AQUARION WATER COMPANY OF CONNECTICUT v. PUBLIC UTILITIES REGULATORY AUTHORITY, SC 21010

Judicial District of New Britain

Administrative Appeal; Utilities; Whether PURA's Disallowance of Certain Pro Forma Plant Additions Was Arbitrary and Capricious Where Plaintiff Argues That PURA Allowed Other Plant Additions to Enter Rate Base on Basis of Same Evidence; Whether PURA Properly Applied Governing Prudence Standard to Plaintiff's Claimed Conservation and Compensation Expenses; Whether PURA Erred in Assessing Whether Total Effect of Its Rate Order Was Confiscatory. The plaintiff has supplied water to residents and businesses in fifty-six municipalities across the state since 1857. On August 26, 2022, the plaintiff filed an application with the defendant to amend its existing rate schedules; it last requested an amendment to its rates in 2013. The plaintiff's application requested an annual approved revenue requirement of $236 million, an approximately $37 million increase over the revenue requirement approved in 2013, and a 10.35 percent return on equity (ROE). After extensive proceedings, the defendant issued a final decision approved by a vote of 2 to 1 that approved an annual revenue requirement of $195,561,690, a decrease of $1,969,517 or approximately 1 percent of the plaintiff's 2013 approved revenue requirement, and a ROE of 8.70 percent, rather than the 10.35 percent requested by the plaintiff. The plaintiff thereafter appealed the defendant's final decision to the trial court and filed a twelve-count complaint. The trial court dismissed nine counts, remanded two counts, and partially dismissed and partially remanded the final count. In particular, the trial court dismissed the plaintiff's claims (1) that the defendant's decision was confiscatory, (2) that the defendant's disallowance of $42,136,826 in pro forma plant additions from September 1, 2022, through December 15, 2022, was arbitrary and capricious where it had allowed $51,177,892 in plant additions included in the plaintiff's application to enter the rate base, (3) that the defendant's disallowance of approximately $2 million in employee incentive compensation costs was improper where such costs were necessary and therefore recoverable, and (4) that the defendant's disallowance of 50 percent of the plaintiff's deferred conservation costs was arbitrary and capricious where the defendant had allowed the plaintiff to incur the costs as a deferred regulatory asset in a prior rate decision. The trial court determined that the total effect of the defendant's rate decision was not confiscatory because the defendant possesses broad regulatory discretion in setting rates, the 8.7 percent ROE was commensurate with returns on investments in other enterprises having corresponding risks and fell within the range of estimates recommended during the hearing process, and there was no evidence in the record to support the plaintiff's argument that the defendant's decision would affect confidence in its financial integrity and its ability to attract capital. The trial court further dismissed the plaintiff's pro forma plant additions claim on the ground that there was substantial evidence to support the defendant's conclusion that the plaintiff had failed to establish the prudency and usefulness of the post-September 1, 2022 pro forma plant additions for purposes of satisfying the standard for an adjustment to the rate base and, in response to the plaintiff's argument regarding the prior allowance, that there was no authority that the defendant's factual conclusions were required to be consistent across the differing decisions and that the trial court's review was limited to the challenged disallowance. Additionally, the trial court concluded that the defendant's disallowance of the plaintiff's employee incentive compensation costs was within the defendant's broad discretion to balance competing interests in setting utility rates and supported by substantial evidence where the defendant referred to the record in deciding that the plaintiff's employee incentive compensation program did not achieve its stated goals. Finally, the trial court dismissed the plaintiff's deferred conservation expenses claim on the ground that the defendant's decision that the plaintiff had failed to establish that the expenses were reasonable and prudent was within the defendant's broad discretion and supported by substantial evidence. The plaintiff filed an appeal from the trial court's judgment to the Appellate Court, and the Supreme Court transferred the appeal to its docket pursuant to General Statutes § 51-199 (c). The Supreme Court will decide whether the defendant's disallowance of $42 million of the plaintiff's used and useful plant additions was erroneous and arbitrary. The Supreme Court will also decide whether the defendant's application of the governing prudence standard to the plaintiff's operating expenses regarding deferred conservation and variable-pay compensation warrants reversal. Finally, the Supreme Court will decide whether the defendant erred in assessing whether the total effect of its rate order was confiscatory.