Reasonable and uniform rates for water, sewer, and other services: What Pennsylvania law allows and requires

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By Gregory H. Teufel
Schnader Harrison Segal & Lewis LLP

March 28, 2003 -- Those faced with questions of what a municipal corporation may charge or is required to charge residents within and/or beyond its corporate limits must contend with a morass of seemingly contradictory laws and court decisions, which this article attempts to reconcile.

Presently, there seems to be little or no published guidance on this topic. In the process, the hope is to dispel some of the popular misconceptions underlying some of the rate structures currently in place and to assist those attempting to challenge, revise, or defend rate structures.

For example, it seems many municipal corporations in Pennsylvania are under the impression that they are required to charge the same rates to residents within and outside their corporate limits, or they do not understand what costs they are permitted to consider in charging different rates.

The Public Utility Code of 1978 at 66 Pa.Cons.Stat. § 1301 defines the PUC's jurisdiction over the rates charged by municipal corporations or their operating agencies as follows:

Every rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in conformity with regulations and orders of the commission. Only public utility service being furnished or rendered by a municipal corporation, or by the operating agencies of a municipal corporation, beyond its corporate limits, shall be subject to regulation and control by the commission as to rates, with the same force, and in like manner, as if such service were rendered by a public utility.

Further, the Third Class City Code at 53 Pa.Stat. § 38531 provides:

The service of water by any such city in the territory outside of the limits of the city shall be subject to regulation and control by the Public Utility Commission as to character of service, extensions, and rates, with the same force and in like manner as though the city serving in such territory were in fact a water corporation and with respect to such territory outside of the limits of the city, and shall have all the power and be subject to all the duties of a water corporation.

The section quoted above from the Public Utility Code of 1978 was a reenactment of an identical section of the Public Utility Law of 1937. Subsequent to the enactment of the Public Utility Law of 1937 and the section of it identical to the section of the Public Utility Code quoted above, Pennsylvania enacted the Municipality Authorities Act of 1945.

The Municipality Authorities Act, at 53 Pa.Cons.Stat. § 5607(d)(9), provides that an Authority has the power to fix, alter, charge and collect rates and other charges "in the area served by its facilities" at reasonable and uniform rates to be determined exclusively by it, and that the Common Pleas court shall have exclusive jurisdiction to determine all questions involving the reasonableness or uniformity of any rate fixed by any Authority.

Pennsylvania reenacted the Public Utility Law in 1978 and renamed it the Public Utility Code. Despite the subsequent reenactment of the section in the Public Utility Code quoted above, the Municipality Authorities Act continues to supercede that section of the Public Utility Code and vests exclusive jurisdiction to determine all questions involving the reasonableness or uniformity of any rate fixed by any Authority in the Common Pleas court regardless of whether the service at issue is provided outside the relevant municipal limits.

See Graver v. Pennsylvania Public Utility Commission, 469 A.2d 1154 (Pa.Commw. 1984); Rankin v. Chester Mun. Auth., 68 A.2d 458 (Pa.Super. 1949), overruled in part on other grounds, Calabrese v. Collier Twp. Mun. Auth., 240 A.2d 544 (Pa. 1968). In other words, the PUC has no jurisdiction over rates charged by an Authority, period. See Elizabeth Township v. Mun. Auth. of City of McKeesport, 447 A.2d 245, 248 (Pa. 1982).

The Municipality Authorities Act also provides at 53 Pa.Cons.Stat. § 5607(d)(19) that Authorities have the power:

[t]o enter into contracts to supply water and other services to and for municipalities that are not members of the authority or to and for the Commonwealth, municipalities, school districts, persons or authorities and fix the amount to be paid therefore.

Because 53 Pa.Cons.Stat. § 5607(d)(9) of the Municipality Authorities Act refers to reasonable and uniform rates "in the area served by its facilities," courts have found that, outside the area served by its facilities, 53 Pa.Stat. § 306(B)(h) (now 53 Pa.Cons.Stat. § 5607(d)(9)) does not govern Authorities, but rather that 53 Pa.Stat. § 306(B)(p) (now 53 Pa.Cons.Stat. § 5607(d)(19)) applies. Township of Aston v. Southwest Delaware County Mun. Auth., 535 A.2d 725, 728 (Pa.Commw. 1988) (court refused to let an authority out of agreement to provide sewer service to a neighboring township at $23.85 per EDU annually, even after rates to all other users raised to $80 per year). In other words, outside of the limits of the incorporating municipality, the Authority can through contract charge different rates than the rates charged within the limits.

Nevertheless, courts will intervene in the name of public policy to set aside unfairly discriminatory rates set by any municipal corporation. See The Public Advocate v. Philadelphia Gas Commission, 674 A.2d 1056, 1061 (Pa. 1996) (rates must fall within a broad zone of reasonableness and avoid discrimination amounting to confiscation) (citing American Aniline Products, Inc. v. Lock Haven, 135 A. 726 (Pa. 1927)).

For example, the Pennsylvania Supreme Court in American Aniline Products, Inc. struck down an agreement where a city agreed to supply water free of charge to a corporation, because the agreement was discrimination against other users and void as against public policy.135 A. at 727.

The Court further explained that: "All public service contracts are viewed in the light of having been made with an implied provision that the rate named therein is subject to change according to law, so as to keep it reasonable and nondiscriminatory at all times." Id. at 728 (quoting Suburban Water Co. v. Oakmont Boro., 110 A. 778 (Pa. 1920)).Thus, contracts with entities outside the municipal limits fixing rates lower than the rates charged within the municipal limits are subject to being declared void as against public policy.

Municipal corporations have greater discretion to charge rates outside their corporate limits higher than the rates within. They can include a reasonable rate of return or profit in the calculation of their rates both inside and outside the relevant municipal limits (see Allegheny Ludlum Corp. v. Mun. Auth. of Westmoreland County, 659 A.2d 20, 28-30 (Pa.Commw. 1995) (court upheld 8.9% rate of return), or they can forego such profit in the rates charged to consumers within the relevant municipal limits and include such profit in the calculation of rates outside of their limits (see Township of Hopewell v. Mun. Water Auth. of Boro. of Aliquippa, 475 A.2d 878, 882 n.6 (Pa.Commw. 1983) (court vacated a lower court order that had modified an authority's rate increase) (citing Ambridge Boro. v. Pennsylvania Public Utility Commission, 8 A.2d 429 (Pa.Super. 1939) (court upheld rates charged by a borough to nonresidents that was higher than the rates charged to borough residents)).

In addition, in determining rates for those within the relevant municipal limits, the municipal corporation can ignore the cost of the system outside the limits and consider only the cost of the system within the limits, while the rates charged to customers outside the limits can include a fair proportion of the cost of the system within the limits plus the costs of the system outside the limits. Ambridge Boro., 8 A.2d at 433.

For example, in Borough of Sykesville v. City of DuBois, 24 Pa.D.&C.3d 177 (1981) (Reilly, J.), Sykesville's contract for water supply from DuBois expired and Sykesville challenged the new contract rates DuBois proposed. Sykesville sought to force DuBois to charge the same rate to Sykesville that it charged to its other customers pursuant to an ordinance. Citing American Aniline Products, Inc., the court noted the power of the courts to review rates charged by a municipality outside its boundaries to determine whether the rates are unreasonable or discriminatory.

The court further cited Boro. of Ambridge, noting that a municipality can charge different rates outside the municipality from those charged within, but, citing Reigle v. Smith, 134 A. 380 (Pa. 1926), further noted that no distinction could be made between those applying for service under "like conditions." Thus, the court found that DuBois could properly group Sandy Township and Sykesville as one classification distinct from its other customers, because both receive their water and assume responsibility for it at their meters and both are municipal corporations.

Because the rate for Sandy Township was actually slightly higher than the rate proposed for Sykesville, the court dismissed Sykesville's rate challenge. It is not clear why the court did not discuss 53 Pa.Stat. § 38532 (quoted below), or why the case was not within the exclusive jurisdiction of the PUC.

Consistent with the foregoing, the Third Class City Code at 53 Pa.Stat. § 38532 provides with regard to water supply that:

Inasmuch as the city may be serving its inhabitants at less than the actual cost of service, including capital charges and depreciation, because the plant may have been or may be built and operated in part out of the funds raised by municipal taxation, no rate, classification, rule, regulation, or practice, put in operation by the city in the portion of its territory supplied, located beyond the city limits shall be considered as unjustly discriminatory solely by reason of the fact that a different rate, classification, rule, regulation, or practice is in operation within the boundaries of the municipality with respect to a similar service rendered.

The Public Utility Code, at 66 Pa.Cons.Stat.Ann § 507, further limits the PUC's jurisdiction as follows:

Except for a contract between a public utility and a municipal corporation to furnish service at the regularly filed and published tariff rates, no contract or agreement between any public utility and any municipal corporation shall be valid unless filed with the commission . . . [and] the commission may institute proceedings to determine the reasonableness, legality or any other matter affecting the validity thereof.* * *

Thus, for example, where a municipality sets forth rates by ordinance, the PUC has no jurisdiction to review the reasonableness of an agreement to provide service at those rates. See White Rock Sewage Corp. v. Pennsylvania Public Utility Commission, 578 A.2d 984 (Pa.Commw. 1990).However, the ordinance itself could be reviewed by a court pursuant to the principles described in Public Advocate and other cases discussed above.

The complexity, difficulty, and effort involved in reconciling the above has no doubt been a deterrent to clear thinking and decisive action on rate issues in Pennsylvania. Also, the failure to attempt this reconciliation has no doubt led to some of the seemingly contradictory law in this area. It is hoped that the future will bring us fewer contradictions on these issues and clearer guidance.

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