Opinion ID: 751394
Heading Depth: 2
Heading Rank: 2

Heading: Application of the power site formula

Text: 25 Kalispel II 's remand order did not give a detailed description of how the damages formula should be applied, and the parties dispute the court's application of the formula. The Tribe and the United States argue that the district court incorrectly put a cap on the damage award by attempting to avoid an increase in utility rates, and for this and other reasons reached too low a figure. PUD, in its turn, contends that the district court ignored easements, improperly failed to distinguish between tribal and allotted lands, and erred in dismissing its condemnation action. 26 Kalispel II directed the district court to use the power site value of the Indian lands to determine the value of the use of tribal lands as part of the power project, and to establish a reasonable charge based on that value. The district court chose the sharing of the net benefits approach to calculate power site value, citing the Commission's decision in Portland General Electric, 20 FERC 61,294 (1982), 1982 WL 40297  12 n. 28 (F.E.R.C.) (PGE II) (the net benefits approach can be an appropriate method for making an initial determination of annual charges.) In an earlier proceeding in Portland, the Commission characterized the approach as the most reliable and least speculative means of determining a reasonable annual charge for the use of Tribal lands, and described the analysis as determining 27 (1) the cost of operating the ... project, 28 (2) the identity and cost of the next-best alternative, 29 (3) the difference between (1) and (2); i.e., the net benefit, and 30 (4) the allocation of net benefits amongst the parties. 31 Portland General Electric Co., 12 FERC 63,055 (1980), 1980 WL 24161,  14 (F.E.R.C.) (PGE I); see Montana Power Co. v. Federal Power Commission, 298 F.2d 335, 338 (D.C.Cir.1962) (sharing of net benefits method has considerable standing, and, if a particular method of evaluation is to be preferred, that method ... is the one to be used.) The steps can be described as follows: 32 (1) Cost of operations. This step determines the actual cost of owning, operating, and maintaining a hydropower plant. 33 (2) Alternative costs. This step determines what it would cost to generate the same amount of electric energy from a different source, for example, from the least-cost alternative generating plant that could have been constructed in the place of the hydropower project. 34 (3) Net benefits. These are calculated by subtracting the actual cost of the hydropower plant from the estimated cost of the alternative. This net benefits figure is the power site value of the project. 35 (4) Allocation. In this further step, the net benefits are allocated, or shared, between the operator of the project and the owners of the land. Traditionally, net benefits are first divided equally between the landowners and project developers and then, in a second step, the landowner share is apportioned among the various individual landholders on the basis of the percentage of total project lands owned by each. PGE I, 1980 WL 24161 9 23. The end result of the calculation must be an annual charge reasonable under § 10(e). Montana Power, 298 F.2d at 340 (Whether the Commission properly adopted and correctly applied the 'Sharing of Net Benefits' method of computing the additional payment is not the question. The question is, rather, whether the end result is a reasonable one, as the statute requires it to be.) 36 After stating that it would use the Commission's net benefits approach in determining trespass damages, the district court noted that the Commission has designated three purposes in its consideration of annual charges for the use of land: 37 (1) protecting the Act's goals of promoting development of hydroelectric power in the public interest; 38 (2) avoiding an unreasonable increase in the price of power to the consumers; and 39 (3) giving fair compensation to the Indians for use of their lands for the project. 40 (quoting PGE II, 1982 WL 40297 at  5). This the court interpreted as giving the finder-of-fact a reasonable amount of discretion in determining the setting of the rate and the damages due for past trespasses. 41 The parties agree that the Commission has used the formula as described in PGE I and PGE II, but they dispute the district court's application of the separate steps. While this court reviews de novo the determination of the proper elements of a damage award, In re Air Crash Disaster Near Cerritos, Cal., 982 F.2d 1271, 1275 (9th Cir.1992), the actual computation of damages following a bench trial is reviewed for clear error. Howard, 41 F.3d at 530.
42 The United States and the Tribe presented expert testimony from Dr. Gordon Taylor regarding how the Commission has used the power site formula to set annual charges. Dr. Taylor measured the alternative cost of producing the energy at Box Canyon by comparing the cost of the dam with the cost of constructing an alternative generating plant. See PGE I, 1980 WL 24161, (net benefits analysis is intended to determine the dollar advantage of building [the hydropower plant] instead of the next-best source of generation). The district court rejected that testimony and did not use the cost of building an alternative power source as an alternative measure. Instead, the court used the cost of a special firm power rate available to PUD to purchase power from existing projects, believing the result of the other method resulted in too high an award:
43 The U.S./Tribe sought to use as alternative costs, the cost of new plants being constructed while the [PUD] used the preference rate charged public utility districts by the Bonneville Power Administration (BPA). To use the U.S./Tribe's formula would create a massive windfall to the Tribe and result in unreasonable increases in the power rates. 44 The United States and the Tribe claim that it was error to use any measure for alternative costs other than the cost of construction of an alternative source of power. They argue that the district court's only reason for choosing its method of valuation was the court's conviction that the cost of constructing an alternative power source would produce an unreasonably high award. 45 This case, however, is not the standard case, and a review of the record shows that the district court focussed on the facts of the case as well as the Commission's stated purpose to protect ratepayers from unreasonable increases. The district court heard testimony from Dr. Taylor that the Indian lands, located as they were in a thin ribbon or bathtub ring at the top of the reservoir, were incremental to the project, and that the extra power generated from flooding above 2028 feet was incremental or windfall power. The court characterized this as meaning that 46 it does cost a little bit more to produce power above 2028, but it is going to be a relatively small percentage because all of your basic fixed costs have been put in the ground and are there.... [The costs of the additional power] bear a considerably different cost than you would in just getting up to 2028.... 47 The court heard testimony that PUD owned the entire dam site and that PUD bought power from the BPA before and (in a reduced amount) after the dam's construction. The court asked whether the utility could generate power at 2028 feet, and after testimony that it could, characterized the increase as 48 getting to the higher level where your fixed costs are essentially the same and you are really cutting the fat hog because you are up at the upper part where every company wants to be where you are at the maximum just before you hit the point of diminishing returns. 49 The district court characterized this case as unique: All of you have got cases that deal with Government dams, or with other kinds of dams, nobody has a PUD dam that has trespassed on an Indian reservation. We get-you know, this is a virgin case, so that is it. 50 The district judge characterized this case as different because the Indian lands were incremental to the original boundaries of the project, and the power generated by flooding the lands was windfall or extra power. The measure for the alternative cost of the windfall was not the cost of constructing an entirely different alternative project, but the cost of buying extra power from the BPA. If PUD had not trespassed on the Indian lands, it would have had to purchase extra power elsewhere; it would not have had to build an alternative project. Given the flexibility the Commission itself has identified in determining power site value and the statute's requirement that charges be reasonable, it was not clearly erroneous to choose this measure of alternative cost. Kalispel II made no mention of how to implement the details of a power site analysis, and the Commission precedent is sparse and desperately wanting in detail. PGE I, 1980 WL 24161 at  28. Further, the Commission appears to have allowed a similar measure of alternative costs in PGE I when it accepted BPA power rates under an existing contract as a measure of the alternative cost of energy to meet the plant's peaking capacity, i.e., power above and beyond the usual annual production. 1980 WL 24161,  19. 51 The district court did, however, rely almost entirely on cost considerations when explaining why it rejected the estimate by the United States and the Tribe. Nevertheless, the United States and the Tribe must do more than claim that the district court used the wrong measure of alternative cost: they must also show that the resulting amount was unreasonable. While [i]t is the interest of the general consuming public which serves as the paramount concern in determining a reasonable annual charge, the calculation must balance the interests of the consumers, the licensee ... and the Indian landowners. PGE I, 1980 WL 24161 at  3. 52 The United States argues that the charge is unreasonable because it is much lower than the annual charge for the project in issue in PGE I. But in that case, the western half of the dam and reservoir were located on reservation lands, id. at  2, while none of the Box Canyon dam and only a narrow strip of the flooded area included the Indian lands in this case. The rationale adopted by the district court, that the Indian land was incremental to the project and to its production of electricity, is a reasonable basis for distinguishing PGE I. 53 We find it was not clear error to choose the BPA measure for the cost of alternative power.
54 In determining how the net benefits of the incremental power generation should be divided between the flooded lands and the project operator, the district court ruled: 55 3. Share to Land. 56 In several of the FERC cases relied upon by plaintiffs, the share to land has been 50% to the power producer and 50% to the land owners. In all of these cases, the Indians owned some portion of the land underlying the dam and power plant and/or substantial portions of land used for storage of water. This case differs substantially in that all of the land underlying the dam and power station is owned by the District. Furthermore, this is a run-of-the-river dam which means there is no storage capacity and it would be inequitable to allocate 50% to the landowners in this case. The Court has determined under these unique facts that 40% is a more appropriate allocation. 57 The United States and the Tribe argue that the court erred in allocating 40 percent rather than 50 percent to the landowners. 58 The traditional allocation of net benefits under Section 10(e) begins with a division of net benefits into two equal parts; one of these parts is assigned to the landowners, the other to the investors who take the risks associated with developing the site. This first division gives recognition to the fact that there would exist no net benefit without both land and improvements. 59 . . . . . 60 There is good reason for the initial 50-50 sharing of net benefits.... [I]t is the ratepayer who compensates the Company for the risks taken. The ratepayer also pays all capital and operating costs so that, in a very real sense, the ratepayer has assumed the role of financier or entrepreneur.... 61 This division of benefits between the landowners and the consuming public also serves to effect the national policy which favors the development of water power resources. 62 PGE I, 1980 WL at  23- 24; see City of Vanceburg v. FERC, 571 F.2d 630, 635 (D.C.Cir.1977) (one-half of net benefits used to compute dam-use charges). 63 Nevertheless, there is not inherent in this 'method' a necessity that the division be on a 50-50 basis. Montana Power, 298 F.2d at 338 (quotation omitted). In determining that the amount should be so divided, it is not only desirable but from the standpoint of fairness and justice there must be taken into account all of the relevant attendant circumstances including the amount, if any, of the relevant investments by the parties participating. Id. 64 The court thus was required to consider all the facts in evidence regarding the unusual nature of this case. The court therefore did not err by taking into account that the Tribe owned none of the land underlying the dam and power plant and no substantial portion of the land used for storage of water. The Tribe can point to no case involving similar circumstances in which a different division of damages from that ordered by the district court was chosen. We conclude that the district court did not clearly err in allotting 40 percent of the benefits to the flooded land.
65 The final step in allocating net benefits is apportioning the share of net benefits due the land between individual landholders, on the basis of the percentage of total lands owned by each. The district court found: 66 4. Percentage of Land Owned by the Tribe. 67 The District sought to persuade the Court that it should determine the total number of acres from the high water mark (2034) from one side of the river to the other including all the river bed, resulting in a figure of 1.47% representing the percentage of land owned by the Tribe. The U.S./Tribe claimed 13% and attempted as part of their rebuttal to increase that figure to 17%. The Court disallowed plaintiffs' latter figure as being in violation of the Court's pretrial orders and improper rebuttal. On cross examination, the District submitted figures that showed that the portion of the land at issue on the riverbank between 2028 and 2035 was 8.1%. (This was based on a determination of 2,274 acres divided by 186.07 acres held by the United States for the benefit of the Kalispel Indian Tribe and individual allottees.) The Court has determined that the 8.1% figure most closely approaches a reasonable basis on which to determine damages. 68 The determination of the area of the Tribe's submerged land, and the total acreage of the submerged land in the ribbon, is a purely factual question. The Tribe argues that the total acreage of submerged incremental land was not 2,274 acres but 1,105 acres, based on testimony submitted from the 1987 trial. Other testimony, however, supports the finding that 2,274 acres of incremental land was submerged. 69 It is not possible to evaluate the accuracy of the measurements on appeal. The district court made its findings after hearing extensive testimony and evaluating the different methods of measurement. We do not find the result to be clearly erroneous. 70 The Tribe also complains that the district court improperly excluded evidence supporting its alternative calculation. The district court knew of the 13 percent figure arrived at by Dr. Taylor, and refused to allow further testimony from another expert witness using different survey maps, on the ground that it should have been presented as part of the case in chief. The United States and Tribe argued that it was rebuttal evidence. The district court refused to allow the testimony after an offer of proof in which the witness testified that he would estimate the Indian's percentage at 17.8 percent. The district court did not abuse its discretion in excluding the evidence under Federal Rule of Evidence 403, which provides Although relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence. The district court reasonably could have concluded that introducing in rebuttal yet a third, much higher estimate of the percentage of Tribal land would needlessly complicate the issue and unduly delay the proceeding.
71 In its amended judgment, the district court stated that the Tribe's proposed judgment of about $30 million 72 would increase the rates 3.10 mills/kwh. It is doubtful that the District could sell bonds in this amount for a nonrevenue producing purpose or otherwise borrow the money to pay such an outrageous amount. Furthermore, the large commercial user is in a rate-sensitive business and if forced to pay 80% of a $29 million judgment would undoubtedly relocate, thereby depriving the district of its main consumer. 73 The large commercial user referred to was Ponderay Newsprint, which came into PUD's service area in Pend Oreille County in the late 1980s. See City of Seattle v. FERC, 923 F.2d 713, 714-15 (9th Cir.1991). The Tribe argues that these conclusions are not supported by the evidence. Yet the court heard testimony that the newsprint plant might leave if utility rates increased and that the impact of that departure would be severe. The district court thus did not clearly err in its evaluation of this evidence.