The SCC’s Broad Powers, Appellate Standards of Review,
and the Regulation of Rates for Water and
Wastewater Systems Infrastructure
On August 30, 2018, the Virginia Supreme Court issued an instructive and unanimous decision in City of Alexandria v. State Corp. Comm'n, Record No. 171428, 2018 Va. LEXIS 103 (Aug. 30, 2018). Justice D. Arthur Kelsey wrote the Court’s opinion. The case presented an appeal by the Cities of Alexandria (“Alexandria”) and Hopewell (“Hopewell”) from a State Corporation Commission (“SCC”) decision in favor of the Virginia-American Water Company (“VAWC”).
The underlying SCC decision permitted VAWC to impose a customer rate surcharge to fund the cost of replacing aging water and wastewater pipes infrastructure. The central issues focused on whether the SCC possessed “statutory authority to approve the new surcharge,” and if so, whether “the evidence was insufficient to justify the SCC’s approval.”
The factual scenario was relatively straightforward. In 2014, VAWC and other water utilities petitioned the SCC to promulgate rules by which they could apply for “a water and wastewater infrastructure surcharge,” dubbed a “WWISC.” The SCC did so, ultimately issuing a “Rulemaking Order.” Alexandria participated in the rulemaking process.
The Rulemaking Order anticipated a case-by-case approach to whether the SCC would grant a water utility’s future application for a WWISC. In 2015, VAWC applied for a general water rate increase in its five service districts. Its application also sought a WWISC. The entirety of the application pertained to funding the costs of replacing aging water and wastewater pipes infrastructure.
An SCC hearing examiner conducted proceedings on the VAWC application. Alexandria and Hopewell (collectively, “the Cities”) contested the WWISC application. The hearing examiner received extensive evidence, including expert testimony on the merits of the application. The Cities contended that a general rate increase would fully satisfy VAWC’s fiscal needs and contested the SCC’s statutory authority to consider and approve a WWISC.
The hearing examiner recommended that the SCC approve VAWC’s application. As to the WWISC, the hearing examiner recommended a three-year pilot program with several “safeguards and limitations” designed to safeguard VAWC’s customers’ interests. Among other safeguards, the hearing examiner proposed an “Earnings Test” that would trigger partial customer refunds of amounts collected under the surcharge if the collected amounts resulted in “annual earnings above the mid-point of [VAWC’s] authorized range” of rate of return on its capital.
The SCC approved the hearing examiner’s recommendations with slight modifications, thus approving the WWISC. The SCC’s approved “safeguards and limitations” included the Earnings Test methodology to trigger potential partial customer refunds.
In considering the Cities’ challenge to the SCC’s statutory authority, the Court discussed at length the applicable appellate review standards. Justice Kelsey first noted that the review standard will vary “depending on the nature of the decision under review.” In general, the SCC’s “decision is entitled to the respect due judgments of a tribunal informed by experience.”
Questions of law receive de novo review. The Court thus “will not hesitate to reverse” if an SCC decision “is based on a mistake of law.” As to SCC factual findings, the Court will reverse only if “its determination is contrary to the evidence or without evidence to support it.”
Going further, the Court noted that it is “not at liberty” to substitute its own judgment for that of the SCC “in matters within the province of the Commission…That is particularly true with regard to the SCC’s rulemaking authority because in that context, the SCC ‘is exercising a legislative function delegated to it by the General Assembly.’” Significantly, the Court rounded out its review standard discussion by stating, “We thus ‘presume that where the General Assembly has not placed an express limitation in a statutory grant of authority, it intended for the Commission, as an expert body, to exercise sound discretion.’”
Consistent with this last statement, the Court noted that despite the Cities’ “vehement” arguments, both the Virginia Constitution “and the enabling statutes written by the General Assembly are written in purposefully broad terms.” Thus, the Court concluded, while “arguably controversial, the SCC’s approval of the WWISC does not offend any provision of the Constitution or the Code of Virginia.”
From a constitutional perspective, Justice Kelsey acknowledged that Va. Const. art. IX, §2, in specifying the SCC’s ratemaking and other powers, does not mention “water companies.” Nevertheless, the provision states that the SCC “shall have such other powers and duties not inconsistent with this Constitution as may be prescribed by law.”
The Court then discussed its precedent and a number of statutes pertaining to the SCC’s ratemaking powers vis-à-vis water and wastewater companies. Those statutes included Va. Code §§12.1-12, 56-35, 56-232(A)(1), 56-234, 56-235, and 56-235.2. Collectively, these “broadly written statutes authorize the SCC to set just and reasonable rates for public utilities, including water and wastewater companies, without limitation as to the type of rate mechanism set.” Indeed, the applicable law “requires only that when the SCC sets any rate, it must be satisfied that the utility has demonstrated that aggregate revenues earned will not exceed aggregate costs, plus a fair return.”
Based upon the articulated legal principles, the Court in turn rejected each of the Cities’ arguments that the SCC lacked authority to consider and approve the WWISC. In so doing, it concluded that “[w]e find nothing legally unprecedented about the SCC’s approval of the WWISC.”
In addition, the Court explicitly rejected the Cities’ arguments based on analogies to legislation specifying limitations upon natural gas companies’ regulation. The Court ruled the analogies inapposite because, “when a statute delegates such authority to the Commission, we presume that any limitation on the Commission’s discretionary authority by the General Assembly will be clearly expressed in the language of the statute.” The Court found no such limiting language applicable to the SCC’s exercise of its authority to approve the WWISC.
On the evidence sufficiency question, the Court found ample evidence to support the SCC’s decision. Noting the “highly deferential standard of review,” the Court ruled that “[w]e cannot sit as a board of review to substitute our judgment for that of matters within” the SCC’s province. “In sum, the SCC possessed statutory authority to approve the WWISC, and the evidence was sufficient to justify its approval. We thus affirm.”
In City of Alexandria, the Court reaffirmed its tradition of broadly interpreting the SCC’s constitutional and statutorily derived powers. The Court’s opinion carefully reviewed and applied the appellate review standards applicable to the SCC’s judicial and legislative determinations. As an “expert body” functioning as “a tribunal informed by experience,” the SCC enjoys a “highly deferential standard of review” in all matters save pure questions of law.
Since founding my appellate law firm in 2014, I have undertaken litigation in the SCC. I’ve thoroughly enjoyed the work and found the SCC’s procedural rules straightforward in their wording and application. Although personal injury, domestic relations, eminent domain or criminal litigation certainly evoke images of spirited adversarial contests, one should never underestimate the intensity of SCC proceedings across the spectrum of its judicial and legislative authority.
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