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Spectraserv, Inc. v. Kearny Municipal Utilities Authority

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


November 5, 2008

SPECTRASERV, INC., A NEW JERSEY CORPORATION, PLAINTIFF-APPELLANT,
v.
KEARNY MUNICIPAL UTILITIES AUTHORITY, DEFENDANT-RESPONDENT.

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

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

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 from that pipe. However, Hoag stated, there was no practical way to measure storm water runoff.

Hoag proposed three alternative rate structures, one of which was purely theoretical and two of which he believed could be implemented. The first of the two practical alternatives would account for I&I "by compl[e]menting sewage-based charges with impervious parcel areas for certain customers. . . ." Under this alternative, I&I charges would be apportioned equally among all KMUA customers which, Hoag stated, was an accepted method in the industry. Considering the KMUA's limited number of customers, Hoag opined that this alternative rate structure could be easily developed and implemented.

Hoag's second practical alternative was to impose an annual groundwater infiltration charge on each account while reducing sewage-flow based unit rates. Hoag approximated that the first alternative would reduce Spectraserv's annual KMUA charge by $85,494, and the second alternative by $122,898.

The KMUA's expert, Coe, opined that the rate structure created in 2005, which remained largely unchanged for 2006 and 2007, was "fair, equitable and reasonable," as it assured customers that their rates would remain fairly stable from year to year as opposed to previous years in which rates would vary as much as one hundred percent from one year to the next.*fn1 Coe also opined the 2005-2007 rate structure accurately reflected Spectraserv's use of the KMUA's sewer system.

Coe further opined that storm water runoff and I&I do not constitute "use" of the sewer system because they are not directly attributable to individual customers. Since I&I are not metered and cannot be attributed to any one customer, Coe believed it was proper to charge for I&I based on water consumption or wastewater discharge.

Coe noted that other municipalities with combined sewer systems based their rates on water consumption; however, he conceded that those municipalities served both residential and industrial users, as well as a far greater number of customers than the KMUA. Coe stated that he knew of no other municipal authority in New Jersey that had as few users as the KMUA.

On August 24, 2007, Judge Bariso placed his decision on the record. At the outset, the judge noted that it was "undisputed that we are dealing with a[] 'unique system.'" Citing to Judge Messano's decision in the Talbot Hall litigation, the judge noted that the KMUA has "no residential users, and . . . services a peninsula bordered on one side by the Passaic River and on the other side by the Hackensack River, both of which empty into Newark Bay."

The trial court reviewed the record and found that, in the years 2002 through 2004, the KMUA had adopted a rate structure that was based upon three major variables: flow, area and frontage. In defending the Talbot Hall litigation, the KMUA had attempted to use some of Spectraserv's expert's conclusions. Once that rate structure was found to be arbitrary and capricious, the KMUA implemented the rate structure currently at issue. By implementing the new rate structure, the trial court found that the KMUA "went back to what has been accepted as a . . . general basis for rates," which is I&I as measured by "flow based or user [rates] with some tweaking . . . ."

The court noted:

And the issue really deals with what has been referred to as I and I, inflow and infiltration. . . . [A]nd basically a description is in the record as to what both experts feel by what those terms mean, the extraneous flows and how to properly measure that.

[T]he standard here is not what is the best and most accurate system, and that's I think a key to what my ultimate decision will be. I'm not here to judge which is the best or better system. I'm not here to second guess what a public entity, in this case the Kearny MUA does. I'm just here, my view is to make a determination, is the rate study that was adopted for 2005, 2006 and 2007 arbitrary, capricious or unreasonable, or is it in conformance with state statute and therefore not arbitrary, capricious or unreasonable.

In reviewing the evidence, the trial court found:

Essentially, it was Spectraserv's position and Mr. Hoag's position that the rate study adopted by the Kearny MUA was not equitable.

Now, as I have indicated, we are dealing with what everyone concedes to be a unique system. We are also dealing with a situation where a rate study was prepared after the previous rate study was declared arbitrary and capricious by the Court.

Spectraserv's position is that the new rate study adopted, which is involved in this litigation for . . . 2005, 6 and 7, they used the term essentially, [the] Kearny MUA threw the baby out with the bath water. I guess the analogy being just because Judge Messano found the prior rate study to be arbitrary and capricious, rather then throw the entire thing out perhaps they should have re-worked it. And that's the position essentially being advanced Mr. Hoag.

So we're left with whether or not Spectraserv has met the burden of proof, which is indicated to be a high . . . burden, . . . that the Kearny MUA's rate study for 2005, 2006 and 2007 is arbitrary, capricious and unreasonable.

Essentially, as I said, what's in dispute[] is Mr. Hoag, who also is an expert and does do rate studies, utilized various trade organizations . . . in terms of measuring techniques. And he is of the opinion, and his conclusion essentially was that the rate study adopted by Kearny MUA does not factor in a proper measurement of I and I and extraneous flows, and therefore it's not equitable. And accordingly, I guess, [he] is taking the position that it's arbitrary and capricious.

He concedes however that the methodology used by the Kearny MUA is [a] generally standard methodology among various municipal utilities authorities. The disagreement is that we're dealing with a unique system, it's a combined system, and I think if you boil it down to the essential terms of his testimony for my purposes, . . . [h]e seems to be saying that it's a unique system. He hasn't seen one like it in the Country, and since it's a unique system it should be dealt with in a unique manner.

Now, as I indicated, had this been an issue before me as to who the better expert is, what's the better system, I might lean in favor of Spectraserv, but having laid out what the burden of proof and what the standard I must apply is, as a trier of fact and listening [to] and reviewing the testimony, I don't believe that Spectraserv has met its burden to find this rate study of 2005, 2006 and 2007 is arbitrary, capricious and unreasonable.

In this case it's conceded by everyone that Spectraserv is . . . probably the largest user in its class. It has a unique business. It deals with waste management, so to speak. The issue being presented by Mr. Hoag . . . [is] his criticism of reliance on the water flow and consumption, and [he] is concerned more with storm water drainage and that the combined system really presents three variables according to Mr. Hoag. A meter flow, an infiltration, and a storm water inflow.

The problem however, is to accept his position that because Spectraserv has incorporated a self[-]contained storm water drainage system would require Kearny MUA to make unique assessments of an individual[']s property in this Court's opinion, and that's not a proper rate study.

Kearny MUA can't be held to the standard to try and gauge what each unique quality of someone's property is. There is no measuring device, and . . . it is impractical to measure. . . . [I]t is virtually impossible to get an accurate measure of that unless one truly measures what goes into the pipe and what comes out. And to place that burden on the Kearny MUA, I think is unreasonable.

And it's not practical to require an MUA to come up with the best and most accurate measurements. There has to be a rational basis to what they're doing, and contrary to Mr. Hoag's position, on cross-examination he did concede that the majority of systems rely upon the factors utilized by Mr. Coe in this rate study.

The issue here is a unique MUA, but there's no provision in the statute that imposes a higher duty upon a MUA because of the uniqueness of their system. If there is such a duty, I have not been able to find it, and that would be left to the legislature and not the judicial branch of government.

The court finds that Kearny MUA's rate study is in accordance with the statute previously read by me [N.J.S.A. 40:14A-8], and that it is not arbitrary, unreasonable and capricious. It relies upon well tested formulas, and I don't believe that the Kearny MUA should be held to a different standard because they have a unique system.

I think Mr. Coe's testimony in terms of measurements is credible, and I find that the plaintiff has not met their high burden of proof, and that the complaint therefore will be dismissed with prejudice . . . .

On appeal, Spectraserv attributes three errors to the judge's decision: (1) the failure to declare the 2005-2007 rate structures arbitrary, capricious or unreasonable; (2) qualifying defendant's witness, James G. Coe, as an expert; and (3) reliance upon the prior decision in the Talbot Hall litigation. We have considered these contentions in light of the record and the applicable law, and conclude they are without merit. R. 2:11-3(e)(1)(E). We add the following comments.

The KMUA's authority to set rates and collect charges for its services is authorized by N.J.S.A. 40:14A-8, which provides:

(a) Every sewerage authority is hereby authorized to charge and collect rents, rates, fees or other charges . . . for direct or indirect connection with, or the use or services of, the sewerage system. Such service charges may be charged to and collected from . . . the owner or occupant . . . of any real property which directly or indirectly is or has been connected with the system or from or on which originates or has originated sewage or other wastes which directly or indirectly have entered or may enter the sewerage system . . . .

(b) Rents, rates, fees and charges, which may be payable periodically, being in the nature of use or service charges, shall as nearly as the sewerage authority shall deem practicable and equitable be uniform throughout the district for the same type, class and amount of use or service of the sewerage system, and may be based or computed either on the consumption of water on or in connection with the real property, making due allowance for commercial use of water . . . .

We defer to the decisions of the municipalities with regard to the operation of their utilities pursuant to this statutory authorization, and will invalidate a rate structure only where it is patently unreasonable. Meglino v. Twp. Comm. of Eagleswood, 103 N.J. 144, 152 (1986); Seton Co. v. City of Newark, 194 N.J. Super. 499, 506-07 (App. Div.), certif. denied, 99 N.J. 152 (1984). "[A]n ordinance setting sewer rates is not patently unreasonable provided that those serviced and benefited by a sewer system finance the system in fair proportion to the cost of providing service to them." Id. at 507.

Spectraserv asserts that the 2005-2007 rate structure is patently unreasonable because smaller customers of the KMUA that did not consume water from the system were exempt from paying for I&I, thereby disproportionately increasing the amount Spectraserv had to pay for I&I in relation to the I&I it actually contributed to the system. Therefore, Spectraserv contends, the trial judge erred in rejecting Hoag's suggestion of alternative rate structures that would factor in each property's actual I&I contribution. However, we will not overturn a rate structure simply because there may be a preferable alternative, so long as the operative structure is not arbitrary, capricious, or unreasonable. See White Birch Realty Corp. v. Gloucester Twp. Mun. Utils. Auth., 80 N.J. 165, 176-77 (1979) ("There may be any number of ways in which a computation of a fair share can be fixed, and a utilities authority is free to adopt any one which will accomplish the result of fairly apportioning system costs among the users.")

As the trial court found, a particular strength of the 2005-2007 KMUA rate structure is its practicability. Although Hoag asserted that infiltration can be accurately measured by "measur[ing] the flow into the pipe versus the flow coming out of the bottom," he conceded that inflow could not be practically measured. Thus, even according to Spectraserv's expert, while I&I could potentially be estimated, it could not be accurately measured. Since the KMUA's previous method of accounting for I&I -- measuring lot area and frontage -- was deemed arbitrary and capricious in the Talbot Hall litigation, the KMUA had no other practicable option for addressing I&I. As the trial court concluded, charging for I&I on the basis of water consumption or wastewater discharge was practicable considering the KMUA's unique circumstances.

The 2005-2007 KMUA rate structure, based exclusively on water consumption or wastewater discharge without consideration of lot frontage or area, is similar to that challenged in Seton Co., supra, 194 N.J. Super. at 503. There users were charged $10.50 per 1,000 cubic feet of water either consumed or discharged. Id. As in this case, I&I accounted for approximately fifty percent of the system's total volume. Id. at 503-04. We held that the utility's rate structure was neither arbitrary nor unreasonable because, by including the indirect costs of the system in the cost of service, "the benefit conferred on the user [was] directly proportionate to his use of the system . . . ." Id. at 507.

We reach a similar conclusion here. While the inclusion of I&I in the cost of service may not specifically reflect each user's actual I&I contribution, the benefit received by each user under the 2005-2007 rate structure was proportionate to that customer's use of the system. Spectraserv is one of the KMUA's largest users and it was appropriately charged for its fair share of the system's costs. We find no basis upon which to disturb the trial judge's ruling on this issue.

Regarding the qualification of defendant's proffered expert witness, James G. Coe, the trial judge ruled:

As I understood the basis of the objection that was presented in Court as well as during the videotaped deposition of Mr. Coe, it was the plaintiff's position that . . . , while he . . . certainly had [the] qualifications of an engineer, . . . and plaintiff was not questioning that aspect of his qualifications, but . . . counsel attempted to show that Mr. Coe's experience in performing actual rate studies was somewhat lacking, and therefore he should not be considered an expert as a rate setter.

I think that may be too technical of an objection. And the reason I say that is because what we are dealing with here, quite frankly[,] is a divergence of opinion of experts as to whether or not there is a way to adequately measure I and I and extraneous flows, and whether or not there is an accurate device to measure that, and if so is it practical for an MUA to utilized those "measurable devices."

In that vein, Mr. Coe certainly is an expert. And his credentials speak for themselves . . . . The fact that he may be involved in only a limited number of rate studies does not mean he is not an expert in the field of waste water management, because I think the plaintiff concedes that he is. And the issue before me really is a dispute in the testimony. One, as to whether or not the system is equitable, but more importantly there's a big disagreement between the experts about whether you can adequately measure I and I or extraneous flows. And he certainly, from an expert[']s point of view, can talk about how you measure it regardless of the number of rate studies he has performed.

He also certainly is familiar with the statute and has indicated that through his testimony, and certainly is an expert who can testify as to whether or not the rate study that he prepared and, again, he did prepare this rate study, and the issue being presented is he's not an expert but a fact witness, but he really . . . isn't, he's an engineer. And if anything he's a hybrid if you wish to call him that, but for the Court's purposes I find him qualified and competent under Rule 702 to express an opinion in engineering certainty. And the fact that he has not performed a number of . . . rate studies, if anything goes to the weight of his testimony[,] not the admissibility. So the objection regarding Mr. Coe is overruled by the Court, because we're really dealing with the discussion of measurement techniques as opposed to some type of rate study formula, from this Court's point of view.

A trial judge is vested with wide discretion in determining whether a witness is competent to testify as an expert, and we will not disturb such a discretionary decision unless it is necessary in order to prevent "'manifest error or injustice.'" State v. Moore, 122 N.J. 420, 459 (1991)(citation omitted); see also, State v. Frost, 242 N.J. Super. 601, 615 (App. Div.), certif. denied, 127 N.J. 321 (1990).

Under N.J.R.E. 702:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.

"What we look for from the [expert] witness is 'the minimal technical training and knowledge essential to the expression of a meaningful and reliable opinion.'" Hake v. Manchester Twp., 98 N.J. 302, 314 (1985)(quoting Sanzari v. Rosenfeld, 34 N.J. 128, 136 (1961)).

We concur with the trial judge that Spectraserv's objections to Coe's qualification as an expert witness were "too technical . . . ." As the judge found, the divergent opinions offered by Coe and Hoag concerned "whether or not there is a way to adequately measure I and I and extraneous flows, and whether or not there is an accurate device to measure that, and if so is it practical for MUA to utilize those 'measurable devices.'" In determining that Coe, an engineer familiar with the relevant statute, was qualified to testify as an expert, the trial judge identified the primary disputed issues as: (1) the reasonableness of the KMUA rate structure; and (2) the ability of the KMUA to measure I&I or extraneous flows. In sum, the trial court overruled Spectraserv's objection to Coe "because we're really dealing with the discussion of measurement techniques as opposed to some complicated rate study formula. . . ."

Coe is a professional engineer who manages the wastewater and municipal division of his firm. His division designs wastewater facilities and pipelines, prepares rate studies and consults with several municipalities and MUA's. Coe had personally participated in a total of five rate studies for certain municipalities, in addition to serving as the engineer for the MUAs of Bernards and Raritan Townships. Since the feasibility of measuring I&I and extraneous flows was central to the trial court's decision as to the reasonableness of the KMUA rate structure, the court's ruling the Coe would be qualified as an expert on behalf of the KMUA was not an abuse of discretion.

Finally, we conclude that Spectraserv's contention that the trial judge erred in "relying upon" the decision in the prior Talbot Hall litigation is "without sufficient merit to warrant discussion in a written opinion[.]" R. 2:11-3(e)(1)(E). Judge Bariso rendered a thorough decision regarding the KMUA's 2005-2007 rate structure based upon the record before him.

Affirmed.


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