DEC Review of NYC “Excess Water” Rates Uses Prometheus/Carey Deferential Utility Standard (Not “Fair and Reasonable”)

1. Introduction

This appeal sits at the intersection of (i) New York City’s unique upstate reservoir system, (ii) statutory protections for certain upstate communities that may buy “entitlement water,” and (iii) the Water Board’s discretionary decision to sell additional “excess water” at rates it sets. Petitioners—municipalities and water districts north of New York City—challenged the Water Board’s rates for fiscal years 2015–2017, during which the excess water rate was about three times the entitlement water rate.

The central legal issue was not whether the rates were “too high” on the merits, but what standard DEC must use when adjudicating an administrative challenge to the Water Board’s excess water rates:

• Petitioners/Supreme Court’s view: DEC should apply a “fair and reasonable” type standard akin to the entitlement-water regime.
• Water Board/DEC’s view: Excess water rate-setting is entitled to substantial deference; DEC should uphold rates if rationally supported by economic or public policy goals as the Board reasonably conceives them.

Procedurally, the matter reached the Third Department after Supreme Court (Albany County) denied DEC summary judgment and issued a declaratory ruling that the “fair and reasonable” standard governs DEC’s review of excess water rates. The Water Board appealed; DEC joined the Water Board’s position.

2. Summary of the Opinion

The court rejected Supreme Court’s reliance on Environmental Conservation Law provisions that use “fair and reasonable” or “just and equitable” language, concluding those statutes address DEC’s permit/compulsory supply function rather than the rate-setting context where NYC is voluntarily supplying excess water.

Finally, the court held that the Town of Carmel could not obtain affirmative relief from aspects of Supreme Court’s ruling because Carmel did not appeal.

3. Analysis

3.1 Precedents Cited (and How They Drove the Outcome)

(a) The controlling “excess water” jurisdictional backdrop: Matter of Village of Scarsdale v Jorling

The Opinion accepts the Court of Appeals’ framing from Matter of Village of Scarsdale v Jorling, 91 NY2d 507 (1998), that DEC’s authority regarding excess consumption rates “is derived from [its] power to control, regulate and preserve the water resources of the entire State” under ECL article 15.

But the Third Department uses Scarsdale primarily to delimit the nature of DEC’s role: DEC’s oversight is rooted in statewide water-resource conservation authority—not in a statutory mandate that excess water be sold at a “fair and reasonable” price. That distinction becomes decisive when choosing the standard of review.

(b) The dispositive utility rate-setting standard: Matter of Prometheus Realty Corp. v New York City Water Bd. and Carey Transp. v Triborough Bridge & Tunnel Auth.

The Third Department treats Matter of Prometheus Realty Corp. v New York City Water Bd., 30 NY3d 639 (2017), and Carey Transp. v Triborough Bridge & Tunnel Auth., 38 NY2d 545 (1976), cert denied 429 US 830 (1976), as controlling on the level of deference owed to public-utility-type rate setting.

• Key quoted rule (via Prometheus quoting Carey Transp.): a utility has “unfettered discretion to fix rates as it will so long as invidious illicit discriminations are not practiced and differentials are not utterly arbitrary and unsupported by economic or public policy goals, as it reasonably conceives them.”
• How the court uses it here: Because no statute imposes a “fair and reasonable” formula for excess water, the Third Department “discern[ed] no basis to deviate” from the normal deferential approach to utility rate-making and imports the Prometheus/Carey standard into DEC’s administrative review of excess water rates.

Notably, the Opinion also underscores that the Water Board is a public benefit corporation under the Public Authorities Law, reinforcing the analogy to utility governance and the appropriateness of deference.

(c) Judicial deference to rate-setting generally: Matter of New York Tel. Co. v Public Serv. Commn. of State of N.Y. and related cases

To situate the standard of review, the Third Department cites mainstream utility-rate review decisions:

• Matter of New York Tel. Co. v Public Serv. Commn. of State of N.Y., 95 NY2d 40 (2000) — cited for the proposition that rate-setting determinations are entitled to deference and are not set aside unless lacking rational basis or reasonable support in the record.
• Matter of Corning Natural Gas Corp. v Public Serv. Commn. of the State of N.Y., 221 AD3d 1075 (3d Dept 2023), appeal dismissed 41 NY3d 968 (2024), lv denied 42 NY3d 906 (2024) — reinforces rational-basis/record-support framing.
• Matter of Home Depot U.S.A., Inc. v State of N.Y. Pub. Serv. Commn., 92 AD3d 1012 (3d Dept 2012), lv denied 19 NY3d 811 (2012) — similarly supports deferential review.
• Additional examples of rate challenges typically proceeding in court rather than an agency: Sloane v Power Auth. of the State of N.Y., 214 AD3d 1150 (3d Dept 2023), lv denied 40 NY3d 902 (2023); Matter of Board of Trustees of Inc. Vil. of E. Williston v Board of Trustees of Inc. Vil. of Williston Park, 119 AD3d 679 (2d Dept 2014).

These citations do not change the holding so much as supply doctrinal “comfort”: the Third Department frames DEC’s role as applying a familiar deferential review paradigm, rather than performing its own independent ratemaking-style fairness calculus.

(d) Why Supreme Court’s “fairness” statutes were rejected: Matter of Town of Watertown Water Dist. No. 2 v State of N.Y. Dept. of Envtl. Conservation

Supreme Court relied on ECL provisions (notably ECL 15-1521’s “fair and reasonable” language and ECL 15-1503 (2) (c)’s “just and equitable” language) to apply a fairness standard to excess water.

The Third Department rejected that approach by distinguishing the statutory context: those provisions concern DEC’s permit-granting/compulsory supply function—situations where DEC may require one water system operator to supply another. Citing Matter of Town of Watertown Water Dist. No. 2 v State of N.Y. Dept. of Envtl. Conservation, 176 AD2d 1166 (3d Dept 1991), the court characterized those regimes as ones where “fairness is paramount” because they implicate entitlement to water compelled by DEC action.

Here, by contrast, the City is “voluntarily supplying excess water,” and the rate-setting dispute does not arise from a statutory command that excess water be sold or sold at a particular fairness-defined rate. Accordingly, the Opinion deems Supreme Court’s fairness-statute analogies “misplaced.”

(e) Appellate practice limitation: Matter of 61 Crown St., LLC v City of Kingston Common Council and Finch v Erie Ins. Co.

The Opinion includes a standard appellate-practice reminder: a party seeking affirmative relief must appeal. Because Carmel did not appeal, it could not obtain affirmative relief from parts of Supreme Court’s ruling. The Third Department cites Matter of 61 Crown St., LLC v City of Kingston Common Council, 217 AD3d 1144 (3d Dept 2023), and Finch v Erie Ins. Co., 211 AD3d 1152 (3d Dept 2022).

3.2 Legal Reasoning

(1) Statutory structure: entitlement water is regulated; excess water is not

The Opinion begins from the statutory asymmetry in Administrative Code of the City of New York § 24-360:

• Entitlement water: Upstate communities along the aqueduct route are “statutorily entitled” to a per-capita equivalent supply, and the Water Board must sell that entitlement water at a “fair and reasonable” rate under a formula, capped so it cannot exceed the rate paid by City residents.
• Excess water: The Water Board is not compelled to sell additional water, and “there is no formula governing the rate that it may charge.”

From that textual silence, the Third Department infers that importing the entitlement-water “fair and reasonable” formula into excess-water disputes would effectively create a constraint the legislature did not impose.

(2) Institutional competence and role-conflict: DEC conservation oversight is not a mandate to second-guess policy ratemaking

Supreme Court worried DEC would be “overly deferential” and abdicate its statewide conservation mission. The Third Department counters by emphasizing the Water Board’s own public-benefit mandate and conservation sensitivity, quoting Matter of Prometheus Realty Corp. v New York City Water Bd. (Rivera, J., dissenting) describing the Water Board as organized to act “for the benefit of the people of the city and the state.”

The Opinion further reasons that the Water Board must balance economic and public policy concerns (citing Public Authorities Law §§ 1045-g (4); 1045-j (1)). If DEC were required to substitute its judgment for the Water Board’s on those economic and policy issues, DEC would be pushed “outside the scope of its conservation mandate.”

(3) Harmonizing administrative posture with the substantive standard: DEC applies a judicial-style deference test

Although outside-the-City challengers must proceed administratively before DEC (Administrative Code of City of NY § 24-360; and the bifurcated review noted in Matter of Village of Scarsdale v Jorling), the Third Department treats the substantive standard as the same type used in judicial review of utility ratemaking. The upshot is that DEC’s forum does not transform excess-water pricing into a fairness-formula question.

3.3 Impact

(1) Higher hurdle for upstate challengers to excess-water price differentials

By declaring Prometheus/Carey controlling, the Third Department makes clear that large differentials (even “triple” pricing) are not inherently suspect. A challenger must show more than perceived unfairness; it must demonstrate that the differential is “utterly arbitrary” or lacks rational support in economic or public policy goals as the Board reasonably conceives them (and must also contend with record-based deference).

(2) Clear doctrinal separation: “entitlement water” fairness vs “excess water” discretion

The decision sharpens a two-track regime:

• Entitlement water: governed by an express “fair and reasonable” statutory formula and cap.
• Excess water: governed by discretionary utility-style ratemaking subject to deferential review.

Future litigants will likely focus efforts on (i) evidentiary attacks on the rationality and record support for the Board’s stated goals, and (ii) any claim of “invidious illicit discriminations,” rather than arguing for a generalized fairness metric.

(3) Constraining DEC’s role in excess-water price disputes

The Opinion implicitly confines DEC’s function in these disputes: DEC is not to use broad ECL “fair and reasonable” language from other contexts to impose an equitable price ceiling on excess water. Instead, DEC’s task is closer to rational-basis review of a public utility’s policy-laden pricing decision.

(4) Practical incentives: conservation pricing and optional supply

Because “nothing compels the Water Board to sell” excess water, a judicially imposed fairness formula could deter voluntary supply or alter pricing incentives. By adopting a deferential standard, the court preserves the Water Board’s latitude to use price signals—such as higher marginal rates for non-essential consumption—to advance conservation and fiscal aims without being recast into a statutory entitlement regime.

4. Complex Concepts Simplified

Entitlement water vs excess water

• Entitlement water: a statutorily protected baseline amount upstate communities can buy; pricing is constrained by “fair and reasonable” rules and a cap.
• Excess water: additional water beyond the entitlement amount; NYC may sell it but is not required to, and pricing is not governed by the entitlement formula.

“Fair and reasonable” (as defined in the Administrative Code)

The Opinion’s footnote definition (Administrative Code of City of NY § 24-360 [c]) describes “fair and reasonable” in cost-accounting terms—essentially the City’s total cost of water, minus certain intra-city construction/distribution expenses. That definition is tightly tethered to the entitlement-water scheme and does not automatically carry over to excess water.

Standard of review / deference

A “deferential” standard means the reviewing body (here, DEC, and later a court on review) does not decide what rate it would have set. It asks whether the rate is rationally supported—here, whether it is not “utterly arbitrary” and is supported by economic or public policy goals as reasonably conceived by the Water Board.

CPLR article 78 and the split forum for challenges

Under Administrative Code of City of NY § 24-360 (as described in the Opinion and Matter of Village of Scarsdale v Jorling): in-city customers challenge rates in Supreme Court via CPLR article 78, while outside-the-City customers must first bring an administrative proceeding before DEC, with later judicial review. The forum differs, but—per this case—the substantive deference for excess-water ratemaking remains the utility-style standard.

Why some ECL “fairness” statutes did not apply

The court distinguished ECL provisions used when DEC is effectively allocating water rights through permitting or compelled supply between systems (where fairness standards are explicit and central), from the present context where NYC voluntarily sells additional water and the dispute is about the Water Board’s discretionary pricing.

5. Conclusion

The Third Department’s key contribution is a clear rule: DEC must review the New York City Water Board’s excess water rates under the deferential utility rate-setting standard from Matter of Prometheus Realty Corp. v New York City Water Bd. and Carey Transp. v Triborough Bridge & Tunnel Auth., not under the “fair and reasonable” entitlement-water framework.

By rejecting Supreme Court’s attempt to import fairness standards from other Environmental Conservation Law contexts, the Opinion preserves the statutory distinction between protected entitlement water and optional excess water, reinforces deference to the Water Board’s economic and public policy judgments, and raises the bar for future excess-rate challenges to show true arbitrariness or illicit discrimination rather than mere inequity.