Title: City of Novi v. City of Detroit

State: michigan

Issuer: Michigan Supreme Court

Document:

Decided September 26, 1989. Fried & Levitt, P.C. (by David M. Fried and Dennis Watson), for the plaintiff. Donald Pailen, Corporation Counsel, and Robert C. Walter, Assistant Corporation Counsel, for the defendant. ARCHER, J. We granted leave to appeal in this matter, limited to the issues (1) whether the standard for judicial review of municipal utility water rates has been changed by 1981 PA 89, codified at MCL 123.141(2); MSA 5.2581(2) and, if so, what is that standard of review; and (2) whether the rate set by the defendant was based on the actual cost of services provided pursuant to MCL 123.141(2); MSA 5.2581(2).[1] We hold that, in a dispute regarding the legality of municipal water rates established pursuant to MCL 123.141(2); MSA 5.2581(2), a court should determine whether the plaintiff has satisfied its burden of proving that the rate-making method or the resulting rate does not reasonably reflect the *417 actual cost of service as determined under the utility basis of rate-making. In the instant case, the plaintiff City of Novi did not meet its burden of proving that the rate-making method employed by the City of Detroit Department of Water and Sewerage did not comply with the utility basis of rate-making. Therefore, we reverse the judgment of the Court of Appeals and grant judgment in favor of the defendant City of Detroit. INTRODUCTION This case arises out of a dispute over water rates charged to the City of Novi as a customer of the City of Detroit Water and Sewerage Department (DWSD).[2] In 1964 the City of Detroit and the Village of Novi entered into a contract providing for the sale and delivery of water from Detroit to Novi. Under the agreement, it is the DWSD'S responsibility to *418 deliver water at one or more delivery points at the rates of flow and pressures necessary to meet all reasonable requirements of Novi's customers.[3] The responsibility for distributing the water beyond the delivery points to specific customers lies with Novi. Water rates charged to the City of Novi for water supplied by Detroit are governed by the following provision in the contract: 8. The Village (Novi) agrees to pay for all water supplied by the Board at such rates as the Board may establish from time to time, it being mutually understood that such rates shall always be reasonable in relation to the cost incurred by the Board for the supply of water. At the time this contract was entered into, MCL 123.141; MSA 5.2581, the statute from which Detroit derived its authority to enter into contracts for the supply of water, provided that the water rate charged to Novi could not be less than the rate charged to retail customers within Detroit or more than double the rate charged to customers within Detroit.[4] *419 In 1981 PA 89, the Legislature amended MCL 123.141; MSA 5.2581. The amendment removed the language that limited water rates to twice that charged to customers within Detroit. As amended, the section states in pertinent part: (1) A municipal corporation, referred to in this act as a corporation, authorized by law to sell water outside of its territorial limits, may contract for the sale of water with a city, village, township, or authority authorized to provide a water supply for its inhabitants. (2) The price charged by the city to its customers shall be at a rate which is based on the actual cost of service as determined under the utility basis of rate-making. [MCL 123.141; MSA 5.2581.][[5]] The "utility basis" of rate-making is a methodology that is designed to produce relatively accurate estimates of revenue requirements for investorowned utilities and for publicly owned utilities providing service to customers outside their corporate limits. A utility-rate method also seeks to allocate to different customers a just and reasonable *420 share of the operating and capital costs of the system. The fundamental purpose of a "utility basis" method is to compensate the proprietary interest in a public utility with a reasonable rate of return from nonowner, nonresident customers, commensurate with the value of the facilities required to provide service to these customers.[6]*421 There is no single formula or method which may be identified as the "utility basis" of rate-making. The two broad categories of methods most widely used are the "demand commodity method" and the "base-extra capacity method."[7] In December 1980, the DWSD adopted a proposal for a new rate-making method developed by its utility-management consultant, Camp, Dresser & McKee. The parties stipulated at trial that this proposal utilized the base-extra capacity method to classify cost components according to the following basic cost categories: A. Base Costs Those costs associated with furnishing water at average annual rates of use. B. Maximum day extra capacity costs Those *422 additional costs associated with meeting water demands on the day or days of maximum use. C. Peak hour extra capacity costs Those additional costs associated with meeting demands during the peak hour of use. D. Customer costs Those costs more closely correlated with total number of customers served than with the volume or rates of water use. This category also includes costs of facilities which are separable and assignable to individual customers, for example, individual meters and service connections. E. Distance costs Those costs associated with conveying water over distances from DWSD treatment plants to serve governmental jurisdictions. F. Elevation costs Those costs associated with pumping water to higher elevations from DWSD treatment plants to serve governmental jurisdictions. The dispute herein is whether the DWSD uses the proper method of calculating the distance and elevation factors for the City of Novi. In its 1980 report, Camp, Dresser & McKee described the following method for computing these factors for the purpose of setting rates: 3.2.2.1. Distance and Elevation The distance parameter is equal to the average of five straight line distances drawn between a customer's single meter connection or geographic center (where there is more than one meter connection) and each of the DWSD'S five water treatment facilities. The elevation parameter is equal to the average of five differentials in elevation established between a customer's single meter connection or average service area elevation and the DWSD'S five water treatment facilities. [Camp, Dresser & McKee, Proposed Water Rates (June, 1980), pp 3-4. Emphasis added.] The parties further stipulated that since 1961, *423 the DWSD has computed the elevation factor for its suburban customers with multiple meter connections on the basis of the average values of the entire geographic area of the customer community. Similarly, because the City of Novi is served by four metered connections, the DWSD computes the Novi distance factor on the basis of the geographic center of Novi. The City of Novi disputes this method of computation because only a portion of Novi is actually served by the DWSD.[8] This area consists of the eastern and southeastern areas of the city, which are closer to the DWSD treatment facilities and lower in average elevation than the City of Novi as a whole. It is undisputed that if the distance and elevation factors had been computed using only the eastern and southeastern portion of the city, Novi residents would enjoy lower water rates.[9] The case was tried without a jury in Oakland Circuit Court in April, 1986. Each party called only one witness. Plaintiff's witness was a civil engineer who was qualified as an expert in design and construction of water systems. He was not an expert on utility rate-making. The defense witness, William Stannard, was qualified as an expert on the subject of water rate-making and water-system engineering. At trial, defendant's expert, Mr. Stannard, testified that the DWSD'S method of allocating costs on the basis of distance and elevation factors was consistent with the "utility basis" of rate-making. He also testified that capital costs attributed *424 to unconnected areas of Novi had already been incurred by the DWSD and were therefore attributable to the entire geographic area of Novi. Mr. Stannard offered his opinion that under the utility basis of rate-making, the DWSD was permitted to calculate the cost of providing water services to Novi by taking into account the entire geographic area of that city. In closing argument at trial, counsel for the City of Novi asserted that use of the phrase "service area" in § 3.2.2.1 of the Camp, Dresser & McKee report bound the City of Detroit to use the actual service area of the City of Novi to compute the distance and elevation factors because Detroit had stipulated that the report constituted its method of determining the actual cost of service under the utility basis of rate-making as required by MCL 123.141(2); MSA 5.2581(2).[10] In response, the City of Detroit argued that the expert testimony of Mr. Stannard established that Detroit's rate-making methodology for computing the distance and elevation factors was permissible under the utility basis of rate-making. The city asserted that the use of the term "service area" in the Camp, Dresser & McKee report was a "semantic" error that belied Detroit's use, since 1961, of the average area elevation of the City of Novi for computation of its elevation factor. Detroit further argued that under its contract with the City of Novi, it was obligated to provide facilities to serve the entire City of Novi and that Detroit had provided adequate facilities for such service. Detroit urged the court to find that it was reasonable *425 to use the entire geographic area of the City of Novi in computing its water rates. The trial court found in favor of the City of Detroit. The court specifically found that computation of the elevation and distance factors using either the actual area served or the entire geographic area and its geographic center, respectively, would be consistent with the utility basis of rate-making. On that basis, the court held that the City of Novi had failed to satisfy its burden of proving that the method used by the City of Detroit violated MCL 123.141(2); MSA 5.2581(2). The Court of Appeals reversed, holding that § 2 imposed a strict standard of judicial review and that the DWSD had failed to comply with the statute when it used the entire geographic area of Novi rather than the actual area served.[11] The City of Detroit appealed in this Court, challenging the Court of Appeals application of a new standard of review as well as the Court of Appeals conclusion that the DWSD'S water rates were in violation of § 2. We granted leave to appeal.[12] ANALYSIS I Prior to the instant case, there had been no opportunity for this Court or the Court of Appeals to interpret MCL 123.141; MSA 5.2581 as amended by 1981 PA 89. Accordingly, the first question presented is whether that amendment changed the standard for judicial review of municipal utility water rates. Historically, this Court has accorded great deference to legislatively authorized rate-making authorities *426 when reviewing the validity of municipal water rates. In Detroit v Highland Park, 326 Mich 78, 100-101; 39 NW2d 325 (1949), the Court espoused the principle that "[t]he rate lawfully established by [the municipal utility] is assumed to be reasonable in absence of a showing to the contrary or a showing of fraud or bad faith or that it is capricious, arbitrary or unreasonable, and the burden of proof is on the [challenging party] to show that the rate is unreasonable." The standard of review and allocation of the burden of proof in municipal utility-rate cases set forth in Detroit v Highland Park were recently cited with approval in Plymouth v Detroit, 423 Mich 106, 133-134; 377 NW2d 689 (1985). In that case, the Court engaged in an extensive discussion of municipal utility rate-making and the means which courts have used to review those rates.[13] The Court reaffirmed that the concept of reasonableness is of fundamental importance in this process. Id. The Court in Plymouth v Detroit also cited Meridian Twp v East Lansing, 342 Mich 734, 749; 71 NW2d 234 (1955), which stated: The word "reasonable" with respect to rates charged by utilities is a word of the most universal employment. It may be provided by ordinance, statute, or constitution that rates shall be "reasonable," or "fair and reasonable." Moreover, should the question of rate arise on a contract implied in law, the judicial requirement is that the rate to be paid shall be "reasonable." It may also be employed (as in the case at bar) in a contract. The determination of its meaning, in any case, is not subject to mathematical computation with scientific exactitude but depends upon a comprehensive examination of all factors involved, having in *427 mind the objective sought to be attained in its use. Here it is related to the costs incurred by the city in the supply of water. [Citations omitted.] Plymouth and Meridian Twp are distinguishable in some respects from the matter before us, in that both opinions evaluated rates on the basis of contractual provisions. Nonetheless, they both stand for the general principle that rate-making is a legislative function that is better left to the discretion of the governmental body authorized to set rates.[14] In the instant case, however, the Court of Appeals held that the change in statutory language effected by 1981 PA 89 created a new standard of review for municipal water rates. The Court stated: Under the current statutory scheme, it is enough for the challenging party to show that the water rates do not reflect the actual cost of providing the service. In so ruling, though, we do not mean to hold municipal corporations accountable for every penny charged to their water service customers. Because rate-making is not an exact science, mathematical precision cannot be required. However, as recognized in the argument for the House Bill 4029 [the precursor of 1981 PA 89], municipal corporations now have at their disposal a reliable method for apportioning costs. While perhaps not exact, that method must certainly provide greater precision and guidance to municipal corporations than formerly available. It makes little sense then to adhere to a standard of review which was developed at a time when calculating *428 the actual cost of water was neither possible nor required. [166 Mich App 397, 403; 420 NW2d 839 (1988).] Thus, the Court of Appeals banished the concept of reasonableness from the determination of whether a particular rate or rate-making method complies with the utility basis of rate-making. We decline to take this step. We find the Court of Appeals reasoning to be inconsistent with a harmonization of the new statutory language with the statutory and common-law bases for judicial deference in municipal utility-rate cases. Michigan courts, as well as those in other jurisdictions, have recognized the longstanding principle of presumptive reasonableness of municipal utility rates. These courts have stressed a policy of judicial noninterference where the Legislature has authorized governmental bodies to set rates. As this Court noted in Plymouth, supra at 128-129, the Court in Federal Power Comm v Hope Natural Gas Co, 320 US 591, 602; 64 S Ct 281; 88 L Ed 333 (1943) stated: We held in Federal Power Commission v Natural Gas Pipeline Co [315 US 575; 62 S Ct 736; 86 L Ed 1037 (1942)], that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of "pragmatic adjustments." And when the Commission's order is challenged in the courts, the question is whether that order "viewed in its entirety" meets the requirements of the Act. Under the statutory standard of "just and reasonable" it is the result reached not the method employed which is controlling. It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at *429 an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. [Citations omitted.] See also Hillis Homes, Inc v Public Utility Dist No 1, 105 Wash 2d 288, 297-298; 714 P2d 1163 (1986); Pompano Beach v Oltman, 389 So 2d 283 (Fla App, 1980); Shawnee Hills Mobile Homes, Inc v Rural Water Dist No 6, 217 Kan 421; 537 P2d 210 (1975); Water Works Bd of Birmingham v Barnes, 448 So 2d 296 (Ala, 1983). The Michigan Legislature's intention that courts refrain from strictly scrutinizing municipal utility rate-making is reflected in several statutory provisions. For example, municipal utilities are exempt from the Public Service Commission's power to regulate rate-making. MCL 460.6; MSA 22.13(6).[15] The rate-making authority of a municipal utility is expressly reserved to the legislative body given the power to set rates under the municipal charter. MCL 141.103(d); MSA 5.2733(d),[16] MCL 141.121; *430 MSA 5.2751.[17] When the Legislature enacted 1981 PA 89, it did not concomitantly amend any of these statutory provisions to provide for additional judicial or administrative review of the rate-making process. Courts of law are ill-equipped to deal with the complex, technical processes required to evaluate the various cost factors and various methods of weighing those factors required in rate-making. The decision of the Court of Appeals, however, superimposes Michigan courts as ultimate rate-making authorities despite the absence of any express statutory language or legislative history that would support such a role in the rate-making process. We acknowledge that the Legislature intended *431 that municipal water rates more accurately reflect the actual cost of service when it eliminated the artificial limits imposed by the previous version of MCL 123.141; MSA 5.2581. However, the Legislature's use of the phrase "based on the actual cost of service as determined under the utility basis of rate-making" cannot be construed to mean "exactly equal to the actual cost of service," in light of the difficulties inherent in the rate-making process and the statutory and practical limitations on the scope of judicial review. The concept of reasonableness, as recognized by the courts of this state and other states in utility rate-making contexts, must remain operable, in order to provide a meaningful and manageable standard of review.[18] B The determination of "reasonableness" is generally considered by courts to be a question of fact. Plymouth v Detroit, supra. In that case, this Court quoted the Louisiana Supreme Court, which stated: "The ascertainment of a fair return in a given case is a matter incapable of exact mathematical demonstration. It is one of reasonable approximation having its basis in a proper consideration of all relevant facts." * * * The question of what constitutes a reasonable return is one of fact rather than of law. It requires *432 the application of an enlightened judgment to the multiplicity of variables disclosed by the evidence. [United Gas Pipeline Co v Louisiana Public Service Comm, 241 La 687, 704-705; 130 So 2d 652 (1961), quoting Southern Bell Tel & Tel Co v Louisiana Public Service Comm, 239 La 175, 225; 118 So 2d 372 (1960).] In ignoring the body of common law employing the concept of reasonableness in utility rate-making, the Court of Appeals provides insufficient guidance to the bench and bar for determining whether a given rate or rate-making method complies with § 2, and alters the burden of proof between the parties in a rate dispute. Although the Court of Appeals nominally leaves the burden of proof on the plaintiff, stating that "it is enough for the challenging party to show that the water rates do not reflect the actual cost of providing the service,"[19] the burden of proof is effectively shifted to the defendant to justify its rate or rate-making method because any given formula will employ approximations of the factors used to arrive at an approximation of the actual cost of service. This effective shift of the burden of proof is ill-advised in that it would lead to a plethora of needless litigation. See Plymouth v Detroit, supra at 133-134. C For these reasons, we hold that 1981 PA 89 did not render inoperable the concept of reasonableness in the process of judicial review of municipal utility water rates. The burden of proof remains on the plaintiff to show that a given rate or rate-making method does not reasonably reflect the actual cost of service as determined under the *433 utility basis of rate-making pursuant to MCL 123.141(2); MSA 5.2581(2). II At trial, defendant DWSD'S expert offered the only testimony regarding the requirements of the utility basis of rate-making. After review of the various factors involved in utility method rate-making, the expert testified that it was his opinion that the DWSD'S method of calculating distance and elevation factors for the City of Novi complied with this standard. His testimony was never refuted by the plaintiff. The trial judge based his ruling on the fact that there was unrebutted testimony that the City of Detroit complied with the standards of the utility basis of rate-making. In substituting its fact finding for that of the trial court, the Court of Appeals ignored the City of Novi's failure to offer any testimony or other evidence that the water rate for Novi was not determined under the utility basis of rate-making. The Court also misconstrued the expert testimony of Mr. Stannard. Although he testified, in response to a question from the trial judge, that his definition of the term "service area" would encompass only the actual area served, he also testified that the DWSD'S rate model, as developed by Camp, Dresser & McKee, used the entire geographic area of Novi.[20] *434 We disagree with the dissenting opinion's characterization of the record when it states that "[t]he expert witnesses of both parties testified that `service area' means the area actually receiving water." Post, p 439. In fact, the DWSD'S utility rate-making expert testified that the rate model developed by Camp, Dresser & McKee used the average geographic area elevation for each community served, including Novi, for computing the elevation factor.[21] Although Novi's water system engineering expert testified that the actual area served in Novi consisted of the eastern portion of the city, he was not allowed to give his opinion regarding the Camp, Dresser & McKee rate model because he was not an expert on utility rate- making.[22] Utilizing the standard of review set forth in the preceding section, therefore, it cannot be said that the DWSD'S use of the geographic center of Novi to compute the distance factor and use of the average elevation of the entire geographic area of the City of Novi to compute the elevation factor is unreasonable. *435 The contract between the City of Novi and the City of Detroit requires the DWSD to provide facilities capable of providing water to the entire City of Novi.[23] The City of Detroit's expert, Mr. William Stannard, testified that Detroit's water system has already incurred capital costs attributable to the entire geographic area of Novi. Thus, Detroit stands ready to fulfill its contractual obligation to be able to provide water to the entire geographic area of Novi as needed. Although the DWSD'S costs attributable to the unconnected areas of Novi are arguably excess capacity, they may still be included in calculating the rate base. Courts have held that excess capacity is includable in the rate base where it is reasonably necessary to fulfill contractual obligations. Iowa Planners Network v Iowa State Commerce Comm, 373 NW2d 106, 111-112 (Iowa, 1985); Pennsylvania Power & Light Co v Pennsylvania Public Utility Comm, 101 Pa Commw 370; 516 A2d 426 (1986); North Carolina ex rel Utilities Comm v Eddleman, 320 NC 344; 358 SE2d 339 (1987). In the instant case, because the DWSD system is integrated, the facilities that are arguably excess capacity are constantly in use. Justice GRIFFIN correctly concludes in his dissent that "[municipal utility water] rates are still assumed to be reasonable, and the burden of proof continues to be on the challenging party to show that they are unreasonable." Post, p 443. However, the dissent displays a fundamental misunderstanding of utility rate-making when it goes on to state: Given the stipulation between the parties that the CD & M report constituted the chosen utility basis of rate-making, followed by evidence that the rates actually charged were calculated by applying an elevation factor inconsistent with that basis, I *436 would find that the City of Novi met its burden. [Post, pp 444-445.] In referring to the Camp, Dresser & McKee report as the "chosen" utility basis of rate-making, the dissent completely ignores the expert testimony that Camp, Dresser & McKee used the average geographic area elevation of the City of Novi to compute the elevation factor, consistent with DWSD'S longstanding practice. Further, the DWSD'S rate-making expert testified explicitly and without rebuttal that the rate model employed was consistent with the utility basis of rate-making. Accordingly, the trial judge correctly concluded that the City of Novi had not met its burden of proof. The City of Novi argued, and the Court of Appeals held, that the City of Detroit had conceded the merits of the issues herein when it stipulated that the Camp, Dresser & McKee method for computing distance and elevation represented a utility-basis methodology. We disagree. The dissent correctly points out that the parties stipulated that the DWSD'S rate model was based upon a methodology "outlined" in the Camp, Dresser & McKee report. See post, p 439. The dissent, in effect, argues that since the stipulation of facts included the term "service area," Detroit conceded that, in the CD & M model, the elevation parameter was calculated using the area actually served and not the entire geographic area. The stipulation on its own terms is not clear. This is readily apparent for several reasons. First, the statement of issues to be tried, signed by both parties the day before trial, states the sole issue to be determined as: Does the City of Detroit's computation of distance and elevation cost of service factors using the entire geographic area of the City of Novi *437 comply with the utility basis of ratemaking which is required by MCL 123.141? [Emphasis added.] To accept the dissent's argument would require us to ignore the ultimate issue of the case as agreed to by both parties. Furthermore, Novi expressly conceded in the same document that Detroit "comput[es] distance and elevation using the entire geographic area...." Second, both experts testified that they personally would define "service area" to mean the area actually served.[24] Only Detroit's expert, however, testified that in the CD & M model, the only rate-making model at issue in this case, the elevation parameter was calculated on the basis of the entire geographic area of Novi.[25] The trial court specifically found that Novi failed to rebut this testimony. Finally, the trial court found as a conclusion of fact that the CD & M model used the entire geographic area and not the actual area served. As the trial court noted, the ultimate issue in this case was whether the rate actually used violated MCL 123.141(2); MSA 5.2581(2), not whether the rate was calculated using the area actually served or the entire geographic area. Rather than "completely dismissing the stipulation," we have merely interpreted it in light of the facts and issues as agreed to by the parties and as found by the trial court. The stipulation was designed to narrow the issues and facts to be proven at trial. It did not control the determination of whether the method employed by the DWSD renders a rate that is reasonably based upon the actual cost of service. The stipulation merely explained several facts regarding the utility basis of *438 rate-making, the origin of the DWSD'S rate-making method, and the cost factors considered in this particular method so that the trial court could decide the ultimate issue, viz., whether it was a violation of § 2 for the City of Detroit to compute the distance and elevation factors for the City of Novi on the basis of its geographic center and its entire geographic area, respectively. CONCLUSION We hold that the plaintiff City of Novi did not meet its burden of proving that the City of Detroit Water and Sewerage Department's rate-making method, or the resulting rates charged, did not comply with the utility basis of rate-making. Therefore, we reverse the judgment of the Court of Appeals and grant judgment in favor of the City of Detroit. RILEY, C.J., and LEVIN, BRICKLEY, CAVANAGH, and BOYLE, JJ., concurred with ARCHER, J. GRIFFIN, J. I respectfully dissent. The majority barely mentions, and then dismisses the effect of, a "Stipulation of Facts" entered into at trial by the parties. As the Court of Appeals emphasized, "That stipulation, which was received and approved by the court, was binding upon the parties." 166 Mich App 397, 404; 420 NW2d 839 (1988). As a result, the City of Detroit stipulated that the particular utility basis of rate-making specified in the 1980 Camp, Dresser & McKee (CD & M) report was used by Detroit in setting the rates for water sold to the City of Novi. Paragraph 8 of the stipulation by the parties provides: *439 The water rates charged by DWSD are based upon a methodology developed by consultant Camp, Dresser & McKee. The rate methodology is outlined in a June, 1980, report from Camp, Dresser & McKee, entitled "Proposed Water Rates." According to the stipulation, ¶ 12, distance and elevation factors were to be computed under the CD & M methodology on the following basis: "3.2.2.1. Distance and Elevation The distance parameter is equal to the average of five straight line distances drawn between a customer's single meter connection or geographic center (where there is more than one meter connection) and each of the DWSD'S five water treatment facilities. The elevation parameter is equal to the average of five differentials in elevation established between a customer's single meter connection or average service area elevation and the DWSD'S[[1]] five water treatment facilities." [Emphasis added.] The meaning of the term "service area," both generally and as applied to the City of Novi, was a central question at trial. The expert witnesses of both parties testified that "service area" means the area actually receiving water.[2] *440 Nevertheless, the majority completely dismisses the stipulation by acquiescing in the City of Detroit's assertion that "[t]he stipulation merely explained several facts regarding the utility basis of rate-making, the origin of the DWSD'S rate-making method, and the cost factors considered in this particular method so that the trial court could decide the ultimate issue...." Ante, pp 437-438. Accordingly, the majority reads the term "service area" in the stipulation to mean "entire geographic area" in order to conform the term to the very practice challenged by the City of Novi. Explaining away the significance of "service area" in this manner effectuates a retroactive amendment that renders the stipulation meaningless. A stipulation entered into by the parties is an *441 important procedural device for narrowing the issues at trial. It is a device that has no utility unless the facts stipulated are honored. If stipulations can be quickly dismissed as insignificant explanations, their efficacy as procedural tools will quickly dissipate. The majority's treatment of the stipulation in this case does not square with past pronouncements by our Court on the integrity of stipulations: [O]nce stipulations have been received and approved they are sacrosanct.... A party must be able to rest secure on the premise that the stipulated facts and stipulated ultimate conclusionary facts as accepted will be those upon which adjudication is based. Any deviation therefrom results in a denial of due process for the obvious reason that both parties by accepting the stipulation have been foreclosed from making any testimonial or other evidentiary record. [Dana Corp v Employment Security Comm, 371 Mich 107, 110; 123 NW2d 277 (1963).] Nor should the Court be satisfied with the excuse that the stipulation is a "`semantic' error" at odds with the DWSD'S actual practice. Ante, p 424. The City of Detroit has not alleged any of the factors that would allow us to "undo" its stipulation on the basis of error: there has been no showing that Detroit was misled into making the stipulation, nor was documentary evidence produced to demonstrate that the stipulation was in fact in error. Kittridge v Toledo, A A & G T R Co, 53 Mich 354; 19 NW 32 (1884). Thompson v Continental Motors Corp, 320 Mich 219; 30 NW2d 844 (1948). This "semantic error" is at the heart of the dispute before us: whether Detroit's computation of rates for service to the City of Novi complied with the statute. Once Detroit stipulated that the *442 CD & M methodology described in the stipulation was its methodology for purposes of this trial, there were only two questions left to be resolved: 1) Did the stipulated methodology satisfy the statute by reflecting the actual cost of service? 2) Did DWSD apply the formula properly to its service to the City of Novi? The expert witnesses for Detroit and Novi both agreed at trial that the stipulated method satisfied the statute.[3] The unrefuted testimony further established that the formula actually applied by the City of Detroit did not conform to the stipulation because the elevation factor was calculated using the entire geographic area rather than the service area as described in the stipulation. The majority's reliance on the testimony of Detroit's expert witness that the CD & M methodology did not actually use the service area for determining the elevation factor is misplaced; because that testimony refuted a stipulated fact, it should have been disregarded. "Any deviation [from a stipulation of facts] results in a denial of due process for the obvious reason that both parties by accepting the stipulation are foreclosed from making any testimonial or other evidentiary record." Dana Corp v Employment Security Comm, supra at 110. The implication by the majority that it is somehow unfair or contrary to the intent of 1981 PA 89 to hold the City of Detroit accountable to the stipulated CD & M methodology is simply untenable. The legislative history of 1981 PA 89 reveals that the City of Detroit specifically advanced the newly developed CD & M methodology as the primary *443 justification for changing from a floor/ceiling limitation on rate-making to a cost-of-service, utility-basis model. The Senate Analysis Section analysis of the bill which became 1981 PA 89[4] was distributed to the Legislature prior to the final vote on the bill and offered the following rationale for amending the enabling act, 1917 PA 34: Part of the difficulty in setting fair rates arises from the tremendous complexity of assigning proportional responsibility for such a huge, intricate, and interconnected system [the DWSD], but the difficulty also arises in part from the limitations placed on rate-making by Public Act 34. Detroit officials believe that the first difficulty has been largely overcome by a study performed by the Boston consulting firm of Camp, Dresser, and McKee (CDM) and the development of a computer program from that study which serves to identify the actual cost of providing water to each community. [Senate Analysis Section, HB 4029, First Analysis, April 27, 1981, p 1.] The City of Detroit has used the question of the proper standard of review of rates as a smoke screen to obscure the effect of the stipulation it agreed to prior to trial. To find in favor of the City of Novi in this case, it is not necessary to determine that the standard of review was significantly changed by the enactment of 1981 PA 89: rates are still assumed to be reasonable, and the burden of proof continues to be on the challenging party to show that they are unreasonable. Detroit v Highland Park, 326 Mich 78, 100-101; 39 NW2d 325 (1949). Plymouth v Detroit, 423 Mich 106, 133-134; 377 NW2d 689 (1985). The fact that the standard of review was not changed by 1981 PA 89, however, *444 does not save the City of Detroit from its own stipulation. What was changed by 1981 PA 89 was the basis for determining whether a rate is unreasonable. Thus it did not "render inoperable the concept of reasonableness in the process of judicial review" (ante, p 432); rather, it clarified the concept. Prior to enactment of 1981 PA 89, a party challenging rates that fell within the limits of MCL 123.141(2); MSA 5.2581(2) had the burden of proving that the challenged rate did not bear a reasonable relationship to the service rendered.[5] 1957 PA 53 (repealed by 1981 PA 89). Now, the burden of the challenging party is more focused: it must prove that the rate is not "based on the actual cost of service as determined under the utility basis of rate-making."[6] Given the stipulation between the parties that the CD & M report constituted the chosen utility basis of rate-making, followed by evidence that the *445 rates actually charged were calculated by applying an elevation factor inconsistent with that basis, I would find that the City of Novi met its burden. The majority is correct, however, that the CD & M methodology, as stipulated by the parties, uses "service area" only in the calculation of elevation. While that distinction does not affect my conclusion that the City of Novi has demonstrated that the rates charged by the City of Detroit for the years in dispute were not in compliance with MCL 123.141(2); MSA 5.2581(2),[7] the distinction does affect the amount of the overcharge. Consequently, I would remand to the trial court for further testimony aimed at establishing the overcharge on the basis of the failure to calculate the elevation factor using the "service area" as required by the methodology stipulated by the parties.