Seal Rock Water District v. City of Toledo

Citations: 77 Or. App. 251; 712 P.2d 174Docket: 44305; CA A33786

Court: Court of Appeals of Oregon; January 7, 1986; Oregon; State Appellate Court

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Defendant appeals a declaratory judgment that determined the proper interpretation of a water rate contract with plaintiff. The trial court found that defendant had overcharged plaintiff since January 5, 1981, defined a method for calculating the water rate, and mandated repayment of the overcharges. The plaintiff, a domestic water supply district, and the defendant, a municipal corporation, had initially collaborated in the early 1970s to combine their water systems to comply with state standards, leading to a 1973 statement of intent. This agreement involved shared costs for constructing a new water treatment facility and pipeline connections. In 1976, they formalized a contract allowing defendant to deliver up to one million gallons of water per day to plaintiff, with an adjustable rate based on actual treatment costs, excluding capital amortization. Although plaintiff's water consumption rose, it never reached the contracted amount, averaging below 400,000 gallons per day in 1982. The water rates increased from 18 cents to 28 cents per thousand gallons from 1976 to 1980. An external study commissioned by defendant recommended adopting a utility enterprise pricing system, which considers both operating and facility costs, including reserves for asset replacement. The consultant's findings suggested a revised charge for plaintiff that reflects its share of defendant's costs, adjusted for capital contributions and estimated consumption. The appellate court reversed and remanded the trial court's decision.

The trial court found that the defendant's interpretation of "amortization" was too narrow, limiting it to payments for a sinking fund for bonded debts, and thus did not constrain the facility costs that could be charged to the plaintiff. As a result, the defendant increased charges to the plaintiff to 58 cents per thousand gallons on January 5, 1981, and to 80 cents on February 1, 1982, which the plaintiff paid under protest. The court rejected the defendant's rate-setting method based on the utility enterprise system and instead required a yearly rate based on the average of the defendant’s previous five years' expenses, excluding non-beneficial items and considerations like profit and depreciation. Consequently, the court set the rate at 29.2 cents per thousand gallons starting February 1, 1982, and mandated a determination of the proper rate for the earlier period, awarding the plaintiff the difference paid in excess of this rate plus statutory interest, while prohibiting the defendant from altering the rate-setting method.

The legal review centers on whether findings of fact are supported by substantial evidence and whether they justify the judgment, as the case fundamentally concerns contract interpretation, which is a legal matter. The dispute hinges on the definition of "amortization," with the defendant asserting a specific meaning that excludes economic depreciation and replacement reserves, while the plaintiff contends for a broader interpretation relevant to water utilities. The adopted definition from the 1973 Uniform System of Accounts encompasses amortization as the gradual reduction of an amount over time, aligning with the parties' 1976 agreement. The court concluded that the utility pricing method did not pertain to the contractual agreement, as neither party utilized it or acknowledged it at the time.

Plaintiff and defendant initially agreed that plaintiff would partially fund defendant's system expansion in exchange for treatment and delivery of water at actual cost, covering all obligations related to defendant's facilities. The trial court determined that defendant could only charge plaintiff for these actual costs, excluding replacement or depreciation. However, the court faced challenges in accurately determining defendant's actual costs due to inadequate budget breakdowns. Although the court attempted to devise a formula based on the city's water department budget, it failed to align with the parties' original agreement and included irrelevant consultant testimony. The record did not allow for a precise allocation of costs to treatment and delivery. Evidence supported the trial court's findings, but they were insufficient for the judgment. Consequently, the judgment is reversed and remanded for further proceedings, including evidence gathering on treatment and delivery costs, establishing appropriate rates from January 5, 1981, and awarding plaintiff any overcharges with interest. The contract did not specify who would set the rate, only that it would reflect defendant's experience, and plaintiff appeared to accept the rate increases leading to the 28 cent charge, while defendant adjusted its pricing in line with consultant recommendations.

The consultant included all excluded elements in calculating facilities costs and in his recommendations for charges between the municipalities. Both parties are not subject to PUC regulation, yet the consultant's definition of 'amortization' reflects industry standards and is relevant to the parties' understanding of the term. The defendant objected to introducing this definition, arguing it altered the term's plain meaning. Under ORS 42.250, terms are presumed to have their general meaning, but evidence of technical definitions is admissible. The trial court correctly admitted the evidence. The defendant claimed the court's actions limited its ability to modify its pricing model, but this limitation resulted from the contract made with the plaintiff. The obligation for the plaintiff to make annual payments on its capital contribution remains unaffected. The trial court provided examples of excluded line items, ending with 'etc.,' which the defendant argued was vague. Despite the challenges in interpreting the defendant's budget documents, the court sufficiently described the types of excluded line items. However, the budget documents ultimately did not meet the court's intended purposes.