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Daufuskie Island Utility Company, Inc. v. South Carolina Office of Regulatory Staff

Supreme Court of South Carolina

July 26, 2017

Daufuskie Island Utility Company, Inc., Appellant,
v.
South Carolina Office of Regulatory Staff, Haig Point Club and Community Association, Inc., Melrose Property Owner's Association, Inc., and Bloody Point Property Owner's Association, Respondents. Appellate Case No. 2016-000652

          Heard December 14, 2016.

         Appeal From The Public Service Commission

          George Trenholm Walker and Thomas P. Gressette, Jr., both of Walker Gressette Freeman & Linton, LLC, of Charleston, for Appellant.

          Lyndey Ritz Zwingelberg and John Julius Pringle, Jr., both of Adams and Reese LLP, Shannon Bowyer Hudson and Andrew McClendon Bateman, both of South Carolina Office of Regulatory Staff, all of Columbia, for Respondents.

          HEARN JUSTICE.

         Petitioner Daufuskie Island Utility Company ("DIUC") appeals an order of the South Carolina Public Service Commission ("Commission") granting only thirty-nine percent of the additional revenue requested in its application. We reverse and remand to the Commission for a new hearing.

         FACTUAL/PROCEDURAL BACKGROUND

         DIUC is the only provider of water and wastewater services to residential and commercial customers on Daufuskie Island in Beaufort County, South Carolina. In June 2015, DIUC applied to the Commission for approval of a new rate schedule which would provide a 108.9% revenue increase based upon a 2014 test year. Pursuant to Section 58-4-10(B) of the South Carolina Code (2015), the South Carolina Office of Regulatory Staff ("ORS") was automatically joined as a party to the matter. Additionally, a number of property owners' associations on Daufuskie Island-Haig Point Club and Community Association, Inc., Melrose Property Owner's Association, Inc., and Bloody Point Property Owner's Association (collectively "POAs")-petitioned to intervene in the case.[1]

         DIUC last requested a rate increase in June 2011. The same POAs intervened in that case and, during the merits hearing, were able to negotiate a settlement agreement with DIUC to which ORS did not object. Under the terms of the agreement, DIUC stipulated it would not file another application for rate increases before July 1, 2014. Based upon the evidence at the hearing and the parties' agreement that DIUC would be able to provide services to its customers while earning a fair and reasonable operating margin and return on equity ("ROE") under the proposed rates, the Commission approved the settlement in July 2012.

         Prior to and while the 2011 rate case was pending, DIUC encountered a few unanticipated tax issues. Because the South Carolina Department of Revenue did not initially recognize DIUC as a utility, it did not begin assessing the ten and a half percent utility property tax against DIUC until 2012. Thus, instead of its expected property tax bill of approximately $10, 000, in August 2012 DIUC received a bill for $132, 398, with back taxes for 2010 and 2011 exceeding $230, 600. Due to the substantial increase in its tax liability and its inability to seek further revenue increases until July 2014, DIUC entered into an agreement with Beaufort County to pay the back taxes for years 2012, 2013, 2014, and the projected tax for 2015.[2]Specifically, Beaufort County agreed to allow DIUC to pay the full $526, 843.39 in monthly installments of $5, 487.95 ($65, 856 a year) over eight years, with no interest. In addition to the $65, 856 DIUC owes annually pursuant to its settlement with Beaufort County, DIUC presented testimony at the hearing that its annual property tax bill going forward will be approximately $192, 300. Therefore, in total, DIUC requested additional revenue of $258, 158 to cover its taxes for at least the next eight years.

         DIUC faced a second tax problem when the county sent one of its property tax bills to the wrong address. As a result, the tax was never paid and Beaufort County initiated tax sale proceedings. The DIUC property in question contained a 125, 000 gallon elevated water storage tank and a number of related facilities including a well, water pump, and system pipes. The property ("Elevated Tank Site") was sold at a tax sale in October 2010 to Mamdouh Sabry Abdelrahman (Sabry), however, DIUC did not discover the property had been sold until early 2012.[3]

         Critical to this case is the ownership of the elevated water tank, well, water pump, system pipes, and other DIUC equipment located on the Elevated Tank Site. Although the tax deed purported to convey the property "all and singular . . . with the appurtenances, " DIUC presented testimony from the Beaufort County Treasurer, Maria Walls, that the tax deed did not convey "the elevated water tank, the well, the water pump, system pipes, or other DIUC property located on the Elevated Tank[] Site." According to Walls, DIUC's ownership of all the equipment located on the property remained unaffected by the tax sale to Sabry. Despite providing no evidence to the contrary to support its recommendation, ORS nevertheless proposed excluding the value of the utility equipment located on the property when calculating DIUC's rate base[4] and property taxes.

         A hearing on the merits of DIUC's application was held in October 2015. The day before the hearing, the POAs filed a Settlement Agreement they had entered with ORS for the Commission's consideration. Pursuant to the Agreement, ORS and the POAs stipulated to each party's testimony and exhibits in the record, and the parties agreed to accept all of ORS's adjustments and recommendations, with the exception of the bad debt expense for which they agreed to adopt DIUC's proposal.[5]At the hearing, DIUC objected to the admission of the Settlement Agreement, arguing it was irrelevant and prejudicial because it bolstered ORS's recommendations without providing any new or additional evidence to support them. Over DIUC's objection, the Commission admitted the Agreement, reasoning it was more probative than prejudicial.

         Following the hearing, the Commission issued an order explicitly adopting the Settlement Agreement and granting DIUC a revenue increase subject to all of ORS's adjustments, except for the bad debt expense. Shortly thereafter, DIUC filed a petition for reconsideration and/or rehearing, arguing it would be forced into default and bankruptcy if compelled to implement the rates specified in the Commission's order. Additionally, DIUC requested the Commission reconsider adopting ORS's adjustments to the property taxes, management fees, rate case expenses, bad debt expense, and rate base.[6]

         The Commission denied DIUC's petition, holding (1) the issue of inevitable default could not be raised for the first time in a petition for rehearing; and (2) ORS's accounting methods and adjustments were in keeping with accepted regulatory principles and supported by substantial evidence. DIUC then filed a direct appeal to this Court to review the Commission's order.

         ISSUES PRESENTED

1) Did the Commission err by admitting into evidence and adopting the proposed Settlement Agreement between ORS and the POAs to which DIUC was not a party and which granted only thirty-nine ...

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