TOWN OF LEESBURG v. STEVE GIORDANO, JR., ET AL.
Record Nos. 091455 & 092329
Supreme Court of Virginia
November 4, 2010
JUSTICE LEROY F. MILLETTE, JR.
PRESENT: Koontz, Kinser, Lemons, Millette, and Mims, JJ., Carrico and Russell, S.JJ.
Thomas D. Horne, Judge
In this appeal, we consider whether the circuit court erred in ruling that the Town of Leesburg failed to present sufficient evidence to meet its burden under the fairly debatable standard in a challenge to a town ordinance that imposes a 100% surcharge on water and sewer consumption rates charged to residents of Loudoun County who reside outside of the Town of Leesburg.1
BACKGROUND
Seven individuals and three homeowner’s associations (the complainants) filed this civil action against the Town of Leesburg (the Town), challenging a town ordinance that increased the water and sewer rates affecting properties owned by the complainants that were located in Loudoun County, but outside the Town. By a series of agreements with Loudoun County, the Town was given the exclusive right to provide water
Prior to enacting the 100% surcharge, the Town hired Municipal & Financial Services Group (MFSG) to conduct a study regarding the pricing of utility services. This was done pursuant to the Town’s policy to conduct a cost of service study for water and sewer rates every five years to assure the stability and financial health of the water and sewer utility
In its November 2005 final report, MFSG recommended that the Town adopt a 100% surcharge on water and sewer consumption rates charged to out-of-town customers as a means to collect sufficient revenue to establish reserves and cover costs. However, MFSG stated in its final report: “It should be noted that the surcharge in-Town vs. outside-Town is proposed to increase from 50% to 100% based upon policy guidance provided by the Town Council.” In addition to the 100% surcharge on out-of-town customers, MFSG recommended that the Town increase the water and sewer rates incrementally, similar to its initial
The complainants filed a complaint against the Town seeking a declaratory judgment that the water rates charged to out-of-town customers were “unfair and unreasonable,” in violation of
At trial, Glenn A. Watkins, an economist specializing in public utilities rate-making, testified as the complainants’ expert witness. Watkins stated that his work has focused on
Watkins testified that the rates charged to out-of-town customers were excessive. In formulating his opinion as to the reasonableness of the out-of-town rates, Watkins conducted a rate study. Watkins testified that the purpose of the rate study is two-fold: first, to determine if the rates at issue are fair and reasonable; and if not, second, to determine the extent to which the rates are excessive. Watkins further testified that a rate study is a three tier process, consisting of the following steps: (1) determining the revenue that is needed to operate the utility; (2) allocating the costs among the various groups of customers the utility serves, after determining if there is any reason to allocate costs differently to one group of customers than to another group; and (3) establishing the “rate design,” which is the development of the actual rates charged. In performing the rate study, Watkins sought to estimate the “maximum rate that could be deemed fair and reasonable.”
Watkins used the “utility” method in conducting his rate study. By using the “utility” method, Watkins considered
Watkins was questioned concerning the Town’s policy decision to impose a 100% surcharge on consumption rates charged to out-of-town customers, particularly the relevance of the differential in rates charged by other localities. When asked by the complainants’ counsel if there are other ways of establishing reasonable rates not based on cost, Watkins responded, “Unequivocally no.” In a competitive world, Watkins said, “costs are the standards for prices.” Because the Town is operating as a monopoly, however, Watkins testified that the rates must reflect costs to “act as a surrogate for competition.” Watkins also testified that from an operational standpoint there is “essentially no difference” in cost to serve out-of-town customers versus in-town customers.
After his preliminary analysis, Watkins performed his rate study, which utilized audited financial data from fiscal year 2007. Watkins’ rate study focused on the water and sewer rates that became effective on July 1, 2008. Watkins opined that these rates were not fair and reasonable. Watkins’ rate study concluded that the then existing water rate for out-of-town customers was 45.51% excessive, and that the sewer rate for out-of-town customers was 28.36% excessive. Watkins concluded that the water and sewer rates for out-of-town customers must be reduced by these percentages to be reasonable. However, Watkins conceded that rate making, while an objective process, involves a subjective element such that reasonable people may differ as to what a reasonable rate is.
Olstein opined that the water rates for the out-of-town customers were “fair and reasonable,” and that the sewer rates for the out-of-town customers were “practicable, equitable, and uniform.” In formulating his opinion, Olstein spent at least 100 hours examining MFSG’s report, reviewing Watkins’ report, interviewing a number of persons, and reviewing various financial documents from the Town.
Olstein identified four justifications for his opinions and conclusions. First, Olstein testified that the Town’s process of reviewing its water and sewer rates every five years, and hiring MFSG to perform a rate study, was sound and reasonable. According to Olstein, five years is the time period recommended in the rate manuals, and MFSG has excellent
Second, Olstein stated that the Town customers are the owners of the utility, and as such, bear certain “owner’s risks,” which include the risk posed by damage to the water and sewer system, a change in regulations affecting the utility, a water main break, increases in demand, and an economic downturn. Olstein considered these “owner’s risks” in reaching his conclusion that the water and sewer rates charged to out-of-town customers were fair and reasonable. Olstein stated that incorporating these risks into a rate is ultimately a qualitative rather than a quantitative assessment because many of the risks involve the probabilities of future events. Olstein also said he did not know any Virginia municipality that actually quantified such risks. Additionally, Olstein stated that these risks, which are borne by the Town, are independent of and in addition to the risk of default the Town bears on the bond issued to finance capital improvements to the
Third, Olstein disputed Watkins’ testimony that there was essentially no cost difference in serving out-of-town versus in-town customers. Olstein performed calculations which supported his opinion that the demand for water services for the out-of-town customers is more variable than the demand of the in-town customers. Based on these calculations, Olstein concluded that it costs more to provide water service to the out-of-town customers than the in-town customers.
Fourth, Olstein testified that it was not uncommon for municipal water and sewer utilities to have a rate differential for out-of-town customers. Olstein stated that he could not recall a case where he did not look at other localities to present a rate comparison. According to Olstein, rate-setting bodies are interested in knowing how their rates compare to the rates of their peers, and the differential gives insight into how other localities have valued owner’s risks in a qualitative way. Olstein testified that he relied on the range of differentials in preparing his report, and that the rate
Regarding the MFSG study, Olstein opined that it was reasonable for MFSG to use the “cash needs” method in developing its proposed rates. Olstein stated that the “cash needs” method was appropriate because it takes into account the payment the Town must make on its outstanding debt used to finance the utility. Olstein further testified that it is appropriate to use the “cash needs” method in setting rates for municipal utilities because it ensures that the municipality has coverage for its debt obligations. According to Olstein, the “utility” method is more appropriate for investor-owned utilities, as it provides for a rate of return or profit. Further explaining this, Olstein stated:
One of the things that rates have to do – not the only one, but an important one – is to allow the utility owner to finance the system. If you’re in the private sector, that means you have to show good return on equity. If you are in the public sector, you are going to most likely be using revenue bond financing or some variant of that. And in a revenue bond issue, you have to show coverage on a cash basis.
Olstein did not conduct an independent rate study, nor was he asked to by the Town. However, Olstein independently reviewed MFSG’s rate study and the rates enacted by the Town, and based on this review, concluded that the rates were fair, reasonable, and equitable.
DISCUSSION
The key issue in this appeal is whether the circuit court properly ruled that the Town failed to put forth some evidence of reasonableness of the water and sewer rates charged to out-of-town customers sufficient to make the issue fairly
This Court has held that “setting rates and fees for sewer or water services is a nondelegable legislative function.” City of South Boston v. Halifax County, 247 Va. 277, 283, 441 S.E.2d 11, 15 (1994) (quoting County of York v. King’s Villa, Inc., 266 Va. 447, 450, 309 S.E.2d 332, 333 (1983)). Thus, the ordinance establishing such rates is afforded a presumption of validity. Eagle Harbor L.L.C. v. Isle of Wight County, 271 Va. 603, 615, 628 S.E.2d 298, 304 (2006). This presumption of legislative validity is a presumption of reasonableness. Board of Supervisors v. Robertson, 266 Va. 525, 532, 587 S.E.2d 570, 575 (2003); Board of Supervisors v. McDonald’s Corp., 261 Va. 583, 590, 544 S.E.2d 334, 338 (2001); Board of Supervisors v. Snell Constr. Corp., 214 Va. 655, 659, 202 S.E.2d 889, 893 (1974). Legislative action is reasonable if the matter at issue is fairly debatable. Robertson, 266 Va. at 532, 587 S.E.2d at 575. An issue is fairly debatable “when the evidence offered in support of the opposing views would lead objective and reasonable persons to reach different conclusions.” Board of Supervisors v. Williams, 216 Va. 49, 58, 216 S.E.2d 33, 40 (1975). Under the fairly debatable standard, “[t]he governing body is not required to go forward with evidence sufficient to
We have stated the following principles for determining whether the presumption of reasonableness in a particular case should prevail or is overcome:
Where presumptive reasonableness is challenged by probative evidence of unreasonableness, the challenge must be met by some evidence of reasonableness. If evidence of reasonableness is sufficient to make the question fairly debatable, the [legislative action] “must be sustained“. If not, the evidence of unreasonableness defeats the presumption of reasonableness and the [legislative action] cannot be sustained.
Robertson, 266 Va. at 533, 587 S.E.2d at 575 (citations omitted).
The General Assembly has expressly granted localities the power to provide and operate water and sewer facilities, and has placed limitations on the rates that localities’ governing bodies may charge for water and sewer services.
On appeal, the Town argues that it offered sufficient evidence to prove that the issue of reasonableness of the rates is fairly debatable. The Town asserts that the fairly debatable standard imposes a low burden on the Town, which it met with sufficient probative evidence of the rates’ reasonableness. Specifically, the Town contends that it met this low burden by presenting expert testimony from Olstein that the water rate for out-of-town customers was fair and reasonable, and that the sewer rate for out-of-town customers was practicable, equitable, and uniform.
The Town also asserts that the circuit court improperly applied the fairly debatable standard. According to the Town, the circuit court treated this case as a battle of the experts by improperly weighing the opinions, reasoning, and methodologies utilized by the opposing experts. In doing so, the Town contends that the circuit court failed to give effect to the Town’s evidence that supported the reasonableness of the rates.
The complainants respond that the circuit court properly applied the fairly debatable standard and correctly ruled that the Town failed to present sufficient evidence to meet its burden under that standard. The complainants focus their
In Board of Supervisors v. Stickley, 263 Va. 1, 556 S.E.2d 748 (2002), this Court addressed a Board of Supervisors’ denial of an application by a landowner, Stickley, for a special use permit to raise and release game birds on his property. The Board denied Stickley’s application, citing concerns from poultry companies about the possibility of wild game birds carrying disease into local poultry farms in the area. Id. at 5-6, 556 S.E.2d at 751. In a proceeding in the circuit court filed by Stickley to declare the Board’s action unreasonable, arbitrary, and capricious, both parties presented expert witnesses who testified about the risk of disease posed to the local poultry industry by the wild birds. Id. at 7-8, 556 S.E.2d at 752. After summarizing the various expert witnesses’ testimony regarding this issue, this Court stated:
The question in this case is not who presented the greatest number of expert witnesses or even who won the battle of the experts. Rather, the question is whether there is any evidence in the record sufficiently probative to make a fairly debatable issue of the Board’s decision to deny Dr. Stickley a special use permit.
Id. at 11, 556 S.E.2d at 754.
As this Court stated in Stickley, the issue in this case is not who won the battle of the experts. Accordingly, this Court need not critically examine and contrast the methodologies, processes of reasoning, and calculation methods used by the opposing experts in formulating their opinions. Rather, the Court need only examine whether any evidence in the record is sufficiently probative to make a fairly debatable issue of the fairness and reasonableness of the water rate charged to out-of-town customers, and the practicability, equitableness, and uniformity of the sewer rate charged to out-of-town customers. Olstein’s testimony that the water rate charged to out-of-town customers is fair and reasonable, and that the sewer rate charged to out-of-town customers is practicable, equitable, and uniform, supported by his justifications for his opinion, is sufficient to make the issue fairly debatable.3 Accordingly, we will reverse the judgment of
Reversed and final judgment.
TOWN OF LEESBURG v. STEVE GIORDANO, JR., ET AL.
Record Nos. 091455 & 092329
Supreme Court of Virginia
November 4, 2010
SENIOR JUSTICE RUSSELL, with whom JUSTICE MIMS joins, dissenting.
In this appeal, Leesburg’s out-of-town customers, the prevailing parties in the circuit court, assign cross-error to the circuit court’s application of the “fairly debatable” standard in these circumstances. We granted them an appeal on that assignment of cross-error, but the majority opinion does not mention it. Rather, the majority opinion begins its discussion with the holding: “The key issue in this appeal is whether the circuit court properly ruled that the Town failed to put forth some evidence of reasonableness . . . sufficient to make the issue fairly debatable.” That holding ignores the fundamental question, fairly presented in this appeal, whether the “fairly debatable” standard properly applies at all.
We consistently adhere to the “fairly debatable” standard because of the constitutional principle of separation of powers. It is not the proper function of the judicial branch of government to second-guess legislative judgments made by the duly-elected representatives of the people. Neither the wisdom of legislative enactments nor the motivations of those enacting them are subject to judicial review. The majority opinion
In the case of legislative acts affecting persons and territory outside the jurisdiction in which the legislative body has the authority to govern, the rationale supporting the “fairly debatable” standard is non-existent. A town council’s decision setting utility rates outside the town should be accorded no more deference than the decision of the board of directors of a private business operated for profit.2
Because the Town, as to its out-of-town customers, is shielded from the competitive forces affecting private business
If the “fairly debatable” standard is applied to such cases, the out-of-town customers are left to the mercies of an unregulated monopoly against which they have no redress either at the polls or in the courts. If litigation such as this is subjected to the “fairly debatable” standard, the rate-making body, to prevail, needs only to find an expert witness who will opine that the rate-maker’s pre-determined decision was “fair and reasonable” with respect to water rates, or “practicable[,] equitable [and] uniform” with respect to sewer rates. That
I would affirm the decision of the circuit court. That court, after carefully reviewing the evidence, found the Town’s evidence insufficient to overcome the complainants’ evidence of unreasonableness even applying the very low “fairly debatable” standard. A fortiori, the Town’s evidence would have failed to meet the more stringent standard of proof by a preponderance of the evidence. See, e.g., Ames v. Town of Painter, 239 Va. 343, 348, 389 S.E.2d 702, 704 (1990) (distinguishing “preponderance of the evidence” and “fairly debatable” standards). Because a pure question of law is presented here, and no further evidence
Our people are not noted for their docility in the face of monetary exactions imposed upon them by a government in which they have no voice. In the late eighteenth century, a similar grievance led to considerable unpleasantness in this country, leading to a fundamental change of government. That grievance also arose from the fact that those aggrieved had no redress either at the polls or in the courts.