In re Quechee Service Co.
Annotate this Case
In re Quechee Service Co. (95-047); 166 Vt. 50; 690 A.2d 354
[Filed 13-Dec-1996]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
No. 95-047
In re Petition of Quechee Service Supreme Court
Company, Inc. for a Certificate of
Public Good and for Approval of On Appeal from
Rates, Rules and Regulations Public Service Board
September Term, 1995
Richard H. Cowart, Chair
James B. Anderson of Ryan Smith & Carbine, Ltd., Rutland, for
appellant
Michael Marks of Tarrant, Marks & Gillies, Montpelier, for appellee
Quechee Lakes Landowners' Ass'n
Geoffrey Commons, Special Counsel, Montpelier, for appellee Department
of Public Service
PRESENT: Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.
JOHNSON, J. In this case we review two orders of the Public Service
Board concerning Quechee Service Company (QSC), a once-private sewer
company that became subject to the jurisdiction of the Board following the
adoption of 30 V.S.A. § 203(6) in 1993. In the first of the challenged
orders the Board established an initial rate base and cost-of-service for
QSC; in the second, the Board denied QSC a certificate of public good
(CPG). On appeal, QSC contests each aspect of the Board's decision,
claiming that the Board erred: (1) by reducing QSC's rate base to reflect
the percentage of development costs recovered through lot sales and then
further reducing QSC's rate base to account for depreciation; (2) by
determining a cost-of-service that was less than QSC's annual
out-of-pocket expenses for utility operations, and did not include certain
expenses requested by QSC; and (3) by denying QSC a CPG based on acts that
occurred before QSC was subject to regulation. In addition, QSC raises a
number of constitutional claims, essentially arguing that the Board
violated its due process rights by
confiscating QSC's rate base and depriving QSC of its "vested property
right" to operate a sewer plant in Vermont. We affirm the Board's order in
all respects.
This case raises a combination of familiar issues and new questions.
The unusual position of QSC, as a private utility with a twenty-year
operating history that has now become subject to regulation by the Board as
a public utility, complicates both the findings and decisions of the Board
and our review of those decisions. Yet, although this case is complex, and
in some ways novel, our standard of review remains the same. Public
Service Board orders "enjoy a strong presumption of validity," and we will
accept the Board's findings and conclusions "unless the appealing party
demonstrates that they are clearly erroneous." In re Green Mountain Power
Corp., 162 Vt. 378, 380, 648 A.2d 374, 376 (1994). Our deferential review
of the Board's findings recognizes the special expertise of the Board in
these matters. See In re East Ga. Cogeneration Ltd., 158 Vt. 525, 531, 614 A.2d 799, 803 (1992).
I. Background
The Quechee Lakes Subdivision is a resort community that was created
in the late 1960s. The subdivision was developed by Quechee Lakes
Corporation (QLC), which was required as a condition of its Master Plan to
provide for off-site sewage disposal for all lots not suitable for on-site
disposal. QLC formed QSC at some point in the late 1960s or early 1970s,
to facilitate sewage disposal for the subdivision. QSC, QLC, and the Town
of Hartford entered into an agreement in 1973 for the construction of a
sewage treatment plant. QSC and QLC agreed to construct the plant, and to
pay Hartford to operate it. QSC agreed to serve customers other than those
living in the subdivision. In 1977 and 1982, QLC deeded the sewer
facilities it constructed (including the plant, leach fields, mains,
pumping stations, sewer easements and real estate) to QSC.
In 1979, David LaRoche and associates purchased the stock of QLC and
its subsidiaries, including QSC, from CNA Financial for $480,000. From
1986 to 1989, LaRoche held all of QLC's stock, while the LaRoche Grantor
Income Trust, of which LaRoche was trustee, held all
the stock of QSC. In June 1989, the LaRoche Trust sold the stock of QSC,
QLC, and the Quechee Water Company to NECO Enterprises, Inc., a Rhode
Island holding company, for $6,500,000. During the first six months of
1989, LaRoche received dividends of $7,331,792 from QLC, QSC and
affiliates. The dividends were not matched by earnings. The Quechee
Companies showed losses of $1.48 million in 1988, and $551,841 during the
first six months of 1989. LaRoche is also the President, Chief Executive,
and majority shareholder of NECO (although his NECO stock is being held as
collateral for overdue debts). In 1993, LaRoche was convicted of bank
fraud in Rhode Island.
During this period, QSC's rates rose sharply. Purchasers of lots in
the subdivision are required by deed to pay availability, connection and
use fees to QSC if their lots are benefitted by and contiguous to a sewer
main. Use fees are paid by those who are connected to the sewer system,
while those holding empty lots pay availability fees. QSC's use fees
increased more than 1000%, from $105 per year to $1092 per year, over the
ten-year period from 1983 to 1993.
In 1993, the Legislature adopted 30 V.S.A. § 203(6), expanding the
jurisdiction of the Public Service Board to include sewage companies
servicing 750 or more "connections." 1993, No. 21, § 19. The next year
the Legislature clarified the Board's jurisdiction and its intent by
amending § 203(6) to cover sewage companies servicing 750 or more
"household or dwelling units." 1993, No. 120 (Adj. Sess.). This amendment
applied to all Board proceedings commencing on or after May 12, 1993, the
effective date of the earlier act. Id. Because QSC services more than 750
households, it became subject to regulation by the Board as of that date.
Following extensive hearings, a hearing officer appointed by the Board
recommended setting QSC's rate base at $1,004,696 and its cost of service
at $528,879, and also recommended denying QSC a CPG. In its order issued
on November 15, 1994, the Board largely adopted the findings of the hearing
officer, but modified some calculations to establish a rate base of
$224,665 and a cost of service of $398,154. As is more fully explained
below, the Board, on remand from this Court to explain an apparent clerical
error in the Board's calculations, further
reduced QSC's rate base to $167,775 and its cost of service to $387,455.
Finally, in an order dated December 30, 1994, the Board denied QSC a
certificate of public good and required the sale of QSC's stock or assets.
This appeal followed.
II. Rate Base Calculation
The rate base of a publicly regulated utility is a dollar amount
representing the utility's net plant investment. The usual formula for
calculating rate base is capital investment plus improvements minus
depreciation. In re Town Hill Water Co., 139 Vt. 72, 75, 422 A.2d 927, 928
(1980). After determining a utility's rate base, the Board determines
rates for the utility that represent a fair rate of return on that
investment. Green Mountain Power Corp., 162 Vt. at 381, 648 A.2d at 376.
Straightforward application of this formula to QSC is complicated,
however, by the gaps and inconsistencies in QSC's financial records. QSC
has not operated as a regulated utility for most of its twenty-year
history. Neither the Board nor the parties had the benefit of the type of
complete and careful financial records required of regulated utilities.
Rather, the Board had the difficult task of calculating a rate base for a
company with "fragmentary" financial records, "casual" financial
connections with affiliates, and multiple changes of ownership. No audited
financial statements were available for QSC, and few were available for its
affiliates.
In the face of these obstacles, the Board attempted to apply the
formula to achieve a just and reasonable result, based on the information
available to it. Choosing a method to calculate rate base is a matter that
is within the Board's expertise. In re Young's Community TV Corp., 141 Vt.
53, 56, 442 A.2d 1311, 1313 (1982); see also Duquesne Light Co. v Barasch,
488 U.S. 299, 315-16 (1989) (constitution does not compel single theory of
ratemaking; within broad limits, states are free to decide what methodology
best meets their needs in balancing interests of utility and public);
Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944)
(agency not bound to use of any single formula in determining rates; it is
result reached, not method used, that is controlling). We will uphold the
Board's determination unless it is
shown to be clearly erroneous. Green Mountain Power Corp., 162 Vt. at 380,
648 A.2d at 376.
A. Methodology
In calculating QSC's rate base, the Board was concerned with crediting
QSC's customers for both the depreciation of QSC's assets since
construction, and for the contributions in aid of construction made by QSC
customers.(FN1) See id. at 383, 648 A.2d at 378 (once customers have
returned portion of utility's investment, they should not be required to
pay for that portion again). The Board's rate base calculation thus begins
with the original cost, and reduces that amount by the percentage of the
cost recovered through sales of lots. The unrecovered original cost is
then depreciated. Finally, expenditures for additions subsequent to the
original investment are added to the depreciated unrecovered original cost
to yield QSC's rate base.
QSC's first objection to the Board's rate base calculation is the
reduction based on the percentage of cost recovered through sales of lots.
Although recognizing that its original cost must be reduced to some extent
for customer contributions in aid of construction, QSC argues that those
contributions should be calculated based solely on the connection fees paid
by purchasers of lots in the subdivision to connect to the sewer system.
The Board chose instead to calculate customer contributions using the
percentage of QLC's development costs recovered through lot sales. That
is, the Board assumed that each time QLC sold a lot, it recovered a
proportional share of its overall development costs, including the cost of
constructing the sewer plant. While part of that cost may have been
labelled "connection fee," the rest would have been built into the price of
the lot.
The Board's decision is supported by the evidence. QSC is part of a
larger development scheme. The Board found that QLC expected to recover
all of its investment cost, including investment in sewage facilities,
through lot sales and connection fees. Cf. In re Eastman Sewer
Co., 636 A.2d 1030, 1031 (N.H. 1994) (upholding finding of public utility
commission that sewer company recovered the cost of its system through
condominium and lot sales). By calculating customer contributions using
percentage of costs recovered through lot sales, rather than the amounts
labelled connection fees, the Board merely recognized that buyers of land
are generally concerned only with the total price, not with the relative
amounts included within that price.
Although challenging the Board's calculation of customer contributions
as "result oriented," QSC's argument is limited to a claim that only those
payments from customers labelled "connection fees" should be subtracted
from rate base. QSC does not attempt to explain the fatal flaws in its
argument: if QLC recovered the cost of the sewer facilities only through
connection fees, then QLC (1) recovered none of its cost from hundreds of
purchasers of condominiums, who paid no connection fee, and (2) would not
have recovered the entire cost of the sewer facilities even if every lot in
the subdivision sold, because the connection fees were not sufficient to
repay QLC for its investment in the sewer facilities. In light of these
unlikely propositions, the Board reasonably concluded that QLC intended to
recover its investment in the sewer facilities through lot sales as well as
QSC further argues that if the Board reduces its rate base by the
percentage of costs recovered through lot sales, then the Board may not
also reduce QSC's rate base by straight-line depreciation. According to
QSC, this calculation "double counts" QSC's depreciation, because the
Board is treating the sewer facility as both a separate depreciable asset
and as a component of QLC's cost of nondepreciable real estate
inventory.(FN2) The Board, QSC claims, may apply only one method of
calculating rate base: either by depreciation and connection fees as
established by QSC, or by costs recovered through lot sales and connection
fees.
In calculating QSC's rate base, the basic question before the Board
was how much of the cost of the sewer facilities was paid for by QSC's
customers. We do not accept QSC's argument that the Board could consider
customer contributions either through lot sales, or through depreciation,
but not both. Had QSC been a regulated company, depreciation would have
reduced QSC's rate base over the past twenty years. See, e.g, Green
Mountain Power Corp., 162 Vt. at 384, 648 A.2d at 378 (Board erred by
failing to adjust rate base for interim-year accumulated depreciation).
Customers may pay for utility plant costs both through contributions in aid
of construction, which reduce the utility's net investment, and through
depreciation, which is charged to customers over time. As depreciation is
based on investment net of contributions in aid of construction, this
calculation does not "double-count" depreciation. Moreover, the Board
found that QSC's rates, particularly in the five years preceding
regulation, were sufficiently high to repay investors for their
depreciation expense.
QSC contends, however, that labelling a portion of its preregulatory
profits as depreciation constitutes retroactive ratemaking. QSC claims
that the Board, in effect, is attempting to refund customers for excessive
past rates by reducing QSC's rate base. QSC is correct that the Board may
not set rates for regulated utilities that are intended to redress past
inequities. That is, the Board may not set rates that credit customers for
past overpayments or repay the utility for past shortfalls. In re Central
Vt. Pub. Serv. Corp., 144 Vt. 46, 53, 56, 473 A.2d 1155, 1159, 1160 (1984).
In the context of this case, the Board would be engaging in retroactive
ratemaking if it set artificially low rates for QSC to make up for
purportedly excessive rates paid by customers in past years. But there is
no dispute here with the prospective rates set by the Board. Rather, QSC
challenges the Board's conclusion that a certain portion of the monies
collected by QSC through its preregulatory rates must be deemed
depreciation.
The Board made an assumption, one that, in our view, was reasonable
under the circumstances of this case, that over the many years since the
sewer facilities were built, QSC's
customers have been funding depreciation expense on the unrecovered cost of
the sewer facilities. This assumption is supported by the fact that QSC's
rates were sufficiently high to include a charge for depreciation.
Moreover, depreciation is a normal operating expense for a utility, as for
any business with substantial capital investment. See Knoxville v.
Knoxville Water Co., 212 U.S. 1, 13-14 (1909) (before coming to question of
profit, utility has both right and duty to set aside earnings sufficient to
make good depreciation on its property). Indeed, if the Board had not
reduced QSC's rate base to account for depreciation, QSC's customers would
have been forced to pay a portion of the plant investment twice, "once as
depreciation expense and again as a return on plant value." Green Mountain
Power Corp., 162 Vt. at 383, 648 A.2d at 378.
Nor do we accept QSC's claim that the Board improperly based its rate
base calculation on the fair value of its sewer facilities. QSC has
mischaracterized the Board's decision. The Board did note the effects of
time on the sewer facilities, pointing out that QSC's property is in poor
condition. In so doing, however, the Board merely underlined the
unfairness that would result if QSC's rate base were not adjusted for
depreciation.
QSC's dispute with the Board's methodology can be summarized as a
complaint that the Board deviated from generally accepted utility
accounting principles in calculating QSC's rate base. QSC fails to
suggest, however, how those principles can be applied to a utility that for
twenty years failed to follow them. Preregulation, QSC was not obligated
to follow the principles applicable to public utilities, and is therefore
entitled to some latitude with respect to its financial records.
Nevertheless, QSC cannot insist that the Board now adhere strictly to those
principles in calculating QSC's rate base, where to do so would produce an
unfair result. Although QSC has suggested alternative approaches to
calculating the company's rate base, QSC has not demonstrated that the
method chosen by the Board was clearly erroneous.
B. Calculation
QSC also contests some of the numbers used by the Board in the rate
base calculation.
Specifically, QSC argues that the Board overestimated the percentage of
investment costs recovered through lot sales. The Board concluded that QLC
recovered its cost for the sewer facilities only from the sale of lots that
could be served by the sewer facilities. As most of these lots were sold,
under the Board's calculation most of the cost was recovered. QSC argues
that the cost of the sewer facilities was, like other capital costs,
intended to be spread across all of the potential lot sales. Because a
large number of the lots that QLC obtained legal approval to sell were
never sold, or in some cases even subdivided, using QSC's suggested figures
yields a much smaller percentage of recovered investment costs.
The hearing officer in his report to the Board used the figures now
suggested by QSC. The hearing officer found that QLC had the right to sell
a total of 2154 lots and that it had sold approximately 1269 lots. The
latter figure uses memberships in the homeowner's association as a proxy
for the number of lots sold. Using these numbers, the hearing officer
estimated that 58.1% of the investment in the sewer facilities had been
recovered. Rejecting this calculation, the Board instead found that only
1532 of the Quechee lots could actually be served by QSC, and that QSC
itself reported that 1470 lots had been sold. The Board thus concluded
that 95.95% of the investment costs had been recovered.
The numbers used by the Board, however, were based on an exhibit that
contained a clerical error. Recognizing this error, we remanded the case
to the Board for reconsideration of the rate base calculation. On remand,
the parties agreed to two numbers: first, that the subdivision contains
1522 separate properties that are able to receive sewer services, and
second, that of those properties, 1493 have been sold or transferred in
such a way that the developer had an opportunity to recover its investment
costs. Based on these numbers, 98.095% of the investment in the sewer
facilities has been recovered.
As the parties now agree on the relevant figures, the only question
for this Court is whether the Board erred in concluding that QLC recovered
the cost of the sewer facilities only through sales of lots able to receive
sewer services. The Board's conclusion is supported by the
record. QSC is not capable of serving 2154 lots; only 1522 lots are
benefitted by sewer mains. The Board reasonably assumed that QLC intended
to recover its investment in the sewer facilities from the purchasers of
lots served by those facilities.
The Board's calculation does not conflict with its finding that QLC
"considered the sewer system to be a development cost, like road
construction and the clubhouse complex, that would be recovered through lot
sales." The Board did treat the sewer system as a development cost
recovered through lot sales. Unlike amenities intended for the use of all
potential purchasers of lots, however, the sewer system serves only a
certain number of lots. If, for example, QLC had built a golf course for
use only by owners of single-family homes in the subdivision, QLC would not
have intended to recover that cost from purchasers of condominium units.
Similarly, the purchaser of a lot not served by the sewer system would not
expect to be charged for the construction of that system. As QLC sold
98.095% of the lots served by the sewer system, the Board did not err in
calculating that QLC recovered the same percentage of its investment in the
system.
C. Constitutional Claim
QSC also argues that the Board confiscated its rate base in violation
of the Fourteenth Amendment to the United States Constitution. As we have
previously recognized, public utilities in Vermont have a right to a
reasonable, nonconfiscatory rate of return. See Arlington Selectmen v.
Arlington Water Co., 136 Vt. 495, 498, 394 A.2d 1130, 1131-32 (1978). That
right has a constitutional dimension. See Duquesne Light Co., 488 U.S. at
310 ("At the margins, these questions [as to whether specific rates are
unjust or unreasonable] have constitutional overtones."). QSC's investors
are entitled to a return on their investment, however, not on the
investment of others; that is why customer contributions to plant
investment are deducted from rate base. See Eastman Sewer Co., 636 A.2d at
1032. As the Board reasonably concluded that most of the investment in the
sewer system was recovered from QSC's customers, the Board did not
confiscate QSC's rate base by excluding those customer
contributions from its rate base calculation.
III. Cost of Service
We next consider QSC's challenge to the portion of the Board's order
establishing QSC's cost of service. As a general matter, QSC complains
that the Board's order is result-oriented, clearly erroneous, and not
entitled to any deference from this Court. QSC points to two facts in
support of its argument: first, that the temporary rate set by the Board
allowed a larger cost of utility operations than does the final order, and
second, that the amount approved by the Board to fund the utility's annual
expenses is substantially less than the expenditures approved by the
Board-appointed independent trustee that ran QSC during 1994.
QSC's claim has no legal basis. Temporary rates are established
quickly, without a "full and detailed explanation of the supporting and
opposing issues." In re Green Mountain Power Corp., 142 Vt. 373, 390, 455 A.2d 823, 831 (1983); see also 30 V.S.A. § 226(a) (if necessary, following
preliminary hearing, Board shall authorize immediate reasonable temporary
rate increase pending final determination). As a utility may be required
to refund excess temporary rates to customers after the rate case is
decided, see 30 V.S.A. § 226(a), the Board may be somewhat generous to a
utility when it sets temporary rates without a full understanding of the
circumstances. QSC may not use the temporary rates, set prior to the
lengthy and exhaustive hearings in this matter, as a basis to criticize the
Board's final decision.
Nor may QSC rely on reports filed by the independent trustee as
evidence of the company's legitimate annual expenses. These trustee
reports are not part of the record in this case. Moreover, based on the
parties' allegations, the trustee's accountings cover a portion of 1994,
and are therefore not related to the test year used in this case, which
ended December 31, 1993. We decline to consider these reports on appeal.
QSC also contests several specific aspects of the cost-of-service
order. First, QSC maintains that the Board violated generally accepted
utility accounting principles by not including in the cost of service a
$30,000 charge for investigating and repairing water infiltration. The
Board found that the project should be treated as a capital expense, and
not included in the cost of service. Tellingly, QSC points to nothing in
the record or the Board's findings to support its description of
"betterment accounting" principles or its claim that such principles
require including the charge in the cost of service. A single cite to
inapposite federal regulations governing electric plants, see 18 C.F.R. §
10(c)(3) (1995), does not demonstrate that the Board's finding is clearly
erroneous. In the absence of such a showing, the finding must stand.
Next, QSC argues to this Court that the Board should have granted it a
bad debt allowance of 12.94% of its cost of service. In the hearings
below, however, both QSC and the Quechee Lakes Landowners' Association
recommended a bad debt allowance of approximately 2% of cost of service,
the same figure chosen by the Board. Again, as the Board's determination
is adequately supported by the record, we will not disturb it.
For the same reason, QSC's last challenge to the cost-of-service order
must fail as well. QSC maintains that the Board's allowance of $87,674 for
rate case expenses is insufficient and not based on the evidence. In
support of its claim QSC again relies on trustee documents that are not
part of the record. In addition, QSC ignores the fact that the Board's
allowance for rate case expenses is more than twice the amount expended
during the test year and somewhat larger than the $80,000 requested by QSC.
IV. Certificate of Public Good
In its second order, the Board denied QSC a CPG to operate the Quechee
sewer system. See 30 V.S.A. § 231(a) (applicant desiring to own or operate
business within Board's jurisdiction shall first petition Board to
determine whether operation of such business will promote general good; if
Board finds favorably, it shall award applicant CPG). The Board considered
the past management practices of QSC, including insufficient maintenance,
excessive dividends, unexplained cash transfers to NECO, QSC's parent
company, and salary guarantees in QSC's name for persons working for NECO.
The Board also noted QSC's history of poor customer relations, including
one instance where LaRoche materially misrepresented the cost of
the sewer facilities in an attempt to justify a rate increase to the
customers. Finally, the Board found that QSC was financially unstable and
unable to raise capital, based in part on liabilities that QSC incurred on
behalf of NECO. In light of QSC's financial instability and the
irresponsible past behavior of QSC's management, the Board concluded that
issuing a CPG would not promote the general good of the State.(FN3)
QSC does not contest these findings, but instead makes a number of
convoluted statutory and constitutional claims, essentially arguing: (1)
that QSC was automatically granted a CPG when 30 V.S.A. § 203(6) went into
effect, and the Board could not revoke that CPG based on acts occurring
prior to the effective date; and (2) that requiring QSC to petition for a
CPG and permitting the Board to consider past acts in ruling on that
petition violates several constitutional provisions, including the Due
Process and Equal Protection clauses of the Fourteenth Amendment and the
prohibition on bills of attainder. We first consider the statutory claim
and then turn to the constitutional arguments.
A. Statutory Interpretation
QSC maintains that 30 V.S.A. § 126, the saving clause for corporations
formed prior to April 2, 1915 that conduct business subject to Board
regulation, entitles QSC to a "grandfathered" CPG. The most obvious flaw
in this argument is that § 126 on its face does not apply to a company
formed in the late 1960s or early 1970s. Moreover, § 126 predates 30
V.S.A. § 231, which establishes the CPG requirement. QSC's suggestion that
§ 126 should apply by analogy is also unavailing. Even if we were to
accept the proposition that corporations governed by § 126 automatically
received CPGs when § 231 was enacted years later, QSC has shown only that
the Legislature knows how to draft "grandfather" provisions. See 30 V.S.A.
§ 503(a)(1) (Board shall issue CPG, without requiring proof that business
will promote general good, to any company that owned or operated cable
television system as of February 10, 1970). The Legislature made no such
provision in § 203(6) and we see no reason to infer an intent to do so from
an eighty-year-old statute of questionable relevance.
B. Constitutional Claims
QSC's first constitutional claim is that the Board violated its due
process rights by denying a CPG based on acts occurring prior to
regulation. According to QSC, the Board unconstitutionally applied §
203(6) retroactively, depriving QSC of its "vested property right" to
operate the Quechee sewer facilities.
In making this argument, QSC mischaracterizes the Board's decision.
The Board did not deny a CPG merely because QSC's past behavior fell below
the standard expected of a regulated utility. The Board considered QSC's
current financial condition and ability to provide services in the future.
But the Board could not evaluate the company in a vacuum. QSC's current
financial instability is the result of past financial mismanagement,(FN4) and
past management decisions are obviously relevant in attempting to predict
future behavior.(FN5)
We are not persuaded that the Board applied § 203(6) retroactively.
Cf. Carpenter v. Department of Motor Vehicles, 143 Vt. 329, 333, 465 A.2d 1379, 1382 (1983) (retroactive laws defined as those that take away or
impair vested rights acquired under existing laws, or create new
obligation, impose new duty, or attach new disability with respect to past
transactions). The Board did not punish QSC for its preregulatory acts, nor
did it set artificially low rates to
compensate customers for past abuses. QSC has not been required to repay
its customers for excess profits earned during the years the company
operated free of regulation. The Board simply judged QSC's present fitness
to operate a regulated utility, and in so doing had no choice but to
consider QSC's past conduct as a guide to its likely future behavior.(FN6)
See In re Telesystems Corp., 143 Vt. 504, 507 n.*, 509, 469 A.2d 1169, 1170
n.*, 1171-72 (1983) (applicant's business experience considered in
evaluating cable company's petition for CPG). Any CPG applicant must expect
the Board to consider past incidents of mismanagement in making its
decision.
At any rate, QSC has no "vested property right" to conduct a sewer
business that could be affected by the Board's decision. QSC holds no
franchise or other grant of authority from the State to operate the Quechee
facilities. See State v. Gibbs, 82 Vt. 526, 527-28, 74 A. 229, 229 (1909)
(franchise is grant by or under authority of government; it has legal
character of property or estate in which holder has vested right and is
entitled to same constitutional protection as other property). As we have
already rejected QSC's "grandfathering" claim, the only basis for this
claimed right is the company's twenty-year operating history. Not
surprisingly, however, QSC can point to no case that holds that a company's
history of operating a particular business or providing a particular
service gives the company a vested right to continue doing so. Cf. id. at
528, 74 A. at 230 (license to sell liquor is not franchise that gives
holder vested rights).
QSC's claim that § 203(6) is an unconstitutional bill of attainder,
see U.S. Const. art. I, § 9, is similarly without merit. A bill of
attainder is "a law that legislatively determines guilt and inflicts
punishment upon an identifiable individual without provision of the
protections of a judicial trial." Nixon v. Administrator of Gen. Servs.,
433 U.S. 425, 468 (1977). Although
§ 203(6) did impose a burden on QSC by subjecting it to regulation, the
United States Supreme Court has recognized that "[f]orbidden legislative
punishment is not involved merely because [a statute] imposes burdensome
consequences." Id. at 472. Rather, the proper inquiry is whether the
statute "fairly can be characterized as a form of punishment leveled
against" QSC. Id. at 473.
Based upon the Supreme Court's analysis in Nixon, we conclude that the
Legislature did not enact § 203(6) as a form of punishment. The statute
"further[ed] nonpunitive legislative purposes," id. at 475-76, by
subjecting a company operating a monopoly utility (FN7) to regulation by the
Board. See United States v. Patzer, 15 F.3d 934, 942 (10th Cir. 1993)
(statute defining "outfitter" to include "hunting clubs," thereby
subjecting hunting clubs to licensing requirement, was not bill of
attainder). The Legislature did not confiscate QSC's property (FN8) nor bar
it from the sewer business. See Nixon, 433 U.S. at 473-74 (discussing
legislative punishments
traditionally considered bills of attainder). The question of whether QSC
would receive a CPG was properly left to the Board, which applied the same
standards to QSC as to any applicant.
Indeed, QSC directs its bill of attainder claim more at the Board's
construction of § 203(6) than at the statute itself. Here, however, QSC
relies on arguments that we have already rejected, namely that the Board
confiscated its rate base and improperly "revoked" its CPG. Assuming that a
nonpunitive statute can be transformed into a bill of attainder by the
actions of a regulatory body, but see Walmer v. U.S. Dep't of Defense, 52 F.3d 851, 855 (10th Cir. 1995) (constitutional prohibition against bills of
attainder applies to legislative acts, not to regulatory actions of
administrative agencies), that did not occur in this case. The Board made
the regulatory decisions that are entrusted to its expertise, and did so in
a fair and reasonable manner. QSC may be unhappy with the result, but it
nonetheless has not been punished.
QSC's claim that § 203(6) violates the Equal Protection Clause has
even less merit. The statute is an economic regulation that impinges no
fundamental right and involves no suspect classification. It is therefore
presumed to be constitutional, and must stand if it is reasonably related
to a legitimate public purpose. See Choquette v. Perrault, 153 Vt. 45,
51-52, 569 A.2d 455, 458-59 (1989). A statute subjecting a private sewage
company that serves 750 or more households or dwelling units to regulation
by the Board benefits the public by preventing abusive monopoly sewage
rates and promoting public health. The so-called "rational basis" test is
therefore easily met. Cf. Town of Sandgate v. Colehamer, 156 Vt. 77, 88,
589 A.2d 1205, 1211 (1990) (zoning ordinance not unconstitutional, even
though it applied to only one person at time of passage; ordinance was
neutral on its face and its purposes were reasonably related to public
interest).
V. Conclusion
Finally, QSC repeatedly argues that the Board in this matter was
motivated by improper regulatory objectives, namely putting QSC out of
business and effectively confiscating its assets, and that this Court
should not defer to the Board's decisions in this matter. See In re Green
Mountain Power Co., 142 Vt. at 380, 455 A.2d at 825 (Board's decisions
subject to great deference by this Court so long as they are directed at
proper regulatory objectives). QSC supports this claim with allegations
that the outcome of the hearings in this case was "pre-ordained" and that
in effect the Board used its regulatory power to "immediately strip[]" QSC
of its rate base and "automatically revoke[]" its CPG.
An examination of the record shows that these allegations are
baseless. The Board's actions in this case were neither arbitrary nor
abbreviated; rather, its orders are based on lengthy technical hearings,
presided over by a hearing officer who even QSC admits was impartial and
fair. The Board's decisions include detailed findings and lengthy
discussions of the legal and factual bases for the Board's decision.
Nothing in the record suggests that the Board was motivated by any goals
other than the protection of the general good of the State and the
reasonable interests of the customers and investors of QSC. We have
concluded that each challenged element of the Board's orders is adequately
supported by the record; as QSC's individual claims fail, so must its
overall claim that the Board exceeded its authority and engaged in
result-oriented decision-making.
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. For a regulated utility, the cost of a capital improvement is
reduced by customer contributions in aid of construction before that cost
is entered into the utility's rate base.
FN2. QSC and its parent companies have, ironically, been treating the
sewer facility as both a depreciable asset and an asset held for resale.
The financial reports and tax returns of the parent companies have treated
the sewer assets as property held for resale, while QSC's own financial
reports (unaudited) and tax returns have classified those assets as
depreciable property.
FN3. The Board also referred briefly to proceedings in another case
before it. Apparently, the Board had recently issued a preliminary
injunction to prevent improper cash transfers from Quechee Water Company,
QSC's sister utility, to NECO. QSC claims that the Board violated QSC's
due process rights by relying on acts of QWC. The Board, however, merely
mentioned this incident in a footnote. The Board's decision denying the
CPG was based on other, substantial evidence concerning QSC alone.
FN4. QSC's complaint that "QSC is as financially stable as the Board
wants it to be" is disingenuous. Of course, if the Board awarded QSC an
unjustifiably high rate base, QSC would be in a stronger financial
position. But QSC's customers are not required to bail out the company by
paying a second time for the cost of the sewer facilities.
FN5. QSC suggests that the Board could award a CPG and simultaneously
appoint a trustee to run the operation. We agree with the Board that if a
trustee and/or other costly safeguards are necessary to protect the public
from QSC's management, awarding the company a CPG would not serve the
general good.
FN6. Considering only actions occurring after QSC became subject to
regulation would not have provided guidance to the Board, as for much of
that time QSC has been run by an independent trustee.
FN7. The Board stated that § 203(6) "appears designed to apply to
only one sewage company." That the statute defines what is in effect a
class of one does not render the statute void as a bill of attainder. See
L.H. Tribe, American Constitutional Law 643 (2d ed. 1988) (law imposing
prophylactic measure designed to achieve nonpunitive public purpose on
persons with certain general characteristic is not bill of attainder merely
because set of persons having that characteristic might be identifiable and
known at time law is passed); cf. Nixon v. Administrator of Gen. Servs.,
433 U.S. 425, 472-73 (1977) (act concerning presidential papers that refers
to President Nixon by name does not automatically offend Bill of Attainder
Clause; focus of act can be fairly and rationally understood because only
President Nixon's papers demanded immediate attention).
Nor has QSC presented evidence of a legislative intent to punish. See
Nixon, 433 U.S. at 478 (inquiring whether legislative record evinces intent
to punish). The fact that QSC's past abuses were considered by the
Legislature is hardly surprising; the regulatory provision was a response
to those problems. And comments made by an attorney for the Department of
Public Service to a newspaper reporter after the legislation passed are in
no way relevant to the question of legislative intent.
FN8. The Supreme Court's decision in Nixon v. Administrator of Gen.
Servs. does not support QSC's claim that its property was punitively
confiscated. The Nixon court specifically rejected such a claim because
the statute at issue provided for just compensation. 433 U.S. 425, 475
(1977). Similarly, QSC has the right to sell its stock or assets at fair
market value, based on a just and reasonable rate base set by the Board.
As QSC will "`be put in the same position monetarily as [it] would have
occupied if [its] property had not been taken,'" id. (quoting United States
v. Reynolds, 397 U.S. 14, 16 (1970)), it cannot argue that the State has
punitively confiscated its property.
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