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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 operates its , electric, and . In Wisconsin, there are costs and obligations, which, in and sewer utilities as a 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 , maintain system reliability and service All public utilities in Wisconsin, except and clean 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 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 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 and the Role of return; enforcing customer service, $8.5 billion over the next 15 years to of customer protection and safety rules to meet existing drinking water priorities, ensure reasonable and adequate service; such as the replacement of aging A is classically defined and imposing specialized reporting and infrastructure and the elimination of as a 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 approved substantial rate increases for on the idea that the public utility is and wastewater systems are not defined the 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 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 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 may be municipally or -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

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Municipal Governance Options According to Wis. Stat. § 66.0805(1), of the council. Unlike a utility a city exercises its control and supervision commission, a Board of is The broadest authority for the by enacting ordinances. But it is not unique to cities, created pursuant to Wis. 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, levy, appropriation, and 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 by statute, and its general duty is “to from the municipality that created it. non-statutory, the governing body has superintend all public works and keep the Although members of the governing greater reign to determine how they streets, alleys, sewers and public works body can be on the commission, they will function and retains discretion in and places in repair” under the direction must be in the minority. what powers and duties it assigns to the ▶p.23 22 The Municipality | March 2020 Legal

committee or utility board. Additionally, utility operations. Moreover, since of Wisconsin, American Public Power the governing body may determine the governing body members are subject to Association, Municipal Environmental composition of the committee or utility election and must devote substantial time Group-Water Division, American Water board members, which may include to the operation of every other aspect of Works Association, Wisconsin Rural members of the governing body13 the municipality, direct management of a Water Association, and other groups to and local residents. Consequently, a utility by the governing body is rarely the learn about new and policy committee or utility board may still allow best . developments. for building some of the expertise of a Conclusion With several options available, utility commission, while retaining more municipalities should carefully consider control by the governing body. However, Regardless of the governance structure, which governance structure is likely a committee or utility board is less there are a few principles for governing to yield the best results for their insulated from partisan politics, which bodies to keep in mind. While municipal communities. means it may not always be inclined to officials must always act for the common prioritize long-term planning. good of the municipality, when it comes Public Utilities 356 to municipal utilities, it is especially If opting for a non-statutory form important to act in essence as a trustee of About the Authors: of utility governance, municipalities utility property to ensure that long-term should take care to craft the authorizing made by previous governing Jared Walker Smith is an attorney at ordinance and committee or board bodies are protected for the benefit of Boardman & Clark LLP, where his structure appropriately in order to the public. If municipal utility decisions practice focuses on general municipal, avoid confusion over scope of authority, are delegated, the governing body should water utility, and real estate law. He is a encourage retention of expertise, and respect the expertise of its advisors, graduate of St. Olaf College and the discourage breakdowns in trust or particularly with respect to the details of UW Law School. Contact Jared at communication. utility operations, while keeping an eye [email protected] A governing body could also decide to on the long term. Richard A. Heinemann is an attorney exercise direct control over the operation Governing officials should also have a at Boardman & Clark LLP. He of its municipal utilities. This would basic understanding of utility rules of advises a wide range of municipalities maximize control, but it’s not clear operation, rate setting, and environmental and local governments in Wisconsin on that the results would be optimal since protection. Whenever possible, they all areas of municipal law, with a focus governing body members are typically should avail themselves of opportunities on energy issues. Contact Richard at generalists without the special expertise offered by trade groups and associations [email protected] typically required to manage complex such as the Municipal Electric Utilities

1. Munn v. People of State of Illinois, 94 U.S. 113 (1876). 9. It is worth noting that funds generated through utility operations are considered enterprise 2. The PSC also has the authority to exercise oversight over all municipalities, not just municipal funds. Governing body access to such funds is therefore restricted by state law (Wis. Stat. § utilities, when it comes to the regulation of public utility use of municipal rights of way under 66.0811), PSC rules and in some instances, by revenue covenants. Wis. Stat. § 196.58(4) and (5). 10. See Schroeder v. City of Clintonville, 90 Wis. 2d 457, 280 N.W.2d 166 (1979). 3. Combined water and wastewater utilities are, however, fully regulated by the PSC. 11. In villages, the village board functions as the board of public works for purposes of letting 4. See Wisconsin’s Public Water Systems 2018 Annual Drinking Water Report, PUB-DG-045 2019 contracts under Wis. Stat. § 61.54. (July 2019). 12. The City of Madison provides one example of non-66.0805 utility board governance. City of 5. See Final Decisions in PSC dockets 2740-WR-110 and 3420-WR-106. Madison Code of Ordinances Section 13.01. 6. For example, the City of Kenosha implemented the first PSC-approved lead service line 13. When designating members of the governing body to a committee or utility board or replacement program under Wis. Stat. § 196.372. See PSC docket 2820-LS-100. commission, municipalities must consider the provisions of Wis. Stat. § 66.0501, which restricts the ability of elected officials to serve on boards over which they have the authority 7. Wis. Stat. §§ 61.34(1) and 62.11(5). of selecting members. 8. Hack v. City of Mineral Point, 203 Wis. 215, 219, 233 N.W. 82 (1930)(“[A] city operating under the general chapter finding no limitations in express language has under the provisions of this chapter all the powers that the Legislature could by any possibility confer upon it.”).

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