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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Municipality of Anchorage v. Regulatory Commission of Alaska (05/08/2009) sp-6371
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
| MUNICIPALITY OF ANCHORAGE | ) |
| d/b/a ANCHORAGE WATER & | ) |
| WASTEWATER UTILITY, | ) |
| ) Supreme Court No. S- 12788 | |
| Appellant, | ) |
| ) Superior Court No. 3AN-05- 11721 CI | |
| v. | ) |
| ) O P I N I O N | |
| ) | |
| REGULATORY COMMISSION OF | ) No. 6371 - May 8, 2009 |
| ALASKA, and the ATTORNEY | ) |
| GENERAL FOR THE STATE OF | ) |
| ALASKA, | ) |
| ) | |
| Appellees. | ) |
| ) | |
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Honorable Philip R. Volland,
Judge.
Appearances: Heather H. Grahame, Dorsey &
Whitney LLP and James N. Reeves, Municipal
Attorney, Anchorage, for Appellant. Robert
Stoller, Assistant Attorney General, and
Steve DeVries, Assistant Attorney General,
Anchorage, Talis J. Colberg, Attorney
General, Juneau, for Appellees.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Carpeneti, and Winfree, Justices.
WINFREE, Justice.
I. INTRODUCTION
The Municipality of Anchorage , doing business as
Anchorage Water and Wastewater Utility (AWWU), operates a public
utility providing water and sewage services in Anchorage.
Because AWWU is a regulated utility, the Regulatory Commission of
Alaska (RCA) must approve any rate changes AWWU proposes.1 In
2003 the Municipality changed its regulations regarding payment
in lieu of property taxes, and in 2004 AWWU applied for a rate
change to cover the increased costs. RCA denied approval of
AWWUs proposed rate increases. The superior court affirmed RCAs
decision on intermediate appeal. Because there is no reasonable
basis in the record for RCAs ruling, we reverse the superior
courts decision and remand for further proceedings by RCA.
II. FACTS AND PROCEEDINGS
A. Rate-Setting Background
Setting the rates a utility may charge its customers is
a two-step process. RCA first determines a utilitys revenue
requirement, the amount of annual revenue a regulated utility
needs to pay its operating expenses and to generate a reasonable
return on investment.2 RCA then determines the rates a utility
may charge to generate that amount of revenue.3
When calculating the revenue requirement, property
taxes are accounted for as operating expenses.4 Property taxes
fund municipal services such as police and fire protection.
Public utilities benefit from these municipal services but do not
pay property taxes. A municipality may require public utilities
to make payments in lieu of property taxes to contribute to the
cost of municipal services. Reasonably calculated payments in
lieu of taxes are also considered operating expenses when
calculating the revenue requirement.5 RCA closely scrutinizes
such payments as transactions between affiliated interests.6
B. Facts
In 1976 the Municipality passed an ordinance requiring
its public utilities to make a payment in lieu of taxes known as
a Municipality Utilities Service Assessment (MUSA). The MUSA
payment was calculated as a percentage of the assessed value of
utility assets, called plant. There are two categories of plant:
non-contributed plant is acquired at some cost to a utility;
contributed plant is donated or acquired through grants from
federal, state, or private sources, requiring no initial
investment of capital by the utility. Under the 1976 ordinance
the assessed value of both contributed and non-contributed plant
was used to calculate the MUSA payment.
From 1976 to 1987 RCAs predecessor, the Alaska Public
Utilities Commission (APUC), approved the Municipalitys MUSA
charges as legitimate operating expenses for AWWUs component
utilities.7 In other words, APUC set AWWUs rates at a level that
allowed AWWU to recoup the MUSA payment cost.8
In 1988 the Municipality changed its MUSA ordinance.
The 1988 ordinance provided for a MUSA payment based on (1) a
percentage of the assessed value of only non-contributed plant
and (2) a gross receipts tax (similar to a sales tax). APUC
allowed the non-contributed plant assessment portion of the MUSA
payment to be computed in AWWUs revenue requirement, but
determined that the gross receipts tax portion of payment
functioned not as an operating expense, but rather as a dividend
to the Municipality.9 Dividends, unlike operating expenses, are
not recoverable from consumers through utility rate adjustments.10
APUC thus prohibited AWWU from increasing utility rates to
recover any gross receipts tax payments to the Municipality.11
The Municipality apparently understood this to mean it could not
collect the gross receipts tax from AWWU, and never did so.
From 1988 to 2003 AWWU made a MUSA payment to the
Municipality based only on the assessed value of non-contributed
plant. Under that arrangement AWWU made substantially smaller
MUSA payments than it would have if either (1) the 1976 ordinance
had remained in effect or (2) the 1988 ordinance had gone into
effect with the gross receipts tax component included.
In 2003 the Municipality passed an ordinance
reinstating the 1976-1987 method of MUSA calculations that is,
MUSA payments were again to be based on the assessed value of
both contributed and non-contributed plant. The Municipality
claimed the change was necessary to address AWWUs substantial
underpayments from 1988 to 2003.
C. Proceedings
In 2004 AWWU filed a request with RCA to raise its
revenue requirement, and therefore its utility rates; about six
million dollars of the request was intended to cover its
increased MUSA payment to the Municipality. By statute RCA must
ensure that public utility rates are just and reasonable,12 and in
2005 RCA decided that allowing AWWU to increase its rates to
cover the larger MUSA payment would be unjust and unreasonable.
RCA gave three reasons for its decision.
First, RCA stated that two APUC decisions from 1989
required denial of AWWUs request. In the Tariff Provisions case
APUC ruled that the costs of excess capacity plant plant not
actually being used to provide utility services could not be
recovered from consumers through utility charges.13 In the
Reasonableness of the MUSA case APUC approved as reasonable the
non-contributed plant portion of the Municipalitys 1988 MUSA.14
RCA interpreted these two decisions as controlling precedents
requiring rejection of AWWUs current rate change request.
Second, RCA rejected AWWUs argument that including MUSA
payments on contributed plant in AWWUs revenue requirement was
reasonable because the MUSA payment is analogous to private
utilities payments of property taxes on contributed plant. RCA
implied but did not explicitly find that AWWU had failed to
prove that private utilities actually pay taxes to the
Municipality on contributed plant.
Third, RCA stated that because the proposed rate
increase would not be accompanied by increased utility services,
it bears the characteristics of a dividend to the Municipality.
In other words RCA viewed AWWUs increased MUSA payment to the
Municipality not as a legitimate business expense, but rather as
an unwarranted transfer of money to the Municipality from AWWU
and ultimately from consumers paying higher utility rates.
AWWU appealed RCAs decision to the superior court. In
June 2007 the superior court affirmed RCAs decision, applying the
reasonable basis standard of review and determining that each of
RCAs three rationales was reasonable. AWWU now appeals the
superior courts decision.
III. STANDARD OF REVIEW
When the superior court acts as an intermediate court
of appeal in an administrative matter, we independently review
and directly scrutinize the merits of the [agencys] decision
without giving deference to the superior courts decision.15 We
apply a deferential reasonable basis standard to conclusions of
law involving the agencys expertise, specialized knowledge, or
fundamental policy.16 Otherwise conclusions of law are reviewed
under the substitution of judgment standard, and we adopt the
rule of law that is most persuasive in light of precedent,
reason, and policy. 17
IV. DISCUSSION
A. RCAs Interpretation of APUC Decisions
Even assuming an agencys interpretation of its own
prior decisions involves the agencys expertise, specialized
knowledge, or fundamental policy considerations, RCAs conclusion
that the two 1989 APUC decisions were binding precedents
requiring the denial of AWWUs rate increase request fails the
deferential reasonable basis standard. Both decisions involved
factual circumstances facially distinct from AWWUs current
request. The validity of a MUSA payment on contributed plant was
not an issue before APUC in either of those decisions.
The Tariff Provisions decision involved excess capacity
plant, or plant not actually being used to provide consumers
utility services.18 APUC determined that the utility should not
be able to recover the cost of acquiring excess assets that are
not used and useful.19 AWWUs current request involves MUSA
payments for plant that is used and useful, not for excess plant.
The Reasonableness of the MUSA decision concerned the
Municipalitys 1988 changes to MUSA calculations.20 The
Municipality changed the MUSA from a payment based on valuations
of both contributed and non-contributed plant to a payment based
only on the value of non-contributed plant, plus a tax on gross
receipts.21 APUC approved the calculation change that excluded
contributed plant, but rejected the gross receipts payment as
unreasonable.22 APUC determined that a MUSA payment calculated on
the value of non-contributed plant is reasonable, but that
determination did not necessarily imply that a MUSA payment
calculated partly on contributed plant would be unreasonable.
RCAs decision conflated those two separate conclusions and
ignored APUCs prior approval of MUSA payments based on both
contributed and non-contributed plant.
The 1989 APUC decisions are not binding precedents
controlling the determination of AWWUs current rate request, and
in fact have no bearing on the rate request at all. RCAs
reliance on them to deny AWWUs current rate request was therefore
unreasonable.
B. RCAs Rejection of AWWUs Tax Equity Rationale
In its Reasonableness of the MUSA decision APUC noted
that although a MUSA payment was not calculated exactly the same
as the property tax payments by private utilities, there is no
requirement that the two types of utilities be treated
identically.23 But the decision also noted that address[ing] a
potential inequity . . . between Municipal and private utilities
weighed in favor of a change in MUSA calculation.24 In other
words tax equity may be a ground for finding a rate increase
reasonable, but increased rates may still be reasonable even
without a tax equity rationale.
AWWU presented records of two utility companies and a
letter from a third, all purporting to show that property taxes
are assessed on private utilities property, whether contributed
or non-contributed. AWWUs evidence was countered by confidential
records appearing to show that the Municipality allowed two
private utility companies to exclude contributed plant from their
tax assessments.25
RCA did not address the factual evidence submitted by
the parties. Without deciding whether private utilities pay
taxes on contributed plant, or whether an increased MUSA payment
would result in more equity between private utilities and AWWU,
RCA rejected the tax equity argument because the Municipality and
AWWU had argued for the exclusion of contributed plant while
defending the 1988 MUSA ordinance, also on tax equity grounds.
However RCA ignored the fact that the 1988 MUSA ordinance also
contained a gross receipts tax component, which APUC rejected.
The Municipalitys position on the current MUSAs potential to
further tax equity is therefore not necessarily inconsistent with
its position on the 1988 MUSA.
We observe that private utilities must pay property
taxes on their contributed plant. Article IX, section 4 of the
Alaska Constitution states that tax exemptions may be granted by
general law.26 The legislature has limited municipal authority to
exempt property from local taxes by listing classes of property
which must or may be exempted.27 Donated property is not one of
those classes.28 The Anchorage Municipal Code likewise does not
exempt donated property from taxation.29 Because RCA
inappropriately relied on the arguments from the 1988 MUSA
modification rather than acknowledging the statutory requirements
for taxation and addressing the merits of the Municipalitys and
AWWUs tax equity arguments, we hold RCAs decision lacked a
reasonable basis.
C. RCAs Determination that the Increased MUSA Bears the
Characteristics of a Dividend
RCA noted that AWWU was proposing a significant rate
increase to pay for the higher MUSA and concluded that because
the increase in the MUSA payment was not accompanied by provision
of more municipal services, the MUSA had the characteristics of a
dividend not recoverable through consumer rates. RCAs language
implies that an increase in MUSA is not justified without a
commensurate increase in the provision of municipal services.
That standard problematically leaves no room for a municipality
to rectify a MUSA that is set too low or, by extension, to
establish a MUSA for the first time.
It is plausible that the Municipality is attempting to
rectify fifteen years of insufficient MUSA payments. RCA made no
explicit findings and apparently did not consider whether AWWUs
MUSA payments actually were insufficient to defray the reasonable
costs of municipal services from 1988 to 2003 or whether the MUSA
payments during that period were significantly lower than taxes
paid by private utilities.
RCA may properly conclude that AWWUs increased MUSA
obligations are like a dividend and may not be funded by an
increase in utility rates.30 But RCA acted unreasonably in
calling the increased MUSA a dividend without making factual
findings to support that conclusion, especially in light of the
fact that APUC had approved the same MUSA formula for eleven
years after it was first instituted in 1976.
V. CONCLUSION
Because RCA: (1) unreasonably believed that its
decision was controlled by 1989 APUC precedents; (2) unreasonably
failed to consider applicable tax law and evidence on whether
private utilities pay property taxes on contributed plant; and
(3) unreasonably concluded without sufficient factual findings
that the proposed 2003 MUSA payment had the characteristics of a
dividend, we hold RCAs denial of AWWUs rate request lacked a
reasonable basis. We therefore REVERSE the superior courts
decision affirming RCAs denial of AWWUs request for a rate
increase. We REMAND for RCA to conduct further proceedings and
make a determination on the merits of the reasonableness of AWWUs
proposed rate increase.
_______________________________
1 AS 42.05.141(1).
2 AS 42.05.141(a)(1)-(3); Re Alaska Elec. Light & Power
Co., 4 A.P.U.C. 352, 353 (Alaska Pub. Util. Commn 1982) (Docket U-
81-44, Order No. 5).
3 Re Alaska Elec. Light & Power Co., 4 A.P.U.C. at 353-54
(Docket U-81-44, Order No. 5 at 2-3).
4 Id. at 354; Charles F. Phillips, Jr., The Regulation of
Public Utilities 259-260 (Public Utilities Reports, Inc. 1993).
5 See, e.g., Re Mun. of Anchorage d/b/a Anchorage Tel.
Util., 2 A.P.U.C. 22, 24-28 (Alaska Pub. Util. Commn 1977)
(Docket U-76-6, Order No. 12 at 3, 6).
6 Re Filing of Tariff Provisions, Mun. of Anchorage d/b/a
Anchorage Tel. Util., (hereinafter Tariff Provisions) Docket U-88-
18, Order No. 14 at 46 (Alaska Pub. Util. Commn 1989) (citing AS
42.05.511(c)). In the instant case, RCA described the standard:
We are required to closely scrutinize
affiliated interest transactions with
utilities to ensure that ratepayers are not
charged a greater amount [than] had the
utility engaged in an arms length
transaction. In this case, we are evaluating
an even closer relationship; one where the
taxing authority and the utilities are one
and the same.
The Municipality argues AS 42.05.511(c) does not apply in this
context.
7 See, e.g., Re Mun. of Anchorage d/b/a Anchorage Sewer
Util., 7 A.P.U.C. 490, 500 (Alaska Pub. Util. Commn 1986) (Docket
U-83-100, Order No. 25 at 10).
8 When we refer to APUC or RCA as approving a MUSA, we
mean it in the sense used here that the MUSA paid by a utility
to the municipality is an operating expense included in that
utilitys revenue requirement. A MUSA payment not approved by
RCA, and therefore not recouped by the utility through its rate
charges, would effectively reduce the utilitys return on
investment.
9 Re Investigation of the Reasonableness of the Mun.
Util. Serv. Assessment, (hereinafter Reasonableness) Docket U-89-
1, Order No.2 at 6-7 (Alaska Pub. Util. Commn 1989).
10 Id.
11 Id.
12 AS 42.05.381(a); AS 42.05.431(a).
13 Tariff Provisions, supra note 9, at 4.
14 Reasonableness, supra note 9, at 4.
15 Alyeska Pipeline Serv. Co. v. DeShong, 77 P.3d 1227,
1231 (Alaska 2003) (citing DeYonge v. NANA/Marriott, 1 P.3d 90,
94 (Alaska 2000); Tesoro Alaska Petroleum Co. v. Kenai Pipe Line
Co., 746 P.2d 896, 903 (Alaska 1987)).
16 Rose v. Comml Fisheries Entry Commn, 647 P.2d 154, 161
(Alaska 1982); see also Jager v. State, 537 P.2d 1100, 1107-08
(Alaska 1975) (applying reasonable basis standard of review to
APUCs decision not to investigate a complaint of rate
discrimination in gas utilitys rate schedule).
17 Alyeska Pipeline Serv. Co., 77 P.3d at 1231 (quoting
Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979)).
18 Tariff Provisions, supra note 9 at 7-13.
19 Id. at 9.
20 Reasonableness, supra note 9 at 2.
21 Id.
22 Id. at 4-7.
23 Id. at 4.
24 Id. at 4-5.
25 We say appearing to show because some pages contained
handwritten adjustments, and because ownership of the contributed
plant was disputed or unclear.
26 According to article XII, section 11, by law means by
the Alaska Legislature.
27 AS 29.45.030, .050.; see also Anchorage Mun. Code
12.15.010 (providing that real property not exempt under the
constitution or laws of the state or the ordinances of the
municipality is subject to taxation).
28 See AS 29.45.030, .050.
29 Anchorage Mun. Code 12.15.010, .015.
30 See Reasonableness, supra note 9 at 6-7.
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