On certification to the Superior Court, Appellate Division.
For modification and remandment -- Justices Mountain, Sullivan, Pashman, Clifford, Schreiber and Handler. Opposed -- None. The opinion of the court was delivered by Schreiber, J.
At issue in these appeals is the reasonableness of the method of calculating the sewer connection fees charged two real estate developers by defendant Gloucester Township Municipal Utilities Authority (Authority), a municipal authority organized pursuant to the provisions of the Municipal and County Utilities Authorities Law, N.J.S.A. 40:14B-1 to 69. The trial court, finding that the connection fees charged were unreasonable, entered judgments for each developer. Upon appeal, the Appellate Division affirmed the judgment for one developer, but remanded that of the other for recalculation of the amount of its award. We granted the Authority's petitions for certification primarily to review the methodology used to compute the extent of the overcharges. 78 N.J. 403 (1978).
The Authority, originally created in 1958 as a municipal sewerage authority under N.J.S.A. 40:14A-1 to 37, was reorganized in 1964 as a municipal utilities authority pursuant to N.J.S.A. 40:14B-1 to 69. It commenced operations in 1963 when, with the receipt of a federal grant-in-aid of $611,000 and the proceeds from the sale of $3,490,000 principal amount of bonds (Series A Bonds), it acquired for approximately $620,000 two privately owned sewage collection and treatment plants and a municipally owned sewage
treatment plant. The balance of the funds, after payment of expenses and financing costs, was used for the repair of the two private systems, reconstruction of the municipal treatment plant, construction of a new sewage treatment plant and construction of about 45 miles of new collection mains. At this point in time the Authority was serving approximately 2200 customers.
The Authority's principal sources of revenue were twofold. First, there were service fees for providing sewerage service. These funds were available and used for meeting operating costs, satisfying bond interest and amortization, and paying for major repairs, renewals and improvements.
A second source of revenue was the connection charge assessed against new customers. This charge reflected not only the cost of tapping the sewerage main in the street and the cost of installing a lateral from the main to the curb, but also served as a basis for having new customers pay a part of the original cost of the plant. Under the terms of the bonds, the receipts from the connection charge were intermingled with the service fees and became a part of the general funds of the Authority. As such, they were in fact used for the same purposes as the proceeds of the service charges.
A customer's annual service charge depended on the number of service units ascribed to the nature of his usage. Single-family homes, each living unit of multi-family houses, and each rental unit of an apartment house were classified respectively as one basic service unit. Motels were scheduled at 3/5 of a unit for each rental unit, while restaurants were scheduled at three units for each seating capacity of 50. The initial annual service charge in 1963 was $44 per unit. This was increased to $50 in 1969 and $60 in 1971.
In 1963 the Authority charged $100 for a connection fee, provided the lateral pipe did not exceed a 6" diameter. Whenever the pipe was of a larger size, the Authority would negotiate the amount of the fee. In 1969 the standard connection fee was increased to $200, and in July 1970 it was raised to $250. At this latter time, the provision for negotiable connection
fees for multi-family and nonresidential structures was discontinued, and the connection fee for a multi-family structure became $250 per living unit. In 1973 the residential unit connection fee was increased to $450.
Plaintiffs, The Korman Corporation (Korman) and White Birch Realty Corporation (White Birch), were two real estate developers in Gloucester Township. In 1969 Korman began construction of a development of single-family houses, townhouses, and garden apartments on a 370-acre tract. Between 1970 and the early part of 1974, Korman paid to the Authority $250,000 for about 1000 connections at $250 each.
White Birch's project consisted of approximately 200 single-family houses and 850 apartments. Between 1972 and 1975, White Birch paid for 361 connections at $250 each (total $90,250) and 425 connections at $450 each (total $191,250), or a total of 786 connections at a cost of $281,500.
In August 1972 Korman filed this suit against the Authority asserting, among other things, that it had been subjected to discriminatory treatment in that other developers had paid lower connection fees, and that the connection fees were arbitrary, capricious, unreasonable and unlawful. Korman sought declaratory and injunctive relief as well as a refund of the connection fees which it had paid.
In November 1973 White Birch, making similar charges, sought to intervene as a plaintiff. Its motion was granted. However, when the trial commenced in July 1974, White Birch's cause of action was severed when it was not prepared to move its case.
The Korman proceedings clearly established, and the trial court held, that the Authority unjustifiably discriminated among prospective customers until at least the implementation of its July 1970 rate schedule which eliminated negotiations in fixing connection fees for laterals. Other Korman claims for reimbursement for the cost of certain facilities were held to be premature or were dismissed on the merits by the trial court. These determinations were subsequently affirmed by the Appellate Division and are not before us.
The remaining question and the one with which we are concerned is the relationship of the amount of the connection charge to the connector's fair share of the construction cost theretofore paid by prior users. All parties and both the trial court and Appellate Division accepted the principle enunciated in Airwick Industries, Inc. v. Carlstadt Sewerage Auth., 57 N.J. 107 (1970), app. dism. and cert. den. 402 U.S. 967, 91 S. Ct. 1666, 29 L. Ed. 2d 132 (1971), to the effect that a connector was obligated to pay his proportionate part of the cost of the system so that a new customer would stand on a footing comparable to existing customers.
Korman attempted to demonstrate that the Authority's connection fees were not calculated in accordance with the Airwick test. It produced as witnesses the Authority's members, counsel, engineers, and accountant. Their testimony made clear that the Airwick standards were not followed. For example, one former attorney for the Authority testified that the purpose of a connection charge was "[t]o provide funds for the Authority," and that he never "was called upon to consider that question for the Authority." A former member of the Authority testified that the $250 fee was used to discourage apartment buildings, and that the number was "picked" rather than calculated. The Authority's accountant indicated that, at least in 1970, the need for revenues and a comparison with rates charged by other authorities were the determinative factors.
Korman's principal expert witness was Kenneth White of the accounting firm of Price Waterhouse & Company. Under White's proposal the amount of past capital contributions was calculated by subtracting total operating costs from total service charge revenues from inception of the system on January 1, 1962 to date. That amount was then divided by the number of users on the line at the beginning of the year in question. The result was said to equal the contribution previously made by users for amortization and interest on the debt. Predicated on what he conceived to be the reduction
in the Authority's debt before the respective Korman units were attached, he calculated that Korman had overpaid $130,262. His breakdown was tabulated as follows:
Corporation's Connection Proper
Year Ending units charge connection Over-
February 28 connected paid charge payment
1971 100 $250 $115.15 $13,485
1972 470 250 111.65 65,024
1973 170 250 120.84 21,957
1974 261 250 135.84 29,796
Total overpayment $130,262
The Authority's expert was Herbert Krugman. He determined that the new plant and improvements to be made with the proceeds of the bond issue would increase the system capacity so that an additional 5500 service units could be added. Excluding the $417,000 expended by the Authority for the private facilities existing in 1963 when the Series A bond issue was floated, he applied the balance of the proceeds from the bond issue, $3,073,000 to the contemplated 5500 additional service units and found that each new unit would entail a capital cost of $558. Since the interest on the bulk of the Series A Bonds was 4-1/2% per annum, Krugman computed the connection charge by assessing to each connector compound interest on $558 at 4-1/2% per annum from 1963 to the date of connection. In this manner a customer who came on the line in 1973 would be charged with $309 in interest. To that figure would be added $100, the connection fee which the Authority had charged its new customers in 1963 plus $60 per service unit which Krugman believed was equivalent to the per unit expenditure of capital improvements made after 1963. He thereby calculated that in 1973 a proper connection fee should have been $469. Utilizing this approach for each of the periods in question,
he concluded that the connection fees charged Korman were "reasonable."
The trial court found that the Authority's "past and present methods of calculating the connection fees have no rational support in fact and were based on arbitrary and capricious assumptions." It adopted the methodology and conclusions of Korman's expert, Kenneth White, and awarded damages of $130,262 with interest at 6% from the dates of the various overpayments. The trial court also held that "future connection charges should of course be based on the principles of Airwick [ Industries, Inc. v. Carlstadt Sewerage Auth., 57 N.J. 107 (1970)] and S.S. & O. Corp. [ v. Bernards Tp. Sewerage Auth., 62 N.J. 369 (1973)] and consistent with the principles expressed here, namely, an amount calculated to recover past capital costs from users as they enter the system on an equitable and sound accounting basis." In its judgment entered in December 1974, the court also ordered that:
From and after the date hereof, the defendant is to calculate all future sewer connection charges by dividing, at the beginning of each fiscal year, the number of units at that time into the total debt service paid from inception of the Authority to that date.
The White Birch trial did not begin until November 1975. Much of the same evidence was again adduced. One notable difference, however, was that White Birch did not accept the formula of Korman's expert, Kenneth White. White Birch's expert, Albert Weisskopf, proposed a method which resulted in connection fees which were higher than those calculated by White and closer to those charged by the Authority.
Weisskopf used a method in which he added the principal amount of the bonds issued ($3,490,000), the total interest contemplated over the life of the bonds ($4,349,446), and the total amount that had been paid into the Improvement Fund through February 28, 1973 ($670,074). This sum total of $8,509,520 was then divided by the number of connections
as of that date, 10,778. The resultant figure of $790 was considered to be the cost of facilities per connection. He figured that the annual charge required could be ascertained by dividing the $790 by 40 (the term of the bonds). This came to $19.75 per year, so that at the end of a ten-year period, a new customer should have been charged $197.50. To this figure Weisskopf added a credit for existing customers to the extent that they had paid more than $19.75 per year (i.e., the amount paid in excess over operating expenses). In this manner Weisskopf calculated that proper connection charges for the years ended February 28 were:
1971 $162.56 1973 $216.05 1975 $231.62
1972 197.89 1974*fn1 216.05 1976 247.18
On this basis the White Birch damages were $103,668. However, the trial court fixed the damages at $169,806.43, apparently based on additional connections made after the trial.
The Authority again presented Herbert Krugman as its expert witness. However, the formula he proposed this time was somewhat different from that which he had proposed at the Korman trial. He started as before with the per capita cost of the Authority's investment in new plant and equipment, but he then calculated the annual payment necessary to pay off this investment over the life of the bonds. When a new customer was connected to the system, his fee would be the sum of the annual payments he had missed, plus interest compounded from the date of each missed payment. The theory was that the fees paid by each user in excess of operating and maintenance expenses, when discounted to present value by the interest rate of the bonds, should equal
the Authority's per-unit investment in physical plant. As in the Korman proceedings, Krugman concluded that the fees being charged by the Authority were reasonable.
Krugman also presented, as a "second-best" approach, a method derived from that which the trial court had approved in Korman, i.e., that of Kenneth White. Krugman's approach differed from White's in three respects. First, he used the average number of customers on line during the fiscal year, rather than the number of customers on line at the beginning of the year, as White had done. Second, he included revenues attributable to connection fees in his calculation of debt service. That is, he subtracted operating expenses from the total revenue derived from annual service charges and connection fees, in contrast to White, who had used only the annual service charges. Finally, he added an interest charge to the connection fee, equal to the accumulated amount of interest on each of the connection fees that had been levied in earlier years. He again found that the fees actually charged by the Authority were reasonable. The trial court adopted Weisskopf's method and awarded damages accordingly.
Upon review the Appellate Division affirmed the Korman judgment. With respect to White Birch, the court noted that the trial court had adopted an approach inconsistent with that utilized in Korman and so remanded that judgment for recalculation.
The Authority is a creature of the "municipal and county utilities authorities law," N.J.S.A. 40:14B-1 to 69, and its powers and limitations are found in that statute. The act permits the Authority to charge "rents, rates, fees or other charges (in this act sometimes referred to as 'sewer service charges') for direct or indirect connection with, or the use or services of, the sewerage system." N.J.S.A. 40:14B-22. These charges must be nearly as the Authority deems "practicable and equitable be uniform * * * for the same type, class
and amount of use or service of the sewerage system * * *." Id. It can be seen that the statute clearly authorizes the Authority to ...