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.