This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-1200

 

 

Sam M. Daryani, et al.,

Respondents,

 

vs.

 

Rich Prairie Sewer and Water District,

Appellant,

 

Morrison County, Minnesota,

Defendant.

 

 

Filed March 14, 2006

Reversed

Halbrooks, Judge

 

 

Morrison County District Court

File No. C8-01-1131

 

 

Michael K. O’Tool, 18073 Bernard Trail, Brainerd, MN 56401 (for respondents)

 

James G. Golembeck, Jessica E. Schwie, Jardine, Logan & O’Brien, P.L.L.P., 8519 Eagle Point Boulevard, Suite 100, Lake Elmo, MN 55024 (for appellant)

 

 

 

            Considered and decided by Klaphake, Presiding Judge; Kalitowski, Judge; and Halbrooks, Judge.

U N P U B L I S H E D   O P I N I O N

HALBROOKS, Judge

            Appellant challenges the district court’s determination that the water and sewer rate for one-bedroom apartments in a complex served by a single meter and connection violates Minn. Stat. § 444.075, subd. 3 (2004), and should be reconsidered by appellant on remand.  Because we conclude that appellant did not act arbitrarily or capriciously in setting its rate or establish an inequitable or unjust rate, we reverse. 

FACTS

            Appellant Prairie Sewer and Water District (District) is a regional governmental entity that provides sewer and water services to its users in the municipalities of Pierz, Genola, and Buckman.  The District planned and constructed a major project to install new wastewater and water plants and collection systems.  The cost of the project was $10.2 million, with approximately $4.2 million in grant funds and $6 million in loans.

            The terms of the grants and loans require the District to maintain financial stability by taking in sufficient revenues to repay loans for construction costs, meet operational costs for providing service, and make provisions for future expenditures and replacement.  In order to accomplish this, the District considered a variety of revenue-generating mechanisms, including special assessments, a general tax, and user fees.  The District ultimately chose to implement user fees because monthly fees would more easily be absorbed by residents living on a fixed income.

            After considering a variety of rate structures, the District adopted an “increasing block rate” for its wastewater service and water system that charges customers a minimum monthly fee for 3,500 gallons and then charges for each additional 1,000 gallons used above 3,500.  The 3,500 gallon base rate was selected based on the historical average for residential use.  The District’s decision to adopt an increasing block-rate structure was based on its intent to promote water conservation and to provide a reasonable amount of water at a reasonable rate, charging a premium to those who use more. 

            Rates are charged to property owners on a per unit per meter basis.  Each user that is served by a single meter and is a single unit (whether residential, commercial, or institutional) within a particular building equals one equivalent residential unit (ERU).  The District opted to charge apartment complexes by the number of units in each complex, or one ERU per unit, based on its reasoning that an apartment complex is an aggregation of dwelling units, and usage by residents of apartments and single-family dwellings would not differ greatly, particularly in light of the fact that many elderly individuals live in the single-family dwellings. 

Respondents Sam and Lila Daryani are the owners of a low-income, 30-unit apartment complex in Pierz.  In their challenge to the sewer and water rates established by the District, respondents asserted that the District was not properly formed under chapter 116A and that both the rates and the rate structure established by the District were unjust and inequitable under Minn. Stat. § 444.075 (2004).  The District moved for summary judgment.

The district court granted the District summary judgment on all issues but one, concluding that there was a factual issue as to whether the rate the District charged respondents for single-bedroom apartments from 2001 forward was reasonable.  The matter was tried to the district court, and the parties stipulated to the admission of more than 370 documentary exhibits and affidavits.  Engineering experts for both the District and respondents testified at trial.

Respondents’ expert, Edward DeLaForest, testified that he disagreed with the District’s assumption that sewer use in a one-bedroom apartment is nearly the same as sewer use in a single-family dwelling.  DeLaForest noted that the costs for a single-family dwelling are greater because the dwelling requires (1) an individual connection; (2) an individual meter that must be read, maintained, and billed; and (3) a longer sewer line to serve the individual property.  But on cross-examination, DeLaForest conceded that he was not aware that individual connections had been funded by grants rather than rolled into the cost of the project.

The district court entered its final order and judgment, concluding that the sewer and water services rates the District charged effective January 1, 2001, for a one-bedroom apartment in a building served by a single meter violate Minn. Stat. § 444.075, subd. 3.  The district court remanded to the District “for the limited purpose of reconsideration and the setting of rates to be applied on a per unit basis for one-bedroom apartments in a complex served by a single meter and connection” retroactive to January 1, 2001.  The district court suggested to the District that it charge one-bedroom apartments a rate that would be 80% of that charged to multi-bedroom apartments and single-family dwellings, or .8 ERU. 

The District moved for amended findings of fact and conclusions of law or, in the alternative, a new trial.  The district court denied the District’s motion.  This appeal follows.

D E C I S I O N

            The parties agree that utility rate-making is a legislative act entitled to deferential judicial review.  In re Request of Interstate Power Co. for Authority to Change Rates, 574 N.W.2d 408, 412-13 (Minn. 1998); St. Paul Area Chamber of Commerce v. Minn. Pub. Serv. Comm’n, 312 N.W.2d 250, 253-54 (Minn. 1977).  Therefore, a court will uphold an established rate system unless it is shown by clear and convincing evidence to be in excess of statutory authority or results in unjust, unreasonable, or inequitable rates.  City of Moorhead v. Minn. Pub. Util. Comm’n, 343 N.W.2d 843, 846 (Minn. 1984); St. Paul Area Chamber of Commerce, 312 N.W.2d at 254.  When reviewing on appeal the determination of a mixed question of fact and law, we will affirm if the findings of fact are supported by the evidence and if the conclusion based on those facts is consistent with the statutory mandate.  Colburn v. Pine Portage Madden Bros., Inc., 346 N.W.2d 159, 161 (Minn. 1984).  Statutory construction is a question of law, which this court reviews de novo.  Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 393 (Minn. 1998).

            Minn. Stat. § 444.075, subd. 3 (2004), which governs the establishment of utility rates, provides as follows:

Subd. 3.  Charges; net revenues.  (a) To pay for the construction, reconstruction, repair, enlargement, improvement, or other obtainment, the maintenance, operation and use of the facilities, and of obtaining and complying with permits required by law, the governing body of a municipality or county may impose just and equitable charges for the use and for the availability of the facilities . . . . 

(b) Charges made for service rendered shall be as nearly as possible proportionate to the cost of furnishing the service.

 

Subd. 3a.  Sanitary sewer charges.  Sanitary sewer charges may be fixed:

(1) on the basis of water consumed; or

(2) by reference to a reasonable classification of the types of premises to which service if furnished; or

(3) by reference to the quantity, pollution qualities and difficulty of disposal of sewage produced; or

(4) on any other equitable basis including any combination of equitable bases referred to in clauses (1) to (3) . . . .

 

. . . .

 

Subd. 3g.  Reasonableness of charges.  In determining the reasonableness of the charges to be imposed, the governing body may give consideration to all costs of the establishment, operation, maintenance, depreciation and necessary replacements of the system, and of improvements, enlargements and extensions necessary to serve adequately the territory of the municipality or county including the principal and interest to become due on obligations issued or to be issued and the costs of obtaining and complying with permits required by law.

 

            Minnesota law authorizes municipalities to construct sewer systems, among other water-works systems.  Minn. Stat. § 444.075, subd. 1a (2004).[1]  Minnesota law also authorizes municipalities to pay for construction of the water works facilities by imposing “just and equitable” charges for the use, availability, and connection to the facilities.  Id.,subd. 3; cf. Minn. Stat. § 444.075, subd. 3(a) (Supp. 2006) (authorizing the governing body of a municipality or county to impose “just and equitable” charges for the use and for the availability of facilities and connections). 

            This court has read Minn. Stat. § 444.075, subd. 3, to include a non-exhaustive list of ways that municipalities can charge sewer services users in an equitable manner.  JAS Apartments, Inc. v. City of Minneapolis, 668 N.W.2d 912, 915 (Minn. App. 2003).  In JAS Apartments, we held that the statute’s reference to “any other equitable basis” established that the City of Minneapolis permissibly based its sewer charges on water consumption.  Id. (quotation omitted).  Additionally, this court held that while services that are directly rendered require a rate “as nearly proportionate to the cost of furnishing the service,” this general provision did not prevail over the specific provision that bases charges on water consumption or other equitable means.  Id. (quotation omitted).

            Here, the District asserts that its charges for one-bedroom apartments are “just and equitable” under Minn. Stat. § 444.075, subds. 3-3l. The District considered several options to recover the costs of the project and maintain operations and was obliged because of receipt of federal grant funding to set aside money for future equipment replacement.  At the time it determined the monthly fee, the District analyzed the costs and benefits associated with participation in a district by several cities and rural areas, including residential and business use, and the revenues it must have to remain financially sound when it set its monthly rates.  The District’s largest cost is debt replacement for the construction of the sewer, not the actual cost of sewer use by individual users.  And appellant considered the administrative simplicity of the arrangement, especially in light of the complex costs and benefits of the involvement by each of the users. 

            The district court concluded that the District had failed to meet its clear-and-convincing standard in support of its contention that its decision to charge 1 ERU to single-bedroom apartments is not inequitable under the statute.  In doing so, the district court considered the District’s argument that it had balanced a number of factors, including, but not limited to, grant money attributable to participation of the various cities, pre-treatment costs, and future expenses relative to repair and replacement of existing infrastructures.  The district court was persuaded because the monthly charges are used to not only pay operating costs of the system but also to retire the construction debt.  The district court noted that overall,

the cost of constructing distribution and collection lines to serve a single building located on a single large lot, with one hookup and meter, in which there are thirty apartments, would be significantly less than constructing a collection and distribution system to serve thirty separate residential lots, all with a separate hookup and meter.

 

In addition, the district court considered not only actual water use, but potential water use as well and assumed that within the next several years, the single-family dwellings currently occupied by a single elderly residents would be sold and occupied by multiple individuals.

            It is understood that perfect equality in establishing a rate system is not expected, nor can quality be measured with mathematical precision.  See, e.g., R.K. Rutherford v. City of Omaha, 160 N.W.2d 223, 228 (Neb. 1968); Hickory Twp. v. Brockway, 192 A.2d 231, 236 (Pa. Super. Ct. 1963).  Instead, only a practical basis must be used in establishing a rate system, and apportionment of utility rates among different classes of users may only be roughly equal.  Hickory Twp., 192 A.2d at 236. 

            The record establishes that at the time the rate system was enacted, the historical average use was 3,500 gallons per unit.  In addition, the District has demonstrated that since the operation of the new system, respondents’ residents’ use, on occasion, has been at least 3,500 gallons per unit, if not more.  And while much is made by respondents of the fact that the District’s expert, Curt Brekke, Jr., recommended a .8 ERU for one-bedroom apartments in respondents’ complex, Brekke also testified by way of affidavit that

[o]ne possible way of establishing a rate system is to take into consideration the consumer use in a single-family dwelling and find that the consumer use there is really no different than that in an apartment unit, mobile home park, duplex, or other multi-unit dwelling complex.  It is an acceptable rate practice to consider an apartment complex to be really a mere aggregation of dwelling units.  In the case of dwelling units, the District took into consideration that it has an aging population and that a little old lady living in a home was really no different tha[n] a little old lady living in an apartment.

 

Brekke then stated:

Therefore, it is not unusual for water and/or wastewater utility to treat multi-unit complexes as an aggregation of dwellings or businesses, whatever the case may be.  Further, it is not unusual in such circumstances, to then charge a base rate multiplied by the number of individual units served by the single meter.  For example, as is the case here, it is an acceptable practice, not an unusual practice, for the District to charge Kamnic Lane Apartments, a 30-unit complex served by a single meter, the base rate x 30 units.

 

In conclusion, Brekke stated that “[t]here are many different types of rate systems employed by water and/or wastewater facilities to meet their fiscal responsibilities.  The rate system adopted by the District is not unreasonable and it [is] consistent with rate systems employed by other utilities.”

            While the district court here made a comprehensive review of the record and reached a different conclusion, we are mindful on appeal of our deferential standard of review of legislative action.  We conclude that the district court, however well-intentioned, engaged in improper factfinding.  Clearly, the District had other alternatives available to it in setting its rates.  But the District conducted a thorough analysis in reaching its ultimate conclusion that is supported by the record.  Therefore, we cannot say that the charge for the one-bedroom apartments is inequitable or unjust. 

            Reversed.