater utilities may confront a question whether to defend claims filed against them by environmental agencies or to challenge the application of rules deemed unreasonable.

When a utility is sued by an agency for alleged non-compliance with a rule or standard, frequently there is a temptation to settle the litigation. Settlement is sought not necessarily because of admission. Rather, settlement likely may be rationalized based on the costs of litigation. However, in disregarding possible defenses or alternative remedies, a utility may actually wind up incurring greater costs for penalties and for installation of new facilities which are not necessarily needed or cost effective.

For example, some courts have held that rules and standards are arbitrary and unreasonable where not sufficiently specific or where enacted without regard to scientific data. In one case, the Illinois Supreme Court held that a state rule revision regarding wastewater water quality and effluent standards for bacteria was arbitrary and capricious. The Court stated that the state agency's action had no appreciable scientific support, and that the agency had ignored scientific testimony and had made only a limited examination of any health risks of its rules revision. (People v. Pollution Control Board, 103 Ill.2d 441 (1984)).

In another case, a wastewater utility was accused of violating operation and maintenance standards because a portion of the treatment facility went out of service due to ice breakage. The court reversed a finding of violation by the state agency. It stated that the evidence was insufficient to support a finding of violation, and that there was no evidence that any mechanical breakdown had ant adverse environmental impact. (Citizens Utilities Company of Illinois v. Pollution Control Board, 127 Ill. App.3d 504 (3rd Dist. 1984)).

Courts also have held that environmental regulations must be premised upon economic accountability based upon cost/ benefit analysis. (see Citizens Utilities Company of Illinois v. Pollution Control Board, 134 Ill. App. 3d 111 (3rd Dist. 1985); Citizens Utilities Company of Illinois v. Pollution Control Board, 216 Ill. App. 3d 629 (3rd Dist. 1991)).

Apart from defending claims or challenging regulations in court litigation, utilities may have options before federal and state administrative agencies. Under various provisions of the federal Safe Drinking water Act and the federal Clean Water Act, and comparable state statutes, utilities may seek variances, exemptions, general rules revisions, permit revisions, site specific
standards and adjusted standards. At least one court has acknowledged the importance of such options. Where improvements to a wastewater treatment facility would be a needless expenditure if a pending change in the standards were allowed, then compliance with the then current more stringent standard should be stayed. (See Citizens Utilities Company of Illinois v. Pollution Control Board, 152 Ill. App. 3d (3rd Dist. 1987)).

Customers of water and wastewater utilities will bear, in rates, the reasonable costs of environmental compliance. These costs are part of the costs of service. As more and more regulations and standards are established, more and costs will be incurred; and as more and more compliance litigation is initiated, more and more costs will be incurred. Utilities will have the responsibility to their customers and shareholders to balance unquestioned compliance with rational challenge and affordability. Intelligent decisions must be based upon a complete understanding of each situation: the applicable regulations, the reasonableness of the regulations, the underlying facts, the available alternatives and remedies, and the costs and benefits of any course of action.