Opinion ID: 889492
Heading Depth: 1
Heading Rank: 7

Heading: September 13, 2007 Memorandum and Order Regarding the Parties' Motions to Strike

Text: ถ 62 On October 6, 2006, PPL moved to strike the affidavits submitted by the State in support of its motion for summary judgment regarding the navigability of the Missouri, Clark Fork, and Madison Rivers. In support of its summary judgment motion, the State had submitted affidavits from Monte Mason (Mason), an employee for the DNRC, and State Archivist Jodie Foley (Foley). In his affidavit, Mason rendered his opinion that the Clark Fork, Missouri, and Madison Rivers were navigable at the time of statehood. He based these conclusions on a number of reports and studies attached as exhibits. PPL claimed that in his deposition, Mason admitted he had no personal knowledge of these studies or their preparation. PPL claimed that because Mason lacked personal knowledge of the contents, accuracy, or reliability of the exhibits, they should be stricken from consideration for purposes of summary judgment. Additionally, PPL argued the State failed to show that any of the documents or exhibits upon which Mason relied fell into recognized exceptions to the hearsay rule. For instance, one attached exhibit was the River Study prepared by the Heritage Research Center of Missoula in December 1986. Because Mason had no personal knowledge of how it was prepared, and it was less than 20 years old at the time its admittance was sought in May 2006, it could not be admitted under the Montana Rules of Evidence as an ancient document or through Mason. See M.R. Evid. 901(8). ถ 63 PPL presented a similar argument with respect to another attached exhibit, an undated report on the navigability of the Clark Fork River prepared for the Army Corps of Engineers. Mason could not personally attest to its contents, and could not demonstrate that it was more than 20 years old. Two other exhibits challenged by PPL were navigability reports on the Madison and Missouri Rivers completed by the Army Corps of Engineers in 1974. While these two reports did appear to meet the prima facie test of being at least 20 years old, PPL argued their admission was barred because they were based on the accounts of others in old newspapers, old books and similar publications regarding matters that reportedly occurred in the late 1800's or early 1900's. Because the State could not establish any first-hand knowledge of these events by authors of these reports, PPL argued they were inadmissible hearsay whose defects could not be cured by admission under the ancient document exception. ถ 64 PPL asserted that 38 documents attached to Foley's affidavit were inadmissible hearsay for largely the same reasons. PPL noted that the majority of these documents were excerpts from books or magazine articles written by authors, typically years after the recounted events, and do not provide a basis for any personal knowledge of the matters discussed. PPL argued that all historical evidence, except for sources based on direct, first-hand accounts like the Lewis and Clark Journals, were inadmissible and should be stricken from consideration. ถ 65 Again, the District Court denied PPL's motion. First, it considered the affidavit of Mason and accompanying exhibits. The District Court observed that Mason averred in his affidavit that DNRC has conducted numerous studies to determine and document the ownership of state lands, and that it had in fact commissioned the 1986 River Study. Mason averred that the River Study compiled historical evidence for over 43 different rivers in Montana in order to assist DNRC in determining state ownership of streambeds for leases of trust land. Mason also averred that he relied on the reports prepared by the Army Corps in making determinations regarding the navigability of the rivers at issue. Based on an analysis of the affidavit, the District Court concluded that Mason regularly relies upon the River Study and Army Corps reports in carrying out his official duties, and that these documents were relevant to the issues at hand. The District Court concluded that the attachments to Mason's exhibits would likely be admissible at trial. Although the District Court acknowledged the documents were hearsay, it nonetheless concluded that the State would likely be able to lay a foundation for the admission of these exhibits if required to do so. ถ 66 Employing a similar rationale, the District Court held that the Foley affidavit and accompanying exhibits could be considered on summary judgment as well. The District Court noted that Foley's affidavit simply authenticates the documents listed and attached to her affidavit in accordance with her duties as a state archivist. Although the documents themselves are hearsay, the District Court determined Foley would likely be able to lay a foundation for the admissibility of these documents at trial. For these reasons, the District Court denied PPL's motion to strike. ถ 67 Upon the resolution of these motions and the District Court's determination that the State was entitled to seek compensation from PPL for its use of the state-owned riverbeds and streams occupied by its dams, the stage was set for a bench trial on the State's counterclaims for compensation. A seven-day bench trial was held from October 22 to 30, 2007, and the District Court received expert testimony and argument from both parties. The primary issues were the amount of compensation the State was entitled to recover from PPL for its use of the riverbeds, and whether the HRA is preempted on an as applied basis by the FPA. The District Court was tasked with considering the methodology which should be used to calculate damages, whether the State was entitled to prejudgment interest, and whether the Land Board or the District Court should determine full market value for PPL's use of state-owned land. ถ 68 On June 13, 2008, the District Court entered a Memorandum of Decision (Memorandum) and a final order containing findings of fact and conclusions of law (Final Order). In its Memorandum the District Court first addressed PPL's as applied federal preemption challenge to the operation of the HRA. PPL maintained that the HRA, as applied, was preempted by the FPA because it was impossible for PPL to comply with the mandates of both statutes. PPL noted that ง 77-4-209, MCA, of the HRA permits the Land Board to enter into a lease for a term of no greater than 50 years. However, under the FPA's implementing regulations FERC requires a licensee to acquire title in fee or the right to use in perpetuity all lands, other than lands of the United States within 5 years of the issuance of a license for a hydroelectric facility under Article 5 of a standard FERC license. See Standardized Conditions for Inclusion in Preliminary Permits and Licenses Issued Under Part I of the Federal Power Act, 54 F.P.C. 1792, 1834, 1975 WL 14631  (1975) (emphasis added) (discussing Article 5 of Form L-5). PPL claimed that the 50-year limitation on state leases frustrated the objective of the FPA. Furthermore, PPL argued that the leasing process described in the HRA, see งง 7-4-204 to 207, MCA, also contravened the regulatory purpose of the FPA as well as its FERC licenses. ถ 69 The District Court determined that the FPA did not preempt the HRA under an as applied challenge. The District Court observed that the State's obligation to seek compensation stemmed from its fiduciary duties to administer public trust lands under Article X, Section 11, of the Montana Constitution. Referring to First Iowa, the District Court noted that the United States Supreme Court had previously concluded that the FPA does not preempt property rights pursuant to state law, and allows states to seek compensation for the use of state lands by FERC-licensed facilities. Secondly, the District Court determined that FERC had the ability to alter the in perpetuity clause in PPL's license, noting that 18 C.F.R. ง 2.9(a) (2010), states that [t]he Commission has approved several sets of standard conditions for normal inclusion in preliminary permits or licenses for hydroelectric developments. In a special situation, of course, the Commission in issuing a permit or license for a project will modify or eliminate a particular article (condition). Indeed, the District Court observed that FERC permitted just such a modification in Copper Valley Electric Assn., Inc., 4 F.E.R.C. ถ 61336, 1978 WL 15902 (1978), and allowed a FERC licensee to hold an interest in land which would be a part of its hydroelectric facility without the requirement that it be in perpetuity. See Copper Valley, 4 F.E.R.C. ถ 61336 at ถ 61796, 1978 WL 15902 . Thus, the District Court concluded that the Land Board had the authority to enter into a lease under the HRA, provided that such a lease would comply with FERC regulations. ถ 70 The District Court then considered whether the State could seek rent for affected acreage lying both above and below PPL's dams, or, as argued by PPL, it could seek rent based solely on affected acreage above PPL's dams. To resolve this question, the District Court turned to ง 77-4-202, MCA, of the HRA, which defines the term power site. The District Court concluded that the statute was clear on its face, and it was not necessary to resort to the rules of construction in order to determine if PPL could be assessed for acreage below its dams. The District Court noted again that the State's claim for compensation was based on Article X, Section 11, of the Montana Constitution, in its role as the trustee of state lands. Because the riverbeds below and above PPL's dams were state-owned lands and fell within the HRA's definition of a power site, the State was required to obtain full market value for the use of those lands under Montrust. ถ 71 The District Court also considered the State's claims for prejudgment interest pursuant to ง 27-1-211, MCA. It rejected this claim under the criteria set forth in Ramsey v. Yellowstone Neurosurgical Assocs., 2005 MT 317, ถ 19, 329 Mont. 489, 125 P.3d 1091, because the amount of compensation was not certain or capable of being made certain when PPL purchased the Thompson Falls and Missouri-Madison Projects. Furthermore, neither DNRC nor the Land Board had adopted a rule as to how to set rent for the use of a power site under the HRA, requiring a trial in order to determine the appropriate methodology for this assessment. ถ 72 Next, the District Court addressed the question of what methodology should be used in order to assess the amount of compensation due to the State. This issue was the focus of much of the trial. PPL argued that the State was entitled to recover only the value of the estate or interest conveyed by its dams (i.e., an easement for the footprints created by the dam), and that any damages based on its occupation of state-owned riverbeds would be limited to the value of the flowage easement from its use. The State, by contrast, argued for a damage assessment based on what it termed the shared net benefits methodology. ถ 73 Under this methodology, net benefits of a project would be determined by calculating the difference between the value of the power produced and the cost of producing that power. The net benefits (i.e., the profits), would then be distributed 50-50 between the project owner and the land owners. In the Memorandum, the District Court noted that ง 77-4-208, MCA, of the HRA required the Land Board to obtain full market value for PPL's use of power sites, as carefully ascertained from all available sources. The District Court observed that riverbeds have unique characteristics which make them valuable for the production of hydropower, and concluded that the shared net benefits methodology as presented by the State would best take into consideration the economic contributions the state lands make to hydropower projects. In this connection, the District Court stated that the Supreme Court of Maine had concluded this methodology was appropriate to apply to the assessment of rents for a hydroelectric facility in State v. Cent. Me. Power Co., 640 A.2d 1067 (Me. 1994), and that it had been applied by FERC to assess hydroelectric facilities in previous regulatory proceedings involving tribal lands. ถ 74 Lastly, the District Court considered whether it or the Land Board should decide the fair market value of the riverbeds. PPL had argued that under the HRA, the Land Board, and not the District Court, was the proper authority to decide the fair market value rental or lease rate for PPL's use of the power sites. The District Court rejected this argument, and held that it could determine the fair market value for PPL's past use of the state-owned lands. First, the District Court noted that PPL had not raised this issue in the pretrial order. Second, it distinguished Montanans for the Responsible Use of the Sch. Trust v. Darkenwald, 2005 MT 190, 328 Mont. 105, 119 P.3d 27, noting that the case sub judice did not involve a challenge to actions taken by the Land Board. See Darkenwald, ถ 6 (noting that the appeal in that case was a direct challenge to the actions of the Land Board). Finally, the District Court held that it would not rule on the terms of a lease between PPL and the Land Board extending into the future, as that matter would be properly left to the discretion of the Land Board. ถ 75 In its Final Order, the District Court applied the rationale set forth in the Memorandum to the argument and evidence presented by the parties at trial. The District Court noted its previous rulings discussed above, and concluded it would apply the State's shared net benefits method to assess damages. The District Court relied principally upon the State's expert economist, John Duffield, Ph.D. (Dr. Duffield), in order to arrive at damages for PPL's use of the state-owned power sites from 2000 to 2007. The District Court rejected the valuation offered by PPL's expert, Gary Saleba (Saleba), who based his rental assessment on the methodology used by FERC to determine the amounts PPL should pay for using federal lands at its Montana facilities, pursuant to 18 C.F.R. ง 11.2 (2010). [7] The District Court noted that Saleba's methodology did not employ the shared net benefits methodology, did not include below the dam acreage, and arrived at a much lower figure than that calculated by Dr. Duffield. ถ 76 To arrive at his calculations, Dr. Duffield utilized documents either produced or publicly filed by PPL to conclude that PPL owed the State past rents, excluding interest, from 2000 to 2006 in the amount of $8,988,436 for Thompson Falls Project. The 2007 rent for this project was $1,950,592. This figure was based on the calculation that the State owned 54.6 % of the power site, and that the State was entitled to a 27.3% share, or half, of the net benefits of the project. For the Madison-Missouri Project, Dr. Duffield concluded that PPL owed the State past rent, excluding interest, of $25,759,825 for 2000 through 2006. The 2007 rent due for the Madison-Missouri Project was $4,257,327. The percentage shares of state ownership of the lands constituting each separate hydroelectric facility are as follows: Hebgen, 5.7%; Madison, 6.8%; Hauser, 17.6%; Holter, 26.2%; Black Eagle, 96.2%; Rainbow, 63.6%; Cochrane, 79.3%; Ryan, 39.7%; and Morony, 62.9%. With the Hebgen Dam's benefits allocated to downstream facilities, [8] the State's share of the net benefits of each of these facilities is as follows: Madison, 3.3%; Hauser, 8.6%; Holter, 12.8%; Black Eagle, 46.9%; Rainbow, 31.0%; Cochrane, 38.8%; Ryan, 19.4%; and Morony, 30.8%. ถ 77 Judgment in the amount of $40,956,180 was entered against PPL on August 18, 2008. PPL now appeals from this judgment, as well as the rulings discussed above. We state the issues as follows: ถ 78 Issue One: Did the District Court err in granting summary judgment regarding the navigability of the Clark Fork, Missouri, and Madison Rivers at the time Montana became a state in 1889? ถ 79 Issue Two: Did the District Court err in granting summary judgment to the State on the issue of whether Montana's navigable riverbeds are school trust lands? ถ 80 Issue Three: Did the District Court err in granting summary judgment on whether the right to appropriate water for beneficial use of hydropower includes the incidental right to use state land? ถ 81 Issue Four: Did the District Court err in granting summary judgment regarding the availability of PPL's affirmative defenses against the State's claims? ถ 82 Issue Five: Did the District Court err in concluding that the HRA applied to the Thompson Falls and Missouri-Madison Projects? ถ 83 Issue Six: Did the District Court err in its calculation of damages?