                         IN THE SUPREME COURT OF MISSISSIPPI
                                  NO. 96-CC-01367-SCT
MISSISSIPPI PUBLIC SERVICE COMMISSION
v.
DIXIE LAND AND WATER COMPANY, INC.

DATE OF JUDGMENT:                              11/18/96
TRIAL JUDGE:                                   HON. DOROTHY WINSTON COLOM
COURT FROM WHICH APPEALED:                     LOWNDES COUNTY CHANCERY COURT
ATTORNEY FOR APPELLANT:                        WILLIAM BRUCE MCKINLEY
ATTORNEY FOR APPELLEE:                         DENNIS WAYNE MILLER
NATURE OF THE CASE:                            CIVIL - OTHER
DISPOSITION:                                   AFFIRMED IN PART; REVERSED AND
                                               REMANDED IN PART - 2/5/98
MOTION FOR REHEARING FILED:
MANDATE ISSUED:                                3/18/98




     BEFORE SULLIVAN , P.J., BANKS AND MILLS, JJ.


     SULLIVAN, PRESIDING JUSTICE, FOR THE COURT:


¶1. The appeal before this Court arises from the November 8, 1996, Order of the Lowndes County
Chancery Court on appeal, which reversed the order by the Mississippi Public Service Commission
(hereafter MPSC) and directed the MPSC to allow the Company's water rate increase of $22,703
annually and the Company's sewer rate increase of $18,783 annually. The chancery court based its
decision on its finding that the order by the MPSC was arbitrary, not supported by substantial
evidence, and contrary to the manifest weight of the evidence. The Chancellor found that the only
substantial evidence before the Commission was the testimony of Dixie Land's witnesses. We agree
with the chancellor that the order by the MPSC denying the rate increase for the water service and
delaying the full imposition of the sewer rates was not supported by substantial evidence, and we
therefore affirm that part of the decision. However, with respect to the chancellor's attempt to set the
rate increase, this Court reverses that part of the order and remands the case back for further
consideration.

¶2. Dixie Land is a Mississippi for-profit public utility corporation engaged in the provision of water
and sewer service to the public for compensation in Lowndes County, Mississippi. As required by the
Mississippi Legislature, the MPSC has the duty of regulating public utilities and setting utility rates
charged by these companies. On November 29, 1995, Dixie Land filed two petitions with the MPSC,
one seeking a rate increase for the provision of water service, and the other seeking a rate increase
for the provision of sewer services. In accordance with section 77-3-39 of the Mississippi Code of
1972 a special meeting was held on December 14, 1995, where the MPSC ordered the suspension of
both of the proposed rate increases, up to 120 days from the date of filing, and requested a full
investigation to be made by the Public Utilities Staff.

¶3. The Public Utilities Staff (hereafter PUS) is a separate and independent group created by
legislation to investigate and advise the MPSC. Miss. Code Ann. § 77-2-1 (1991). It has authority to
review rate proposals by a public utility when it deems it to be necessary. Miss. Code Ann. § 77-2-9
(3)(m) (1991). It should be made clear that although the PUS may aid the MPSC in determining
issues presented before the commission, the PUS is not controlled by the MPSC. The PUS chose not
to intervene or advise the MPSC regarding the proposed rate increases.

¶4. Commissioner Robinson held a hearing on February 2, 1996, where several customers of Dixie
Land gave extensive testimony regarding discoloration of the water and overall displeasure with the
quality of their water service. The only other witnesses that testified were those on behalf of Dixie
Land. As a result of the hearing, Commissioner Robinson issued separate Recommended Orders
regarding the water and sewer rate increases on April 23, 1996. On May 8, 1996, final orders were
issued by the entire Commission fully adopting the recommendations of Commissioner Robinson.
Dixie Land appealed the MPSC orders to the Chancery Court of Lowndes County which resulted in
reversal by the Chancellor. The MSPC has appealed this reversal order to this Court.

                                  STATEMENT OF THE LAW

                                                  I.

DOES THE CHANCERY COURT HAVE THE AUTHORITY TO DIRECT THE
MISSISSIPPI PUBLIC SERVICE COMMISSION TO ALLOW DIXIE LAND AND WATER
COMPANY, INC., A WATER RATE INCREASE IN THE ANNUAL AMOUNT OF $22,703
AND SEWER RATE INCREASE IN THE ANNUAL AMOUNT OF $18,783?

¶5. The MPSC argues that the Chancery Court lacked the authority to set the levels of rates to be
fixed by the Commission. This Court stated, "It is beyond question that the function of rate making in
this state is purely legislative in character and a court is without power to fix rates charged by a
public utility. We firmly have established this rule in a number of cases." Mississippi Pub. Serv.
Comm'n v. South Cent. Bell Tel. Co., 464 So. 2d 1133, 1135 (Miss. 1984); Mississippi Pub. Serv.
Comm'n v. Hinds County Water Co., 195 So. 2d 71 (Miss. 1967); United Gas Corp. v. Mississippi
Pub. Serv. Comm'n., 240 Miss. 405, 127 So. 2d 404 (1961). Since the rate making authority rests
entirely with the MPSC this Court reversed the lower court when it fixed a rate base and rate of
return even though it affirmed the part of the order that stated that the commission's order was not
supported by substantial evidence. Mississippi Pub. Serv. Comm'n v. Hughes Tel. Co., 376 So. 2d
1074, 1079 (Miss. 1979). Here, the chancellor's order in this matter reads in part as follows:

     IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the Commission Orders
     denying Dixie Land's proposed water rate increase and granting an increase for the sewer
     system over a two year period are set aside. The cases are remanded to the Commission and it
     is directed to allow Dixie Land a water rate increase in the annual amount of $22,703 and a
     sewer rate increase in the annual amount of $18,783 on or before July 1, 1996.

The MPSC places great emphasis on the word "directed" as being an effort by the chancery court to
actually set the increase. On the other hand, Dixie Land contends that the evidence in the record is
uncontradicted by the MPSC and anything less than the specified numbers requested has been shown
to be confiscatory. Therefore, it is Dixie Land's contention that the chancellor merely directed the
MPSC to do its job in approving the proven and justified rate increase.

¶6. In Mississippi Pub. Serv. Comm'n v. Hinds County Water Co., this Court determined that the
chancellor, by stating that the minimum monthly rate should be near the figure of $4 per month, was
not attempting "to fix the rate, but he was merely giving his impression as to what a reasonable rate
would be after adjustments he thought necessary were made." Hinds County Water Co., 195 So. 2d
at 78. In contrast, this Court reversed the lower court when it adopted the proposed rate increase of
the power company. Mississippi Pub. Serv. Comm'n v. Mississippi Power Co., 337 So. 2d 936, 941
(Miss. 1976). In support of that decision this Court, in reviewing Mississippi Code Annotated of
1972 section 77-3-67 (4), stated:

     As we view this language, it means that the court in addition to sustaining or dismissing an
     appeal may also, when the order is wholly or partially vacated, remand the matter to the
     commission for further proceedings not inconsistent with the court's order. The discretion
     mentioned in the statute does not authorize removal of the rate making power from the
     commission where it is embedded by Mississippi Code Annotated section 77-3-41 (1972). The
     numerous references to the commission's rate making power in the statutes, both precedent and
     antecedent to Section 77-3-41, buttress our thoughts that the legislature clearly intended that
     the power remain with the commission.

Mississippi Power Co.,337 So. 2d at 940.

¶7. Accordingly, we find that the language used by the chancellor in the case sub judice is an attempt
to set the rate increase in direct contravention of section 77-3-41 of the Mississippi Code of 1972.
Therefore, this Court reverses the part of the chancellor's order that attempts to set the rate increase
for both the water and sewer service and remands the case back to the commission for further review
and consideration.

                                                  II.

IS THE ORDER RENDERED BY THE MISSISSIPPI PUBLIC SERVICE COMMISSION IN
THE WATER RATE INCREASE REQUEST BY DIXIE LAND AND WATER COMPANY,
INC., ARBITRARY OR CAPRICIOUS OR IS IT SUPPORTED BY ANY SUBSTANTIAL
EVIDENCE?

¶8. The Mississippi Legislature provides the standard of review a chancery court must follow when
hearing a case on appeal from a final finding, order or judgment of the MPSC. The relevant section
provides:

     (4) The court may hear and dispose of the appeal in termtime or vacation and the court may
     sustain or dismiss the appeal, modify or vacate the order complained of in whole or in part, as
     the case may be. In case the order is wholly or partly vacated the court may also, in its
     discretion, remand the matter to the commission for such further proceedings, not inconsistent
     with the court's order as, in the opinion of the court, justice may require. The order shall not be
     vacated or set aside either in whole or in part, except for errors of law, unless the court finds
     that the order of the commission is not supported by substantial evidence, is contrary to the
     manifest weight of the evidence, is in excess of the statutory authority or jurisdiction of the
     commission, or violates constitutional rights.

Miss. Code Ann. § 77-3-67 (1991) (emphasis added). "This Court has followed the foregoing
legislative mandate and continues to do so in the present case." South Cent. Bell Tel. Co., 464 So.
2d at 1135; Southeast Mississippi Legal Services Corp. v. Mississippi Power Co., 605 So. 2d 796,
798 (Miss. 1992). In addition, this Court has explained that an order of the MPSC is presumptively
valid. State ex rel. Pittman v. Mississippi Pub. Serv. Comm'n, 538 So. 2d 387, 394 (Miss. 1989).
"The reasonableness of public utility rates is not determined by definite rules and legal formulas, but
is a fact question requiring the exercise of sound discretion and independent judgment in each case."
State ex rel. Pittman, 538 So. 2d at 394 (citing Mississippi Pub. Serv. Comm'n v. South Cent. Bell
Tel., 464 So. 2d. 1133, 1134-35 (Miss. 1984)).

¶9. At the hearing two witnesses testified on behalf of Dixie Land in connection to the financial
position of the company presently, as well as an estimate of the future status of the company with and
without the proposed rate increases. Dixie Land's first witness was E. S. Thomas, Jr., a Certified
Public Accountant. He explained the financial status of Dixie Land based on historical data and
testified that the income statement of Dixie Land reflected a $10, 378 loss for the six-month period
ending June 30, 1995, and a $4,246 loss for the twelve-month period ending June 30, 1995. His
testimony was not disputed. The other witness that testified to the financial status of Dixie Land was
B. Leon Browning, a CPA who was qualified as an expert in utility rates. Browning explained several
exhibits which formed the basis for the need for the proposed rate increases. Browning prepared two
pro forma income statements(1), one future estimate for water and one for sewer, for the twelve-
month period ending December 31, 1996, based on the historical data. Browning used the first six
months of 1995, and the last six months of 1994, as the historical test year. In the pro formas for both
the water and sewer he calculated the rate of return at 5.1% which he testified was well below the
10% to 12% overall return of other privately owned water systems. In order to obtain this rate of
return the revenue would have to be increased annually to $22,703 for water services and $18,783
for sewer services. These are the exact amounts the Chancellor directed to be allowed in the order
reversing and remanding the case to the MPSC. Without the rate increase, the pro forma on the
water side shows a negative net income of $18,377 and on the sewer side a negative net income of
$18,669. With the proposed rate increase the pro forma shows a net income of $4,326 on the water
side and a net income of $114 on the sewer side. Willis Puckett, II, president of Dixie Land, testified
that the last rate increase for water was in September of 1988, and the last rate increase for sewer
was in September of 1990. His reason for the water rate increase was to enable Dixie Land to make
the needed improvements to the system and still make a profit. The justification he gave for the sewer
rate increase was that the system is operating in a deficit.

¶10. The MPSC's order required Dixie Land to conduct a feasibility study to address the capital cost,
operation and maintenance cost associated with improving the existing water treatment plant. Dixie
Land had already done this and the results of the study were before the MPSC at the time of the
decision. Robert L. Calvert, a professional engineer, had prepared an engineering report for Dixie
Land recommending both short-term and long-term plans to improve the company's water service.
To require another study is unsupported by the evidence, and therefore arbitrary and capricious.
However, the order to conduct a study pertaining to the making of a emergency as well as permanent
water connection with the City of Columbus was not previously done by Dixie Land and it was not
necessarily arbitrary or capricious to order such a study.

¶11. The MPSC denied the water rate increase because it claims that it did not have actual figures to
utilize to adjust the rate base and/or expenses of the Company relating to its work on the water
system. The MPSC determined that Dixie Land had submitted speculative estimated costs of work to
be done on the water system and it was "not in a position to grant a rate increase based on these
estimated costs." The chancery court addressed this issue by explaining, "[a]fter reviewing the
testimony of Dixie Land and its exhibits, the Court finds that the routine maintenance costs are
necessary operating expenses and not part of the rate base."

¶12. The normal practice followed in rate making is "to test rates for the future upon the basis of
actual operating experience of a representative period of time and to adjust that experience for
changes that appear definite and certain." Southern Bell Tel. And Telegraph Co v. Mississippi Pub.
Serv. Comm'n., 237 Miss. 157, 184, 113 So. 2d. 622, 627 (1959). Dixie Land submitted a pro forma
operating statement which included the $17,500 expense for the improvements that need to be made
to the water system as explained to Commissioner Robinson by Calvert, the engineering expert. This
Court has already been confronted with a similar issue when considering the cost of a new water
treatment plant, clearly a capital expenditure. Mississippi Pub. Serv. Comm'n v. Coast Waterworks,
Inc., 437 So. 2d 448 (Miss. 1983). In that case, this Court held that the MPSC was in error for not
considering increased expenses and basing its calculations without regard to the projected rate of
return for the pro forma period. The Court stated, "When operational expenses increase and such
increases are properly substantiated, then it is error for the Commission not to take the increases into
consideration." Coast Waterworks, Inc., 437 So. 2d at 451. The Court further stated, "[i]t is evident
from the testimony that the proposed repairs and improvements would be operational during the test
year. Therefore, these items would properly be included in the rate base to the extent of their
usefulness in the test year." Id. at 451.

¶13. The MPSC did not present any of its own witnesses to address the figures submitted by Dixie
Land's accountants and although questioned, none of the testimony or exhibits offered by Dixie Land
were disputed as to their accuracy. There was no testimony or results of any investigation done by
the Public Utilities Staff on the reasonableness of Dixie Land's proposed rate increases for water or
for sewer. If the expenses to be incurred within the next year are not to be properly considered then
there would be no need for the requirement of submitting a pro forma income statement. In
Mississippi Pub. Serv. Comm'n v. Mississippi Power Co., this Court affirmed the trial court in part
because the MPSC failed to consider increased cost of operating expenses, and the increased capital
cost of the business. Mississippi Power Co., 337 So. 2d at 939. This Court held, "[w]e therefore
affirm the trial court in its finding that the order of the commission was not supported by substantial
evidence because it is apparent that the commission overlooked uncontradicted and reasonable
testimony of the company's witnesses in reaching its conclusion that the proposed rate increase was
not supported by substantial evidence." Mississippi Power Co., 337 So. 2d at 939.
¶14. This Court reaches this same conclusion in the case sub judice. There was no contradicted
evidence or testimony pertaining to the need for the improvements to the water system. The engineer
gave an estimated cost of $17,500 for the improvements and stated the improvements would be a
temporary solution and would only be effective for one to two years maximum before the
discoloration of the water and poor water quality would return. While the engineering report showed
greater needs with higher costs than those being performed, the immediate maintenance was
economical and result oriented. Furthermore, Browning, the CPA, stated that the expense was a
normal maintenance expense and therefore it expensed off in the current year as opposed to being
capitalized over a period of time. It is apparent that Dixie Land, under its current rates, can not afford
to make the necessary improvements which should be considered routine maintenance. However, this
Court finds that the MPSC's decision to disallow the $1,000 expense to locate the valves that were
covered up when the developer poured a driveway over them was not arbitrary or capricious and
should not be considered routine maintenance.

¶15. As stated correctly by the chancellor, the burden of proof rests with Dixie Land to establish the
reasonableness of its proposed new rates. Mississippi Power Co., 337 So. 2d at 938; Rankin Utility
Co., Inc. v. Mississippi Pub. Serv. Comm'n., 585 So. 2d 705, 709 (Miss. 1991) . As the MPSC
correctly points out, it is granted discretion and flexibility in rate cases. The MPSC is free to accept
or reject recommendations of any witness. South Cent. Bell Tel. Co., 464 So. 2d at 1135. The
MPSC is the trier of facts and within this province, it has the right to determine the weight of
evidence, the reliability of estimates and the credibility of witnesses. However, this does not mean
that it can ignore all evidence presented and arbitrarily deny a rate increase.

¶16. The MPSC places much emphasis on the testimony of customers of Dixie Land about the poor
quality service they have and the fact that Dixie Land ignored many of the recommendations made by
the Public Utilities Staff in 1992. Calvert was questioned on cross-examination and counsel for the
MPSC presented a memo dated September 21, 1992, which contained a list of recommendations for
better water service prepared by the PUS. Some of the recommendations have been complied with
and others have not, but on re-direct Calvert stated that the memo was only suggested
recommendations and was not an order. Dixie Land argues that adequacy of service issues are dealt
with separate and apart by the MPSC either upon complaint of a customer or upon its own initiative.
The process of rate making was explained by this Court in South Hinds Water Co. v. Mississippi
Pub. Serv. Comm'n., 422 So. 2d 275 (Miss. 1982 ). This Court explained:

     There are three essential elements in the rate making process: First, the necessary operating
     expenses incurred to produce the utility's products; second, the rate base; and third, the rate of
     return allowed the utility. F. Welch, Cases and Text on Public Utility Regulation 453-54 (rev.
     ed. 1968). The rate base is calculated by valuing the property used and useful for public service.
     Then, a fair and reasonable rate of return is allowed on the value of the property included in the
     rate base, plus an allowance for the necessary operating expenses. In other words, a utility is
     given revenues in excess of its operating expenses so that it can pay a fair return to its investors
     and retire its indebtedness.

South Hinds Water Co., 422 So. 2d at 281 (emphasis added). No where in this explanation does the
Court address the issue of adequacy of service. The authority for addressing the issue of service for a
public utility is found in an unrelated statute of the Mississippi Code of 1972. See Miss. Code Ann.
§ 77-3-21 (Supp. 1997). However, this statute specifically states, "Nothing in this paragraph shall be
construed to include service for water and sewage." Miss. Code Ann. § 77-3-21 (Supp. 1997). In
1995, the Mississippi Legislature, pursuant to section 77-3-22 of the Mississippi Code Annotated of
1972, provided a way that the MPSC could, upon the finding of inadequate service, petition the
chancery court to attach the assets of the privately owned water or sewer utility and place it under
the sole control of a receiver. Miss. Code Ann. § 77-3-22 (Supp. 1997). The MPSC seems to be
confusing the issue of adequate service with the rate increase issue. Each issue is considered apart
from the other and the quality of service being provided should not influence the decision to either
grant or deny a rate increase.

¶17. Dixie Land has proven that in order to receive a 5.1% rate of return, in light of the maintenance
expenses, that it must be allowed a rate increase. The MPSC must consider these expenses that are
normal operating expenses as opposed to capital expenditures in its determination of the
reasonableness of the proposed rate increase. There is no other evidence in support of the denial for
the water increase other than the fact that the work to be done by Dixie Land has not been
commenced or completed. As a result, this Court affirms the lower court's finding that the MPSC's
order was not supported by substantial evidence and was contrary to the manifest weight of the
evidence and remands the case back to the MPSC for further findings not inconsistent with this
opinion. On remand, the Commission should be allowed to condition the rate increase by requiring
the recommended maintenance to be completed within a certain time after the effective date of the
rate increase.

                                                  III.

IS THE ORDER RENDERED BY THE MISSISSIPPI PUBLIC SERVICE COMMISSION IN
THE SEWER RATE INCREASE REQUEST BY DIXIE LAND AND WATER COMPANY,
INC., ARBITRARY OR CAPRICIOUS OR IS IT SUPPORTED BY ANY SUBSTANTIAL
EVIDENCE?

¶18. The MPSC allowed the requested sewer rate increase but "to avoid rate shock" it staggered the
increase over a period of two years. The MPSC stated in its order, "[t]he approximate 75% rate
increase requested by the Company in its Notice of Intent to Change Rates for sewer service might be
justified at this time if the Company's position was the Commission's only consideration. However,
the Commission also has a duty to protect the Company's ratepayers from rate shock which would be
the case should the full rate increase requested by the Company be granted at this time." The
chancellor did not address this concern but instead reversed the order as being arbitrary and not
supported by any evidence.

¶19. This Court has upheld the right of a public utility to earn a fair return in describing it as "one
which, under prudent and economical management, is just and reasonable to both the public and the
utility." Southern Bell Tel. & Telegraph Co., 237 Miss. at 241, 113 So. 2d at 656. There seems to
be no Mississippi case discussing the term "rate-shock". The MPSC asserts that Dixie Land could
have requested appropriate rate relief in the past when necessary, and therefore prudent management
was not used. Dixie Land does not address this point but argues that the increase requested was only
an additional four dollars per month and the resulting profit to Dixie Land based on this increase is
only $114. Dixie Land argues that the MPSC's denial of revenue for one year totaling approximately
$9,390 would cause a negative income and amount to confiscation of the utility's property by the
MPSC.

¶20. The Supreme Court of the United States said, " [t]he just compensation safeguarded to the
utility by the Fourteenth Amendment is a reasonable return on the value of the property used at the
time that it is being used for the public service. And rates not sufficient to yield that return are
confiscatory." Bd. of Pub. Util. Comm'rs v. New York Tel. Co., 271 U.S. 23, 32 (1926) (citing
Willcox v. Consolidated Gas Co., 212 U. S. 19, 41; Bluefield Co. v. Public Service Commission,
262 U.S. 679, 692)). The U.S. Supreme Court in a later case explained:

     The guiding principle has been that the Constitution protects utilities from being limited to a
     charge for their property serving the public which is so "unjust" as to be confiscatory.
     Covington & Lexington Turnpike Road Co. v. Sandford, 164 U.S. 578, 597 (1896) (A rate is
     too low if it is "so unjust as to destroy the value of [the] property for all the purposes for which
     it was acquired," and in so doing "practically deprive[s] the owner of property without due
     process of law"); FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 585 (1942) ("By long
     standing usage in the field of rate regulation, the 'lowest reasonable rate' is one which is not
     confiscatory in the constitutional sense"); FPC v. Texaco Inc., 417 U.S. 380, 391-392 (1974)
     ("All that is protected against, in a constitutional sense, is that the rates fixed by the
     Commission be higher than a confiscatory level"). If the rate does not afford sufficient
     compensation, the State has taken the use of utility property without paying just compensation
     and so violated the Fifth and Fourteenth Amendments.

Duquesne Light Co. v. Barasch, 488 U.S. 299, 307-08 (1989).

¶21. Without the rate increase for sewer service the evidence indicates that Dixie Land would have a
negative income of $18,669, and with the full rate increase it would only have an income of $114. If
the rate increase is phased in over a period of two years with only half of the proposed increase
allowed in the first year, then Dixie Land will suffer a negative net income. There does not seem to be
any dispute that 5.1% is considered to be a reasonable, if not low, rate of return. This Court finds
that the partial rate increase allowed would amount to an unreasonable rate which could be
considered confiscatory.

¶22. The MPSC based its decision solely on the "rate shock" to Dixie Land's customers. The flat rate,
under the proposed rate change, would increase by four dollars per month. This is not such a drastic
increase that Dixie Land should be denied a reasonable rate of return for its investment. Therefore,
this Court affirms the chancellor's finding that the MPSC's order was not supported by substantial
evidence and it was arbitrary and capricious.

¶23. AFFIRMED IN PART. REVERSED AND REMANDED IN PART.

PITTMAN, P.J., BANKS, McRAE, ROBERTS, SMITH, MILLS AND WALLER, JJ.,
CONCUR. PRATHER, C.J., NOT PARTICIPATING.
1. The Mississippi Code of 1972 requires a utility seeking a rate change to file in its application:

     (e) A pro forma operating statement in the same form as the actual operating statement showing
     estimate of revenue and expenses for the twelve-month period beginning with the effective date
     of the changed rates (i) without giving effect to the changed rates and (ii) giving effect to the
     changed rates;

     (f) A pro forma operating statement in the same form as the actual operating statement for the
     same period giving effect to the proposed changes in rates and adjusted for known changes in
     the cost of operations;

Miss. Code Ann. § 77-3-37 (2)(e) & (f)(Supp. 1997).
