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In re Prometheus Realty Corp.

Supreme Court of New York, First Department

February 16, 2017

In re Prometheus Realty Corp., et al., Petitioners-Respondents,
The New York City Water Board, et al., Respondents-Appellants.

          Zachary W. Carter, Corporation Counsel, New York (Michael Pastor of counsel), for appellants.

          Herrick Feinstein LLP, New York (Michael Berengarten, Kevin Fullington and Jared D. Newman of counsel), for respondents.

          Friedman, J.P., Moskowitz, Gische, Kahn, JJ.

         Judgment (denominated an order), Supreme Court, New York County (Carol R. Edmead, J.), entered June 21, 2016, annulling and vacating respondents' resolutions approving a 2.1% increase to the water rates for fiscal year 2017 and a one-time credit of $183 for a class of ratepayers, affirmed, without costs.

         In this article 78 proceeding, respondents New York City Water Board (Water Board) and the New York City Department of Environmental Protection (DEP) appeal from a judgment granting the petition to annul and vacate the Water Board's resolution approving a 2.1% increase to the water rates for Fiscal Year 2017 along with a one-time $183 credit to "Class 1" property owners of one, two, and three-family homes. Petitioners contend that the Water Board's actions are ultra vires, but even if they are not, the rate increase adopted and credit issued to some, but not all, of its customers are without a rational basis and, therefore arbitrary.

         The Water Board is a public benefit corporation that functions independently of other branches of City Government (Public Authorities Law §§ 1045-f[1], 1045[g]). The primary functions of the Water Board include establishing and collecting water and sewer charges and other revenues to raise sufficient funds to operate and maintain the City's water system. In addition, the Water Board is responsible for raising revenues to support debt issued by the Water Finance Authority to finance the water system's capital program to improve and maintain the water system infrastructure. The Water Board is statutorily mandated to "establish, fix, revise, charge and collect and enforce the payment of all fees, rates, rents and other service charges" necessary for the operation and maintenance of the water and sewage systems in New York City (Public Authorities Law § 1045-g[4]; Giuliani v Hevesi, 90 N.Y.2d 27, 34 [1997]). In accordance with Public Authorities Law § 1045-h, since 1985, the Water Board has paid rent to lease the water system from the City. The City's DEP has acted as the Water Board's billing agent. Revenues collected from the water system customers are used to fund, among other things, the rent payments due to the City and reimburse DEP for its administrative duties. The Water Board is directed to collect revenues that are at least sufficient to make the water system financially self sustaining (Public Authorities Law §§ 1045-g[4], 1045-j).

         The Water Board is the "sole authority" empowered to set the rates it charges its customers for their water and sewage usage (Perry Thompson Third Co. v City of New York, 279 A.D.2d 108, 115 [1st Dept 2000], citing Matter of Village of Scarsdale v Jorling, 91 N.Y.2d 507, 515 [1998]). Despite such broad powers, the Water Board's authority is not without limits. A rate-fixing determination by any agency must still have a rational basis and reasonable support in the record (see Matter of Abrams v Public Serv. Comm., 67 N.Y.2d 205, 212 [1986]). In the case of water and sewer charges, public hearings must be held before the Water Board acts (Public Authorities Law § 1045-j[3]). Any rate structure ultimately approved by the Water Board must be consistent with its statutory authority and mandate (see Giuliani v Hevesi, supra at 34; see also Matter of Medical Soc. of State of New York v Serio, 100 N.Y.2d 854, 864 [2003]; Boreali v Axelrod, 71 N.Y.2d 1, 9 [1987]; Matter of Leon RR, 48 N.Y.2d 117, 126 [1979]). According to the Water Board, its mission is to "establish rates for and distribute the collected revenues of the Water and Sewer system of the City of New York, proactively considering the optimal level to achieve efficient financing of the System's infrastructure and sustainable provision of high-quality service at a fair price for our customers" (New York City Water and Wastewater Rate Report-FY 2017, May 2016, New York City Water Board, p.1) (mission statement).

         Initially, in setting its rate schedule for 2017, the Water Board proposed instituting a 2.1% rate increase. The minutes of the Water Board's April 8, 2016 meeting expressly provide that the 2.1% rate increase was intended to fill a $76 million funding gap between anticipated revenue and expenditures projected in year 2017. Notices for the required public hearings were published. On April 25, 2016, however, the City announced its decision to forgo a remaining $122 million rental payment that the Water Board owed for that year. The City recommended that the Water Board use the additional $122 million to issue a one-time only $183 credit on customer water and sewer bills, but only to those customers who are designated class one property owners [1]. Class one property owners consist primarily of one, two and three-family homeowners, regardless of the location of the property, its value or size. The other customers, for whom no credit was proposed in FY 2017, consist of residential buildings with four or more units, including rental, cooperative and condominium apartments (class 2); most utility property (class 3) and commercial and industrial properties (class 4). [2]

         A proposed new rate schedule was then published by the Water Board, adopting the City recommendation for a one-time $183 credit for class one property owners and linking it directly to the City's rent forbearance in 2017. Clearly the two are interrelated since the amount of the rent forbearance ($122 million) closely correlates mathematically to the total cost of the credit (664, 000 x $183 = $121, 500, 000). Public hearings were held, and on May 20, 2016, the Water Board voted to approve the 2.1% rate increase as well as the $183 credit limited only to class one property owners.

         We cannot say that as a general matter the Water Board's adoption of a rate increase and/or the implementation of a credit program distinguishing among different classes of customers is an ultra vires action. The Water Board has broad statutory authority to set water rates (see Perry Thompson Third, 279 A.D.2d at 115). We agree, however, with the trial court's assessment that the one-time credit adopted for some, but not all, water customers at the same time the Water Board needed to increase overall water rates to fund a projected budget shortfall for that particular year, has no rational basis. [3]

         The Water Board typically imposes rates based upon the ratepayers' use of water. Exceptions have been made, however, for certain programs that benefit different categories of ratepayers. For instance, under the Multi-Family Conservation Program (MCP), owners of buildings with four or more dwelling units who invest in low consumption plumbing, hardware and fixtures and cooperate with the Department of Environmental Protection's (DEP) conservation efforts, are billed at a flat rate for water and wastewater services instead of at a metered rate that measures actual water consumption. The Home Water Assistance Program (HWAP) provides credits to low income, senior citizen and disabled account holders, who demonstrate an economic need for such credits. The lead and copper monitoring program offers a credit to those customers who meet certain DEP plumbing criteria and satisfy the program's requirements. The Frontage Transition Program for residential units with six or more dwelling units provides temporary financial benefits for customers transitioning from flat rate billing to metered billing. While these programs lend support for the general proposition that the Water Board has and can provide differential rates among categories of customers, it does not necessarily follow that the distinctions made in this case have a rational basis. Notably many of the programs highlighted by the Water Board serve legitimate objectives of the Water Board related to water usage or quality, such as water conservation or the servicing of vulnerable customers who demonstrate a financial need.

         At bar, however, the rationale for designating class one property owners as qualified for or deserving of a credit, but not other classes of property owners, is lacking. The Water Board argues that consistent with its right to set rates "equitably, " it acted rationally to alleviate the financial burden of water bills for class one property owners by issuing a credit. Such a rationale only repeats the action taken, but does not provide the underlying justification for it. There is no factual basis to conclude, as the Water Board claims, that class one property owners have been more financially burdened by paying water bills than other classes of users; there is no basis for any conclusion that class one property owners are more needy than other ratepayers. The Water Board claims that a rational basis derives from the fact that class one property owners clearly include "seniors and low or moderate income homeowners." It is equally clear, however, that class one includes owners of luxury brownstones and other high value dwellings in the City; just as it should be clear that class two properties consist of other types of residential buildings, including coops and condominiums, also occupied by seniors and persons of low or moderate income, none of which derive any benefit, directly or indirectly, from this credit. Although the Water Board claims that the credit would be more financially meaningful for class one property owners, the credit is not in any way tied to financial need. There is no rational basis for the conclusion that class one ratepayers have traditionally borne a disproportionate burden of water and sewage fees. While the Water Board argues that some members of class one rate payers experience financial hardship in paying for water, the application of the credit does not in any manner take into consideration an owner's ability to pay or customers' need for this benefit, solely relying on the classification of the property for tax purposes, which bears little relation to the stated objective. [4]

         The one-time credit lacks a rationale basis because it cannot be reconciled with the projected budget shortfall for the year in which the credit is given. Once the City decided to forgo its rent, the resulting credit seems to have eliminated any shortfall for the particular year [5]. The Water Board's justification for the increase as necessary to ensure funding for the costs of repairing or replacing existing portions of the City's water and sewer system, while consistent with its mission statement and statutory mandate, is irreconcilable with the Water Board's implementation of a credit if, the Water Board still needed funds to balance its books for the year. The action seems inconsistent with the Water Board's statutory mandate to make the water system self sustaining. Although the Water Board also argues that it can apply the forgone rental payments in the manner proposed, the Water Board's decision to use the credit as proposed instead of meeting the costs of furnishing water services does not reflect any rational basis for doing so.

         The Water Board attempts to separately and independently justify the 2.1% increase by claiming that it needs the rate increase regardless of the credit because it is part of its five year projection of expenses. Yet, the Water Board's own meeting minutes confirm that the 2.1% rate increase was only to cover a $76 million budget gap for the FY 2017. Even accepting that the rate increase once adopted is permanent, the Water Board does not explain how its five year projections still have validity when they were made before the City announced its intention to forgo rent for the next five years. Moreover, even if this particular rate increase is unjustified, the Water Board's authority to determine future water rates, including any necessary increases, remains intact.

         Accordingly, we find that the trial court correctly granted the petition.

         All concur except Kahn, J. who dissents in a memorandum as follows:

          KAHN, J. (dissenting)

         Because I believe that the actions of the New York City Water Board in approving the 2.1% rate increase and one-time credit to class 1 property owners were neither ultra vires nor demonstrably arbitrary and capricious, I respectfully dissent.

         At the outset, it is important to note that the rate increase and credit were approved as components of an overall rate proposal to be implemented in FY 2017 (FY 2017 Rate Proposal). Under that proposal, not only would class 1 property owners receive an immediate credit of $183 in FY 2017, but each ratepayer, including class 2, 3 and 4 property owners, would receive an average benefit of nearly $1200 over the life of the rate schedule through FY 2020.

         I. ULTRA VIRES

         Petitioners contend that the Water Board's actions in approving the 2.1% rate increase and one-time credit were ultra vires. "[T]he Water Board is granted broad authority to set rates for water usage and is the sole entity which may do so with regard to [New York] City users[, ]" however (Matter of Village of Scarsdale v Jorling, 91 N.Y.2d 507, 515 [1998]; see Perry Thompson Third Co. v City of New York, 279 A.D.2d 108, 115 [1st Dept 2000]). Here, in approving the rate increase and the credit for class 1 property owners, the Water Board exercised ...

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