Water and wastewater utilities-both municipal-owned and investor owned- are subject to regulatory agency dictates, policies, rule makings and adjudications. While in many states municipal -owned utility rates may not be set by a utility commission, all rates of all water and wastewater utilities indirectly become regulated by actions of USEPA and state environmental agencies. For example, when USEPA establishes MCL standards or treatment techniques, compliance by utilities imposes costs which must be recovered in rates charged the users of water and wastewater service.
In the case of water utilities, compliance costs often are driven by contamination to sources of water supply caused by polluters. However, utilities and their customers are charged with the financial burden of removing such contamination in order to use the source of supply. In other words, regulatory compliance imposes both operating and capital costs on utilities for both monitoring and treatment. Pursuing the causes of contamination, however, may not be simple. In one case, a group of water systems sued a manufacturer of a herbicide to recover costs to monitor and remove the herbicide from their source of supply. The court dismissed the case, finding that the utilities had not sought relief from the MCL for the herbicide and had not exhausted their administrative remedies. (Iberville Parish Water Works District No. 3 v. Novartis Crop Protection Inc., 48 ERC 1905 (U.S.Dist Ct., S.Dist Ala.1999)).
Are there limitations on regulatory authority over water and wastewater utilities? Frequently, when court challenges to an agency rule are initiated, courts defer to the agency itself, citing alleged agency "expertise" or the agency's "primary jurisdiction" over the subject matter. However, experience indicates that such claims of "expertise" can be misplaced.
Sometimes, however, challenge to regulation can be successful. For example, in one case a federal court of appeals held that regional water supply utility did not have to comply with USPEPA's filtration requirement because the rule would impose costs substantially in excess of benefits , given that less costly alternatives were available to provide safe water. Thus, the court, appropriately, became the regulator of the regulators in this case. (U.S. v. Massachusetts Water Resources Authority, 256 F.3d 36 (1st Cir, 2001)).
We live in a highly regulated culture. A possible risk is that regulatory agencies may have agendas to take actions which Congress or state legislatures have declined to approve or are unable to approve. Administrative agencies have only delegated power. However, at times their action may approach what Justice Cardozo once called the tendency of a principle to extend itself to the limit of its logic.
In a real way, the utilities themselves become regulators of the regulators by pursing administrative and judicial remedies for relief from rules which may impose unreasonable costs upon the utilities and their customers.