City of Alexandria v. State Corporation Commission

PRESENT: Lemons, C.J., Mims, McClanahan, Powell, Kelsey, and McCullough, JJ., and
Russell, S.J.
CITY OF ALEXANDRIA, ET AL.
OPINION BY
v. Record No. 171428 JUSTICE D. ARTHUR KELSEY
AUGUST 30, 2018
STATE CORPORATION COMMISSION, ET AL.
FROM THE STATE CORPORATION COMMISSION
The City of Alexandria and the City of Hopewell (“Cities”) appeal from an order of the
State Corporation Commission (“SCC” or “Commission”) that approved a new surcharge for
Virginia-American Water Company (“VAWC” or “Company”). On appeal, the Cities argue that
the SCC had no statutory authority to approve the new surcharge and that, even if it did, the
evidence was insufficient to justify the SCC’s approval. We disagree on both counts and affirm.
I.
A. VAWC’S RATE APPLICATION
In 2014, VAWC and two other water utilities filed a petition requesting that the SCC
establish rules pursuant to which a water utility could apply for the establishment of a water and
wastewater infrastructure surcharge (“WWISC”). The City of Alexandria participated in that
proceeding. See Virginia Am. Water Co., Case No. PUE-2014-00066, 2015 Va. PUC LEXIS
668, at *2 (S.C.C. Sept. 9, 2015) (“Rulemaking Order”).
The SCC decided not to implement the requested rule, but stated in its Rulemaking Order
that “the need for such investment, along with the appropriate recovery thereof, can be
reasonably addressed on a case-by-case basis wherein the Commission and interested parties
may consider the specific circumstances attendant to each utility.” Id. at *6-7. In reaching this
conclusion, the SCC stated that it was not ruling on the “appropriateness of various rate design
mechanisms that may be utilized in association with new infrastructure investment.” Id. at *7.
In 2015, VAWC filed an application with the SCC for a general increase in water rates.
VAWC requested a rate increase, claiming increased capital investment costs, decreased water
sales, and a diminished rate of return on common equity (“ROE”). VAWC sought to increase
rates to produce an additional $8.69 million of revenue, representing an 18.42% increase in test-
year revenues based on a 10.75% ROE. The proposed increase would be divided among
VAWC’s five operating districts, effective April 1, 2016. 1
In its application, VAWC also sought approval and implementation of a WWISC to allow
VAWC to better plan for and timely recover costs of necessary investment in replacing aging
infrastructure and other investments in its system that do not generate additional revenue.
B. THE SCC RECORD
1. VAWC’s Evidence
A hearing examiner convened a public hearing to receive evidence on VAWC’s
application. Along with several other entities, the Cities participated fully in the hearing. The
record shows that VAWC owns and operates “a water distribution system consisting of
approximately 734 miles of water main, ranging in size from under two to 36 inches, as well as
services, meters, hydrants, water treatment plants, pumping stations, storage tanks and water
testing equipment.” 3 J.A. at 1306. VAWC also “owns, operates and maintains a wastewater
system consisting primarily of approximately 181 miles of sewer main, 101 miles of sewer
laterals[,] and wastewater treatment plants.” Id. at 1306-07.
1
The Commission authorized VAWC to implement the WWISC “as set forth in” the
Commission’s order and dismissed the case. See In re Virginia-Am. Water Co., Case No. PUR-
2017-00149 (S.C.C. Mar. 13, 2018); see also Appellee’s Br. (SCC) at 4 n.1.
2
VAWC organized its water and wastewater systems into five operating districts: The
“Alexandria District serves the City of Alexandria and parts of Fairfax . . . and Arlington
Count[ies].” Id. at 1307. The “Hopewell District serves the City of Hopewell, and parts of
Prince George County.” Id. The “Eastern District serves 18 subdivisions through 18 distinct
public water systems in” Westmoreland, Northumberland, Lancaster, Essex, and King William
Counties. Id. The Prince William water and wastewater districts serve “the Dale City
community in Prince William County.” Id.
VAWC constructed its systems over time with different types of materials. Older water
systems, like the one in Alexandria started in 1850, include “very old pit-cast pipe, centrifugal
cast iron pipe, cast iron cement lined pipe, asbestos cement pipe, PVC, reinforced concrete and
ductile iron pipe.” Id. at 1283. “Ductile iron pipe is a newer” and more flexible “pipe material
that VAWC started to install around 1970.” Id. Given its relative inflexibility, “the older cast
iron pipe” corrodes over time and “fails more often.” Id. A significant portion of VAWC’s
water and wastewater infrastructure has begun to reach the end of its useful life.
VAWC’s engineering manager testified that, although VAWC “has made and continues
to make investments in” replacing aging infrastructure, “the amount of main replaced cannot
keep up with the amount of main requiring replacement in the coming decades.” Id. at 1294.
VAWC’s “mains that have been installed over the past 115 years will need to be replaced over
the next 85 years to ensure that the system is” properly maintained. Id. at 1295. At the current
rate, “the estimated time frame for total replacement of [the Company’s] mains is over 430 years,
or 345 years longer than the average life expectancy of these facilities.” Id. at 1296. The
engineering manager opined that, if the SCC approved the WWISC, VAWC’s capital
replacement program would “operate more effectively” and would likely avoid “the additional
3
costs associated with infrastructure failures or main breaks.” Id. at 1301. He also stated that the
WWISC would fund the total main replacement plan and reduce its duration “to an average of
139 years,” with the “long-term goal . . . to reduce the time frame for total replacement to 100
years.” Id. at 1296.
Another engineering manager for VAWC pointed out that “VAWC’s water main
replacement rate for 2014 was 0.32%.” Id. at 1283-84. At that rate, “the average pipe in
VAWC’s network would have to continue in service for nearly 300 years.” Id. at 1284. The first
engineering manager explained further that VAWC planned to focus “its replacement efforts in
the Alexandria and Eastern Districts.” Id. at 1298. Alexandria in particular “has the largest
inventory of cast iron pipe in need of replacement,” “a significant inventory of pipe” six inches
or less in diameter, and “the highest average main break frequency rate of all the Districts with
33 breaks per 100 miles of pipe.” Id. “In Alexandria, 63% of mains are cast iron,” and these
“mains account for 94% of the main breaks in that District.” Id.
VAWC’s president testified that “the major drivers of the Company’s need for rate relief”
in this case were VAWC’s “ongoing capital investment” in infrastructure and “revenue loss
arising from declining [water] usage.” Id. at 1117. He said that VAWC had increased its utility
plant investment by $53 million “since the last general rate case” and had continued to make
investment in infrastructure. Id. VAWC needed the WWISC, he contended, to replace aging
infrastructure on an accelerated basis and reach a “100-year main replacement schedule” — “or
1% annually” — which would permit VAWC to timely recover the costs of these non-revenue
producing investments. 2 Id. at 1129.
2
The SCC last approved VAWC’s base rates on December 12, 2012, “based on a test
year ended September 30, 2011.” 3 J.A. at 1115.
4
A manager in VAWC’s Mid-Atlantic Division explained that a utility typically must file
a general rate case to recover its investment in replacing aging infrastructure but “may only
include investment that is ‘reasonably predicted to occur’ through the end of the rate year.” Id.
at 1198. He explained that this approach created a “limited and insufficient horizon for
replacement of aging infrastructure.” Id. VAWC considered infrastructure replacement to be a
non-revenue producing investment “because it [did] not add additional customers” or “increase
sales.” Id. at 1199. He stated that VAWC proposed the WWISC because of this “regulatory lag”
present in the traditional ratemaking process. 4 id. at 1924. 3
The division manager further opined that the WWISC would accelerate infrastructure
replacement in a more orderly way and increase capital infusion while mitigating against
periodic spikes in the base rate. Otherwise, timely recovery for infrastructure improvements
would require filing more base-rate cases, which “would result in larger and more frequent base
rate increases” if they were successful. 3 id. at 1238-39. But a WWISC would “allow the
Company to better plan for, more consistently fund, and more gradually incorporate into
customers’ bills, the costs associated with these types of investment.” Id. at 1239. Under
VAWC’s requested WWISC, the SCC would have to approve the initial charge and any
adjustments to the charge, could not already be included in the calculation of the company’s base
rates, and would relate only to non-revenue-producing infrastructure. See id. at 1201-03. The
proposed WWISC could also include conditions safeguarding the public interest such as SCC
3
See generally William T. Reisinger, Public Utilities Law, 49 U. Rich. L. Rev 137, 148
(2014) (stating that “[r]egulatory lag” refers to “the time period between when a utility first
makes an investment (such as when it starts construction of a power plant) and when the utility
may begin to recover those costs through rates”).
5
approval of annual updates to the rate, audits, and annual reconciliation of the difference between
revenues and costs. Id.
The division manager projected that the Company would spend $44,508,091 in necessary
expenditures for “WWISC-eligible infrastructure” between 2017 and 2020. Id. at 1236. Of that
amount, the Company would spend $28,543,600 to replace water and wastewater distribution
mains. See id. Compared to the period from 2012 to 2015, these expenditures represented a
46% increase in capital investment for WWISC-eligible infrastructure and a 98% increase in
planned replacement of distribution mains. Id. Based on “the projected calendar-year 2017
WWISC-expenditure levels, the typical residential monthly customer bill” for all districts would
increase “on average by $0.44.” Id. at 1251. The projected average increase for the Alexandria
District was $0.43 per month. See id. at 1260.
2. The Opposition’s Evidence
The City of Alexandria’s energy manager testified that Alexandria did not take issue with
VAWC’s efforts to replace infrastructure. See id. at 1395. But the WWISC was unnecessary, he
maintained, because VAWC “has the ability to successfully invest in infrastructure replacement
while . . . achieving appropriate returns” by filing a base-rate case. Id.; see also 2 id. at 814
(“[VAWC] does have alternative methods currently available to them to invest in such
infrastructure.”). He described the WWISC request as “fraught with issues and questionable
public protections” as well as “hasty and gratuitous.” 3 id. at 1395.
A hired consultant agreed, opining that the current ratemaking process sufficiently
addressed the need for accelerated infrastructure replacement. See id. at 1416. He stated that
“[o]ne way the current ratemaking process permits infrastructure replacement is through
depreciation of existing plant in service.” Id. Under this approach, “depreciation expense
6
collected through base rates can be invested in new plant without having any impact on the
utility’s overall revenue requirement.” Id. He also said that other existing ratemaking
mechanisms already addressed the need to replace aging infrastructure. See id. at 1417.
The consultant criticized VAWC’s proposed customer safeguards as inadequate. See id.
at 1420. He pointed to the lack of an Earnings Test, which he considered “crucial” in order to
match actual WWISC-rate expenditures during a defined period with the estimates used to
determine the WWISC. In addition, he maintained that a “true up” was necessary to prevent
VAWC from earning beyond its allowed return. Id. at 1422. He argued further that the proposed
WWISC would require ratepayers to pay for future improvements and infrastructure
replacements, and that VAWC had “no incentive . . . to control its costs.” Id. at 1423. He
opined that “[t]raditional ratemaking always has and always will best serve the public interest,”
not single-issue ratemaking. Id. at 1425.
Two other consultants testified in opposition to the proposed WWISC, who were both
experts in the field of public-utility regulation. They considered the WWISC to be unnecessary
to accomplish VAWC’s goals. They contended that VAWC “has not been earning substantially
less than its authorized [ROE],” id. at 1506, that it has not “experienced exceptional growth in
rate base” (with an annual growth rate of about 4%), id., and that it has not “show[n] that its
planned capital expenditures for eligible infrastructure investment will result in rate base growth
that [could not] be supported under the traditional ratemaking practices,” id. at 1508. One of the
consultants testified that “the $200,000 per year of new wastewater infrastructure spending is
less than” VAWC’s “annual depreciation expense of $1.842 million,” that “[c]ontinuing annual
accruals of depreciation expense increase Accumulated Depreciation,” and that if “the annual
change in Accumulated Depreciation equals or exceeds the change in Plant in Service, there is no
7
net increase in rate base.” Id. at 1662. Whether VAWC truly needed a WWISC for
infrastructure replacement was “highly questionable.” Id. Both consultants suggested various
consumer safeguards if the SCC ultimately approved the WWISC. 4
3. The SCC Staff’s Evidence
A principal utilities analyst in the SCC’s Division of Energy Regulation did not make a
recommendation for approval of the WWISC, but he did suggest how to implement the WWISC
if approved. 5 A deputy director with the Division of Utility Accounting and Finance also
reviewed the proposed WWISC and recommended various safeguards, including an annual
Earnings Test, if the WWISC were approved. He agreed that the WWISC would help to
accomplish VAWC’s goals of continuing improvement, safety, and reliability for its distribution
system “[t]o the extent [the WWISC] accelerates replacement of infrastructure and the needed
replacement.” 2 id. at 1021-22. He also concurred in the view that an acceleration of the
replacement rate “seems reasonable.” Id. at 1026-27.
4. The Hearing Examiner’s Report
After receiving briefs, the Hearing Examiner found “that a three-year pilot WWISC
should be approved for [VAWC’s] Alexandria District subject to” certain safeguards and
4
The consultants’ recommendations included that there should be an Earnings Test, 4
J.A. at 1649-50; that there should be a cap on charges at 5%–7.5% of the base rate, id. at 1678;
that the WWISC “should be narrowly and specifically tailored to address the specific need to
replace . . . water utility infrastructure,” id. at 1675; that certain accounting measures should be
used, id. at 1678-79; that the WWISC should be implemented “as a pilot program that is
restricted to the Alexandra district,” id. at 1679; that “[t]he WWISC charge should be separated
between water service and wastewater service,” 3 id. at 1489; and that the WWISC “should be
implemented on a district-specific basis,” id.
5
The utilities analyst specifically recommended the filing of “separate rate schedules for
water [and wastewater] by district . . . for the length of the WWISC,” id. at 1472; that “both
components of the WWISC . . . should be allocated to each one of the Company’s rate schedules
in conformance with the revenue allocation by schedule approved by the Commission,” id.; and
that certain language “be removed from the proposed tariff,” id. at 1473.
8
limitations. 1 id. at 516. He concluded that the SCC had statutory authority to approve the
WWISC and that VAWC’s infrastructure-replacement needs justified the imposition of the
WWISC. See id. at 518. He noted that infrastructure replacement does not generate revenue,
that the WWISC could provide an “ongoing revenue stream” as opposed to “the stop-start regime
that currently exists,” that it is “expensive” to file base-rate cases, and that the SCC would not be
deprived of oversight of the rate increases. Id. He recommended 12 safeguards as conditions for
the imposition of the WWISC:
 “The WWISC should be limited to mains and main related
infrastructure in the Alexandria District.”
 “The WWISC should be approved for” only a three-year period after
which “it may be ended, expanded, or otherwise modified.”
 “The use of an Earnings Test should accompany the annual WWISC
review, and to the extent WWISC collections result in annual
earnings above the mid-point of [VAWC’s] authorized range of
ROE, a refund should be made to ratepayers, with interest.”
 “The WWISC should not be approved as an automatic rate
adjustment clause.”
 “[A]nnual updates to the WWISC Rider and [its] amendments to the
WWISC Plan should occur in docketed proceedings.”
 “The annual filing should occur 120 days prior to the requested rate
effective date.”
 The SCC “Staff’s tariff revisions” — “except as modified” in the
Hearing Examiner’s Report — as well as the “revisions to the
calculation of the WWISC” appearing in the Hearing Examiner’s
Report, “should be adopted.”
 “Detailed accounting information as required by [SCC] Staff should
accompany the annual WWISC filings,” and the SCC “should have
the discretion to rule any annual WWISC filing [to be] incomplete.”
 “Currently approved depreciation rates should be used in WWISC
calculations.”
 “The calculation of carrying charges should be based on a series of
two-month averages over-or under-recovery balances.”
9
 SCC “Staff should have access to the internal analysis [that VAWC]
performs in the evaluation of contractor bids for [WWISC-eligible]
projects.”
Id. at 519.
The Hearing Examiner further found that the WWISC revenues should not exceed 7.5%
of the Alexandria District’s aggregate revenues. See id. With a 7.5% cap on “the amount billed
to customers under otherwise applicable rates and charges,” 3 id. at 1242, “the typical residential
customer’s [monthly] bill [will] increase, on average, by $0.32,” id. “Until th[e] cap is
reached” — that is, “while the program is ramping up,” “which could take a year or more” —
“the actual bill impact [will] be much less.” 1 id. at 520. “This is a small price to pay for much
needed infrastructure improvements that will not only improve customers’ service, but service
reliability as well,” the Hearing Examiner determined. Id. He concluded with the observation
that “[t]he need to accelerate the rebuilding of the Company’s distribution infrastructure is
essential to meet the ongoing needs of the community and customers and to maintain system
reliability.” Id.
5. The Commission’s Final Order
In its final order, the Commission agreed with the Hearing Examiner’s report
recommending a three-year pilot plan for a WWISC applicable to the Alexandria District, subject
only to “the safeguards and limitations . . . as modified” by the Commission. Id. at 651. The
Commission authorized VAWC “to file an application on or after June 1, 2017, to institute [the]
WWISC, as set forth” in the final order. Id. at 652.
The Commission emphasized that “the use of an Earnings Test should accompany the
annual WWISC review” and found “that refunds should be made to ratepayers, with interest, to
the extent WWISC collections result in annual earnings above the rate of return on common
equity of 9.25% approved.” Id. Under the Earnings Test, the SCC would calculate test-year
10
earnings every year that the WWISC would be in place. See 2 id. at 1003. VAWC would be
required to issue a refund to ratepayers, with interest, if the SCC found that “WWISC collections
result[ed] in annual earnings above the mid-point of the Company’s authorized range of return
on common equity.” 4 id. at 1828. The Earnings Test would not be used to “reestablish” future
base rates. 2 id. at 1003.
II.
The Cities appeal to us, arguing that the SCC has no statutory authority to approve the
WWISC and, in the alternative, that the evidence was factually insufficient to justify the
approval of the WWISC. The SCC and the VAWC disagree, arguing that the SCC has broad
discretion to approve the WWISC, that the SCC’s discretion may only be limited expressly by
statute, and that there is sufficient evidence to uphold the SCC’s approval. We agree with the
VAWC and the SCC and hold that the SCC has the statutory authority to approve the WWISC.
We also conclude that sufficient evidence in the record supports the Commission’s finding that
the rate is “just and reasonable” under Code § 56-235.2.
A. STANDARD OF APPELLATE REVIEW
“[T]he standard of review applied to a Commission decision ‘will depend on the nature of
the decision under review.’” Office of the Att’y Gen. v. State Corp. Comm’n, 288 Va. 183, 191,
762 S.E.2d 774, 778 (2014) (citation omitted). As we have often said, “the Commission’s
decision is entitled to the respect due judgments of a tribunal informed by experience.” Virginia
Elec. & Power Co. v. State Corp. Comm’n, 284 Va. 726, 735-36, 735 S.E.2d 684, 688 (2012)
(citation omitted). Even so, we review questions of law de novo. See Virginia Elec. & Power
Co. v. State Corp. Comm’n, 295 Va. 256, 262, 810 S.E.2d 880, 883 (2018). Although the SCC’s
statutory construction “is entitled to the respect due judgments of a tribunal informed by
11
experience,” id. at 263, 810 S.E.2d at 883 (citation omitted), we are “not inextricably bound” by
it and “will not hesitate to reverse” it if we find that it “is based on a mistake of law,” BASF
Corp. v. State Corp. Comm’n, 289 Va. 375, 403, 770 S.E.2d 458, 473 (2015).
A different paradigm governs the SCC’s findings of fact. We may not “overrule the
Commission’s findings of fact unless . . . its determination is contrary to the evidence or without
evidence to support it.” Virginia Elec. & Power Co., 284 Va. at 735, 735 S.E.2d at 688; Board
of Supervisors of Campbell Cty. v. Appalachian Power Co., 216 Va. 93, 105, 215 S.E.2d. 918,
927 (1975). In this context, we only ask whether a rational factfinder could have interpreted the
historical facts, accompanied by reasonable inferences therefrom, in a way supportive of and
consistent with the SCC’s conclusions.
We also recognize that we are not “at liberty to substitute [our] judgment [for that of the
Commission] in matters within the province of the Commission.” Virginia Elec. & Power Co.,
284 Va. at 735, 735 S.E.2d at 688. That is particularly true with regard to the SCC’s ratemaking
authority because in that context the SCC “is exercising a legislative function delegated to it by
the General Assembly.” Old Dominion Comm. for Fair Util. Rates v. State Corp. Comm’n, 294
Va. 168, 180, 803 S.E.2d 758, 764 (2017) (citation omitted). 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.” Virginia Elec. &
Power Co., 284 Va. at 741, 735 S.E.2d at 691.
B. STATUTORY AUTHORITY TO APPROVE THE WWISC
On appeal, the Cities “vehemently disagree” that the SCC has statutory authority to
approve the proposed WWISC. Appellants’ Br. at 12. We do not understand the basis for such
vehemence. Both the Constitution of Virginia and the enabling statutes enacted by the General
12
Assembly are written in purposefully broad terms. While arguably controversial, the SCC’s
approval of the WWISC does not offend any provision of the Constitution or the Code of
Virginia.
1. Governing Constitutional and Statutory Provisions
The Constitution of Virginia authorizes the SCC to regulate “rates, charges, and services
and . . . facilities of railroad, telephone, gas, and electric companies.” Va. Const. art. IX, § 2.
Although water companies are not explicitly mentioned, Article IX, Section 2 further states,
“[t]he Commission shall have such other powers and duties not inconsistent with this
Constitution as may be prescribed by law.” Id.
Code § 12.1-12 confers on the SCC the power and duty to “regulat[e] the rates, charges,
services, and facilities of all public service companies as defined in [Code] § 56-1,” which
includes water supply companies and wastewater companies, “[s]ubject to such criteria and other
requirements as may be prescribed by law.” See also Code § 56-35. “When the rate of return
has been determined, the Commission exercises primarily an administrative duty in deciding
where, how, and from what source or sources the increased revenue awarded is to be obtained.”
Anheuser-Busch Cos. v. Virginia Nat. Gas, Inc., 244 Va. 44, 47, 418 S.E.2d 857, 859 (1992).
Code § 56-235, which sets out the SCC’s general ratemaking authority, provides in
relevant part:
If upon investigation the rates, tolls, charges, schedules, or joint
rates of any public utility[, including water or wastewater
companies, see Code § 56-232(A)(1),] operating in this
Commonwealth shall be found to be unjust, unreasonable,
insufficient or unjustly discriminatory or to be preferential or
otherwise in violation of any of the provisions of law, the State
Corporation Commission shall have power to fix and order
substituted therefor such rate or rates, tolls, charges or schedules
as shall be just and reasonable. All rates, tolls, charges or
13
schedules set by the Commission shall be valid only if they are in
full conformance with the provisions of this chapter.
(Emphasis added.) Code § 56-235.2 states in relevant part:
A. Any rate, toll, charge or schedule of any public utility operating in
this Commonwealth shall be considered to be just and reasonable only
if: (1) the public utility has demonstrated that such rates, tolls, charges
or schedules in the aggregate provide revenues not in excess of the
aggregate actual costs incurred by the public utility in serving
customers within the jurisdiction of the Commission, including such
normalization for nonrecurring costs and annualized adjustments for
future costs as the Commission finds reasonably can be predicted to
occur during the rate year, and a fair return on the public utility’s rate
base used to serve those jurisdictional customers . . . . Notwithstanding
[Code] § 56-234, the Commission may approve, either in the context of
or apart from a rate proceeding after notice to all affected parties and
hearing, special rates, contracts or incentives to individual customers
or classes of customers where it finds such measures are in the public
interest. . . .
B. The Commission shall, before approving special rates, contracts,
incentives or other alternative regulatory plans under subsection A,
ensure that such action (i) protects the public interest, [and] (ii) will not
unreasonably prejudice or disadvantage any customer or class of
customers . . . .
C. After notice and public hearing, the Commission shall issue
guidelines for special rates adopted pursuant to subsection A that will
ensure that other customers are not caused to bear increased rates as a
result of such special rates.
(Emphases added.)
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. Code § 56-235.2(A) 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.
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2. Explicit Authorization for Rate Change
The Cities acknowledge the SCC’s delegated ratemaking power but argue that, even so, the
SCC’s approval of the WWISC in this case cannot satisfy even the minimal statutory requirements.
Under their view, it is essential that “future improvements to infrastructure be included as a
component considered by the Commission in approving a public utility company’s proposed rates.”
Appellants’ Br. at 14 (emphasis in original). The SCC erred in approving the WWISC, the Cities
argue, because the WWISC “program only considers infrastructure costs and does not consider
returns on investment or profit to be derived from system improvements.” Id. (emphasis added).
In other words, the Cities reason that the WWISC takes into account “only the cost of
replacement of a water main, but not the additional profits that might be obtained from that
replacement due to elimination of inflow and infiltration, and ignores potential new customers or
profits from replacement of smaller, older lines with larger mains carrying more water volume.” Id.
at 15. Based upon this reasoning, the Cities conclude, the SCC has no “statutory authority for this
infrastructure cost recovery program outside of a regular rate case.” Id. at 17.
Embedded in this argument is a valid concern. If the SCC approved a rate while wholly
ignoring the decision-making factors required by Code § 56-235.2, we would declare the approval
to be ultra vires. In this case, however, the SCC did not ignore the governing statutory factors.
VAWC filed this case as a traditional rate case that included each of its five service districts. The
VAWC filed its “Application of [VAWC] for a general increase in rates,” 1 J.A. at 3 (altering
capitalization), requesting an increase in its base rate to recover additional annual revenues of $8.69
million as well as a surcharge to recover additional revenue for accelerated infrastructure
replacement costs not included in the base rate. The SCC ultimately approved an increase in the
VAWC’s base rate to recover additional annual revenues of $5.18 million and a temporary
15
surcharge for the accelerated infrastructure replacement costs applicable to only one of VAWC’s
five districts.
The SCC’s review of the WWISC was not disconnected from its overall discretionary
review of VAWC’s request for an increase in its base rate. It was an analysis that looked at all of
the facts presented in the aggregate and in light of the statutory factors. This is particularly evident
in the extensive qualifications that the SCC placed upon the implementation of the WWISC.
Perhaps the most significant is the Earnings Test, which takes into account all of the Alexandria
District’s revenues from base rates and from the WWISC to determine if VAWC earned more than
its approved rate of return for that district. Other qualifications — the 7.5% cap and the three-year
period for the pilot WWISC, the mechanism for customer refunds, and the requirement of SCC
approval for annual updates to the rate — further reinforce the SCC’s attention to the required
statutory factors.
3. Adjustment Clauses
We find nothing legally unprecedented about the SCC’s approval of the WWISC. To be
sure, we have upheld analogous clauses in other contexts. In City of Norfolk v. Virginia Electric
and Power Co., a municipality challenged an “escalator clause” in a natural gas provider’s rate
schedule. 197 Va. 505, 506-07, 90 S.E.2d 140, 141 (1955). The clause calibrated the rate to the
fluctuating costs of natural gas. Under the clause, “[t]he consumers of gas [were] required to pay
the increase in the cost of gas, if an increase occur[ed], and they [were] given the benefit of a
decrease in such cost when a decrease occur[ed].” Id. at 513, 90 S.E.2d at 146. Consequently,
[t]he proposed escalator clause [was] nothing more or less than a
fixed rule under which future rates to be charged the public [were]
determined. It [was] simply an addition of a mathematical formula
to the filed schedules of the Company under which the rates and
charges fluctuate as the wholesale cost of gas to the Company
fluctuates.
16
Id. at 516, 90 S.E.2d at 148. See generally 2 William A. Mogel, Regulation of the Gas Industry
§ 40.06[1] (2017) (“This type of ratemaking mechanism allows the rate approved by the regulators
to fluctuate in relation to changes in the expense categories and/or business factors covered by the
clauses.”). We held that the SCC “had the authority to approve the escalator clause . . . and to
authorize its insertion in the schedules of rates, charges, rules and regulations of the Company.”
City of Norfolk, 197 Va. at 519, 90 S.E.2d at 150. We concluded “that in its operation the escalator
clause violates no constitutional or statutory limitations.” Id.
We also addressed an “automatic adjustment clause” in Old Dominion Power Co. v. State
Corporation Commission, 228 Va. 528, 323 S.E.2d 123 (1984). In that case, an electric utility
requested the clause to protect against “future changes in the price its parent charges it for
purchased power.” Id. at 532, 323 S.E.2d at 125. The SCC denied the request. We assumed, as the
electric utility had conceded, that the SCC’s decision to grant or deny requests of this nature fell
“within the Commission’s discretion.” Id. And we held that such decisions would “be upheld if
they bear some rational relationship to a legitimate interest or purpose.” Id. at 534, 323 S.E.2d at
127. 6
6
The SCC has regularly exercised its authority in cases involving automatic adjustment
clauses. See, e.g., Washington Gas Light Co., 2017 S.C.C. Ann. Rept. 314, 315 (2017) (ordering
the adoption of a revised stipulation, which provided for a purchase gas cost mechanism and an
annual cost adjustment mechanism); Columbia Gas of Va., Inc., 2012 S.C.C. Ann. Rept. 337,
337 (2012) (denying the company’s request to allocate refunds outside of the automatic
adjustment mechanism in place); Atmos Energy Corp., 2005 S.C.C. Ann. Rept. 322, 322-23
(2005) (granting the company’s request for a weather normalization adjustment charge);
Shenandoah Gas Co., 1996 S.C.C. Ann. Rept. 318, 318-19 (1996) (granting the company’s
request to suspend the actual cost adjustment clause of a purchased gas adjustment provision);
State Corp. Comm’n, 1988 S.C.C. Ann. Rept. 333, 333, 337 (1988) (incorporating the
recommendations of SCC Staff regarding the SCC’s purchase gas adjustment policies, subject to
certain modifications) ; State Corp. Comm’n v. Roanoke Gas Co., 1982 S.C.C. Ann. Rept. 568,
571 (1982) (ordering the company to issue refunds in accordance with the terms of its purchased
gas adjustment provisions).
17
4. The SAVE Act
Finally, the Cities compare the SCC’s statutory authority in this case to the SCC’s statutory
authority to approve rate-adjustment clauses in its regulation of natural gas companies under the
Steps to Advance Virginia’s Energy Plan Act, Code §§ 56-603 to -604 (the “SAVE Act”). Because
the Constitution of Virginia expressly authorizes SCC-regulation of natural gas companies and
because “the natural gas utilities sought legislation to implement the SAVE Act,” Appellants’ Br. at
18, the SCC necessarily lacked the authority “to implement a natural gas infrastructure replacement
charge,” id. at 20. Therefore, “in order for water and wastewater companies — which are not set
forth in the [Constitution of] Virginia . . . — to implement a WWISC, legislation is certainly
required.” Id. at 18. Furthermore, the Constitution of Virginia expressly authorizes SCC-regulation
of “railroads, telephone, gas and electric companies” but authorizes SCC-regulation of other entities
only when the SCC is exercising “powers and duties not inconsistent with this Constitution as may
be prescribed by law.” Va. Const. art. IX, § 2.
This interpretative inference does not apply here for several reasons. Express statutory
authorization on one specific subject may sometimes imply the absence of authorization on another
analogous subject. See generally Du v. Commonwealth, 292 Va. 555, 565 n.7, 790 S.E.2d 493, 500
n.7 (2016). But as we observed earlier, the SCC’s authority to approve rate-adjustment clauses
comes from several broadly worded statutes that delegate discretionary power to the SCC. See,
e.g., Code § 12.1-12; id. § 56-35; id. § 56-235; id. § 56-235.2. “[W]hen 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.”
Virginia Elec. & Power Co., 284 Va. at 741, 735 S.E.2d at 691. Only the presence of such “clearly
expressed” statutory language, id., can limit a general statutory grant of authority. The presence of
18
statutory grants of power in analogous contexts raises only a silent implication of such a limitation.
In other areas of law, that silent implication might be enough. But not here. 7
Other statutory analogies undermine the Cities’ interpretation. The General Assembly has
expressly limited the SCC’s ratemaking discretion by enacting specific requirements for the
approval of rate-adjustment clauses in several regulatory contexts. See, e.g., Code § 56-
585.1(A)(5)(c) (providing for a rate adjustment clause “to design, implement, and operate energy
efficiency programs” only if “the program is in the public interest”); id. § 56-585.1(A)(5)(e)
(providing for a rate adjustment clause to cover costs necessary to ensure compliance “with state or
federal environmental laws or regulations”); id. § 56-585.1(A)(5)(f) (providing for a rate
adjustment clause “to design, implement, and operate programs that . . . accelerate the vegetation
management of distribution rights-of-way”); id. § 56-585.1(A)(6) (providing for a rate adjustment
clause for new or modified generation facilities “after the expiration or termination of capped
rates”); id. § 56-249.6 (providing for a rate adjustment clause for electric utility fuel costs under
certain conditions). Each of these statutes imposes various procedural and substantive limitations,
thus presupposing an underlying general regulatory power.
7
See generally Henry Campbell Black, Handbook on the Construction and Interpretation
of the Laws § 72, at 220 (2d ed. 1911) (stating that there are circumstances in which “the
legislature [does] not in fact intend that its express mention of one thing should operate as an
exclusion of all others” such that “the maxim must give way”); Reed Dickerson, The
Interpretation and Application of Statutes 234-35 (1975) (stating that the application of the
negative-implication canon “depends on the particular circumstances of context”); Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 107 (2012)
(“Virtually all the authorities who discuss the negative-implication canon emphasize that it must
be applied with great caution, since its application depends so much on context.”); 2A Norman J.
Singer & Shambie Singer, Sutherland’s Statutes and Statutory Construction § 47:3, at 423 (7th
rev. ed. 2014) (stating that “expressio unius is a rule of statutory construction and not a rule of
law,” and as such “is subordinate to the primary rule that legislative intent governs the
interpretation of a statute”).
19
This reasoning also applies to the SAVE Act because it too imposes various limitations on
the SCC’s discretionary authority to approve rate-adjustment clauses for natural gas infrastructure.
See Code §§ 56-603 to -604. The General Assembly enacted the statute in 2010, half a century
after we recognized the SCC’s authority to approve an “escalator clause” that implemented rate
adjustments according to the fluctuating costs of natural gas. See City of Norfolk, 197 Va. at 516-
17, 90 S.E.2d at 148-49. What we said there we repeat here: The general ratemaking “power of the
Commission is in no wise limited or restricted by reason of additional powers granted it in other
sections of the Code.” Id. at 515, 90 S.E.2d at 147.
C. SUFFICIENCY OF THE EVIDENCE
The Cities argue in the alternative that the Commission’s findings were contrary to the
evidence because VAWC allegedly failed to show the need for the WWISC to accelerate
infrastructure investment, as proven by VAWC’s ability to implement certain accounting
practices or use existing ratemaking mechanisms. “There was simply no evidence showing that
the WWISC program was needed to serve the public interest,” and the SCC “effectively
dismiss[ed] substantial expert testimony regarding the lack of necessity for the WWISC.”
Appellants’ Br. at 22-23 (emphasis added); see also id. at 26-27. 8
8
To the extent that the Cities argue that the Company’s current request should be rejected
because the Commission rejected the need for a WWISC in the Rulemaking Order, see
Appellants’ Br. at 23-24; see also Cities’ Ex. No. 21 at 9-10 (Testimony of Carl W. Eger III,
Energy Manager for the City of Alexandria) (arguing that the WWISC in this base-rate case
should be denied because “no material facts have changed since the Commission’s Final Order”
in that rulemaking case), the Cities’ argument fails. Even if the Commission rejected a global
request for the WWISC in the Rulemaking Order, that fact does not bear on the Commission’s
targeted approval of the pilot WWISC here. The Hearing Examiner repeatedly observed that the
Commission acknowledged this fact in the Rulemaking Order when it determined that the
Commission would decide whether to apply the WWISC on a “case-by-case basis.” 1 J.A. at
517 (quoting Virginia-Am. Water Co., 2015 Va. PUC LEXIS 668, at *6).
20
The SCC correctly asserts, however, that whether “the Commission could have set just
and reasonable rates for the Alexandria district without a rate adjustment clause . . . . is not the
standard.” Appellee’s Br. (SCC) at 20. Instead, the question is whether there is sufficient
evidence in the record to support the Commission’s finding that the proposed WWISC is “just
and reasonable” under Code § 56-235.2. See BASF Corp., 289 Va. at 398, 770 S.E.2d at 471
(observing that the Commission’s findings are only reversed if they are “contrary to the evidence
or without evidentiary support”).
The Commission’s final order “agree[d] with the Hearing Examiner” and “[found] that a
three-year pilot WWISC [should] be approved and implemented for the Alexandria District,”
subject only to “the safeguards and limitations . . . as modified” by the Commission. 1 J.A. at
651. Experts in support of and in opposition to the WWISC testified to the deterioration of the
current infrastructure and the need to replace it. See 3 id. at 1174; id. at 1284; 4 id. at 1661-62.
VAWC’s division manager stated that the Company proposed the WWISC primarily due to the
“regulatory lag” in the traditional ratemaking process, 4 id. at 1924, and the Hearing Examiner
noted that the WWISC could replace “the stop-start regime that currently exists,” 1 id. at 518.
In support of their argument, the Cities assert that opposing experts showed that certain
accounting practices and existing ratemaking mechanisms would adequately support the
Company’s goals to accelerate the pace of infrastructure replacement. Appellants’ Br. at 27-28.
They also argue that the VAWC made “admissions regarding its already-existing ability to
recover infrastructure costs.” Id. at 22. But this evidence does little more than show that the
parties’ experts disagreed, which does not render the Commission’s findings contrary to the
evidence, see, e.g., BASF Corp., 289 Va. at 397, 770 S.E.2d at 470, and it does not support the
argument that the Company produced “simply no evidence,” Appellants’ Br. at 22.
21
“The Commission [is] entitled to interpret [the] conflicting evidence and to decide the
weight to afford it.” Board of Supervisors of Loudoun Cty. v. State Corp. Comm’n, 292 Va. 444,
458, 790 S.E.2d 460, 467-68 (2016). Thus, the Commission was entitled to afford more weight
to testimony that current rates account “only for investment ‘reasonably predicted to occur’
before and during a utility’s rate year,” which provides only “a limited and insufficient horizon,”
3 J.A. at 1198; that there is a “revenue-recognition lag” or “regulatory lag” under the traditional
ratemaking model, id. at 1238-39; that filing more base-rate cases “would result in larger and
more frequent base rate increases” if they were successful, id. at 1239; or that a WWISC would
“allow the Company to better plan for, more consistently fund, and more gradually incorporate
into customers’ bills, the costs associated with these types of investment,” id.; see also id. at
1130 (stating that the WWISC would “moderate future rate increases on customers and facilitate
the acceleration of infrastructure investment”).
To the extent that the Cities argue that the proposed WWISC fails to meet the “just and
reasonable” standard in Code § 56-235.2 because the customer protections are insufficient, see
Appellants’ Br. at 25-26, the Cities’ argument is unpersuasive. The WWISC is limited to a
three-year period exclusive to the City of Alexandria, and there is a 7.5% cap on the amount
billed to customers. The SCC would also approve annual updates to the WWISC in docketed
proceedings. Finally, the SCC would conduct an Earnings Test for the annual review of the
WWISC so that VAWC will refund ratepayers, “with interest, to the extent WWISC collections
result in annual earnings above the rate of return on common equity of 9.25% approved.” 1 J.A.
at 652.
“In determining the question” whether the Commission’s finding that the WWISC is just
and reasonable and in the public interest, this Court observes a “highly deferential standard of
22
review.” BASF Corp., 289 Va. at 398, 770 S.E.2d at 471. “[T]he Commission properly
considered” the testimony on behalf of all parties and “found substantial evidence showing” the
appropriateness of the WWISC. Board of Supervisors of Campbell Cty., 216 Va. at 96-97, 215
S.E.2d at 921. “We cannot sit as a board of revision to substitute our judgment for that of
matters within the province of the Commission.” Virginia Gas Distrib’n Corp. v. Washington
Gas Light Co., 201 Va. 370, 375, 111 S.E.2d 439, 442-43 (1959). In light of this record, “we
cannot say the Commission’s decision is contrary to the evidence or without evidentiary
support.” Appalachian Power Co. v. State Corp. Comm’n, 284 Va. 695, 710, 733 S.E.2d 250,
258 (2012).
III.
In sum, the SCC possessed statutory authority to approve the WWISC, and the evidence
was sufficient to justify its approval. We thus affirm.
Affirmed.
23