Discretionary Review Sought In Kentucky-American Water Case

INTRODUCTION

Comes Movant Citizens for Alternative Water Solutions (?CAWS” or “Movant”) and respectfully requests that this Court grant discretionary review of the Opinion of the Kentucky Court of Appeals affirming the decision of the Franklin Circuit Court that the Public Service Commission did not act unreasonably and unlawfully in granting a Certificate of Public Convenience and Necessity (“CPCN”) to Kentucky American Water Company (“KAWC”) for construction of a new water treatment plant adjacent to Pool 3 of the Kentucky River, and a 30.59-mile transmission line associated with the plant. In support of this motion and in compliance with the requirements of CR 76.20, Movant states as follows:

(a) Movant Citizens for Alternative Water Solutions, 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.

(b) The Movant is represented by Tom FitzGerald, Kentucky Resources Council, Inc., P.O. Box 1070, Frankfort, KY 40602, KBA ID 22370.

(c) The Respondents and their counsel of record are:
• Kentucky-American Water Company, represented by General Counsel, Kentucky-American Water Company, 2300 Richmond Road, Lexington, Kentucky 40502 and by Hon. Lindsey Ingram Jr., Hon. Lindsey Ingram, III, Stoll Keenon Ogden PLLC, 300 West Vine Street Suite 2100, Lexington, Kentucky 40507;
• Attorney General Jack Conway, represented by Hon. David E. Spenard, 1024 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601;
• Lexington-Fayette Urban County Government, represented by Hon. David J. Barberie, Hon. Leslye Bowman, LFUCG Department of Law, 200 East Main Street, Lexington, Kentucky 40507,
• Kentucky Industrial Utility Customers, represented by Hon. David Boehm, Boehm, Kurtz and Lowry, 36 East Seventh Street, Suite 2110, Cincinnati OH 45202;
• Kentucky Public Service Commission, represented by Hon. Jerry Wuetcher, Public Service Commission, 211 Sower Boulevard, Frankfort, KY 40601;
• Bluegrass Water Supply Commission, represented by Hon. Damon R. Talley, P.O. Box 150, Hodgenville, Kentucky 42748;
• Louisville Water Company, represented by Hon. Barbara K. Dickens, Louisville Water Company, 550 South Third Street, Louisville, KY 40202 and by Hon. John E. Selent, Hon. Edward T. Depp, DINSMORE & SHOHL LLP, 1400 PNC Plaza, 500 West Jefferson Street, Louisville, Kentucky 40202; and
• Kentucky River Authority, represented by Hon. John Hughes, 124 W. Todd Street, Frankfort, Kentucky 40601.

(d) The date of the Opinion of the Court of Appeals Affirming the Franklin Circuit Court was August 19, 2011. That Opinion is attached as Appendix A. This motion is timely filed pursuant to CR 6.01.

The Franklin Circuit Court Opinion and Order dated July 26, 2010 is attached as Appendix B.

The June 5, 2008 Order of the Kentucky Public Service Commission (Commission) denying the Petition of Citizens for Alternative Water Solutions (“CAWS”) for Rehearing of a Commission 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 the April 25, 2008 Order, are attached as Appendices C and D, respectively.

(e) No supersedeas bond was posted in this case.

(f) Movant does not have a petition for rehearing or a motion for reconsideration pending in the Court of Appeals, and no other party to this proceeding has a petition for rehearing or a motion for reconsideration pending in the Court of Appeals.

STATEMENT OF THE MATERIAL FACTS

The Kentucky-American Water Company (“KAWC”), a for-profit water utility company serving the Kentucky counties of Bourbon, Clark, Fayette, Gallatin, Grant, Harrison, Jessamine, Owen, Scott and Woodford counties, applied for a Certificate of Public Convenience and Necessity (CPCN) from the Kentucky Public Service Commission pursuant to KRS 278.020(1). The CPCN sought approval for the construction of a new water treatment plant adjacent to Pool 3 of the Kentucky River, and almost 31 miles of water transmission line.

CAWS, the Attorney General, Lexington-Fayette Urban County Government, Kentucky Industrial Utility Customers, Inc., the Bluegrass Water Supply Commission, Kentucky River Authority and the Louisville Water Company intervened. CAWS opposed the CPCN request, which was approved after an evidentiary hearing.

On appeal CAWS argued that the Kentucky Public Service Commission acted unlawfully and unreasonably in granting a Certificate of Public Convenience and Necessity to Kentucky-American Water Company to construct the new treatment plant and associated pipeline from Pool 3 of the Kentucky River for several distinct reasons, each and all of which justified reversal of the issuance of the CPCN.

First, CAWS argued that the KAWC failed to prove the “need” for the new treatment plant and associated transmission facilities, instead basing the supposed need on future water demand projections that were significantly higher than historic usage, and proposing only minor curtailments of usage during the recurrence of a dust-bowl drought. In approving a project based on unprecedented demand growth some four times higher than historic usage and lacking in reasonable restrictions on usage during a recurrence of the “dust bowl” drought of record, and without requiring demand moderation measures and leak detection be employed “in the ordinary course of business”, the Commission violated the statutory and regulatory criteria for issuance of a CPCN of reasonable need, causing great and unnecessary cost to KAWC ratepayers.

Second, CAWS argued that by approving the CPCN despite the rejection by KAWC of an array of demand and supply measures that could meet reasonable demand in a more incremental, stepwise, flexible fashion, in favor of a costly capital project that would meet all of the long-range projected demand and impose costs from day one for capacity not needed for many years (even under KAWC’s projected demand), the Commission failed to put KAWC to the test of meaningfully evaluating alternatives. Further, the sanctioning of a new Pool 3 treatment facility was quintessentially a “wasteful duplication of facilities” in light of available raw water and treatment capacity from Louisville’s Water Company.

The third argument advanced by CAWS was a challenge to the PSC’s reliance on the relative implementation status of KAWC’s favored alternative, since such reliance undercuts full and fair evaluation of alternatives by rewarding the applicant for moving forward towards project implementation prior to PSC approval. A fair evaluation of alternatives comporting with due process would not allow an applicant to present a proposed project as virtually a fait accompli by developing one alternative over others prior to application for a CPCN, nor would it reward an applicant for doing so.

Finally, CAWS argued that the PSC erroneously relied on the “regional” nature of the Pool 3 project in granting the CPCN, despite the lack of ability of the “partners” to afford participation in the Pool 3 project, and improperly relied on a factor that has no place in a CPCN review, that being the use of the KAWC project of the Kentucky River as a water source.

CAWS sought review of the Public Service Commission’s Order Denying Rehearing and of the underlying Order, and the Franklin Circuit Court affirmed. The Court of Appeals, by Opinion dated August 19, 2011, affirmed the decision of the Franklin Circuit Court. This motion follows.

QUESTIONS OF LAW INVOLVED

1. Did the Public Service Commission act unlawfully and unreasonably in granting the CPCN where the Commission failed to reconcile the significant discrepancy between historic water demand and usage and the projected four-fold increase in demand on which KAWC based the “need” for the new treatment plant?

2. Is a grant of a CPCN intended to assure that water customers can satisfy virtually unrestricted and unreasonable demands during a recurrence of the “dust bowl” drought of record violative of state law?

3. Is a water utility required, under KRS 278.020(1) and controlling case law, to adopt all reasonable measures in the ordinary course of business prior to seeking a CPCN for new water treatment and supply capacity, in order to satisfy the standards of showing “a substantial inadequacy of existing service” and “absence of wasteful duplication” of facilities?

4. Is reliance by the Commission on the relative state of implementation of a preferred alternative by an applicant for a CPCN violative of due process inasmuch as it rewards an applicant for efforts to advance one alternative and prejudices full and fair consideration of other reasonable alternatives?

5. Does the concept of “public convenience and necessity” require evaluation of a combination of alternatives that can meeting incremental increases in demand in an incremental manner?

SPECIFIC REASONS WHY THE OPINION SHOULD BE REVIEWED

Discretionary review is “a matter of judicial discretion and will be granted only when there are special reasons for it.” Ky. CR 76.20(1). While Kentucky case law does not delineate the precise guidelines for granting discretionary review, decisions of the Court of Appeals that would create a manifest injustice or are clearly erroneous fall within the guise of “special reasons.” Kurt A. Philipps, Jr., 7 KENTUCKY PRACTICE, RULES OF CIVIL PROCEDURE ANNOTATED 861 (6th Ed, West Group 2005). Id. at 861. Other areas receiving consideration for review by this Court include those of importance to the general public interest or in the administration of justice, questions of interpretation of the state constitution, and the interpretation of statutes. Id.

With apologies to the author, this case is in some respects “A Tale of Two Cities” – Lexington, a city in need of some additional raw water and water treatment capacity to meet its demands; and Louisville, a community with both excess treated water capacity and an ample raw water source. For the shareholders of KAWC, it is the “best of times,” for they will reap the significant financial benefits of a return on investment in the construction of a new water treatment plant and associated water transmission lines if the Commission decision to issue the CPCN stands, despite the unreasonable projections of average and peak demand and the availability of an alternative source of treated water from Louisville that the Commission itself acknowledged would be less costly to KAWC’s customers.

For the ratepayers of KAWC, it is the “worst of times,” since they will be burdened with costs of the new treatment plant and associated transmission main; costs acknowledged by the Circuit Court to be “enormous” and which could have been lessened had the Commission more rigorously held KAWC to the proper legal standards of demonstrating both that public convenience and necessity required such a substantial capital project based on a substantial inadequacy of existing service and the absence of wasteful duplication resulting from the construction of the new system or facility.

This motion for discretionary review raises several questions of law regarding how the “need” for service is to be determined under KRS 278.020(1) and applicable case law, and what is a legally sufficient evaluation of “alternatives”, and what must be considered in finding an “absence of wasteful duplication” such as is needed in justifying a request for a CPCN.

KAWC failed to demonstrate the need for the new water plant and association transmission facilities. All parties to the proceeding recognized that some additional raw water supply and treated water capacity would be needed during the planning horizon. The question presented to the Commission, however, was whether the proposed KAWC Project would supply the “total reasonable requirements of its customers under maximum consumption,” or whether it was a project proposing new supply and treatment capacity in excess of reasonable requirements and needs, at greater cost to ratepayers than was justified.

KAWC is not required to provide unlimited supply, nor is it allowed to charge ratepayers for building unnecessary facilities, but is instead obligated to supply water that is “[f]rom a source reasonably adequate to provide a continuous supply of water[;] 807 KAR 5:066 Sec. 3(2)(c); and sufficient in quantity to “supply adequately, dependably and safely the total reasonable requirements of its customers under maximum consumption.” Id, Sec. 10(4). CAWS asks this Court to affirm that approval of an application to construct a new treatment plant providing unreasonable levels of treated water supply beyond reasonable needs, at higher cost to the ratepayers, exceeds what the Commission may lawfully approve under its own regulations.

In reviewing a request for a CPCN, the Commission must make “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. Kentucky Utilities Co. v. Public Service Commission, Ky., 252 S.W.2d 885, 890 (1952). The Commission has noted that “wasteful duplication of facilities” incorporates not merely a determination that the proposal is feasible, but includes” a balancing of factors, including consideration of and demonstration of infeasibility of other alternatives, cost, and any unique characteristics that could be affected by the proposed alternative. In the December 21, 2007 Order in this case, the Commission enunciated its understanding of the governing legal standard, noting that “[s]imply 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, AR, CN 2007-00134 R. Doc. 502 p. 018825.

In this case, KAWC has 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” and that other alternatives, both on the supply and demand side, were infeasible. Instead, KAWC focused almost exclusively on finding a single supply-side option to meet all of its projected 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. For these reasons, the Commission acted unreasonably and unlawfully and the CPCN should have been denied.

KAWC based its “need” on a projected increase in demand significantly higher than current and recent usage would suggest. The record included six years of historic data, from 2000 through 2006, which reflected a maximum daily demand increase of 0.14 million gallons per day for each year. Based on historical usage trends for a six-year period, CAWS witness Dr. Solomon questioned how it was that the projected demand on which the “necessity” for the Pool 3 Project rested, rose much more dramatically at a rate of 0.58 mgd each year. He concluded that “[u]sing 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. AR, CN 2007-00134, R. Doc. 615, p. 19719-19720.

The Commission categorically dismissed the testimony of Dr. Martin Solomon concerning future growth in demand, concluding summarily 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, Appendix B at pp. 34-5. Yet there is no indication in the record that the Commission actually weighed the conflicting historical usage against the KAWC model projections, nor that the Commission reconciled the wide gulf between KAWC’s historical use data (the accuracy of which was not challenged) and KAWC’s projected demand.

While the weighing of evidence is in the first instance a matter for the Commission, the unexplained and unresolved gulf between historical usage and projected demand reflects a failure to weigh the evidence. The Commission dismissed the messenger and ignored the factual demand numbers. The result of the Commission failure to weigh and resolve the wide gulf between the factual usage for a six-year period preceding the application for a CPCN, with future projections, may burden ratepayers with, what the Circuit Court noted are “enormous capital costs of the water treatment plant and transmission lines” Opinion and Order, Appendix A, at p. 18; that historical usage data reflects may be much greater than to meet any reasonable “need.”

The Commission erred in a second area, approving maximum consumption demand projections that were patently unreasonable and inconsistent with applicable law requiring that only “reasonable” requirements be met during “maximum consumption” periods (expressed as the drought of record). Instead of requiring that the target demand be demonstrated to be reasonable in light of the projected recurrence of a drought of “Dust Bowl” proportions, the Commission approved capital construction sufficient to meet a demand under such extreme conditions that proposed no water use restrictions above limiting the frequency of lawn watering to alternative days.

As noted earlier, 807 KAR 5:066 Sec. 10(4) requires the utility to plan for water supply sufficient to “supply adequately, dependably and safely the total reasonable requirements of its customers under maximum consumption.” Id. (Emphasis added). In this instance, the Commission unlawfully approved a CPCN that would supply more than reasonable requirements of the customers under maximum consumption.
CAWS believes that as a matter of law, the determination of “need” and the “reasonableness” of demand projections under a recurrence of the dust bowl drought of record must include an assumption of implementation of all cost-effective emergency conservation measures commensurate with such a sustained and severe drought. Yet while tacitly acknowledging in that observation that unrestricted ability to use water during the drought of record is on its face unreasonable, the Commission approved KAWC’s projected maximum consumption numbers that included virtually unrestricted demand during a recurrence of the drought of record, in a manner inconsistent with regulatory criteria as to violate 807 KAR 5:066 Sec. 10(4).

The Commission erred in approving the CPCN for another reason – the “need” projected by the applicant failed to incorporate and evaluate “improvements in the ordinary course of business” (i.e. using best conservation and non-revenue water minimization measures) that would yield reductions in the loss of water that has already been withdrawn and treated, could augment the availability of water to KAWC customers, and would reduce capital costs for addressing water needs remaining after implementation of such measures.

Failing to have required an aggressive leak detection program before approving a new treatment facility capital construction at Pool 3 is presumptively wasteful and duplicative of existing capacity that has been withdrawn, treated, and lost in the system. In determining the “need” for new capacity, the Court in Kentucky Utilities Co. v. Public Service Commission, Ky., 252 S.W.2d 885 (1952) has made clear that the “showing of a substantial inadequacy of existing service” necessary to support a CPCN, must be “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[.]” (Italics added).

In rejecting out of hand the requirement that KAWC implement such measures and adjust projected demand for new and additional capacity accordingly, the Commission misapplied the applicable legal standard. The lowering of unmet demand through more aggressive leak detection should not be required to completely eliminate a projected deficit, but clearly should have been incorporated as a requirement prior to imposing substantial capital costs for new treatment capacity on the ratepayers, since such an action could delay the need to augment the water supply or lessen the deficit in water supply. The failure of KAWC to pare the scope of the need for new supply and treatment by capturing millions of gallons per day of water it treats and loses, and to deploy routine and emergency conservation measures to moderate and define what is the “reasonable” unmet “need,” prevented the Commission from reasonably and lawfully determining what supply and treatment needs were justified because they could not reasonably be met by better management of the existing system and normal improvements.

Where the Commission issues a CPCN that approves a new capital project based on delivery of unreasonable levels of service during a severe drought condition, and despite acknowledging the ability of the utility in the normal and ordinary course of business to cut its project need simply by fixing its leaking pipes, the Commission has misconstrued and misapplied the statutory and regulatory requirements, and allowed wasteful duplication of facilities within the KAWC system to the detriment of the ratepayers. Until the reductions achievable through such measures are evaluated and employed, the extent of the projected deficit after “normal improvements in the ordinary course of business” could not be ascertained and the new 20 MGD plant could not be lawfully determined to have been necessary or reasonable. Kentucky Utilities Co. v. Public Service Commission, Ky., 252 S.W.2d 885 (1952).

The Commission erred in approving the CPCN for another reason, which is the failure of KAWC to meaningfully consider a combination of alternatives that could meet reasonable needs. The Commission noted in Case No. 2001-00117, that

"[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.’…[and that] 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., AR, CN 2001-00117 R. Doc. 143, p. 013528.

Yet KAWC focused single-mindedly on advancing one supply-side project to meet all of its needs over the planning horizon, and in so doing selected an option that will impose significant present costs on ratepayers, and the Commission ratified this approach.If it is to have any meaning, the legal concept of “wasteful duplication” encompasses a fair and meaningful evaluation of the range of demand and supply-side options that could meet incremental growth in demand with incremental augmentation of supply, and avoid construction of new water treatment and supply facilities at what the Circuit Court recognized was an “enormous”.

Finally, the Commission unlawfully weighted its review and approval of the Pool 3 Project based on the relative stage of development of that project prior to CPCN issuance, in a manner that failed to provide fair and full consideration of all feasible alternatives. The Commission acknowledged that the Louisville Water Company proposal to construct a pipeline along the I-64 corridor to supply treated water to KAWC “could be slightly less costly than the specific facilities proposed by Kentucky-American.” Order, Appendix B, p. 77. Yet despite this conclusion, the Commission approved the KAWC proposal for three stated reasons: that KAWC’s proposed 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. Order, Appendix B, p. 80 (Italics added). Appellees argued below that, despite the Commission’s obvious reliance on “regional planning and use of the Kentucky River” as being two of the three bases for the decision, that they are merely dicta. Accepting for the moment that they are, despite every indication to the contrary, that leaves the Commission’s decision with one identified legal basis, which is that the KAWC proposal “can be immediately implemented with few financial or regulatory risks.” Id.

Why did the Commission so conclude? It was because, by the time that the Commission held a hearing on whether to grant a Certificate of Public Convenience and Necessity, “ Kentucky-American ha[d] completed the design and routing of the proposed facilities. It has received bids on all facets of the project and has obtained virtually all regulatory approvals necessary to commence construction. With the exception of obtaining private easements, the project is ready to proceed almost immediately.” Order, p. 78.

The Commission’s crediting actions taken towards implementing one alternative in advance of review and approval of the project, rewarded KAWC for advancing its preferred approach and failing to investigate other options thoroughly, and had a clear prejudicial effect on full and fair consideration of the feasibility and cost of other alternatives, in violation of KRS 278.020(1).

CONCLUSION

For the reasons stated above, the Movant CAWS respectfully requests that this Court grant discretionary review and reverse the Opinion of the Court of Appeals affirming the judgment of the Franklin Circuit Court, and vacate the Commission Order approving the CPCN granted to Kentucky-American Water Company.

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