Public Utility Commission s21

PENNSYLVANIA PUBLIC UTILITY COMMISSION Harrisburg, PA 17105-3265

Public Meeting held January 28, 2016

Commissioners Present:

Gladys M. Brown, Chairman Andrew G. Place, Vice Chairman Pamela A. Witmer John F. Coleman, Jr. Robert F. Powelson

Petition of Delaware Sewer Company for P-2014-2404341 the Opening of an Investigation into Whether the Public Utility Commission Should Order a Capable Public Utility to Acquire the Company Pursuant to 66 Pa. C.S. § 529

OPINION AND ORDER

BY THE COMMISSION:

Before the Pennsylvania Public Utility Commission (Commission) for consideration and disposition are the Exceptions of Pennsylvania-American Water Company (PAWC) and the Commission’s Bureau of Investigation and Enforcement (I&E) filed on July 30, 2015, to the Recommended Decision (R.D.) of Administrative Law Judge (ALJ) Ember S. Jandebeur issued on July 10, 2015, in the above-captioned proceeding. On August 10, 2015, the Office of Consumer Advocate (OCA) and Delaware Sewer Company (DSC or Company) filed Replies to Exceptions.

I. Background Section 529 of the Public Utility Code (Code), 66 Pa. C.S. § 529, empowers the Commission to order a larger, capable public utility to acquire a small water or sewer utility if, after an investigation, certain findings are made. The statute requires the Commission to determine that (1) the small water or sewer utility is no longer capable of providing and maintaining safe, adequate, efficient, and reasonable service and facilities in violation of statutory and regulatory standards (Sections 529(a)(1) through (3)); (2) alternatives have been considered and found to be impractical or uneconomic (Section 529(a)(4)); and (3) the acquiring utility is technically, financially, and managerially capable and the acquisition will not unreasonably increase the acquiring utility’s existing customers’ rates (Sections 529(a)(5) and (6)).

DSC is the former affiliate of Clean Treatment Sewage Company (CTSC), both of which were previously wholly-owned subsidiaries of Consolidated Pocono Utilities, Inc. (CPU), a corporate affiliation DSC retains. Petition at 1. CTSC was acquired by PAWC through a Section 529 investigation, Investigation Instituted into Whether the Commission Should Order a Capable Public Utility to Acquire Clean Treatment Sewage Company Pursuant to 66 Pa. C.S. § 529, Docket No. I-2009-2109324 (Order entered May 25, 2012) (CTSC Investigation I), which investigation was initiated as part of the Commission’s resolution of customer complaints filed against CTSC in Sutter v. Clean Treatment Sewage Company, Docket No. C-20078197 (Order entered May 15, 2009) (Sutter). The CTSC Section 529 investigation was ultimately resolved by settlement in Investigation Instituted into Whether the Commission Should Order a Capable Public Utility to Acquire Clean Treatment Sewage Company Pursuant to 66 Pa. C.S. § 529, Docket No. I-2009-2109324 (Order entered July 16, 2013) (CTSC Investigation II), resulting in DSC’s operating as a stand-alone company. II. History of the Proceeding

On February 6, 2014, DSC filed a document captioned “Petition for the Opening of an Investigation into Whether the Public Utility Commission Should Order a

2 Capable Public Utility to Acquire the Company pursuant to 66 Pa. C.S. § 529” (Petition). The Petition was filed under Section 529 of the Code, and Section 5.41 of our Regulations, 52 Pa. Code § 5.41. In the Petition DSC described its history as a certificated wastewater provider from its initial 1996 certification at Docket No. A- 230051 through the present. As averred by DSC, the Company continues to provide sewer service through the discharge of effluent into what is effectively a septic field to a customer base limited to the thirty-nine customers as were in existence in 1996. At that time, the local municipality, Delaware Township (Township), was placed under a building moratorium by the Pennsylvania Department of Environmental Resources (now the Department of Environmental Protection (DEP)) pending the Township’s filing a revised Section 537 Plan.1 The moratorium remains in place. Petition at 3-4.

Citing Public Service Water Company v. Fairview Water Company, 77 Pa. P.U.C. 544, 0092 WL 12602359 (Pa.P.U.C.) (Public Service Water), DSC argued that while it could not file a private complaint to commence a Section 529 proceeding, it could seek relief by filing a petition under Section 5.41 of our Regulations, 52 Pa. Code § 5.41. Petition at 4. Section 5.41 provides that parties may seek relief under an act or other statute that the Commission administers by filing a written petition stating clearly and concisely the petitioner’s interest in the subject matter, the facts and law relied upon, and the relief sought.

Addressing the Petition’s compatibility with the requirements of Section 529, DSC averred that (1) it is a small sewer utility and PAWC is a capable public utility as those terms are defined in Section 529; (2) its then-current $52/month tariffed rate for service and the 2013 sale of its former affiliate CTSC impeded the Company’s financial 1 The 1966 Pennsylvania Sewage Facilities Act was amended by Act 537 to address sewage disposal problems. It largely assigns responsibility for implementing corrective action and planning to local municipalities with DEP assistance. See http://www.dep.state.pa.us/dep/deputate/watermgt/wqp/Forms/Act537/Forms_537Plan.ht m

3 ability to continue to provide service on a stand-alone basis; and (3) PAWC’s acquisition of CTSC resulted in the logical merger of water and wastewater systems in the Township’s Marcel Lakes subdivision, and the potential acquisition of DSC by PAWC would continue that logical consolidation of water and sewer service in the Township’s Wild Acres residential development where DSC believed PAWC already provides water service. Id. at 5-7. On these bases, DSC requested that the Commission “initiate a proceeding under Section 529 of the Code with the objective of ordering a capable public utility acquire” and that “subsequent to the determinations required by Section 529(a) of the Code, the Commission issue an order for the acquisition of” DSC, which order would also direct “the capable public [utility] to acquire DSC by following the procedure prescribed for exercising the power of eminent domain consistent with Section 529” if DSC and the capable public utility were unable to agree to a purchase price. Id. at 8.

On February 26, 2014, the OCA filed an Answer to DSC’s Petition (OCA Answer). The OCA questioned the number of and areas where DSC served customers, the description of the system, and the original cost of the collection plant that currently serves customers. OCA Answer at 1-2. Responding to the relief DSC sought, the OCA averred that Section 529 did not allow the Commission to direct the acquisition of a small sewer utility “unless and until all of the requirements in Section 529 [were] met.” Id. at 3. The OCA further alleged that based upon its review of information, it appeared that the Company violated the Pennsylvania Clean Streams Law.2 The OCA further alleged that on behalf of the Company the representation was made to the Township that after December 31, 2011, the Company would have insufficient funds to operate the system. The OCA supported the Company’s Petition, requesting that an investigation be opened and that “as part of that investigation” the Commission consider the additional information provided by the OCA and schedule a public input hearing in the Company’s service territory. Id. at 5.

2 See OCA Answer at 3, citing 35 P.S. §§ 691.201, 691.202, and 691.402.

4 PAWC filed an Answer and New Matter to DSC’s Petition on March 6, 2014 (PAWC Answer).3 In its Answer PAWC also questioned the number of customers DSC served, admitted that it provides water to Wild Acres, admitted that per our order granting DSC certification the Company is operating under a moratorium in which no new customers may be added until the DEP lifts its building moratorium or the Company develops alternative disposal methods, and admitted to DSC’s characterization of Public Service Water. PAWC Answer at 2. In New Matter, PAWC claimed that the Petition should be dismissed because it failed to meet the criteria in Section 529 and that the application of Section 529 is impermissible and inappropriate where DSC could seek alternative remedies. Id. at 3.

On March 17, 2014, DSC filed a Reply to PAWC’s New Matter in which it in essence repeated its original averments that its current circumstances warrant the Commission’s initiation of a Section 529 investigation “with the objective of ordering a capable public utility to acquire the DSC wastewater system.” DSC Reply to PAWC New Matter at 2.

While the Petition remained pending, PAWC filed a Motion for Judgment on the Pleadings (Motion) on November 25, 2014. In its Motion, PAWC contended that DSC failed to plead facts that would, if true, allow for relief under Section 529 of the Code. According to PAWC, “opening a Section 529 investigation should not be granted because the investigation could not, as a matter of law under the well-pled facts, result in the ultimate relief requested by DSC – i.e., the mandatory takeover of DSC’s sewer system.” Motion at 3. The core of PAWC’s Motion was the argument that DSC had failed to plead or address each of the required findings under Section 529. Contending that “the extraordinary relief of Section 529 is unavailable where only one required

3 PAWC requested and received an extension in which to file its Answer.

5 finding cannot be made[,]” PAWC concluded that “the initiation of an investigation . . . would result in a waste of the Commission’s and the parties’ time and resources because ultimate relief under Section 529 is unavailable.” Id. at 9-10.

DSC filed an Answer to PAWC’s Motion on December 15, 2014, in which the Company asserted that “PAWC [was] attempting to determine the merits of the investigation before it is even opened.” DSC Answer to Motion at 3. The Company argued that the Commission initiated its most recent Section 529 investigation involving its former affiliate CTSC in Sutter, a case in which the Commission responded to service complaints filed against CTSC in part by directing the opening of an investigation “without engaging in a paragraph by paragraph analysis of Section 529(a)[.]” Id. At this stage, contended DSC, the determination before the Commission was simply whether it should grant the relief requested in its Petition by initiating an investigation, it was not to determine the ultimate relief under Section 529 itself. This relief was supported, argued DSC, because the Company had clearly and concisely stated its interest in the subject matter and the facts and law relied upon for the relief sought, all that was required in its Petition under 52 Pa. Code § 5.41.

Addressing the sufficiency of facts supporting the Section 529(a) standards, the Company contended that PAWC acknowledged that the Company pleaded sufficient facts under subsections (3) and (5), which addressed DSC’s inability to provide safe and reasonable service and PAWC’s financial, managerial, and technical fitness, and that the OCA had pleaded sufficient facts under subsections (1) and (2), which addressed DSC’s violations of environmental and other statutory or regulatory standards. As to the remaining subsections (4) and (6), addressing, respectively, alternative resolutions and the impact on PAWC’s existing customers, the Company stated its belief that ultimately there is no alternative resolution and that there will not be adverse effects on PAWC’s existing customers based on PAWC’s prior acquisitions in the Township. Moreover, contended DSC, PAWC itself averred in its Motion that DSC had failed to adequately

6 fund necessary capital and maintenance to keep its system running reasonably and efficiently. DSC concluded that accepting all this as true, the Motion must fail. Id. at 57.

By Interim Order dated March 3, 2015, the ALJ denied PAWC’s Motion. The ALJ considered the correlation between the operative standard applicable to granting summary relief, i.e. the existence of no genuine issue of material fact and entitlement to judgment as a matter of law, and the functional purpose of Section 529, which is to allow the Commission to initiate an investigation with the possibility of ordering an acquisition after notice and opportunity to be heard. On those bases, the ALJ concluded that “[t]here is nothing in Section 529 that states any requirements prior to initiating an investigation. There are genuine issues of material facts and the Motion must be denied.” Interim Order at 3. On that same date, I&E filed a notice of appearance.

The ALJ engaged the parties in two prehearing conferences the following two days, March 4 and 5, 2015, which were attended by representatives from DSC, PAWC, the OCA, and I&E. At that time the parties agreed to the dates for the filing of testimony and briefs and the conduct of a hearing, as memorialized in a March 5, 2015 Scheduling Order issued by the ALJ. R.D. at 2.

An evidentiary hearing was held on May 8, 2015. DSC presented the direct and surrebuttal testimony of two witnesses; the OCA presented the direct and surrebuttal testimony and exhibits of two witnesses; I&E presented the rebuttal and surrebuttal testimony of one witness; and PAWC submitted the direct testimony and exhibits of one witness. All were entered into evidence. The proceeding generated a transcript comprising 128 pages. On May 29, 2015, DSC, PAWC, the OCA, and I&E filed Main Briefs. Those parties each filed Reply Briefs on June 22, 2015, at which time the record closed.

7 By Recommended Decision issued July 10, 2015, the ALJ recommended that DSC’s Petition be granted. Reviewing the evidence presented in relation to the statutory requirements, the ALJ concluded that the standards in Section 529(a) may be met if an investigation were opened. R.D. at 14. As stated previously, PAWC and I&E filed Exceptions to the ALJ’s Recommended Decision on July 30, 2015, and DSC and the OCA filed Replies to Exceptions on August 10, 2015.

III. Discussion

A. Legal Standard

As the proponent of a rule or order, the Petitioner in this proceeding, DSC, bears the burden of proof pursuant to Section 332(a) of the Code, 66 Pa. C.S. § 332(a). That is, DSC must establish by a preponderance of the evidence that it is entitled to the relief requested. DSC’s evidence must be more convincing, by even the smallest amount, than that presented by opposing parties. Samuel J. Lansberry, Inc. v. Pa. PUC, 578 A.2d 600 (Pa. Cmwlth. 1990), alloc. denied, 529 Pa. 654, 602 A.2d 863 (1992); Se-Ling Hosiery, Inc. v. Margulies, 364 Pa. 45, 70 A.2d 854 (1950). Additionally, any finding of fact necessary to support this Commission’s decision must be supported by substantial evidence that a reasonable mind might accept as adequate to support a conclusion. More is required than a mere trace of evidence or a suspicion of the existence of a fact sought to be established. Norfolk & Western Ry. Co. v. Pa. PUC, 489 Pa. 109, 413 A.2d 1037 (1980); Murphy v. Dept. of Public Welfare, 480 A.2d 382 (Pa. Cmwlth. 1984); Mill v. Pa. PUC, 447 A.2d 1100 (Pa. Cmwlth. 1982).

Upon the presentation by DSC of evidence sufficient to initially satisfy the burden of proof, the burden of going forward with the evidence to rebut DSC’s evidence shifts to parties-opponent. If the evidence presented by those parties is of co-equal value or “weight,” the burden of proof has not been satisfied. The Petitioner now has to

8 provide some additional evidence to rebut that of the other parties. Burleson v. Pa. PUC, 443 A.2d 1373 (Pa. Cmwlth. 1982), aff’d, 501 Pa. 433, 461 A.2d 1234 (1983). While the burden of going forward with the evidence may shift back and forth during a proceeding, the burden of proof never shifts. The burden of proof always remains on the party seeking affirmative relief from the Commission. Milkie v. Pa. PUC, 768 A.2d 1217 (Pa. Cmwlth. 2001). In other words, in this petition proceeding, DSC must demonstrate by a preponderance of evidence that the Commission should initiate an investigation.

In her Recommended Decision, the ALJ made fifteen Findings of Fact (FOF) and reached two Conclusions of Law (COL). R.D. at 3-4, 14. The Findings of Fact and Conclusions of Law are incorporated herein by reference and are adopted without comment unless they are either expressly or by necessary implication rejected or modified by this Opinion and Order.

Before addressing the Exceptions, we note that any issue or Exception that we do not specifically delineate shall be deemed to have been duly considered and denied without further discussion. It is well-settled that the Commission is not required to consider expressly or at length each contention or argument raised by the parties. Consolidated Ra il Corp. v. Pa. PUC, 625 A.2d 741 (Pa. Cmwlth. 1993); also see, generally, University of Pennsylvania v. Pa. PUC, 485 A.2d 1217 (Pa. Cmwlth. 1984).

B. The ALJ’s Recommended Decision

In her Recommended Decision, the ALJ recommended granting DSC’s Petition by having the Commission open a Section 529 investigation. The ALJ found that with the building moratorium in place, DSC has no expectation of being able to increase its customer base. At the same time, the Company is servicing thirty-eight customers through a system that is no more than an elevated sand mound that is improperly functioning, cared for, and secured. Specifically, the ALJ found that DSC’s

9 sand mounds continue to be driven over by ATVs with the potential for damage, a vegetative cover has not been planted, and a chain link fence has not been installed, all contrary to Township directions and all of which lessen the useful life of the sand mounds. Further, the ALJ found that DSC does not have the funds to comply with these directions, the end result being that the Company lacks the management, financial, and technical capabilities necessary to run a wastewater system, rendering the Company a non-viable wastewater treatment company. R.D. at 3-4.

The ALJ set forth the six criteria required to be met in Section 529 if the Commission were to grant the ultimate relief under Section 529, the ordered acquisition of DSC by a capable public utility, as follows:

(a) General rule - The commission may order a capable public utility to acquire a small water or sewer utility if the commission, after notice and an opportunity to be heard, determines:

(1) that the small water or sewer utility is in violation of statutory or regulatory standards, including, but not limited to, the act of June 22, 1937 (P.L. 1987, No. 394), known as The Clean Streams Law, the act of January 24, 1966 (1965 P.L. 1535, No. 537), known as the Pennsylvania Sewage Facilities Act, and the act of May 1, 1984 (P.L. 206, No. 43), known as the Pennsylvania Safe Drinking Water Act, and the regulations adopted thereunder, which affect the safety, adequacy, efficiency or reasonableness of the service provided by the small water or sewer utility;

(2) that the small water or sewer utility has failed to comply, within a reasonable period of time, with any order of the Department of Environmental Resources or the commission concerning the safety, adequacy, efficiency or reasonableness of service, including, but not limited to, the availability of water, the potability of water, the palatability of water or the provision of water at adequate volume and pressure;

10 (3) that the small water or sewer utility cannot reasonably be expected to furnish and maintain adequate, efficient, safe and reasonable service and facilities in the future;

(4) that alternatives to acquisition have been considered in accordance with subsection (b) and have been determined by the commission to be impractical or not economically feasible;

(5) that the acquiring capable public utility is financially, managerially and technically capable of acquiring and operating the small water or sewer utility in compliance with applicable statutory and regulatory standards; and

(6) that the rates charged by the acquiring capable public utility to its pre-acquisition customers will not increase unreasonably because of the acquisition.

R.D. at 5-6, quoting 66 Pa. C.S. § 529(a)(1)-(6).

The ALJ summarized the parties’ positions, noting that both I&E and PAWC maintained that DSC should have filed an application to abandon service rather than a petition seeking to have the Commission institute a Section 529 investigation, a proceeding that according to PAWC should be used most sparingly. Addressing the burden of proof, the ALJ stated that PAWC contended DSC could not meet its burden of proof under Section 529. I&E contended that, as the Petitioner DSC, would have the burden of proof if any investigation were opened, an argument the ALJ found statutorily unsupportable. R.D. at 6.

According to the ALJ, both DSC and the OCA maintained that with no finances available to conduct necessary facility upgrades, the Company was essentially unable to provide safe, adequate, efficient, or reasonable service in compliance with basic statutory and regulatory standards. The OCA further contended that the manner in which

11 DSC operated its system was inadequate because it was not operated as designed and even as operated, as a sand mound, it was unprotected. DSC contended that even with the full grant of rate relief in its then-pending rate case at Docket No. R-2014-2452705, the Company would still operate at a loss. R.D. at 7.

The ALJ concluded by initially addressing I&E’s and PAWC’s contention that the Company should have filed to abandon service in lieu of petitioning for institution of a Section 529 investigation. The ALJ found either to be options available to DSC because neither was prohibited and both considered the needs of the Company and its customers. Id. at 7-8.

In reviewing DSC’s request for relief in the form of institution of an investigation, the ALJ applied a prima facie standard of review of each of the six Section 529(a) criteria. As the ALJ stated, parties were requested to “brief their cases with an eye to each requirement of a 529 case” although the prevailing party was not expected “to prove a point by preponderance, rather . . . to prevail on a point by making a prima facie case based on substantial evidence.”4 Id. at 8.

With respect to those six statutory criteria, the ALJ found that DSC was in violation of statutes or regulations resulting from the Company’s financial inability to provide necessary improvements such as seeding the sand mounds or installing a chain link fence to prevent ATV damage. These, she concluded, were evidence of violations of Section 1501 of the Code, 66 Pa. C.S. § 1501, requiring improvements be made to facilities to maintain proper service, and 25 Pa. Code § 73.55(b)(8), establishing standards for on-lot sewage treatment facilities. The ALJ also found evidence of a

4 The ALJ had also directed the parties aligned with DSC to file testimony addressing the requirements of Section 529(a) and present substantial evidence to support the need for an investigation, while directing parties opposed to the Petition to file rebuttal testimony. See OCA Main Brief (M.B.) at 4; PAWC M.B. at 2.

12 violation of Pennsylvania’s Clean Streams Law, 35 P.S. §§ 691.1 et seq. in a May 2, 2014 DEP inspection documenting the external flow of untreated sewage. These, the ALJ found, were sufficient prima facie evidence to satisfy Section 529(a)(1). R.D. at 8-10.

The ALJ similarly found that while there was no evidence that either DEP or the Commission had entered a final order against DSC with which the Company failed to comply, the Company’s failure to comply with the Township’s seeding and fencing requirements were sufficient to make a prima facie finding with respect to the “spirit if not the letter” of Section 529(a)(2). Id. at 10.

The ALJ next addressed the Section 529(a)(3) criterion raising the Company’s ability to provide adequate, efficient, safe, and reasonable service and facilities. The ALJ found that evidence of DSC’s failure to correct a set of conditions that were noted as early as 2006, coupled with the failure to file for rate relief from the time of the Company’s certification in 1996 until an intervening 2014 base rate case filed at Docket No. R-2014-2452705, supported a finding that “there is no point in the future under the current owners and managers that DSC could reasonably be expected to furnish and maintain adequate, efficient, safe, and reasonable service and facilities” and that its thirty-eight customers were “in an untenable situation.” Id. at 11. Reciting the OCA’s evidence that DSC “allowed the tertiary treatment plant it acquired to fall into such disrepair that for the last 10 years it can only provide treatment similar to a septic tank . . . . dosing the sand mounds with septic tank quality effluent that will shorten” their useful lives, the ALJ stated that DSC proved itself incapable technically or financially of managing the Company. Id., quoting OCA St. 2S at 4-5. This, concluded the ALJ, was a prima facie case that DSC could not provide safe and adequate service and facilities, satisfying Section 529(a)(3).

In consideration of alternatives to acquisition under Section 529(a)(4), the ALJ determined that the prospect of abandonment, which she found contrary to the

13 interests of the thirty-eight customers and the public interest, was off the table upon the filing of the Petition. Other options to consider under Section 529(b) included appointment of a receiver, reorganization, entering a service or management contract, merger, or municipal acquisition. The ALJ agreed with the OCA’s assessment that alternatives involving new management (reorganization, receivership, service contract) failed to address the Company’s financial woes, which would continue even under changed management, and that a municipal takeover or other merger was unlikely because no party identified nearby potential municipal systems and there was a disparity in size between DSC and PAWC. Id. at 12-13.

Addressing the capability of PAWC under Section 529(a)(5), the ALJ found no dispute that PAWC possessed the financial, managerial, and technical capability to acquire DSC. The ALJ also noted the fact that PAWC already provided water service to 2,000 customers in the Wild Acres development, including to the 38 DSC sewage customers. Id. at 13.

Finally, as to the Section 529(a)(6) criterion requiring a finding that the rates of the acquiring company will not increase unreasonably because of the acquisition, the ALJ noted that PAWC did not address the potential impact on its customers and that I&E chose not to address this factor. The ALJ noted that the OCA, on the other hand, argued that due to PAWC’s significantly larger size, it could absorb DSC’s thirty-eight customers without a need to raise its rates unreasonably. The ALJ also referred to DSC’s argument that PAWC’s ability under Act 11 to calculate its revenue requirement on a combined water/wastewater basis further ameliorated concerns for PAWC’s ratepayers. Finding merit in these positions, the ALJ concluded that the OCA and DSC successfully presented a prima facie case supported by substantial evidence that the impact will not be unreasonable. Id. at 14.

14 In her consideration of alternatives to acquisition, the ALJ stated that “[t]here is no guarantee that a 529 investigation will result in an acquisition. It is the nature of an investigation that you don’t know the end result until the end of the investigation. If we knew the end result the investigation would not be necessary.” Id. at 12. Upon consideration of all Section 529(a) criteria and the prima facie cases presented, the ALJ concluded that the OCA and DSC “successfully presented a prima facie case that the standards of Section 529 may be met if an investigation is opened.” Id. at 14 (emphasis added). Accordingly, the ALJ recommended that the Commission open a Section 529 investigation.

C. Exceptions, Replies, and Disposition

In response to the ALJ’s Recommended Decision, PAWC and I&E filed Exceptions to which DSC and the OCA filed Replies. At times overlapping, each of PAWC’s and I&E’s Exceptions falls roughly into two categories, either a challenge to the sufficiency of the evidence presented before the ALJ in this petition proceeding or a challenge to the petition process itself used by DSC to request the Commission to initiate an investigation.

With respect to PAWC’s and I&E’s arguments regarding the sufficiency of the evidence, we find those parties’ arguments as provided in Exceptions to this petition proceeding to be premature with respect to the relief requested, the initiation of an investigation as distinguished from the ordering of an acquisition. Further, the prematurity of their conclusions has resulted in PAWC’s and I&E’s presentation of incongruous Exceptions to the process that alternatively assert, respectively, that an investigation will be a waste of time or has otherwise already been conducted. In granting the relief requested by DSC and the OCA, we find that neither PAWC’s nor I&E’s characterization of this proceeding accurately describes its purpose or result.

15 Accordingly, we first summarize below these Exceptions and the OCA’s and DSC’s Replies, we then dispose of them collectively.

1. PAWC’s and I&E’s Exceptions

a. PAWC

PAWC filed two Exceptions. PAWC’s overriding sentiment is that it is clear from this petition proceeding that “the Commission cannot ultimately make the mandatory findings of fact necessary to satisfy the requirements of Section 529” therefore doing so would be a “waste of the Commission’s and the parties’ time and resources” and the Commission should decline to open a formal investigation.5 PAWC Exc. at 1, 3, 11- 12. Section 529 does not exist, contends PAWC, to “provide a system owner with a ‘pay out’ after years of neglecting its system and failing to charge appropriate rates.” PAWC Exc. at 2.

In its first Exception, PAWC contends that the substantial evidence in this petition proceeding demonstrates that a Section 529 acquisition cannot be compelled. PAWC takes issue with the ALJ’s evaluation of the prima facie evidence in support of initiating an investigation under Sections 529(a)(2), (3), (4), and (6). PAWC Exc. at 2. Section 529(a)(2) is not satisfied, contends PAWC, because there was no evidence that DSC failed to comply with a DEP or Commission final order, but merely failed to comply with mandated Township improvements. Id. at 4-6. Section 529(a)(3) is not satisfied, contends PAWC, because as this petition proceeding was pending, DSC filed for and received some rate relief, including a claim for maintenance and repair expenses.

5 As in its Exceptions, PAWC contended at the close of pleadings and every stage thereafter of this proceeding that the conduct of an investigation would be a waste of the parties’ time and resources. See Motion at 9; Main Brief at 4, 18, 26; Reply Brief at 2, 8, 11.

16 According to PAWC, the Commission should “wait to see” whether the revenue increase will be sufficient to allow DSC to provide safe and adequate service going forward. Id. at 6-7. Section 529(a)(4) is not satisfied, contends PAWC, because the OCA’s witness’ testimony that no nearby municipal authority was willing to acquire DSC was impeached and the substantial evidence of record does not support a finding that alternatives were adequately considered. Id. at 8. Finally, Section 529(a)(6) is not satisfied, contends PAWC, because no finding can be made on the impact on PAWC’s existing rates without substantial evidence presented on the cost to remediate DSC’s system. Id. at 9. The “mere existence of Act 11,” contends PAWC does not eliminate DSC’s obligation to make a prima facie showing with respect to this element. Id. at 10.

In its second Exception, PAWC argues that the conduct of an investigation would be a waste of time. PAWC contends that I&E already was forced, by DSC’s filing of the Petition, to conduct an investigation under Section 529, and that after doing so I&E itself concluded it cannot meet its statutory burden under that Section. Because no other party can carry that burden, and the Commission cannot direct I&E how to prosecute the case, an investigation would be wasteful according to PAWC. Id. at 11-12.

b. I&E

I&E filed four Exceptions. In its Exception No. 3, I&E takes issue, as did PAWC, with the ALJ’s findings regarding the sufficiency of the evidence adduced in the petition proceeding. According to I&E, that evidence was insufficient to support not just the initiation of a Section 529 investigation but also any ultimate Section 529 acquisition. Id. at 7. I&E claims it does not contend that DSC has committed no violations, only that they are “of such a minor nature that they do not render the DSC system incapable of providing safe, adequate, and reliable service.” Id. at 9.

17 In Exception Nos. 1, 2, and 3, I&E continues its challenges to the process, arguing first as it did before the ALJ that the proper course of conduct for DSC to have pursued was abandonment under Section 1102 of the Code and not relief under Section 529. Contesting the ALJ’s conclusion that either avenue was available to DSC, I&E contends that Section 1103 abandonment and Section 529 relief are two very different legislative courses of action as demonstrated, inter alia, by their placement in different chapters of the Code and Section 529’s placement of the burden of proof on the Law Bureau. According to I&E, a utility has the power to initiate an application proceeding to abandon authority; it does not have authority to initiate Section 529 relief by filing a petition. I&E Exc. at 3-5. In this vein, I&E also excepts to the ALJ’s conclusion that abandonment was not in the interest of either DSC’s customers or the public. Characterizing abandonments as a part of the Commission’s normal course of business and DSC’s continuous pleas of financial woes as the admissions of a failed utility, I&E contends that DSC should not be rewarded with a Section 529 acquisition but instead should have pursued alternatives, including abandonment. Id. at 5-7. I&E specifically comments that if such an acquisition is ultimately ordered, the price paid should reflect not only DSC’s owners’ admissions of financial failure but also the total state of disrepair in which the new owner would find the “as designed” system. Id. at 7 n.26.

I&E finally contends that the ALJ erred in concluding that appointment of a receiver was considered and rejected. In what I&E appears to interpret as a final Commission conclusion that appointment of a receiver under Section 529(b) has already been considered and rejected as a possible outcome notwithstanding that an investigation has yet to be opened, I&E contends that the power to render such a decision rests solely with the Commission, but “because DSC initiated this Section 529 proceeding, the meaning and intent of Section 529 got turned around[.]” Id. at 10.

2. The OCA’s and DSC’s Replies

18 a. The OCA

The OCA addresses the record support for initiation of a Section 529 investigation in reply to PAWC’s Exception Nos. 1 and 2 and I&E’s Exception No. 3. Responding to I&E, the OCA contends that I&E itself acknowledged the infirmities in DSC’s facilities, operations, and service when making the observation, with which the OCA agrees, that the price paid in any acquisition that may be ordered should reflect the DSC system’s “total state of disrepair.” OCA R. Exc. at 5 (emphasis in original), quoting I&E Exc. at 7 n.26.

Addressing I&E’s characterization of the regulatory violations identified in the petition proceeding as “minor,” the OCA reiterated the evidence presented by its engineer while noting that I&E presented no engineering evidence. Its evidence, contends the OCA, supports conclusions that: (1) the system, designed as a treatment plant but operating as a septic tank, does not operate properly, has not operated as designed for over thirty years, and has not been properly maintained as operated for the last ten years; (2) DEP’s communications with DSC, including a May 2014 Notice of Violation letter regarding sewage spills, indicated unpermitted discharge in violation of The Clean Streams Law; (3) DSC fails to operate and maintain the sand mounds by virtue of the Company’s operation of the system as a septic tank in a manner that maximizes their useful lives; and (4) DSC fails to protect the subsurface disposal system as mandated by the Township. This evidence, contends the OCA, all points to violation of the requirements of Section 1501 of the Code as well as DEP and Township directives. Id. at 5-10.

The OCA also refutes PAWC’s contentions that DSC has not met its burden of proof with respect to satisfying Sections 529(a)(2), (3), (4), and (6), thereby justifying proceeding with a full investigation. Primarily the OCA contends that this is a

19 petition proceeding where the evidentiary standard applied is different than it would be in a full Section 529 investigation. OCA R. Exc. at 13. The OCA contends that both it, as a party supporting institution of an investigation, and DSC, as the party requesting the relief of the institution of an investigation, submitted substantial evidence to support a prima facie finding that a full investigation should move forward where Section 529(a) issues may be fully explored. For example, the OCA contends that because of the Company’s operation of its system as an on-lot septic system rather than a treatment plant, both DEP and the Township share oversight of DSC. Moreover, contends the OCA, PAWC’s “wait-and-see” stance with respect to an investigation after DSC was awarded rate relief is inconsistent with the Code. The OCA also retorts that its witness’ response regarding investigation into a municipal acquisition was not impeached. The witness did not inquire with any municipality about an acquisition because the witness testified there are no municipal entities providing wastewater service in the Township with which she could inquire. Id. at 14-17.

In concluding, the OCA submits that “until a full investigation is done by I&E and other parties, it is not appropriate to prejudge the outcome of the future proceeding” because it is only after that investigation that the Commission will be in a position to determine whether a mandatory takeover is appropriate. Id. at 17. The OCA quotes with agreement the ALJ’s statement that “[i]f we knew the end result the investigation would not be necessary.” Id.

In response to the challenge to the process raised by I&E in its Exception Nos. 1, 2, and 4, the OCA argues, as it did before the ALJ, that the Commission instituted a number of Section 529 investigations after consideration of a prior filing or proceeding, including petitions and complaints. See OCA R. Exc. at 2-3, citing CTSC Investigation II, Public Service Water, Pa. PUC v. Tremont Water Co., Docket No. C00935209 (Order entered September 23, 1993) (Tremont), and Investigation of W.P. Water Co., Inc. and W.P. Sanitary Co., Inc. Pursuant to Section 529 of the Public Utility Code, 2009 Pa. PUC

20 Lexis 691 (W.P.); OCA M.B. at 3-4. The OCA also contends that use of a petition seeking institution of an investigation that will review evidence similar to that in an application, but which provides a timely mechanism to ensure continuous service, serves the interest of DSC’s customers and the public. OCA R. Exc. at 4.

Finally, the OCA posits that I&E appears to be under the impression that the ALJ’s consideration of the prima facie evidence supporting initiation of a Section 529 investigation converted review and disposition of DSC’s request for initiation of an investigation into conclusive Section 529 findings following a Section 529 investigation, which only the Commission may make. Characterizing this proceeding as preliminary, the OCA concludes that it is “unaware of any proceedings related to the initiation of a Section 529 investigation that required a showing that the Section 529(a) criteria were met in order to initiate the Section 529 proceeding or that even required an investigation prior to the Section 529 investigation.” OCA R. Exc. at 12. OCA concludes that as a preliminary proceeding the parties had insufficient time to develop the complete information that would be provided in a full-blown investigation. Having satisfied the ALJ’s request for a prima facie showing to support the relief requested, i.e. the implementation of an investigation, the OCA submits that an investigation should be instituted so that all affected parties may more fully explore all the Section 529 criteria. Id. at 13.

b. DSC

Responding to I&E’s Exception No. 3 and PAWC’s Exception Nos. 1 and 2 regarding the sufficiency of the evidence in this proceeding justifying initiation of an investigation, DSC contends that I&E’s contention that the Company’s violations are “minor” is at odds with its statement that the Company is in a “total state of disrepair.” DSC R. Exc. at 5. Addressing PAWC’s critique of the six factors in Section 529(a) that must be satisfied, DSC, like the OCA, also reargues the evidence presented in the petition

21 proceeding and concludes that those standards can be met. DSC also refers to the Commission’s decision in the Company’s base rate case, Pa. PUC v. Delaware Sewer Company, Docket No. R-2014-2452705 (Order entered July 30, 2015) (DSC 2014 Rate Increase) and argues that the Commission already determined that the Company’s current operations are providing inadequate service, supporting initiation of a Section 529 investigation. Id. at 6, 10-16.

Addressing PAWC’s contentions regarding proceeding with a 529 investigation after I&E has already concluded it cannot meet the standards for a prima facie case, DSC responds, first, that the Commission need not direct I&E how to proceed and, second, that other parties, including itself and the OCA may also satisfy the burden of proof in any investigation. DSC R. Exc. at 15-16. DSC notes that in the CTSC Section 529 investigation, I&E presented no testimony at all but the investigation went forward and ultimately resulted in an acquisition. DSC further cites PAWC’s policy of consolidating small water and wastewater facilities as evidence of the public benefits of furthering regionalization. Id. at 8-10.

In response to I&E’s challenges to the process opposing DSC’s use of a petition in its Exception Nos. 1, 2, and 4, the Company repeats its argument, accepted by the ALJ, that an abandonment process is neither required nor in its customers’ best interests. Section 529 does not set up a “reward” system, contends DSC, but it does establish the methods by which an acquisition price should be determined. Finally, there is no evidence to support appointment of a receiver that will have not just managerial and technical, but also financial fitness, a critical need given DSC’s current negative balance sheet equity. DSC R. Exc. at 3-7.

22 3. Disposition

We reject PAWC’s and I&E’s Exceptions and adopt the Recommended Decision of the ALJ. We base our conclusion on our review of the record developed and, critical to this disposition, using an analysis to determine the satisfaction of the requirements of Section 5.41 of our Regulations not Section 529 of the Code. We agree with the ALJ that a prima facie case has been established that supports our initiation of a Section 529 investigation.

Addressing the process first, we agree with the ALJ that a petition for relief under our Regulations or an application by DSC seeking to abandon service are both available avenues that rely on similar evidence and ultimately share the same goal – the continuous provision of safe, adequate, reliable, and efficient wastewater service to the affected customers of DSC. Moreover, as the OCA argued without contradiction from either I&E or PAWC, we have initiated investigations under Section 529 under a number of different circumstances.

In Sutter, we were called upon to address multiple complaints filed against DSC’s former affiliate, CTSC. Like DSC, CTSC also was operating in the Township under a building moratorium and experiencing service and financial difficulties. While the customer complaints were not filed with the objective of having us institute a Section 529 investigation, upon review of the evidence of the company’s operations, we concluded that such an investigation would be prudent, stating as follows:

Based on our review of the record in this proceeding, we have serious concerns regarding whether CTSC has the financial, technical, and managerial ability to provide or make the improvements necessary to provide adequate, efficient, safe and reasonable service to its customers. Pursuant to Section 529 of the Code, 66 Pa. C.S. § 529, the Commission has the authority, after due process notice and opportunity to

23 be heard, to direct the acquisition of a small non-viable water or sewer company by a larger capable public utility. It appears that initiation of an investigation proceeding to determine whether the Commission may order a capable public utility to acquire CTSC is warranted.

Sutter at 24.

We responded, in part, by initiating a Section 529 investigation into whether an alternative to CTSC’s continued service was appropriate, which culminated in PAWC’s acquisition of CTSC under that section in CTSC Investigation II. Similarly in Public Service Water and W.P., we initiated Section 529 investigations following the filing of other pleadings by other entities. Finally, in Tremont we initiated a complaint against a company requiring it to show cause why we should not order its acquisition by a capable public utility.

We find nothing in the procedural posture of this proceeding that would mandate a different conclusion or preclude us from acting in a similar fashion by initiating an investigation. While PAWC contends that a private complainant may not seek to institute an investigation, as the ALJ determined, Section 529 does not preclude us from taking notice, no matter how directly or indirectly, of the potential need for such an investigation. DSC’s Petition, while a different pleading than the customer complaints that ultimately brought CTSC’s condition to our attention, has served the same purpose. We agree with I&E that a utility has the power to initiate an abandonment proceeding but not a Section 529 investigation. It is this Commission in this Order, however, and not DSC in its Petition, who is initiating the investigation. Further, nothing in Section 529 restricts the Commission to instituting an investigation sua sponte without the ability to consider facts properly brought to our attention.

24 The failure in I&E’s and PAWC’s challenges to the process that was employed upon DSC’s filing of the Petition is best evidenced in their diametrically opposed arguments on exception that an investigation either would be a waste of time or has already been concluded. As both the OCA and DSC contended and the ALJ agreed, the relief DSC sought under the Petition was not a Section 529 acquisition, but the institution of an investigation to examine what are disturbing facts about DSC’s current service capabilities. What relief, if any, is warranted following that investigation can only be determined after the investigation is conducted. As the ALJ correctly observed, “[t]here is no guarantee that a 529 investigation will result in an acquisition. It is the nature of an investigation that you don’t know the end result until the end of the investigation. If we knew the end result the investigation would not be necessary.” R.D. at 12.

The OCA and DSC are correct that this proceeding was not a Section 529 investigation. The purpose of this proceeding, as the ALJ had effectively determined in her Interim Order denying PAWC’s Motion, as the parties addressed during the March 4, 2015 prehearing conference,6 and as the ALJ ultimately confirmed in her Recommended Decision, was for the parties to have the opportunity to present a prima facie case addressing the Section 529(a) criteria to support whether institution of an investigation was warranted. The proceeding was not intended to prove nor was it conducted with the purpose of proving each Section 529 criterion by a preponderance of the evidence in order to support a forced acquisition at its conclusion. R.D. at 8. In adopting the ALJ’s Recommended Decision, that is all we decide. Sufficient cause exists for us to

6 See, e.g., Tr. at 7 (“The sole outcome of this petition docket, in the opinion of [PAWC], is that there should be a recommendation by Your Honor as to whether a separate investigation should be opened by the petition.”); 15 (“[T]he sole outcome of this P-docket should be a recommendation by Your Honor to the Commission as to whether it should open an I-docket to further explore Section 529 factors.”). We note that the March 4th prehearing conference was transcribed, the March 5th conference was not.

25 investigate whether we should order an acquisition of DSC’s wastewater service operations.

Evidence of a facility that was designed to operate as a treatment and collection system but has been operating instead as an improvised septic system with unprotected sand mounds sufficiently calls into question the Company’s technical capabilities. When this evidence is compounded by current ownership’s claims of the lack of financial capability to proceed with necessary improvements to the system as operating, even as the flat monthly fee DSC charges its customers increased by 84%,7 warrants an investigation into the Company’s continued viability. Without any predetermination of an investigation that has yet to be conducted, we share the OCA’s concern that DSC’s failure to make the necessary improvements to extend the life of this system or bring it into compliance with its original design raises questions about, inter alia, its compliance with Section 1501.8

We believe, based upon the prima facie evidence provided to support the Petition, that it is appropriate for us to institute an investigation under Section 529. Although PAWC and I&E challenge the adequacy of the evidence provided, this was not a full investigation. DSC did not, in its Petition, need to plead facts sufficient for us to recommend relief under Section 529 nor did it, in this proceeding, need to carry the burden of proving that an acquisition was justified. That burden and any subsequent

7 As a result of our disposition in the Company’s intervening base rate case in DSC 2014 Rate Increase, the Company’s monthly customer fee was increased from $52 to $95.52. See DSC 2014 Rate Increase at 36-37. 8 Our concern over the Company’s operations was reflected in our disposition of its 2014 rate case, where the Company contended, as it does here, that it lacked the funds to address the service inadequacies identified by the OCA, a condition that would continue even with a rate increase. See DSC 2014 Rate Increase at 13-15, 22. On August 27, 2015, the Company appealed that Order, Delaware Sewer Company v. Pa. PUC, No. 1561 C.D. 15, which was followed by a cross-appeal by the OCA, McCloskey v. Pa. PUC, No. 1705 C.D. 15, filed September 14, 2015.

26 relief if appropriate will be addressed in the investigation, where parties will have the opportunity and obligation to comply with all statutory and evidentiary requirements by presenting the full panoply of evidence available to support their positions, whether that may be the grant or denial of relief under Section 529.9

As to the burden of proof, the ALJ is also correct that pursuant to Section 529(i), the burden of proof is assigned to I&E, as the successor to the Law Bureau for purposes of this investigation.10 That burden is to proceed with the establishment of a prima facie case whether under Section 529 we should order a capable public utility to acquire DSC. However, while assigned to I&E, that burden is not exclusive to I&E. As DSC contends, the source of the evidence addressing the Section 529(a) requirements need not be and is not limited to I&E.

While I&E has a specific statutory charge, any party may present or rebut a prima facie case in support of its position in the proceeding. Ultimately, if a prima facie case satisfying the requirements of the section is not made on the record, or a prima facie case is made, sufficiently rebutted, and not further supported with substantial evidence, the relief DSC seeks will not ensue. To this end we specifically note that the relief sought by DSC as presented in its Petition was more targeted. DSC requested not just that the Commission initiate an investigation under Section 529 of the Code, but also that 9 We note, for example, the OCA’s claim that because the petition proceeding was preliminary and not a “full-blown investigation,” it lacked complete information. This included information to address the effect of an acquisition on PAWC’s existing customers, the Section 529(a)(6) criteria that PAWC contends was insufficiently addressed here. OCA R. Exc. at 13; ALJ April 23, 2015 Order (dismissing PAWC’s objections to OCA interrogatories). Finally, we also note that I&E’s appearance in the proceeding was filed the day before the prehearing conference, which itself was only two months before the matter proceeded to evidentiary hearing. R.D. at 2; Tr. at 11. The parties must be afforded the time and opportunity necessary to develop facts of record before it is possible to conclude that the facts are insufficient to proceed with an investigation. 10 See CTSC Investigation I at 5 n.5.

27 we do so “with the objective” of ordering its acquisition and with the direction that the acquisition follow “the procedure prescribed for exercising the power of eminent domain consistent with Section 529” if DSC and the capable public utility were unable to agree to a purchase price. Petition at 8. This we decline to do. While the burden of going forward with evidence is on I&E, I&E is not assigned this task with any predetermined or targeted result in mind and will be guided in making its recommendation by the evidence it adduces.11 This does not preclude any other party, however, from producing its own evidence to address the evidentiary and statutory requirements of Section 529.

Thus I&E is charged with the burden of proof to present a prima facie case addressing the six Section 529(a) factors, wherever that leads. To the extent DSC seeks an investigation with specific relief and a specific objective in mind, it will be DSC’s burden to assure that sufficient evidence is produced to support that relief and objective. We neither delegate I&E’s statutory burden to any other party nor direct the result of I&E’s investigation.

IV. Conclusion

Based on our review of the record and the applicable law, we deny the Exceptions of PAWC and I&E and adopt the ALJ’s Recommended Decision consistent with this Opinion and Order; THEREFORE,

11 We acknowledge I&E’s concerns regarding the valuation of DSC in a potential 529 acquisition given DSC’s self-described debilitated condition and encourage I&E to give due consideration to that issue in its proper procedural context, namely the investigation itself.

28 IT IS ORDERED:

1. That the Exceptions of Pennsylvania-American Water Company are denied.

2. That the Exceptions of the Bureau of Investigation and Enforcement are denied.

3. That the Recommended Decision of Administrative Law Judge Ember S. Jandebeur issued on July 10, 2015, is adopted.

4. That pursuant to Section 529 of the Public Utility Code, 66 Pa. C.S. § 529, an investigation shall be instituted into whether the Commission shall order a capable public utility to acquire Delaware Sewer Company consistent with this Opinion and Order.

5. That the Bureau of Investigation and Enforcement, the bureau under the reorganization of the Commission’s investigative duties that assumed the Law Bureau’s investigatory functions, shall participate in this investigation pursuant to Section 529(i).

29 6. That a copy of this Opinion and Order shall be served on the parties to this proceeding as well as on Delaware Township in Pike County, Pennsylvania, the Pennsylvania Department of Environmental Protection, and the Office of Small Business Advocate.

BY THE COMMISSION,

Rosemary Chiavetta Secretary

(SEAL)

ORDER ADOPTED: January 28, 2016 ORDER ENTERED: January 28, 2016