September/October 2023 Issue

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Court Upholds Negotiated Consideration in Exchange for Agreement to Provide Extraterritorial Wastewater Service

Lawrie J. Kobza | 09.27.23

In Mary Lane Area Sanitary District, et. al. v. City of Oconomowoc, Appeal No.2022AP1649 (decided August 31, 2023, publication recommended), the Wisconsin Court of Appeals held that the City of Oconomowoc has the authority to negotiate a license fee (in addition to sewerage service charges) as consideration for its agreement to provide wastewater treatment service to extraterritorial customers. 

In the 1980’s, the City entered into agreements with several neighboring municipalities and affiliated sanitary districts to treat their wastewater at the City’s wastewater treatment plant. The agreements required these extraterritorial customers to pay certain charges for sewerage treatment and capital costs. The agreements also required the extraterritorial customers to pay an annual ​“license fee.” Each agreement provided that the annual license fee was to be calculated by multiplying the number of residential equivalent connections (RECs) in the extraterritorial customer by a negotiated dollar amount which escalated by 4% per year. 

Three of the extraterritorial customers challenged the enforceability of the license fee. The extraterritorial customers’ primary argument was that the City could only charge them ​“sewerage service charges” as described in Wis. Stat. § 66.0821(4)(a) and that the license fees did not comply with the requirements in § 66.0821(4)(c).

The Court closely examined the language of the agreements to determine whether the license fees should be construed to be sewerage service charges subject to Wis. Stat. § 66.0821(4)(a) and concluded that they should not. Instead, the Court determined that the license fees should be construed to be consideration for the City’s agreement to extend wastewater treatment services to customers located outside the City’s borders. 

The Court stated that nothing in Wis. Stat. § 66.0821 expressly or by inference precludes a municipality from receiving compensation connected to its provision of sewage treatment services in addition to sewerage service charges. 

The extraterritorial customers also challenged the license fees under Wis. Stat. § 66.0628, which requires any fee imposed by a political subdivision to bear a reasonable relationship to the service for which the fee is imposed. The Court rejected this challenge because it concluded that the license fee was not a fee imposed for service but rather constituted consideration for the City’s agreement to extend its wastewater treatment service beyond its borders. The Court noted that the parties’ description of this consideration as a ​“fee” was misleading because it was not imposed in exchange for a service or to regulate or supervise an activity.

The extraterritorial customers’ third argument was that the City did not have the authority to negotiate for compensation in exchange for its agreement to extend wastewater service to extraterritorial customers. This argument was rejected by the Court as Wis. Stat. §§ 62.11(5) and 62.04 provide municipalities with broad authority to negotiate contracts. 

Boardman Clark represented the City of Oconomowoc in this litigation.