Opening Brief Filed In Kentucky-American Water Appeal Posted: May 20, 2009
COMMONWEALTH OF KENTUCKY
FRANKIN CIRCUIT COURT
CIVIL ACTION NO. 2008-CI-1055
CITIZENS FOR ALTERNATIVE WATER SOLUTIONS,
V. BRIEF FOR PLAINTIFF CITIZENS FOR ALTERNATIVE WATER SOLUTIONS
KENTUCKY PUBLIC SERVICE COMMISSION, et al.
* * * * *
This action seeks judicial review pursuant to KRS 278.410(1) of a June 5, 2008 Order of the Public Service Commission (Commission) denying the Petition of Citizens for Alternative Water Solutions (“CAWS”) for Rehearing of an Order of April 25, 2008 in the case of
In the Matter of: The Application of Kentucky-American Water Company For a Certificate of Convenience And Necessity Authorizing The Construction Of Kentucky River Station II, Associated Facilities And Transmission Main, PSC Case No. 2007-00134 and of the April 25, 2008 Order. The Motion For Rehearing sought rehearing by the Commission of its April 25, 2008 Order granting the application of Kentucky-American Water Company (“KAWC”) for a Certificate of Public Convenience and Necessity (“CPCN”) to construct a twenty (20) million gallon per day (GPD) water treatment plant in Owen County adjacent to Pool 3 of the Kentucky River, and approximately 160,000 linear feet of associated transmission main to transport the treated water from that plant to KAWC’s facilities in Fayette County, Kentucky.
For the reasons stated below, CAWS urges this Court to vacate and set aside the Commission’s April 25, 2008 Order granting the CPCN on the ground that it is unlawful and unreasonable.
This complaint and petition for review is filed pursuant to KRS 278.410, which provides in relevant part that:
"(1) Any party to a commission proceeding . . . may, within thirty (30) days after service of the order, or within twenty (20) days after its application for rehearing has been denied by failure of the commission to act, or within twenty (20) days after service of the final order on rehearing when a rehearing has been granted, bring an action against the commission in the Franklin Circuit Court to vacate or set aside the order or determination on the ground that it is
unlawful or unreasonable. Service of a commission order is complete three (3) days after the date the order is mailed. Notice of the institution of such action shall be given to all parties of record before the commission."
The final Order from which this complaint and petition for review is taken was entered on June 5, 2008. This action was timely filed within the meaning of KRS 278.410(1), having been filed within the twenty (20) day period following the three (3) day period prescribed by statute after which service of the Order is deemed to be complete.
This court has jurisdiction to hear this petition for review pursuant to KRS 278.410(1). The June 5, 2008 Commission Order is a final and appealable order, and it is an “order of the Commission” within the meaning of that statute.
Plaintiff CAWS was an Intervenor in the underlying administrative process from which this appeal is taken. CAWS is a non-profit corporation in good standing, organized under the laws of the Commonwealth of Kentucky, with its principal office at 2390 Sullivan Lane in Frankfort, Kentucky 40601, and dedicated to development of environmentally sound, fiscally responsible and socially just solutions to Central Kentucky’s water needs. According to the mission statement adopted by the Board of CAWS, the organization supports “the search for solutions that will have the least overall impacts on the communities and cultural and ecological resources of the region.”
CAWS interest includes both property interests, and interests in assuring safe and dependable water supplies at a reasonable cost to ratepayers. CAWS membership includes, but is not limited to, individuals who are ratepayers of KAWC, and numerous individuals whose properties lie in the direct path of Kentucky-American’s route for the transmission main from the proposed Kentucky River Station II. CAWS, on behalf of its members, is a “person” whose interests as property owners and ratepayers are or may be adversely affected by the Commission’s June 5, 2008 Order denying the request for rehearing of the April 25, 2008 Order, and by the granting of the CPCN to KAWC.
As a party granted the status of full Intervenor in Case 2007-00134 by the Commission on May 11, 2007, CAWS is among those parties authorized by KRS 278.410(1) to maintain an action seeking review of the June 5, 2008 and April 25, 2008 Orders.
The Commission, an agency of the Commonwealth of Kentucky, was named as respondent as directed by KRS 278.410(1). KAWC, Louisville Water Company (LWC), Office of Attorney General, Lexington-Fayette Urban County Government (LFUCG), Kentucky Industrial Utility Customers, Inc., Bluegrass Water Supply Commission (BWSC), and the Kentucky River Authority (KRA), are all parties of record in the underlying administrative proceeding, and were likewise named as Defendants.
STATEMENT OF FACTS
The factual and procedural background for the Certificate of Public Convenience and Necessity proceeding is provided in pp. 1-23 of the Commission’s April 25, 2008 Order. Following issuance of that Order, CAWS sought rehearing before the Commission, which was denied by Order issued June 5, 2008. This appeal followed.
STANDARD OF REVIEW
Kentucky American Water Company had the burden of demonstrating entitlement to the requested CPCN before the Commission. Energy Regulatory Com. v. Kentucky Power Co., 605 S.W.2d 46, 50 (Ky. App. 1980) citing Lee v. International Harvester Co., 373 S.W.2d 418, 420 (Ky. 1963). As the party challenging the determination of the commission to issue the CPCN, CAWS has the burden of proving that the Commission’s order was unreasonable or unlawful. KRS 278.430; Energy Regulatory Com. v. Kentucky Power Co., 605 S.W.2d 46, 50 (Ky. App. 1980). An agency’s decision is unlawful if it is in violation of a state or federal statute or provision of the constitution. Commonwealth v. PSC of KY, 2008 Ky. App. Lexis 29, *10 (February 1, 2008).
A determination is unreasonable where it is unsupported by substantial evidence. Id.
“[T]he test of substantiality of evidence is whether when taken alone or in the light of all the evidence it has sufficient probative value to induce conviction in the minds of reasonable men." Kentucky State Racing Commission v. Fuller, 481 S.W.2d 298, 308 (Ky. 1972). Although the Commission’s evaluation of the evidence presented and the credibility of witnesses is entitled to deference by a reviewing court, anything in the record that detracts from the weight of the evidence must be taken into account in determining whether the evidence is substantial. Id.; Willbanks v. Secretary of Health & Human Services, 847 F.2d 301 (6th Cir. 1988) (quoting Universal Camera Corporation v. NLRB, 340 U.S. 474, 488, (1951). Findings of fact of an administrative agency are not to be given deference by this Court where they are not supported by substantial evidence of probative value. Burch v. Taylor Drug Store, Inc., Ky. App., 965 S.W.2d 830, 834-35 (1998). Where the agency decision on a factual issue was arbitrary or capricious, this Court may freely substitute its judgment for that of the agency. McManus v. Kentucky Retirement Systems, Ky. App., 124 S.W.3d 454 (2003).
Additionally, questions of law may always be corrected by a reviewing court and are reviewed de novo. Reis v. Campbell County Bd. Of Educ., Ky., 938 S.W.2d 880 (1996); Rogers v. Fiscal Court of Jefferson County, Ky. App., 48 S.W.3d 28 (2001); Roland v. Kentucky Retirement Systems, Ky. App., 52 S.W.3d 579 (2001).
STATEMENT OF APPLICABLE LAW
On March 30, 2007, KAWC filed an application with the Public Service Commission seeking a CPCN authorizing the construction of a new water treatment plant, identified as “Kentucky River Station II” or “KRS II” as well as associated transmission lines and facilities. Record (hereinafter “CN xx, R. Doc. xx, p. xx”), CN 2007-00134, Documents 001 – 013.
As a public utility regulated by the Public Service Commission, KAWC is obligated to supply water that is “[f]rom a source reasonably adequate to provide a continuous supply of water[;] 807 KAR 5:066 Section 3(2)(c); and sufficient in quantity to “supply adequately, dependably and safely the total reasonable requirements of its customers under maximum consumption.” 807 KAR 5:066 Section 10(4). Additionally, the utility is to make reasonable efforts to “prevent interruptions of service[.]” 807 KAR 5:066 Section 4(1). The utility’s facilities are to be designed, constructed and operated to “provide adequate and safe service to its customers” 807 KAR 5:066 Section 7. Finally, a copy of any water shortage response plan filed with the [Energy and Environment Cabinet] is required to be filed with the Commission. 807 KAR 5:066 Section 17.
Issuance of a Certificate of Public Convenience and Necessity is governed by KRS 278.020(1), which states in relevant part that:
"No person, partnership, public or private corporation, or combination thereof shall commence providing utility service to or for the public or begin the construction of any plant, equipment, property, or facility for the furnishing to the public any of the services enumerated in KRS 278.010 . . .until that person has obtained from the Public Service Commission for a certificate that
public convenience and necessity require the service or construction."
That a CPCN was required in this instance is clear, since among those “services enumerated in KRS 278.010” is “the purity, pressure, and quantity of water[.]” KRS 278.010(13).
The determination of when public convenience and necessity requires the proposed service or construction, has been left to the Commission, in the first instance, and the courts, in the last.
The Courts and the Commission have both spoken to the standards to be employed in determining whether the applicant has demonstrated entitlement to a CPCN. The Court in Kentucky Utilities Co. v. Public Service Commission, Ky., 252 S.W.2d 885 (1952) described the factors to be utilized to determine whether the applicant has met the burden of establishing that public convenience and necessity demand the proposed service or facility:
"we think it is obvious that the establishment of convenience and necessity for a new service system or a new service facility requires first a showing of a substantial inadequacy of existing service, involving a consumer market sufficiently large to make it economically feasible for the new system or facility to be constructed and operated. Second, the inadequacy must be due either to a substantial deficiency of service facilities, beyond what could be supplied by normal improvements in the ordinary course of business; or to indifference, poor management or disregard of the rights of consumers, persisting over such a period of time as to establish an inability or unwillingness to render adequate service.
The above two factors have relation to the need of particular consumers for service. However, our concept of the meaning of ‘public convenience and necessity,’ as expressed in our decisions in previous cases, embodies the element of absence of wasteful duplication, as well as a need for service. (Citations omitted). Therefore, a determination of public convenience and necessity requires both a finding of the need for a new service system or facility from the standpoint of service requirements, and an absence of wasteful duplication resulting from the construction of the new system or facility."
Id., at 890. (Italics added).
The dual standards of “need” and “absence of waste duplication” have been utilized consistently by the Courts and the Commission in reviewing applications for certificates. “Duplication of facilities” means, as the Commission noted in In the Matter of The Application of East Kentucky Power Cooperative, Inc. For A Certificate Of Public Convenience and Necessity To Construct A 138 KV Transmission Line In Rowan County, Kentucky, (hereafter “Rowan County”) CN 2005-00089 (August 19, 2005), that “the Commission must examine proposed facilities ‘from the standpoints of excessive investment in relation to efficiency, and an unnecessary multiplicity of physical properties.’” Id. at p. 5, quoting Kentucky Utilities, at 891.
As the Commission noted in the December 21, 2007 Order in this case:
"To obtain a CPCN, Kentucky-American must demonstrate ‘the need for a new service system or facility from the standpoint of service requirements and an absence of wasteful duplication resulting from the construction of the new system or facility.” Kentucky Utilities Company v. Public Service Commission, 252 S.W.2d 885, 890 (Ky. 1952). Wasteful duplication, Kentucky courts have held, ‘embraces
the meaning of an excessive investment in relation to productivity.’ Id. Simply put, Kentucky-American must demonstrate that it has considered all reasonable alternatives to resolve its water supply needs and that its proposed facilities represent the most reasonable solution to those needs."
December 21, 2007 Order, CN 2007-00134 R. Doc. 502 p. 018825.
The Kentucky Utilities Court further clarified that a consideration of whether a request for CPCN would result in a wasteful duplication of facilities requires examination of the proposed facilities from the standpoints of excessive investment in relation to efficiency, “and from the standpoint of inconvenience to the public generally, and economic loss through interference with normal uses of the land, that may result from multiple sets of right of ways [sic] and a cluttering of the land with poles and wires.” Kentucky Utilities, 252 S.W.2d at 892.
Applying the standards enunciated in Kentucky Utilities and reaffirmed by the Commission in numerous decisions reviewing requests for CPCNs and in prior Orders in the underlying administrative proceedings in this case, it is apparent that the applicant KAWC failed to demonstrate entitlement to the requested certificate, and that the Commission acted unlawfully and unreasonably in granting the requested certificate inasmuch as KAWC failed to “demonstrate that it has considered all reasonable alternatives to resolve its water supply needs and that its proposed facilities represent the most reasonable solution to those needs.”
SUMMARY OF ARGUMENT
The Commission’s April 25 and June 5, 2008 Orders are unlawful and unreasonable for several distinct reasons.
First, the Commission erred in issuing the CPCN because KAWC both overestimated the need for additional water supply and water treatment capacity, and failed to adequately evaluate a range of both supply and demand-side measures that could address the water supply needs of its ratepayers and wholesale customers at a more modest cost and in a more incremental, flexible, step-wise manner.
With respect to need, the Commission acted unlawfully and unreasonably in categorically dismissing the testimony of Dr. Martin Solomon concerning future growth in demand. The Commission failed to provide any reasonable basis for summarily rejecting the use of actual historic demand data that tracked the incremental growth of consumption of water under both average and peak demand conditions, and failed to independently assess and reconcile the wide divergence between the moderate increases reflected in those actual historical demand numbers, and the significantly higher projected future demand used by KAWC. The inflated nature of the utilized demand numbers could well result in construction of unnecessary capacity, resulting in wasteful duplication that is disallowed by law.
With respect to need, the Commission failed to utilize the appropriate standard for determining what supply is “reasonable” in the severe drought scenario. While rejecting CAWS suggestion that meeting unrestricted need in the drought of record is not a reasonable goal and that conservation measures should be incorporated in identifying the target supply need, the Commission accepted as reasonable the assumption by KAWC that the only curtailment of water utilization that would be imposed in a drought of record scenario would be restrictions on lawn watering.
As to supply, the Commission approved the CPCN despite the failure of KAWC to demonstrate that it meaningfully evaluated a range of reasonable measures that, in combination, could augment both available treated and raw water supply and significantly reduce both the projected treatment and supply deficits. Despite knowing for over a decade that it would face limitations in treatment capacity, and that the available Pool 9 supply was not adequate to meet drought-of-record demand without certain actions being taken, KAWC failed to evaluate a range of feasible options that in combination could meet reasonable peak drought demand, including:
* the cost and feasibility of providing capital and in-kind engineering and other services to the Kentucky River Authority in order to expedite the completion of renovations on Dams 10 and 9 and installation of crest gates on 9;
* the cost and feasibility of a joint plan with the Louisville Water Company to serve the water supply needs of Kentucky-American’s and [Bluegrass Water Supply Commission’s] customers from the Ohio River, despite LWC’s repeated attempts to engage the utility that had previously signed (and never formally rescinded) a water supply contract to serve those needs;
* the feasibility of purchasing treated water from Versailles through an existing system interconnection;
* the possibility of interconnection with Frankfort in order to purchase treated water from the Frankfort system once it is interconnected on the western side of that system with LWC; and
* the possibility of purchasing finished water from the City of Versailles if needed to meet short-term peak drought demand.
The Commission summarily rejected CAWS suggestion that incremental expansion of available water through aggressive leak detection and conservation, coupled with access to treated water from the City of Versailles, was a viable alternative to the proposed Pool 3 Project. By rejecting alternatives that in combination could moderate demand and augment supply to address reasonable needs during the drought of record, the Commission failed to fully and fairly evaluate the possibility of scaling up supply to meet reasonable demand as an alternative to imposing on a generation of ratepayers the costs of capacity beyond that needed to meet reasonable current and near-term demand.
The record reflects that KAWC devoted scant attention to conservation or management of unaccounted for system losses, despite admonitions from the Commission in previous cases to do so. Despite these failures, the Commission approved the new supply and treatment capacity, saddling KAWC ratepayers with immediate costs for potentially unnecessary capacity.
Second, the Commission acted unlawfully and unreasonably in concluding that the differences in cost of the KAWC and Louisville Water Company (LWC) proposals were not materially significant in net present value (NPV), when the undisputed evidence indicated that at the actual usage rates that KAWC has proposed for the Pool 3 Project, that project would be at least 15% more expensive.
The Commission acted unlawfully and unreasonably for a third reason, by according unfair weight to the proposed KAWC alternative over other alternatives based on actions taken by KAWC to implement the KAWC preferred alternative prior to issuance of the CPCN. The Commission unlawfully relied on the acquisition by KAWC of those permits and easements, and on KAWC’s preliminary engineering design work, as the primary basis for rejecting other alternatives. This improper reliance on the actions taken by an applicant to advance a preferred alternative prior to Commission review and approval, has the effect of gaming the evaluation of alternatives in a manner that prejudices the fair consideration of other alternatives, which will always be “more conceptual” or “less advanced.” The Commission’s according of substantial weight to the status of the KAWC alternative relative to other alternatives, was fundamentally inconsistent with the Commission’s obligation to fairly evaluate all alternatives prior to approval of any alternative, and constitutes arbitrary government action in contravention of Kentucky Constitution Section 2.
Fourth, the Commission acted unlawfully and unreasonably in failing to fully consider the infeasibility of the Pool 3 project in light of the refusal by some private landowners to grant an easement and the doubtful power of KAWC to condemn private lands in order to install a transmission line for the Pool 3 Project. The Commission did so despite having relied on the KAWC acquisition of a fraction of the 104 needed private land easements as one of the bases for approving the KAWC project.
Fifth, the Commission acted unlawfully and unreasonably in approving the KAWC application in part on the characterization of the KAWC alternative as a regional solution; when the evidence in the record indicates that the supposed partnership with the Bluegrass Water Supply Consortium in the Pool 3 Project was more illusory than real since BWSC members could not afford to purchase the water from a 20% interest in the project absent significant public subsidy to spend down the cost of the water.
Finally, the Commission acted unlawfully and unreasonably by according any weight to the impact of the various alternatives on the Kentucky River Authority’s budget, as a factor in determining whether to approve the requested Certificate.
I. KAWC HAS FAILED TO DEMONSTRATE THE NEED FOR A NEW 20 MGD TREATMENT PLANT AND ASSOCIATED TRANSMISSION FACILITIES
The issue of how best to meet the needs of the ratepayers of KAWC for safe and dependable water supply has been the subject of several cases before the Commission. As the Commission noted in the December 21, 2007 Order, the “decision in this case will affect hundreds of thousands of ratepayers for decades to come[.]” Id. at 3. CN 2007-00134, R. Doc. 502, p. 018827. The approval of the requested treatment plant and associated facilities would significantly affect a generation of ratepayers, and the Commission acted with appropriate circumspection in assuring that “no stone has been left unturned, and that all reasonable proposals have been examined[.]”
It is clear from the record that KAWC focused almost exclusively on finding one supply-side option to meet all of its needs over the planning horizon, selected an option that will impose significant present costs on ratepayers, and rejected a range of options that in combination could augment and expand available supply and treatment capacity sufficient to satisfy the reasonable needs of KAWC customers in a more step-wise, flexible manner and at much lower cost to ratepayers.
Having failed to demonstrate the need for the new treatment plant and associated facilities, and having failed to fully evaluate the range of alternative water demand moderation and supply augmentation measures, the CPCN should have been denied.
A. THE COMMISSION ACTED UNREASONABLY AND UNLAWFULLY IN FAILING TO RESOLVE THE SIGNIFICANT DISCREPANCY BETWEEN KAWC’S PROJECTED WATER DEMAND AND HISTORIC USAGE TRENDS
Fundamental to the question of whether the applicant for a CPCN has met the burden of demonstrating the need for the proposed service or supply, is the reasonableness of the demand projections.
In a CPCN proceeding, there is no penalty for the utility to overestimate demand; in fact, there is a reward in terms of return on investment. Unfortunately, for the ratepayer, there is the penalty of rate increases to fund capacity development that might be better served through more realistic assumptions and more reasonably scaled improvements in system management and supply augmentation. The Commission’s essential function is to assure that the demand projections are reasonable, in order to avoid excessive costs relative to reasonable demand. The Commission failed abjectly in this regard in this case.
In a March 14, 1995 Order, the Commission indicated that KAWC’s demand projections were “within the realm of reasonableness,” but the Commission did not ratify carte blanche all projections that KAWC might generate from use of its model. In fact, the Commission also found that the assumptions of intervenors in that case that projected a lower demand were also “within the realm of reasonableness.” March 14, 1995 Order, CN 93-434 R. Doc. 097, p. 007676.
The Commission concluded in the 1995 case that because all of the “demand projections in this case indicate a supply deficit under a drought of record scenario, further analysis of demand projections would be little more than an academic exercise.” March 14, 1995 Order, p. 5. CN 93-434 R. Doc. 097, p. 007677. While in the context of Case No. 93-434, it might have been an academic exercise, in the context of a concrete proposal to build a new 20 MGD treatment plant and associated facilities, further analysis of the reasonableness of demand projections is an essential first step compelled by the requirement that the applicant demonstrate and the Commission find that the reasonable “need” has been properly identified and that the least cost alternative has been selected from among reasonable options. Overstated demand will result in overbuilt facilities and overcharged ratepayers.
In prefiled direct testimony of Dr. Martin Solomon, CAWS raised serious questions about the KAWC projections of future demand, noting that
"From 2000 to 2006, Kentucky American’s maximum daily demand in normal weather increased by 140,000 gallons per day, or 0.14 mgd each year. Yet for 2006 to 2030, their projected normal daily demand increases much more dramatically, with a projected increase over the 24-year period of .58 mgd per year. This dramatic increase in projected demand is hard to fathom. The projections for drought daily maximum demand increases are likewise seemingly high with a projected annual increase of .56 mgd. Using demand increase numbers that are more in line with historic trends, the necessity for a major new capital project is even more questionable."
Solomon Direct Testimony, pp. 3-4. CN 2007-00134, R. Doc. 615, p. 19719-19720.
In fact, as evidenced in Dr. Solomon’s chart (attached to his Prefiled Direct Testimony), even doubling the historical annual increase in maximum daily demand from .14 mgd/year to .28 mgd/year, the value is still substantially lower (in fact slightly less that half) than the estimated maximum daily demand increase projected by KAWC. Utilizing reasonable demand projections more consistent with historic use trends, CAWS demonstrated that the alleged need for an additional 20 MGD of treated water in order to serve customers maximum reasonable demands in year 2020 was significantly beyond what actual use trends would indicate.
The Commission made clear in closing out Case No. 2001-00117 that both “the extent of Kentucky-American’s current supply deficit and the feasibility and adequacy of the potential solutions to such deficit will be examined in the new docket (i.e. in this case). CN 2001-00117, April 19, 2007 Order, p. 2. R., Doc. 143, p. 013528. Yet the Commission categorically dismissed the testimony of Dr. Martin Solomon concerning future growth in demand, concluding that “no weight should be afforded to Dr. Solomon’s methodology. It is overly simplistic and fails to consider many of the factors that affect customer usage.” Order, at pp. 34-5. CN 2007-00134, R. Doc. 663, p. 020933-020934.
Unless those “factors that affect customer usage” are new factors that haven’t historically been present, one must presume that those factors are embedded in the actual demand numbers that Dr. Solomon utilized. Yet the Commission, faced with the uncomfortable reality of an historic demand trend that is much more moderate than the projected trend, dismissed the undisputed numbers by challenging the messenger, and utterly failed to reconcile significant discrepancies between projected future growth and historical growth based on actual data. The Commission failed to provide any reasonable basis for summarily rejecting the use of actual data tracking the incremental growth of consumption of water under both average and peak demand conditions, and no party questioned the validity of the data, which was drawn directly from numbers supplied by KAWC.
The evidence shows that KAWC’s projections of future demand are much larger than past and current trends would indicate. Dr. Martin Solomon used six (6) years of actual data generated by KAWC showing that from 2000 to 2006, Kentucky American’s maximum daily demand in normal weather increased by 140,000 gallons per day, or 0.14 mgd each year. Yet for 2006 to 2030, KAWC projected normal daily demand to increase much more dramatically, with a projected increase over the 24-year period of .58 mgd per year. Rather than addressing on the merits Dr. Solomon’s observation that the demand increase numbers for 2006-2030 are not in line with historic trends, and that using (and even doubling the historical annual increase in maximum daily demand from .14 mgd/year to .28 mgd/year,) the value is still substantially lower (in fact slightly less that half) than the estimated maximum daily demand increase projected by KAWC, the Commission summarily dismissed Dr. Solomon’s methodology as “overly simplistic[.]” Order at 34. CN 2007-00134 R. Doc. 663, p. 020933.
It is remarkable that the Commission would reject out of hand the use of actual, historical data to predict a reasonable range of incremental growth and would fail to even address the discrepancy between the predictions and the historic reality. Presumably, all of the “variables” that the Commission praises as having been considered in other studies, to wit, population growth, historical demand, weather, leakage, non-revenue usage, and conservation measures”, Order at p. 35, have been in place through the historical period used by Dr. Solomon, and during that period, a measured, documented steady increase of only approximately .14 mgd in demand has occurred. KAWC has identified no factor or set of factors among the variables identified by the Commission that will dramatically change during the 2006-2030 period, yet for each year going forward, KAWC assumes an incremental annual growth in demand fours time higher than any historical trend would support. Rather than requiring KAWC to demonstrate the reasonableness of projected increases in light of historical trends, and rather than attempting to resolve this significant discrepancy in projected demand versus historical and current demand increases, the Commission sidestepped the issue by dismissing the method of analysis of historical data as “simple” and “overly simplistic.” The Commission can dismiss the messenger but can’t avoid addressing the wide gulf between the future projections and historic realities.
The Commission made clear in closing Case No. 2001-00117 that both “the extent of Kentucky-American’s current supply deficit and the feasibility and adequacy of the potential solutions to such deficit will be examined in the new docket (i.e. in this case). CN 2001-00117, April 19, 2007 Order, p. 2. R. Doc. 143, p. 013528. Such an independent assessment was and is certainly warranted to assure that the actual “need” has not been overstated, since unrealistic demand projections will result in construction of excess capacity and wasteful duplication. The Commission owed it to the residents of central Kentucky, prior to the approval of a plant that will saddle customers on day one and for a generation with rate increases for capacity that will not be needed for 20 years (and which, if Dr. Solomon is correct, may not be needed well beyond that time) to independently scrutinize the assumptions made by KAWC and to explain and resolve the discrepancy between projected future growth in demand and the actual historical growth. The failure to have done so demands that the Commission’s Orders be vacated as unreasonable and unlawful, and remanded.
B. THE COMMISSION ERRED IN FAILING TO INCORPORATE SUBSTANTIAL CONSERVATION MEASURES IN PLANNING FOR THE DROUGHT OF RECORD AND THUS UTILIZING UNREASONABLE DEMAND PROJECTIONS DURING THE DROUGHT OF RECORD
The second area in which the Commission failed to act lawfully and reasonably to assure that the project would not result in excess capacity and wasteful duplication, was in approving the use by KAWC of unrealistic demand projections. While no party to the proceeding would dispute that it is appropriate to plan for addressing the reasonable needs of customers in the worst-case scenario, couched in terms of the “drought of record,” the regulatory standard of 807 KAR 5:066 Section 10(4) does not require that unreasonable demand be met during severe drought conditions. Instead, the utility is to plan to provide water sufficient in quantity to “supply adequately, dependably and safely the total reasonable requirements of its customers under maximum consumption.” Id.
CAWS believe that the Commission was correct in observing in its Order closing case 93-434 that:
"[T]he issue here is not the sufficiency of water for health and sanitation uses. An adequate supply exists for such purposes. The real issue is whether Kentucky-American’s customers should pay $50 million for a supplemental source of supply to ensure their unrestricted ability to use water during a drought of record."
March 14, 1995 Order, p. 7, CN 93-434 R. Doc. 097, p. 0077679.
The April 25, 2008 Order paid lip service to CAWS suggestion that planning for unrestricted demand in a drought of record is unreasonable, and results in the inflation of drought demand numbers that will cause wasteful expenditure of ratepayer monies to address unrealistic expectations. CAWS argued, and the Commission acknowledged that consideration of conservation measures during such a severe drought is appropriate, yet the Commission approved the KAWC demand projections on the basis that “[o]ur examination of Kentucky-American’s projections indicates that reasonable demand restrictions have been taken into consideration.” Order at p. 34. CN 2007-00134, R. Doc. 663, p. 020933.
This conclusion is unreasonable on its face, since the only new restriction that KAWC proposed to include by way of conservation during a prolonged drought of record, was “mandatory restrictions upon outdoor water use.” Id. at 34. R. Doc. 663, p. 020933.
The failure to have required KAWC to evaluate and incorporate a range of available emergency conservation measures, including but not limited to drought pricing, is unreasonable and requires that the Commission’s Order be remanded.
C. THE COMMISSION ACTED UNREASONABLY IN APPROVING A NEW 20 MGD TREATMENT PLANT WITHOUT FIRST REQUIRING IMPLEMENTATION OF DEMAND MANAGEMENT MEASURES AND LEAK DETECTION
The record is clear that KAWC has not adequately addressed demand management measures that could flatten the peak demand and augment available treated water supply. The Commission acted unreasonably in approving the construction of new system capacity without first requiring that KAWC assess and incorporate all reasonable and cost-effective measures to moderate demand.
Initially, the record reflects that Kentucky-American’s unaccounted for water loss is at or near 17%, while the national average is substantially lower at 12%. Without any augmentation of supply, a more aggressive program of leak detection and system maintenance could significantly reduce the need to supply augmentation. Assuming the ability to treat 65 mgd, a 17% loss is 11 mgd, and a 12% loss is 7.8 mgd – a difference of 3.2 mgd that could be captured for customer use simply by bringing line losses down to the national average, and fully half (and slightly more) of what KAWC indicated they would routinely treat and pump from the Pool 3 project in year one. Prior to saddling the ratepayers with a 50% increase in rates, it might be prudent to require KAWC to fix its leaky pipes.
The Commission acknowledged that the savings of 3.2 MGD is “significant” yet dismissed the issue because “these savings . . . are insufficient to solve Kentucky-American’s water supply deficit.” Order at p. 50. CN 2007-00134 R. Doc. 663, p. 020949. The lowering of unmet demand by 3.2 MGD through more aggressive leak detection should not be required to completely eliminate the deficit, but clearly should have been incorporated as a requirement prior to imposing substantial capital costs for new treatment capacity on the ratepayers, and the rejection of this requirement out of hand due to the failure to completely eliminate the deficit is unreasonable, and results in wasteful creation of new capacity.
Addressing line losses is an essential predicate to granting a CPCN, since as the Court in Kentucky Utilities Co. v. Public Service Commission, Ky., 252 S.W.2d 885 (1952) noted,
"w]e think it is obvious that the establishment of convenience and necessity or a new service system or a new service facility requires first a showing of a substantial inadequacy of existing service. . . due either to a substantial deficiency of service facilities, beyond what could be supplied by normal improvements in the ordinary course of business; or to indifference, poor management or disregard of the rights of consumers[.]"
Id., at 890. (Italics added).
KAWC ratepayers have every right to expect that before they are requested to shoulder a 50% increase in average monthly bills, that the management of the unaccounted for water losses has been optimized and that the losses of treated water have been reduced to a reasonable level on a consistent basis. The Commission erred in approving the new plant where KAWC failed to demonstrate that the projected treated water deficit necessitates the construction of a new 20 mgd plant, since “normal improvements in the ordinary course of business” are highly likely to yield reductions in the loss of water that has already been withdrawn and treated, and could augment by as much as 3.2 mgd the availability of water to KAWC customers. Failing to have required an aggressive leak detection program before approving such a new capital project makes the new treatment facility capital construction at Pool 3 presumptively wasteful and duplicative of existing capacity that has been withdrawn, treated, and lost.
Additionally, despite the historic admonition of the Commission to KAWC that conservation measures should be employed, Ms. Bridwell’s testimony reflects that minimal efforts have been made in the area of conservation. The prefiled direct testimony of Elizabeth Felgendreher notes at pp. that other than community education, KAWC has done little in the area of conservation since 1991, CN 2007-00134 R. Doc. 69, p. 006959-60; and as reflected in KAWC’s Response to CAWS Second Supplemental Data Requests, KAWC has not exhausted reasonable approaches to addressing demand management. CN 2007-00134 R. Doc. 64, p. 006898-900. The Commission concluded that KAWC’s conservation program is inadequate, and in the Order, at p. 89, directed KAWC to develop a water conservation, leak mitigation and demand management plan consistent with the best practices of the water industry. CN 2007-00134 R. Doc. 663, p. 020988. CAWS submits that until such measures are employed, the extent of the projected deficit cannot be ascertained and the new 20 MGD plant approved by the Commission could not be determined to have been necessary or reasonable.
D. THE POOL 3 PROJECT WOULD CONSTITUTE A WASTEFUL DUPLICATION OF FACILITIES SINCE REASONABLE SUPPLY ALTERNATIVES EXIST THAT HAVE NOT BEEN ADEQUATELY EVALUATED BY THE APPLICANT
LFUCG argued and the Commission concurred in CN 2001-00117, “’[a]ny solution to the water supply deficit issue that ignores a potentially lower cost solution for KAW[C]’s ratepayers is not in the public interest.’ …Any proceeding that considers KAWC’s construction of a water treatment plant on Pool 3 of the Kentucky River must consider and evaluate all other alternatives that may provide a lower cost solution.” October 2, 2006 Order, p. 2., CN 2001-00117 R. Doc. 143, p. 013528.
Unfortunately, KAWC has focused almost exclusively on advancing a supply-side option to meet all of its needs over the planning horizon, selecting an option that will impose significant present costs on ratepayers, and has rejected a range of options that in combination could augment and expand available supply and treatment capacity sufficient to satisfy the reasonable needs of KAWC customers in a more step-wise, flexible manner and at lower cost to ratepayers. By failing to require reasonable demand projections, moderated by appropriate emergency conservation, better system maintenance, and structural conservation measures, and to evaluate combinations of alternatives that would address reasonable drought-of-record needs, the Commission has enabled KAWC in their failure to meaningfully explore options beyond new capital construction.
Though the Commission agreed that “Kentucky-American should aggressively pursue demand management and conservation” (both of which were mandated by the Commission of KAWC years ago and neither of which have been aggressively pursued) the Order discounts the concept of a step-wise incremental approach to augmenting supply through moderating line loss, curbing demand through conservation, and use of emergency resources currently available at a fraction of the cost of the Pool 3 Project. CN 2007-00134 R. Doc. 663, p. 020949. The Commission falls into the same mode as KAWC – rejecting a combination of alternatives because no one of them would “alone pose a viable alternative to solve Kentucky-American’s long-term water supply deficit.” The Commission failed to require KAWC to adequately explore, the package of conservation, leak detection and mitigation, and purchase of treated water as interim solutions in order to meet incremental needs while the Dam 9 crest gates proceed. CN 2007-00134 R. Doc. 663, 020949.
Certainly, wasteful duplication encompasses arbitrary rejection of a package of options that could meet incremental growth in demand with incremental augmentation of supply through conservation and interconnection.
Virtually all of the studies conducted (and including the Commission’s own NPV analysis) have concluded that the KAWC plan is not the most cost-effective, and will impose costs on ratepayers that are higher than would be the case were KAWC to link to the LWC line through Frankfort, or by constructing a transmission main along the I-64 corridor. To the extent that after implementation of aggressive conservation and leak detection, and after installation of crest gates on Dam 9, there remains a deficit in treatment and supply, the Louisville Water Company option is demonstrably superior to the Pool 3 project. The LWC option is scaled, in the sense that water customers would pay only for the incremental increases in water use that would be required over time rather than paying immediately for capacity that won’t be needed for some 20-30 years. The LWC plan offers another advantage by providing another source of supply from the Ohio River, providing additional security of supply availability, and avoiding costs of expanding treatment capacity. Given the significant movement towards extension of the LWC supply to Frankfort, it was imprudent to approve new KAWC treatment capacity at Pool 3 until the Louisville-Frankfort connection is completed or until it is determined that the connection will not occur.
In June, 1998, KAWC published Volume 1, Number 1 of “Bluegrass Water Project Update” identifying a pipeline connection to LWC as the “best alternative & environmental solution.” Among the salient points raised by KAWC were:
- that the “option to purchase treated water from Louisville Water Company will eliminate the need for additional investments in plant capacity to overcome the treatment plant deficit [which] would run $38 million.
- that “[t]he Ohio River is a limitless source of water; providing communities existing along the banks of the Ohio with a continual source of supply. The Ohio River Basin Sanitation Commission is a watchdog organization that carefully monitors the Ohio River. The Kentucky River is not monitored to the level of the Ohio and does not presently have such a sophisticated protection system.
As the Commission noted in the Order granting full intervention status to LWC, the participation of LWC was important to the proceeding because the company possessed “significant information regarding the cost of purchasing and transporting water from LWC to central Kentucky[,]” and because in order to determine the reasonableness of the proposed KAWC Pool 3 Project, the Commission “must review all options that Kentucky-American Water Company (“Kentucky- American”) considered to resolve its supply deficit.” August 13, 2007 Order, p. 1. CN 2007-00134 R. Doc. 089, p. 008441.
The Commission properly noted that the “public expects the Commission to determine the need for and reasonableness of investment in the proposed facilities in light of all known and viable options.” Yet the record demonstrates that KAWC had not meaningfully engaged LWC in discussion concerning meeting the water supply needs of the central Kentucky region. Rather, having failed to communicate directly with LWC since the decision to abandon the pipeline project, KAWC has devoted significant resources and time to demonstrating why the LWC plan is not the best among alternatives, rather than attempting to explore the various options to make the project a positive one for the region and for KAWC ratepayers.
Neither has KAWC pursued other potential solutions to short- and long-term needs. Missing from KAWC’s filing was any meaningful exploration of the feasibility of purchasing treated water from Versailles through an existing system interconnection. The availability of 2-3 mgd, which KAWC indicated had not been explored with the Division of Water, in conjunction with savings from reductions in unaccounted for water, would net sufficient additional treated water supply to meet short-term needs as the LWC – Frankfort project proceeds.
The feasibility of interconnection with Frankfort in order to purchase treated water from the Frankfort system once it is interconnected on the western side of that system with LWC, in order to meet longer-term needs, had not been adequately considered by KAWC. Prudence dictates that the combination of short-term measures, including purchase of treated water from Versailles, improved leak detection, upgrading of treatment capacity at the existing facility, be employed and that a reasonable period be given to allow the LWC-Frankfort transmission main to be constructed and the crest gates incorporated into the reconstructed Dam 9 on the Kentucky River.
Finally, KAWC has failed to adequately evaluate the impact of installation of the crest gates on Dam 9. The Kentucky River Authority is moving forward with plans to install crest gates on Dam 9, and that the crest gates will have the capacity to store an additional .9 billion gallons of water, reducing the deficit in that pool by almost a third. Despite the acknowledgment that the parent company of KAWC owns and manages water supply impoundments, and the testimony of Ms. Bridwell that the crest gates present challenges, KAWC has not offered any assistance, financial or in-kind, to help KRA address those “challenges.” There is no indication that KAWC has evaluated the alternative of assisting in the funding of reconstruction of Dam 10 or installation of crest gates for Dam 9, despite the reliance by KAWC on the continued maintenance and rehabilitation of both. Given the acknowledgment in the KAWC Post-Hearing Data Request 1 that for roughly half the projected cost of the Pool 3 project, treatment capacity could be expanded by KAWC at the existing facilities to 80 mgd, the Commission erred in not requiring KAWC to seriously explore partnership with KRA to expedite the deployment of crest gates on Dam 9 and the reconstruction of Dam 10.
In response to a Commission Order, KAWC filed on March 21, 2001 a Report To The Public Service Commission captioned “Source of Supply and Treatment Status” which provided “a summary of the activities of Kentucky-American Water Company (KAWC) and other relevant agencies subsequent to the Kentucky Public Service Commission (PSC) Order of August 21, 1997 which directed KAWC to “take the necessary and appropriate measures to obtain sources of supply so that the quantity and quality of water delivered to its distribution system shall be sufficient to adequately, dependably, and safely supply the total reasonable requirements of its customers under maximum consumption through the year 2020.” CN 2001-00117 R. Doc. 001, p. 000003
Among the salient points raised in that report are that:
* KAWC identified a source of supply deficit of 21 mgd during a severe drought, and a reliable production capacity deficit of 11 mgd. Report, p. 1. Id.
* KAWC explained that subsequent to the December 9, 1999 LFUCG resolution calling for a Kentucky River solution to the region’s water supply shortage, KAWC abandoned the LWC pipeline option and “pledged its support for the LFUCG’s proposed program for resolution of the deficit.” Report, p. 2. CN 2001-00117 R. Doc. 001, p. 000004.
* The Kentucky Water Resources Research Institute (KWRRI) 1996 analysis of the Kentucky River demonstrated that the basin deficit in the Kentucky River could be reduced from 9.727 billion gallons to 5.467 billion gallons with the installation of six valves in upstream dams that would allow the transfer of water to downstream pools. The installation of the valves and proposed valve operating plan could reduce KAWC’s deficit by approximately half, to 3.038 billion gallons over the duration of the drought of record. Report pp. 3-4. CN 2001-00117 R. Doc. p. 000005-6.
* That the now-abandoned Ohio River supply project had been selected by KAWC in 1992 from over 50 alternatives as the most feasible, cost effective solution for the water supply deficits. Report p. 5. CN 2001-00117 R. Doc. 001, p. 000007.
The Report bears close scrutiny, since it outlines a series of short-term and long-term actions that KAWC committed to undertake in order to address the needs of its customers – actions which do not appear from the record to have been fully implemented. The record in this case contains little information on a number of questions identified by KAWC in that Report as needing answers, including:
* Whether the hydraulic improvements at the Richmond Road Station which KAWC projected could produce an additional 5 mgd were implemented;
* The outcome of discussions with the Frankfort Electric and Plant Board to purchase finished water;
* The outcome of KAWC’s pursuit of modifications of the Division of Water permit restrictions on withdrawals from the Kentucky River under low flow conditions.
Missing also from the record is an explanation of why KAWC departed from the process outlined in the Report for addressing long-term needs. KAWC did not demonstrate that the combination of enhancements, including the mining of pools through the valve operating plan, additional capital improvements to enhance treatment capability, temporary relaxation of withdrawal permit restrictions under low-flow drought conditions, installation of temporary or permanent additions to increase storage of water at Pools 10 or 9, were inadequate to meet reasonable needs for its customers under maximum demand conditions. In the absence of a demonstration that one or more combinations of these alternatives that KAWC had itself identified as reasonable in its proposed plan of action, the construction of a new 20 MGD plant on Pool 3 cannot be shown to be needed, nor to avoid wasteful duplication of facilities.
With respect to the Versailles option, the Commission stated without citation to the record that “Versailles’ ability to provide water during times of drought is limited due to restrictions upon its ability to withdraw from the Kentucky River in such times.” Order at p. 51. CN 2007-00134 R. Doc. 663, p. 020950. Yet no testimony was presented by KAWC or by BWSC indicating that the possibility was explored with the Division of Water of temporary modifications to increase water withdrawals, despite the fact the Commission acknowledged, in rejecting the LWC challenge to the potential insufficiency of the DOW-granted withdrawal permit for Pool 3, that “DOW has historically granted temporary modifications to withdrawal permits to permit increased withdrawals”. Order p. 45. CN 2007-00134 R. Doc. 663, p. 020944. The failure of KAWC to have explored the Versailles option, which could deliver treated water at a fraction of the cost of the Pool 3 project, and the acknowledgment by the Commission of the ability to seek temporary modifications to withdrawal limits on one hand but not the other, demands rehearing. On remand, KAWC should be required to explore more completely the possibility of purchased water from the City of Versailles, including whether temporary modifications to the withdrawal permit allowing withdrawals to exceed Versailles permitted withdrawal, would be possible as an emergency source of water to address short-term needs for treatment water supply if needed.
A review of the table provided in KAWC Post-Hearing Data Request 1, reflects that KAWC has similarly rejected a number of incremental alternatives that could in combination address any reasonable water treatment and water supply deficits, on that basis that the alternatives standing alone would not “solve” the deficits. Because KAWC did not thoroughly evaluate the combination of supply-side and demand-management alternatives that could, in combination, meet reasonable peak demands at lower incremental costs, the requested CPCN should have not be issued.
II. THE COMMISSION ERRED IN UTILIZING A FLOW RATE FOR THE POOL 3 PROJECT THAT IS NOT SUPPORTED IN THE RECORD, THE RESULT BEING THAT THE NET PRESENT VALUE OF THE KAWC PROPOSAL IS MUCH HIGHER THAN THE LWC PROPOSAL
Much of the Commission’s Order is devoted to a net present value (NPV) comparison of the KAWC and LWC proposals. The Commission conducted an independent assessment after concluding that the analyses produced by KAWC and LWC each contained “assumptions and methodologies most favorable to the proposal being advanced by its client[.]” CN 2007-00134 R.Doc. 663, p. 020950. The Commission concluded that the two proposals had a difference of just one percent NPV.
One area of significant disagreement was the amount of water that would be purchased under the LWC proposal. LWC had offered pricing provisions that would allow Kentucky-American to access a 25-30 MGD supply while paying only for the capacity when it is needed. Order at p. 68. CN 2007-00134 R. Doc. 663, p. 020967. The Commission determined that in order to provide “drought-proof” supply, a reservation of its full requirements would be appropriate, and utilized a 10 MGD value, with a volumetric charge from 2010 through 2015 of $1.71 per thousand gallons, and after January 1, 2016, of $2.17 per thousand gallons. Order, at 70. CN 2007-00134 R. Doc. 663, p. 020969.
In calculating the Pool 3 NPV, however, the Commission also assumed a flow rate of 10 MGD, even though it acknowledged that “Pool 3’s minimum flow is anticipated to be 6 MGD.”
Id. at 70. The use of a 10 MGD base flow from the Pool 3 project at year one, instead of the 6 MGD flow rate that KAWC had indicated would occur, is contrary to the evidence in the record and had the effect of skewing the numbers so that the two projects appeared comparable in NPV when, under the 6 MGD flow rate base case, the KAWC proposal was actually 15% more costly than the LWC proposal.
According to the rebuttal testimony of the expert witness for the Attorney General’s office, Scott Rubin, “under base conditions – 6 MGD of water the first year, increasing by 0.5 MGD per year – the Pool 3 Project would be approximately 15% more expensive on a net present value basis than the LWC pipeline option.” CN 2007-00134 R. Doc. 266, p. 016174. The Commission erred as a matter of fact in concluding that the NPV comparison of the two proposed projects was roughly comparable.
III. THE COMMISSION ERRED IN APPROVING THE KAWC PROPOSAL OVER OTHER ALTERNATIVES ON THE BASIS OF THE STATUS OF THE PROPOSED PROJECT IMPLEMENTATION
The Commission acted unlawfully and unreasonably in according controlling weight to the proposed KAWC alternative over other alternatives, based on actions taken by KAWC to advance and implement the KAWC preferred alternative prior to issuance of the CPCN. This reliance on the actions taken by an applicant to advance a preferred alternative prior to Commission review and approval, had the effect of gaming the evaluation of alternatives in a manner that prejudiced fair consideration of other alternatives, which will always be “more conceptual” or “less advanced” to the extent that an applicant begins to obtain permits and easements for an alternative in advance of approval. The Commission’s according of weight to the status of the KAWC alternative relative to other alternatives was fundamentally inconsistent with the Commission’s obligation to fairly evaluate all alternatives prior to approval of any alternative.
That the KAWC proposal status relative to other reasonable alternatives was a key determinant cannot be gainsaid. The Commission, after independent assessment comprising fully twenty-six (26) pages of the Order, concluded that “the proposed [Pool 3 Project] may not be the least cost solution to Kentucky-American’s supply deficit. Our NPV comparison indicates that LWC’s Pipeline proposal could be slightly less costly than the specific Facilities proposed by Kentucky-American.” Order, p. 77. CN 2007-00134 R. Doc. 663, p. 020976.
Yet despite this conclusion, the Commission concluded that "Kentucky-American’s proposed facilities are reasonable, needed, economically feasible and will not result in wasteful investment or wasteful duplication of facilities. They represent a cost-effective approach to
resolving Kentucky-American’s supply deficit that can be immediately implemented with few regulatory or financial risks and are consistent with regional planning and use of the Kentucky River."
Order, pp. 80. CN 2007-00134 R. Doc. 663, p. 020979. (Italics added).
CAWS addresses below the insufficiency of the latter two grounds for the approval of the CPCN below. With respect to the first, the Commission obviously and unlawfully relied on the efforts of the applicant to implement the proposed project before receiving approval in a manner that undercut fair and full analysis among alternatives, and which created an unfair standard of analysis that will inevitably favor an applicant’s preferred approach and discount other, lower cost options.
The Commission noted that “[t]o demonstrate that a proposed facility does not result in wasteful duplication, we have held that the applicant must demonstrate that a thorough review of all alternatives has been performed.” Order, p. 29-30. CN 2007-00134 R. Doc. 663, pp. 020928-020929. Yet while embracing the concept that a thorough review of all alternatives must be performed, and that in considering whether a wasteful duplication of facilities will result, “all relevant factors must be balanced,” it is clear that the Commission gave undue and controlling weight to the status of development of the Pool 3 Project relative to other alternatives. On Page 78 of the Order it noted that the KAWC project “had fewer financial and regulatory risks”, had completed design and routing, received bids on “all facets of the project” and had obtained “virtually all regulatory approvals necessary to commence construction.” Id. p. 020977. On p. 83 of the Order, the Commission concluded that “[t]oday’s decision is possible because the Commission has been presented, for the first time, with a fully developed and concrete solution to the problem for its formal consideration.” In weighting the “developed and concrete” nature of the KAWC preferred alternative and discounting the others that KAWC should have as fully assessed, the Commission skewed the analysis of alternatives in a way that favored the KAWC project and prejudiced all other alternatives (even those that, as here, were acknowledged by the Commission to be lower-cost). Id., p. 020982.
The Commission’s evaluation of the reasonableness of the proposed facilities relative to other alternatives is found at pp. 77-80 of the Order. CN 2007-00134 R. Doc. 663, p. 020976-020979. Repeatedly, the Commission credited the actions KAWC had taken towards implementation of the proposal as being reasons for approval of the alternative. Order, pp. 78-9. Id. at pp. 020977-020978.
The Commission contrasted the LWC proposal as remaining “a concept that requires considerable work and is rife with uncertainty and risk.” Order, at p. 79. CN 2007-00134 R. Doc. 663, p. 020978. A fair evaluation of alternatives requires that the applicant provide an equivalent and thorough assessment of the feasibility of each, yet in this case, KAWC had progressed towards implementation of only one alternative, and was rewarded by the Commission for having done so.
In light of the requirement of 807 KAR 5:001 Section 9 that permits for proposed facilities normally be obtained prior to filing for a Certificate, it will always be the case that the applicant’s preferred alternative would have had more specific design, permitting, and routing work at the time of Commission review. If the Commission intends for a full and fair consideration of alternatives, it cannot grant controlling or indeed any weight to the relative status of design and permitting of a preferred alternative to other feasible alternatives, lest the Commission process be reduced to a rubber-stamping of a proposal presented as a fait accompli but for the actual construction.
In this instance, KAWC did not adequately and fairly explore all alternatives; in fact it fell to LWC to intervene in order to provide information concerning an alternative proposal that this Commission has acknowledged to be lower cost. That the Commission found “the LWC Pipeline proposal remains a concept that requires considerable work and is rife with uncertainty and risk” is conclusive evidence that KAWC failed to “demonstrate that a thorough review of all alternatives has been performed” particularly with respect to the LWC pipeline alternative (an alternative that it repeatedly embraced as the best less than a decade ago).
Despite acknowledging the legal requirement that “[n]o utility may construct a facility to be used in providing utility service to the public until it has obtained a Certificate from this Commission[,]” the weight placed by the Commission on the relative status of implementation of the KAWC preferred alternative to other alternatives, encourages applicants to advance their preferred approach and to not to investigate other options to the same extent, since invariably that will prejudice the fair consideration of other alternatives and affect the Commissions’ rejection of other options, which will always be “more conceptual” or “less advanced.” In reviewing the KAWC application, fair consideration of alternatives would have required that the applicant provide comparable investigation of routing, permitting requirements, easement acquisition, and design; or that the Commission evaluate the various alternatives without giving weight to the one to which the applicant has committed resources prior to Commission review.
The Commission’s approach to crediting actions taken towards implementing one alternative in advance of review and approval of the project, has a clear prejudicial effect on full and fair consideration of other alternatives, and is thus violative of KRS 278.020.
IV. THE COMMISSION ERRED IN FAILING TO GIVE ADEQUATE CONSIDERATION TO OPPOSITION BY LANDOWNERS TO CONSTRUCTION OF THE TRANSMISSION LINE ACROSS PRIVATE LANDS
While CAWS believes that the Commission erred as a matter of law in according any weight to the KAW preferred alternative on the basis that KAW’s preferred alternative had progressed further into the permitting and land acquisition processes than had the other alternatives, the Commission was selective in crediting KAWC with the progression of its proposal while failing to acknowledge a legal impediment that may render the project infeasible.
The Commission erred in concluding that the Pool 3 project facilities “clearly have fewer financial and regulatory risks” by failing to consider the inability of KAWC to acquire needed private easements to complete the transmission pipeline. Having relied on the acquisition of a fraction of the 104 needed private land easements as one of the bases for approving the KAWC alternative, the Commission sidestepped the potential infeasibility of the Pool 3 project in light of the refusal by some 15% of the remaining private landowners to grant an easement and the doubtful power of KAWC to condemn private lands in order to install a transmission line for the Pool 3 Project.
KAWC indicated that it will need a number of private easements in order to construct and maintain the lines, and that some landowners had already refused to grant such easements. The
company noted that “a total of one hundred and four (104) easements are being sought from private land owners. . . and sixteen (16) private landowners have indicated a refusal to grant an easement; several stating a preference for no action until the PSC issues a certificate.”
Response to Hearing Data Requests, Item 1 of 15. CN 2007-00134 R. Doc. 419, p. 016883.
The acknowledged refusal of some 15% of the landowners for whom easements had not been obtained as of December 10, 2007 to grant such an easement, may make the project infeasible, since under Kentucky law, KAWC lacks the authority to condemn property in Franklin or Scott Counties in order to transmit water into the Central Division system for sale at retail and wholesale to customers inside and outside of Fayette County.
The General Assembly has provided water utilities with certain powers relative to condemnation and to use of rights-of-way. For example, the right of a company authorized under the laws of the Commonwealth to conduct the business of producing or supplying water or who is engaged in the business of transmission or sale of water, to construct and maintain transmission and distribution lines “under, on, along, and over” any right-of-way used as a state, county or public way, is recognized under KRS 416.140. Nonstock nonprofit water associations (of which KAWC is not one) are authorized to exercise the power of eminent domain under KRS 416.130, and city utilities are granted, with an exception not applicable here, the same rights with respect to condemnation and eminent domain as given corporations and partnerships under KRS 278.502 and 416.130. KRS 96.547.
There is no comparable general grant of power to privately-owned water utilities such as KAWC to condemn private lands for the purpose of construction or maintenance of such transmission or distribution lines. KRS 96.080, the only potentially applicable grant of authority for condemnation of lands in order to facilitate maintenance or operation of waterworks or pipelines for the supply of water to a municipality, does not grant a power of condemnation to a private company in order to serve non-municipal customers. There is nothing in the KAWC application, in the hearing testimony, or in the Commission’s Order, that limits or dedicates the distribution or sale of the water that will be produced and transmitted from the KRS II project to residents of the Lexington-Fayette Urban County Government, or which limits the construction, maintenance or operation of the Pool 3 waterworks or transmission pipeline for the supply of water “to a municipality.” Indeed, it would be reasonable to assume, in the absence of such constraints, that KAWC fully intends to utilize the water to meet the retail and wholesale needs of all customers in the Central Division through the KRS II project, which includes non-municipal water districts and water associations.
CAWS believes it was inappropriate and unlawful for the Commission to have given any weight to the KWC preferred alternative based on the acquisition by KAWC of permits and easements. However, to the extent that the Commission could lawfully do so, it acted arbitrarily and unreasonably in failing to accord as much weight to the inability of KAWC to secure the easements of those who refuse to voluntarily grant one, as it apparently did to the acquisition by KAWC of a fraction of the needed easements.
V. THE COMMISSION ERRED IN CONCLUDING THAT THE KAWC PROJECT IS CONSISTENT WITH REGIONAL PLANNING GOALS
The second of three bases on which the Commission grounded the decision to approve the KAWC proposal was the supposed “consistency” of the project with “regional planning goals. It represents a significant effort to resolve not just a single water utility’s supply problem, but to address central Kentucky’s water supply problems. Kentucky-American’s and BWSC’s efforts toward joint ownership of the proposed facilities are a major advance in the regional planning that will insure better coordination among the region’s water providers and a more orderly and effective development and use of the region’s water resources.” Order at p. 79, CN 2007-00134 R. Doc. 663, p. 020978. The administrative record in no fashion supports the conclusion that this is a regional planning effort that will address central Kentucky’s water supply problems. The reality is that the KAWC Project was “hijacked” from the BWSC, and that BWSC was seeking a $60 million dollar public subsidy in order to make the BWSC investment in the project affordable. The record in this case reflects that it is the partnership of the Louisville Water Company, Frankfort Electric and Water Plant Board, North Shelby County Water District, West Shelby County Water District, U.S. 60 Water District, and Shelbyville Water and Sewer Commission, acting in partnership as the Shelby-Franklin Water Management Group (SFWMG) that will provide a real regional partnership. With the decisions by Frankfort and the City of Winchester from the BWSC members that would potentially purchase an interest in the KAWC project, it is clear that there is nothing in the KAWC project of a regional or “partnership” nature. The Commission acted in a manner contrary to the record in finding otherwise, and in grounding the decision to approve the CPCN in part on supposed consistency with “regional planning goals.”
VI. THE COMMISSION ERRED IN CONSIDERING THE IMPACT OF USING THE OHIO RIVER ON THE KENTUCKY RIVER AUTHORITY AS “POLICY SUPPORT” FOR ITS DECISION
The Commission unlawfully relied on a third basis outside of the range of proper considerations, in granting the CPCN – a misplaced assumption that the LWC proposal would adversely affect the Kentucky River Authority’s revenue stream. While asserting that “it does not enter into our consideration of ‘need’ and ‘wasteful duplication,” the Commission determined that “we find broader policy support for authorizing construction of the facilities” in the potential deprivation of water withdrawal fees from using “the Ohio River as a supplemental source of supply to Central Kentucky’s supply deficit[.]” April 25, 2008, Order p. 82. CN 2007-00134, R. Doc. 663, p. 020981. That the reliance on this basis factored into the final decision is clear on p. 80 of the Order, wherein the Commission states that the KAWC facilities “represent a cost-effective approach to resolving Kentucky-American’s supply deficit that can be immediately implemented with few regulatory or financial risks and are consistent with regional planning and use of the Kentucky River.” CN 2007-00134 R. Doc. 663, p. 020979. The Commission’s reliance on this “broader policy support” renders the April 25 Order arbitrary and unreasonable as a matter of law.
The PSC is a creature of statute, and must find within the statute warrant for the exercise of any authority that it claims. Boone County Water v. Public Service Commission, Ky., 949 S.W.2d 588, 591 (1997). The powers of the Commission are purely statutory, and it has only such powers as are conferred expressly by the General Assembly or by necessity or fair implication. Croke v. Public Service Commission of Kentucky, Ky., 573 S.W.2d 927 (1978).
As a statutory agency of limited authority, the PSC cannot add to its enumerated powers. Boone County, supra, at 591.
The considerations to be evaluated by the Commission in determining whether to issue a Certificate of Public Convenience and Necessity are two, as noted by the Commission. “To obtain such Certificate, the utility must demonstrate a need for such facilities and an absence of wasteful duplication.” Order, p. 29. CN 2007-00134 R. Doc. 663, p. 020928. Yet inexplicably, while acknowledging that the issue “does not enter into our consideration of “need” and “wasteful duplication,” the Commission relies on “broader policy support” in a statute charging the Kentucky River Authority with “proper maintenance” of the “system of locks and dams” to support the conclusion that the KAWC proposal should be approved. This reliance on the “broader policy support” in the KRA enabling statute is wholly inappropriate, since the Commission cannot utilize criteria other than “need” and “wasteful duplication” in deciding whether to issue a Certificate. KRS 151.700(2), which is the declaration of policy for the Kentucky River Authority, entrusts that agency, not the Commission, with the responsibility to provide for the proper maintenance of the Kentucky River locks and dams.
The Commission cannot create new grounds for approval or disapproval of Certificates, but is limited to consideration of whether the applicant has demonstrated need and an absence of wasteful duplication of facilities. The Commission “can neither add to the requirements established by the legislature for the issuance of a permit nor can it exercise authority not vested in it.” Department for Natural Resources and Environmental Protection v. Stearns Coal and Lumber Co., Ky., 563 S.W. 2d 471, 473 (1978).
Factually, it is inaccurate for the Commission to ground its decision approving the CPCN on the assumption of a negative impact on fee receipts to the Kentucky River Authority. In the first instance, there is no evidence of record that such loss of fee receipts would “necessarily” occur. Instead, while KRA chose to call no witnesses in the proceeding (despite the significance of its future plans for renovation of the dams, and of installation of crest gates, to the proceeding), the only evidence of record indicates a willingness by LWC testified to under oath that it would consider making a payment to KRA for any lost revenue (as the Commission notes on p. 83 of the Order). CN 2007-00134 R. Doc. 663, p. 020982. The Commission notes that the LWC offer was not binding, yet failed to ask LWC if it would make such an offer binding as a condition of service.
Further, the 2004 BWSC Study cited by the Commission, contemplated a pipeline north from the Pool 3 plant to the Ohio River, and, according to the testimony of Ms. Bridwell at hearing, using the Ohio River as a supplemental source of supply to the Pool 3 treatment plant has been contemplated by KAWC as well.
Despite the protestation of the Commission to the contrary, this inappropriate “policy” consideration was one of three bases on which the CPCN was issued, and should be remanded.
CONCLUSION AND REQUEST FOR RELIEF
Wherefore, for the reasons stated above, Plaintiff respectfully requests that this Court determine and declare that the Commission acted unlawfully and unreasonably in approving the Certificate of Public Convenience and Necessity for construction of a water treatment plant adjacent to Pool 3 of the Kentucky River and Associated Facilities and a transmission main; vacate and set aside the June 5, 2008 and April 25, 2008 Orders as being unlawful and unreasonable; and for any and all other relief to which Plaintiff may appear entitled.
Liz D. Edmondson
Kentucky Resources Council, Inc.