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A.O. Smith Corp. v. South Carolina Department of Health and Environmental Control

Court of Appeals of South Carolina

August 28, 2019

A.O. Smith Corporation, Appellant,
South Carolina Department of Health and Environmental Control and Town of McBee, Respondents. Appellate Case No. 2016-002108

          Heard March 14, 2019

          Appeal From The Administrative Law Court Shirley C. Robinson, Administrative Law Judge

          W. Thomas Lavender, Jr. and Joan Wash Hartley, both of Nexsen Pruet, LLC, of Columbia, for Appellant.

          Martin S. Driggers, Jr., of Sweeny Wingate & Barrow, PA, of Hartsville; Richard Edward Mclawhorn, Jr., of Sweeny Wingate & Barrow, PA, of Columbia; Kathryn Susan Mansfield, of Womble Bond Dickinson (US) LLP, of Charleston; and Matthew Todd Carroll and Belton Townsend Zeigler, both of Womble Bond Dickinson (US) LLP, of Columbia, all for Respondent Town of McBee.

          Stephen Philip Hightower, of Columbia, for Respondent South Carolina Department of Health and Environmental Control.

          KONDUROS, J.

         A.O. Smith Corporation appeals the dismissal of its contested case regarding the Town of McBee's (the Town) operation of the Town's wells, arguing the administrative law court (ALC) erred in finding final approvals are not staff decisions subject to appeal under section 44-1-60 of the South Carolina Code (2018 & Supp. 2018) because the South Carolina Department of Health and Environmental Control (DHEC) had a legal duty to issue the final approvals and the applicable regulation does not provide for conditional approvals. We affirm.


         A.O. Smith owns a water heater and boiler manufacturing facility in Chesterfield County outside of the Town's city limits. According to the facility's Director of Operations, Jeff Barron, the facility needs an adequate and dependable water supply to operate. In addition to the water used in the manufacturing and testing process, the facility's insurance carrier requires a minimum instant flow of water for its fire protection system. In 1979, the Town and A.O. Smith agreed the Town would provide A.O. Smith with "a reasonable supply of water."[1] A.O. Smith comprises about sixty percent of the Town's water revenue.

         The Town's water system is made up of two wells (Well No. 1 and Well No. 2). From 1995 to 1999, the Town's water system received three consecutive "unsatisfactory" ratings results from DHEC sanitary surveys "due to a lack of quantity to meet the system's customers' needs, wellhead security issues[, ] and distribution system shortcomings." In 1999, the Town and Alligator Rural Water & Sewer Company, Inc. (Alligator Water) entered into a forty-year agreement for Alligator Water to supply the Town's water. The Town stopped operating both of its wells at that time. According to the Town's engineer, Alligator Water took over operation of the Town's entire water system and had DHEC transfer the Town's operating permits to it. DHEC discontinued the Town's operational permit for its supply wells and entire water system and transferred them to Alligator Water.

         The Town received a $4.5 million loan in 2005 from the United States Department of Agriculture. According to the Town's mayor, John Campolong, the Town used the loan to refurbish its water system. Campolong also indicated the Town became aware of information that led it to believe Alligator's financial situation was precarious and decided it no longer wished Alligator Water to be its sole source of water. Alligator Water placed the Town's Well No. 1 offline in 2009 due to contaminants in routine water sampling.

         On December 7, 2010, the Town submitted a Preliminary Engineering Report (PER) to DHEC. Alligator Water received a copy of a draft operating permit for the Town and contacted DHEC "to offer several comments," including that its agreement with the Town is "for the operation and maintenance of the system" and if the Town terminates the agreement, "Alligator [Water] will no longer be obligated to supply potable water to the Town." On June 13, 2011, DHEC Staff approved the Town's PER. On June 14, 2011, DHEC Staff issued a public water operating permit to the Town. On January 10, 2012, the Town submitted an application to DHEC to modify Well No. 2. On November 13, 2012, DHEC issued the Town a permit for modifications to Well No. 2.

         According to Campolong, in the summer of 2013, the Town received a letter from Alligator Water that it was increasing the water wholesale rate by 56%.

         In a letter dated October 10, 2013, the Town informed A.O. Smith "the Town . . . has over the period of [three] years embarked on an evaluation of the existing water supply system currently owned by the Town . . ., as well as other sources of water for the Town's customers. These facilities were in operation until just a couple of years ago." The letter further provided:

Throughout the review process and the permitting required to place the existing water supply system back into operation, the Town . . . has worked closely with . . . DHEC. [DHEC has] been aware of the study that was performed on the water system and our efforts to provide a safe, reliable water source for our customers. We have received all of the necessary permits for the new construction and modifications to the existing wells and are working together on a daily basis with . . . DHEC in moving forward to place the system back into operation. The water supply system will meet all of the requirements of . . . DHEC from a water quality and redundancy standpoint.

         On October 16, 2013, the Town increased the rate it charged customers by 25%. The Town informed Alligator Water it would not pay the increased wholesale rate to Alligator Water until Alligator Water supplied it with certain financial data.

         On December 20, 2013, the Town submitted an application to DHEC for the construction of two granulated activated carbon contactors and associated appurtenances to be connected to Well No. 1 and Well No. 2. On June 30, 2014, DHEC issued the Town a permit for the construction of the contactors for Well No. 1 and Well No. 2.

         In 2014, according to Barron, A.O. Smith upgraded its fire protection system and began discussing water service with Alligator Water because A.O. Smith's engineer determined "the Town's water storage capacity was not sufficient to support the upgraded system." In May 2015, Alligator Water began construction of a water line to connect to the A.O. Smith facility.

         In a meeting on September 3, 2015, A.O. Smith raised concerns to the Town about fire protection and future water supply. According to the Town's engineer, this was the first time A.O. Smith raised those concerns to the Town. A.O. Smith also raised concerns about the Town's ability to meet the facility's fire flow requirements with its two wells as well as other concerns about contaminants in the water.

         On January 12, 2016, after receiving a letter of certification from Joseph McGougan, P.E, DHEC issued the Town two Final Approvals to Place into Operation (Final Approvals)-one in accordance with the 2012 permit and the other in accordance with the 2014 permit. Both Final Approvals stated under the heading "SPECIAL CONDITIONS," "This Final Approval to Operate is being conditionally approved. The Department has concerns about the water system's capacity if only Well No. 1 and Well No. 2 are the sole sources for water supply." The Final Approvals also stated, "The Department recommends that the Town . . . investigate this capacity issue to demonstrate that sufficient capacity exists before utilizing Well No.[ ]1 and Well No. 2 as the primary supply for water."

         On January 27, 2016, A.O. Smith requested a final review by the DHEC Board of the Final Approvals. On February 17, 2016, DHEC sent a letter to A.O. Smith's counsel regarding the Final Approvals, stating "[t]he [DHEC Board] will not conduct a Final Review Conference on the above-referenced matter." The letter further provided the following contested case guidance:

Section 44-1-60 provides that if the Board declines in writing to schedule a final review conference, the staff decision becomes the final agency decision, and an applicant, permittee, licensee, or affected person may request a contested case hearing before the [ALC] within thirty calendar days after notice is mailed to the applicant, permittee, licensee, and affected person that the Board declined to hold a final review conference.

         On March 15, 2016, A.O. Smith filed with the ALC a request for a contested case hearing for review of the Final Approvals. The Town filed a motion to dismiss, arguing the ALC lacked jurisdiction because the request was untimely as DHEC issued the permits in question in 2011, 2012, and 2014 and A.O. Smith made no request for final review of those permits.[2]

         The ALC conducted a hearing on the motion to dismiss[3] on April 28, 2016. The ALC asked A.O. Smith if it "knew the construction was ongoing, why did [it] wait until it was completed?" A.O. Smith responded it did not "believe [it] had sufficient information on whether or not these two wells [could] supply th[e] adequate capacity until they were completed and [it had] seen the records." According to an affidavit sworn by Barron on April 5, 2016, the Town's water service to A.O. Smith had in recent months become "interrupted and inadequate."

         On May 5, 2016, the ALC granted the motion to dismiss. Following a motion for reconsideration filed by the A.O. Smith, the ALC vacated the order. Thereafter, the ALC issued a new order ...

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