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Sewer Authority of City of Scranton v. Pennsylvania Infrastructure Investment Authority of Commonwealth of Pennsylvania

Commonwealth Court of Pennsylvania

November 12, 2013

Sewer Authority of the City of Scranton, Petitioner
v.
Pennsylvania Infrastructure Investment Authority of the Commonwealth of Pennsylvania, and Paul Marchetti, in His Official Capacity as Executive Director, Respondents

Argued: June 17, 2013

BEFORE: HONORABLE BERNARD L. McGINLEY, Judge, BONNIE BRIGANCE LEADBETTER, Judge, JAMES GARDNER COLINS, Senior Judge.

OPINION

BONNIE BRIGANCE LEADBETTER, Judge

Before the Court are (1) a motion for summary relief "in the form of judgment on the pleadings" filed by the Sewer Authority of the City of Scranton (Sewer Authority) in its action against the Pennsylvania Infrastructure Investment Authority of the Commonwealth of Pennsylvania (PENNVEST) and PENNVEST's executive director, Paul Marchetti, (collectively PENNVEST), and (2) PENNVEST's preliminary objections to the Sewer Authority's first amended petition for review.

Pursuant to a Funding Agreement entered into with PENNVEST in 2012, the Sewer Authority obtained a low-interest loan from PENNVEST to finance a project of improving the wastewater treatment facility. In this action, the Sewer Authority challenges the validity of Section D.35 of the Funding Agreement, which granted PENNVEST the ownership of "nutrient credits" to be generated by the Sewer Authority, to the extent of the value of the interest rate subsidy provided by PENNVEST. The Sewer Authority also alleges that

PENNVEST breached the Funding Agreement by refusing to disburse the loan fund.

The central issue to be decided is whether Section D.35 of the Funding Agreement is void because it effectively increased the subsidized interest rate to the market rate, thereby exceeding the maximum interest rate set forth in Section 10(f) of the Pennsylvania Infrastructure Investment Authority Act (Investment Authority Act), Act of March 1, 1988, P.L. 82, as amended, 35 P.S. § 751.10(f). The Court must also decide whether the Sewer Authority stated a valid cause of action for a breach of contract. After careful consideration, we deny the Sewer Authority's motion for summary relief and sustain PENNVEST's preliminary objections in part. We dismiss the Sewer Authority's action to the extent that it challenges the validity of Section D.35 of the Funding Agreement.

I.

The Sewer Authority is a municipal authority established under the Municipality Authorities Act, 53 Pa. C.S. §§ 5601 – 5623, and was required by the National Pollutant Discharge Elimination System (NPDES) permit to substantially reduce the discharge of "nutrients, " i.e., "[n]itrogen or phosphorus, " into Lackawanna River by April 1, 2013. Section 3 of the Water and Sewer Systems Assistance Act, Act of July 9, 2008, P.L. 915, 32 P.S. § 695.3. Upon noncompliance with the NPDES permit requirement, the Sewer Authority is subject to civil penalties imposed by the Pennsylvania Department of Environmental Protection (DEP) and the United States Environmental Protection Agency (EPA). The United States filed an action against the Sewer Authority, on behalf of EPA, in the United States District Court for the Middle District of Pennsylvania seeking injunctive relief and civil penalties for violations of the Clean Water Act, 33 U.S.C. §§ 1251 – 1387. In that action, in which DEP intervened, the court issued a consent decree in January 2013, requiring the Sewer Authority to construct a new biological nutrient removal facility by August 1, 2014. United States v. Scranton Sewer Auth. (No. 3:CV-09-1873, filed January 31, 2013). The consent decree also set forth stipulated penalties to be imposed upon the Sewer Authority's noncompliance.

PENNVEST is an instrumentality of the Commonwealth established by the Investment Authority Act.[1] In enacting the Investment Authority Act, the Legislature found, inter alia, that "[m]any water and sewage systems in this Commonwealth are aging, outmoded, inadequate, deteriorating and operating above capacity" and that "[f]inancing of water and sewage projects and storm water projects at affordable cost is not currently available in many areas of this Commonwealth." Section 2(2) and (5) of the Investment Authority Act, 35 P.S. § 751.2(2) and (5).

In 2008, the Legislature authorized the incurring of indebtedness in the amount of $400, 000, 000 for grants and loans to be awarded by PENNVEST for "projects." Section 8(a) of the Water and Sewer Systems Assistance Act, 32 P.S. § 695.8(a). The term "project" is defined to include "[t]he acquisition, construction, improvement, expansion, extension, repair, rehabilitation or security measures of all or part of a facility or system for … the collection, treatment or disposal of wastewater, including industrial waste … and … the reduction of nitrogen, phosphorus and sediment to comply with Pennsylvania's Chesapeake Bay Tributary Strategy, including the purchase or trading of nutrient credits." Section 3 of the Water and Sewer Systems Assistance Act (emphasis added).[2] A "nutrient credit" is "[t]he unit of compliance that corresponds with a pound of reduction of a nutrient and that has been approved by [DEP]." Id. Under this definition, if the actual nutrient discharge amount is less than the discharge limit set forth in an NPDES permit, the difference is a nutrient credit. Nutrient credits can be sold to another entity which can use them to reduce the nutrient discharge amount exceeding the allowable limit. Section 8(e) of the Water and Sewer Systems Assistance Act provides that "[n]othing in this act shall prohibit the use of funds allocated under the provisions of this act for projects involving the purchase or trading of nutrient credits."

On March 6, 2012, PENNVEST and the Sewer Authority entered into a Funding Agreement, in which the Sewer Authority agreed to obtain a loan in the amount of $11, 256, 361 from PENNVEST at a subsidized interest rate to finance a project of improving the existing wastewater treatment facility to reduce the nutrient discharge. The interest rate for the loan was 1% for the first 5 years of the term of the loan and 1.51% for the remainder of the term.[3] PENNVEST agreed to disburse the loan fund in increments as progress payments upon the Sewer Authority's request. Paragraph F.2.a of the Funding Agreement.

Section D.35 of the Funding Agreement ("Nutrient/Environmental Credits") further provided in relevant part:

The nutrient credits, or any other marketable environmental credits, (if any)[, ] generated as a result of this subsidized funding, as well as any proceeds derived from the subsequent sale of the same, shall be the property of [PENNVEST] to the extent of the value of the subsidy associated with credit generating project components. Thus a grant, principal forgiveness offer or subsidized interest rate loan shall afford [PENNVEST] ownership in the credits and proceeds derived therefrom in an amount equal to the grant, principal forgiveness or the present value of the interest rate subsidy provided, to the extent such funds were used to finance credit generating project components, including a proportionate share of indirect costs. A preliminary estimate of the value of the subsidy has been calculated and included in the Project Management Plan attached hereto as Exhibit E. Once final project costs are determined, the final value of the subsidy will be calculated by [PENNVEST] at the time of project closeout. Funding Recipient shall take all steps necessary to certify, verify or register any nutrient credits or other credits generated as a result of the Project Funding that are owned by [PENNVEST] and for which [PENNVEST] requests such steps to be taken on the part of the Funding Recipient. [Emphasis added.]

Exhibit 1 to the First Amended Petition for Review. The value of the subsidy for the Sewer Authority's loan was ...


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