PUC hears arguments in wholesale water dispute

The Texas Public Utility Commission of Texas met Friday and continued discussions on a dispute between the city of Graham’s wholesale water customers and the city related to an appeal filed in October 2017.

The PUC tabled the topic until the next open meeting after attorneys representing the petitioners of all four wholesale entities and the city of Graham made their arguments. Attorney Geoffrey Kirshbaum, representing the wholesale petitioners, was the first to make his argument Friday.

“This is a wholesale appeal of rates charged by the city of Graham in 2017,” Kirshbaum said. “As reflected in the city of Graham’s request for oral argument in its actions that led to this appeal, the city of Graham believes wholesale water customers like the petitioners should have no input on their wholesale rates. In contrast, the petitioners believe (the) contract rate should be mutually agreeable, set in a reasonable manner and not set arbitrarily. The public interest rule assumes there has been agreement on wholesale rates in the contract. There was no agreement on rates here. The city has taken advantage of its monopoly position over petitioners by the manner in which it set rates in 2017, and our primary complaint is that evidence shows there was no cost of service study done, just a retail rate study addressing rate design based on budgeted amounts.”

Kirshbaum alleges the city witness could not explain how they set their budgeted amount and included a $400,000 an amount for unspecified projects to build up a reserve. He continued and said the city’s study did not comply with their contract calling for a cost of service study with the entities.

“The city said its retail rate study was a cost of service study, it is not,” Kirshbaum said. “That is evidence from the face of study document in addition to information from the city’s witnesses at trial. And a problem we had is the commission’s rules prevent cost of service evidence in a phase one hearing. The details of those budget figures would be explored in phase two, as would the details of what the wholesale rate should actually be, so we would like a phase two cost of service hearing.”

Michael Guevera, representing the city of Graham, spoke after the allotted time provided by the PUC for Kirshbaum. He started his statement by asking the commission to adopt the proposal for decision submitted by an Administrative Law Judge (ALJ) and to look at the wholesale appeal process completed by the city of Graham.

“What I would like the commission to look at, was in this case I believe the city of Graham, the city of Newcastle and the city of Bryson all spent funds unnecessarily to both prosecute and defend this case,” Guevera said. “As we have talked about in this case, in phase one the protestants have the burden of proof, yet they (...) conducted no discovery and they produced no expert witnesses nor expert testimony. You heard whether it was a cost of service study or a retail rate study, there was only one person in the entire case that had ever done anything regarding that and that was the witness that the city of Graham produced in the case.”

In January 2018, the PUC filed a preliminary order on the case in which they requested one or more ALJ at the State Office of Administrative Hearings prepare a proposal for consideration by the commission regarding the phase-one issue.

Guevera said at the hearing the protestants each provided a witness which spoke about the rates, but he claimed that not one could explain how they came to the rate number they had.

“One of them even testified that they don’t even remember filling out the pre-file testimony form and thought that it was somebody else that mentioned that somebody else filled it out,” Guevera said. “In their initial brief following the hearing, the protestants cited as what is stated here, one item that they allege that the city of Graham violated the public interest and that was the monopoly power. However, all four of the witness for the protestants, one for each protestant, testified during the hearing that they did not believe that the city of Graham violated or abused their monopoly power.”

Guevera said that in the protestants pre-filed testimony the petitioners complaint was that the felt the city was charging a higher wholesale rate for wholesale customers than it was for its retail customers.

“Each one of those witnesses recanted that and changed their testimony and said that no, in fact they either misunderstood the rate study, or they miscalculated,” Guevera said. “In fact, they understood that the retail rate was actually higher than the wholesale rate, so they changed their testimony.”

Guevera reiterated for the commission to approve the decision and also look over the rules so other municipalities do not have to spend funding on similar cases. After Guevera made his case, commissioner Arthur C. D’Andrea responded to the two attorneys.

“I agree with you (Guevera) that the record is light,” D’Andrea said. “(...) Some might say that is by design and the process, but no discovery is done, but we have got some evidence so let me kind of throw out what I saw on the record and give you a chance to tell me why that is not enough to be a public interest finding. I think it is probably undisputed, or there is plenty evidence of monopoly power, (...) but then abuse is the interesting question. There is testimony that a disproportionate amount of customers charges were put on the buyers because the customer service charges were allocated by gallon, instead of by customer. There is evidence that there is some costs associated with lost water. I think someone testified the city, your client, fills up a water truck from a fire hydrant to water some county facility and so I know that is a small thing, but it is water that is not metered and will be allocated to them.”
D’Andrea continued and said there was also testimony regarding capital upgrades to the water distribution system allocated to those users, which he said Guevera argued they are just another customer on the distribution system. Guevera said the witnesses testimony said they did not believe they received abuse from the city.

“When you look at the system itself, depending on where the different water source, where the different taps come off of for the wholesale providers, they go through the water system, and so when the city of Graham went forward with doing it they included the system itself,” Guevera said. “Each one of them is below where the water source is and there was some substantial upgrades that were done as part of that. If you looked at the record, you would saw that the city was actually operating at a loss with regard to their system itself.”

Guevera argued that much of the testimony made by the petitioners was based on feeling with little evidence.

“There was no evidence put on by the protesters of what methodology was even used to come up to that rate or if it was just somebody grabbing something out of the air, and now when we come and we use a new methodology during the rate study, which is a cash basis, then they appear to be claiming we changed methodology, so therefore it is an abuse of power,” Guevera said. “If that is the case, then you set up a situation where every wholesale customer would basically have the right to decide. The argument was, we don’t want to listen to the wholesale customers. If you look at the record, that was actually not true. We gave them more than enough time for them to come. Not one of them approached the city, not one of them came to a council meeting to address the meeting to find out how we calculated the rates to be a part of the process.”

D’Andrea said he read the prior practices of Texas Commission on Environmental Quality in a similar cases. He said TCEQ would toss the old contract and do a cost of service study to weed out appeals.

Guevera reiterated the witnesses who gave testimony could not determine how their own rates were set and one entity raised rates with the city of Graham.

“One of the protestants in the case, Fort Belknap, when the city of Graham (increased) the increase was basically $2 per 1,000 gallons, but in return they turned around and increased their rates by $4.20 per 1,000 to their retail rates customers,” Guevera said.

Kirshbaum said if there are improprieties in the numbers used to set the rates, then the petitioners should get the cost of service hearing to go further into the details of the improprieties. D’Andrea responded to Kirshbaum request for a cost of service study request.

“I have no idea what to do with that cost of service study requirement in your contract, I will be honest with you,” D’Andrea said. “I would think we would have to write around it. You know, it is a contractual obligation, it is something you could clearly enforce in the courts, I am not sure how we would enforce that here.”

D’Andrea said the understanding of the rules is there is no cost of service information required to proceed through phase one. PUC Chairman, De Ann T. Walker, said the decision is not usually made on the same day the commission hears argument from the attorneys. Based on some of the questions raised, both her and D’Andrea said they needed more time to make a decision.

“It is much easier if we tell the two of you (both attorneys) here are the issues, litigate them,”  D’Andrea said. “(…) I don’t mean this as a criticism, I can’t tell if it is an after the fact justification that you look at the rules and (say) I couldn’t prove my case because you restricted me, or what I believe is a misunderstanding between the two of you of phase one required.”

Background
The city of Graham began the installation of new water meters throughout the city in April 2016, with the company Ferguson Muller, after they encountered high incidents regarding incorrectly read water meters in 2015. After complaints in the community regarding the rates under the new meters, it was not until September 2017 that the city was able to set a rate from which they could collect accurate data from a year later.

An appeal from the city’s wholesale customers was filed October 2017 with the PUC and claimed the city was not following the contractual agreements made between the city and the four wholesale entities when they set their new rates.

The wholesale customers for the city are Fort Belknap Water Supply Corporation, Graham East Water Supply Corporation, the city of Bryson and the city of Newcastle. Graham serves as the home rule which owns and operates wholesale and retail public water utilities. In April 2019, the city of Graham voted to lower the wholesale water rate to $5.52 per 1,000 gallons used. The city’s past water rate ordinance for wholesale customers was a flat rate of $6.35 per 1,000 gallons used.

Graham City Manager Brandon Anderson said in August 2019 that if the city lost the PUC appeal with the wholesale customers the city would potentially have to pay back $250,000- 500,000.

Anderson said in a May 30, 2019 public statement that the conclusion of this grievance with the PUC will allow the city to move forward on plans for water improvements and reiterated those feelings during the meeting Thursday.
“So, what we want to do is, and this was our proposal and the reason why we took the bite that we did in terms of water rates, to try to find some money to start working on water projects,” Anderson said. “The water projects that we have in mind, we need an alternate liner to town which we have talked about. We need to consider a standpipe on Spivey Hill, which is probably not as high priority, but would help with water quality and water pressure up on Spivey Hill. But also to addressing the large (water) lines that are of age that need to be replaced.”