BOROUGH OF LODI, a Municipal Corporation of the State of New Jersey, and THE HOUSING AUTHORITY OF THE BOROUGH OF LODI, Plaintiffs-Respondents,
PASSAIC VALLEY WATER COMMISSION, a Public Body of the State of New Jersey, Defendant-Appellant
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 22, 2013
On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1526-09.
James M. Hirschhorn argued the cause for appellant (Sills, Cummis & Gross, P.C., attorneys; Mr. Hirschhorn and Theodora McCormick, of counsel; Brian P. Scibetta, on the brief).
Andrew T. Fede argued the cause for respondent Borough of Lodi (Archer & Greiner, P.C., attorneys; Thomas J. Herten, of counsel; Mr. Fede, on the brief).
Before Judges Graves, Ashrafi and Espinosa.
In 2008, defendant Passaic Valley Water Commission (PVWC or Commission) concluded that, for approximately one decade, it had erred in failing to raise the rates it charged to plaintiff Borough of Lodi (Lodi or Borough) pursuant to a lease provision that permitted rate increases based on increases in wholesale water costs. PVWC made "corrective rate increases" totaling 49% over two years that were designed to bring the rates charged to the level where they would have been if increases in wholesale water costs had been passed on to Lodi. Lodi filed this suit, challenging the increases. PVWC appeals from a judgment, following a bench trial, that ruled its rate increases to Lodi in 2009 and 2010 were unconscionable; required it to roll back rates to 2008 levels with defined annual increases; required the refund of rates deemed excessive; and restricted future annual rate increases. We affirm in part and reverse in part.
PVWC, a waterworks commission established by the cities of Paterson, Passaic, and Clifton, pursuant to N.J.S.A. 40:62-109, sells water at wholesale prices to both municipal and privately owned water utilities. Prior to 1997, Lodi operated its municipal water system, purchasing its water from PVWC pursuant to a wholesale water supply agreement and then sold it to retail customers in Lodi. In February and March 1997, Lodi and PVWC entered into a fifteen-year Water Supply Agreement (the Agreement) and a thirty-year lease agreement (lease). Under the lease, PVWC leased Lodi's water system and assumed all the responsibilities for operating Lodi's municipal water system.
PVWC is authorized to set and change the rates it charges. N.J.S.A. 40:62-127. However, it is required by statute to set rates for a particular "class of service" that are "uniform in all the municipalities supplied." N.J.S.A. 40:62-127(a). PVWC has four classes of customers: retail in-house, retail in-town, retail out-of-town, and wholesale. Lodi is in a class by itself because its agreement with PVWC is governed by the 1997 lease. However, the Agreement states that Lodi agreed to pay "the charge for water delivered by [PVWC] which shall be at the same bulk or wholesale rate which other bulk or wholesale customers of [PVWC] pay." (Agreement § 4A). Lodi and PVWC also agreed that the rates paid by Lodi would be subject to the increases and decreases in wholesale rate charges to other wholesale customers:
B. In the event that the bulk or wholesale rate charges by COMMISSION to other purveyors is raised or lowered during the term of this Agreement or any renewal period thereof, COMMISSION agrees to sell and MUNICIPALITY agrees to buy and pay for water delivered at such new rate from the date any such change in rate shall become effective. [Agreement § 4B.]
The establishment of rates and rate increases for Lodi is governed by Article V of the lease, which provides three categories of rate increases: an annual "Inflation Rate Increase, " defined as the greater of 3.5% or the increase in the applicable consumer price index plus one-half percent (§ 5.02(a)); an increase based upon the increase in "Wholesale Water Rates" (§ 5.02 (b)); and an increase "Due to Excess Capital Expenditures" (§ 5.03). PVWC has neither made any excess capital expenditures in Lodi nor used this provision as the basis for a rate increase. The only rate increases from 1998 through 2008 were annual 3.5% increases made pursuant to Section 5.02(a).
In late 2007, Yitzchak Weiss, PVWC's chief financial officer, discovered that PVWC had erred in increasing rates by only 3.5% annually since 1997 because those increases failed to account for increases in wholesale water rates. Weiss testified that rates for Lodi customers had to be increased by 49.8% to bring the rates to the level they would have been had appropriate rate increases been made. If the rates were not changed, he stated, there would be an additional, annual $1.2 million shortfall for the remaining eighteen years of the lease, which would have to be paid by PVWC's other customers. Weiss also calculated "uncollected revenues, " i.e., the amount that would have been collected "had the rates been raised properly throughout the life of the lease for those years" and determined that PVWC had collected approximately $3.7 million less from Lodi customers between 1997 and 2008 than it should have collected. PVWC proposed that the increase be phased in over two years. For 2009, the rate increase would be 21%, which included a 12% "corrective" component and 9% as the wholesale water cost increase. For 2010, a 30.7% increase included a 26.7% "corrective" component and a 4% wholesale water cost increase. According to Weiss, these increases were intended "not to recoup the losses, but to just set the rates where they should be going forward."
A fact emphasized by PVWC is that it is required by statute to be "self-supporting, " that is, its "earnings [must] be sufficient to provide for all [the] expenses of operation and maintenance . . . so as to prevent any deficit to be paid by taxation from accruing." N.J.S.A. 40:62-127(b). Weiss testified that PVWC was required to maintain a certain amount of reserves on hand, based on PVWC's bond ordinance.
In 2009, PVWC's reserves were depleted. Weiss testified that PVWC decided to issue bonds in part to increase the reserves to obtain a better standing with rating agencies and "to refill the reserves because we were having some cash flow issues in 2009 related to . . . bonding and/or debt service." He stated that if PVWC had not refilled the reserves, PVWC would have been in default on its bonds. After obtaining ...