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Westchester County (NYC Water Rate) - Ruling, August 9, 1993

Ruling, August 9, 1993

STATE OF NEW YORK : DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter of the Water Rate Petition filed by

WESTCHESTER COUNTY
Petitioner

ISSUES RULING

DEC WATER SUPPLY NO. 8865

SUMMARY

These rulings address the issues discussed at the March 30, 1993 Issues Conference regarding Westchester County's request for the Department of Environmental Conservation (the Department) to fix the water rate charged by New York City (the City) to upstate communities who use the City's water supply system.

To fix the fair and reasonable water rate, the only issues for adjudication are:

  1. What are the appropriate costs for chemicals, other than personal services (OTPS) at the Hillview Reservoir, and fringe benefits?
  2. How should the interest rates and operating expenses used to calculate the water rate be normalized?

BACKGROUND AND JURISDICTION

New York City's potable water supply comes from three reservoir systems located north of the City's limits in Ulster, Green, Delaware, Schoharie, Sullivan, Orange, Westchester and Putnam Counties. The Croton System is the oldest part of the City's water supply system and includes the Croton River and its tributaries. The City later developed the Catskill and Delaware Systems. The Catskill System collects water from the Esopus and Schoharie Creek watersheds. The Delaware System collects water from the East and West branches of the Delaware River. A series of aqueducts interconnects the three reservoir systems.

The New York State Water Supply Act of 1905 and later amendments, now identified as 24-360 of the Administrative Code of the City of New York (the Act), authorized the City to develop the Catskill and Delaware watersheds as sources of potable water. In return, the Act acknowledges the upstate communities located in the watersheds have a right to take water from the City's supply at a "fair and reasonable rate."

The daily quantity of water that an upstate community may take is limited to the number of inhabitants in the upstate community times the daily per capita consumption of water in the City [24-360(e)]. The rate charged to upstate users may not exceed the rate charged to persons using water in the City [24-360(c)].

If there is a dispute about what the fair and reasonable rate charged by the City should be, the Act and the ECL authorize the Commissioner of the Department of Environmental Conservation to conduct a hearing to determine the proper rate. The NYS Supreme Court has the authority to review the Commissioner's determination. [24-360(c)]

Traditionally, the City charged one rate for upstate communities who took water from the Croton system and another rate for those who used the Catskill/Delaware system. Since January 1973, the rate for the Croton System has been $76.87 per million gallons (PMG) and the rate for the Catskill/Delaware system has been $103.72 PMG.

WESTCHESTER COUNTY'S PETITION

In April 1992, the New York City Water Board approved an increase in the rate for upstate users to $165.23 per million gallons (PMG) to be phased in over two years. As provided by the Water Supply Act, ECL Article 15, Title 9 (Water Resources - Administrative Procedures for Article 15) and 6 NYCRR Part 603 (Applications for Fixation of Water Rates), Westchester County petitioned the Department to conduct a hearing to fix the rate for upstate communities who take water from the City's supply.

HEARING PROCEDURES

The County filed its petition pursuant to 6 NYCRR Part 603 (Applications for Fixation of Water Rates). While these rules provide for a public hearing, they do not precisely describe how the hearing should be conducted. Consequently, the hearing procedures outlined in 6 NYCRR Part 624 (Permit Hearing Procedures) will be used as a guide for this proceeding.

PUBLIC HEARING AND ISSUES CONFERENCE

A copy of the Notice of Public Hearing (the Notice) appeared in the Department's Environmental Notice Bulletin on March 3, 1993 and in the Gannett Suburban Newspaper on March 5, 1993. A copy of the Notice was also sent to each municipality and water district in Westchester County.

A public hearing convened on March 30, 1993 at 10:00 A.M. at County offices located at 85 Court Street, White Plains, NY. No individuals from the affected upstate communities appeared to provide legislative comments about the proposed rate increase.

The Notice also provided for an Issues Conference. The following upstate municipalities and water districts filed requests for party status and appeared at the Issues Conference.

Marianne J. Berlingeri, Esq., Assistant County Attorney, appeared for Westchester County (the County).

Florence Hutner, Esq., Assistant Corporation Counsel, and Gail Rubin, Esq., Assistant Corporation Counsel appeared on behalf of New York City (the City).

Glen Bruening, Esq., Senior Attorney, represented the Department Staff.

Joel Dichter, Esq. from Seham, Klein and Zelham, New York, appeared for the Town and Village of Scarsdale (Scarsdale).

David S. Lent, Town Supervisor for the Town of New Paltz, appeared on behalf of the Town and Village of New Paltz (New Paltz).

John G. Hock, P.E., Manager, appeared for the Westchester Joint Water Works (WJWW), Mamaroneck. Francis A. Auleta, Esq., Mamaroneck, later filed a brief on behalf of WJWW.

Joseph Hennerby, Esq., Senior Assistant Corporation Counsel, appeared on behalf of the City of White Plains (White Plains).

Cara Lee, Environmental Director, appeared for Scenic Hudson, Poughkeepsie.

At the Issues Conference, the City and the County stated they were actively negotiating a water rate that would be acceptable to both Parties. The City and County conditioned the success of the negotiations on whether the other Issues Conference participants accepted the settled water rate. Additionally, if there were issues associated with water conservation and excess water consumption, the City and the County stated the negotiations would end without agreeing on a mutually acceptable water rate.

During the Issues Conference, ALJ O'Connell set a schedule for the participants to file comments about the Ernst & Young Report and the Guastella Report (See THE REPORTS below), and to submit briefs and replies about whether the Department has the jurisdiction to address excess water consumption and to set the rate for excess water consumption. The Department Staff clarified its position about how to include a water conservation program in the rate process. Upon timely receipt of the participant's comments and other filings, the record of the Issues Conference closed on June 18, 1993.

THE REPORTS

In July 1991, the New York City Water Board retained Ernst & Young to review the cost of providing potable water to upstate communities. Historically, the City charged one rate for upstate communities who took water from the Croton System and another, higher rate for upstate communities who used water from the Catskill/Delaware System. The report prepared by Ernst & Young (the Ernst & Young Report), however, recommended one uniform rate for all upstate communities regardless of the water source because each component of the City's water supply system is an integral part of the total system. Furthermore, the Ernst & Young Report stated a uniform rate for upstate users would be consistent with the City's billing policy for its residents. Using the cash basis method, the Ernst & Young Report calculated a uniform water rate of $165.23 per million gallons (PMG) for upstate communities to be phased in over two years.

Westchester County retained Guastella Associates, Inc. to review the Ernst & Young Report. The Guastella Report did not object to setting one uniform water rate for all upstate communities. The Guastella Report proposed adjustments to some of the costs relied upon in the Ernst & Young Report, and reduced the rate from $165.23 to $153.71 PMG.

Citing City of New York, Water Supply Application No. 5947, dated January 31, 1973, the Department Staff argued the cash basis method is the proper method for calculating a fair and reasonable water rate. According to the Staff, the differences between the Ernst & Young Report and the Guastella Report are minor. The Staff takes no position about these differences.

The Town and Village of Scarsdale (Scarsdale) agreed with the adjustments proposed in the Guastella Report, but argued the interest rates and operating costs assumed in both reports are substantially less than originally projected. Scarsdale contended the expenditures in both reports should be revised because these expenses were not normalized over time.

Scarsdale also objected to the City's proposal to implement a single water rate and argued there have been no changes to the City's water system to justify discontinuing this tradition. Scarsdale contended users of the Catskill/Delaware System unfairly subsidize the Croton System because it costs more to operate the Croton System while the rate charged for taking water from it is less than the Catskill/Delaware rate. Scarsdale argued equalizing the rate will not alter the cross-subsidization.

The Westchester Joint Water Works (WJWW), a water district distinct from Westchester County, agreed with the analysis in the Guastella Report.

The City of White Plains (White Plains) argued the rate proposed by the City in the Ernst & Young Report is excessive and accepted the rate suggested in the Guastella Report. White Plains suggested a ten step phase-in period would be fairer rather than the two year phase-in period proposed in the Ernst & Young Report or the four year phase-in period proposed in the Guastella Report.

The Town and Village of New Paltz, and Scenic Hudson did not provide any comments about the Ernst & Young and the Guastella Reports.

DISCUSSION AND RULING: There is no issue about what method should be used to calculate the water rate. The City and the County properly relied on the precedent established by the Commissioner (City of New York, Water Supply Application No. 5947 dated January 31, 1973). None of the other Issue Conference participants objected to using the cash basis method to calculate the water rate.

There are issues about what are the proper expenditures, and how interest rates and operating expenses should be normalized. The Guastella Report disputes the cost of chemicals, the costs for other than personal services (OTPS) at the Hillview Reservoir, and the costs associated with fringe benefits. Scarsdale's argument about the need to normalize expenditures is persuasive because of the time value associated with money.

Scarsdale's objection to a single uniform water rate does not raise an issue for adjudication. Though geographically separated, a series of aqueducts interconnects the three reservoir systems. The three reservoir systems, therefore, operate as a single water supply unit, and the water taken from the system is fungible. All upstate users benefit from the interconnections. Consequently, the cost of water should be uniform regardless of its origin in the system.

Therefore, the issues are:

  1. What are the appropriate costs for chemicals, other than personal services (OTPS) at the Hillview Reservoir, and fringe benefits?
  2. How should the interest rates and operating expenses used to calculate the water rate be normalized?

EXCESS WATER CONSUMPTION, AND
THE RATE CHARGED FOR EXCESS CONSUMPTION

Pursuant to 24-360(e) of the New York City Administrative Code, upstate communities may take water from the City's water supply up to an amount equal to the number of that community's inhabitants times the daily per capita consumption in the City. Although the Act guarantees this amount of water, upstate communities occasionally exceed the established minimum. The excess amount is more than what the City must provide. For the excess amount, the City charges the upstate communities the metered rate for in-City residents which is higher than the usual upstate water rate.

Westchester Joint Water Works (WJWW) and the other municipalities and water districts requesting Party Status object to the rate the City charges upstate users for excess water consumption. In considering this objection, I found the issue raised a legal question about whether the Department has jurisdiction over this issue, and permitted the Issues Conference participants to file briefs and replies.

Westchester Joint Water Works, the Town and Village of Scarsdale, the Department, the City, and the County filed briefs about whether the Department has the authority to determine how to calculate excess water consumption and what the rate for excess consumption should be. White Plains adopted the arguments presented by the Town and Village of Scarsdale. Replies came from the Town and Village of Scarsdale, the County, and the City. The Town and Village of New Paltz, and Scenic Hudson did not file a brief or a reply about this jurisdiction question.

WJWW argued the City has no explicit legal authority to fix the rate charged for excess water consumption by upstate communities. WJWW concluded the Commissioner has the right and responsibility to accept jurisdiction to fix the rate charged to the upstate users for excess water consumption.

Scarsdale contended various provisions of the ECL authorize the Department to control the State's water supply and to arbitrate the rates for water sales between municipalities [See ECL 15-0109, 15-1521 and City of Utica Board of Water Supply DEC Application No. 60-83-0264 Decision dated July 16, 1984]. Since 24-360 of the Water Supply Act identifies the Department as the only entity designated to resolve conflicts about the wholesale water rate charged to upstate communities, Scarsdale argued the Act also must allow the Department to set water rates for excess water consumption.

The Department argued the Act guarantees a minimal amount of water to the upstate communities but does not authorize excess water sales. According to the Department, excess water sales require a permit from the Department pursuant to ECL 15-1501 and 15-1521. If the Department issued a permit for excess water sales, then the Department argued ECL 15-0301(2) would authorize the Commissioner to broaden the scope of this proceeding, on the petition of Westchester County, to determine the rate for excess water consumption.

Citing Westchester County Water Agency (Water Supply Application No. 6840 Decision dated June 20, 1980), the City argued the Department does not have the authority to calculate excess water consumption or to set the rate for that consumption. The City described how the language of the Water Supply Act contrasts with ECL 15-1521. Although ECL 15-1521 authorizes the Department to fix both the rate and the amount of water supplied, the Act, which specifically applies to the City, authorizes the Department to fix only the rate. Without express authority, the City argued the Legislature intentionally limited the Department's authority in this way.

The City further asserted the Municipal Water Finance Authority Act [PAL 1045-j(9)] prevents the Department from fixing rates for excess water supplied to upstate communities. Based on ECL 15-0111, the City also contended the Department does not have permitting authority pursuant to ECL 15-1521 over the excess water the City provides to the upstate communities.

The County stated the Water Supply Act and its legislative history are silent about excess water consumption and the rate the City should charge for excess consumption. On the one hand, the Act does not define the terms "water charges or water rates." The County asserted the meaning of these terms could reasonably include charges for excess water consumption. If this assertion is accepted, the County argued the Department would be able to look at the issue of excess water consumption and the rate associated with excess consumption.

On the other hand, the County noted the Commissioner has previously determined there are limits on the Department's jurisdiction with respect to determining the amount of water that upstate communities can take pursuant to the Water Supply Act and its amendments (Westchester County Water Agency Water Supply Application No. 6840 Decision dated June 20, 1980).

RULING AND DISCUSSION: Excess water consumption and the rate New York City charges upstate communities for taking excess water are beyond the scope of this proceeding, and therefore are not issues for adjudication.

The Water Supply Act and its amendments require the City to provide a minimum amount of water to the upstate communities and explicitly limit the Department's authority to fixing the rate associated with that amount if there is a dispute. As a matter of law, the sole purpose of this proceeding is to respond to the County's petition for the fair and reasonable water rate the City may charge upstate communities for water. The rate resulting from this hearing applies to the amount of water 24-360(e) of the New York City Administrative Code requires the City to supply to the upstate communities.

The Act neither requires the City to provide excess water to upstate communities nor authorizes upstate communities to take excess water. ECL Article 15, Title 15 (Water Supply), however, contemplates all aspects of water supply. Since the Act is silent about excess water consumption by upstate communities, ECL Article 15, Title 15 applies to the excess amount of water used by the upstate communities.

Section 15-1501(a) states, in pertinent part, that a permit is required to take additional water from an existing approved source. Consequently, upstate communities must obtain permits from the Department pursuant to ECL Article 15, Title 15 to take excess water from the City's supply. The Department would review these applications for water supply permits pursuant to ECL Article 8 (SEQRA), Article 15, Title 15 (Water Supply) and Article 70 (UPA), and 6 NYCRR Part 617 (SEQR) and Part 621 (Uniform Procedures).

The scope of this proceeding will not be expanded pursuant to 15-0301(2) because there is an established regulatory procedure for reviewing applications for water supply permits. Any unresolved issues associated these permit applications such as the amount of water that could be taken, the rate the City could charge for this water and water conservation concerns (See WATER CONSERVATION below) would be addressed in adjudicatory hearings held pursuant to Part 624. Such hearings will be separate from this proceeding.

The City's argument that the Municipal Water Finance Authority Act [PAL 1045-j(9)] and ECL 15-0111 bar the Department from fixing rates for excess water supplied by the City to upstate communities is misplaced. As explained above, these statutory provisions limit the Department's jurisdiction with respect to the amount of water the City is required to supply to the upstate communities. Because the Water Supply Act is silent about excess water consumption, and ECL Article 15, Title 15 (Water Supply) considers all aspects of water supply, ECL Article 15, Title 15 applies to the excess amount of water used by the upstate communities. This interpretation is consistent with PAL 1045-j(9) and ECL 15-0111.

Section 24-360(e) sets the parameters for calculating water consumption by upstate communities. Consequently, arguments by the Westchester Joint Water Works and the Town and Village of Scarsdale about whether the Department has the discretion to modify the parameters for calculating water consumption and whether these parameters are inherently discriminatory are not issues for adjudication. Similarly, providing population credits for large upstate regional water users, such as industrial facilities and the Westchester County Airport, are not authorized by the Act, and therefore are not issues for adjudication in this proceeding. However, it may be proper to examine these concerns as part of the regulatory review of any application for a water supply permit filed by an upstate community to take excess water from the City's supply.

WATER CONSERVATION

Since ECL 15-1503 requires applicants for water supply permits to develop water conservation programs, the Department argued the water rate should recover any costs associated with implementing a water conservation program. According to the Department, a water conservation program could be implemented by either developing a conservation program during the hearing, or establishing the proper rate and requiring the City to develop a conservation program based on that rate. In the former instance, the current rate formula would be revised to account for the program costs. In the latter instance, the rate would be adjusted to recover the costs associated with implementing the conservation program.

Scenic Hudson supplied a draft report dated March 1993 entitled Expanding New York City's Water Conservation Program to Upstate User Communities. The report states water conservation programs should be implemented to decrease the need for developing new water supply sources thereby containing costs. The report acknowledges that the City has begun to implement conservation measures and recommends that the City and the upstate communities jointly implement a more comprehensive water conservation program.

The City argued the currently proposed rate incorporates the costs associated with implementing a water conservation program for upstate communities. As the Water Board implements conservation measures, the City contended the costs associated with these measures would be included in later rate proposals.

The County argued its proposed rate also incorporates the costs associated with conserving water supply resources. According to the County, it has been working with the City to develop a water conservation program.

The other Issues Conference participants did not comment about the need to develop a water conservation program for upstate communities.

RULING AND DISCUSSION: Within the context of the County's petition, developing a water conservation program for upstate communities is not an issue for adjudication. Both the City and the County agree it is necessary to develop a more comprehensive water conservation program. Furthermore, the City and the County contend their respective rates include the costs associated with implementing existing conservation measures.

Those upstate communities that file applications for water supply permits to take excess water from the City's supply would be subject to the water conservation requirements provided in ECL Article 15, Title 15.

TREATMENT PLANT COSTS

The Town and Village of New Paltz argued the costs incurred by upstate communities who operate waste water treatment plants in the watersheds of the City's reservoirs should be subtracted from the water rate charged by the City to these upstate communities.

DISCUSSION AND RULING: With respect to treatment plants located in the watersheds of the City's reservoirs, the Commissioner has determined the City is responsible for paying the costs for "extra" treatment (Matter of the Village of Delhi DEC No. 41850397, dated October 23, 1987 and May 18, 1988). Upon renewal of its SPDES permit, the Department required the Village of Delhi to disinfect the discharge from its treatment plant. This requirement was "over and above" the treatment needed to maintain downstream water quality but necessary for public health. Relying on Condition "C" of Decision #2005 dated November 14, 1950 by the Water Power and Control Commission for the City's permit to develop the Cannonsville Reservoir, the Commissioner concluded the City was responsible for paying the costs associated with disinfecting the Village's discharge.

The Delhi decision requires the City, as a water provider, to pay for "extra" treatment. Therefore, the costs for "extra" treatment should be factored into the water rate charged to upstate communities.

New Paltz is not entitles to water credits equal to the cost of operating its water treatment plant. New Paltz, as a sewage treatment provider, must maintain the established water quality standards, and operate its waste water treatment plant in a manner consistent with its SPDES permit, and the applicable statutes and regulations. However, the City would have to reimburse New Paltz for any "extra" treatment that New Paltz would have to undertake as a condition of its SPDES permit.

New Paltz did not identify any "extra" treatment that it is required to provide or assert the City does not pay for this "extra" treatment. Consequently, there is no issue for adjudication.

ILLEGAL RATE CHANGES

The Town and Village of Scarsdale argued the first phase of the rate increase that took effect in July 1992 is illegal. According to Scarsdale, either upstate water users must agree to the rate increase or the Department must issue an order changing the rate. Scarsdale asserted neither prerequisite was met. Scarsdale also called for a freeze on the water rates due to adverse economic conditions.

RULING: Whether the first phase of the rate increase that took effect in July 1992 was legal is beyond the scope of this proceeding. Furthermore, Scarsdale did not cite, nor could I find, any authority that would permit the Commissioner to freeze water rates due to the economic recession.

REQUESTS FOR PARTY STATUS

RULING: I grant all requests for Party Status, and put the Parties on notice that I will exercise the authority provided in 624.4(h) to minimize repetitious testimony and argument during the proceeding.

APPEALS

Sections 624.4(f) and 624.6(d) provide for an appeal to the Commissioner from the Administrative Law Judge's rulings on requests for Party Status and issues for adjudication. Appeals from the ALJ's rulings must be sent to: Office of the Commissioner, New York State Department of Environmental Conservation, 50 Wolf Road, Albany, New York 12233-1010.

The Commissioner must receive any appeal by August 30, 1993. A copy of any appeal filed with the Commissioner must be sent to the ALJ and to each Issues Conference participant on the Service List. Telefaxed copies of appeals will not be accepted.

Replies to appeals are authorized. The Commissioner must receive any reply by September 10, 1993. A copy of any reply filed with the Commissioner must be sent to the ALJ and to each Issues Conference participant on the Service List. Telefaxed copies of replies will not be accepted.

FURTHER PROCEEDINGS

Depending on the outcome of any appeals, I will advise the Issues Conference participants about scheduling further proceedings after the Commissioner issues an Interim Decision.

__________/s/_______________
Daniel P. O'Connell
Administrative Law Judge

Dated: Albany, New York
August 9, 1993

To: Service List dated April 8, 1993

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