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Appeals court ruling allows Westlake to pursue other water sources

By KEVIN KELLEY

WESTLAKE – A recent ruling by the Eighth District Court of Appeals allows Westlake to continue exploring the purchase of water from utilities besides the city of Cleveland’s Division of Water, according to both Mayor Dennis Clough and Law Director John Wheeler.

The appeals court reversed, in part, a February 2016 ruling by Cuyahoga County Common Please Court Judge Michael Astrab that found in Westlake’s favor on all major points in the suburb’s dispute with the city of Cleveland.

But the reversal mainly deals with the largely academic issue of the length of the suburb’s original contract with Cleveland Water. On the most important question of whether Cleveland Water can charge Westlake customers a surcharge for costs associated with a Westlake departure from Cleveland’s water system, the appeals court agreed with the trial court.

Cleveland officials have not officially filed notice as to whether they will appeal the case to the Ohio Supreme Court, Wheeler said.

Contract length

Westlake’s city charter states that City Council may not grant any franchise to a utility for longer than 25 years and that such a franchise must be non-exclusive. The 1990 Westlake ordinance authorizing the water agreement with Cleveland stated the contract shall be non-exclusive and for no more than 25 years. So Westlake officials had argued the suburb’s water service agreement with Cleveland expired on March 19, 2015, 25 years after it was signed. The trial court agreed with Westlake.

But the appeals court ruled that contract dictated an initial 10-year term, followed by a series of self-renewing annual contracts thereafter.

However, the appeals court said Cleveland’s contractual demand that a five-year notice was required to terminate the contract was unenforceable.

“It is irreconcilable to require that notice be given five years in advance of an intent to terminate a one-year contract,” Presiding Judge Melody J. Stewart wrote in her opinion. She was joined by Frank D. Celebrezze Jr. in judgment only, with Sean C. Gallagher concurring in part and dissenting in part.

But Stewart said some advanced notice is necessary.

“Delivery of potable water is complex,” the ruling said of the infrastructure associated with bringing water to each home. “Ceasing delivery requires more than the mere flip of a switch. Some period of transition is necessary for the parties, and this means that some period of reasonable notice is required.”

The appeals court returned the case to the trial court to determine what constitutes reasonable notice for termination.

Stranded costs

In September 2013, Cleveland officials interpreted a letter from Clough as a move to leave its water system and announced plans to bill the suburb’s water customers an additional $291 per quarter, $58.8 million in all, for anticipated infrastructure separation costs, referred by Cleveland officials as “stranded” costs, associated with the suburb’s departure from the system. Cleveland also argued that Westlake owed the regional water system money for investments in the system that benefited Westlake.

The appeals court agreed with the trial court that Clough’s letter, and Westlake’s exploration of other water sources, did not constitute a notice of termination of the contract.

The appeals also found no justification for Cleveland’s effort to charge Westlake customers for costs the water system might incur if the suburb exited the system.

“We agree with the trial court that nothing in the agreement allows Cleveland to recoup stranded costs by special assessment to the citizens of Westlake,” Stewart wrote. “Article 4 of the agreement comprehensively addresses “water” rates – it says nothing about surcharges. And there is no question that Cleveland was [planning on] imposing a surcharge on Westlake water customers.”

Dissent

In his dissenting comments, Judge Gallagher said Clough’s 2013 letter to Cleveland was “a clear notice of Westlake’s intent to terminate the agreement.”

Gallagher also differed with the majority on the issue of stranded costs, saying he would not rule out the prospect of Cleveland seeking some compensation for infrastructure work associated with a Westlake departure.

“These costs would have to be proven; but in any event, I believe the question of Cleveland’s being able to recover these costs, and from whom, is premature,” Gallagher wrote.

What’s next

Clough underscored the fact that the appeal court found that the water contract with Cleveland was a nonexclusive contract, meaning the suburb is free to explore other water suppliers. The mayor reiterated his frequently stated assertion that Westlake would like the ability to purchase water from more than one supplier.

In fact, last summer engineering consultant Brandstetter Carroll presented Westlake City Council a scenario by which the suburb could create six or seven connections between its water distribution system and water pipes in Avon, Avon Lake and North Ridgeville. If this option is pursued, an independent Westlake water department could theoretically purchase water from Avon Lake Regional Water, the Elyria Water Department and Cleveland’s Division of Water.

Wheeler, the law director, also said the appeals court ruling allows Westlake to explore other water supply options. The most important part of the ruling, he said, is that Cleveland Water cannot unilaterally impose a surcharge on Westlake residents.

“Although we differ with the court of appeals [on the contract length], the end result is about the same for us,” Wheeler said.

Wheeler again rejected entirely the concept of stranded costs in this case, saying infrastructure costs are built into water bills.

“They’re not just selling you water,” he said. “They’re selling you the ability to get the water to you.”

Wheeler compared the issue to the price per gallon of gasoline. Motorists, he said, do not pay any separate fee for the delivery and storage of gasoline, as that is included in the price per gallon.

 

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