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Spectraserv, Inc. v. Kearny Municipal Utilities Authority

November 5, 2008


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, L-4853-06.

Per curiam.


Argued September 29, 2008

Before Judges Wefing, Parker and LeWinn.

Plaintiff Spectraserv, Inc. appeals from the September 12, 2007 order of the Law Division dismissing with prejudice its complaint against defendant Kearny Municipal Utilities Authority (KMUA), following a one-day trial. We affirm.

Spectraserv is a New Jersey corporation located in South Kearny. Its business is split into two divisions: (1) the "construction division," which "is involved in the construction, repair, and renovation of water and waste [water] . . . treatment plants"; and (2) the "waste operations division," which "is involved with the transportation, processing, disposal and reuse[] of municipal water and waste water sludges and other waste materials." Spectraserv's business includes the trucking of wastewater to its Kearny site from outside sources, some of which is then discharged into the KMUA sewer system. This wastewater contains pollutants known as biological oxygen demand (BOD) and total suspended solids (TSS) in concentrations that are as much as ten times higher than the average wastewater discharged by other KMUA customers. Spectraserv is one of the largest users of the KMUA's sewer system.

The KMUA is a body created pursuant to the Municipal and County Utilities Authorities Law, N.J.S.A. 40:14B-1 to -78. The KMUA operates a sanitation system in Kearny that it bifurcates into two districts for purposes of wastewater treatments, the South Kearny District and the Meadowlands District. The South Kearny District is served by a combined sewer system (CSS), which receives both storm water drainage and sewage. The Meadowlands District is served by a separate sewer system (SSS), which does not receive storm water drainage inflows.

The KMUA services sixty-six industrial customers and no residential customers. Fifty-eight customers, including Spectraserv, are within the South Kearny District and eight are in the Meadowlands District.

The KMUA does not fully treat the wastewater itself, but rather transports it to a treatment plant operated by the Passaic Valley Sewerage Commission (PVSC). The PVSC bills the KMUA directly for its services. The KMUA recovers its yearly operating costs by billing its customers in accordance with the KMUA's adopted rate structure.

In 2006 the KMUA became involved in litigation over its rate structure when a facility known as Talbot Hall challenged the KMUA's rate structure for the years 2002 through 2004. The rate structure for those years had taken into account three variables: water consumption, lot area and lot frontage. The latter two variables were included in the rate structure in order to account for inflow and infiltration (I&I), which is the leakage of groundwater or surface water into the system.

On March 3, 2006, Judge Carmen Messano found the 2002-2004 rate structure to be "arbitrary, capricious, and unreasonable," and ordered the KMUA to hold a public meeting and adopt a new rate schedule. Judge Messano held that the use of lot area and lot frontage in the rate structure was improper because there was no rational relationship between those two variables and the actual use of the property.

Pursuant to Judge Messano's decision, the KMUA commissioned James G. Coe, P.E., to develop a new rate structure. Coe created a new structure based upon what he believed was permissible under relevant state statutes; he declined to consider other possible methods of developing rate structures employed by other municipalities. Coe's proposed rate structure took effect in 2005; it eliminated consideration of I&I and was based exclusively upon a customer's metered water consumption or wastewater discharge. Coe opined that water consumption was an appropriate basis upon which to charge some customers because "very close to a hundred percent of the water . . . consumed goes back into the sewer system as wastewater." This rate structure eliminated property area and frontage, and allocated costs for I&I proportionately to customers based solely on their water consumption or metered wastewater discharge. Thus, customers who had neither water consumption nor wastewater discharge incurred no fee for I&I.

The 2005 rate structure divided the KMUA's customers into three groups: Class I, customers billed based on municipal water utility meters; Class II, customers who did not redeposit all of their metered water back into the sewer system and were billed based upon private water meters; and Class III, customers billed based upon wastewater meters. Spectraserv was included in Class III.

The rate structure divided the KMUA's revenue requirement by the total metered water consumption based on metered wastewater discharged. PVSC surcharges for BOD and TSS were billed separately to the KMUA's customers. As a result of the implementation of the new rate structure, Spectraserv's annual KMUA charge increased from $182,135.40 in 2003 to $444,787.30 in 2005.

On October 10, 2006, Spectraserv filed a complaint in lieu of prerogative writs, challenging the new rate structure as "arbitrary and invidious discrimination against companies, such as Spectraserv[,] which generate large amounts of wastewater"; Spectraserv also claimed that the new rate structure "exceeded the scope of [the KMUA's] statutory authority" and was "in contravention of the KMUA's enabling statute and applicable state and federal laws, rules and mandates."

Judge Peter F. Bariso held a trial on Spectraserv's complaint on July 12, 2007. Prior to trial, on July 9, 2007, the KMUA had taken Coe's videotaped deposition. The KMUA proffered the transcript of that deposition at trial. Spectraserv challenged Coe's qualifications and objected to his serving as an expert. The trial judge reserved on Spectraserv's objections pending his review of the videotaped deposition.

At trial, Spectraserv presented its expert witness, Grant Hoag, who opined that the rate structure was "inequitable, and unreasonable, and unfair to the customers . . . that ha[ve] relatively low inflow or infiltration associated with their service, . . . but high metered or measured waste water flows."

Hoag criticized Coe for basing his proposed rate structure solely on the state statute and not considering what Hoag described as the three unique characteristics of the KMUA's system: (1) the number of customers served by the KMUA is significantly smaller than any system with which he is familiar; (2) the KMUA has both a CSS (serving the South Kearny District) and an SSS (serving the Meadowlands District); and (3) the system has a "relatively high volume" of I&I.

Hoag took exception to the use of water consumption as a basis for determining a customer's wastewater discharge. Although acknowledging that the attribution of I&I based upon wastewater volume is common, Hoag nonetheless opined that such a rate structure was problematic because the KMUA provides both wastewater and storm water collection in the South Kearny District, and because the volume of I&I exceeds the actual wastewater flow.

Hoag testified that it was "possible to estimate with sufficient accuracy the amount of . . . the I&I flow[] that can be allocated to each customer." To determine the amount of infiltration attributable to an individual customer would require measurement of the wastewater flow entering the pipe at the customer's property and measurement of the total outflow ...

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