
    CITY OF NOVI v CITY OF DETROIT
    Docket No. 96203.
    Submitted November 10, 1987, at Detroit.
    Decided February 16, 1988.
    Leave to appeal applied for.
    In 1964 the City of Novi entered into a contract with the City of Detroit for the purchase of water at rates "reasonable in relation to the costs incurred” for supplying the water. Among the factors considered in determining the rate are the elevation differential and distance from the water source. Although the City of Detroit supplies water to only half of the City of Novi, it calculates the rate by considering the entire geographic area of the City of Novi. The City of Novi brought an action in the Oakland Circuit Court against the City of Detroit challenging this practice. The court, Francis X. O’Brien, J., entered a judgment of no cause of action. Plaintiff appealed.
    The Court of Appeals held:
    
    The statute granting authority to cities to contract for water sales to other municipalities requires that the price charged be based on the actual cost of service. The practice of considering the entire geographic area of the purchasing city rather than just the geographic area serviced in determining water rates violated the statutory mandate. Plaintiff is entitled to a refund of the overcharge.
    Reversed.
    Hood, P.J., concurred in the analysis but wrote separately to note that it was not clear from the record whether the City of Detroit made a change in the wholesale or retail rate charged for water after July 1, 1982, the effective date of the amendment containing the statutory language in question. The amendment provides that the new language is applicable upon the first change in the rates.
    Public Utilities — Municipalities — Water.
    The statute authorizing a municipality to contract for the sale of water to other municipalities requires that the price charged be based on the actual cost of service (MCL 123.141; MSA 5.2581).
    
      References
    Am Jur 2d, Public Utilities § 120.
    Am Jur 2d, Waterworks and Water Companies §§ 1 et seq.
    
    Discrimination between property within and that outside municipality or other governmental district as to public service or utility rates. 4 ALR2d 595.
    
      
      Fried & Levitt, P.C. (by David M. Fried and Dennis Watson), for plaintiff.
    
      Donald Pailen, Corporation Counsel, and Robert Walter, Assistant Corporation Counsel, for defendant.
    Before: Hood, P.J., and R. M. Maher and J. B. Sullivan, JJ.
   R. M. Maher, J.

This appeal as of right concerns the validity of the water rates charged to plaintiff as a customer of defendant’s water and sewerage department. At the bench trial on the matter, the trial court entered a judgment of no cause of action, finding that plaintiff had not adequately shown that the water rates charged by defendant were unreasonable or contrary to the actual costs incurred. We reverse.

Plaintiff is one of approximately one hundred communities which purchase water from defendant. The parties entered into a contract in 1964 for the sale and delivery of water. By its terms, the contract is to last for a minimum of thirty-five years and provides that the "rates shall always be reasonable in relation to the costs incurred by [defendant] for the supply of water.” In calculating the rates charged to wholesale water customers, such as plaintiff, defendant employs a ratemaking formula which considers thirteen different cost factors. Two of the factors are (1) the distance between the customer and the water source, and (2) the elevation differential between the same. Those two factors are calculated according to the following methodology:

The distance parameter is equal to the average of five straight line distances drawn between a customer’s single meter connection or geographic center (where there is more than one meter connection) and each of the dwsd’s [Detroit Water and Sewerage Department’s] five water treatment facilities. The elevation parameter is equal to the average of five differentials in elevation established between a customer’s single meter connection or average service area elevation and the dwsd’s five water treatment facilities. [Emphasis added.]

In applying that methodology to water customers with multiple meter connections, defendant has since 1961 computed the distance and elevation factors based on the average values of the entire geographic area of the customer community.

Plaintiff does not challenge the ratemaking formula itself, but rather the application of that formula. Specifically, plaintiff asserts that the distance and elevation factors must be calculated according to the "average service area” of the city, not the entire geographic area. Plaintiff maintains that its average service area is only the eastern one-half of the city. Defendant concedes this but insists that the water rates are still valid because they are reasonably related to the actual costs of providing the water.

Measuring the distance and elevation factors from the eastern one-half of plaintiff’s land area, defendant should be using a distance value of thirty miles and an elevation value of 873.31 feet. The actual values used by defendant are thirty-two miles in distance and 910 feet in elevation. Using the former values as the proper measure, plaintiff was overcharged $40,010.85 for the 1983-84 rate year and $38,824 for the 1984-85 rate year. The total overcharge for the 1985-86 rate year was unavailable at the time of trial, although it was anticipated that the unit overcharge would be forty-eight cents per thousand cubic feet of water. We believe the water rates charged by defendant were not proper and, therefore, plaintiff is entitled to a refund of the aforementioned overcharges.

Before discussing the reasons for our decision, we note that municipal corporations are empowered to sell and deliver water outside their corporate limits. Const 1963, art 7, §24. Further, we acknowledge that ratemaking is a legislative function, not a judicial one. The Detroit Edison Co v Public Service Comm, 82 Mich App 59, 67; 266 NW2d 665 (1978), aff'd 416 Mich 510; 331 NW2d 159 (1982), reh den 417 Mich 1133 (1983). The ratemaking authority for a municipal utility is reserved to the legislative body given that power under the municipal charter. MCL 141.103(d), 141.121; MSA 5.2733(d), 5.2751. Utility ratemaking and the cost of service allocation are not exact sciences. Mars Hill & Blaine Water Co v Public Utilities Comm, 397 A2d 570, 587 (Me, 1979); New England Telephone & Telegraph Co v State, 113 NH 92; 302 A2d 814 (1973). A ratemaking authority is not bound by any single ratemaking formula. City of Plymouth v Detroit, 423 Mich 106, 126-133; 377 NW2d 689 (1985); Attorney General v Public Service Comm #2, 136 Mich App 515, 523; 358 NW2d 351 (1984). The mere fact that one method of ratemaking is deemed reasonable does not make all other alternative methods of setting a rate unreasonable. Public Service Co of Colorado v Public Utilities Comm, 653 P2d 1117, 1120 (Colo, 1982). While it is not our function to determine what a particular rate should be, it is our duty to review the rate imposed to determine if it complies with the statutory requirements.

Defendant derives its authority to contract with other municipalities for the sale of water from MCL 123.141(1); MSA 5.2581(1). Subsection (2) of that statute further provides that "[t]he price charged by the city to its customers shall be at a rate which is based on the actual cost of service as determined under the utility basis of ratemaking.” (Emphasis added.) MCL 123.141(2); MSA 5.2581(2). That language represents a departure from the former statutory language which directed only that the water rate, in cases such as this, "shall bear a reasonable relationship to the service rendered.” 1957 PA 53 (repealed in 1981). Hence, no longer can the water rate be merely reasonably related to the service rendered but must reflect the actual cost of providing the service. By amending the statutory language in that manner, we must assume the Legislature intended to effectuate some change in the application of the statute. Borkus v Michigan National Bank, 117 Mich App 662, 668; 324 NW2d 123 (1982), lv den 417 Mich 998 (1983). Logically, this would be to impose a stricter standard upon municipal corporations in establishing the water rates charged to their utility customers. Indeed, this fact is borne out by the argument for the house bill from which the new statute originated, HB 4029:

The present rate-making limitations result in obvious inequities. Thirty-four of Detroit’s water service customers pay more than the actual cost of service while ten pay less. In effect the thirty-four overcharged customers are subsidizing the cost of water service to the ten undercharged customers. The City of Detroit alone will benefit this year in the amount of $3.4 million. The other undercharged customers will pay almost $1.4 million less than their actual cost of service. Thus, the thirty-four overcharged customers will be paying a total of $4.8 million this fiscal year to help provide service to undercharged customers. Now that the Detroit water system has at its disposal a reliable method of equitably apportioning costs there is no reason why water service customers should not pay the actual cost of service. [House Legislative Analysis, HB 4029, March 9, 1981.]

On the basis of the new statutory language of MCL 123.141(2); MSA 5.2581(2), we believe the water rates charged to plaintiff were improper.

Defendant insists that its water rates are valid based on the decisions in Building Owners & Managers Ass’n of Metropolitan Detroit v Public Service Comm, 424 Mich 494, 509; 383 NW2d 72 (1986), and Pennwalt Corp v Public Service Comm, 157 Mich App 273, 279; 403 NW2d 121 (1987), lv den 428 Mich 905 (1987). In Pennwalt Corp, it was held that "[t]he crucial question is not whether the methodology was unreasonable, but whether the overall rates were unreasonable or unlawful.” (Emphasis in original.) 157 Mich App 279. Using that logic then, defendant argues that, even though its water rates were not calculated according to the actual area served alone, they are still valid because plaintiff has not shown them to be unreasonable or unlawful. We find Building Owners Ass’n and Pennwalt Corp to be distinguishable from the instant case.

Both Building Owners Ass’n and Pennwalt Corp interpreted a different statute than the one in dispute herein. That statute, MCL 462.26(e); MSA 22.45(e), now MCL 462.26(8); MSA 22.45(8), expressly provided that "the burden of proof shall be upon the complainant to show by clear and satisfactory evidence that the order of the commission complained of is unlawful or unreasonable.” Here, the statute in question does not delineate the applicable burden of proof. However, several early cases which interpreted the former statutory language held that, unless the plaintiff can show that the water rates are arbitrary, capricious or unreasonable, the charge is valid despite a defect in calculating the rates. City of Plymouth, supra, p 134; Meridian Twp v East Lansing, 342 Mich 734, 746-753; 71 NW2d 234 (1955). Considering the significant change in the new statutory language, we believe that interpretation is no longer viable.

Under the current statutory scheme, it is enough for the challenging party to show that the water rates do not reflect the actual cost of providing the service. In so ruling, though, we do not mean to hold municipal corporations accountable for every penny charged to their water service customers. Because ratemaking is not an exact science, mathematical precision cannot be required. However, as recognized in the argument for House Bill 4029, municipal corporations now have at their disposal a reliable method for apportioning costs. While perhaps not exact, that method must certainly provide greater precision and guidance to municipal corporations than formerly available. It makes little sense then to adhere to a standard of review which was developed at a time when calculating the actual cost of water was neither possible nor required.

Although we speak in terms of a single "method” of rate calculation, we recognize that it is entirely possible for several formulas — each of which considers different factors or applies them in a different way — to yield a sum which constitutes the actual cost of service. However, in the instant case, the parties stipulated at trial that the rate methodology for calculating the distance and elevation factors represented the utility basis of ratemaking. That stipulation, which was received and approved by the court, became binding upon the parties. Dana Corp v Employment Security Comm, 371 Mich 107, 110; 123 NW2d 277 (1963). Moreover, defendant’s expert witness acknowledged, upon questioning by the court, that the "average service area” of plaintiff includes only the eastern portion of the city which is actually being served by defendant. It would be anomalous to hold that defendant’s water rates are valid despite the fact that they are contrary to the methodology which defendant is bound to follow. Clearly, the water rates charged by defendant cannot be said to reflect the actual cost of providing the water. Thus, plaintiff is entitled to a refund of the water rate overcharges for the years 1983-84, 1984-85, and 1985-86.

Reversed.

Hood, P.J.

(concurring). I concur in Judge Maher’s analysis. I write separately only because it is not clear to me from the record before us that the City of Detroit made a change in the wholesale or retail rate following the July 1, 1982, effective date of the amendment to MCL 123.141; MSA 5.2581. Neither parties’ brief nor the stipulation of facts address this point. The clear language of the amendatory act provides that "[t]his subsection shall take effect with the first change in wholesale or retail rate by the city or its contractual customers following the effective date of this subsection.” If, in fact, there were no rate changes during the years in question, the amendatory language did not apply and the rate charged plaintiff was proper. 
      
       It should also be pointed out that defendant does not argue that its rates were permissible under the terms of the parties’ 1964 contract. This is significant because the relevant statute, MCL 123.141(2); MSA 5.2581(2), states, in pertinent part, that "[t]his subsection shall take effect with the first change in wholesale or retail rate by the city or its contractual customers following the effective date of this subsection [i.e., July 2, 1981].” Because defendant does not claim that there has not yet been a change in water rights, we decline to advance that argument for it. In any case, in light of defendant’s concessions, it seems clear that the statute was in effect during the rate years in dispute.
     
      
       Although the rate methodology for calculating the distance factor does not explicitly require its calculation according to its average service area, we believe such is implicit. That factor talks of measuring the straight line distance from the single meter connection (where applicable), not from the center of the entire city limits. And, although the methodology refers to the "geographic center” in the case of multiple meter connections, we believe that reference is to the area actually served. Because the methodology speaks of specific points within the service area, and not the city limits of the customer community as a whole, it logically follows that the distance factor is also to be calculated according to the average service area.
     