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Municipal Utility Governance: Options and Responsibilities Attorneys Richard Heinemann and Jared Walker Smith, Boardman & Clark, LLP

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Municipal Utility Governance: Options and Responsibilities Attorneys Richard Heinemann and Jared Walker Smith, Boardman & Clark, LLP Legal Municipal Utility Governance: Options and Responsibilities Attorneys Richard Heinemann and Jared Walker Smith, Boardman & Clark, LLP It is generally understood that a directly meet the needs of local residents greater scrutiny of rates, construction municipality operates its water, electric, and businesses. In Wisconsin, there are costs and service obligations, which, in and sewer utilities as a public service to approximately 575 municipally-owned theory, is good for customers. It also community residents, businesses, and water utilities, 81 electric utilities, 1 gas affords utilities some cover for imposing industries. But in an era where drinking utility, and 600 wastewater utilities. necessary rate increases required to water concerns, aging infrastructure, maintain system reliability and service All public utilities in Wisconsin, except and clean energy priorities increasingly quality. On the other hand, PSC wastewater utilities, are regulated by the capture the public’s attention, achieving hearings can be time-consuming, costly, Public Service Commission (PSC). In the full benefits of municipal utility and complicated, requiring expertise most other states, municipal utilities are ownership seems more important than and sometimes outside assistance. This regulated by the local unit of government ever before. With that end in mind, this is especially true when dealing with itself, and not by a state commission. article will first describe what municipal complex policy issues where achieving The PSC regulates most aspects of water, public utilities do and the regulatory equitable outcomes is not always electric, and gas utility operations. This landscape within which they operate, straightforward. includes authorizing major construction and then lay out the various governing projects; establishing retail rates with an Wisconsin’s municipal water systems, structures available for running them. authorized rate base and reasonable rate for example, face estimated costs of The Utility Industry and the Role of return; enforcing customer service, $8.5 billion over the next 15 years to of Regulation customer protection and safety rules to meet existing drinking water priorities, ensure reasonable and adequate service; such as the replacement of aging A public utility is classically defined and imposing specialized reporting and infrastructure and the elimination of as a business charged with the public accounting systems.2 lead service lines.4 To actively address interest. In the United States, the these costs through rate setting, utilities principle of utility regulation – the Unlike municipally owned water, electric, must involve the PSC. The PSC recently so-called “regulatory compact” – centers and gas utilities, municipal stormwater approved substantial rate increases for on the idea that the public utility is and wastewater systems are not defined the cities of Janesville and Marshfield granted the right to serve customers as “public utilities,” which are subject to finance ongoing replacement of their exclusively in its defined territory and to full PSC regulation.3 Consequently, aging mains.5 Other communities are earn a fair and reasonable return on its municipalities may determine and set implementing new PSC-approved assets in exchange for the obligation to rates, rules, and practices governing use and utility-financed programs to assist serve all its customers in its territory in of their municipal sewerage systems. residents with the replacement of their a non-discriminatory manner and allow The PSC retains limited authority to lead laterals.6 regulators access to the utility’s books and hear complaints about such rates, rules records for the purpose of establishing or practices, and, when warranted, The bottom line is that PSC regulatory just and reasonable rates.1 Public utilities may set them, or provide other relief. oversight means that local governments may be municipally or investor-owned. While different statutes provide for the do not have complete control of their formation and operation of municipal water, electric, and to some extent, sewer In contrast to investor-owned utilities, sewerage systems, municipalities may still and stormwater utilities. This is true municipally owned utilities do not earn establish a governance system similar to regardless of how the municipal utilities their fair and reasonable return for their public utilities. are managed and governed. the benefit of shareholders. Instead, municipal utility profits stay in the PSC regulation is a double-edged sword. community, allowing utility assets to On the one hand, regulation ensures ▶p.22 The Municipality | March 2020 21 Legal Municipal Governance Options According to Wis. Stat. § 66.0805(1), of the city council. Unlike a utility a city exercises its control and supervision commission, a Board of Public Works is The broadest authority for the by enacting ordinances. But it is not unique to cities, created pursuant to Wis. management and governance of always clear what distinguishes a Stat. § 62.14.11 In all cities but cities of municipal utility operations derives semi-independent utility commission the 2nd class, the board of public works from statutory home rule.7 This is an from other city departments. As a commissioners are the city attorney, extremely broad grant of authority with practical matter, it’s a good idea to city comptroller, and city engineer. In respect to the management and control align city and commission policies 2nd class cities, the commissioners are of “the public service” through regulation, and practices when it comes to human appointed by the mayor and confirmed license, tax levy, appropriation, and resources matters, contracting, bidding, by the council. In any city, by a two- “other necessary or convenient means.” and purchasing. So while a commission thirds vote, the council may determine Although this language, as well as may determine what piece of equipment the board of public works to consist of Wisconsin case law,8 would appear to should be purchased, for example, other officers or persons. A city may also confer free reign to local governments the actual purchase can be made in eliminate the board of public works and for organizing and managing their accordance with the city’s general assign its duties to the council, another utilities, Wis. Stat. § 66.0805 in the purchasing policies. committee, or an officer or officers. municipal utility subchapter specifies the most common governance While in practice the lines of authority While there remains some insulation alternatives: management by a local as between a utility commission and the from the city council and partisan utility commission and (for cities of the governing body may sometimes appear politics, ultimately the board of public 2nd, 3rd, or 4th class, villages or towns) blurry, the courts have made it clear that works lacks a utility commission’s management through the board of public once a utility commission is created, quasi-independent stature and is subject works or other officers.9 a governing body cannot undo the to greater city council control. For independence of the commission by, for example, a board of public works typically Utility Commissions example, establishing a sub-committee does not have the authority to contract Under a utility commission form of of the council to set wages or usurp other separately from the city or retain its own governance, a municipality creates a commission responsibilities.10 legal counsel. Nevertheless, because of the non-partisan utility commission to flexibility in how a city may select board Because utility commissions are designed be responsible for the management of public works commissioners, when to be non-partisan in nature, they can and control of utility operations while those selections are made wisely, boards be run more like a business. Moreover, remaining under the general control of public works can also benefit from the best run commissions benefit from and supervision of the governing body. expertise and continuity. expertise and continuity, which are at a The utility commission may have 3, 5, premium in a business that by its very Other Options or 7 commissioners, and is intended to nature is complex and ever-changing. function as a semi-autonomous public Municipalities have a range of other However, it goes without saying that body with authority, among other governance options contemplated by a commission cannot be oblivious to things, to appoint and establish the both Wis. Stat. §§ 66.0805 and 62.14. the politics of the municipality – the compensation of a manager, enlist the Municipal utilities may be run by a governing body always retains the right to services of municipal engineers, contract committee of the governing body or a eliminate the commission it has created. for utility services in its own name, new utility board or other commission retain its own attorneys, and supervise Board of Public Works not expressly given the powers of a Wis. construction of its own facilities, rather Stat. § 66.0805 commission.12 Both a A board of public works operates in than through the board of public works. committee and utility board function some ways like a utility commission – it Utility commissions, however, cannot similarly and have similar considerations is comprised of commissioners, it has tax or borrow; nor do they otherwise to a board of public works. However, certain powers and duties delegated constitute a separate legal entity apart since a committee or utility board are
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