Judge Says Cut QT Water Increase By Half

August 20, 2012

When area residents talk about water during a record-breaking hot summer, generally they are thinking of the shore, or the cool lake in the Poconos, or the municipal pool. But there has been a different type of H2O on the minds of some, particularly the 931 families living in Richland, but served by the Quakertown Borough water system.

Back in November, 2011, QT announced a plan to increase the water rates for those folks by 87.9 percent, to bring them more into line with what 3156 borough residents pay. This additional $278,854 was supposedly to cover "the increased cost of the salaries and benefits for the water department employees, and the need to continue maintaining the aging infrastructure".

Since Qtown owns the water system, borough council can set any rate it chooses for its own residents. Those charges have gone up substantially in the past few years, as the town is paying off the $10 million loans it incurred 6-8 years ago to slip-line, and replace, miles of its leaking 100-year old pipes and sewer mains (nowhere near the RT homes). Those payoffs will continue for 11 more years. The rates for the Richland 931 have remained much lower, mostly because they weren't assessed the debt service fee that was laid on the in-towners.

But aside from objecting to the enormous rate increase, the Richland folks were upset because they felt that their higher water payments were simply subsidizing a portion of every borough residents' real estate taxes. Quakertown transfers all of its sewer, water, and electric income to the general fund - $185,000 from water and sewer last year, and an expected $250,000 this year. Every dollar collected from utilities is one less needed from taxes. If the borough received the $278,854 from Richland, that is $278,854 that isn't taxed to their own residents. And, of course, the Richland 931 still must pay their own township taxes.

To accomplish the out-of-town rate increase, Qtown had to get approval from the PA Public Utility Commission. But the state Office of Consumer Affairs, which routinely represents ratepayers in hearings before the PUC, filed a formal complaint on December 20. The PUC's Bureau of Investigation and Enforcement also requested to be involved on behalf of the Richland 931.

The matter was assigned to Administrative Law Judge David Salapa, who gathered evidence throughout the spring, set deadlines for filings, and conducted mediation. Richland, backed by State Rep Paul Clymer, requested a public input session on April 23. Following another flurry of documents among the parties, Salapa finally heard testimony on May 31. The residents were represented by OCA attorney Christine Hoover. Richland Township officials also testified.

It was then up to Salapa to determine if QT's request for $278,854 met the legal standard, which states that "the burden of proof to show that the rate involved is just and reasonable shall be upon the public utility". And, further, Section 315(a) of the Public Utility Codes mandates "It is well-established that the evidence adduced by a utility to meet this burden must be substantial".

The hearing wasn't what you might expect, given the general emotional outcry of "It's not fair". The judge wasn't interested in personal opinion. The testimony and evidence were an accountant's wet dream - presentations by number-crunching bean counters, with blithe references to composite allocation factors, cash working capital, depreciation, inventory records, and bad debt expenses. Salapa analyzed each of these, and offered a detailed, reasoned explanation for each category.

Quakertown was at a disadvantage from the beginning. They suffered from poor, occasionally non-existent, accounting systems put in place by former Borough Manager David Woglom. And they were outgunned, with both the OCA and BIE accountants and attorneys attacking their methodology. Not surprisingly, it didn't go well for the borough.

Salapa lowered Quakertown's claim for cash working capital (salaries, benefits, pensions, expenses for this case). He knocked out more than $21,000 because the borough did not maintain the required "detailed inventory record of materials and supplies on hand". Even more was rejected because Qtown improperly changed its method of accruing depreciation after the fact.

Some annual depreciation came off because the town had fully depreciated electric pumping equipment back in 2005, but then continued to take depreciation after that. (Still following along?) Almost $10,000 in expenses were dropped because certain costs for plant replacement were improperly categorized. There was several thousand dollars of income that Qtown didn't show as revenue.

On the expense side, Salapa disallowed more than $57,000 which Qtown claimed for such non-water related items as training and insurance of elected officials, expenses for the use of borough hall for planning and meetings, and filing and document storage. Even Quakertown's own witnesses admitted that if there was no water utility, the borough "would have to support the expenses through a transfer from the electric and sewer funds". Salapa found that those expenses were "without any factual basis"

Qtown agreed that their $51,913 electric billing to their own water department was excessive, but the OCA wanted all but $931 taken off because, they claimed, the borough billed the electric at a much higher rate than other electric companies, and, therefore, the water department paid far more for power than other similar sized water companies.

The sides sparred over how many years Quakertown should spread the $241,700 expenses of the rate case. Qtown said three. OCA said seven. So did Salapa. His was the vote that mattered, knocking $46,000 from the borough's expenses for each of the next three years. The sides actually agreed on the amount of reductions to pension expenses, legal fees, 401A contributions, and salaries and benefits.

The town's bad debt write-off was eliminated because no actual records were kept, and about $10,000 came off because certain water meters and water lines were improperly classified as repairs rather than replacements.

$5000 was removed from Qtown's claim of expenses for rate making after a complicated argument involving direct jurisdictional expense and the calculation of the composite allocation factor. (Anyone wanting to learn more about this can stay after class.)

In the end, Salapa recommended to the PUC that the requested increase of $278,854 be reduced to $135,953, a cut of about 52 percent. The OCA felt the number should be $91,400, or 71 percent less. They have filed exceptions with the Commission. Quakertown is also appealing.

The entire PUC will now hear the matter at one of their regularly-scheduled public meetings in Harrisburg in September. They will do what is called "binding polling", which means that they will first hear Salapa's recommendations on each issue, then the OCA and borough objections, if any. After each, a vote will be taken. A final order must be issued by September 28.

Don't expect much to change at that hearing. Salapa spent months analyzing all of the evidence, which had, itself, taken months to compile, and the PUC commissioners will only have a few minutes for each category. They won't be overruling him unless he erred on the math, or misapplied the law.

So the borough won't be balancing its budget on the backs of the Richland 931, but the out-of-towers will be paying somewhat more to turn on their taps. Something for everyone to dislike - the sign of a good legal decision.