Highfield Water Co. v. Public Service Commission

Wilner, J., delivered the opinion of the Court. Appellant — Highfield Water Company (HWC) — formerly provided water service to about 300 families in a rural area of Washington County. On September 8, 1978, having previously conducted a public hearing in the matter, the Public Service Commission (PSC) issued Order No. 63332, in which it concluded that (1) HWC was not providing adequate service to its customers, (2) there was little likelihood that the company would be financially able to make the necessary improvements in order to provide adequate service, and (3) "it is consistent with the public convenience and necessity to have public ownership of the facilities necessary to provide water service to the Highfield area.” Upon these findings, the PSC revoked HWC’s authority to exercise its franchise and requested the State Department of Health and Mental Hygiene (DHMH) and the Washington County Sanitary Commission (WCSC) to assume their respective responsibilities with respect to furnishing water service to the area. HWC appealed that order and now appeals the affirmance of it by the Circuit Court of Baltimore City.

It complains (or asks) that: "I. The lower court erred in refusing to reinvestigate and reverse the findings of the ³³⁴ Public Service Commission. The actions of the Commission are clearly subject to review and must be reversed if it is found that the Commission acted in an improper manner.

II

The action of the Public Service Commission in issuing Order No. 63332 was improper due to the inadequate notice given to Highfield Water Company of the nature of the proceedings before the Commission.

III

Did the lower court err in failing to reverse the action of the Public Service Commission due to the Public Service Commission’s failure to give preference to Highfield Water Company’s rate case?

IV

The action of the Public Service Commission in revoking Highfield Water Company’s right to exercise its franchise exceeded the statutory authority granted to it by Md. Code art. 78, § 24(a). V. Did the lower court err in failing to find that the actions of the Public Service Commission constitute an unconstitutional taking of Highfield Water Company’s property, because the procedure used was improper, because the Public Service Commission has no power to acquire property, and because there were means available for the proper taking of the property by authorized governmental agencies?” A history of the proceedings that led to Order No. 63332 will facilitate our consideration of these issues. HWC and a sister company that was incorporated in Pennsylvania jointly operated an integrated water system, supplying water in a service area that bordered the Mason-Dixon line. In 1974, the Pennsylvania company (and with it the Pennsylvania part of the integrated system) was purchased by the local public water authority and thus became lost to HWC as a steady resource.

Thereafter, a ³³⁵ number of problems developed for HWC. Customers received rusty and malodorous water, at low pressures; every now and then, there was an outright cessation of water service, on one occasion lasting several weeks. On June 29, 1977, HWC applied for an increase in rates, apparently to take effect July 31, 1977. Pursuant to its authority under Md. Ann. Code, art. 78, § 70 (b), the PSC suspended the increased tariff for 150 days (and then for an additional 30 days) pending a determination as to the justice and reasonableness of the increase.

On January 17, 1978 — within the allowable 180-day period (dating from July 31, 1977) — PSC Order No. 62835 granting a part of the requested increase took effect. While HWC’s application for rate increase was pending, the PSC (and others) began to look into the adequacy of service provided by the company. On July 19,1977, a public meeting was held in Cascade (within HWC’s general service area) before the Washington County Commissioners. Present, among others, were a PSC Commissioner, PSC general counsel, a number of technical staff personnel from the Commission, and representatives of the Maryland Environmental Service.

Based in whole or in part upon what was learned at that meeting, Joseph H. Walter, a PSC Public Service Engineer, wrote a memo to the Commission on August 10, 1977, in which he opined that the HWC water system "is not capable of providing service of acceptable standards to its present customers” and that, although the system storage was sufficient for existing customers, "the water distribution system needs improvement, specifically, replacement of smaller size mains and interconnecting various sections of main to provide more reliable service.” Upon receipt of the Walter memo, the Commission, on August 30, 1977, opened Case No. 7099 — "In the Matter of the Investigation by the Commission on its own Motion of the Adequacy of Water Service by Highfield Water Company” — with the issuance of Order No. 62553. In its preamble, this Order recited that (1) "[i]n response to several complaints concerning the water service provided by [HWC], ³³⁶ the Commission’s Engineering Staff conducted an investigation of that Company’s water system,” (2) the Staff Engineer (Walter) had concluded that the system was not capable of providing service of acceptable standards and made certain specific recommendations as to system improvements, (3) under Md. Ann. Code art. 78, § 28 (c), HWC had an affirmative duty to furnish its customers with safe and adequate service, and (4) in view of the deficiencies noted by Walter, the Commission believed that HWC may not be providing its customers with adequate service. Upon that premise, the Order directed HWC to show cause, within 21 days, why it should not be directed to correct the system deficiencies described in the memo, a copy of which was attached to the Order. A copy of the Order and memo was served on HWC.

On September 20,1977, counsel for the company requested that the time for answering the Order be extended until the PSC ruled on the company’s request for rate increase. He said that HWC’s financial data developed in connection with the rate case was prepared without knowledge of the "massive capital improvements” called for in the memo and did not "reflect any capital improvement costs.” He stated further that, "[r]ecognizing the possible need for capital improvements,” HWC had employed a consultant, whose report was attached to the letter. Counsel asked for time to "digest” the information in the report in order to "be in the position to outline speciñc capital improvements for review by the Commission.” The two-page report attached to counsel’s letter was from John J. Mooney Associates. Its principal conclusions were as follows: "The Highfield system is presently an admixture of truncated growth, unplanned extensions and dependent supply.

The system has been victimized by its satellite nature between two larger water facilities (Ft. Ritchie, Md. and Blue Ridge Summit [Pa.]). No major rebuilding is possible in this limited ³³⁷ customer situation where revenues do not produce any borrowing power. Nevertheless, some improvements are essential.

I have therefore assessed priorities and present a phased program for your consideration as follows:....” (Emphasis supplied.) What followed then was a three-stage program of improvements involving the distribution system, well acquisitions, repairs to storage facilities, and meter testing and replacement. Mooney estimated the cost of Stage I at $70,000 but was unable, in that report, to estimate the cost of Stages II and III without "[e]xtensive additional study.” 1 PSC granted the requested extension, and a further extension sought on November 8, 1977. Finally, on December 15,1977, HWC filed an answer to the show cause order. Most of the answer consists of a summary of the public hearing held on July 19,1977, and the efforts being made by HWC to improve its system.

The Company viewed the problem as involving supply and distribution, but not water quality. The supply problem, it suggested, had been resolved by an interconnection with the Government-operated Ft. Ritchie system, primarily serving the army base located there. 2 Distribution problems it proposed to solve by the staged improvement plan outlined by Mooney. Among the points made in the answer were these five: (1) "The cost of acquiring a new water source and replacing the distribution system will be in excess of $500,000.00.” (2) "The cost of these capital improvements will ³³⁸ ultimately be passed on to the consumer, irrespective of public or private ownership.” (3) "The geographic and demographic factors of the [HWC] customer service area economically prohibit an immediate total system replacement; the previously submitted and approved[ 3 ] 'phased’ program is the only possible alternative.” (4) HWC "is unable to finance any other improvements [i.e., other than those already undertaken — about $25,000] until its emergency rate increase request has been granted and additional capital financing for the next 'phased’ improvements becomes available from either public, private or commercial sources.” 4 (5) HWC "states its intention to continue to examine the alternate methods (including public ownership) available to finance the additional capital improvements outlined in the Company’s consulting engineers [sic] report and upon securing a rate increase and additional financing, [HWC] also states its intention to continue this 'phased’ improvement program.” 5 (Emphasis supplied.) On April 20, 1978, the PSC held a public hearing in the matter, notice of which was given to HWC.

Although counsel for HWC was present, no officer or employee of the company attended, which precluded any direct questioning of the company as to its intentions or financial ability to make the necessary or desired improvements. 6 A number of HWC customers testified about the poor service they were receiving: inadequate supply manifested ³³⁹ by a low gallonage per minute; total cessation of service during summer droughts and winter freezes; rusty and malodorous water coming from the tap requiring special filters in the home that were in need of frequent replacement. One customer, who observed the water lines while the company was working on them, stated that they were "solid rust.” Another customer complained about having to pay higher fire insurance rates because the water main serving the fire hydrants in her area was inadequate. The area was classified as "unprotected” by the insurance company due to insufficient water service. Mr. Walter, on behalf of the Commission’s engineering staff, iterated his earlier conclusion that the HWC system had failed to provide its customers with adequate water service.

He noted that, serving only about 300 customers, HWC "has practically no capability for borrowing money, especially in the amounts necessary.” Walter stated that if the system were publicly owned, federal grants sufficient to defray 50% of the total project cost were available; and that, as a result, even if HWC could borrow the necessary funds, the average annual cost to the customer would be considerably less under public ownership ($200 as opposed to $700). He advised the Commission that the State Department of Health and Mental Hygiene (DHMH) had directed the Washington County Sanitary Commission (WCSC) to perform a feasibility study of county ownership of the system. His conclusion from all this was that "public ownership and operation of this utility would be in the best interest of the customers.” Mr. Mooney, the consultant employed by HWC, also testified about the system’s deficiencies and possible remedies. Among many other things, he observed: "Any company that is under a thousand customers has an inherent strike against it.

It is insufficient to make logical business decisions, and so forth, in the present day environment. If you are below that, the costs to the customers are very high. It almost of necessity calls for a subsidy or for the system to be ³⁴⁰ integrated with an overall system.” (Emphasis supplied.) William Sloan, of MES, then described a study he had made for that agency comparing the costs to the customer of public vs. private operation of the company. If all of the improvements recommended by Mr. Mooney were made under private ownership, the annual cost to each customer would be about $719 a year.

Under public ownership, the cost would be about $319 a year, and possibly as low as $200 a year if, in addition to the Federal 50% grant, a Farmers Home Administration loan became available to finance the remaining 50% of the capital cost. 7 In addition to the differential in capital costs, Mr. Sloan stated that the operating costs would also be less under public management ($27,490 as compared with $43,000), pointing out several specific areas of savings. MES, said Mr. Sloan, was empowered to acquire and operate private water companies (see Md. Ann. Code, Natural Resources article, §§ 3-101(i), 3-104, 3-105), and had acquired or assumed the operation of a number of them. With respect to HWC, public ownership offered a partial solution. The system needed improvement, he said, "and public ownership will save the ratepayers 50 to 70 percent.” Sloan made clear that he had not included in his figures for public ownership the cost of acquisition because he wasn’t certain what that would be.

He observed, however, that the company’s balance sheet showed a net worth of only $22,800. Michael Wojton, a sanitarian with DHMH, testified that, based on a sanitary survey of the HWC system conducted in the summer of 1977, he believed "the system is inadequate in terms of storage, in terms of source, wells, and also condition of the mains.” Although water quality at the source was excellent, it deteriorated because of particulate ³⁴¹ matter in the lines. He saw no direct health hazard, but noted that the water might have an odor or have rust in it, and, for that reason, may be unpalatable. Indirect health problems might arise from the inability of customers to flush their toilets.

As a result of the various deficiencies, DHMH had (1) sent a proposed consent order to HWC requiring prompt improvements (see Md. Ann. Code art. 43, §§ 391, 392), and (2) directed WCSC to study the feasibility of acquiring the system (see art. 43, §§ 388, 450). James Eckle, Chairman of WCSC, stated that WCSC would make every effort to comply with the DHMH order, although he preferred that HWC make the needed improvements on its own. Following this testimony, there was some discussion between counsel and the Commission over the relative advantages and disadvantages of public ownership. Because no one from HWC (other than counsel) was present and no evidence had been offered on its behalf as to the company’s current financial status, it was unclear whether the company would be able to finance the improvements on its own.

As its answer noted, the pending application for rate increase did not include any consideration of capital improvements. It was left that HWC would submit to the PSC, within 10 days, a verified statement "with respect to the present plans of the company to improve service and its capability to obtain financing to improve service....” At the end of the hearing, counsel for HWC was asked whether he had discussed with his client its position regarding the pending investigation, and specifically whether it desired to continue operating. His response was as follows: "I understand the company is most interested in turning over the company to some sort of public ownership subject to negotiations with Maryland Environmental Services and Washington County Sanitary Commission. I think the first step from our point of view is we have to have some evaluation of the company.

If the ³⁴² public agencies are going to take the position that the company is worth $30,000, they are going to base it, as the Commission did in its rate case, the value of the company is based on assets acquired in 1902 or 1900, the turn of the century, I don’t see how we can go on. I think the first step is to come to the reasonable value of the company. I think we should do that now before July 14.” (Emphasis supplied.) On May 5, 1978 — nearly 10 months (rather