The Law

Water Wars by Ron Davis Home Depot U.S.A. has greatly improved its chances of avoiding a huge payment for water service at a New York State shopping center location. The shopping center is in the town of Southeast, located just north of New York City. And Home Depot agreed in 2000 to pay the shopping center developer $1.68 million to lease the premises there for 99 years. Plus, Home Depot agreed to pay the developer $5.82 million as a “contribution” to site costs. As part of the project, the developer consented to bearing all other costs associated with the site work. The developer then constructed a water facility to serve the shopping center tenants. After completion of the water facility, the developer sold it to an allied company. Two years later, the New York State Public Service Commission approved an initial water rate schedule for that allied company. That schedule included the cost of construction in its rate base. Result: much higher water rates for the shopping center tenants. Home Depot and another tenant of the center immediately complained to the Public Service Commission, requesting an 80-percent reduction in water rates. Home Depot argued that the cost of the water system should not have been passed on and included in the rate base. That’s because, Home Depot explained, the development agreement contemplated that all costs of site work would be covered by the $5.82 million that the company had already paid. Thus, Home Depot added, the developer received a “double recovery” of construction costs by passing along the cost of the water system to its allied company. The Public Service Commission rejected Home Depot’s argument, finding no basis for a double recovery. The commissioners concluded that the $5.82 million was actually an “additional” payment for the lease and therefore could not be used to reduce the cost of the water facility. The commission did not, however, directly address the provision contained in the development agreement. In that provision, the developer agreed to assume all cost of the center’s site work not covered by Home Depot’s contribution. Home Depot appealed the commission ruling. And a New York State court found that the Public Service Commission acted arbitrarily by relying solely on the developer’s accounting treatment of the payments received from Home Depot. But the court disagreed with Home Depot’s argument that the entire cost of construction should be removed from the rate base. Instead, the court decided, $525,142 that is traced directly to Home Depot’s contribution to the water system should be deducted from the rate base. Again, Home Depot appealed. And a New York State appellate court modified the lower court ruling, stating, “We find no rational basis for the Public Service Commission to disregard the clear language of the development and lease agreements between Home Depot and the developer in favor of the developer’s tax and accounting treatment of the funds on its books…. In sum, the commission’s unexplained disregard of the provisions contained in the development agreement and the lease agreement renders its determination arbitrary and capricious.” (Home Depot U.S.A., Inc. v. New York State Public Service Commission, 2008 WL 4661485 [N.Y.A.D. 3 Dept.], 2008 Slip Op. 08061) Decision: October 2008 Published: November 2008