ICA has no Problem with Increase 3 Times Higher than Present Rate

In re: Application of Wai'ola O Moloka'i, Inc. (ICA June 14, 2012)

Background. Waiola O Moloka'i, Inc. is a wholly owned subsidiary of Moloka'i Properties Limited and provides water services for residents, businesses, churches, and Maui County parks for most of western and central Moloka'i. The water comes from mountain sources on the island and is purchased from the Moloka'i Public Utilities--another subsidiary of MPL and the Department of Hawaiian Home Lands. In 1993, Waiola got a Certificate of Public Convenience and Necessity to provide water to residential, commercial, and agricultural customers on the island. In 2008, MLP announced that all business operations were coming to an end. The Consumer Advocate requested to the PUC that MPL keep the water on. The PUC granted the request and ordered Waiola to continue providing water to the island until it transferred its certificate or returned it back to the PUC.

In 2009, Waiola applied for a rate increase. The proposed increase was nearly 383% higher than the present rate. A public hearing was held and Maui County intervened. The Consumer Advocate announced a settlement on the rate increase. The Consumer Advocate and Waiola agreed to a rate increase of 328.69%. The County was not part of the agreement, and objected. The PUC approved of the rate increase. The County appealed.

Public Utilities: Age-old Regulation. "All rates, fares, charges, classifications, schedules, rules, and practices made, charged, or observed by any public utility or by two or more public utilities jointly shall be just and reasonable and shall be filed with the public utilities commission." HRS § 269-16(a). The just-and-reasonable standard was borrowed from the standard established long ago by the federal regulations. Maui County argued that when establishing a "just and reasonable" rate, the PUC "clearly has the duty to prevent its regulatees from charging rates based upon illegal, duplicative, or unnecessary labor costs." NAACP v. Fed. Power Com'n, 425 U.S. 662, 668 (1976).

Unlawful Conduct in Itself Bears Nothing on the Issue of a "Just and Reasonable" Rate Increase. Maui County pointed out that Waiola was not authorized to provide water to the Kualapu'u area on the island. This, according to the ICA, was not enough. According to the ICA, "in order for a charge to be considered unjust and unreasonable, the charge must be based on expenses unnecessarily incurred as a result of the illegal activity." The ICA held that Maui County failed to demonstrate a nexus between the unlawful activity and the rate increase. "Simply alleging Wai'ola does not have the proper permit to service the Kualapu'u is not enough to prove the rate was unjust and unreasonable."

Nexus Between Unlawful Conduct and the Rate Increase. It appears that the ICA does not dispute the proposition that unlawful activity cannot be considered in evaluating a rate increase pursuant to courts outside our jurisdiction. It even looks like the ICA does not dispute that providing water to Kualapu'u was unlawful. The ICA departs from Maui County because Maui County failed to link the unlawful activity to the rate increase. This may be true. Merely alleging that a corporation broke the law--viewed in isolation--would not seem to be enough in finding an unjust and unreasonable rate increase. But the ICA did not really flesh out what was or what was not on the record. It's unclear from the opinion if there is no evidentiary link between the unlawful service and the rate increase. It's also unclear what exactly Maui County argued. Perhaps it argued that unlawfully providing water to Kualapu'u could not be made part of its proposed calculation for a rate increase more than 300% the present rate. But that's just speculation. If that was the case, then the problem still remains: is there any evidence that the Kualapu'u service contributed to the rate increase? If so, then perhaps there is a problem. If not, then there's no nexus.

Impact, not Theory. The ICA next addressed Maui County's contention that relying on the settlement between the Consumer Advocate and Waiola was error. PUC decisions "are not presumptively valid . . . [but] an agency's discretionary determinations are entitled to deference, and an appellant has a high burden to surmount that deference." Paul's Electric Service, Inc. v. Befitel, 104 Hawai'i 412, 419, 91 P.3d 494, 501 (2004). Reliance on the settlement, according to the County, was improper because it imposed an unreasonable burden on the people of Molokai.

The ICA disagreed. "The methodology employed by the PUC in its rate-making determination lies within its expertise and discretion." In re Hawaii Elec. Light Co., 67 Haw. 425, 431, 690 P.2d 274, 279 (1984).

It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry is at an end. The fact that the method employed to reach that result may contain infirmities is not then important.

In re Hawaiian Tel. Co., 67 Haw. 370, 381, 689 P.2d 741, 749 (1984) (quoting Fed. Power Comm'n. v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944)).

Impact, not Theory? What exactly did the ICA hold? It seems that the ICA held that reliance on a settlement is perfectly fine so long as the rate is just and reasonable. That's because it's "not theory but impact of the rate order which counts." But then again, was that Maui County's argument? It's unclear. Did Maui County really challenge reliance on the settlement or did it challenge the justness and reasonableness of the agreement (and ultimately the rate change order)?

The Other Issues: the Impact. The ICA addressed the impact. Although the rate increase was quite high, it was ultimately just and reasonable. The other issues raised by the County--the failure to review Waiola's projections supporting the rate increase and the PUC's approval of Waiola's costs for sales and attorney's fees--did not arise to reversible error. The rate increase was affirmed.


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