NO. 94-309

IN THE SUPREME COURT OF THE STATE OF MONTANA

1995

CITY OF BILLINGS,

Petitioner and Appellant,

STATE OF MONTANA,

DEPARTMENT OF REVENUE,

Respondent and Respondent.

APPEAL FROM: District Court of the Thirteenth Judicial District,

In and for the County of Yellowstone,

The Honorable Russell K. Fillner, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Bonnie J. Sutherland, Assistant City Attorney,

Billings, Montana

For Respondent:

Lawrence G. Allen, Special Assistant Attorney

General, Department of Revenue, Helena, Montana

Filed:

Submitted on briefs: December 15, 1994

Decided: March 21, 1995
Justice Fred J. Weber delivered the Opinion of the Court.

This is an appeal by the City of Billings from an Order of the

District Court of the Thirteenth Judicial District, Yellowstone

County. The District Court's Order held that the City of Billings

is not exempt from payment of fees for the funding of the

Department of Public Service Regulation and the Montana Consumer

Counsel during years when its municipal water utility rates are not

increased more than twelve percent. We affirm.

The sole issue for review is whether the District Court erred

in holding that the City of Billings, as owner and operator of a

municipal utility, must always pay a Public Service Commission fee

and a Montana Consumer Counsel fee.

The City of Billings owns and operates a municipal water and

sewer utility serving customers in and near Billings. On August 7,

1992, the Montana Department of Revenue (DOR) assessed the City of

Billings for Public Service Commission (PSC) and Montana Consumer

Counsel (MCC) fees of $14,890.98 and $14,886.16, respectively, for

the City's 1991 and 1992 fiscal years.

After the assessment, the City questioned whether it was

subject to the PSC and MCC fees. The City took the position that

it could not be required to pay these fees when it had never raised

its rates in excess of twelve percent in any one year following

deregulation of its utility activities in 1982. In response to the

City's query, both the PSC and DOR took the position that the City

must pay the fees annually. The City appealed the assessment,

claiming it did not owe the fees because it had not raised its

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rates more than twelve percent in either of the two fiscal years

concerned and, thus, had no revenues from regulated activities.

Because DOR had issued an opinion stating its position on the

matter prior to assessing the fees, the parties waived informal

agency appeal proceedings with DOR and brought the matter directly

to the State Tax Appeal Board. The City filed a Notice of Appeal

with the State Tax Appeal Board on February 24, 1993. On April 22,

1993, following DOR's answer to the Notice of Appeal indicating

that the parties could resolve the only remaining factual issue,

the City petitioned the District Court for interlocutory

adjudication pursuant to §§ 15-Z-304 and -305, MCA.

After briefing by the parties and without an oral hearing, the

District Court ruled in favor of DOR and it is from this ruling

that the City of Billings now appeals.

Did the District Court err in holding that the City of

Billings, as owner and operator of a water and sewer utility, must

always pay PSC and MCC fees?

The operations of the PSC and MCC are not funded through the

general fund like most state government agencies. The method of

funding them is provided for as follows:

69-1-223. Funding of office of consumer counsel. .

. . (2) In addition to all other licenses, fees, and

taxes imposed by law, all regulated companies shall:

(a) within 30 days after the close of each calendar

quarter, file with the department of public service

regulation and the department of revenue a statement, in

a form that the commission and department may determine,

showing the gross operating revenue from all activities

regulated by the commission within the state for that

calendar quarter of operation or portion of a quarter,

separately stating gross revenue from sales to other

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regulated companies for resale; and

(b) at that time pay to the department of revenue a

fee based on a percentage of the gross operating revenue

reported, as determined by the department of revenue

under 69-l-224. . .

69-l-402. Funding of the department of public

service regulation. . (2) In addition to all other

licenses, fees, and taxes imposed by law, all regulated

companies shall, within 30 days after the close of each

calendar quarter, pay to the department of revenue a fee

based on a percentage of gross operating revenue reported

pursuant to 69-l-223(2) (a), as determined by the

department of revenue under 69-l-403.

DOR assessed the PSC and MCC fees to the City of Billings Public

Utility Department for the sale of water for fiscal years 1991 and

1992 according to the formula set forth in § 69-1-224, MCA.

DOR assesses the PSC and MCC fees to "regulated companies" in

Montana based on a percentage of gross operating revenues generated

within the state by the regulated company. Sections 69-l-201(3),

and -401(2), MCA, both set forth the following definition of

"regulated companies":

"Regulated companies" means all those organizations,

corporations, associations, or other public or private

entities which now are or may hereafter become subject to

regulation in any manner by the department of public

service regulation or the public service commission or

any successor agency.

In 1981, the Montana Legislature enacted House Bill 765,

transferring regulation of municipal utilities from the PSC to the

municipality, except as expressly retained in § 69-7-102, MCA. The

following statutes govern the PSC's regulation of rates by the

municipality:

69-7-101. Municipal utilities -- regulation by

municipality -- limitation. A municipality has the power

and authority to regulate, establish, and change, as it

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considers proper, rates, charges, and classifications

imposed for utility services to its inhabitants and other

persons served by municipal utility systems. Rates,

charges, and classifications shall be reasonable and just

and, except as provided in 69-7-102, they may not be

raised to yield more than a 12% increase in total annual

revenues or, in the case of mandated federal and state

capital improvements, the increase may not exceed amounts

necessary to meet the requirements of bond indentures or

loan agreements required to finance the local

government's share of the mandated improvements. Annual

revenues must be computed on any consecutive 12-month

period for purposes of this chapter.

69-7-102. Rate increases over maximum. (1) If a

municipal utility requires rate increases that yield an

increase in total revenues in excess of 12% in any one

year or rate increases for mandated federal and state

capital improvements for which the increase exceeds

amounts necessary to meet the requirements of bond

indentures or loan agreements required to finance the

local government's share of the mandated improvements, it

must make application for such increases to the public

service commission.

These statutes exclude municipal utilities from PSC jurisdiction

over rate increases if the utility does not increase its rates by

more than twelve percent for any twelve-month period.

Section 69-l-223, MCA, providing for funding of the MCC,

states that the MCC fee is calculated with reference to "the gross

operating revenue from all activities regulated by the commission."

The PSC fee is determined in the same manner as the MCC fee, except

that gross revenues from sales to other regulated companies for

resale, as calculated by the PSC, must be excluded from the

determination of the total gross operating revenue.

Section 69-l-224, MCA, sets forth the method for calculating

the MCC fee. It contains a limitation stating that no regulated

company owned and operated by any municipal corporation can be

required to pay more than .06 of one percent of its gross operating

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revenue. Section 69-l-403, MCA, provides that the PSC fee shall be

calculated in the manner described in fj 69-l-224, MCA, for the MCC

fee. The statutory formula for determining both PSC and MCC fees

is based on a utility's gross operating revenue from "activities

regulated by the commission."

The City contends that it had no such activities and therefore

owed no MCC or PSC fees. However, none of the statutes which are

applicable to the funding of the PSC and MCC in Chapter 1, Parts 2

and 4, or in Chapter 7, Part 1, entitled Regulation of Rates by

Municipality, include any specific exemption for municipal

utilities for the payment of the PSC and MCC fees. Although the

City asserts that §§ 69-7-101, MCA, through 69-7-201, MCA, give

municipalities all regulatory power and authority over municipal

utilities, it acknowledges that a municipality must obtain PSC

approval if it wishes to increase rates, charges, or

classifications to yield more than a twelve percent increase in any

one year.

The City argues, however, that because it did not raise its

rates, charges, or classifications in fiscal years 1991 and 1992 to

yield more than twelve percent in total annual revenues, the PSC

had no regulatory power over the City and the City is not subject

to either of the fees under Chapter 1, Parts 2 and 4. The City

argues that the fees are "user fees" to be assessed for involvement

of the PSC and MCC in utility rate proceedings of which it will

never be a participant unless it raises its rates more than twelve

percent in one year.

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DOR contends that the fees are not "user fees" and that they

are in fact taxes. It further contends that the sale of water is

an activity regulated in Montana, the City generated revenue from

the sale of water and, therefore, the City must be taxed for that

activity. It contends that the City is subject to the fees because

the Billings Public Utility Department meets the statutory

definition of "regulated company" as set forth in 55 69-l-201(3)

and -401(2), MCA. Not only is the City's water and sewer utility

a "regulated company," but as such, it was statutorily required to

file an annual statement with the PSC for regulation purposes.

Therefore, according to DOR, the City's utility is subject to the

fees.l

Clearly, the City's municipal utility is included within the

statutory definition of "regulated companies." Both the PSC and

the MCC fee statutes use the term "regulated company," both

statutes include definition of "regulated companies" and both

definitions of "regulated companies" include the language "public

entities . . subject to regulation in any manner." The City's

rate increases are subject to regulation if they are in excess of

twelve percent in any one year and it must submit annual statements

to the PSC detailing its gross operating revenues. Although PSC

regulation of municipal utilities is limited by Part 7, clearly the

definition of "regulated companies" includes the City of Billings'

'The City of Billings did file the statutorily required

statements showing its gross revenues from regulated activities.

However, it stated on the forms that it had no revenue from

regulated activities for fiscal years 1991 and 1992.
water and sewer utility. Therefore, the plain language of these

statutes includes the City's municipal utility as an entity subject

to regulation by the PSC.

Nonetheless, the City maintains that both the MCC fee and the

PSC fee are "user fees." It claims that its revenue is not derived

from a "regulated activity" as that term is used in § 69-l-223,

MCA, because it can raise its rates up to twelve percent a year

without PSC approval. Section 69-l-223, MCA, sets forth the

procedure for collecting the fees to fund the MCC; it does not

address the question of what entities are subject to the taxes.

Parts 2 and 4 of Title 69, Chapter 1, which specifically apply to

the funding of the MCC and PSC and determine how the fees for such

are to be calculated and assessed by the DOR, both include

definitions of "regulated companies" which we have stated above

apply to the City of Billings Public Water Department. There would

be no reason to include entities such as the City's municipal

utility in the definitions if such entities were not to be assessed

the fees which Parts 2 and 4 authorize.

The City also relies on Lechner v. City of Billings (19901,

244 Mont. 195, 797 P.2d 191, for its position that it does not owe

the PSC or MCC fees. The issue in Lechner was whether the City of

Billings could adopt by resolution a new system for funding the

expansion of water and sewer facilities. The City assessed a

"systems development fee" on customers who requested new or

upgraded water or wastewater service. In Lechner, 797 P.2d at 195,

we noted that municipal utilities were excluded from the definition

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of "public utility" in 5 69-3-101, MCA. However, the exclusion

from the definition of "public utility" does not determine that it

is not a "regulated company." The Court did not conclude that the

PSC had no regulatory power over the City's water utility. The

Lechner case does not support a conclusion that the sale of water

at a rate set by a municipal utility is revenue from unregulated

activities.

According to the City, regulated companies do not have to pay

the fees unless they "use" the services of the PSC and the MCC

during a given year for rate making. Under this rationale, a

municipal utility could control and avoid the imposition of the PSC

and MCC fees, except under extraordinary circumstances. The

municipal utility could decide never to "use" the services of the

PSC and this could place the burden of funding the MCC and PSC

totally on other regulated companies. There is no indication that

this is what the legislature intended.

Moreover, the "user fee" rationale would not seem to apply to

the MCC according to the statutes governing that entity. The

City's argument that the MCC and PSC fees are "user fees" is

weakened by the express provision contained in § 69-7-111(5), MCA,

which mandates that notice of all public hearings for regulating,

establishing or changing rates, charges, or classifications imposed

o n customers be mailed to the MCC. Section 69-7-112, MCA,

expressly provides that all affected or interested persons and

entities, including the MCC, may be present and represented by

counsel, and, if the MCC chooses to be present and represented by

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counsel, the MCC shall be allowed to make arguments as it may

consider proper at the conclusion of the municipal rate hearing.

When the legislature relaxed the PSC's regulation of municipal

utility rate proceedings in 1981, it did not change the role of the

MCC in municipal rate cases. Municipal utilities must still notify

the MCC of all rate hearings and the MCC is specifically authorized

to represent the consumer's interest at rate hearings conducted by

municipalities. Although the MCC has discretion concerning its

involvement in municipal rate hearings, clearly the appearance of

the MCC at municipal rate hearings is not discretionary on the part

of the municipal utility. Although the City can control the

jurisdiction of the PSC in its decisionmaking concerning rate

increases to its customers, it has no power to control the

participation of the MCC in the rate hearing process.

The DOR contends, and we agree, that the City of Billings'

interpretation of the statutes is contrary to legislative intent

underlying the fee statutes. The legislature was aware that

municipal utilities were subject to the MCC fees when it enacted

the provisions of Title 69, Chapter 1, Part 4, to fund the PSC in

1986. At that time, it established methods for calculating the

PSC fee which referred to and incorporated the formula used by DOR

in calculating the MCC fee. The legislature chose not to provide

an exemption from either of these fees for municipal utilities

subject to limited regulation by the PSC. We conclude the City's

municipal water utility must pay the MCC and PSC fees as determined

by DOR using the method set forth in §§ 69-l-223(2) and -224, MCA.

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We hold the District Court did not err in holding that the

City of Billings, as owner and operator of a municipal utility,

must always pay the PSC and MCC fees.

Affirmed.

/’ Chief Justice

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