"MUNICIPAL CORPORATIONS" AND PUBLIC UTILITY SERVICE IN PENNSYLVANIA. George A. Bibikos, Esq. * INTRODUCTION

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1 "MUNICIPAL CORPORATIONS" AND PUBLIC UTILITY SERVICE IN PENNSYLVANIA George A. Bibikos, Esq. * INTRODUCTION The Public Utility Commission (PUC) is the agency statutorily mandated to regulate public utility service within the Commonwealth of Pennsylvania. 1 This principle is stated easily enough, but in reality, the PUC s power over specific entities that provide utility service is either eliminated or significantly limited. 2 Such is the case when the entity providing utility service is a "municipal corporation" as defined in the Public Utility Code. 3 The problem with this definition is that municipalities and municipal authorities comprise the definition of "municipal corporations" under the Public Utility Code, 4 but neither receive equal treatment as far as PUC jurisdiction is concerned. As discussed in more detail below, municipalities will be subject to the PUC s jurisdiction under certain circumstances, but under no circumstances will municipal authorities be subject to the PUC s jurisdiction. The purpose of this article is therefore to review the treatment of municipal corporations providing public utility service in Pennsylvania and comment on this somewhat paradoxical area of public utility law. Part I provides the definition of "municipal corporations" and bifurcates that definition into "municipalities" and "municipal authorities." Part II discusses the treatment of municipalities and municipal authorities providing public utility services. Part III proposes the following three solutions to the * J.D., magna cum laude, Widener University School of Law; B.S., Shippensburg University of Pennsylvania. Many thanks to the worthy editors of the Widener Law Journal for their hard work and dedication. Any errors are my own. I would also like to thank my wife, Kristen, whom I love deeply PA. CONS. STAT. 501(b) (1999) (power over statutorily defined public utilities). 2 Id. 102 (excluding entities from the definition of public utility). 3 Id. 4 Id

2 880 WIDENER LAW JOURNAL [Vol. 13 PUC s apparent inconsistent treatment of municipalities and municipal authorities: (1) The PUC should maintain exclusive jurisdiction over municipalities and municipal authorities that provide utility service, (2) the PUC should treat municipal authorities similar to other municipalities and maintain jurisdiction when the authority provides utility service to customers outside its municipal boundaries, or (3) the General Assembly should amend the Public Utility Code to exclude municipal authorities from the definition of municipal corporations. This section also applies each proposal to a hypothetical scenario in an effort to pinpoint the best solution to the apparent inconsistency in this area. I. MUNICIPAL CORPORATIONS GENERALLY The Public Utility Code defines "municipal corporations" as "[a]ll cities, boroughs, towns, townships, or counties of this Commonwealth, and also any public corporation, authority, or body whatsoever created or organized under any law of this Commonwealth for the purpose of rendering any service similar to that of a public utility." 5 There are two types of municipal corporations described in the Public Utility Code. For simplicity s sake, the first category could be termed municipalities, which includes cities, boroughs, towns, townships, or counties of Pennsylvania. The second category of municipal corporations could be termed municipal authorities, which includes public corporations, public authorities, or other public bodies created by or organized under Pennsylvania law to render services similar to public utility service. 6 5 Id The Public Utility Code defines "service" as follows: Used in its broadest and most inclusive sense, [service] includes any and all acts done, rendered, or performed, and any and all things furnished or supplied, and any and all facilities used, furnished, or supplied by public utilities... in the performance of their duties under this part to their patrons, employees, other public utilities, and the public, as well as the interchange of facilities between two or more of them.... Id. Acknowledging this broad definition, the Commonwealth Court of Pennsylvania has even held that vegetation maintenance is a "service" within the

3 2004] MUNICIPAL CORPORATIONS 881 Municipalities and municipal authorities are separate legal entities created by separate laws. 7 The primary distinction is that municipalities are politically created sovereigns, while municipal authorities are essentially independent agencies of the commonwealth. 8 Despite the differences between the two types of municipal corporations, the Public Utility Code in its current form considers both municipal corporations. 9 II. MUNICIPAL CORPORATIONS AS "PUBLIC UTILITIES" Although municipal corporations are generally not considered "public utilities," courts have held that municipal corporations may be subject to PUC regulation if the municipal corporation provides service to customers beyond municipal borders. 10 The statutory basis for this proposition is not in the definitional section of the Public Utility Code. Instead, Chapters 11 and 13 of the Public Utility Code provide guidance. Section 1102(a)(5) provides that a "municipal corporation" must be granted a certificate of public convenience to begin rendering any public utility service "beyond its corporate limits." 11 Additionally, section 1301 provides as follows: meaning of the statute requiring utilities to furnish adequate and reasonable service. W. Penn Power Co. v. Pa. PUC, 578 A.2d 75 (Pa. Commw. Ct. 1990). See, e.g., Popowsky v. Pa. PUC, 653 A.2d 1385 (Pa. Commw. Ct. 1995) (A utility s maintenance of vegetation is a regulated service regardless if the maintenance of such service causes a "utility-generated" problem.). See 66 PA. CONS. STAT (1999) (requiring utilities to provide adequate and reasonable service). 7 See O Hare v. County of Northampton, 782 A.2d 7, 13 (Pa. Commw. Ct. 2001). 8 Id PA. CONS. STAT. 102 (1999). 10 See generally Ernest Renda Contracting Co., Inc. v. Commonwealth, 532 A.2d 416, 420 (Pa. 1987); In re Borough of Boyertown, 466 A.2d 239, (Pa. Commw. Ct. 1983). Cf. Pub. Advocate v. Phila. Gas Comm n, 674 A.2d 1056 (Pa. 1996) (gas utility that does not provide service outside its borders is not subject to PUC regulation); Rulli v. Pa.-Am. Water Co., 81 Pa. P.U.C. 555, 559 (1994), available at 1994 WL uding that a municipality rendering service within its municipal boundaries is not a "public utility") PA. CONS. STAT. 1102(a)(5) (1999).

4 882 WIDENER LAW JOURNAL [Vol. 13 Only public utility service being furnished or rendered by a municipal corporation, or by the operating agencies of any municipal corporation, beyond its corporate limits, shall be subject to regulation and control by the commission as to rates, with the same force, and in like manner, as if such service were rendered by a public utility. 12 When read in tandem, municipal corporations must comply with the Public Utility Code and incidentally must comply with PUC directives when providing services beyond corporate limits. 13 A. Treatment of Municipalities Treatment of the first type of municipal corporation, the municipality, is relatively straightforward. As background, consider that the underlying purpose behind PUC jurisdiction over services rendered by municipalities outside municipal limits has political overtones. Customers within the municipality are the voters who determine the officers of the municipality. By contrast, customers outside the municipality have no voice and no power to select the officers of the municipality. With this scenario in place, the municipality may be inclined to charge customers within its boundaries a lower rate than customers outside municipal boundaries to curry favor with voters. By giving the PUC jurisdiction over municipal corporations providing service outside municipal boundaries, extraterritorial customers receive some protection from possibly discriminatory rates. 14 Thus, rates charged by the extraterritorial municipality must be just, 12 Id (emphasis added). 13 See also PA. STAT. ANN. tit. 53, (West 1997) (determining that water service provided by third class city outside its boundaries "subject to regulation and control by the Public Utility Commission as to character of service, extensions, and rates, with the same force and in like manner as though the city... [was] a water corporation"). 14 See County of Dauphin v. Pa. PUC, 634 A.2d 281, 283 (Pa. Commw. Ct. 1993) (citing State Coll. Borough Auth. v. Pa. PUC, 31 A.2d 557, 562 (Pa. Super. Ct. 1943); Berkley v. Borough of Berlin, 96 Pa. P.U.C. 351, 358 (2001), available at 2001 WL , at *15-*17 (disparate rates charged to extraterritorial customers subject to PUC jurisdiction; rationale is protection of extraterritorial customers with no voice in political process).

5 2004] MUNICIPAL CORPORATIONS 883 reasonable, and non-discriminatory 15 because the Public Utility Code treats municipalities operating and rendering public utility service to customers outside corporate boundaries as if it were a traditional public utility. 16 However, Section 1304 provides that "[n]o rate charged by a municipality for any public utility service rendered or furnished beyond its corporate limits shall be considered unjustly discriminatory solely because a different rate is charged for a similar service within its corporate limits." 17 Accordingly, in Ambridge Borough v. Pennsylvania Public Utility Commission, 18 the court held that an extraterritorial municipality could not give undue or unreasonable preference to or unfairly discriminate amongst customers outside its municipal boundaries. 19 The court stated, however, that rates charged to customers within municipal borders could be disparate from the rates charged to customers outside municipal limits so long as the rates are fair and reasonable, based on the fair market value of the property used and useful in public service, and proportionate to the plant investments necessary for rendering services outside the municipality s limits. 20 In sum, the relevant portions of section 1304 and the Ambridge case stand for the proposition that, when subject to PUC jurisdiction, (1) municipalities can establish classes of customers; (2) municipalities can charge different rates to each class of customers; and (3) municipalities cannot charge different rates to similarly classified customers. As discussed below, the same is not the case with municipal authorities. B. Treatment of Municipal Authorities The case of municipal authorities presents unique considerations. As noted above, municipalities are subject to PUC jurisdiction when providing service to customers outside municipal boundaries but not when providing services within municipal PA. CONS. STAT. 1301, 1304 (1999); Pub. Advocate v. Phila. Gas Comm n, 674 A.2d 1056 (Pa. 1996) PA. CONS. STAT (1999). 17 Id A.2d 429 (Pa. Super. Ct. 1939) 19 Id. at Id.

6 884 WIDENER LAW JOURNAL [Vol. 13 borders. 21 The question then becomes whether the same is true for municipal authorities. Although the Public Utility Code clearly includes municipal authorities in the definition of "municipal corporations," it is not entirely clear that municipal authorities are subject to the jurisdiction of the PUC under any circumstances. The argument that municipal authorities are subject to PUC jurisdiction begins with several statutory provisions. First, section 102 of the Public Utility Code, as stated above, includes "municipal authorities" within the purview of "municipal corporations." 22 With that in mind, recall that (1) section 1102(a)(5) requires "municipal corporations" to obtain certificates of public convenience for rendering service outside municipal boundaries, and (2) section 1301 subjects "municipal corporations" operating outside municipal boundaries to rate regulation. 23 Since municipal authorities fall within the definition of municipal corporations, and the Code applies to municipal corporations operating outside corporate boundaries, the logical conclusion is that a municipal authority operating outside its boundary is subject to PUC regulation. 24 In Allegheny County Port Authority v. Pennsylvania Public Utility Commission, 25 for instance, the court held that the county port authority was a "municipal corporation" as defined by the Public Utility Code and upheld a Commission order to allocate costs in rail-highway crossings to the county authority. 26 The court reasoned that since the Code gave the PUC general jurisdiction over cost allocation resulting from construction and alteration of rail-highway crossings, and "no other body retain[ed] jurisdiction over this subject matter[,]" the PUC properly asserted jurisdiction. 27 In State College Borough Authority v. Pennsylvania 21 E.g., Ernest Renda Contracting Co., Inc. v. Commonwealth, 532 A.2d 416, 420 (Pa. 1987) PA. CONS. STAT. 102 (1999). 23 See id. 1102(a)(5), This principle seems to be deflating. See Rankin v. Chester Mun. Auth., 68 A.2d 458 (Pa. Super. Ct. 1949). Rankin acknowledged that the Municipal Authorities Act of 1945 impliedly rejected the holding of State College Borough Authority v. Pa. Public Utility Commission, 31 A.2d 557 (Pa. Super. Ct. 1943) A.2d 810 (Pa. Super. Ct. 1966). 26 Id. at Id.

7 2004] MUNICIPAL CORPORATIONS 885 Public Utility Commission, 28 customers who resided outside the State College Borough Authority service area petitioned the PUC for a reduction in rates because customers within the Authority s service area were charged lower rates. 29 The court held that both municipalities and municipal authorities rendering public utility service beyond corporate boundaries triggers PUC jurisdiction for such extraterritorial services. 30 Contrary decisions notwithstanding, there is stronger support for the proposition that municipal authorities are exempt from PUC regulation even if operating outside of municipal boundaries. Statutorily, section 5602 of the Municipal Authorities Act defines "authority" as "[a] body politic and corporate created under this chapter...." 31 "Municipal authority" is defined as "[t]he body or board authorized by law to enact ordinances or adopt resolutions for the particular municipality." 32 The Municipal Authorities Act grants municipal authorities the power to provide utility services and fix rates for such service, 33 and section 5607 of that Act vests the courts of common pleas with jurisdiction over municipal authorities rendering utility service. 34 The judicial recognition that the PUC lacks jurisdiction over municipal authorities dates back over fifty years. In Rankin v. Chester Municipal Authority, 35 the court held that the court of Id A.2d 557 (Pa. Super. Ct. 1943). 29 Id. at Id. at PA. CONS. STAT (2000). 32 Id. 33 Id. 5607(d)(9). 34 Specifically, section 5607(d)(9) provides the following: Any person questioning the reasonableness or uniformity of a rate fixed by an authority or the adequacy, safety and reasonableness of the authority s services, including extensions thereof, may bring suit against the authority in the court of common pleas of the county where the project is located or, if the project is located in more than one county, in the court of common pleas of the county where the principal office of the project is located. The court of common pleas shall have exclusive jurisdiction to determine questions involving rates or service A.2d 458 (Pa. Super. Ct. 1949).

8 886 WIDENER LAW JOURNAL [Vol. 13 common pleas, not the Public Utility Commission, "has exclusive jurisdiction to inquire into the reasonableness of rates charged by a municipal authority beyond as well as within the corporate limits of the municipality which created it." 36 The court explained that the Public Utility Code included municipal authorities within the definition of "municipal corporations" and that the court in State College held that municipal authorities operating outside corporate limits fell within the jurisdiction of the PUC. 37 The court here, however, explained that the Municipal Authorities Act was enacted after State College, and since the Municipal Authorities Act conflicted with an earlier law (the Public Utility Code), canons of construction required that the latter enactment prevail. 38 As such, the Municipal Authorities Act that grants exclusive jurisdiction to the common pleas court, rather than the PUC, prevails over the Public Utility Code, and the PUC lacks jurisdiction over any utility services provided by municipal authorities. 39 Elizabeth Township v. Municipal Authority 40 similarly held that the Municipal Authorities Act exempts municipal authorities from PUC regulation. 41 Noting that while the Municipal Authorities Act impliedly rejected the holding of State College, neither the Act nor the cases that followed intended to alter the procedures for rate regulation. 42 The court held that the procedures for rate regulation in the common pleas court should mirror those of the PUC s procedures. 43 As such, challengers to rates charged by municipal authorities are not entitled to jury trials, to name one example Id. at 460 (emphasis added). 37 Id Id. at Id A.2d 245 (Pa. 1982). 41 Id. at Id. at Id. 44 Id. See also Graver v. Pa. PUC, 469 A.2d 1154 (Pa. Commw. Ct. 1984) (reaffirming Rankin and stating that (1) the Municipal Authorities Act negated the State College holding; (2) since the Act was the later enactment, it impliedly repealed the inconsistent provision in the Public Utility Code; (3) as such, the court of common pleas has exclusive jurisdiction over utility services provided by municipal authorities irrespective of whether such service is inside or outside municipal limits). See, e.g., Glennon s Milk Serv., Inc. v. W. Chester Area Mun.

9 2004] MUNICIPAL CORPORATIONS 887 Other attempts have been made to bring municipal authorities within the jurisdiction of the PUC, particularly when regulated utilities contract with municipal authorities. Section 507 of the Public Utility Code generally requires contracts with municipal corporations to be submitted to the PUC for approval except for contracts between public utilities and municipal corporations to furnish service at regularly filed and published rates. 45 Thus, in White Rock Sewage Corp. v. Pennsylvania Public Utility Commission, 46 the court first rejected the argument that the PUC could assert jurisdiction over a municipal authority providing service inside and outside its municipal boundaries. 47 Second, the court held that the contract between the utility and the authority was not subject to the PUC s jurisdiction under section 507 because the authority merely agreed to provide sewage treatment service to the utility under a published schedule of rates. 48 In sum, the court of common pleas has exclusive jurisdiction over rates set by municipal authorities. 49 Rates set by municipal authorities must be reasonably proportional to the value of the service rendered, but the authority is entitled to recover its full operating costs, including reasonable returns on its investment. 50 In addition, municipal authorities can set different rates for the same type of customers within each class of customers. In other words, authorities can create classifications of customers and charge such customers in proportion to the service rendered, even if such rates are different from other customers of the same class. 51 Auth., 538 A.2d 138 (Pa. Commw. Ct. 1988) (common pleas court decides whether water authority has power to determine maintenance responsibilities and require customers to regularly service pipes at their own expense) PA. CONS. STAT. 507 (1999) A.2d 984 (Pa. Commw. Ct. 1990). 47 Id. at Id. at PA. CONS. STAT. ANN. 5607(d)(9) (West. Supp. 2003). 50 See Allegheny Ludlum Corp. v. Mun. Auth. of Westmoreland County, 659 A.2d 20, (Pa. Commw. Ct. 1995); Township of Hopewell v. Municipal Water Auth., 475 A.2d 878, 881 (Pa. Commw. Ct. 1984). 51 Township of Hopewell, 475 A.2d at 882.

10 888 WIDENER LAW JOURNAL [Vol. 13 III. EVALUATION OF LAW AND HYPOTHETICAL The general principles outlined above present several topics of discussion. Most noteworthy is the disparate jurisdictional treatment of municipalities versus municipal authorities. Municipalities will be subject to the jurisdiction of the PUC when operating outside their municipal boundaries but not when operating within municipal boundaries. Although there is some support to the contrary, it appears that municipal authorities will not be subject to the PUC under any circumstances. Confusion might arise, however, because municipalities and municipal authorities are both considered municipal corporations under the Public Utility Code. The sections that follow apply the following proposals to a basic hypothetical scenario involving a municipal authority providing water service: (1) declare that the PUC has jurisdiction over any entity that provides public utility service, (2) treat municipal authorities similar to municipalities, or (3) amend the Public Utility Code to specifically exclude municipal authorities from PUC jurisdiction. The effort here is to pinpoint the best way to resolve the inconsistencies under the current regulation of utility service when municipal corporations are involved. A. Hypothetical: Utopia Municipal Authority Utopia Municipal Authority (UMA) has been duly created under the Municipal Authority Act for the sole purpose of providing water service to 5,000 residents within its municipal boundaries. The rate charged by UMA for the 5,000 current customers is $3.50/tg (thousand gallons). The UMA has been operating since 1995 without disruption. In 2003, a developer is granted the opportunity to build residential homes, housing some 2,000 residents, just outside UMA s boundaries. A nearby water utility, Euphoria Water Company, is certificated to provide water service in the neighboring area. Euphoria applied to the PUC for a certificate of public convenience but was denied. UMA, on the other hand, contracts with the developer to furnish water service to the prospective customers at a rate that is considerably higher than the rate charged to the current 5,000 customers Utopia serves within

11 2004] MUNICIPAL CORPORATIONS 889 its municipal borders. Instead of $3.50/tg, the rate is $4.50/tg for the 2,000 new customers. The rationale behind UMA s increase in rates is that the capital costs of extending water mains and other construction efforts will be considerably high in order to begin servicing these new customers. There is no alternative source of water. Under the current state of the law, and assuming that both the 5,000 current customers and the 2,000 new customers are similarly situated for the most part, UMA would violate the Public Utility Code s mandate that rates be nondiscriminatory. 52 Equally true is the reality that if UMA were a municipality, and not an authority, its rates would be subject to PUC jurisdiction because UMA would be offering and rendering water service to customers outside its boundaries. 53 Assuming again that the two classes of customers are similar, it would at least raise the issue of discrimination in rates, although there is support that extraterritorial customers need not be treated exactly the same as customers within the municipality s service area. 54 However, since municipal authorities are outside the jurisdiction of the PUC, there is no chance that the Public Utility Code applies. 55 Of course, customers could bring an action in the court of common pleas, where the court applies ratemaking and adequacy of service procedures similar to those followed by the PUC. 56 The problem with this is institutional. On an institutional level, part of the rationale underlying the creation of administrative agencies like the PUC was to create an expert body to decide issues imbued with the public interest and, many times, involving technical ratemaking formulas and economic calculations 57 that, by and large, fall outside the province of the courts. Courts interpret law, administer PA. CONS. STAT (1999). 53 Id Id Supra Part II.B and cases cited therein. 56 Id. 57 The basic ratemaking formula used by the PUC is the formula that calculates a utility s revenue requirement: RR = E + ROR x RB, where "RR" is the revenue requirement; "E" represents proper expenses determined by the PUC; ROR represents the rate of return based on the utility s rate base, represented by RB. See, e.g., Pa. Power Co. v. Pa. PUC, 561 A.2d 43, 46 (Pa. Commw. Ct. 1989).

12 890 WIDENER LAW JOURNAL [Vol. 13 justice, and resolve disputes of the parties. Agencies such as the PUC have prosecutorial, legislative, and adjudicatory powers. The courts fundamentally lack a prosecutorial function an executive function that, if possessed by courts, would undermine the very premise of our "separation of powers" system of government. 58 Thus, the court cannot preemptively investigate, supervise, and regulate entities providing utility service in the "executive" sense, nor should the courts embark on such an undertaking. The current scheme (allowing courts of common pleas to serve as the equivalent of the PUC when the service provider is a municipal authority) perhaps leaves aggrieved consumers in the unenviable position to first suffer injury and subsequently bring an action against the authority. The agency, quite to the contrary, has independent investigatory powers under its prosecutorial function, which may prevent injury to consumers before such injury occurs. 59 This is particularly true given that jurisdictional utilities must file tariffs with the commission for any rates charged before such rates are enforceable on consumers. 60 B. Application under the Proposed Alternatives The first proposal, requiring the PUC to exercise jurisdiction over all entities providing utility service, would quell the institutional problems outlined above and would promote statewide uniformity of utility service and regulation. Applying this approach to the hypothetical above, the PUC would exercise jurisdiction over UMA and require UMA to file tariffs with respect to its rates charged to both classes of customers, new and current. The disparity in rates would be clear at the outset before such rates would take effect. Various consumer groups such as the Pennsylvania Office of Consumer Advocate 61 could intervene to challenge the disparity, the Commission would employ its own 58 Judicial independence from the legislative and executive branches of government is a concept as old as our country itself. See, e.g., THE FEDERALIST NO. 78 (Alexander Hamilton) (" [T]here is no liberty, if the powers of judging be not separated from legislative and executive powers. ") (citation omitted). 59 E.g., 66 PA. CONS. STAT (1999) (outlining the powers and duties of the PUC). 60 Id PA. STAT. ANN. tit. 71, (West 1990) (establishing the Office of Consumer Advocate to represent the interest of Pennsylvania utility consumers).

13 2004] MUNICIPAL CORPORATIONS 891 Trial Staff to present its view on the matter, 62 and the matter would be fully considered by the agency charged with enforcing a statute that fundamentally involves a technical area of law. It might very well be that UMA would be able to recover its construction and capital costs through rates if such costs were justified. 63 Over time, however, both classes of customers should enjoy uniform rates. The second proposal, treating municipal authorities similar to municipalities, is perhaps the equitable result. Under this approach, UMA would be subject to PUC jurisdiction only with respect to the new customers. UMA would not be unduly burdened because statutory language permits it to avoid a rate discrimination claim between classes of customers. Consumers would receive adequate protection by participating before the rates took effect, since UMA would be required to file its tariff with the PUC for approval before enforcing its rates. In addition, since the officials operating municipal authorities are not subject to the political oversight that acts as a check on elected officials of municipalities, 64 authorities would be accountable to the PUC. The third proposal, amending the public utility code to exclude municipal authorities, would simply do nothing to change the current state of the law because, in practice, municipal authorities are not subject to the PUC regardless of the statutory language that indicates otherwise. 65 As such, an amendment would only clarify that municipal authorities are not subject to the PUC s jurisdiction. This might eliminate any confusion statutorily, but it would do little to eliminate the substance of current problems, some of which have been outlined above. CONCLUSION To promote uniformity, give the PUC exclusive jurisdiction over any entity that provides utility service. To keep in line with the Public Utility Code as currently written, give the PUC jurisdiction over municipal authorities that provide service outside PA. CONS. STAT. 306(b) (1999). 63 Supra note 57 (formula accounts for reasonable expenses). 64 Supra Part II.A. 65 Supra Part II.B. Cf. 66 PA. CONS. STAT. 102 (1999) (definition of "municipal corporation" includes municipal authority).

14 892 WIDENER LAW JOURNAL [Vol. 13 their territories. Both approaches would be more beneficial to consumers than the final approach, which would be amending the Public Utility Code to specifically exclude municipal authorities from the PUC s jurisdiction. Whatever the benefit of keeping the current definition of municipal corporations, the conflict and confusion it creates does not deserve a passing nod but requires some reevaluation.