Opinion ID: 889492
Heading Depth: 1
Heading Rank: 11

Heading: PPL's Challenge to the Application of the HRA

Text: ถ 134 PPL also claims that the HRA is being retroactively applied to it in a manner contrary to law. PPL correctly notes that the HRA does not contain a retroactivity clause, and argues that its language indicates it was designed to apply to the development of future power sites. See ง 77-4-204, MCA (stating that the Land Board examines matters related to the proposed development. . . .); ง 77-4-206, MCA (stating that the Land Board is to determine whether a lease applicant is capable of carrying out the proposed development. . . .). Further, PPL argues that the HRA's application in this case violates principles of Montana law. Citing to Porter v. Galarneau, 275 Mont. 174, 911 P.2d 1143 (1996), PPL argues that application of the HRA would violate the prohibition against retroactive application of the law because it takes away or impairs vested rights acquired under existing laws or creates a new obligation, imposes a new duty, or attaches a new disability in respect to transactions already passed. Porter, 275 Mont. at 183, 911 P.2d at 1148-49 (quotations omitted). Among these new obligations, PPL argues, is the requirement that PPL pay the State approximately $41 million dollars in back compensation. The claimed impairment of PPL's vested rights also includes the fact that it may now be subject to competitive bidding proposals and possibly not be granted a lease by the Land Board. ถ 135 The District Court held that the HRA was not being retroactively applied in this case because Montana acquired title to the riverbeds when it became a state in 1889 and Article XVIII, Sections 1 and 3, of the 1889 Montana Constitutionโwhich predate the construction of any of PPL's damsโspecifically prevented the state from selling or conveying interests in public state lands without obtaining full market value for them. Thus, neither PPL nor MPC could claim a vested interest in using the State's riverbeds for free. See Opinion, ถ 57. ถ 136 We agree with the District Court's reasoning on this point. In providing a statutory basis for leasing state-owned power sites, the HRA codifies an aspect of a constitutional provision which was extant in 1889. MPC and PPL took ownership of the dams subject to the constitutional trust status of these state lands. See Montrust, ถ 19 (citing Dept. of State Lands v. Pettibone, 216 Mont. 361, 375, 702 P.2d 948, 956-57 (1985)). While PPL claims that the HRA's bidding process may arguably cause it to lose its ability to operate the dams, that situation is not before the Court in the present appeal, nor is it even remotely probable. [10] ถ 137 PPL also argues that the HRA was intended to apply only to Section 17 and 36 school trust lands, and not to the non-school trust riverbeds at issue in this case. As support for this contention, PPL points to various legislative and supporting materials which it claims show the Legislature never intended the HRA to apply to dams which were already located on the riverbeds in 1931. ถ 138 The starting point for statutory construction is the plain language of the statute, and if the plain language is clear and unambiguous no further interpretation is required. Vader v. Fleetwood Enterprises, Inc., 2009 MT 6, ถ 30, 348 Mont. 344, 201 P.3d 139. As noted above ( see Opinion, ถถ 54-55), ง 77-1-101(6), MCA (2005), states that the provisions in Title 77 apply to state lands. The riverbeds at issue are state lands within the meaning of ง 77-1-101(6), MCA (2005). Thus, as the plain language of the HRA and Title 77 demonstrates that the statute applies to PPL's facilities, resort to other methods of statutory construction is not required. ถ 139 We accordingly conclude that the District Court did not err in determining that the HRA was not federally preempted by the FPA, and that it could be lawfully applied by the State to seek compensation for PPL's use of state-owned riverbeds at its hydroelectric facilities. ถ 140 Issue Six: Did the District Court err in its calculation of damages? ถ 141 Before turning to the methodology and reasoning employed by the District Court in its calculation of an award of damages, we take note of the legal basis upon which this award was granted. In the District Court's conclusions of law in the Final Order, it held that: (1) the riverbeds are state school trust lands; (2) the State has a constitutional duty to obtain full market value for their use under the Montana Constitution; (3) under ง 77-4-208, MCA, of the HRA, the rental for power sites shall be not less than full market value . . . .; (4) the FPA did not preclude the State from seeking compensation for PPL's use of state-owned lands; and (5) the State was entitled to compensation based on the shared nets benefits methodology and the acreage computation presented by its experts. From this, the District Court concluded that the State was entitled to compensation from PPL for the years 2000 through 2007. ถ 142 PPL argues the District Court committed reversible error by failing to specify the legal basis for the State's damages claim. PPL contends that while the District Court seems to have awarded damages based solely under the HRA, the HRA, by itself, does not provide a cause of action for damages in this case. The State responds by suggesting that its claim is constitutional in nature, but does not provide any direct argument beyond that. ถ 143 The District Court concluded that the State/Land Board had the constitutional authority to seek compensation for PPL's use of state-owned lands under Article X, Section 11 of the Montana Constitution. The State, in its counterclaims, had sought a declaration to this effect under the Uniform Declaratory Judgment Act (UDJA), Title 27, chapter 8, MCA. Section 27-8-201, MCA, of the UDJA reads as follows: Courts of record within their respective jurisdictions shall have power to declare rights, status, and other legal relations whether or not further relief is or could be claimed. No action or proceeding shall be open to objection on the ground that a declaratory judgment or decree is prayed for. The declaration may be either affirmative or negative in form and effect, and such declarations shall have the force and effect of a final judgment or decree. ถ 144 By concluding that the riverbeds were state school trust lands and then declaring that the State/Land Board had the constitutional obligation to seek compensation for their use, the District Court essentially declared that the State had a right to seek compensation and PPL was obligated to pay it. [11] This declaration was sufficient to establish the legal obligations between PPL and the State in this case on the question of compensation. ถ 145 We now turn to the methodology and reasoning in support of the District Court's award of damages. From October 22 to October 30, 2007, a bench trial was held before the District Court, the primary focus of which was to determine how much PPL owed the State for its use of the state-owned riverbeds dating back to 1999, the year PPL acquired the dams. At trial, the methodology to be used by the District Court in calculating the amount of compensation due was vigorously contested. The State claimed that the measure of damages payable by PPL was the full market value of the state-owned riverbeds as used for hydroelectric generation, and that the HRA provided a statutory mechanism for classifying and then valuing the riverbeds. The State's expert Dr. Duffield advocated for a valuation approach which he called the shared net benefits method. Under this analysis, Dr. Duffield considered the amount of electricity generation at PPL's facilities, and multiplied that figure times the price of power that was being returned, to calculate PPL's gross revenues. From that, Dr. Duffield subtracted PPL's costs in generating power to arrive at a net income, or net revenue figure. Dr. Duffield then apportioned this net income between PPL and the State, based on the State's share of the land associated with each facility. ถ 146 Dr. Duffield presented several reasons in support of this proposed methodology. First, he opined that it captured the productive value of the state-owned land in a manner analogous to the share crop approach used in agricultural leases. Second, Dr. Duffield opined that a similar method was used by FERC with respect to tribal lands, and had been applied in analogous manner by the Maine Supreme Court in Maine Central Power. Third, Dr. Duffield asserted that PPL's status as a non-regulated, wholesale generator of electricity warranted this method in order to prevent PPL from obtaining a windfall profit which would not adequately be captured by other methods. [12] Dr. Duffield's approach was also driven in large measure by his understanding that the State had a fiduciary obligation under the Montana Constitution to obtain full market value for the use of state lands. ถ 147 PPL's expert Saleba disputed the propriety of Dr. Duffield's methodology and advocated a methodology he termed the cost method and comparables method in tandem. Under Saleba's cost method approach, he used several different methodologies to establish a fair market value for PPL's hydroelectric facilities. Saleba then determined the percentage of the value of the hydroelectric facilities attributable to the land. Based on his analysis, Saleba concluded that 2.23% of the total value of PPL's hydroelectric facilities was land-related. Saleba then used this percentage, indexed against the cost of the facilities minus depreciation, to arrive at a fair market value of the land occupied by PPL's facilities. From this fair market value figure, Saleba then calculated the annual lease payments. To arrive at a lease figure, Saleba looked to data from the United States Department of Agriculture for annual lease payments for different types of land, as well as currently available commercial lease information for Montana school trust land. From this, Saleba concluded an annual lease rate of 7% of fair market value would be appropriate. ถ 148 Saleba then applied this figure to the original cost minus depreciation of PPL's facilities and the total acreage of those facilities, to conclude that the fair market value was $28 dollars per acre. Saleba also did an estimate based on the replacement cost of the facilities, which produced a fair market value of $63 dollars per acre. Saleba also ran calculations using state tax assessment data of PPL, to arrive at a fair market value of $26.08 per acre. ถ 149 To supplement this cost methods approach, Saleba also did a comparables analysis to determine if there were any comparable state or federal lease rates which could be used to gauge a lease rate for PPL's facilities in Montana. Additionally, Saleba relied upon the lease methodology utilized by FERC for the hydroelectric use of federal lands pursuant to 18 C.F.R. ง 11.2 (2010). This methodology sets an annual per-acre charge for federal land flooded by a dam based on the schedule of fees for the use of linear rights-of-way prepared by the U.S. Forest Service. Saleba concluded that the comparables he identified correlated well with the results arrived at by his cost methods approach. Based on his calculations, Saleba concluded that the total annual lease payments to the State for 2006 were $205,230 and $210,476 for 2007. ถ 150 In its Memorandum, the District Court adopted the State's approach, concluding it was the most appropriate method to determine the full market value of the riverbeds. The District Court noted that the State has a constitutional duty to obtain full market value for the use of state-owned lands, and that the Land Board was specifically directed under ง 77-1-202(1)(a), MCA, to secure the largest measure of legitimate and reasonable advantage to the state . . . in the administration of state lands. Furthermore, ง 77-4-208, MCA, of the HRA, specifically states the full market value use is to be carefully ascertained from all available sources. ถ 151 The District Court observed that the shared net benefits methodology had been primarily used by FERC in assessments involving tribal lands, but had also been applied in Central Maine Power Co. The District Court determined that riverbeds have unique characteristics making them valuable for the production of hydropower, and that the shared net benefits method best accounted for the economic contributions that the riverbeds make to that production. The District Court also observed that PPL had not cited to any cases where this methodology had been rejected. ถ 152 In its findings of fact, the District Court defined the shared net benefits method in the following terms: Under the shared net benefits analysis, the net benefits are determined by calculating the difference between the value of power produced and the cost of producing that power. The net benefits are then shared between the project owner and the land owners. The standard share is fifty percent to the project owner and fifty percent to the land owners. ถ 153 In applying this method, the District Court relied on data provided by Dr. Duffield. Dr. Duffield utilized documents produced or publicly filed by PPL, and based his net benefits calculations on the basis of state-owned riverbeds both above and below the dams. For the Thompson Falls Project, Dr. Duffield arrived at a net benefits calculation of $38,521,558 for the years 2000 through 2006. Dr. Duffield concluded that the State's share of this project was 27.3% based on its ownership of the riverbeds. Thus, he concluded the total rents due, excluding interest, to the State for this period was $8,988,436. For 2007, applying this same analysis, Dr. Duffield concluded the rent for the Thompson Falls Project was $1,950,592. ถ 154 For the Missouri-Madison Project, Dr. Duffield arrived at a total net benefits figure for the 2000 to 2007 timeframe of approximately $122 million dollars. Dr. Duffield then looked at the percentage of state land associated with each separate facility in the Missouri-Madison Project. Because the Hebgen Dam acts as a storage facility and does not directly produce power, Dr. Duffield allocated its benefits to the generation plants which were downstream of it. From this, Dr. Duffield determined a percentage of the State's share for each of the facilities in the Missouri-Madison Project. See Opinion, ถ 76. Dr. Duffield concluded that for the Missouri-Madison Project, PPL owed the State $25,759,825 for the 2000 to 2006 time period, and $4,257,327 for 2007, excluding interest. ถ 155 PPL argues the District Court erred in relying on Dr. Duffield's methodology. First, PPL contends that damages for rental value cannot be based on profits, citing Pritchard Petroleum Co. v. Farmers Co-Op Oil & Supply Co., 121 Mont. 1, 190 P.2d 55 (1948), and Goodover v. Lindey's, Inc., 255 Mont. 430, 843 P.2d 765 (1992). PPL bases this argument on the notion that damages are being assessed against it in this case for alleged wrongful occupation of property pursuant to ง 27-1-318, MCA. Second, PPL claims that Dr. Duffield's methodology represents a sharp departure from the State's long-established practice of valuing riverbeds. PPL claims that the State's previously utilized valuation method for riverbeds consists of the following components: (1) appraise the value of adjacent upland property; (2) take the unit value per acre or square foot; (3) multiply this value by the area that is encumbered or taken under the riverbed easement; and (4) reduce this value by 50%. PPL contends that under principles of agency law, the State is bound to adhere to its former practice in the instance case. Third, PPL claims that the District Court erred in relying on calculations which included below dam acreage not actually occupied by PPL's dams. PPL asserts that the below dam acreage consists of original riverbeds which have always been covered by water, and that water below its dams is not unlawfully occupying or trespassing on state lands. ถ 156 Finally, PPL asserts that the shared net benefits method has been applied by FERC only to tribal lands, and that there are significant differences between state land and tribal land which do not warrant the application of the methodology in this case. Furthermore, PPL claims that the District Court's version of the shared net benefits methodology is not currently used by FERC and has, in fact, been rejected for decades. PPL, citing to Portland Gen. Electric Co., 12 F.E.R.C. ถ 63055, 1980 WL 24161 (1980), claims that under the approved FERC methodology, only profits earned above a company's expected rate of return on equity are shared with the landowners. PPL argues that Dr. Duffield's failure to include its return on equity/capital costs as a cost of producing power before he arrived at a net benefits figure is contradicted by the caselaw as well as studies by the Government Accountability Office. For these reasons, PPL asserts the District Court's calculation of damages was erroneous, and its damage award must be reversed and remanded. ถ 157 The State argues the District Court did not err in its calculation of damages and application of the shared net benefits methodology in this case. The State asserts that this methodology was used in Central Maine Power and applied by FERC and federal courts to tribal lands, see Portland Gen. Elec. Co., 12 F.E.R.C. ถ 63055, ถ 65223, 1980 WL 24161 -15, and United States v. Pend Oreille Co. Pub. Util. Dist. No. 1, 135 F.3d 602 (9th Cir.1998), and is the most appropriate method to capture the full market value of PPL's use of state lands. The State also contends that this method accurately reflects the general approach of trust land leasing by considering the productive value of the land as used in the determination of agricultural, grazing, geothermal and wind-energy leases. See Admin. R.M. ง 36.25.110(1) (agricultural leases based on a crop share rental basis); Admin. R.M. ง 36.25.110(3) (grazing leases based on the animal-unit-month carrying capacity of the land to be leased or licensed); and Admin. R.M. ง 36.25.406(1)(a)(i) (geothermal lease rates based on percentage of the gross revenues of a project). The State contends that this income-based leasing approach is also supported by State ex. rel . Thompson v. Babcock, 147 Mont. 46, 409 P.2d 808 (1966), and the purpose of the HRA itself. For these reasons, the State argues that the District Court's reliance upon Dr. Duffield's calculations and conclusions was not erroneous. ถ 158 The decision to use the shared net benefits methodology in this case was a conclusion of law which we will review for correctness. Roe Family, L.L.C., ถ 12. The findings in support of the District Court's award of damages will be reviewed for clear error. Baltrusch v. Baltrusch, 2008 MT 245, ถ 44, 344 Mont. 489, 190 P.3d 1034. ถ 159 Here, the District Court did not err in its decision to rely on the shared net benefits methodology presented by Dr. Duffield. First, we agree with the State that it is proper to take account the productive value of the land in this case in order to arrive at a figure for the fair market value of PPL's use of state-owned riverbeds. At trial, the State presented evidence that DNRC already bases the rates for agricultural and wind leases on the productive value of the land. The statutes and administrative regulations concerning agricultural, grazing, and geothermal leases bolster this argument. Second, there is no bar under Montana law for basing an award of damages on the profits made by PPL. As noted repeatedly in this Opinion, the State/Land Board is under a fiduciary duty to obtain full market value for the use of state lands. The HRA specifically provides that the determination of full market value for the hydroelectric use of state lands is to be carefully ascertained from all available sources. Section 77-4-208, MCA. Income-based leasing is an appropriate methodology to use in calculating damages in this case. See Babcock, 147 Mont. at 52-54, 409 P.2d at 811-12. Pritchard and Goodover are inapposite because they involved damages for wrongful occupation of property, as opposed to damages based on failure to provide the State compensation as required under the Montana Constitution. ถ 160 In determining the productive value of the state-owned lands for the purposes of calculating damages in this case, it was not erroneous for the District Court to rely on Dr. Duffield's method of taking into account the profits of PPL's hydroelectric projects, and then sharing those profits, or benefits, with the State based on its percentage of ownership of the project sites. Indeed, even though Saleba disagreed with the approach of Dr. Duffield, he conceded at trial that this methodology could be used in this case for purposes of assessing past damages. On direct examination, Saleba testified as follows regarding Dr. Duffield's method which he referred to as the profitability method: Also, on that profitability method I couldn't figure out a way to do this prospectively. It seemed like one of the things that the Court is going to be challenged with for PP&L Montana is the amount breakโor going back to 2000, as well as coming up with the charge going forward. And, you know, you could arguably use the profitability method to go back and figure out what the profitability was from 2000 to 2006 or 2007. I don't know how you use the profitability method to go forward. (Emphasis added.) ถ 161 Technically speaking, the methodology relied upon by Dr. Duffield is not what is generally termed the shared nets benefits analysis. This method was described in Portland Gen. Elec. Co., 20 F.E.R.C. ถ 61294, 1982 WL 40297 (1982), working: by comparing the cost of producing power at the project being evaluated with the cost of producing an equivalent amount of power at a hypothetical next-best alternative project. The difference in costs is referred to as the net benefit of the project being evaluated. The net benefit is then allocated between the parties intended to benefit from the project. Portland General, 20 F.E.R.C. ถ 61294, ถ 61563, 1982 WL 40297 ; see also Pend Oreille, 135 F.3d at 609. ถ 162 Dr. Duffield did not strictly follow this approach, because he did not consider the next available alternative to hydroelectric generation. Instead, Saleba's characterization of Duffield's approach as a profitability approach is indeed more accurate. See Portland Gen. Elec. Co., 12 F.E.R.C. ถ 63055, ถ 65217, 1980 WL 24161  (discussing the profitability method). However, the approach was appropriate here because the net benefits from PPL's projects for the years 2000 to 2007 are already known and are not based upon speculation. See Portland Gen. Elec. Co., 12 F.E.R.C. ถ 63055, ถ 65223, 1980 WL 24161  (noting that the profitability method is appropriate when actual cost figures are available for a given project). ถ 163 Moreover, we conclude that the District Court's findings of fact in applying this method were not clearly erroneous. Dr. Duffield's profit figures were all provided by PPL or taken from documents which PPL publicly filed. The inclusion of the below the dam acreage in this case was not clearly erroneous because ง 77-4-202, MCA, of the HRA specifically defines power site as including each separate tract of [state-owned] land which will become part of the reservoir and which in and of itself makes an essential contribution to the value of the power site as a whole of not less than 5% of the entire value of such power site. The inclusion of the below the dam acreage was contemplated within the plain meaning of this statute, and it was not clearly erroneous for the District Court to include it in its calculation of damages. ถ 164 As PPL notes, Dr. Duffield's approach considered the total profitability of PPL's facilities in Montana, but did not deduct PPL's expected rate of return on equity prior to an accounting of the net profits. PPL argues that under approved FERC methodology only profits earned above a company's expected rate of return on equity should be shared with the landowners. PPL urges this Court to remand this issue to the District Court for a recalculation of damages under Portland Gen. Elec. Co., 12 F.E.R.C. ถ 63055, 1980 WL 24161 and Mont. Power Co., 38 F.P.C. 766, 1967 WL 113478 (1967), whereby the District Court would only consider sharing those profits over and above PPL's expected rate of return on equity. [13] PPL argues that Dr. Duffield's methodology in this regard is not supported by the case law and that it was error for the District Court to rely upon it. ถ 165 Although PPL is correct in noting that Dr. Duffield's methodology is unique, it has failed to demonstrate how it was incorrect for the District Court to rely upon this methodology as a matter of law. At trial, Dr. Duffield acknowledged that his methodology was singular and unique, but presented a rationale for his departure from the approaches in Portland Gen. Elec. Co. and Mont. Power Co. The utility companies in both of those cases were regulated entities who were granted monopolies as well as a guaranteed a rate of return by the state's ratepayers. In exchange, the regulated utilities provided energy at a guaranteed rate for the consumers. Dr. Duffield referred to this as a social contract between the utilities and the rate-paying public. When considering the shared nets benefits or profitability analysis in this type of context, deducting the ratepayer's return on equity was an appropriate consideration because the regulated utilities are not granted a level of profitability above and beyond the guaranteed rate of return. ถ 166 Here, by contrast, PPL is an unregulated utility and its rate of return is determined by market forces. Although PPL is not guaranteed a rate of return by Montana's ratepayers, there is no ceiling on the amount of profits that PPL can make in the unregulated market. If the return on equity of PPL's private investors is deducted before assessing PPL's profitability, the private investors are allowed to reap the benefits of any windfall profits before sharing a fair portion of them with the Stateโeven though the stateโowned land makes the hydroelectric facilities possible and contributes greatly towards their profitability. ถ 167 Second, Dr. Duffield explained that the riverbeds' status as trust lands required a methodology which properly took into account the State/Land Board's obligation to administer and dispose of those lands for the benefit of the people of Montana. Dr. Duffield reasoned that allowing private investors to deduct their rate of return prior to assessing PPL's net profits, would run afoul of this principle. For these reasons, Dr. Duffield employed his unique methodology and it was adopted by the District Court. ถ 168 PPL clearly disagrees with Dr. Duffield's methodology. Yet aside from referring to the Mont. Power Co. and Portland Gen. Elec. Co. cases and arguing that Dr. Duffield's methodology was unprecedented, PPL does not show why, under the circumstances and evidence presented to the District Court, this methodology was incorrect as a matter of law. Given the unique circumstances before the District Court, and PPL's status as an unregulated utility operating on public trust lands, the District Court did not err as a matter of law in refusing to deduct a rate of return on privately-held equity prior to assessing PPL's profitability. Accordingly, we find no legal basis upon which to reverse the District Court's decision in this regard. ถ 169 Finally, the District Court held that the terms of any future lease, including the calculation of rent, must be approved by the Land Board. The case sub judice is concerned solely with damages based on PPL's failure to compensate the State/Land Board for the use of public lands; thus, the damages in this case are past damages. The methodology applied by the Land Board to the terms of a future lease may or may not be the same methodology used by the District Court in calculating damages in this case. ถ 170 In closing, we take note of the fact that several amici in this case, including the Montana Water Resources Association, the Gallatin Agricultural Irrigators, and the Montana Farm Bureau Federation, have expressed concern that our decision here will have a negative impact on their ability to appropriate water from rivers. While we do conclude that the state-owned riverbeds are public trust lands and that PPL does not have a right to use those riverbeds for free, this does not imply that all other water users will be assessed a fee for usage in the same manner as PPL. As Article X, Section 11(2) of the Montana Constitution makes clear, [n]o such land or any estate or interest therein shall ever be disposed of except in pursuance of general laws providing for such disposition, or until the full market value of the estate or interest disposed of, to be ascertained in such manner as may be provided by law, has been paid or safely secured to the state. In other words, the Legislature may pass general laws providing for the use of state-owned riverbeds by various users of water. See e.g. Norman, 182 Mont. at 444, 597 P.2d at 718. In this case, the HRA was the general law which the District Court used to assess damages because it specifically provided for the disposition of state-owned lands occupied by PPL's facilities. Other general laws may (or may not) provide an assessment method for irrigators, stockmen, recreationists, and other water users, in a manner that takes account of the public trust with respect to these different classes of usage. While the Land Board clearly has a fiduciary duty to administer Montana's riverbeds in the public interest, the Court's decision today is cabined to the specific facts of this case and the applicable provisions of the HRA.