       THE STATE OF SOUTH CAROLINA
            In The Supreme Court

Daufuskie Island Utility Company, Inc., Appellant,

v.

South Carolina Office of Regulatory Staff, Haig Point
Club and Community Association Inc., Melrose Property
Owner's Association, Inc., and Bloody Point Property
Owner's Association, Respondents.

Appellate Case No. 2018-001107



     Appeal From The Public Service Commission


                  Opinion No. 27905
       Heard April 18, 2019 – Filed July 24, 2019


           REVERSED AND REMANDED


Thomas P. Gressette Jr. and George Trenholm Walker,
Walker Gressette Freeman & Linton, LLC, of Charleston,
for Appellant.

Andrew McClendon Bateman and Jeffrey M. Nelson, of
Columbia, for Respondent South Carolina Office of
Regulatory Staff; John Julius Pringle Jr. and Lyndey Ritz
Zwing Bryant, Adams and Reese LLP, of Columbia, for
Respondents Haig Point Club and Community
Association, Inc., Melrose Property Owner's Association,
Inc., and Bloody Point Property Owner's Association.
JUSTICE FEW: Daufuskie Island Utility Company, Inc. (DIUC) filed an
application with the Public Service Commission for a rate increase for the water and
sewer service it provides to residents of Daufuskie Island in Beaufort County.
During a hearing on the merits of the application, the commission approved a
purported settlement agreement between the Office of Regulatory Staff (ORS) and
three property owners' associations: Haig Point Club and Community Association
Inc., Melrose Property Owner's Association, Inc., and Bloody Point Property
Owner's Association. DIUC appealed, and we reversed. Daufuskie Island Util. Co.,
Inc. v. S.C. Office of Regulatory Staff, 420 S.C. 305, 803 S.E.2d 280 (2017). We
found the agreement "was not a true settlement" because DIUC did not agree to it.
420 S.C. at 315-16, 803 S.E.2d at 285-86. We remanded the case to the commission
for a new hearing on all issues. 420 S.C. at 316, 803 S.E.2d at 286.

On remand, the commission held a second hearing on the merits and issued a second
order. DIUC now appeals the second order, arguing the commission erred in
disallowing certain rate case expenses1 and refusing to include items of capital in
DIUC's rate base.2 DIUC argues ORS and the commission applied a higher standard
of scrutiny on remand in retaliation against DIUC for successfully seeking reversal
of the commission's initial order. At oral argument on this second appeal, when
pressed by the Court to respond to DIUC's "retaliation" argument, appellate counsel
for ORS conceded a heightened standard had been employed. Counsel stated, "Was
it a higher standard than was previously applied? It certainly was a different
standard," and "I don't believe it was a lesser standard, you are correct." Pressed
further, counsel stated, "You're right. There is a difference . . . [in] the way we
handled the methodology . . . ." Finally, a Justice of the Court challenged counsel,

1
  Rate case expenses are expenses incurred by a utility in the preparation of a rate
application and in related proceedings before the commission. See generally 73B
C.J.S. Public Utilities § 87 (2015) (describing rate case expenses as "expenses
incurred during a rate-making proceeding"); 64 Am. Jur. 2d Public Utilities § 127
(2011) (describing rate case expenses as "costs incurred by a utility to prepare and
present a rate case").
2
  "'The "rate base" is the amount of investment on which a regulated public utility is
entitled to an opportunity to earn a fair and reasonable return.' It 'represents the total
investment in, or the fair value of, the used and useful property which it necessarily
devotes to rendering the regulated services.'" Utils. Servs. of S.C., Inc. v. S.C. Office
of Regulatory Staff, 392 S.C. 96, 101 n.2, 708 S.E.2d 755, 758 n.2 (2011) (quoting
S. Bell Tel. & Tel. Co. v. Pub. Serv. Comm'n of S.C., 270 S.C. 590, 600, 244 S.E.2d
278, 283 (1978)).
"The reason that [the rate case expenses] were paid the first go around . . . , but
disallowed the next time, is because of the higher level of scrutiny." Counsel
responded, "At the end of the day I think that's a fair characterization."

We appreciate the professionalism of appellate counsel as an officer of the court in
giving candid answers to our direct questions. We do not attribute the actions of
ORS to its appellate counsel. Nevertheless, these retaliatory actions by ORS are
deeply troubling. We rightly demand more of governmental representatives—like
ORS—than such an unprofessional approach to the legitimate financial interests of
South Carolina businesses, and of South Carolina utility ratepayers. Likewise, we
expect more respect for the rulings of this Court than administrative officers exhibit
when they retaliate against parties who prevail against them on appeal.

The misconduct by ORS, however, does not necessarily require the commission's
order on remand be reversed. For two reasons, we find it must be. First, ORS is not
simply a party to a rate case application. Under the legislation creating it, "ORS . . .
has the power to review and investigate rate applications, and to make
recommendations to the PSC." Utils. Servs. of S.C., Inc. v. S.C. Office of Regulatory
Staff, 392 S.C. 96, 105, 708 S.E.2d 755, 760 (2011); see generally S.C. Code Ann.
§ 58-4-10(B) (Supp. 2018) (providing ORS "must represent the public interest of
South Carolina before the commission" and "must be considered a party of record in
all filings, applications, or proceedings"); § 58-4-50(A)(2), (9) (2015) (providing
ORS must "make inspections, audits, and examinations of public utilities" and "serve
as a facilitator or otherwise act directly or indirectly to resolve disputes and issues
involving matters within the jurisdiction of the commission"). Specifically, in a rate
application proceeding, ORS must "review, investigate, and make appropriate
recommendations to the commission with respect to the rates charged or proposed
to be charged by any public utility." § 58-4-50(A)(1).

These statutes require ORS to fulfill a unique role in proceedings before the
commission. They require ORS to act in a fair and unbiased manner to protect the
public interest, provide public utilities a fair rate application proceeding, and make
appropriate and reliable recommendations to the commission. When ORS fails to
meet this responsibility, it necessarily affects the decision-making of the
commission. In this case, ORS made recommendations to the commission which
the commission accepted. The commission's decision cannot be separated from the
higher standard of scrutiny ORS now concedes it applied on remand from its
unsuccessful first trip to this Court.
Second, the commission's own treatment of DIUC's rate case expense claims
demonstrate the commission also employed a heightened standard of scrutiny on
remand. In the commission's initial order, the commission awarded DIUC a portion
of rate case expenses for work performed by its consultant, Guastella Associates.
Addressing DIUC's initial request to recover $191,200 in rate case expenses, the
commission wrote,

             ORS proposed . . . current rate case expenses in the
             amount of $75,000 for [Guastella's] preparation of the
             Application, developing rate models, calculating test year
             data, filing other rate case documents and legal
             expenses. . . . The Commission agrees with ORS's
             judgment that $75,000 in rate case expenses is a
             reasonable amount to pass to ratepayers for this rate case.

On remand, DIUC requested more rate case expenses than the $75,000 the
commission awarded the first time, including $542,978 for Guastella's services.
During the remand hearing, when asked by a commissioner to explain ORS's rate
case expense recommendation—specifically, "how much goes to Guastella
Associates"—a witness for ORS responded, "'Zero goes to Guastella Associates,' is
the quick and easy answer. They have submitted, roughly $540,000 worth of
invoices that were insufficient, and we removed those." The commission then
adopted ORS's proposed adjustment and excluded recovery of the entire $542,978.
The commission's wholesale rejection of every Guastella invoice appears retaliatory
because the commission approved and awarded $75,000 for Guastella's services
after the initial hearing.3

Additionally, in contrast to the commission's assessment of the invoices in its order
after the initial hearing, the commission heavily scrutinized the format of the
Guastella invoices on remand. The commission's order on remand provides, "The

3
  Although the commission's order on remand appears to allow DIUC the ability to
recover the $75,000 awarded after the initial hearing, the order on remand only
specifies, "The $75,000 is a figure that was used in the previous hearing and was
arrived at during settlement negotiations between the ORS and POAs." Because the
commission's order precludes recovery for all of the invoices detailing the rate case
services performed by Guastella, it is not clear to us how the order on remand
actually permits DIUC the ability to recover the previously awarded rate case
expenses.
Commission agrees with ORS. . . . The evidence shows that a large sum of what
DIUC seeks was based on invoices that could not be verified." The commission's
order denying DIUC's motion for reconsideration also provides, "ORS . . .
completed a thorough review of all invoices from Guastella Associates, and found
that they 'contained mathematical errors, lacked sufficient detail, and/or did not
appear to be paid.'" However, the commission expressed these concerns with the
invoices only in its evaluation on remand. The commission's harsher treatment of
the same invoices on remand—of which rate case expenses were previously
awarded—convinces us the commission itself employed a retaliatory standard of
scrutiny.

The commission is "vested with power . . . to fix just and reasonable standards,
classifications, regulations, practices, and measurements of service to be furnished,
imposed, or observed, and followed by every public utility in this State." S.C. Code
Ann. § 58-3-140(A) (2015). "When presiding over a ratemaking proceeding, the
PSC takes on a quasi-judicial role." Utils. Servs., 392 S.C. at 105, 708 S.E.2d at
760. In Utilities Services, we explained,

             [T]he PSC is the ultimate fact-finder in a ratemaking
             application. It has the power to independently determine
             whether an applicant has met its burden of proof. The PSC
             is not bound by ORS's determination that an expenditure
             was reasonable and proper for inclusion in a rate
             application. The PSC may determine—independent of
             any party—that an expenditure is suspect and requires
             further scrutiny.

392 S.C. at 106, 708 S.E.2d at 761.

However, in scrutinizing evidence during a ratemaking proceeding, the commission
should evaluate the evidence in accordance with objective and consistent standards.
See Utils. Servs., 392 S.C. at 113, 708 S.E.2d at 764-65 (acknowledging "the PSC's
duty to fix 'just and reasonable' rates" includes evaluating evidence within "the
context of an objective and measurable framework"); see also § 58-3-225(A) (2015)
("Hearings conducted before the commission must be conducted under dignified and
orderly procedures designed to protect the rights of all parties.").

This Court's review is governed by section 1-23-380 of the South Carolina Code
(Supp. 2018). We may reverse an order of the commission "if substantial rights of
the appellant have been prejudiced because the [commission's] findings, inferences,
conclusions, or decisions" are "arbitrary." § 1-23-380(5)(f). A decision by the
commission is arbitrary "if it is without a rational basis, is based . . . not upon any
course of reasoning and exercise of judgment, is made at pleasure, without adequate
determining principles, or is governed by no fixed rules or standards." Deese v. S.C.
State Bd. of Dentistry, 286 S.C. 182, 184-85, 332 S.E.2d 539, 541 (Ct. App. 1985)
(citing Hatcher v. S.C. Dist. Council of Assemblies of God, Inc., 267 S.C. 107, 117,
226 S.E.2d 253, 258 (1976); Turbeville v. Morris, 203 S.C. 287, 315, 26 S.E.2d 821,
832 (1943)).

The commission's denial of DIUC's rate case expenses it previously permitted was
arbitrary because DIUC's evidence was subjected to a retaliatory, higher standard of
scrutiny on remand. As counsel for ORS conceded, "The reason that the rate case
expenses were paid the first go around, but disallowed the next time, is because of
the higher level of scrutiny." This arbitrary, higher standard of scrutiny affected
substantial rights of DIUC. The commission's findings of fact and conclusions of
law must be reversed. We remand to the commission for a new hearing.

DIUC's rate application will now go before the commission for a third hearing. In
our initial reversal and remand, we explained certain points of law applicable to the
merits of DIUC's claims. Daufuskie Island Util. Co., 420 S.C. at 316-20, 803 S.E.2d
at 286-88. In this reversal and remand, we do not address the merits at all. In
reversing the commission twice, we do not intend to make any suggestion of our
views of the merits. Rather, we simply require the commission and ORS evaluate
the evidence and carry out their important responsibilities consistently, within the
"objective and measurable framework" the law provides. Utils. Servs., 392 S.C. at
113, 708 S.E.2d at 765.

REVERSED AND REMANDED.

BEATTY, C.J., KITTREDGE, HEARN and JAMES, JJ., concur.
