Laurel Hills Condominiums Property Owners' Association v. Tennessee Regulatory Authority

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

January 22, 2014 Session

LAUREL HILLS CONDOMINIUMS PROPERTY OWNERS’

ASSOCIATION v. TENNESSEE REGULATORY AUTHORITY

Appeal from Tennessee Regulatory Authority

No. 1200030 Director David F. Jones

No. M2013-01392-COA-R12-CV - Filed April 14, 2014

A water utility challenges the authority of the Tennessee Regulatory Authority to order it

to divest itself of the water system and to continue providing service until the sale. We

find no error in the actions of the Tennessee Regulatory Authority.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Tennessee Regulatory

Authority Affirmed

A NDY D. B ENNETT, J., delivered the opinion of the court, in which F RANK G. C LEMENT,J R.,

and R ICHARD H. D INKINS, JJ, joined.

Donald L. Scholes and Benjamin A. Gastel, Nashville, Tennessee, for the appellant, Laurel

Hills Condominiums Property Owners’ Association.

Kelly A. Cashman-Grams and Shiva K. Bozarth, Nashville, Tennessee, for the appellee,

Tennessee Regulatory Authority.

Melanie E. Davis, Maryville, Tennessee, for the Customer Intervenors.

Robert E. Cooper, Jr., Attorney General and Reporter; William E. Young, Solicitor General;

and Charlena S. Aumiller, Assistant Attorney General; for the Consumer Advocate and

Protection Division of the Tennessee Attorney General.

OPINION

F ACTUAL AND P ROCEDURAL B ACKGROUND

Laurel Hills Condominiums Property Owners’ Association (“Laurel Hills”), a

Tennessee nonprofit homeowners’ association, purchased a water system from Moy Toy,

LLC on May 1, 2011 for $400,000.1 Michael McClung was the president of Laurel Hills; he

was also the managing member of Moy Toy. Laurel Hills obtained a revocable license from

Moy Toy for the use of the water system infrastructure.

The Laurel Hills water system serves the homes on Renegade Mountain; this includes

approximately 50 customers, one of which is a condominium with 84 residential units.

Laurel Hills purchases water from the Crab Orchard Utility District and pumps the water up

Renegade Mountain for distribution to its customers. The system was originally constructed

in the 1970s and 1980s. When Laurel Hills purchased the system, the pumps and water tank

were in need of repair and not in compliance with Tennessee Department of Environment

and Conservation (“TDEC”) requirements. Laurel Hills made some improvements to the

system to address the TDEC violations.

Laurel Hills contracted with Renegade Mountain Timeshares, LLC (“RMT”) to

perform work on the water system. Laurel Hills obtained a loan or line of credit from RMT

in the amount of $53,038, of which $38,000 was used. Mr. McClung was the managing

member of RMT.

In June 2011, Laurel Hills notified its customers of an increase in water rates from

$25.00 per month ($20.00 per month for condominium residents) to $86.40 per month

effective June 1, 2011. Some customers negotiated a lower rate of $43.20 per month with

Darrell McQueen, the water system engineer. In October 2011, however, Laurel Hills sent

out notices reinstating the $86.40 rate and demanding retroactive payment to June 2011. In

a December 30, 2011 letter, Laurel Hills stated that water would be terminated to all

customers effective January 31, 2012 because of the failure of some customers to pay their

monthly bill.2 Because the system did not have individual shut-off valves at each customer’s

location, Laurel Hills could not terminate service to individual customers.

1

The State Comptroller valued the utility plant at $15,000 for tax purposes.

2

In mid-December 2011, members of the Renegade Mountain Community Club (“RMCC”)

sued Michael McClung and Phillip Guettler for breach of fiduciary duty in their capacity as RMCC

directors. Mr. Guettler was also a director of Laurel Hills.

2

Laurel Hills actually turned off the water system on February 1, 2012. The customers

immediately filed for injunctive relief and received a temporary restraining order from the

chancery court. For a brief time, the customers used a water tanker truck to supply water;

according to some of the customers, Mr. McClung and Phillip Guettler, a Laurel Hills board

member, drove by and made fun of the people around the tanker truck. As a result of the

restraining order, Laurel Hills restored water service on February 6, 2012.

In addition to ordering Laurel Hills to refrain from cutting off water service, the

chancery court ordered Laurel Hills to contact the Tennessee Regulatory Authority (“TRA”)

regarding system regulation and permitted Laurel Hills to charge a monthly rate of $43.20

until the rates could be reviewed by the TRA. Laurel Hills filed a petition with the TRA on

April 10, 2012 requesting a certificate of public convenience and necessity (“CCN”) for the

water system. A group of Laurel Hills customers (“Customer Intervenors”) filed a joint

petition to intervene on May 1, 2012.

On May 7, 2012, Laurel Hills withdrew its petition with the TRA, stating that it

intended to “cease providing water service with its system to any person other than itself”

and, therefore, would no longer be considered a public utility under TRA jurisdiction. The

TRA issued a notice to appear requiring Laurel Hills to appear and show cause why the TRA

should not convene a proceeding to impose civil penalties and sanctions against Laurel Hills

for operation of a public utility without a CCN. Laurel Hills filed a response but failed to

appear at the conference. The Consumer Advocate of the Office of the Tennessee Attorney

General petitioned to intervene. The TRA issued a show cause order for six alleged

violations of state law and created a docket number for the show cause proceedings.

The temporary restraining order compelled Laurel Hills to reinstate its petition with

the TRA. Laurel Hills then filed its first amended petition, which included a request for a

monthly rate of $134.26. (The original petition asked the TRA to approve the rate of $86.40

a month.). In the following months, all parties filed testimony and engaged in discovery.

The TRA filed multiple discovery requests to Laurel Hills to obtain the information it needed

to determine whether a CCN was appropriate.

The hearing was held on February 13, 2013. Multiple customers provided public

comment. The TRA heard testimony from the following witnesses: Michael McLung,

President of Laurel Hills; Dr. Christopher Klein and William Novak, experts for the

Consumer Advocate; John Moore, President of the RMCC and a water customer; Everett

Bolin, Jr., General Manager of the Crab Orchard Utility District; Ronnie Hill, a RMCC

director, water customer, and accountant; and Robert Adkins, a Customer Intervenor. The

TRA panel took the matter under advisement, and the parties submitted post-trial briefs.

3

On April 18, 2013, the TRA issued its order denying a CCN and requiring Laurel

Hills to divest itself of the water system. The TRA’s order includes detailed analysis

supporting its conclusion that Laurel Hills lacked the managerial and financial ability to

operate a water utility. While the TRA found that Laurel Hills had “retained personnel such

that it has the technical ability to operate a water utility at present,” the panel went on to find

that “it is unlikely that Laurel Hills will maintain its technical ability going forward.”

Moreover, the TRA concluded that Laurel Hills had not demonstrated adherence to

applicable statutes, rules or orders. Based upon all of these findings, the TRA denied Laurel

Hills’s first amended petition.

The TRA determined that Laurel Hills’s incurred debts were not prudent debts of the

water utility. The TRA went on to determine that, “based upon the best evidence available

that is contained in the record, a just and reasonable monthly rate for water service is

$33.10.”

Laurel Hills was ordered to divest itself of the water utility “within 60 days, or no later

than June 7, 2013,” and to submit evidence of the divestiture to the TRA for approval. The

order further provides: “If Laurel Hills is unable to divest its water utility by no later than

June 7, 2013, Laurel Hills shall file a notice with the Authority of its inability to divest itself

of the water utility and shall appear before the Authority . . . to explain its efforts to divest

itself of the water utility.” Prior to the sale of the water utility, Laurel Hills remained a public

utility and “shall furnish safe, adequate and proper service and keep and maintain its property

and equipment in such condition as to enable it to do so . . . .” The show cause proceeding

was to remain in abeyance until after the divestment deadline.

Laurel Hills subsequently sought and received a continuance of the divestment twice

and, in its motions, explained its efforts to find a potential buyer.

On appeal, Laurel Hills does not challenge the TRA’s decision to deny it a CCN.

Rather, Laurel Hills argues: (1) that the TRA violated Laurel Hills’s constitutional rights by

requiring it to divest itself of the water system; and (2) that the TRA lacked the authority to

deny a CCN while requiring the utility to continue to provide service. The Customer

Intervenors and the Consumer Advocate assert that the TRA exceeded its statutory authority

or acted arbitrarily and capriciously when it awarded legal fees for Laurel Hills’s efforts to

obtain a CCN.

S TANDARD OF R EVIEW

A person aggrieved by a decision of the TRA must file a petition for review pursuant

to the Uniform Administrative Procedures Act (“UAPA”); and these appeals are taken

4

directly to the middle division of this court. Tenn. Code Ann. § 4-5-322(b)(1)(B)(iii). The

UAPA limits our scope of review as follows:

The court may affirm the decision of the agency or remand the case for further

proceedings. The court may reverse or modify the decision if the rights of the

petitioner have been prejudiced because the administrative findings,

inferences, conclusions, or decisions are:

(1) In violation of constitutional or statutory provisions;

(2) In excess of the statutory authority of the agency;

(3) Made upon unlawful procedure;

(4) Arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion; or

(5)(A) Unsupported by evidence that is both substantial and material in the

light of the entire record.

(B) In determining the substantiality of evidence, the court shall take into

account whatever in the record fairly detracts from its weight, but the court

shall not substitute its judgment for that of the agency as to the weight of the

evidence on questions of fact.

Tenn. Code Ann. § 4-5-322(h).

Under the UAPA, this court, like the trial court, must apply the substantial and

material evidence standard to the agency’s factual findings. City of Memphis v. Civil Serv.

Comm’n, 239 S.W.3d 202, 207 (Tenn. Ct. App. 2007). Substantial and material evidence is

“‘such relevant evidence as a reasonable mind might accept to support a rational conclusion

and such as to furnish a reasonably sound basis for the action under consideration.’” Macon

v. Shelby Cnty. Gov’t Civil Serv. Merit Bd., 309 S.W.3d 504, 508 (Tenn. Ct. App. 2009)

(quoting Pruitt v. City of Memphis, No. W2004-01771-COA-R3-CV, 2005 WL 2043542, at

*7 (Tenn. Ct. App. Aug. 24, 2005)). It is “‘something less than a preponderance of the

evidence, but more than a scintilla or glimmer.’” Id. (quoting Wayne Cnty. v. Tenn. Solid

Waste Disposal Control Bd., 756 S.W.2d 274, 280 (Tenn. Ct. App. 1988)).

The UAPA’s narrow standard of review for an administrative body’s factual

determinations “suggests that, unlike other civil appeals, the courts should be less confident

5

that their judgment is preferable to that of the agency.” Wayne Cnty., 756 S.W.2d at 279. This

court cannot displace the agency’s judgment as to the weight of the evidence even where

there is evidence that could support a different result. Id.

A NALYSIS

(1)

The first argument raised by Laurel Hills is that the TRA’s action of ordering it to

divest itself of the water system constitutes an unconstitutional taking “in that it fails to

provide Laurel Hills adequate compensation for the water system.”

As part of its constitutional argument, Laurel Hills asserts that the TRA lacks the

authority to order it to divest itself of the water system. We disagree. Our Supreme Court

has addressed the “plenary authority” vested in the TRA:

[T]he General Assembly has charged the TRA with the “general supervisory

and regulatory power, jurisdiction and control over all public utilities.” Tenn.

Code Ann. § 65-4-104 (1997 Supp.). In fact, the Legislature has explicitly

directed that statutory provisions relating to the authority of the TRA shall be

given “a liberal construction” and has mandated that “any doubts as to the

existence or extent of a power conferred on the [TRA] . . . shall be resolved in

favor of the existence of the power, to the end that the [TRA] may effectively

govern and control the public utilities placed under its jurisdiction . . . .” Tenn.

Code Ann. § 65-4-106 (1997 Supp.). The General Assembly, therefore, has

“signaled its clear intent to vest in the [TRA] practically plenary authority over

the utilities within its jurisdiction.” Tennessee Cable Television Ass’n v.

Tennessee Public Service Comm’n, 844 S.W.2d 151, 159 (Tenn. [Ct.] App.

1992). To enable the TRA to effectively accomplish its designated purpose—

the governance and supervision of public utilities—the General Assembly has

empowered the TRA to “adopt rules governing the procedures prescribed or

authorized,” including “rules of practice before the authority, together with

forms and instructions,” and “rules implementing, interpreting or making

specific the various laws which [the TRA] enforces or administers.” Tenn.

Code Ann. § 65-2-102(1) & (2) (1997 Supp.).

BellSouth Adver. & Publ’g Corp. v. Tenn. Reg. Auth., 79 S.W.3d 506, 512-13 (Tenn. 2002)

(quoting Consumer Advocate Div. v. Greer, 967 S.W.2d 759, 761-62 (Tenn. 1998)). Thus,

in the absence of some authority prohibiting such action, the TRA is authorized to take

whatever action is necessary to effectuate its regulatory functions. It stands to reason that,

6

in order for the TRA to be able to enforce its regulations and orders, including orders

regarding CCNs, the TRA must be able to order the sale of a water system it determines to

be incompetent to carry out its role. See Tenn. Comp. R. & Regs. 1220-4-13-.11 (describing

the process to be used by the TRA in establishing a receivership or a transfer of ownership

to remedy deficiencies in a public wastewater utility).

The Fifth Amendment to the United States Constitution states that private property

shall not be taken for public use without just compensation. Similarly, article one, section

twenty-one of the Tennessee Constitution, provides, “[t]hat no man’s particular services shall

be demanded, or property taken, or applied to public use, without . . . just compensation

being made therefor.” Thus, the government is prohibited from taking private property for

public use without just compensation. Edwards v. Hallsdale-Powell Util. Dist., 115 S.W.3d

461, 464 (Tenn. 2003). Tennessee law recognizes two types of takings: physical occupation

takings (involving a physical invasion of property or destruction of property rights) and

nuisance-type takings (involving government interference with a landowner’s use and

enjoyment of his or her property, such as noise from an airport). Id. at 465-66. Federal law

also recognizes regulatory takings—for example, through the adoption of a zoning ordinance.

Consol. Waste Sys., LLC v. Metro Gov’t of Nashville & Davidson Cnty., No. M2002-02582-

COA-R3-CV, 2005 WL 1541860, at *8-9 (Tenn. Ct. App. June 30, 2005).

In the present case, there is no “taking” of the property of Laurel Hills by the TRA.

The TRA is not taking possession or control of the water system. Rather, the TRA is

ordering Laurel Hills to sell the water system because Laurel Hills is not competent to

continue to operate the system. The TRA’s action is a valid exercise of the state’s police

power to protect public health and safety. See Spencer-Sturla Co. v. City of Memphis, 290

S.W. 608, 611 (Tenn. 1927) (discussion of police power and takings).3

3

Even if there were a taking, there would be no constitutional violation because the TRA’s order

provides safeguards to ensure that Laurel Hills receives a reasonable price for the water system:

2. Laurel Hills Condominium Property Owners Association shall divest itself of the water

utility within 60 days, or no later than June 7, 2013.

3. Laurel Hills shall submit evidence of such divestiture to the Authority for its approval.

4. If Laurel Hills is unable to divest its water utility by no later than June 7, 2013, Laurel

Hills shall file a notice with the Authority of its inability to divest itself of the water utility

and shall appear before the Authority at the time and date which may be ordered by the

Authority to explain its efforts to divest itself of the water utility.

The final order allows Laurel Hills to request additional time and, at the time of oral argument, the TRA had

already granted two requests for additional time made by Laurel Hills. In the interim, Laurel Hills is allowed

to charge a reasonable rate to its customers. In the event that Laurel Hills sells the water utility to another

public utility, the divestiture would be subject to TRA approval. This process includes sufficient safeguards

designed to protect the interests of Laurel Hills and to provide just compensation.

7

(2)

Laurel Hills next argues that the TRA does not have the authority to deny a CCN

while requiring the utility to continue to provide service.

In support of its argument, Laurel Hills relies upon the language of Tenn. Code Ann.

§ 65-4-201, which provides, in pertinent part: “No public utility shall establish or begin the

construction of, or operate any line, plant, or system . . . without first having obtained from

the authority [TRA], after written application and hearing, a certificate that the present or

future public convenience and necessity require or will require such construction,

establishment, and operation . . . .” According to Laurel Hills’s interpretation, this statute

prohibits the TRA from ordering a public utility without a CCN to operate a water system.

This issue requires this court to interpret and construe the statutes governing the TRA,

Tenn. Code Ann. §§ 65-4-10–65-4-506. In construing statutes, we are guided by the

following principles:

The role of this Court in construing statutes is to ascertain and give effect to

the legislative intent. Cronin v. Howe, 906 S.W.2d 910, 912 (Tenn. 1995).

Whenever possible, legislative intent is to be ascertained from the natural and

ordinary meaning of the language used, without forced or subtle construction

that would limit or extend the meaning of the language. Id. We must avoid

strained constructions which would render portions of the statute inoperative

or void. State v. Turner, 913 S.W.2d 158, 160 (Tenn. 1995). Instead, we must

apply a reasonable construction in light of the purposes and objectives of the

statutory provision. Id.

Consumer Advocate Div. v. Greer, 967 S.W.2d 759, 761 (Tenn. 1998). We must consider

the statute as a whole and resolve any conflict so as to provide for a harmonious operation

of the law. Lind v. Beaman Dodge, Inc., 356 S.W.3d 889, 903 (Tenn. 2011); Cronin v.

Howe, 906 S.W.2d 910, 914 (Tenn. 1995).

The legislature expressly delegated to the TRA “general supervisory and regulatory

power, jurisdiction, and control over all public utilities, and also over their property, property

rights . . . so far as may be necessary for the purpose of carrying out the provisions of this

chapter.” Tenn. Code Ann. § 65-4-104. The TRA’s enabling statutes “shall be given a

liberal construction, and any doubt as to the existence or extent of a power conferred on the

authority . . . shall be resolved in favor of the existence of the power, to the end that the

authority may effectively govern and control the public utilities placed under its jurisdiction

by this chaper.” Tenn. Code Ann. § 65-4-106. As discussed above, our Supreme Court has

8

acknowledged the broad authority conferred by the legislature in these statutes to be

“practically plenary.” BellSouth Adver., 79 S.W.3d at 512.

On appeal, Laurel Hills does not dispute that it is a “public utility” subject to TRA

regulatory jurisdiction and authority. See Tenn. Code Ann. § 65-4-101(6)(A). Pursuant to

Tenn. Code Ann. § 65-4-201(a), a public utility within the purview of the TRA must obtain

a CCN. We do not interpret this provision as limiting or restricting the TRA’s authority to

govern and control all public utilities. Tennessee Code Annotated section 65-4-114(1) not

only authorizes the TRA to require a public utility to furnish water service, but also to

maintain a certain quality of water service:

The authority has the power, after hearing, upon notice, by order in writing, to

require every public utility, as defined in § 65-4-101, to (1) furnish safe,

adequate, and proper service and to keep and maintain its property and

equipment in such condition as to enable it to do so; . . .

This provision allows the TRA to require “every public utility,” not just those that have

obtained a CCN, to furnish safe, adequate, and proper service. Tenn. Code Ann. § 65-4-114

(emphasis added). Tennessee Code Annotated section 65-4-117(a)(3) provides that the TRA

has the authority to “fix just and reasonable standards, classifications, regulations, practices

or services to be furnished, imposed, observed and followed thereafter by any public utility.”

(Emphasis added). Moreover, pursuant to Tenn. Code Ann. § 65-4-115, no public utility

shall “provide or maintain any service that is unsafe, improper, or inadequate, or withhold

or refuse any service which can reasonably be demanded and furnished when ordered by the

authority.”

It should also be noted that, in order to maintain a CCN, a public utility must prove

that it has the managerial, financial, and technical abilities to serve a designated territory.

Tenn. Code Ann. §§ 65-4-201(c)(2), 65-4-204. The standards for proving competence to

obtain a CCN under § 65-4-201 are higher than those required to show the ability to furnish

safe, adequate, and proper service under Tenn. Code Ann. § 65-4-114.

The interpretation urged by Laurel Hills would prohibit the TRA from regulating any

public utility without a CCN. This construction is inconsistent with the legislative purpose

and plan for the regulation of public utilities. Without the ability to regulate public utilities

that do not have a CCN, the TRA would be thwarted in its ability to enforce the law against

utilities that are operating unsafely.

We conclude that the TRA had the authority to order Laurel Hills to continue running

the water utility temporarily, until such time as the utility was sold.

9

(3)

Both the Customer Interveners and the Consumer Advocate challenge the TRA’s

award of attorney fees to Laurel Hills. They argue that a utility should not be able to recover

attorney fees in a CCN proceeding when the CCN was denied.

In the proceeding before the TRA, Laurel Hills stated that it would incur

“approximately $50,000 in legal fees for the CCN proceeding alone,” all of which it argued

was “properly recoverable.” Furthermore, Laurel Hills took the position that all of the legal

expenses it incurred in the two chancery court proceedings “were prudently incurred

expenses and properly recoverable from ratepayers through utility rates.” The Consumer

Advocate objected to the recovery of any attorney fees by Laurel Hills. The Consumer

Advocate asserted that, “if the CCN application is denied, then the expenses related to this

proceeding will never benefit current and future ratepayers and are not ‘used and useful’

reasonable and prudent costs.”

The TRA awarded Laurel Hills $46,783 for legal expenses. The panel disallowed

recovery for the chancery court proceedings ($3,722.89) and for the show cause proceeding

($540), “all of which were initiated by the Petitioner’s attempts to abandon water service to

its customers.” The TRA determined that “these activities did not benefit the customers of

Laurel Hills and their costs should not be borne by those customers.” The Consumer

Advocate asserts that the TRA failed to provide an adequate explanation for its decision and

that the legal expenses were not reasonable, prudent, and necessary operating costs of the

utility.

Contrary to the premise of the Consumer Advocate’s argument, the legal expenses

were awarded in the context of a proceeding to obtain a CCN and to establish a just and

reasonable rate. As part of its rate making authority, the TRA authorized some of Laurel

Hills’s legal expenses to be included in the calculation of the monthly rate charged to

customers. We have previously discussed the plenary authority delegated to the TRA by the

legislature. BellSouth, 79 S.W.3d at 512-13. Rate making is a legislative function delegated

by the legislature that requires the TRA to make determinations of fact, apply its regulatory

judgment and discretion, and balance and weigh many factors, policies, and interests. Tenn.

Cable Television Assoc. v. Tenn. Pub. Serv. Comm’n, 844 S.W.2d 151, 159 (Tenn. Ct. App.

1992).

The scope of review applied to the decisions of administrative agencies acting within

their specialized expertise is deferential and narrow. Wayne Cnty., 756 S.W.2d at 279.

Courts “will not disturb a reasonable decision of an agency with expertise, experience, and

knowledge in the appropriate field.” S. Ry. Co. v. State Bd. of Equalization, 682 S.W.2d 196,

10

199 (Tenn. 1984). Our Supreme Court has made the following statement regarding the scope

of review applicable to rate making:

The criteria by which the Commission should be guided have received only

generalized comments in our reported decisions. This is proper because the

courts are playing a limited role in reviewing actions which essentially are

legislative in character. Rate making is not a judicial function and we accord

the Commission great deference in reviewing its decisions. On fixing rates in

general the Court has spoken in terms of what is just and reasonable “under the

proven circumstances,” of “regard to all relevant facts” and to a rate “in the

zone of reasonableness.”

CF Indus. v. Tenn Pub. Serv. Comm’n, 599 S.W.2d 536, 542 (Tenn. 1980) (quoting S. Bell

Tel. & Tel. Co. v. Tenn. Pub. Serv. Comm’n, 304 S.W.2d 640, 647 (Tenn. 1957)).

Furthermore, our courts have consistently recognized the presumption of validity attached

to the TRA’s exercise of its judgment and discretion in setting rates. See CF Indus., 599

S.W.2d at 540; Ky.-Tenn. Light & Power Co. v. Dunlap, 178 S.W.2d 636, 638 (Tenn. 1944).

A party seeking to overturn the TRA’s ratemaking decisions must undertake a “heavy

burden” of showing that the decisions are unjust and unreasonable in their consequences.

S. Bell, 304 S.W.2d at 649.

The TRA has the authority to fix just and reasonable rates for any public utility within

its jurisdiction. Tenn. Code Ann. §§ 65-5-101(a), 65-5-103(a). Our Supreme Court has held

that “[t]he polestar of public utility rate establishment and regulation is the ‘just and

reasonable’ requirement.” CF Indus., 599 S.W.2d at 542. The TRA must use its experience,

technical competence, and specialized knowledge in fixing just and reasonable rates. See

Tenn. Code Ann. §§ 65-2-109(4), 4-5-314(d). The parties agree that legal fees may be

recoverable in rates as part of the reasonable and prudent costs necessary to provide utility

service. See Consumer Advocate & Protection Div. of the Office of the Attorney Gen. of

Tenn. v. Tenn. Reg. Auth., No. M2011-00028-COA-R12-CV, 2012 WL 1964593, at *1

(Tenn. Ct. App. May 30, 2012); Tenn. Am. Water Co. v. Tenn. Reg. Auth., No. M2009-

00553-COA-R12-CV, 2011 WL 334678, at *26 (Tenn. Ct. App. Jan. 28, 2011).

The Consumer Advocate argues that “costs incurred by a utility as a result of failing

to file for a CCN before establishing service are not recoverable because such costs are a

result of failing to comply with the law and therefore cannot be an ‘efficient’ service under

Tenn Code Ann. § 65-5-103(a).”4 In Consumer Advocate v. Tennessee Regulatory Authority,

4

The show cause proceeding against Laurel Hills was held in abeyance pending the resolution

of this appeal. The purpose of that proceeding is to consider the appropriate actions to be taken

11

2012 WL 1964593, at *1, the court considered the extent of the TRA’s authority to allow a

utility to recover legal expenses. The Consumer Advocate asserted that the TRA had erred

in allowing a gas company to recover $700,000 in legal expenses incurred in a proceeding

where base rates were not set. Id. at *13. Further, the Consumer Advocate argued that the

TRA’s action in permitting the gas company to recover legal expenses in a non-rate case was

“a dramatic change in regulatory practice,” requiring the TRA to “clearly explain the basis

of its authority to make such a change rather than merely relying on its general authority or

citing the fact that the underlying litigation was ‘complex.’” Id. at *17.

The court found the Consumer Advocate’s arguments unpersuasive. The court

emphasized that “[t]he authority granted to the TRA in this arena is clearly intended to be

plenary.” Id. at *19. Therefore, the court reasoned, the “onus . . . is on the Consumer

Advocate to show a limitation on that plenary authority given to the TRA, and it has not done

so.” Id. As to the Consumer Advocate’s assertion that the TRA “did not properly exercise

its authority because it did not explain the reason for its decision,” the court disagreed. Id.

at *22. The court found the TRA’s reasons in the record sufficient.5 Id. In conclusion, the

court stated:

Given the TRA’s plenary authority to regulate utilities, and the absence of a

statute, regulation, or other authority prohibiting the TRA’s actions, we hold

that the TRA had the authority to permit the Gas Company to recover from its

customers the reasonable and prudent litigation expenses incurred in the Asset

Management Docket.[ 6 ]

against Laurel Hills for alleged violations of state law and TRA regulations.

5

The TRA’s order stated, in pertinent part:

The panel found that [the Gas Company] was required by the Authority to participate

in [the Asset Management Docket] and did incur the legal expense in a complex,

lengthy and protracted proceeding. Additionally, the panel found that these costs

were incurred in litigating the issues stemming from [the Gas Company’s] prior rate

case docket . . . .

Therefore, the panel determined that [the Gas Company] should be allowed full

recovery of the legal costs incurred in [the Asset Management Docket].

Consumer Advocate, 2012 WL 1964593, at *12.

6

The purpose of the Asset Management Docket was to evaluate the Gas Company’s asset

management practices. Consumer Advocate, 2012 WL 1964593, at *12.

12

Id.

In this case, Laurel Hills was required by state law and by chancery court order to

petition the TRA for a CCN and for the fixing of a just and reasonable rate. The TRA

conducted a comprehensive financial examination and held a public hearing on the propriety

of the rates proposed by Laurel Hills. After considering all of the evidence, the TRA fixed

a just and reasonable rate of $33.10 per month; this rate includes an allocation of $46,783 for

legal expenses, expenses which the TRA found to be directly related to the instant

proceedings and necessary and prudently incurred. The TRA also excluded legal expenses

resulting from the chancery court and show cause proceedings instituted by the TRA because

they were related to Laurel Hills’s attempts to abandon water service. Thus, the TRA made

specific findings as to which of the legal expenses claimed by Laurel Hills it found

appropriate for inclusion and which expenses it determined to be improper. Because the

proceeding was for a CCN as well as for the establishment of rates, the TRA decided to

amortize the legal expenses over 15 years. The TRA’s decision is supported by substantial

and material evidence in the record and we find no reason to overturn that regulatory

decision.

As to the sufficiency of the TRA’s order explaining its decision, the order contains

detailed findings concerning all of the expenses claimed by Laurel Hills. The order clearly

identifies those legal expenses that were included and those that were excluded. We must

conclude that the TRA’s order satisfies the requirements of Tenn. Code Ann. § 65-2-112

(regarding decisions in contested cases before the TRA) and § 4-5-314(c) (a provision of the

UAPA regarding orders in contested cases generally) and would permit a court to conduct

a meaningful review of the agency decision. See Am. Ass’n of Retired Persons v. Tenn.

Public Serv. Comm’n, 896 S.W.2d 127, 135 (Tenn. Ct. App. 1994).

C ONCLUSION

We affirm the decision of the TRA in all respects. Costs of this appeal are assessed

against Laurel Hills, and execution may issue if necessary.

_________________________

ANDY D. BENNETT, JUDGE

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