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Artesian Water Company, Inc. v. Chester Water Authority

July 24, 2012


The opinion of the court was delivered by: Padova, J.


This is a contract action arising from the Interconnection Agreement and Addendum (collectively the "Agreement"), pursuant to which the Chester Water Authority ("CWA") supplies water to the Artesian Water Company, Inc. ("Artesian"). Artesian alleges that CWA breached the Agreement by failing to calculate rate increases in 2008, 2009, and 2010 in accordance with Modified § 2.10 of the Addendum. Presently before the Court is CWA's Motion seeking partial summary judgment asking the Court to determine, as a matter of law, the meaning of a term contained in Modified § 2.10. For the following reasons, the Motion is denied.


CWA is a public, non-profit municipal water company that serves Delaware and Chester Counties. (CWA Ex. 4 at 3.) Artesian is an investor-owned public water utility that provides water to customers in Delaware and is regulated by the Delaware Public Service Commission. (CWA Ex. 6 at 4, 10, Interconnection Agreement at 1.) CWA supplies water to Artesian through a dedicated water interconnection. (See Interconnection Agreement at 1-2.) The parties entered into the Interconnection Agreement on June 6, 1990. (Id. at 1.) The Interconnection Agreement provided that CWA would provide water to Artesian through December 3, 2002, but did not specify the manner in which CWA was to calculate the rates it charged Artesian for the water it provided. (See id. §§ 2.10, 2.14.) The Interconnection Agreement was amended on August 1, 1997, by the Addendum. (See Addendum.) The Addendum extended the Agreement until December 31, 2021, with an option to further extend the Agreement until December 31, 2047. (Id. Modified § 2.2.) The Addendum also added language concerning the manner in which CWA is to calculate the rates it charges Artesian. (Id. Modified § 2.10.)

CWA's board retains a consultant to study its rates every three years. (Tonge Dep. at 15-16.) In 2007, CWA's board retained Gannett Fleming, Inc. to perform that year's rate study (the "2007 Rate Study"). (Id. at 16.) In the 2007 Rate Study, Gannett Fleming recommended that CWA raise its rates for the provision of water in 2008, 2009 and 2010 in order to raise its annual revenues by approximately 25.5%. (2007 Rate Study at CWA 144.) CWA's board approved and adopted the rate increases recommended in the 2007 Rate Study. (Tonge Dep. at 26-27.)

Artesian contends in the Complaint that the rate increases adopted by CWA based on the 2007 Rate Study allowed CWA to overcharge Artesian and collect more than $700,000 from Artesian than it should have collected. (Compl. ¶ 25.) The Complaint specifically alleges that CWA breached the Agreement by failing to calculate rate increases in 2008, 2009, and 2010 in accordance with Modified § 2.10 of the Addendum. (Compl. ¶ 29.) Modified § 2.10 states as follows:

The interconnection meter shall be read on a monthly basis, at a date and time predetermined and agreed to by Chester and Artesian annually, and Chester shall bill Artesian based in accordance with the terms of this Agreement and Chester's then current rates, rules, and regulations. The rates charged Artesian for wholesale or bulk water purchases shall be cost-based and shall rely on a cost-of-service analysis using utility-basis of rate-making which conforms with water industry practice and standards. Chester's rates and rate structure shall fairly allocate Chester's cost of service and shall not result in Artesian subsidizing the cost of operating Chester's system to the benefit of any class of customers, except as may be permitted in applying water industry cost-of-service standards. (Addendum, Modified § 2.10 (emphasis added).) The Complaint further alleges that CWA's rate increases were not cost-based as required by Modified § 2.10. (Compl. ¶ 15.)

CWA has asserted counterclaims against Artesian, alleging that Artesian has failed to purchase the minimum quantities of water it is required to purchase under the Agreement and has failed to pay all amounts it owes CWA under the Agreement. (Am. Answer & Countercl. ¶¶ 53-54, 59-61.) CWA initially moved for summary judgment on all claims in the Complaint and on its Counterclaims. However, CWA amended its motion in its Reply Brief and now moves for partial summary judgment only with respect to the meaning of the term "cost-based" as that term is used in Modified § 2.10. (CWA Reply Br. at 1.)


Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). An issue is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986). A factual dispute is "material" if it "might affect the outcome of the suit under the governing law." Id.

"[A] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Where the nonmoving party bears the burden of proof on a particular issue at trial, the movant's initial Celotex burden can be met simply by "pointing out to the district court" that "there is an absence of evidence to support the nonmoving party's case." Id. at 325. After the moving party has met its initial burden, the adverse party's response "must support the assertion [that a fact is genuinely disputed] by: (A) citing to particular parts of materials in the record . . . ; or (B) showing that the materials [that the moving party has] cited do not establish the absence . . . of a genuine dispute . . . ." Fed. R. Civ. P. 56(c)(1). Summary judgment is appropriate if the nonmoving party fails to respond with a factual showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.


CWA asks that we determine the meaning of the term "cost-based" as it is used in Modified § 2.10 as a matter of law. Both CWA and Artesian agree that the term "cost-based" as it is used in the water utility industry refers to two different methods of calculating a water utility's revenue requirement, the "utility-basis" approach and the "cash-needs" approach. (CWA's Opening Br. at 14-15; Artesian's Mem. at 14-15; 12/15/11 Hr'g Tr. at 4-5, 15.) The most significant difference between the approaches is that a water utility may include depreciation expenses when it calculates its revenue requirements using the utility-basis approach, but may not include depreciation expenses when it uses the cash-needs approach. American Water Works Association ("AWWA") Manual of Water Supply Practices, M-1, Principles of Water Rates, Fees, and Charges, 5th ed. (the "M-1 Manual") at 5-6.*fn1

CWA contends that, since the term "cost-based" in Modified § 2.10 could mean either the "utility-basis" approach or the "cash-needs" approach, the Addendum's use of that term allows it to use either approach to determine its revenue requirement for the purpose of determining the rates it charges to Artesian. CWA states in its Reply Brief that "the only question the Court needs to determine at this stage, as a matter of law, is whether the language of Modified § 2.10 of the Addendum merely allows CWA to use the utility-basis approach to determine the revenue requirement, which CWA uses to calculate the rates it charges Artesian." (CWA Reply Br. at 1.) Artesian, however, maintains that the fact that the term "cost-based" is susceptible of two different meanings compels the conclusion that it is ambiguous as it is used in Modified § 2.10 and its meaning cannot be determined as a matter of law at this stage in the litigation. (12/15/11 Hr'g Tr. at 15-17.) Artesian further asserts that it will be able to prove at trial, through parole evidence, that the parties' use of the phrase "cost-based" in Modified § 2.10 requires CWA to calculate its revenue requirement using the "cash-needs" approach. (Id. at 18.)

A. Interpreting Contract Terms

The United States Court of Appeals for the Third Circuit has explained that, while "Pennsylvania law on contract interpretation and ambiguity is somewhat complicated" it "begins with the 'firmly settled' point that 'the intent of the parties to a written contract is contained in the writing itself.'" Bohler-Uddeholm America, Inc. v. Ellwood Grp., Inc., 247 F.3d 79, 92 (3d Cir. 2001) (quoting Krizovensky v. Krizovensky, 624 A.2d 638, 642 (Pa. Super. Ct. 1993)). "'Where the intention of the parties is clear, there is no need to resort to extrinsic aids or evidence,' instead, the meaning of a clear and unequivocal written contract 'must be determined by its contents alone.'" Id. (quoting Steuart v. McChesney, 444 A.2d 659, 661 (Pa. 1982)); see also Weston and Co., Inc. v. Bala Golf Club, 391 F. App'x 152, 155 (3d Cir. 2010) ("'It is firmly settled that the intent of the parties to a written contract is contained in the writing itself. When the words of a contract are clear and unambiguous, the meaning of the contract is ascertained from the contents alone.'" (quoting Mace v. Atl. Ref. & Mktg. Corp., 785 A.2d 491, 496 (Pa. 2001))). Under Pennsylvania law, a contract term will only be considered ambiguous if "it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of ...

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