Samuel D. Zurier, Esq. Providence
More than a century ago, the City of Providence made a bold and farsighted investment in the future, building a state of the art water supply that provides the majority of Rhode Islanders with inexpensive, high quality water. As a reward, the General Assembly granted Providence an unusually meager local benefit. In recent decades, the General Assembly and the Public Utilities Commission went further, turning a modest local benefit into a burden. In so doing, the State has deprived Providence of its best available tool to address its serious financial challenges.
Part 1 of this article describes the history of Providence Water's relationship with its host city and nonresident customers since 1871. Part 2 compares that relationship with prevailing arrangements nationally. Part 3 offers a proposal to rebalance that relationship in better accord with the City's prior history and with national norms.
1. The History of Providence Water
In 1871, Providence opened a water supply that drew from the Pawtuxet River in Pettacomsett in Cranston It was a metropolitan water supply, serving Providence and four neighboring communities2 It ran at a profit, generating the equivalent of $4 million in today's dollars for the City in 1878.3 Between 1890 and 1910, Providence's population grew from 132,146 to 224,326.4 To support this growth, Providence petitioned the General Assembly to condemn land in the watershed of the northern branch of the Pawtuxet River to construct an expanded water supply. In 1915, the General Assembly passed enabling legislation (1915 R.I. Pub. Laws § 1278, referred to below as "the Act") providing, among other things, that the City of Providence would become the owner, in fee simple, of any land it acquired for this purpose.5 The Act authorized cities within the affected watershed to purchase water from Providence at "fair" wholesale rates reached by agreement or, in the absence of agreement, through arbitration. The Act authorized Providence to treat its water supply board as if it were a "department of city government," which would receive municipal appropriations through the budgeting process to meet any necessary expenses.7 The Act directed the City to establish a "sinking fund" to receive all excess revenues to be used to pay future costs and obligations.8
Between 1915 and 1929, the City of Providence spent almost $21 million (the equivalent of more than $300 million in today's dollars) to build the water supply. In the decades that followed, Providence Water made further investments in its plant, recently valued at $390 million net of depreciation.10 During that time, the General Assembly extended the right to purchase Providence Water to other cities and towns that never had access to the Pawtuxet River watershed, and that never contributed to the water supply's capital costs.11 In 1959, Providence Water implemented a rate increase (for both wholesale and retail customers) that included a 25% discount for Providence residents.12 Beginning in the late 1960s, the City of Providence allocated surplus revenue from Providence Water into the Emergency Public Improvement Fund ($1.63 million in 1968)13 and the general fund (as much as $871,000 per year during 1969-74).14
In 1967, the General Assembly expanded the jurisdiction of the Public Utilities Commission to include municipal water works that sold water to customers outside their territorial limits.15 In the same session, however, the General Assembly passed a second law authorizing the Providence Water Supply Board to set its own rates.16 The Governor signed the first of these bills into law on May 24,1967, and the second one on May 26, 196717
In 1974, Providence Water implemented a rate increase of 25%-29%.18 In 1977, the Providence Water Supply Board announced further rate increases of upwards of 60%19 When neighboring communities threatened to sue, the Providence Water Supply Board requested the Attorney General's opinion as to whether its rates were subject to the Public Utilities Commission's jurisdiction.20 Based on his affirmative opinion, the Providence Water Supply Board submitted its proposed rates to the Public Utilities Commission, which approved an increase of approximately half the amount requested.21 In 1980, the Providence Water Supply Board petitioned the Rhode Island Supreme Court to review the Attorney General's opinion. In a decision dated April 29,1980, the Court held that the 1967 statute authorizing Providence to set its own water rates controlled, and that the Public Utilities Commission lacked jurisdiction.23 Three weeks later, the General Assembly passed legislation overruling the Supreme Court.24
Since that time, the Public Utilities Commission has transformed Providence Water from a municipal water supply that also serves nonresidents to a State resource that burdens its founder and sponsor for the benefit of nonresidents. The Public Utilities Commission promptly ended the City’s practice of appropriating surplus water revenues for general operations.25 In the early years, the Commission approved Providence’s practice of charging higher rates to nonresidents,26 but in later years it eliminated the City’s home-town discount.27 The Commission prevented the City of Providence from charging Providence Water property tax for its holdings located within the City, even as it authorized every other Rhode Island city and town to charge property tax for Providence Water assets within their jurisdictions, adding those charges to the water rates paid by all customers (including Providence residents).28 Notwithstanding these Commission policies, the Rhode Island Supreme Court held, in R&R Associates v. Providence Water Supply Board, 724 A.2d 432 (R.I. 1999), that the City of Providence, acting through its Water Supply Board, is solely responsible for any liability resulting from its condemnation activities without the right to indemnity from the communities and water districts that purchase Providence water and enjoy its benefits.
2. The State’s Unusual Treatment of Providence Water
In addressing the tension between the interests of Providence taxpayers/customers and nonresident customers, Providence Water and the State of Rhode Island face an issue that is common in many states. A law journal article described the competing concerns this way: A city’s purchase of a utility plant is made on behalf of its citizens, who then become both consumers and owners. The requirement of serving non-residents at the same rates as residents partly defeats the purpose of the purchase by decreasing the benefit derived from the resident consumers’ ownership. Utility service is only one phase of a prevalent situation in which non-residents adjacent to cities enjoy the economic and other advantages of city life without being subjected to all the responsibilities of citizens. Thus, in many instances, cities serve fringe areas at the expense of the municipal taxpayers. The obvious solution to the problem is annexation of these fringe areas...