Marshall Durbin & Co. of Jasper, Inc. v. Jasper Utilities Bd. of City of Jasper

• Decision Date: 15 July 1983
• Citation: 437 So.2d 1014
• Court: Alabama Supreme Court
• Parties: MARSHALL DURBIN & CO. OF JASPER, INC. v. JASPER UTILITIES BOARD OF the CITY OF JASPER, Alabama. JASPER UTILITIES BOARD OF the CITY OF JASPER, Alabama v. MARSHALL DURBIN & CO. OF JASPER, INC. 80-859, 80-885, 81-139, 81-526 and 81-480.

Page 1014

437 So.2d 1014

MARSHALL DURBIN & CO. OF JASPER, INC. v. JASPER UTILITIES BOARD OF the CITY OF JASPER, Alabama.

JASPER UTILITIES BOARD OF the CITY OF JASPER, Alabama v. MARSHALL DURBIN & CO. OF JASPER, INC.

80-859, 80-885, 81-139, 81-526 and 81-480.

Supreme Court of Alabama.

July 15, 1983.

Rehearing Denied Sept. 16, 1983.

C. Lee Reeves and Susan B. Mitchell of Sirote, Permutt, Friend, Friedman, Held & Apolinsky, Birmingham, for appellant cross appellee.

Edward R. Jackson of Tweedy, Jackson & Beech, Jasper, and Carl E. Johnson, Jr., of Bishop, Colvin & Johnson, Birmingham, for appellee cross appellant.

TORBERT, Chief Justice.

These consolidated appeals address the legal propriety of sewer, water, and gas rates imposed upon Marshall Durbin & Co. (Durbin) by the Jasper Utilities Board (Board) for services provided since 1973. Durbin appeals from the trial court's order which 1) found all the rates and charges reasonable; 2) vacated all previously issued injunctions; and 3) granted summary judgment on the Board's counterclaim for $516,638.59 in unpaid charges.

Durbin contests, inter alia, 1) the methodology and consumer classifications utilized by the Board in establishing its rates and charges, and 2) the scope of review utilized by the trial court when testing the legality of the Board's rate-making decisions. More specifically, Durbin contends certain rates and surcharges were unreasonable, discriminatory, arbitrary, and unlawful and that it therefore suffered confiscation of its property without due process of law.

Durbin operates a chicken processing plant in the City of Jasper, and is one of the Board's largest users of water, sewer, and gas services. In 1961, the City constructed, with proceeds from a million-dollar bond issue, a sewer treatment plant to accommodate the needs of Durbin. In 1971, the city conveyed the sewer system and facilities to the Board, which began operating the system in conjunction with the Board's existing water and sewer service facilities.

In late 1972, correspondence between Durbin and the Alabama Water Improvement Commission (AWIC) disclosed that Durbin's sewage discharge was causing problems with the sewage treatment plant operations. AWIC recommended that Durbin install pretreatment facilities to alleviate the sewage overloading problems created by Durbin's inadequate removal of blood, feathers, offal, and grease waste, which resulted from the processing of 13,000 to 14,000 chickens per hour.

In October 1973, the Board passed a resolution establishing a sewer surcharge rate for sewage waste water above certain strength levels. While admitting that one purpose of this surcharge was to encourage Durbin to pretreat its wastes, the Board also contends this surcharge was necessary to defray additional costs necessitated by Durbin's extra-strength wastes.

The Board periodically analyzed the waste water from Durbin's plant and, based on the waste concentration levels, billed Durbin accordingly. Durbin paid all sewer surcharges billed prior to April 1, 1977. A dispute then arose between Durbin and the Board over the testing analysis and cost allocation methodology used by the Board in billing. Durbin, contending the surcharges were unreasonable, computed a surcharge using different cost allocation techniques, and thereafter paid the accrued billings only to the extent of this computation.

Durbin filed suit on June 24, 1977, seeking a declaratory judgment establishing the illegality of the surcharges and, additionally, seeking an injunction to prevent the Board 1) from shutting off or interfering with the supply of water and/or sewage service, and 2) from collecting or attempting to enforce the surcharge. A temporary restraining order was issued by the trial court. On December 28, 1978, the Board filed its answer and a counterclaim for $142,127.08 for past due bills.

In June 1979, the Board, based upon numerous studies by sanitary sewer engineers, increased the basic sewer rate (unchanged since October 1973) from $.25 to $.55 per thousand gallons of effluent discharged. In August 1979, Durbin sought, and was granted, an injunction prohibiting the board from collecting the new basic sewer rates or interrupting water or sewer service. The Board, again considering hydraulic cost studies, increased the basic effluent discharge rate to $.65 effective December 1980.

The Board established two classes of water customers: 1) residential; and 2) wholesale and industrial. During all of the periods here involved, Durbin has been in the lowest water bracket--an industrial user. Cost studies indicated that the cost of producing and distributing wholesale water exceeded the sales price to Durbin during this entire period. Administrative costs are allocated among its water customers on a gallonage basis, rather than by charging a flat rate per customer, as the Board does for its sewer customers.

The Board classifies gas customers based upon distinctions in their needs and services. As to each of the customer classifications, the evidence clearly shows: 1) the Board made substantially more money on its gas operations than it cost to provide that service; 2) during every year from 1974 through 1980, the Board's total system rate of return was lower than the rate of return on the gas system alone; and 3) the Board used some of the profit generated from the gas operations to subsidize the losses incurred on the sewer and water systems.

By subsequent amendments to its original complaint, Durbin challenged the legality of the water and gas rates and requested the court to:

"[O]rder and enjoin the defendant (1) to institute and implement a cost of service study and rate study on each separate utility service, (2) to set all future rates and establish appropriate and reasonable customer classes in any future rates by utilizing accepted and appropriate cost of service studies and rate studies for each utility service, and (3) to implement only fair, equitable, and reasonable rates that reflect the true cost of service to the plaintiff."

Durbin sought, and was denied, class certification for the gas customers. The case was tried during May and June 1981. The lower court entered an order in favor of the Board on all of Durbin's claims in August 1981. In October 1981, the trial court granted a motion for summary judgment on the counterclaim against Durbin for $516,638.59 in past due bills.

THE STANDARD OF REVIEW

The appropriate standard of review applicable in municipal rate cases is of crucial importance, and involves a two-tiered inquiry: 1) Did the trial court utilize the proper standard in reviewing the Board's actions; and 2) Did the trial court, in applying the standard of review to the evidence, exceed the bounds of lawful discretion, or base its judgment upon incorrect law or clearly erroneous findings of fact?

Durbin contends the trial court should have considered the case as an original civil proceeding, determined what methodology should have been used in setting rates, and determined what expert testimony to accept or reject. Durbin also contends, in essence, that a broader standard of review is applicable to municipal utilities, governed by municipal utility boards, than is applicable to privately owned utilities, regulated by the Alabama Public Service Commission (APSC).

The Board contends that ratemaking is a legislative function and that in reviewing the rates established by a municipal board the trial court does not act in a nisi prius function; rather, that in reviewing legislative ratemaking orders, the trial court accords a presumption of reasonableness and validity to the actions of the board.

The lower court, in determining the standard of review, stated the following:

"Though there are no cases which directly put a municipality established board in the same position as the Alabama Public Service Commission (A.P.S.C.) with regard to Court review, this court is of the opinion that a municipality board is a legislative body which functions in the same or similar manner as the A.P.S.C. A private utility must have the approval of the A.P.S.C. before new rates can be imposed. The A.P.S.C. acts as a legislative body, the members of which are elected to that office to regulate, in many cases, monopolistic utilities.

"A public utility board established by statute and appointed by the elected city officials of the municipality, in the opinion of this court, sits in the same position with regard to the intent of the legislature, as the A.P.S.C. and as it relates to court review.

"The Court is further of the opinion that the Board did not act arbitrarily, unlawfully or unreasonably in its methodology in establishing and assigning the various functions of the sewer plant as these functions relate to billing. The plaintiff set forth one methodology of cost distribution (how components of the plant are designated for billing, i.e., administration versus operational cost). The defendant, through expert testimony, set forth another methodology of cost distribution. Both are most persuasive. This court declines and is without legal authority to choose between the two when such testimony is presented, if both theories are credible and not unreasonable to the point of being unlawful."

Thus, the actions of the Board, when it acts in its legislative capacity to promulgate rates, as when it takes other legislative actions, are attended with a presumption of validity. We are in accord with this analysis of the trial court.

The Jasper Utilities Board was incorporated as a public corporation pursuant to Code 1975, § 11-50-310, et seq. The governing body of the municipality elects the directors of the Board. Code 1975, § 11-50-313. Thus, at least indirectly, the utility is answerable to the general public through the election process.

The Board is in a unique position in relation to public utility services. First, the Board is the proprietor of a critical public...