In the Matter of Prometheus Realty Corp., et al., Respondents,v.New York City Water Board, et al., Appellants.BriefN.Y.November 16, 2017APL-2017-00088 New York County Clerk’s Index No. 653003/16 Court of Appeals of the State of New York In the Matter of the Application of PROMETHEUS REALTY CORP., PORTOFINO REALTY CORP., TUSCAN REALTY CORP. and THE RENT STABILIZATION ASSOCIATION OF N.Y.C., INC., Petitioners-Respondents, For a Judgment Pursuant to CPLR Article 78, – against – THE NEW YORK CITY WATER BOARD and THE NEW YORK CITY DEPARTMENT OF ENVIRONMENTAL PROTECTION, Respondents-Appellants. BRIEF OF AMICI CURIAE THE NATURAL RESOURCES DEFENSE COUNCIL AND THE PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC. QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 Tel.: (212) 849-7000 Fax: (212) 849-7100 Attorneys for Amici Curiae The Natural Resources Defense Council and the Public Utility Law Project of New York, Inc. October 6, 2017 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................................................... iii ORGANIZATIONAL DISCLOSURE STATEMENT ............................................vi PRELIMINARY STATEMENT ...............................................................................1 STATEMENT OF INTEREST..................................................................................4 ARGUMENT .............................................................................................................5 I. THE GOVERNING STATUTE GIVES THE WATER BOARD DISCRETION IN SETTING RATES.............................................................5 II. UTILITIES IN THIS STATE AND THROUGHOUT THE NATION HAVE BROAD DISCRETION TO SET APPROPRIATE RATES............10 A. Cost-Of-Service Ratemaking Provides Utilities Discretion In Designing Customer Rates, Credits, Charges, And Fees....................10 B. New York City And State Water Utilities Have Adopted Rates That Both Are Cost-Of-Service Based And Protect Social, Conservation, And Stormwater Management Objectives...................12 C. Utilities Nationwide Are Designing Rate Structures To Address Low-Income Protection, Conservation, And Stormwater Management, And This Court Should Preserve New York Utilities’ Authority To Do So Too ......................................................19 III. THIS CASE SHOULD BE DECIDED ON RATIONAL-BASIS REVIEW, NOT JURISDICTION, TO PRESERVE THE WATER BOARD’S ABILITY TO IMPLEMENT FLEXIBLE RATES ....................23 A. The Validity Of The 2017 Bill Credits And Rate Increase Concern The Rationality Of The Board’s Action, Not Its Jurisdiction To Issue Credits, Differential Rates, Or Programs Beyond Strict Cost-Based Rates .........................................................24 B. Rational-Basis Review Provides A Suitable And Effective Form Of Judicial Review To Prevent Improper Water And Sewer Rates .........................................................................................26 C. The Court Should Rule Solely On The Rationality Of The Bill Credit And Rate Increase Challenged Here ........................................28 ii CONCLUSION........................................................................................................29 PRINTING SPECIFICATIONS STATEMENT .....................................................31 iii TABLE OF AUTHORITIES Page(s) CASES 125 Bar Corp. v. State Liquor Auth., 24 N.Y.2d 174 (1969)....................................................................................22 Abrams v. Pub. Serv. Com., 67 N.Y.2d 205 (1986)......................................................................................9 In re Application of Hawaii Electric Light Co., 60 Haw. 625 (1979) .......................................................................................16 Basel v. Power, 44 Misc.2d 127 (Sup. Ct. N.Y. Cnty. Sep. 28, 1964)....................................22 Carey Transp., Inc. v. Triborough Bridge & Tunnel Auth., 38 N.Y.2d 545 (1976)......................................................................................7 City of Lewiston v. Gladu, 40 A.3d 964 (2012)........................................................................................18 Elmwood-Utica Houses v. Buffalo Sewer Auth., 65 N.Y.2d 489 (1985)......................................................................................7 Energy Ass’n of New York State v. Pub. Serv. Comm’n of State of N.Y., 169 Misc.2d 924 (Sup. Ct. Albany Cnty 1996)...............................................9 Fazio v. Joy, 58 N.Y.2d 674 (1982)....................................................................................22 Giuliani v. Hevesi, 90 N.Y.2d 27 (1997)....................................................................................5, 6 Haymes v. Holzemer, 3 Ohio App.3d 377 (Ct. App. Ohio 1981).......................................................6 Merrimac Paper Co. v. City of Lawrence, 1995 WL 1286562 (Mass. Super. Aug. 29, 1995) ........................................17 N.Y. Tel. Co. v. PSC, 95 N.Y.2d 40 (2000)........................................................................................9 NRDC. v. N.Y.S. Dep’t of Envtl. Conservation, 25 N.Y.3d 373 (2015)....................................................................................13 Perry Thompson Third Co. v. City of New York, 279 A.D.2d 108 (1st Dep’t 2000) ....................................................................6 iv Matter of Phillips v. Town of Clifton Park Water Auth., 286 A.D.2d 834 (3d Dep’t 2001)...................................................................20 Matter of Prometheus Realty Corp. v. New York City Water Bd., 147 A.D.3d 519 (1st Dep’t 2017) ........................................................... 24, 27 State v. City of Iowa City, 490 N.W.2d 825 (Iowa 1992)..........................................................................6 Town Taxi, Inc. v. Police Comm’r of Boston, 377 Mass. 576 (1979) ....................................................................................16 Vill. of Scarsdale v. Jorling, 91 N.Y.2d 507 (1998)........................................................................... 7, 9, 20 Watergate II Apartments v. Buffalo Sewer Auth., 46 N.Y.2d 52 (1978)............................................................................. 7, 8, 15 Westmoreland Apt. Corp. v. New York City Water Bd., 294 A.D.2d 587 (2d Dep’t 2002)...................................................................22 STATUTES AND RULES N.Y. Civ. Prac. L. & R. 7803...................................................... 3, 18, 19, 20, 21, 22 N.Y. Pub. Auth. Law § 1045-g ............................................................. 2, 5, 6, 19, 21 N.Y. Pub. Auth. Law § 1045-j ...................................................................................6 N.Y. Pub. Serv. Law § 37 ........................................................................................11 REGULATIONS 21 N.Y.C.R.R. § 10085.12(m) .................................................................................11 OTHER AUTHORITIES American Water Works Association, Principles of Water Rates, Fees and Charges, (6th ed. 2012) .................................................................................10 American Water Works Association, National Survey of Commercial Industrial And Institutional Water Efficiency Programs...............................20 Black & Veatch Management Consulting, LLC, 2016 Stormwater Utility Survey ............................................................................................................17 Bonbright, James C., Principles of Public Utility Rates, Columbia University Press, New York, New York (2d ed. 1988) ..................................................17 City of Ithaca, Establishing the Stormwater User Fee, FAQs ................................17 v City of Ithaca, Stormwater User Fees, FAQs..........................................................17 Goodman, Leonard Saul, Process of Ratemaking, Public Utilities Reports, Inc. (1998)......................................................................................................17 National Association of Clean Water Agencies, Legal Considerations for Enacting, Implementing, & Funding Stormwater Programs, at 2 (2016).............................................................................................................21 National Resources Defense Council Issue Brief, Waste Less, Pollute Less: Using Urban Water Conservation to Advance Clean Water Act Compliance, June 2014..................................................................................14 N.Y. Public Service Commission, Case 16-W-0130 (Jan. 24, 2017) Order Establishing Rate Plan ...................................................................................13 N.Y.C. Dept. of Environmental Conservation, Stormwater ............................. 15, 19 N.Y.C. Dept. of Environmental Conservation, Urban Stormwater Runoff.............16 N.Y.C. Dept. of Environmental Protection, DEP Launches Parking Lot Stormwater Pilot Program ............................................................................16 N.Y.C. Dept. of Environmental Protection, Grant Program for Private Property Owners............................................................................................16 N.Y.C. Dept. of Environmental Protection, NYC Green Infrastructure Plan, A Sustainable Strategy for Clean Waterways................................................15 N.Y.C. Dept. of Environmental Protection, Home Water Assistance Program......12 N.Y.C. Dept. of Environmental Protection, Stormwater .........................................16 N.Y.C. Housing Dev. Corp., Multifamily Water Assistance Program....................13 New York City Water Board, Water and Wastewater Rate Schedule (effective July 1, 2015) ..................................................................................14 U.S. Environmental Protection Agency, Cases in Water Conservation: How Efficiency Programs Help Water Utilities Save Water and Avoid Costs...............................................................................................................21 U.S. Environmental Protection Agency, Drinking Water and Wastewater Utility Customer Assistance Programs (2016), ...........................................14 Western Kentucky University Stormwater Utility Survey in 2016.........................17 Western New York Stormwater Coalition, Feasibility of a Regional Stormwater Utility District in Erie and Niagara Counties ..........................17 vi ORGANIZATIONAL DISCLOSURE STATEMENT Natural Resources Defense Council states that it is a Section 501(c)(3) nonprofit corporation, and that it has no corporate parents, subsidiaries or affiliates, except that the NRDC Action Fund, a Section 501(c)(4) nonprofit corporation, is an affiliate of NRDC. The Public Utility Law Project of New York, Inc. states that it is a Section 501(c)(3) nonprofit corporation, and that it has no corporate parents, subsidiaries or affiliates. 1 PRELIMINARY STATEMENT The Natural Resources Defense Council (“NRDC”) and the Public Utility Law Project of New York, Inc. (“PULP”) submit this amicus brief to emphasize the need to preserve the New York City Water Board’s discretion to adopt rational rate structures, including credits, to promote reasonable objectives such as affordability of water service, conservation, and managing stormwater runoff. Amici do not have an interest in or take a position as to the validity of the specific bill credit and rate increase that Petitioners-Respondents Prometheus Reality Corp. et al. (“Petitioners”) challenge in this proceeding. Whatever the outcome here, however, NRDC and PULP urge the Court to tailor its ruling in a way that does not unduly limit the Water Board’s discretion to continue programs that involve differential rates that Petitioners have not directly challenged. Preserving water utilities’ discretion in ratemaking will allow the Water Board to implement its mandate to collect revenues that are at least sufficient to make the water system financially self-sustaining and to achieve reasonable objectives consistent with and in furtherance of that mandate. The Water Board’s authorizing statute requires the Water Board to set rates for New York City’s water and sewer systems that are “at least sufficient at all times so that such system or systems shall be placed on a self-sustaining basis….” N.Y. Pub. Auth. Law § 1045-g(4). As the words “at least” suggest, the recovery of 2 costs does not preclude utilities from pursuing other goals that are consistent with the objective of placing the system on a self-sustaining basis. The Water Board, like other state authorities, has long exercised its discretion to adopt rate structures that promote reasonable ends within that cost-of-service framework. Examples in New York City and elsewhere include low-income protection programs that ensure water affordability for all customers (simultaneously conferring benefits on all system users), programs that work to reduce overall system costs through credits and incentives for individuals to adopt conservation measures, and incentives for sewer customers to adopt best practices to manage stormwater runoff. NRDC and PULP are particularly interested in the issue of stormwater runoff. As the costs and environmental impact of stormwater runoff have become better understood, utilities nationwide have joined a trend in recent decades of designing reasonable rates that tie sewer rates to the burden stormwater runoff imposes on water and sewer systems. These programs are consistent with the mission of public utilities in New York and across the country—to ensure reliable, affordable service and recovery of utilities’ costs. Although they do not challenge such programs, Petitioners argue that the challenged 2017 bill credit and rate increase are invalid on the ground that the Water Board exceeded its jurisdiction by adopting rates that diverge from a very strict, narrow conception of cost-of-service. Taken to extremes, this argument 3 could compromise both long-standing present and potential future programs, including those that even Petitioners agree are valid. This Court should not accept Petitioners’ argument that bill credits and differentiated rate classes—or any other particular rate structures—are by their nature ultra vires. To avoid any implication that the Water Board does not have an appropriate scope of discretion in setting reasonable rates, the Court should resolve this case through rational-basis review under CPLR 7803(3), as did the First Department in the decision below, not jurisdictional review under CPLR 7803(2), as Petitioners have argued. This case need not concern whether the Board has authority to render bill credits, differentiate rate classes, or adopt other rate structures in general. Indeed, the Water Board and other New York water utilities have adopted a variety of rate structures, as described more fully below. Petitioners’ fundamental complaint is not with the Water Board’s authority to implement bill credits (as it has through its low-income protection and conservation programs for decades) or differential rate increases (as is appropriate when different classes may be responsible for differentiated increases in system costs) per se. Their true contention is that the credit and rate increase here are not rationally based. The Court should resolve that issue without interpreting the Water Board’s governing statute as containing new, implied limits on the Water Board’s jurisdictional authority and discretion to adopt reasonable rate structures. And in 4 determining whether the challenged rates here are rational or arbitrary and capricious, the Court should specify that it is not opining on the validity of other, unchallenged programs enacted by the Water Board or other New York utilities. STATEMENT OF INTEREST The NRDC is a national, nonprofit, nonpartisan environmental advocacy organization with its principal office located in New York City. NRDC has more than 400,000 members nationwide; more than 35,000 in New York; and more than 17,000 in New York City. It is dedicated to ensuring all people have affordable access to safe and sufficient water, wastewater, and stormwater services—all of which are essential for sustaining healthy communities. For decades, NRDC has worked to ensure that New York keeps its drinking water safe and reliable via cost- effective watershed protection initiatives and through wise investments in New York City’s drinking water infrastructure. Similarly, NRDC has worked for decades to ensure that New York invests wisely to improve its wastewater and stormwater systems in order to keep harmful pollution out of the rivers and bays that surround the city. NRDC also advocates for policies statewide, and around the nation, to ensure that all people have access to safe, sufficient, and affordable water and sewer services. The Public Utility Law Project of New York, Inc. (“PULP”) is a nonprofit organization formed in 1981 to promote and defend the interests of low- and fixed- 5 income utility consumers in matters affecting affordability, universal service, and consumer protection. PULP educates the public about utility rates and charges, conducts research, and provides legal representation to enforce and defend the rights of residential utility consumers. PULP has long sought better consumer protections and lower rates for water in New York, and has intervened in rate cases conducted by private investor-owned water utilities as recently as 2016 to oppose rate increases and seek the creation of low-income rate reduction programs in the water utility sector similar to those it has fought to create or extend since the early 1990s in the energy utility sector. In those 2016 cases, PULP was successful in bringing about the creation of one low/fixed-income rate reduction program which also included affordable and robust conservation measures, and in the other program, PULP’s advocacy helped bring about a conservation program applying to all customers, with the hoped end result of lowering costs for all customers. PULP’s advocacy in the late 1990s and early 2000s also helped bring about the extension of the consumer protections of Article 2 of the Public Service Law to customers of large private water utilities. ARGUMENT I. THE GOVERNING STATUTE GIVES THE WATER BOARD DISCRETION IN SETTING RATES The Water Board’s governing statute gives the Board authority to implement programs based on the above concerns, consistent with its mandate to set rates 6 adequate to ensure a self-sustaining system. The Court should ensure that, however it resolves the present dispute, it does not unduly impair that authority. The Water Board’s first and foremost obligation is to ensure that rates recover adequate costs to maintain the water and sewer systems. It is therefore authorized 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 those systems in New York City. Pub. Auth. Law § 1045-g(4). See also Giuliani v. Hevesi, 90 N.Y.2d 27, 34 (1997) (“The Board’s main function is to provide sufficient funds—through fixing and collecting water and sewer charges and other revenues—for the City to operate and maintain the Water System and for the Authority to service water and sewer debt.” ). But the statutory language does not limit the Water Board’s authority to considering cost alone. The statute provides that the rates must be “at least sufficient at all times so that such system or systems shall be placed on a self- sustaining basis.” N.Y. Pub. Auth. Law § 1045-g(4) (emphasis added); see id. § 1045-j. As the words “at least” imply, the Water Board has discretion to consider issues other than cost in setting rates. Interpreting similarly worded statutes, courts elsewhere have held that mandates to recover utility costs give discretion to those utilities as to specific rate design. See, e.g., State v. City of Iowa City, 490 N.W.2d 825, 828-29 (Iowa 1992) (where statute required that rates must 7 “produce gross revenues at least sufficient to pay the expenses of operation and maintenance of the city utility,” the court reviewed challenged rates only to determine whether they were “unreasonable, arbitrary, and unlawfully discriminatory”); Haymes v. Holzemer, 3 Ohio App.3d 377, 383 (Ct. App. Ohio 1981) (“[T]he inclusion of ‘at least’ clearly represented the legislature’s intent … to grant the board of commissioners the discretion to determine the size of th[e] debt service rather than to mandate an inclusion of fifty percent.”). Courts in New York have recognized that, although rates for customers’ use of the water and sewer systems must be adequate for system-wide cost recovery, the Water Board’s governing statutes leave the Board wide discretion to implement rates, fees, charges, and other billing structures, that are consistent with that purpose. See Perry Thompson Third Co. v. City of New York, 279 A.D.2d 108, 115 (1st Dep’t 2000) (“It is clear from a reading of the applicable sections of the Public Authorities Law … that ‘the Water Board is granted broad authority’ thereunder” (quoting Vill. of Scarsdale v. Jorling, 91 N.Y.2d 507, 515 (1998)); see also Brief for Amici, infra, at 25-28. The Water Board is the “sole authority” empowered to set the rates it charges its customers for their water and sewage usage. Jorling, 91 N.Y.2d at 515. There is thus no other authority or regulator statutorily authorized to ensure that water and sewer rates remain affordable for all New Yorkers or that usage patterns 8 conserve limited system resources. The absence of other legal means to protect low-income residents and to further certain water and sewer related environmental and public health policies underscores the need to preserve the Board’s statutory discretion. Interpreting comparable statutory mandates, this Court has confirmed that state utilities have broad discretion to adopt fees, charges, rates, and credits based on considerations other than individualized (as opposed to system-wide) costs of service. For example, in Elmwood-Utica Houses v. Buffalo Sewer Auth., this Court held that the Buffalo Sewer Authority permissibly adopted an ad valorem charge, noting that “‘[e]xact congruence between the cost of the services provided and the rates charged to particular customers is not required.’” 65 N.Y.2d 489, 496 (1985) (citing Watergate II Apartments v. Buffalo Sewer Auth., 46 N.Y.2d 52, 59 (1978)). Similarly, in Carey Transp., Inc. v. Triborough Bridge & Tunnel Auth., this Court upheld the Triborough Bridge and Tunnel Authority’s imposition of different toll rates as between special purpose and general purpose buses, noting that public authorities given general grants of ratemaking authority by default have broad inherent powers. 38 N.Y.2d 545 (1976), cert denied 429 U.S. 830 (1976). Petitioners recognize the existence and validity of many of the Water Board’s existing low-income and conservation programs, agreeing that they are “rational.” Brief for Petitioners-Respondents at 20, Matter of Prometheus Realty 9 Corp. v. New York City Water Bd., 157 A.D.3d 519 (1st Dep’t 2017) (No. 1805, 653003/16). Nevertheless, their argument as stated in briefing submitted to the Appellate Division—that the Water Board can only set rates for a given consumer through a strict evaluation of the volumetric usage that individual consumer imposes on the system, Brief for Petitioners-Respondents, supra, at 20 (“water is charged based on usage”)—could put these programs at risk. Specifically, citing Watergate II Apts., Petitioners argued that the Water Board exceeded its jurisdiction in issuing the challenged rate increase and bill credit, asserting that the measures are ultra vires because “charges must reflect the cost of special services upon ratepayers that derive a benefit from the services.” Id. at 37-38. However, this Court’s ruling in Watergate II Apts.—that rate increases and bill credits must have “some rational underpinning” relating to costs of service, Watergate II Apts., 46 N.Y.2d at 59—is not a jurisdictional requirement, but inherent to the requirement that rates be rational. In Watergate II Apts., this Court held only that “[a] rational basis thus underlies the use of assessed valuation in the calculation of sewer rents” Watergate II Apts., 46 N.Y.2d at 61. To convert this holding that rates be rationally related to cost of service into a jurisdictional requirement for an exact congruence between each customer’s cost of service and rates would unduly limit the Board in adopting reasonable rate programs consistent with its mandate to achieve system-wide cost recovery. 10 II. UTILITIES IN THIS STATE AND THROUGHOUT THE NATION HAVE BROAD DISCRETION TO SET APPROPRIATE RATES A. Cost-Of-Service Ratemaking Provides Utilities Discretion In Designing Customer Rates, Credits, Charges, And Fees The “broad powers” that the governing statute gives to the Water Board, Jorling, 91 N.Y.2d at 515, are consistent with the authority given to other utilities in New York and throughout the country. Because “[s]etting utility rates presents problems of a highly technical nature,” N.Y. Tel. Co. v. PSC, 95 N.Y.2d 40, 48 (2000), courts recognize that utilities should not be “obligated to use any particular formula or combination of formulae to determine rates,” Energy Ass’n of New York State v. Pub. Serv. Comm’n of State of N.Y., 169 Misc. 2d 924, 940 (Sup. Ct. Albany Cnty. 1996). Utilities are permitted to consider “all relevant factors’ in setting rates. Abrams v. Pub. Serv. Com., 67 N.Y.2d 205, 216 (1986). Indeed, authorities on public utilities law—including the leading treatise of Professor James Bonbright—recognize that utilities should consider a variety of factors in determining rates, including ability to pay and system-wide benefits from rate-driven incentive programs. See American Water Works Association (“AWWA”), Principles of Water Rates, Fees and Charges, (6th ed. 2012), at 4 (“While recovery of the full revenue requirement in a fair and equitable manner is a key objective of a utility using cost-of-service rate-making process, it is often not the only objective.”); id. at 59 (“Another basic tenet followed in the development 11 of the general water service rate structure is that it recovers the costs of providing service to the various classes of customers of the utility in an equitable manner.”); James C. Bonbright, Principles of Public Utility Rates, Chapter 8: Social Principles of Ratemaking, Columbia University Press, New York, New York (2d ed. 1988) (“The ability-to-pay principle is the contention that the rates of charge for public utility services should depend, in part, on the wealth and income status of the ratepayers.”). Those principles recognize that “a perfect harmony or perfect interaction among the various tasks assigned to these rates is impossible to secure…. [T]he development of sound ratemaking policies calls for a resort to wise compromise, for it is not an exact science but a judicious blending of alternative goals.” Bonbright, Chapter 4: The Role of Public Utility Rates. In short, utilities’ mandate to recover system costs does not limit their discretion to choose among reasonable alternatives in designing customer rates that do so. Thus, utilities are afforded flexibility to set rates that address system-wide concerns, and not just individualized cost of service. This includes ensuring affordability of service for all customers. See e.g., Principles of Water Rates, at 190 (“Many different and widely varying aspects of affordability are relevant to utility managers.”). It also includes considerations of system-wide benefits from conservation and stormwater runoff management. See Leonard Saul Goodman, Process of Ratemaking, Part 16: Other Non-Cost Factors, Public Utilities Reports, 12 Inc. (1998) (“Certainly one of the goals of agency ratemaking will be the encouragement of efficient performance”). This background should inform this Court’s evaluation of the specific rates challenged here. Whatever the outcome of this case, the Court should preserve the Water Board and other New York utilities’ general authority to set rates based on all relevant considerations, consistent with established ratemaking principles. B. New York City And State Water Utilities Have Adopted Rates That Both Are Cost-Of-Service Based And Protect Social, Conservation, And Stormwater Management Objectives The Water Board, and many other New York utilities, have exercised their ratemaking authority to adopt programs that address protection of low-income consumers, conservation of water, and stormwater issues. No party to this appeal advocates for a rule that could undermine those existing programs. An overview of those programs demonstrates that they are both reasonable and consistent with utilities’ duty to recover the costs of maintaining water and sewer systems. New York City has a large number of low-income individuals who require assistance in paying for water. As but one example, the Water Board already has the Home Water Assistance program, which offers a credit of $115.89 to qualified participants who demonstrate a need for economic assistance. See New York City Department of Environmental Protection, Home Water Assistance Program, 13 available at https://goo.gl/M915y2. 1 Likewise, utilities throughout New York State use their ratemaking authorities to assist customers who may be unable to afford water service. For example, N.Y. Pub. Serv. Law § 37(1) requires private water companies and utilities to offer a deferred payment plan. In January 2017, the New York State Public Service Commission authorized and directed SUEZ Water, a private utility operating in New York, to implement a low-income rebate program funded by ratepayer revenues. N.Y. Pub. Serv. Comm’n, Case 16-W- 0130 (Jan. 24, 2017 Order Establishing Rate Plan), available at https://goo.gl/VEyWzq. Buffalo’s water utility specifically provides exemptions and rate reductions for low-income senior citizens. See 21 N.Y.C.R.R. § 10085.12(m). Each of these programs embodies the principle that customers’ ability to pay is a valid basis on which to (in part) base rates. Low-income protection and conservation programs not only are consistent with utilities’ cost-recovery mandates, but also can even reduce a utility’s overall cost of service. Low-income consumer assistance can reduce administrative 1 Similarly, the Multifamily Water Assistance Program provides for a discount on water rates to eligible, affordable, multi-family housing units, if the buildings comply with the Multi-Family Conservation Program or demonstrate their use efficiency through the metered rate. See N.Y.C. Housing Dev. Corp., Multifamily Water Assistance Program, available at https://goo.gl/bcg1MC. For ease of review, throughout this brief, lengthy website addresses have been shortened with Google’s URL Shortener. https://goo.gl/. 14 overhead by, for example, reducing the costs of collecting unpaid debts, disconnecting customers who fall behind on their payments, and reconnecting them after they have caught back up. See Principles of Water Rates, at 191 (“When customers have trouble paying utility bills, the cost to the utility is manifested in increased arrearages, late payments, disconnection notices, and service termination.”); U.S. EPA, Drinking Water and Wastewater Utility Customer Assistance Programs, at 4 (2016), available at https://goo.gl/JuHTmA (“EPA Report”). The Water Board also uses its ratemaking authority to create incentives for individuals to adopt water conservation measures. This includes programs that offer reduced rates for customers using certain water-efficient fixtures, appliances, or technologies, and has a history of incentivizing conservation in all sorts of utilities, not just water. See e.g., New York City Water Board, Water and Wastewater Rate Schedule, 19-20 (effective July 1, 2015), available at https://goo.gl/dQ54Bk (describing the Conservation Program for Multiple Family Residential Buildings, Maximum Metered Charge Program; Comprehensive Water Reuse Program, and other programs directed at conservation). Reducing customer water demand can reduce a utility’s overall cost of service—for example by 15 reducing the need to expand system capacity.2 Indeed, New York City employs these strategies for exactly that purpose—demonstrating the consistency of such programs with utilities’ cost recovery mandates.3 Stormwater management is also an area where utilities throughout New York State are beginning to recognize the need for rate reform. As this Court has observed, stormwater runoff can have significant consequences for the environment: “Runoff from rain and snow melt courses over roofs, roads, driveways and other surfaces, picking up pollutants along the way. It then passes through municipal storm sewer systems into rivers and lakes, adding the pollutants accumulated during its journey to those bodies of water.” NRDC v. N.Y.S. Dep’t of Envtl. Conservation, 25 N.Y.3d 373, 378 (2015); see also New York City Department of Environmental Conservation, Stormwater, available at 2 See NRDC Issue Brief, Waste Less, Pollute Less: Using Urban Water Conservation to Advance Clean Water Act Compliance, June 2014, available at https://goo.gl/y4dFH4 (hereinafter “NRDC Issue Brief”), at 3 (water-saving measures can result in “reduced, deferred, or avoided capital costs for new or expanded collection and treatment capacity that would otherwise be necessary.”). 3 See NRDC Issue Brief, at 5 (explaining how New York City’s programs have reduced water usage by the billions of gallons, and saved millions of dollars by reducing sewer overflows); N.Y.C. Dept. of Envtl. Protection (“NYCDEP”), NYC Green Infrastructure Plan, A Sustainable Strategy for Clean Waterways, available at https://goo.gl/xvRUUR, at 51-60 (discussing the Department of Environmental Protection’s “proposed performance standard for new development that would require a stricter stormwater runoff release rate into the sewer system” and resulting reductions in stresses on the system and related infrastructure costs). 16 https://goo.gl/SRbM4Z (discussing negative system effects of stormwater runoff). “[S]tormwater contamination results from the often unforeseen or unpredictable choices of individual residents and businesses (for example, to let litter pile up or to use certain lawn fertilizers), as well as decisions made long ago about the design of roads, parking lots and buildings.” NRDC, 25 N.Y.3d at 378. “The impact from stormwater runoff is a more significant problem in urban and developed areas where there is a greater percentage of impervious surfaces.” DEC, Urban Stormwater Runoff, available at https://goo.gl/Mxj1ru. Stormwater runoff poses severe sewer management, environmental, and public health considerations in New York City because of the area of impervious surfaces that direct stormwater during heavy rain events into the combined sewer system. See New York City Department of Environmental Protection, Stormwater, available at https://goo.gl/XVk47D (hereinafter DEP Stormwater) (“Stormwater can pose challenges to the City by triggering combined sewer overflows, washing pollutants into our waters through the separate storm sewer system, and causing flooding.”). New York has engaged in only limited efforts to incentivize improved stormwater management practices.4 And while the costs that stormwater runoff 4 The NYCDEP launched a limited stormwater program addressed at parking lots. See NYCDEP, DEP Launches Parking Lot Stormwater Pilot Program, available at https://goo.gl/jyjXop. There is also a program whereby the department offers grants to private property owners willing to remodel to address 17 impose on the sewer system are generally proportionate to the volume of runoff a customer discharges, for all but a very small number of customers, the Water Board does not currently tailor water or sewer rates to charge customers based on the volume of stormwater discharged from that customer’s property. At least two New York State utilities have begun to address stormwater issues. Both Ithaca and Buffalo have considered the impact of stormwater in connection with their utility rates: Ithaca has implemented a stormwater user fee, allowing it to bill properties depending on the amount of runoff they create and provides credits for customers who reduce their polluted runoff, see City of Ithaca, Establishing the Stormwater User Fee, FAQs, available at https://goo.gl/KMf4E3, and City of Ithaca, Stormwater User Fees, FAQs, available at https://goo.gl/SF9TmJ, and Buffalo has commissioned a study to look at stormwater management issues and how to incentivize best practices through stormwater fees and credits. See Western New York Stormwater Coalition, Feasibility of a Regional Stormwater Utility District in Erie and Niagara Counties stormwater runoff. See New York City Department of Environmental Protection, Grant Program for Private Property Owners, available at https://goo.gl/PV5yPw. 18 (April 2010), available at https://goo.gl/Em2xBG. These types of approaches are viewed as best practice around the country.5 To preserve utilities’ authority to address this issue, the Court should approach the instant case keeping in mind that, in utility rate design, “[e]xact congruence between the cost of the services provided and the rates charged to particular customers is not required”—indeed, is rarely possible—and that “the test is whether its formulae reflect reasonable and nonarbitrary interpretations of the statute.” Watergate II Apts., 46 N.Y.2d at 59. Low income protection, water conservation, and stormwater management present contexts where “exact congruence” between rates and each customers’ cost of service is difficult if not impossible, because the cost savings are system-wide.6 Strong policies counsel 5 See Black & Veatch Management Consulting, LLC, 2016 Stormwater Utility Survey, at 6, available at https://goo.gl/HLSqJB (hereinafter, “Black & Veatch 2016 Survey”) (explaining benefits of user fees for stormwater charges); Western Kentucky University Stormwater Utility Survey in 2016, at 8, available at https://goo.gl/CVbnPW (analyzing different sorts of fee systems in support of stormwater utilities) (hereinafter “WKU 2016 Stormwater Utility Survey”); DEP Stormwater (“describ[ing] how stormwater is conveyed through the City, the challenges it creates, and what the City is doing to overcome them.”). 6 For example, stormwater fees have been challenged on the grounds that they do not permissibly result in a “direct” benefit. See, e.g., National Association of Clear Water Agencies, Legal Considerations for Enacting, Implementing, & Funding Stormwater Programs, at 5-6 (2016), available at https://goo.gl/4P9rF5. However, these challenges ignore that benefits accrue to all members of a watershed, because all consumers benefit from reduced pollution. Id. 19 against rigid rules governing the scope of the Water Board’s statutory jurisdiction that would limit its discretion to implement rates that capture system-wide benefits. C. Utilities Nationwide Are Designing Rate Structures To Address Low-Income Protection, Conservation, And Stormwater Management, And This Court Should Preserve New York Utilities’ Authority To Do So Too The principles of utility law and ratemaking policies followed on a national level underscore the importance of preserving the Water Board’s flexible authority over rates here. Low-income protection is widely recognized as a permissible end for utility rate design. See e.g., EPA Report, at 29 (“A nationwide examination of nearly 800 utilities found that communities have developed various programs to help low- income, elderly, disabled, and other neighbors in need maintain access to safe drinking water and essential sewer services.”); see also University of North Carolina Environmental Finance Center, Navigating Legal Pathways to Rate- Funded Customer Assistance Programs: A Guide for Water and Wastewater Utilities, at 10 (2017) (hereinafter, “UNC Report”) (describing types of customer assistance programs in which states across the country participate). These rate programs take a variety of forms, including (1) bill discounts, which “[c]an be applied to nearly any type of rate structure or aspect of the bill”; (2) flexible terms, such as arrearage forgiveness or bill timing adjustments; (3) “lifeline rates,” such as minimum bills and low-income rate structures; (4) temporary assistance in the 20 form of grants, one-time reductions, or short-term help due to an unexpected hardship; and (5) subsidies for water-efficiency and conservation measures. UNC Report at 10. 7 Interpreting statutes authorizing utility ratemaking that are comparable to those governing New York utilities, courts have confirmed that utilities have a responsibility, consistent with their mandates, to ensure that all individuals have access to affordable utility service. See, e.g., In re Application of Hawaii Electric Light Co., 60 Haw. 625, 647 (1979) (“[A] public utility’s rate structure should encourage equitable rates to all its consumers including the poor and the elderly”); Town Taxi, Inc. v Police Comm’r of Boston, 377 Mass. 576, 582 (1979) (“[W]e have serious doubt that giving a deserving class of passengers the right to use the services of a regulated monopoly … at a discount must be held to be against public policy.”). Water conservation programs are also widely recognized as permissible uses of utilities’ ratemaking authority—and as beneficial for reducing system costs. See generally AWWA, Water Conservation-Oriented Rates, available at http://goo.gl/Lsx25X (nationwide overview of water utilities’ water conservation programs); AWWA, National Survey of Commercial Industrial And Institutional 7 Especially relevant here, municipal utilities across the country have rate- funded bill credit programs, as evident from even a non-exhaustive sample. See, e.g., UNC Report at 72 (Bozeman, MT), 82 (Albuquerque, NM), 97 (Puerto Rico), 109 (Salt Lake City, UT), 143 (Portland, OR), 152 (District of Columbia). 21 Water Efficiency Programs, at 40 tbl. 21, available at https://goo.gl/MRRmzG (noting that 59% of water utilities in the United States implement some form of “conservation rate design incentives” and that 95% of utilities invest in some form of information and education program to promote conservation). The federal Environmental Protection Agency has specifically reported that these programs provide significant system savings, to ratepayers’ benefit. See EPA, Cases in Water Conservation: How Efficiency Programs Help Water Utilities Save Water and Avoid Costs, available at http://goo.gl/8T2aX5 (“Water utilities across the United States and elsewhere in North America are saving substantial amounts of water through strategic water-efficiency programs. These savings often translate into capital and operating savings, which allow systems to defer or avoid significant expenditures for water supply facilities and wastewater facilities.”). These programs have withstood legal challenge. See, e.g., Merrimac Paper Co. v. City of Lawrence, 1995 WL 1286562, at *8 (Mass. Super. Aug. 29, 1995) (“Choosing to conserve water by utilizing a two-tier inverted block rate is precisely the type of policy decision that a court should not attempt to second guess.”). With respect to stormwater management, more than 1,500 municipalities nationwide have implemented, or are considering implementing, rate programs that incentivize best practices and reduce surface runoff into combined sewers or pollutant-laden runoff into waterways. See, e.g., National Association of Clean 22 Water Agencies, Legal Considerations for Enacting, Implementing, & Funding Stormwater Programs, at 2 (2016), available at https://goo.gl/4P9rF5 (hereinafter “NACWA White Paper”) (“[U]rban stormwater is a leading cause of water quality impairment and its impact is growing” (internal quotation marks and citation omitted)); WKU 2016 Stormwater Utility Survey, at 1. The NACWA White Paper’s 50-state survey of stormwater utility litigation shows that numerous courts have upheld utilities’ efforts to distribute the costs of stormwater management on customers where such charges are rationally related to customers’ stormwater impact. For example, stormwater fees may be calculated based on a parcel’s area of impervious surfaces that generate runoff during rain events. See NACWA White Paper, at 9-10. Challenges to the legal authority of utilities to implement stormwater programs on the grounds that financing stormwater programs through fees amounts to an invalid tax have been widely rejected. See, e.g., City of Lewiston v. Gladu, 2012 ME 42, ¶ 16 (2012) (“[T]he Utility is using the assessment to cover the costs of regulating stormwater runoff, and part of those regulatory costs include maintaining stormwater infrastructure. Because all of the Utility’s expenses are for maintaining or administering the Utility, this factor weighs in favor of concluding that the assessment is a fee and not a tax.”); 23 NACWA White Paper at 5. More and more utilities are adopting rate incentives for stormwater management.8 While New York City (and nearly all of New York State) currently does not have a comprehensive stormwater utility or stormwater fee structure, this growing national trend suggests that ratemaking will prove a useful tool for the state in managing stormwater runoff issues in the future. This Court’s decision here should preserve the Water Board’s and other state utilities’ jurisdictional authority to do so. III. THIS CASE SHOULD BE DECIDED ON RATIONAL-BASIS REVIEW, NOT JURISDICTION, TO PRESERVE THE WATER BOARD’S ABILITY TO IMPLEMENT FLEXIBLE RATES Petitioners’ challenge rests on two separate grounds for relief under Article 78: one for agency action that is “in excess of jurisdiction,” CPLR 7803(2), and one for action that is “arbitrary and capricious or an abuse of discretion,” CPLR 7803(3). If this Court affirms the vacatur of the challenged actions, it should do so under CPLR 7803(3)’s rational-basis test, not 7803(2)’s jurisdictional test, and reaffirm the Water Board’s jurisdiction and discretion over other rate programs. 8 See Black & Veatch Survey, at 15-18 (setting forth the results of a survey as to how utilities finance their stormwater management); WKU 2016 Stormwater Utility Survey, at 7-8 (similar); DEP Stormwater (describing how New York City is dealing with stormwater challenges). 24 A. The Validity Of The 2017 Bill Credits And Rate Increase Concern The Rationality Of The Board’s Action, Not Its Jurisdiction To Issue Credits, Differential Rates, Or Programs Beyond Strict Cost-Based Rates Petitioners challenge the Water Board’s rate increase and credit on two grounds. First, they claim that the Water Board exceeded its statutory authority in setting rates/credits which are not explicitly and directly tied to the costs imposed on the system by a user. Second, they claim that even if the Water Board has such authority, this particular rate increase/credit scheme lacked a rational basis. However this Court resolves the second issue Petitioners raise, it should reject their first argument and rule that the Water Board did not act ultra vires. One need look no further than the jurisdictional statute to determine that Petitioners’ jurisdictional argument is wrong. The statute provides that the rates, together with other available revenues, “shall be at least sufficient” to place the system on “a self-sustaining basis.” N.Y. Pub. Auth. Law § 1045-g(4). It imposes no limit on the Water Board’s discretion over designing the types of rates it uses if those rates are sufficient to recover system-wide costs. Nor does the statute require exact precision in cost recovery—underscoring the flexibility afforded to the Water Board in designing customers class’s specific rate structures. Petitioners’ interpretation reads the words “at least” out of the statute. The decision on appeal held that this case presents a question of whether the credit and rate increase adopted had a rational basis, not whether they were within 25 the Board’s jurisdictional authority. Matter of Prometheus Realty Corp. v. New York City Water Bd., 147 A.D.3d 519, 521 (1st Dep’t 2017) (“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”).9 This Court has already held that “the Water Board is granted broad authority to set rates” Jorling, 91 N.Y.2d at 515 (1998)—a rule that would be rendered meaningless if Petitioners’ strict “cost of water” theory of rates were accepted. This Court, if it affirms the Appellate Division’s decision invalidating the challenged rates, should therefore rule only that the bill credit and rate increase were arbitrary and capricious under CPLR 7803(3). It should not hold that the Water Board is “without or in excess of jurisdiction” to issue credits or rate adjustments when its basis for doing so is rational and consistent with its statutory mandate. Similarly, Petitioners have argued that the bill credits and rate increase are unlawful taxes in excess of the Water Board’s jurisdiction. Brief for Petitioners- Respondents, supra, at 33-36 (citing Matter of Phillips v. Town of Clifton Park Water Auth., 286 A.D.2d 834 (3d Dep’t 2001)). This is simply not true. The bill 9 The Appellate Division correctly modified the IAS court’s decision in this regard, invalidating the challenged credit and rate increase as irrational while acknowledging that the Board acted within its jurisdiction. See R. 19-24. 26 credit is not a “tax” for the obvious reason that it is a payment to customers, not the collection of funds from private entities for public revenue. See Black’s Law Dictionary (10th ed. 2014), “Tax” (“A charge, usu. monetary, imposed by the government on persons, entities, transactions, or property to yield public revenue.”). And the rate increase is an increase in an already-existing, and unchallenged, rate class structure. Petitioners do not challenge the differentiation of Class 1 property owners under the Water Board’s rate schedules generally—so the mere adjustment of already differentiated rates does not create a new “tax.” B. Rational-Basis Review Provides A Suitable And Effective Form Of Judicial Review To Prevent Improper Water And Sewer Rates There need not be any concern that if the Court rules as amici request— holding that bill credits, discounts, and other differential rates or incentives are within the Water Board’s statutory jurisdiction—the Water Board or other agencies will go on to implement improper rate programs. Rather, the rational basis review provided for by CPLR 7803(3) is a sufficient check on the Water Board’s power, if it abuses its statutory discretion. There is no need for the Court to read into Public Authorities Law § 1045-g a new limitation on the Water Board’s authority. At bottom, Petitioners are challenging the reason for the Water Board’s rate system, not the Board’s statutory authority to issue bill credits or class- differentiated rates. In fact, as noted above, Petitioners expressly acknowledged in the court below that existing programs (some of which include bill credits and 27 differential treatment of different classes of customers) are rational. See Brief for Petitioners-Respondents, supra, at 20 (noting “certain rational programs” that apply non-volumetric rates). Petitioners distinguished these programs by arguing that “[u]nlike the Bill Credits, the programs … were budgeted and created through detailed guidelines … and support rational purposes, such as water conservation, system efficiency or assisting vulnerable customers….” Id. at 22. The Appellate Division’s decision likewise distinguished the action at issue here from “many of the programs highlighted by the Water Board [that] serve legitimate objectives of the Water Board related to water usage or quality.” Matter of Prometheus Realty Corp., 147 A.D.3d at 522 (emphasis added). That approach is consistent with the parties’ agreement that adjudicating the validity of the challenged bill credit and rate increase need not and should not interfere with the Water Board’s other, established rate programs. Rational-basis review of the Water Board’s rates is appropriate because that standard is quintessentially used to guard against agency overreach. Courts often invalidate agency actions that are deemed to be based on improper purposes under this standard. See Westmoreland Apt. Corp. v. New York City Water Bd., 294 A.D.2d 587, 588 (2d Dep’t 2002); Fazio v. Joy, 58 N.Y.2d 674 (1982); Pell v. Board of Ed. Of Union Free School Dist. No. 1 of Towns of Scarsdale and Mamaroneck, Westchester Cnty., 34 N.Y.2d 222 (1974); 125 Bar Corp. v. State 28 Liquor Auth., 24 N.Y.2d 174 (1969). Thus, to the extent Petitioners’ complaint is that the challenged rates improperly serve “plainly political goals” instead of legitimate rate considerations, Brief for Petitioners-Respondents, supra, at 5, the proper form of the challenge is rational-basis review. See Basel v. Power, 44 Misc. 2d 127, 130 (Sup. Ct. N.Y. Cnty. Sep. 28, 1964) (finding it “arbitrary” and “unreasonable” for the New York Board of elections to use voting machines displaying the party names, emblems, and candidates of only certain parties campaigning in the election). Rational-basis review provides an effective and logical manner to review agency action that is alleged to be so lacking in legitimate justification as to be arbitrary. Because that is precisely the error that Petitioners allege here, this Court should resolve this case under CPLR 7803(3)’s arbitrary and capricious standard, and reject Petitioners’ arguments that the Water Board’s action was ultra vires. C. The Court Should Rule Solely On The Rationality Of The Bill Credit And Rate Increase Challenged Here The Court should tailor its ruling narrowly to the issues presented in this case. Petitioners do not challenge the types of low-income assistance, conservation, and stormwater runoff management programs discussed in this brief. Indeed, as noted above, Petitioners acknowledged in briefing submitted to the Appellate Division that other bill credit programs implemented by the Water Board are rational. See Brief for Petitioners-Respondents, supra, at 49 (referring to other 29 bill credit programs as “entirely distinguishable” and arguing that “unlike these programs, the Bill Credits [here at issue] were not rational”). Amici further submit that such programs present clear cases of reasonable uses of bill credits and other rate designs to promote permissible objectives within a cost-of-service framework. In any event, the reasonableness of these programs is not before the Court. Amici submit that, whether the Court decides that the credit and rate increase challenged here are rational or arbitrary and capricious, the Court should tailor its decision to exclude dicta that might be interpreted to cast doubt on the validity of those programs. CONCLUSION This Court should rule that the challenged actions are within the Water Board’s jurisdictional authority, regardless of whether the Court upholds them as rationally based, reaffirming the Water Board’s ability to implement existing or prospective programs that use rate design to further low-income protection, water conservation, and stormwater management objectives. DATED: New York, New York October 6, 2017 NATURAL RESOURCES DEFENSE COUNCIL PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC. By: Sljdven M. Edwards iJaniel P. Mach QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010-1601 Telephone: (212) 849-7000 Fax: (212) 849-7100 Attorneys for Amici Curiae Lawrence Levine NATURAL RESOURCES DEFENSE COUNCIL 40 W. 20th Street New York, NY 10011 Of counsel 30 NEW YORK STATE COURT OF APPEALS PRINTING SPECIFICATIONS STATEMENT I hereby certify pursuant to 22 NYCRR PART 500.1(j) that the foregoing brief was prepared on a computer using Microsoft Word 2013. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, corporate disclosure statement, questions presented, statement of related cases, or any authorized addendum containing statutes, rules, regulations, etc., is 6,705 words. Dated: New York, New York October 6, 2017 Steven Edwards Daniel P. Mach QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 Tel.: (212) 849-7000 Fax: (212) 849-7100 Attorneys for Amici Curiae