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Missouri PSC asserts jurisdiction over one tiny utility company, but many others escape


Water and sewer services to residences and businesses are essential. Most of us take for granted that the operations of those who provide these services are reliable and are regulated. In reality, many water and sewer providers fall through several holes in Missouri’s statutory framework of regulation by the Missouri Department of Natural Resources (DNR) and the Missouri Public Service Commission (PSC).

DNR’s regulations

DNR sets engineering standards for water wells, treatment and storage facilities, and distribution systems (mains and valves). DNR licenses well drillers and maintains a registry describing each water well, based on data required to be submitted by well drillers. DNR does not regulate rates charged by water sellers, but does require that permanent entity (called a “continuing authority”) be established for each water system serving more than 15 users. A continuing authority for water is required to show DNR that it has the technical, managerial and financial capacity to operate the system, or at least that’s what the rules say. DNR implements its regulations by requiring submittal of engineering plans for the issuance of construction permits and certfications from private engineers that water and sewer facilities are completed according to the approved plans before issuance of operating and discharge permits. DNR also licenses operators of water and sewer facilities.

For sewer, DNR also establishes engineering standards for treatment plants and collection systems (mains, pumps, manholes, etc.). A discharge permit is also required, which states the gallons per day of treated waste that is allowed to be discharged into a specified watershed. A continuing authority must be designated.

Entities providing water and sewer services (continuing authorities, under DNR rules) fall into these categories:

  • Municipal and governmental providers (cities, towns, governmental districts that provide water or sewer or both). These governmental entities fall under DNR’s regulations, but are generally exempt from PSC regulation.
  • Investor-owned, for-profit utility companies, whose rates and terms of service are regulated by the PSC.
  • Cooperatives, which are exempt from PSC regulations for their electric service, but may have subsidiaries or affiliated companies that provide water or sewer service or both, which are regulated by the PSC.
  • Homeowner associations (HOAs) providing services to their members. HOAs are exempt from PSC regulation, but are under DNR regulations.
  • Others.

The statutes in Chapter 393 of the Revised Statutes of Missouri provide for the formation of non-profit corporations for the provision of water or sewer services, which are exempt from the PSC’s regulations. There are many non-profit companies providing water or sewer services in Missouri, which are not organized under Chapter 393, but have assumed (sometimes with legal advice) that they are exempt from PSC regulation. PSC statutes contain exemptions only for certain Chapter 393 corporations, governmental entities and non-profit homeowner associations providing services only to members.

PSC asserts authority

This week’s opinion from Missouri’s Western District Court of Appeals, in the case Hurricane Deck Holding Co. v. PSC, contains a clear statement that a sewer company serving only 30 customers and probably not making a profit was subject to the PSC’s regulation of rates and terms of service. The facts of this case present a situation common in the area around the Lake of the Ozarks, Table Rock Lake and other areas of Missouri where residential subdivisions are established by developers which often rely on small investor-owned or non-profit entities or HOAs to operate water and sewer services. In this case, the development corporation itself, not a non-profit corporation, operated the water and sewer company for a few months.

Hurricane Deck Holding Co. was a developer in Camden County near Lake of the Ozarks. Hurricane Deck constructed and retained ownership of the water and sewer facilities for its Chelsea Rose development, but contracted with Osage Water Company, a PSC-regulated company, for the operation of the systems. Osage, which operated several small water and sewer systems, became unable to fulfill its responsibilities, so the PSC ordered that its operations be taken over by a receiver in October 2005.

The receiver declined to take over the Chelsea Rose systems, so Hurricane Deck operated the systems in the last quarter of 2005, billing the residents for service.  On December 30, 2005, Hurricane Deck notified the Chelsea Rose owners that it had formed an HOA to take over operations. A separate lawsuit between the Chelsea Rose owners and Hurricane Deck over the ownership of the water and sewer facilities had been filed. No doubt some of the Chelsea Rose residents complained to the PSC that Hurricane Deck was charging them for water and sewer services without PSC approval or exemption, and the Chelsea Rose residents probably had other grievances with Hurricane Deck.

PSC sued Hurricane Deck, claiming that Hurricane Deck had operated as a public utility without following the proper PSC procedures for doing so. The trial court agreed. Hurricane Deck appealed on two grounds:

  • Hurricane Deck did not provide service to the public, just those residents of Chelsea Rose, claiming that it was a private arrangement
  • Hurricane Deck did not provide services for gain

The court of appeals dispensed with the first argument, noting that Hurricane Deck had “indiscriminately” provided services to all customers in the two subdivisions constituting Chelsea Rose, rejecting no customer, as it could do if it were a private utility.

The court of appeals also interpreted the relevant case law to mean that “for gain” didn’t require that customers actually pay Hurricane Deck. If  Hurricane Deck provided a utility service and billed for it, it did so for gain, whether it made a profit. Otherwise, the determination of whether the PSC had regulatory authority over a company would require the company to operate for a while to determine whether its operation was profitable, before the PSC would be involved.

The court of appeals also noted that Hurricane Deck did not make any attempt to qualify for the Chapter 393 exemption from PSC regulation, noting that Chapter 393 companies are required to refund any profits to their customers, who must be members of the company.

The littered landscape of continuing authorities

The PSC and DNR appear to have no formal communication. In the past 15 years, hundreds of small water and sewer systems have been set up by developers with DNR approval. The developers frequently continue to hold legal title to the water well lots and the sewer plants, often in the hope that they can control and sell them. The operating permits are often issued by DNR to the HOAs, in furtherance of the DNR regulation that requires a permanent entity to hold the operating permit. Sometimes the result is that the land where the facilities (water well or sewer treatment plant) are located is owned by a defunct developer and the operating permit is held by a defunct HOA.

The developers frequently fail to file annual reports for the HOAs with the Missouri Secretary of State, so the HOA entities are administratively dissolved. Because the developer has not filed tax returns for the HOAs (or even kept a separate set of books for each HOA), reinstatement of the HOAs is a lengthy process, because a tax-clearance letter from the Missouri Department of Revenue is required for reinstatement.

In the past two years, many developer corporations have also become bankrupt or insolvent, leaving the HOA members with no records and sometimes not even a person to call to get essential information about the water and sewer system for the HOA’s subdivision such as who has the keys and who is the operator.

DNR’s staff has been trying to do a better job of enforcing its regulations and preventing problems, but is terribly understaffed and underfunded. The legislature needs to take a hard look at the problems of orphaned subdivisions and their water and sewer systems and to work cooperatively with those in the PSC, DNR and the private sector who are familiar with the scope of the problems and solutions. The legislative approach should have at least the following features:

  • It should allow for continuing authority status to be awarded to an HOA or other qualified entity, even though the developer failed to form an HOA or allowed it to be dissolved.
  • A uniform set of accounting and service standards, whether or not the PSC regulations are applicable, including the requirement of segregated bank accounts and the accumulation of a replacement fund from the outset so that a part of the service charges will be reserved for replacement of pumps and other equipment.
  • A formal relationship between the PSC and DNR, so that territorial jurisdications of continuing authorities are mapped, with a procedure for resolving territorial overlaps and deterrence of the creation of new continuing authorities where existing authorities are capable of assuming new responsibilities.

Finally, we need to adequately fund DNR, so that it can do its job of preventing water pollution while quickly processing applications for water and sewer construction, operation and discharge permits.

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About Harry Styron

I'm a lawyer who lives in Branson, Missouri, whose professional interests involve real estate, construction and local government.

5 responses »

  1. Russell Steen

    I live in a subdivision built around a small lake (Lake Tamarack) between Cedar Hill and House Springs. I bought the house a year ago and understood it was being forced to abandon the HOA lagoon and hook up to Missouri Water’s sewer system. I was told the cost would be around $4000 per homeowner and thought they must be using gold-plated backhoes and titanium pipe. Alas, I have the letter before me and they are charging each house $8,194 to connect to a sewer system that will then bill us on a monthly basis. There seems to be no choice, but I wish I could run a business like this. No competition, government regulations and threat of DNR lawsuit forcing compliance, all the cost of construction borne by the customers, then American Water gets to charge a continually increasing rate for services that the current system provided at no cost for over twenty years. Nice to wake up to a $4200 unplanned expense and $30/mo flush charge. Maybe the electric co. will re-do the poles and make us pay for them, then the county will make our private road public and charge us to re-pave it plus a monthly fee to use it. Veelcome to Amerika comrads.

    Reply
    • Russell,
      I look at your situation differently–of course, I’m not the one being hit with the $8,194 special assessment. Your situation teaches some hard lessons. I hope you’ll forgive me for disagreeing with you in order to make a point.

      Here’s how I look at it:

      You bought into a subdivision that had a sewage problem that in DNR’s opinion created a risk of pollution outside your subdivision.

      You did not obtain a guarantee that the cost to you of connecting to the new system would be $4,000, so you assumed the risk that the cost could be higher.

      Wastewater treatment is what economists call a “natural monopoly,” because there is no economic advantage (with today’s technology) to be gained in having multiple companies competing, because of the high fixed cost of installing collection and treatment systems and low marginal cost of operating them. The PSC’s job is to tie the rates charged to the utility’s capital investment and operating costs, allowing a reasonable rate of return, rather than what a monopolist would otherwise charge. American Water has an incentive to keep its operating costs low, so that it can make a profit at the rates allowed by the PSC to be charged to customers.

      I’m assuming here that American Water’s operation of your wastewater collection system is regulated by the PSC. It’s possible that your HOA is merely contracting with American Water to operate the HOA’s collection system. If so, your HOA will have to negotiate the best deal that it can get.

      Why shouldn’t the customers of a sewer system bear the cost of constructing and operating it? Can you think of a reason that others should pay part of the costs?

      DNR’s job is to protect the air, soil and water. Your subdivision should not be allowed to pollute with a poorly functioning lagoon system.

      The tough lesson is that when buying real estate, the purchaser needs to take a really hard look at the physical and financial condition of the utility systems serving the property. Developers sometimes turn over undersized, poorly maintained and underfinanced systems to HOAs.

      Many HOAs (developer-controlled and owner-controlled) do not charge adequate rates to operate and maintain their water and wastewater systems and to accumulate reserves for replacement of the systems’ components.

      In the Ozarks, much residential development occurs outside municipalities, where the risks of special assessments and rate increases for water and sewer is very real and very substantial. Owning property in rural subdivisions has serious risks that should be dealt with when the purchase contract is being negotiated. Such issues are often outside the expertise of real estate agents and many general practice attorneys.

  2. Valerie Sanfilippo

    Not sure if you can help, I wrote the Attorney General who said it’s out of their jurisdiction? I live in a small town of Chula, Missouri.

    Our water company here never reads the meter the same day of the month. One day it could be for 28 days, the next 35 days, the next 27 days etc. They also do estimated bills using what we paid last month, reason for the estimated bill, UNKNOWN!

    My main question is, is there a set number of days that they are required to read the water meter (ie: every 30 days (no more, no less) & if they do have to give us an estimated bill, due to weather conditions; don’t they have to use an average? I’m very frustrated as I can’t seem to find where I can location this information. The Attorney General referred my complaint back to the “City of Chula” which is the one I’m complaining about. Can you help me or know who I can talk to.

    Thanks

    Valerie

    Reply
  3. Valerie,
    If your water company is a private company, you can contact the Missouri Public Service Commission about billing and service issues.

    If your water is provided by a public water supply district, then you need to talk to the district’s administrator or board.

    If your water is provided by the City of Chula, you need to talk to your elected representative (trustee, if Chula is a village; alderman, if Chula is a city).

    The reason for estimating bills rather than reading every month is to save money on reading meters, which keeps rates down. Whether there are 27 or 35 days in a billing period shouldn’t amount to a difference of a dollar or two at most.

    Reply
  4. Valerie Sanfilippo

    Dear Harry Styron,

    Thank you very much for your quick response. I really appreciate it! It’s said that the Attorney General couldn’t give me this information. I have spent several hours on the computer & you gave me my information in 3 hours. Again, thank you very, very much.

    Valerie

    Reply

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