Platt v. Town of Torrey, Utah

IN THE SUPREME COURT OF THE STATE OF UTAH

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Duane S. Platt and Donna L.SSall, as individuals, as

trustees of the Duane S.

Platt Living Trust, and as

trustees of the Donna L.

Sall Living Trust,

Plaintiffs and Appellants,

v.

Town of Torrey, Utah, a

municipal corporation,

Defendant and Appellee.

No. 950415

F I L E D November 25, 1997

Sixth District, Loa Dep't

The Honorable David Mower

Attorneys: Marvin D. Bagley, Richfield, for plaintiffs

Ken Chamberlain, Tex R. Olsen, Richfield, for

defendant

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HOWE, Justice:

Plaintiffs appeal from the trial court's judgment that the rate schedule imposed

by defendant Town of Torrey charging different rates to resident and nonresident

water users is valid and enforceable and denying plaintiffs' request for an

injunction and damages.

FACTS

Plaintiffs are residents of Wayne County, Utah, who own property, either

personally or in trust, and reside just outside the limits of the Town of Torrey.

Torrey is a municipal corporation of Wayne County which operates a municipal water

system that provides culinary water to residents and nonresidents of the town.

Torrey imposes connection fees for new water hookups and then varying monthly user

charges that depend on whether the hookup is commercial or residential and on the

amount of water used. In June 1989, the town adopted a moratorium on nonresident

commercial hookups. The town continued at all times to supply residential

out-of-town hookups as well as commercial and residential hookups to residents of

the town.

In October of that same year, plaintiff Donna Sall, who was not yet residing on

real property she and Duane Platt had acquired just outside the town's limits,

purchased a water connection from Torrey for $1000. She asserts that she informed

the mayor at that time of her intentions to build an RV park on the property. She

was given a "Water Connection Agreement" signed by Torrey's then-mayor and

attested to by the town clerk.

In early 1990, plaintiffs began to develop the RV facility. They hired a

contractor to install a water meter and requested permission from the town to

install a commercial one-inch pipe instead of a residential three-quarter-inch

pipe. The town denied their request because of the moratorium but placed them on

the priority list for such a hookup. Consequently, plaintiffs were required to

delay their plans to develop their property.

In the summer of 1994, plaintiffs moved onto their property and requested that the

town activate their water connection to provide water for residential use.

Plaintiffs also applied for a permit from the State of Utah to drill a well to

provide water for their commercial venture. Torrey approved activation of

plaintiffs' water connection, contingent on plaintiffs' extending the town's

six-inch water main to their property. After plaintiffs made that extension at

their own expense, the town installed and activated a residential three-quarter-inch connection.

In November 1994, the mayor informed plaintiffs that they could abandon their

plans to drill a well because Torrey planned to obtain a loan from the State Board

of Water Resources to improve the town's water system and to allow it to provide

commercial service to nonresidents. Torrey's loan application was approved in the

spring of 1995. Thereafter, Torrey executed a bond to the state in conjunction

with this loan. Under the terms of the bond, the connection and user fees charged

by Torrey are placed into an escrow account and are then used to make the annual

payment on the bond.

In early 1995, plaintiffs completed construction of a residence and gift shop.

They planned to open an RV park sufficient to accommodate 12 RVs in June of that

year. Therefore, after learning of the approval of Torrey's loan application,

plaintiffs again requested a commercial hookup. They were informed that they

would have to file a formal application, but after they did so, the town council

tabled the application.

In May, plaintiffs began operating their gift shop, which included an espresso

bar, even though Torrey had not approved their commercial application. The gift

shop used approximately five gallons of culinary water a day that was supplied

through their residential connection.

In June, the town council approved a resolution providing for both residential and

commercial out-of-town hookups. The resolution included a new rate schedule that

imposed higher connection fees in most cases and higher user rates for

nonresidents than residents.⁽¹⁾ Thereafter, Platt appeared before the town council

and informed them of his plans to open the RV park without a commercial connection

and inquired whether doing so would create any problem. The town council warned

Platt that if the RV park were opened, plaintiffs' water would be shut off. The

very next day, plaintiffs' water was turned off on the stated ground that the

water supplied through their residential connection was being used for commercial

purposes.

In response, plaintiffs filed a complaint, seeking a temporary restraining order

and permanent injunction restoring plaintiffs' water service and enjoining Torrey

from interfering with plaintiffs' water for residential and commercial purposes in

the future. The complaint also sought a declaratory judgment requiring that

Torrey charge residents and nonresidents the same rates. In this regard,

plaintiffs contend that the residents' rate schedule for connection and user fees

should be applied to them as well.

The court held a hearing on the motion for a temporary restraining order.

Although the town council's June resolution established fees for commercial and

residential out-of-town hookups, Torrey maintained at the hearing that its

moratorium on commercial out-of-town hookups was still in effect, and therefore,

that plaintiffs could not have their water service restored. Despite these

contentions, at the close of the hearing the trial court issued an order restoring

plaintiffs' residential water use.

Thereafter, a trial was held regarding the validity of the rate schedule. After a

portion of the evidence was presented, the parties reached a stipulation which

provided, in part, that Torrey would immediately call a special meeting of the

town council to reconsider plaintiffs' application for a commercial connection.

The town council, in an emergency meeting, lifted the moratorium on new commercial

service outside of town and approved plaintiffs' application. After the remaining

evidence was presented, the trial court ruled that the rate schedule contained in

the June 8 resolution was valid and enforceable. The court therefore denied

plaintiffs' claims that enacting the rates unlawfully discriminated and that the

rate schedule breached a contract between Torrey and plaintiffs.

Plaintiffs appeal, contending that the trial court erred in ruling that

(1) Torrey's rate schedule, which generally charges higher connection and user

fees to nonresidents, does not discriminate illegally; (2) the town's use of

resident and nonresident connection and user fees to pay its bonded indebtedness

does not require it to charge both classes of consumers the same rate; and

(3) Torrey did not breach the water connection agreement given to Sall when it

charged plaintiffs higher user and connection fees than it would have charged

Torrey residents.⁽²⁾ We review each of the trial court's rulings for correctness.

See Bagford v. Ephraim City, 904 P.2d 1095, 1097 (Utah 1995); Saunders v. Sharp,

806 P.2d 198, 199-200 (Utah 1991) (per curiam); Provo City Corp. v. Willden, 768

P.2d 455, 456 (Utah 1989).

ANALYSIS

Plaintiffs first contend that Torrey's disparate rate schedule is unlawfully

discriminatory. They acknowledge that Torrey is under no obligation to provide

water to nonresidents but assert that having elected to provide that service,

Torrey cannot discriminate and is therefore required to treat all users within its

service area the same.⁽³⁾ Whether a municipality must charge the same rate for

water to residents and to nonresidents is an issue of first impression in this

court. However, plaintiffs claim indirect support for this proposition from this

court's rulings in County Water System, Inc. v. Salt Lake City, 3 Utah 2d 46, 278

P.2d 285 (1954), and Home Owners' Loan Corp. v. Logan City, 97 Utah 235, 92 P.2d

346 (1939). We find no such support in those cases, but as will later be seen,

the cases are helpful to our analysis for a more limited proposition.

In County Water System, we addressed whether a water corporation owned and

operated by Salt Lake City was subject to regulation by the Public Service

Commission ("PSC") when it distributed water beyond its city limits.⁽⁴⁾ We held

that allowing "the PSC to exercise jurisdiction over municipal property and the

management thereof would be an unconstitutional delegation of power to a special

commission forbidden by article VI, section 29 [of the Utah Constitution]." 278

P.2d at 290. The primary justification for this conclusion was that

the authority of the city to sell its surplus water beyond the city limits is

derived in the same manner and from the identical section of the statute which

permits it to supply its own inhabitants. Such sale of surplus water, being

authorized by law as a municipal function, is as much a municipal function as the

supplying of water within the city limits, and disposing of the surplus outside

its limits as permitted by statute does not change its character as a municipality

. . . .

Id. On the basis of this language, plaintiffs contend that County Water System

stands for the proposition that "[b]ecause supplying water to nonresidents within

the Town's service area is as much a municipal function as supplying water to its

own residents, the Town is likewise required to treat nonresident users within its

service area on the same equal basis." We disagree. Nothing in County Water

System suggests that nonresidents are entitled to the same water rates as

residents. As we later discuss, it only supports the proposition that a

reasonable basis must exist for the disparate treatment of residents and

nonresidents.

We also reject plaintiffs' reliance on Home Owners' Loan Corp. v. Logan City for

their contention that resident and nonresident rates must be the same. There we

addressed whether a city could refuse to provide water services to a residence

because a former tenant or owner had failed to pay his water bill. After holding

that a city is prohibited from such an act, we turned to the issue of whether

mandamus was the proper remedy in such a case. We recognized the general rule

that a public service corporation which occupies city streets is under a legal

duty to supply all resident customers who comply with its reasonable regulations

and then held that mandamus is indeed the proper remedy when such service is

wrongfully withheld. We stated:

Mandamus has long been held the proper remedy to compel a public service

corporation to supply an applicant with electricity, gas, or water where the

reasonable rules of the corporation have been complied with. . . . For purposes of

this action, we see no distinction between a public service corporation and a

municipality itself.

92 P.2d at 349 (citations omitted) (emphasis added). Once again, the quoted

language is not pertinent to whether a municipally owned water system must charge

the same rates to residents and nonresidents. Like County Water System, it simply

supports the notion that a municipally owned utility must act reasonably when

serving its residents and that the courts will enforce reasonableness when it does

not. We therefore reject County Water System and Logan City as support for the

proposition that a municipally owned water system must charge the same rate to

residents and nonresidents.

The requirement that a municipality supplying public services to its own residents

must act reasonably is stated more explicitly throughout Utah law. Article XI,

section 6 of the Utah Constitution mandates that a municipal corporation supply

water owned by it to its inhabitants "at reasonable charges." Utah Code Ann.

§ 10-8-38 authorizes municipalities to construct and operate sewer systems and to

"make a reasonable charge for the use thereof."⁽⁵⁾ This court has also held that

water and sewer connection fees must be reasonable. Banberry Development Corp. v.

South Jordan City, 631 P.2d 899, 901 (Utah 1981); see also Call v. City of West

Jordan, 614 P.2d 1257, 1258 n.1, 1259 (Utah 1980) (ruling that ordinance requiring

developer of subdivision to "dedicate seven percent of the land area of the

proposed subdivision to the public use" or pay equivalent in cash be reasonable);

Mantua Town v. Carr, 584 P.2d 912, 914 (Utah 1978) ("[A court] will not intervene

[in the administration of municipal services] unless the administrative action is

capricious, arbitrary or unreasonable . . . ."); Rose v. Plymouth Town, 110 Utah

358, 173 P.2d 285, 287 (1946) (mandamus will not lie to compel town officials to

extend water line to plaintiff's residence unless refusal is unreasonable).

Furthermore, courts of this state have not hesitated to enforce reasonableness in

myriad other situations involving other services. See, e.g., Crawford v. City of

Manti, 18 Utah 2d 79, 415 P.2d 665 (1966) (holding that ordinance regulating

city-owned cemetery must be reasonable); Salt Lake City v. Bennion Gas & Oil Co.,

80 Utah 530, 15 P.2d 648 (1932) (holding amount of fee for municipal inspection of

gasoline and oil may be set by city's legislative department within reasonable

limits).

It is significant that Utah courts have enforced this reasonableness standard on

behalf of residents despite the fact that municipal residents are politically

empowered to vote against the political regime that enacted the unreasonable

rates. Nearly seventy years ago in Logan City, 271 P. 961, the case in which we

decided that a municipal utility furnishing service to its own residents is not

subject to regulation by the Public Service Commission, we stated:

Because patrons, customers or consumers of a product of a privately owned public

utility, as a rule have no voice in the handling and management of the business,

nor in fixing and establishing rates and charges, and no adequate remedy or

redress against unreasonable or excessive or unjust rates or charges fixed by a

public utility company, there are good legal reasons for the state . . . to fix a

reasonable and just rate or charge for such a utility, or to delegate the power to

do so to a commission or board of its creation. But no such ground exists to so

safeguard and protect taxpayers and citizens of a town or city owning and

operating its own utility for its own use and for the use and benefit of its

inhabitants. . . . If officers, boards, or agents chosen and selected by them do

not comply with their demands or requests, or fix an unfair or an unreasonably low

or high or a discriminatory rate or charge, others can be chosen or selected to

establish a proper and fair rate or charge or consumers may appeal to the courts

to correct any such abuses.

Id. at 971.

We turn now to the furnishing of services by a municipality to nonresidents. We

begin by observing that Utah Code Ann. § 10-8-14 (1996) authorizes municipalities

to construct and operate "waterworks, sewer collection, sewer treatment systems,

gas works, electric light works, telephone lines or public transportation systems"

and to "deliver the surplus product or service capacity of any such works, not

required by the city or its inhabitants, to others beyond the limits of the city."

The statute is silent on whether the charges to nonresidents must be reasonable,

as charges to residents are required to be. Nevertheless, upon reflection we find

no reason why the requirement of reasonableness that protects municipal residents

should not also be extended to nonresidents who subscribe to municipal services.⁽⁶⁾

In fact, several reasons dictate that municipalities should act reasonably with

their nonresident customers when furnishing necessary services, which many times

are not available to them elsewhere.

In County Water System, we held that a municipal utility providing water to

nonresidents was not subject to rate regulation by the PSC because the utility was

performing a municipal function, the same as when it served residents. That being

so, the requirement of reasonableness, which attends all actions by

municipalities, should not cease at the city limits. This is especially so

because nonresident customers have less political recourse to combat unreasonable

rates than do residents. If politically empowered residents have recourse to the

courts when their municipal government acts unreasonably, even more so should

nonresidents enjoy the protection of the judiciary against similar conduct.

Indeed, judicial review for unreasonableness may be the nonresidents' sole remedy.

Requiring that nonresident rates be reasonable strikes the proper balance between

competing issues in this area--affording nonresidents protection while allowing a

municipality to recoup some return on its investment in the utility and maintain

considerable autonomy. As one commentator stated:

Municipal ownership of a utility generates a conflict between economic and

political considerations. The problem is common, since many cities sell utility

service to nonresidents and most of these do so at higher rates. All the economic

factors, such as the public need for the service, limited supply of a natural

resource and wasteful duplication of facilities, which impose on a privately owned

utility the duty of providing nondiscriminatory and reasonable rates to all

consumers, recommend that the fact of city ownership should not alter this basic

utility obligation. . . . However, other factors, more political in nature, are

worthy of consideration. A city's purchase of a utility plant is made on behalf

of its citizens, who then become both consumers and owners. The requirement of

serving non-residents at the same rates as residents partly defeats the purpose of

. . . ownership. Utility service is only one phase of a prevalent situation in

which non-residents adjacent to cities enjoy the economic and other advantages of

city life without being subject to all the responsibilities of citizens. . . .

To resolve both the economic and political considerations many states have made

the extraterritorial sale of municipal utility service subject to rate regulation

by the state public utilities commission. Thus the non-residents are afforded

protection against exorbitant rates, and the cities are allowed a fair profit from

sales beyond their corporate boundaries. Where . . . there is no [regulation by

a] utilities commission, the courts can achieve the same desirable result by

setting aside unreasonable rates to the non-residents.

Recent Cases, 101 U. Pa. L. Rev. 140, 161-62 (1952) (footnotes omitted.

Requiring a reasonable basis for higher nonresident rates accords with the

overwhelming majority of cases from other jurisdictions. See Jung v. City of

Phoenix, 770 P.2d 342 (Ariz. 1989); Delony v. Rucker, 302 S.W.2d 287 (Ark. 1957)

(interpreting statute requiring reasonable rates); Hansen v. City of San

Buenaventura, 729 P.2d 186 (Cal. 1986); Barr v. First Taxing Dist., 192 A.2d 872

(Conn. 1963); Mohme v. City of Cocoa, 328 So. 2d 422 (Fla. 1976); Cooper v. Tampa

Elec. Co., 17 So. 2d 785 (Fla. 1944); Inland Real Estate Corp. v. Village of

Palatine, 496 N.E.2d 998 (Ill. App. Ct. 1986); Usher v. City of Pittsburg, 410

P.2d 419 (Kan. 1966); Louisville & Jefferson County Metro. Sewer Dist. v.

Joseph E. Seagram & Sons, Inc., 211 S.W.2d 122 (Ky. 1948); City of Hagerstown v.

Public Serv. Comm'n, 141 A.2d 699 (Md. Ct. App. 1958) (based on statute requiring

PSC to fix reasonable rate for service to nonresidents); County of Oakland v. City

of Detroit, 265 N.W.2d 130 (Mich. Ct. App. 1978); Borough of Ambridge v.

Pennsylvania Pub. Util. Comm'n, 8 A.2d 429 (Penn. 1939) (interpreting statute

requiring reasonable rates); Town of Terrell Hills v. City of San Antonio, 318

S.W.2d 85 (Tex. Civ. App. 1958); Handy v. City of Rutland, 598 A.2d 114 (Vt.

1990); Faxe v. City of Grandview, 294 P.2d 402 (Wash. 1956) (holding that state

constitution required reasonable nonresident rates); cf. Mayor & Council of Dover

v. Delmarva Enterprises, Inc., 301 A.2d 276 (Del. 1973); Schroeder v. City of

Grayville, 520 N.E.2d 1032, 1034 (Ill. App. Ct. 1988) ("[A]lthough not obligated

to serve non-residents in the absence of a contractual relationship, a

municipality is prohibited from discriminating unreasonably in rates or manner of

service when it elects to serve non-residents."); Mayor & City Council of

Cumberland v. Powles, 258 A.2d 410 (Md. Ct. App. 1969). Commentators in this area

are also in agreement with extending the reasonableness requirement to

nonresidents. See Charles S. Rhyne, The Law of Local Government Operations

§ 23.16 (1980); 2 Chester James Antieau, Antieau's Local Government Law § 19.08

(1996) ("Local government utilities can discriminate against nonresidents in rates

whenever such differentiated treatment is reasonable."); 12 Eugene McQuillan, The

Law of Municipal Corporations § 35.35.45 (3d ed. 1995) ("The duty of a

municipality owning a public utility to furnish services and supplies without

discrimination and at reasonable rates extends to users outside the city, . . .

where the city has undertaken to serve the public outside the city."). However, a

few courts have ruled otherwise, usually on a constitutional or statutory basis

peculiar to that jurisdiction.⁽⁷⁾

In the instant case, because we are specifically concerned with water rates,

additional concerns enter into our analysis. The most fundamental principle of

water law in this arid state is found in Utah Code Ann. § 73-1-1 (1989):

All waters in this state, whether above or under the ground are hereby declared to

be the property of the public, subject to all existing rights to the use thereof.

The extent of anyone's right to use water (including municipalities) is limited to

that amount which can be put to beneficial use. See Utah Code Ann. § 73-1-3

("Beneficial use shall be the basis, the measure, and the limit of all rights to

use the water in this state."). Thus, the nonuse of water for five years by an

appropriator works a loss of the right to the unused water, and it reverts to the

public for appropriation and use by someone else. Id. § 73-1-4(1)(a), (4)(a)-(b).⁽⁸⁾ Even the water rights owned by municipalities are subject to forfeiture

for nonuse. Nephi City v. Hansen, 779 P.2d 673 (Utah 1989). Thus, it appears

that the legislature, in authorizing municipalities to sell their surplus water to

nonresidents, accorded them a measure of protection against the loss of the right

to such surplus water. In availing themselves of that protection, municipalities

ought to deal reasonably with those who purchase the surplus water and who might

otherwise be able to appropriate it for their own use.

Arguably, some nonresidents may be able to annex and take advantage of the

constitutional protection of "reasonable rates" accorded to residents. However,

for a nonresident to be annexed, certain rigorous requirements must be met: The

property must be contiguous to the municipal limits; the municipality must

consent; and a majority of the real property owners and the owners of at least

one-third in value of the real property must petition for annexation. Utah Code

Ann. § 10-2-416. Therefore, the opportunity for annexation offers insufficient

protection for nonresidents against unreasonable water rates.

On the basis of these considerations, we conclude that in the sale of this scarce

resource in which the public has an interest, municipalities must deal reasonably

with nonresidents, as they do with their own residents. Thus, a showing by

nonresident plaintiffs, when contesting a rate schedule, that rate discrimination

rests solely on the nonresident status of the user, without some other legitimate

justification, will invalidate the schedule.

Before proceeding to analyze Torrey's rate schedule, we note:

Rates established by a municipality for utility service to inhabitants are

presumptively reasonable. It follows that one who challenges such rates as

unreasonable has the burden of proof. We see no reason why the same principle

should not apply with regard to a challenge to the reasonableness of nonresident

utility rates.

Faxe, 294 P.2d at 408 (citations omitted). "A presumption of validity is accorded

rates enacted by municipal ordinance and plaintiffs bear a heavy burden of proving

that the rates charged are unjustly discriminatory and unreasonable." Inland Real

Estate, 496 N.E.2d at 1002; see also Laramie Citizens for Good Gov't v. City of

Laramie, 617 P.2d 474, 484 (Wyo. 1980) ("The burden of proof is on the party

contesting the reasonableness and nondiscriminatory nature of the charges."); 12

Eugene McQuillan, The Law of Municipal Corporations § 35.37.05 (3d ed. 1995) ("The

burden of proof is on the party claiming unreasonableness or discrimination.").

Thus, a "city has no duty to explain or justify its actions in setting rates until

such burden has shifted to it by the establishment of a prima facie case of

invalidity based on competent evidence." City of Pompano Beach v. Oltman, 389 So.

2d 283, 286 (Fla. Dist. Ct. App. 1980). Trial courts should not require a

municipality to make any showing until plaintiffs contesting a rate have

demonstrated that no reasonable justification exists for the higher rate. After

that showing has been made, a municipality may proffer proof of its own to rebut

the plaintiff's case or establish a reasonable justification unaddressed by the

plaintiff.⁽⁹⁾

Higher rates may be justified by a variety of circumstances, some of which may

exist in this case. Although testimony and evidence were adduced that alluded to

the possible existence of some of these circumstances, the trial court made no

findings of fact concerning them. We will therefore address the justifications

that might exist in this case on which other appellate courts have relied and

remand this case to the trial court for a determination of whether sufficient

justification for the higher nonresident rate exists here.

At the threshold, plaintiffs must prove that the cost of servicing nonresidents

who are charged the higher rate does not justify the price differential. It has

been widely held in other jurisdictions, and appears to be well settled, that

greater costs associated with servicing nonresidents in and of themselves justify

a higher rate to nonresidents that reflects those cost differences. See, e.g.,

Hansen, 729 P.2d at 192-94; McQuillan, § 35.37.10 ("A municipality has the right

to classify consumers under reasonable classifications based upon such factors as

the cost of service . . . ."). We agree. In this regard, we note that plaintiffs

bore the expense of extending a six-inch line to their property. However, if on

remand the trial court finds that there are other increased costs in servicing

nonresidents which justify the higher rate that Torrey charged nonresidents, it

should uphold the rate schedule without additional inquiry into other possible

justifications. Simply put, "[i]f the difference in rates is reasonably related

to a difference in the costs of providing the service, there is no unreasonable

discrimination." Austin View Civic Ass'n v. City of Palas Heights, 405 N.E.2d

1256, 1265 (Ill. App. Ct. 1980).

However, even if no cost justification exists, other justifications could exist.

"Proof that service of nonresidents involves greater expenses is sufficient to

show a city acted reasonably in charging high rates for nonresidents," but "other

factors may also bear upon the question of reasonableness." Jung, 770 P.2d at

345. One might be that residents of Torrey bear risks that nonresidents do not

bear. For example, it is unclear from the record who would be responsible for

financing a major repair in the event of a catastrophe or breakdown. It is

pertinent whether residents alone bear this risk. As the California Supreme Court

recognized, the fact that "nonresidents do not have the same obligations and

responsibilities for the replacement and repair of the system in the event of

disaster or to provide for the expansion to meet population growth," Hansen, 729

P.2d at 193, is a valid justification for a higher nonresident rate. In addition,

Torrey argued, although once again no findings were made regarding the issue, that

the citizens of Torrey would be responsible for paying the bond if the revenues

from the connection and water fees became insufficient.⁽¹⁰⁾ It also seems that only

Torrey bears the risk of tort liability. See Oakland, 265 N.W.2d at 132. If

residents of Torrey alone bear these risks and the risks are tangible and

proportional to the difference in rates, the schedule should be validated.

Another justification might be that residents of Torrey as a class have made or

are making contributions to the system that nonresidents have not made or are not

making. Torrey asserts in its statement of facts that the water system was

constructed with contributions of money and volunteer labor from early residents

of Torrey, but the trial court made no finding in this regard. If residents have

contributed money, be it tax dollars or other funds, or labor to create the water

system from which nonresidents now seek to benefit, the residents are entitled to

a lower water price that reasonably reflects those contributions. It may also be

that monies from the general fund have been or are currently being used to pay

personnel who manage and operate the system. The record indicates that engineers

oversee the system along with the mayor and a town clerk, and other people may be

involved. However, there are no indications whether these persons are paid for

performing these functions and, if so, whether their salaries are paid from the

general fund or water revenues. If employees who operate the water system are

paid with general funds, this may justify a lower rate for residents. See Hansen,

729 P.2d at 193 (finding as valid justification that "the nonresidents have not

made and do not make the same financial contributions to the maintenance of the

water system as do residents"). As the Washington Supreme Court stated, "[A] city

boundary line . . . usually serves to divide those customers who have made a

capital contribution to the system, who have assumed responsibility for its

operation, and who have, through general municipal functioning, contributed to its

support and development, from those who have not." Faxe, 294 P.2d at 409. "Even

in a case . . . where the utility is supported by revenues instead of taxes, it is

the city that bears all of the burdens and responsibilities of management," Town

of Terrell Hills, 318 S.W.2d at 88, and the city residents should receive some

benefit for this added responsibility. Thus, if the trial court should find on

remand that residents have subsidized or are currently subsidizing, directly or

indirectly, the construction, maintenance, or supervision of the water system in a

way that nonresidents are not, in an amount sufficient to justify the higher

rates, the rate schedule should be upheld.

Finally regarding this issue, we note: "Reasonable discretion must abide in the

officers whose duty it is to fix rates. Rate making . . . is an inexact science

and their determination should not be disturbed if there is any reasonable basis

for that determination . . . ." McQuillan, § 35.37.05 (footnotes omitted). Rate

making is a legislative function to which courts owe a degree of deference. "In

adjudicating the validity of any individual application of the standard of

reasonableness, the courts must concede municipalities the flexibility necessary

to deal realistically with questions not susceptible of precise measurement.

Precise mathematical equality 'is neither feasible nor constitutionally vital.'"

Banberry, 631 P.2d at 904 (quoting Airwick Indus., Inc. v. Carlstadt Sewerage

Authority, 57 N.J. 107, 270 A.2d 18, 26 (1970)). A court should "exercise caution

in declaring such an act invalid because it rests upon discretion vested in public

officers, chosen directly or indirectly by the people." Louisville & Jefferson

County, 211 S.W.2d at 125. Courts are not the equivalent of a utilities

commission, but rather serve as a protection against arbitrary, capricious, or

unreasonable behavior. Therefore, the trial court should not require that the

higher rate for nonresidents be justified dollar for dollar. Instead, courts

should seek to determine whether the rate is unreasonable in light of the factors

addressed in this opinion.⁽¹¹⁾

Plaintiffs' second contention is that Torrey is required to charge the same rate

to residents and nonresidents because the revenue from the water system is being

used to retire Torrey's bonded indebtedness. Plaintiffs cite Patterson v. Alpine

City, 663 P.2d 95 (Utah 1983), as support for that proposition. In Patterson,

Alpine City joined several other cities to establish a waste water treatment

facility that would serve all of the cities involved. Alpine deposited $375,000

to obtain funding from the federal government. It then proposed to charge $700

for the immediate purchase of a permit to hookup to the system but $1500 for a

permit purchased just two months later. Alpine City contended that the higher

rate was necessary to enable it to repay its bonded indebtedness. In overturning

the discriminatory rate schedule, we stated, "If the connection fee is indeed to

be used to retire bonded indebtedness, then all users on the system must be

treated equally and late-comers cannot be subjected to an arbitrary increase of

over 100% in a period of two months." Id. at 97.

Alpine City offers no support for plaintiffs' position for two reasons: First,

the plaintiff in Alpine City was a resident of the city who was being charged the

higher rate. We found that Alpine City had proffered no legitimate reason why

residents who connected to the sewer system a few weeks later than the original

subscribers but were otherwise similarly situated with those residents should be

charged a rate more than double that of the original subscribers. The facts of

Alpine City are clearly distinguishable from those currently before us where

nonresidents are contesting the higher rate. Second, Alpine City involved the

creation of a system rather than its expansion, as presented in this case.

Alpine's sewer system was created for the use of all residents of that city, which

provided the basis for ruling that all residents should be treated the same. In

the instant case, however, there was testimony that the bonded indebtedness was

incurred to fund the expansion of Torrey's water system. Torrey undertook this

expansion primarily to service nonresident users, as Torrey apparently had enough

water to supply its own residents. Thus, we reject plaintiffs' contention that

the fact that Torrey uses water revenues to pay its bonded indebtedness entitles

all users of the system to equal rates.

Finally, plaintiffs contend that Torrey breached a contract with Sall when it

enacted the resolution charging Sall the higher nonresident rate. Plaintiffs rely

on the Water Connection Agreement given to Sall, signed by Torrey's then-mayor,

and attested to by the town clerk. The agreement provides, "In the event cost

experience requires the Town Board to raise the water rate to inhabitants in the

Town of Torrey, this contract shall be amended to include a water rate consistent

with that rate charged the inhabitants of Torrey Town." The trial court found

that Sall received the agreement when she paid her connection fee in 1989;

however, no conclusion was made by the court as to whether giving the agreement to

Sall created a contract and, if so, whether that agreement continued to govern the

relationship of the parties. Instead, the court simply concluded that plaintiffs'

claim for breach of contract should be denied. Therefore, on remand the trial

court should determine (1) whether the parties entered into a contract which

obligated Torrey to charge plaintiffs a rate equal to that of Torrey residents,

(2) if so, whether that contract is enforceable,⁽¹²⁾ and (3) whether Torrey breached

that contract by the new rate schedule.⁽¹³⁾

CONCLUSION

Thus, on remand the trial court should address whether the disparate rate charged

nonresidents is justified and, if so, whether Torrey nonetheless breached a

contract with plaintiffs when it enacted the new rate schedule.

Remanded for proceedings consistent with this opinion.

---

Justice Durham and Justice Russon concur in Justice Howe's opinion.

-

BRAITHWAITE, District Judge, dissenting:

I respectfully dissent. I will not attempt to respond to all of the extended

analysis of the majority. Stripped to its essentials, the issue in this case is

whether district courts should be installed as profit referees in water sale

contracts between municipalities and nonresidents. My view is that the majority

opinion reverses present Utah case law and mandates unneeded and unworkable

guidelines that are not required by the Utah Constitution, Utah statutes, or sound

public policy.

1. There is no constitutional or statutory requirement that municipalities

provide water to nonresidents.

Article XI, section 6 of the Utah Constitution requires municipal corporations to

preserve, maintain, and operate their water systems to supply their residents with

water at reasonable charges. There is no similar constitutional or statutory

mandate regarding nonresident users.

2. Nonresidents have no inherent right to receive municipal services.

A person who is not a resident of a nearby municipality is not subject to the

jurisdiction of that municipality. The town's taxes, ordinances, and regulations

have no effect outside of town limits.⁽¹⁴⁾ By the same token, the nonresident has

no standing to demand municipal services. Nonresidents pay no town taxes and do

not participate in electing representatives or governing the town. They do not

have to pay the bills if the town incurs liabilities, cash shortfalls, or other

budgetary problems from operating the town, including water departments.

With respect to providing service outside its territorial limits, municipal

corporations may maintain waterworks, "and they may sell and deliver the surplus

product or service capacity of any such works, not required by the city or its

inhabitants, to others beyond the limits of the city." Utah Code Ann. § 10-8-14(1). The decision whether to sell water outside city limits rests solely with

the town. No Utah statute or case law states otherwise.

3. Should municipalities and nonresidents choose to contract for the sale and

purchase of surplus water, they should continue to be allowed to do so freely,

without oversight by a "profit referee."

Until this case, municipalities and nonresidents have been allowed to contract

freely for the sale and purchase of surplus water, without the validity of the

contracts being contingent upon approval by a "profit referee."

Specifically, in County Water System v. Salt Lake City, 3 Utah 2d 46, 278 P.2d 285

(1954), this court determined that the Public Service Commission has no

jurisdiction over the sale of a municipality's surplus water outside the

municipality's boundaries. The court made the determination on the basis that

allowing such review would be an unconstitutional delegation of power to a special

commission. The court also noted:

[T]here are numerous considerations which make it seem quite impractical for the

city to be subjected to such regulation and control [by the PSC], including the

fact that it would be an almost impossible task, both for the city and the

Commission to analyze the city's finances with respect to construction,

maintenance and operation costs of its water department, and apportion them

between services rendered within and without the city limits.

Id. at 289 (emphasis added). The majority opinion now requires that district

courts undertake such an admittedly "impossible task."

This case effectively overturns County Water System, substituting a district court

for the Public Service Commission to determine what is and is not a reasonable

profit. District courts are ill prepared to make such marketplace decisions, nor

should they be called upon to do so.

This court has rejected similar attempts in other areas of the law, absent

unconscionability in the contract. In a recent landlord/tenant case, Woodhaven

Apartments v. Washington, 942 P.2d 918 (Utah 1997), this court upheld the ruling

of the court of appeals with respect to unconscionability, which quoted two

earlier Supreme Court opinions, Resource Management Co. v. Weston Ranch &

Livestock, 706 P.2d 1028, 1041 (Utah 1985) (an oil and gas royalty contract case),

and Bekins Bar V Ranch v. Huth, 664 P.2d 455, 459 (Utah 1983) (a debtor/creditor

case) ("Although courts will not be parties to enforcing flagrantly unjust

agreements, it is not for the courts to assume the paternalistic role of declaring

that one who has freely bound himself need not perform because the bargain is not

favorable."). This court quoted with approval the court of appeals' language

stating that "'it is still the law in Utah that parties may contract at arms

length without the intervention of the courts to rescue one side or the other from

the result of that bargain.'" 942 P.2d at 924 (quoting Woodhaven Apartments v.

Washington, 942 P.2d 271, 274 (Utah Ct. App. 1995)).

This case represents a financial decision to be made by a nonresident. It is a

situation played out frequently across the state. The decision the nonresident

faces is this: Is it better for me financially to stay outside town limits,

paying lower taxes but higher service rates (either town nonresident rates or the

extra expense of installing a well), or is it better for me to join the town,

paying lower service rates but higher taxes?

Residents located just beyond town limits may make frequent use of a town's

streets, police and fire protection, parks, playgrounds, recreational programs,

libraries, and other services, incurring no expenses through the town's real

property taxes to pay for the facilities, the maintenance and operating costs, and

the salaries of employees required to provide and operate such governmental

amenities. Towns such as Torrey may in reality be using nonresident water rates

to make up some of this difference. Doing so, if they are, would be neither

illegal nor unconscionable.

There has been no showing that the Town of Torrey in this case, or towns

generally, pursue disadvantaged nonresidents to coerce them into agreements

charging unreasonable rates. This case represents the more typical situation: A

nonresident purchases land outside a town yet approaches the town, requesting town

services. The parties dicker and may or may not reach an agreement. If no

agreement is reached, the nonresident may pursue annexation to the town and obtain

all the rights (voting, resident rates, etc.) and all the responsibilities (town

taxes, zoning, etc.) of residency. Both statutes⁽¹⁵⁾ and case law⁽¹⁶⁾ favor

annexation to municipalities where municipal services are needed outside the

municipal limits.

This court should continue to allow parties to negotiate freely and should not

begin to regulate the agreements they reach in an effort to "even" rates out for

nontaxpaying nonresidents.

As a practical matter, it may be that as a result of this case, both the

majority's belief that the strict contract guidelines adopted will be beneficial

and my belief that they will not may very well be moot. The reaction of

municipalities may very well be simply not to enter into such contingent, voidable

contracts. This will benefit neither the nonresidents nor municipalities with

surplus water.

I would affirm the district court.

---

Chief Justice Zimmerman concurs in Judge Braithwaite's dissenting opinion.

Having disqualified himself, Associate Chief Justice Stewart does not participate

herein; District Judge Robert T. Braithwaite sat.

1. For example, under the new fee schedule, a commercial resident user is charged $25 per month for the first 30,000

gallons of water used and then $.50 for each 1000 gallons used for the next 20,000 gallons. For usage over 50,000 gallons,

the fee is $1 per 1000 gallons used. A nonresident commercial user is charged $50 for the first 10,000 gallons used and

then $.50 for each 1000 gallons used for the next 20,000 gallons. For usage over 30,000 gallons, the fee is $1 for each 1000

gallons. Thus, resident commercial users pay $25 per month for the first 30,000 gallons while nonresidents pay $60 per

month for the same amount of water. Anomalously, however, the connection fee for a one-inch commercial connection is

$3000 for both residents and nonresidents.

2. Plaintiffs cursorily raise a fourth argument that the trial court erred in ruling that plaintiffs were required to pay the newly

enacted water fee even though they had applied for a commercial connection that was wrongfully denied before the

increase in rates. However, the argument is not properly briefed and seems to address many of the same issues as

plaintiffs' other arguments. See Rukavina v. Triatlantic Ventures, Inc., 931 P.2d 122, 125 (Utah 1997). Therefore, we do

not address the fourth issue in the text of the opinion.

3. Plaintiffs' contention that Torrey illegally discriminates is not an argument that some nonresidents are treated differently

than other nonresidents. That is apparently not the case, as it seems that all nonresidents are subject to the same connection

fee and rate schedule. Rather, plaintiffs maintain that the prohibited discrimination is treating nonresidents as a class

differently than residents.

4. We had previously held in Logan City v. Public Utilities Commission, 72 Utah 536, 271 P. 961 (Utah 1928), that a

municipally owned water company serving its own residents was not subject to PSC regulation.

5. This explicit reasonableness requirement may extend to nonresidents receiving sewer services as well. However, no court

has addressed the issue, and we make no conclusion regarding it.

6. This is not to say that the rates charged the two classes of customers must be the same for, as we will later discuss in this

opinion, there are many potentially legitimate reasons why higher charges to nonresidents may be justified.

7. See City of Fort Collins v. Park View Pipe Line, 336 P.2d 716 (Colo. 1959) (en banc) (holding that nonresident rates are

matter of contract that will not be reviewed for reasonableness); Barr v. City Council of Augusta, 58 S.E.2d 823 (Ga.

1950); Forest City v. City of Oregon, 569 S.W.2d 330 (Mo. Ct. App. 1978) (statute allowing municipalities to sell water

"upon such terms and under such rules and regulations as it may deem proper" made issue one of contract); Fairway

Manor, Inc. v. Board of Comm'rs, 521 N.E.2d 818 (Ohio 1988) (holding that constitutionally conferred right to operate

utility without restraint or restriction by general assembly limits courts' role to reviewing resident rates for reasonableness);

Calcaterra v. City of Columbia, 432 S.E.2d 498 (S.C. Ct. App. 1993).

8. The appropriator or his successor in interest may, however, file for an extension of time with the state engineer. Id. § 73-1-4(1)(a)-(b).

9. In Brummitt v. Ogden Water Works Co., 33 Utah 285, 93 P. 828 (Utah 1908), this court employed a similar procedure to

that outlined above to uphold a city ordinance enacting water rates for residents that the plaintiffs claimed were

unreasonable. We stated:

With respect to the contention that one of the plaintiffs was charged unreasonable and excessive rates, the evidence did not

sustain the contention, and the court found against it. Until the contrary is shown, the presumption will prevail that water

rates agreed upon between the city and the company are fair and reasonable.

Id. at 831-32.

10. Currently, the bonded indebtedness is paid with revenue raised through connection and user fees. However, it is not

clear from the record what might take place if those revenues became insufficient or the likelihood of the occurrence of that

situation.

11. We do not mean to suggest that the list of factors addressed in this opinion is exhaustive. It very likely is not. If the

trial court finds that other factors not addressed herein are relevant, it should consider them as well as long as they provide

a legitimate justification for the disparate rates charged residents and nonresidents. For example, courts have considered

whether the expansion was done for the nonresidents, Barr, 192 A.2d at 874, and that the city provides police and fire

protection to the plant, Oakland, 265 N.W.2d at 132.

12. In addressing this matter, the trial court should determine whether such a contract violates the general rule that "the

fixing of municipal utility rates is a 'legislative' or 'governmental' power that cannot be bargained away, restricted by

contract, or dealt with in any way so as to curtail the power of future governing bodies to determine and fix reasonable

utility rates." 2 Chester James Antieau, Antieau's Local Government Law § 19.06 (1996); see Fjeldsted v. Ogden City, 83

Utah 278, 303, 28 P.2d 144, 154 (Utah 1933) ("The board of commissioners may not by contract restrict or curtail the

powers of future boards to determine and to fix reasonable rates."); Brummitt, 93 P. at 833 ("That the fixing and regulating

of water rates is a governmental function and cannot be surrendered nor suspended by the city council is agreed to by all

concerned . . . ."). It is unclear whether the alleged contract in this case would restrict the rate-making powers of future

representatives to the degree the contracts prohibited in Brummitt and Fjelsted did, and no evidence was taken on the issue.

Therefore, we think it appropriate that the trial court address the issue on remand after the factual issues surrounding the

contract are clarified.

13. If the trial court concludes that Torrey indeed breached its contract with plaintiffs, the rate schedule is not necessarily

invalid. It appears that plaintiffs would be entitled to damages or equitable relief, but the new rate schedule could continue

in effect.

14. Utah Code Ann. §§ 10-1-101 to -203.

15. Utah Code Ann. § 10-2-401(3).

16. Sandy City v. Salt Lake County, 827 P.2d 212, 222 (Utah 1992).