Opinion
C.A. No. 98A-02-005
Decided: February 29, 2000
Jeremy W. Homer of Parkowski, Noble Guerke, P.A.
John A. Sergovic, Esquire and Julie G. Bucklin, Esquire
Marc P. Niedzielski, Esquire, Department of Justice
David L. Ormond, Jr., Esquire, Department of Justice, DNREC: Legal Office
Dear Counsel:
This case is on remand, with directions from the Supreme Court for actions commensurate with its Order dated August 12, 1999. For the reasons set forth below this Court is further remanding the matter back to the Environmental Appeals Board, and providing guidance on the legal issues the Board will be asked to consider.
NATURE AND STATUS OF THE PROCEEDINGS
In 1996, Tunnell Companies, L.P. ("Tunnell") applied to the Delaware Department of Natural Resources and Environmental Control Division of Water Resources ("DNREC") for two potable water well permits, three irrigation water well permits, and two water allocation permits associated with the development and operation of an 18-hole public golf course and a 726 lot mobile home park, known collectively as Baywood Greens ("Bay-wood"). Public Water Supply Company, Inc. ("PWSC") objected to the issuance of the permits, claiming that PWSC was the appropriate source of water for the development since it is the public utility that holds the Certificate of Public Convenience and Necessity ("CPCN") for the area encompassing Baywood.
PWSC's opposition necessitated a hearing on the matter by DNREC, after which the Hearing Officer issued a recommendation to the Secretary of the Department of Natural Resources and Environmental Control ("Secretary") that approval be given for the permits. In his decision, the Hearing Officer decided that Tunnell does not constitute a "public utility" under 7 Del. C. § 6002(27) and therefore no CPCN was required for Tunnell. He also decided that none of the 7 Del. C. § 6077(b) limitations on issuing a permit for the potable wells were applicable to the Tunnell water plan. Further, the Hearing Officer determined that the irrigation wells fell outside the purview of § 6077.
The irrigation wells have since become a non-issue in the appeals process, and this memorandum will not address them.
The Secretary concurred with the findings of the Hearing Officer and authorized the issuance of all of the permits. PWSC appealed the Secretary's ruling to the Environmental Appeals Board ("Board"). Following a hearing, the Board upheld the Secretary's action.
PWSC appealed again to this Court. In Public Water Supply Company. Inc. v. Tulou, Del. Super., C.A. No. 98A-02-005, Graves, J. (November 23, 1998) this Court applied the standard of review announced in Eastern Shore Natural Gas v. PSC, Del. Supr., 637 A.2d 10 (1994). In conducting that review, the Court found that there was sufficient basis on the record for the Board to have decided as it did and the decision was not clearly erroneous in its interpretation of the pertinent statutes. The decision was upheld, and PWSC appealed to the Supreme Court of Delaware. There, the Supreme Court overruled the standard of review elucidated in Eastern Shore II. Public Water Supply Company v. DiPaspuale, Del. Supr., 735 A.2d 378 (1999). The standard used by the Superior Court in Public Water Supply I, it said, complied with the "clearly erroneous" standard of Eastern Shore II, but that standard was confusing and too deferential. Public Water Supply II at 382. In a case where a statute is being interpreted by the agency authorized with enforcing it, the appropriate standard of review is plenary review. Id at 381,citing Stoltz Management Co. Inc. v. Consumer Affairs Board, Del. Supr., 616 A.2d 1205 (1992). The reviewing Court, however, may give weight to the decision below, but may not defer to the agency's interpretation. Id at 382. The Supreme Court remanded the case back to this Court for further proceedings consistent with that de novo standard of review. This constitutes this Court's decision in the matter, as briefed by the parties on remand.
Citations to this Supreme Court case will be referred to asEastern Shore II, herein. References to the Superior Court caseEastern Shore Natural Gas v. PSC, Del. Super., 635 A.2d 1273 (1993) will be cited as Eastern Shore I.
Citations to the Superior Court case, Public Water Supply Company. Inc. v. Tulou, Del. Super., 98A-02-005, Graves. J. (November 23, 1998), will be referred to as "Public Water Supply I" references to the Supreme Court case, Public Water Supply Company v. DiPasquale, Del. Supr., 735 A.2d 378 (1999) are cited as "Public Water Supply II".
STATEMENT OF FACTS
Tunnell is developing the Baywood project as a 726-lot mobile home community and an 18-hole golf course northeast of Millsboro in the Long Neck area of Sussex County, Delaware. During the initial hearing Robert Tunnell, managing partner of Tunnell, testified to how the development would function and the water service would be structured with respect to tenants and the public. See, generally, Transcript of Hearing before Hearing Officer, pp. 66-106. Tunnell will retain ownership of the entire property. Tenants of the mobile home community will pay ground rent, providing their own housing units. Lot leases will be for 12 years terms, with the tenant holding the option to cancel or renew on a yearly basis. Tunnell would provide water under the lease agreement, in addition to other services such as roads, security, community maintenance and sewer facilities. There will be no individual charges for water, but lots will be metered for sewage system purposes, as the waste treatment system will be designed for a finite daily load. It is anticipated that for the foreseeable future sewer services will be provided for a flat fee. If it becomes apparent in the future that the sewer system is becoming overloaded, charges for excess will be imposed, metering incoming water as a gauge of sewer usage. In addition, Tunnell did not rule out future charges for outside uses of water if overconsumption were to become a problem.
The golf course will be open to the public, and will also offer memberships to residents and non-residents. Tunnell expects to lease the facilities to another entity for operation of the course. The public will have access to the water supply at the golf course via use of restroom and drinking water amenities as well as indirectly through the "snack bar" facility.
PWSC is a public utility regulated by the Public Service Commission, with its primary operations in the Oak Orchard area of Sussex County. It serves approximately 2300 customers in its certificated area on both sides of Indian River Bay. Prior to Tunnell purchasing the six parcels that comprise the land on which Baywood will be developed, PWSC extended an 8-10 inch water main to Long Neck Road near the project site, in anticipation of growth in the area. It is not disputed that, were PWSC to be given the opportunity to serve Baywood, PWSC would be economically advantaged. It is also suggested that PWSC's existing customers could potentially see some benefits from the broadened customer base that Baywood represents to the company.
PWSC currently has a small amount of capacity within its water system that, with connection to Baywood, could service approximately the first fifty residential units. Testimony below reveals that in order for PWSC to effectively serve Baywood as it is phased in, the company would have to install additional wells, similar in scope and likely similar in location to those proposed by Tunnell. The effect on the aquifer from the wells proposed by Tunnell is confined to the property on which Baywood will sit.
STANDARD OF REVIEW
The general standard of review of an agency decision on appeal is whether there is substantial evidence on the record to support the agency's findings of fact and whether an error of law was committed. Stoltz at 1208. However, the appropriate standard for the Court when examining an agency interpretation of a statute that agency is charged with enforcing is plenary review. Public Water Supply II, supra; Stoltz at 1208.
As this Court stated in Public Water Supply I, the language "for public use" in the definitions of a utility under 7 Del. C. § 6002(27) and 26 Del. C. § 102(8) is ambiguous and was subject to construction by the agency below. Public Water Supply I at 12. Therefore, de novo review is the appropriate standard with regard to this question.
Furthermore, as the Supreme Court pointed out in its opinion, the standard used by the Hearing Officer and Board below to interpret "for public use" was erroneous. Public Water Supply II at 383. While this Court may correct an error of law on appeal, it is within the Court's discretion to remand the issue back to the agency for a determination based on a correct application of the law. Cole v. Board of Dental Examiners, C.A. No. 98A-06-016, Goldstein, J. (Feb. 10, 1999) (Mem. Op.).
ISSUES PRESENTED
The parties have submitted briefs on various issues. Central among those issues is whether the activities of Tunnell are that of a public utility subject to regulation. While this was also the crux of the matter in the decisions issued by both the Hearing Officer and the EAB, the parties have argued to this Court a number of specific sub-issues that neither the Hearing Officer nor the EAB had the benefit of considering when making their determinations. These additional issues have arisen as a result of the Supreme Court's consideration of the matter inPublic Water Supply II. The parties have provided ample support for their positions, but I am reluctant to base a ruling on issues and theories not considered by the agency or the Board below.
Also, the decision below, made by the Hearing Officer and substantially adopted by the Board, was based on application of the facts to an erroneous legal standard. Therefore, in the interests of allowing the agency to have an opportunity, using the Eastern Shore II standard, to consider the same information now before this Court, I find it necessary to remand this case to the EAB. The parties are free and encouraged to argue to the EAB, as they have to this Court, their positions in light of the rulings of Public Water Supply II. Below I have outlined what I feel are the basic issues that the parties have presented following remand from the Supreme Court. The Board should consider these items as well as any other it finds pertinent in light of the Supreme Court's rulings.
Is Tunnell a water utility providing water "for public use" under the definition in 7 Del. C. § 6002(27) and 26 Del. C. § 102(8)?
Is Tunnell engaged in the "sale of a regulated commodity" underEastern States II?
Does its activities constitute a "significant impact on the public interest" that the regulating agencies were designed to protect?
If Tunnell is a utility potentially subject to regulation, is there an exception under which its activities may fall?
Does a landlord-tenant exception apply?
Are Tunnell's water supply activities incidental to its primary business or is Tunnell "beginning the business" of a water utility under 26 Del. C. § 203A and 7 Del. C. § 6076?
Is Tunnell a "traditional user" under 7 Del. C. § 6075?
If Tunnell is not subject to regulation, does 7 Del. C. § 6077(b) preclude issuance of the permits?
SUMMARY OF ARGUMENTS
PWSC contends that Tunnell's activities are those of a public utility under the Eastern Shore II test. Tunnell's provision of water to its tenants constitutes a significant impact on the public interest DNREC and the PSC were designed to protect. Additionally, Tunnell's activities impact a public greater than tenants and customers of Baywood; PWSC's customers are also significantly affected by Tunnell supplying water to Baywood.
If Tunnell is deemed a public utility, it would require a certificate of public convenience and necessity ("CPCN") to operate its water supply system. Since PWSC already holds the CPCN for the area including Baywood, and two CPCN's may not be issued for one geographical area for the same utility, Tunnell would be precluded from operating. Water service would have to be provided by PWSC.
Tunnell counters that it does not act as a public utility in providing water to Baywood. It is merely acting on its right to self-supply from its own wells to its own property. It is not "in the business" of a water company, but in the business of renting lots for mobile homes. Provision of water is simply an amenity included in the rental contract. Legislative intent underlying the pertinent statutes indicates that unregulated utility providers are contemplated under the division of regulatory power over potable water in Delaware.
DISCUSSION
Using these arguments and the issues they raise as a framework, the Court will attempt to provide the EAB with some preliminary analysis upon which it may wish to rely in making its determination of Tunnell's status. Unless otherwise noted, the information below is to be used by the Board in its discretion, and does not constitute the Court's determination of the issue.
I. Water Utility Status
The first, and most perplexing, issue to be decided is whether the activities of Tunnell in the operation of the water system of Baywood constitute that of a water utility under the definitions in 7 Del. C. § 6002(27) and 26 Del. C. § 102(8). The crux of the issue is whether Tunnell, in the operation Baywood and its water supply system, is doing so "for public use." The Supreme Court, in its remand order, advised that the interpretation of this phrase is subject to the guidance of the substantive rulings of Eastern Shore II. Public Water Supply II at 383.
Those statute sections define "water utility" identically as "any person or entity operating within this state any water service, system, plant or equipment for public use." As the Supreme Court noted in Public Water Supply II, this definition and its verbiage of "for public use" is essentially the same as that of a public utility defined at 7 Del. C. § 102(2) and at issue in Eastern Shore II.
In Eastern Shore II Court discarded the traditional test for determining whether an entity is a public utility subject to regulation by the Public Utility Commission ("PSC"). That standard, the "indiscriminate-service-to-an-indefinite-public" test, relied heavily on whether a company offered its services to the general public and whether the general public could demand its services. Matter of Bayview Improvement Co. and its Status as a Public Utility, PSC Docket No. 288 (May 4, 1990). Some jurisdictions found that where such a situation existed, the company had "held out" or dedicated itself and its infrastructure to public service. See Cottonwood Mall Shopping Center. Inc. v. Utah Power Light Co., 10th Cir., 440 F.2d 36 (1971) cert. den. 404 U.S. 857 (1971). Such solicitation was without regard for the status of the potential customer vis-a-vis the utility. Matter of Bayview Improvement Co. and its Status as a Public Utility, PSC Docket No. 288(May 4, 1990). Under this standard, an individual or company could provide utility service to less than an indefinite public without regulation by the PSC.
Under the "public interest" test, expressly adopted by the Supreme Court in Eastern Shore II no longer is it determinative of utility status by looking at what segment of the public is served and can demand service. Eastern Shore I at 19; Eastern Shore II at 17. Instead, the focus of inquiry is on whether the activities of the entity are such that they constitute a substantial impact on the public interest the appropriate agency was designed to protect. Eastern Shore II at 17. Furthermore, regardless of whether a company sells to less than the general public, when the "sale of a regulated commodity to independent third parties" is involved, the company takes on public utility status, potentially subject to regulatory authority. Id at 18;Public Water Supply II at 384.
This appears to this Court to be a two-part test the Supreme Court is advocating. First, the deliberative body must look at whether the activities involve the "sale of a regulated commodity" to third parties. If that is satisfied, the analysis moves on to establishing whether the sales are such that they affect the public interest in a significant manner. It is upon this basis that the Board may wish to review the issue.
The Supreme Court was dealing with an "pass-through" intermediary providing gas in Eastern Shore II, and the language "independent third parties" reflects that situation. While this would seem to indicate that the relationship among the resource supplier, any intermediary and the end user is important, this Court feels that, in keeping with the spirit of the Eastern Shore II test, the Board should look less to whether the relationship is "independent" and concentrate instead on whether the distribution is something other than a "self-supply" situation.
This Court will leave to the Board the determination of whether Tunnell is engaged in the "sale of a regulated utility" under prong one of the Eastern Shore II test. I will comment, though, on the underlying basis for evaluating whether those activities meet the second prong of the Supreme Court's test. For an entity to be declared a public utility, subject to regulation, it must significantly affect the public interest under the protection of the regulating entity. Eastern Shore II at 17. Since the General Assembly has split the regulatory responsibility among more than one agency, it is necessary to review the sphere of each agency and the interests they were designed to protect. In the case of water, at least three agencies —. DNREC, the PSC, and the Department of Health and Social Services ("DHSS") — are charged with regulating potable water. Each agency has a role in the regulation scheme, though their areas of influence overlap considerably.
Both DNREC and the PSC have power to certificate utilities in circumstances constituting "public convenience and necessity." 7 Del. C. § 6076; 7 Del. C. § 6077(a); 26 Del. C. § 203A(a)(1). Granting certificating authority to the PSC, the legislature intended to "balance the interests of the consuming public and of the regulated public utilities." 26 Del. C. § 201(a);59 Del. Laws, c. 397, § 1 (Statement of purpose). Further, in its regulation, the PSC is to consider the "efficiency, sufficiency and adequacy" of the utility's service ( 26 Del. C. § 308) and protect against unreasonable rates while ensuring a reasonable rate of return for the utility ( 26 Del. C. § 309-311). DNREC's primary interest is in ensuring that the area subject to certification is elective on the part of the residents, developer, or appropriate governing body or that "sound and efficient water resource planning, allocation, regulation and management" will be advanced. 7 Del. C. § 6077(a).
DHSS, while not possessing certificating authority, does have specific regulatory and punitive control over the installation of adequate plumbing and water supply equipment. 16 Del. C. § 7909 (safe water supply), § 7911 (adequate water supply), § 7934 (penalties). It considers approval of private wells, even where public water exists. 16 Del. C. § 7931. Further, it has authority over all "public water suppliers" with respect to water quality, and has at its disposal administrative penalties to ensure compliance. 16 Del. C. § 122(3)(c) (1-6)
16 Del. C. § 107(c)(1) defines "public water supplier" as "any person that furnishes water for potable or domestic purposes for consumption in more than three dwelling units, or furnishes water for potable or domestic purposes to employees, tenants, guests, or the public at large in commercial offices, industrial areas, multiple dwellings or semi-public buildings, including, but not limited to rooming and boarding houses, hotels, motels, tourists cabins, mobile home parks, restaurants, camps of all types, day and boarding schools, clubhouses, hospitals, and other institutions, or for use in connection with the manufacture or handling of ice, dairy products, food or drink, or offers any water for sale for potable or domestic purposes."
With that background, the areas of broadly defined "public interest" that it appears must be satisfied with respect to the overall regulation of potable water are environmental concerns, adequacy and sufficiency of the water, public health and rates charged for water. Where appropriate, the concerns of the public welfare may be balanced with the interests of the public utility involved.
As the Supreme Court noted, this overlapping authority of the several agencies need not be mutually exclusive. Public Water Supply II at 384. These agencies may operate in conjunction to regulate the same entity. However, each may only regulate within its statutory jurisdiction. As such, it appears to this Court that the Supreme Court is suggesting that one of these agencies, when engaged in determining the regulatory authority of that particular agency over water, must consider the overall regulatory scheme and take into account the public interests protected by the other agencies involved in water regulation. At the same time the agency must be mindful not to overreach its statutory limits. The Board, in reviewing this matter on remand, should bear this potential conflict in mind.
Based on the interests protected by the individual agencies as set forth in the statutory provisions, it appears that the areas of authority are not only overlapping, but form something of a hierarchy. DHSS's regulatory authority (and interest to protect) is broader than that of the PSC, which is in turn broader than those powers afforded to DNREC. DNREC looks at environmental aspects, including adequacy of groundwater supply; PSC looks at broader interests such as rates charged for water, adequacy of service, etc.; DHSS generally protects public health and safety.
II. Potential Regulation Exclusions
While an entity, on its face, may meet the standard of what constitutes a utility as set forth in Eastern Shore II, there exist a number of statutory conditions that may remove a definitional "utility" from the realm of regulation by DNREC and the PSC. The General Assembly has the authority to create exclusions from regulation, and has done so in the case of water utilities. Additionally, the common law may allow exceptions to regulation, though these may be subject to more searching review before being applied. The Board should fully examine potential exclusions from regulation.
Though there may be others applicable in other circumstances, there appear to be three that are called into question in this case. First, there is the potential for a landlord-tenant exclusion, as noted by the Hearing Officer. Second, Tunnell argues that if is not "in the business" of providing water, but the service is incidental to its primary business, it may potentially be excluded from requiring a CPCN. Third, "traditional users" of water under 7 Del. C. § 6075, as Tunnell claims to be, are removed from the certificating authority of DNREC. The Court will only address the landlord-tenant exception, leaving the relevance of the others to the Board's inquiry.
Subsection (h) of 25 Del. C. § 5312 of the Residential Landlord-Tenant Code expressly excludes from the definition of a public utility and the regulation of the PSC any "landlord who installs, operates and maintains meters or other appliances for measurement and who bills tenants separately for utilities." This indicates that the legislature specifically sought to remove from regulation landlords who distribute utilities to tenants. However, no similar provision exists in the Mobile Home Lots and Leases Act, and in 1996 the General Assembly added lot rent situations to the list of exclusions from application of the Residential Landlord-Tenant Code. 70 Del. Laws c. 513 (effective July 17, 1996). Statutory construction precedent instincts that the Court is to assume that, where one provision is included in one section but omitted in another, the legislature was aware of and intended the omission. Giuricich v. Emtrol Corp., Del. Supr. 449 A.2d 232 (1982) (en banc). Therefore, the Court may not import the utility exclusion provision into the Mobile Home Lots and Leases Act.
We are not without helpful Delaware precedent to support the proposition that the landlord-tenant relationship gives rise to a common law exclusion to utility status. The Supreme Court, discussing the PSC's public interest, found that the Commission had been protecting that interest where it had regulated under the circumstances that an entity was "supplying water service to customers other than its own lessees and stockholders." Eastern Shore II at 17 (emphasis not in original). From this language, it would appear that, at least in certain circumstances, the PSC considers landlords exempt from regulation.
Other jurisdictions have viewed the underlying landlord-tenant status controlling over public utility status, as well. See Drexelbrook Associates v. Pennsylvania Public Utility Commission, Pa. Supr., 212 A.2d 237, 240 (1965); Freehold Water Utility Co. v. Silver Mobile Home Park, Inc., N.J. PUC, 68 PUR 3d 523 (1967).See also, Appeal of Paul E. Zimmerman, N.H. Supr., 689 A.2d 678 (1997); Public Service Commission v. Howard Research Development Co., Md. App., 314 A.2d 682 (1974); Arizona Corp. Com. v. Nicholson, Ariz. Supr., 497 P.2d 815 (1972); Aronimink Transportation Co. v. P.S.C., Pa. Super., 170 A.2d 375 (1934);Junction Water Co. v. Riddle, N.J. Ch., 155 A. 887 (1931).
In each of these cases a landlord, providing utility services to tenants and incidental members of the public, were removed from public utility regulation. It is worthwhile noting, though, that each of these cases was decided in a jurisdiction then using the "indiscriminate-service-to-an-indefinite public" test, and the entity was determined not to be a public utility in the first place. The same is true for the Hearing Officer's opinion in this matter. Relying upon the erroneous legal standard, he found that there is a common law exception to "public use" determinations afforded to landlord-tenant relationships. Hearing Officer Decision at p. 28.
In Griffith v. New Mexico Public Service Commission, N.M. Supr. 520 P.2d 269 (1974), the Court did not find that the entity was exempt from regulation, but did rule that there was an exception in cases where a person supplies water only to himself, his tenants, or his employees."
On this tentative basis, and especially in light of the new standard in play here, I do not see how this Court or the Board, in its examination of the issue, can find a blanket common law landlord-tenant exception to utility status. This Court has already held once in this case that such an exception is based on a case-by-case examination and that no overall exemption exists.Public Water Supply I at 14(fn7). This Court is still of that opinion, especially in circumstances where large developments push the boundaries of the traditional landlord-tenant arrangement. Although the landlord-tenant relationship may have some bearing on whether Tunnell is "in the business" of a utility, it is not in itself a determinative exclusion from regulation in this case. Therefore, the Board, in making its determination of Tunnell's status, may consider the fact of Tunnell's landlord-tenant relationship as it relates to the analysis of the development's impact on the public interest, but may not simply find a common law exception for such a relationship.
Beyond ruling that the landlord-tenant exception is not applicable in this case, this Court declines to delve into the possible applicability of the other potential exclusions that have been raised by the parties and identified as being called into question by the facts of this case. The parties are free to make these arguments to the Board, and the Board should fully consider whether they are tenable in this instance.
III. Applicability of 7 Del. C. § 6077(b)
Finally, should the Board find that Tunnell is not a public utility under the Eastern Shore II test or that it falls within one or more of the possible exclusions, it must revisit the issue of whether 7 Del. C. § 6077(b) precludes issuance of the permits. Despite this Court's previous ruling in Public Water Supply I on this particular issue, should the Board reach this stage of analysis in its deliberation, it is free to examine the issue anew. It may take this Court's previous ruling into consideration, but need not feel compelled to follow that position. That said, however, the Court feels that the Board should give adequate attention to the legislative history of the statute.
CONCLUSION
This matter is hereby remanded to the Environmental Appeals Board. The Board may conduct proceedings it feels are necessary to fully evaluate the matter, though the Court strongly feels that the factual record is adequate for the Board to make a determination. The facts as they stand may be applied to the appropriate legal standard. While I am aware of and concerned with the additional time involved with such a step, this Court is remanding the matter to allow the Board, with its heightened technical background, to review the issues in light of the Supreme Court's ruling in Public Water Supply II.
The parties are encouraged to present the new issues that have arisen in the wake of the Supreme Court's ruling as vigorously to the Board as they have to this Court. In reviewing the matter, the Board is urged to make use of the Court's discussion above. It should also be mindful of the Court's limited rulings.
IT IS SO ORDERED.
T.Henley Graves, J.