In Re the Complaint Regarding the Annexation of a Portion of the Service Territory of People's Cooperative Power Ass'n

470 N.W.2d 525, 1991 Minn. App. LEXIS 468, 1991 WL 75257

• Court: Court of Appeals of Minnesota
• Decided: May 14, 1991
• Docket: C1-90-2485, C1-90-2499
• Status: Published

Opinions

OPINION

CRIPPEN, Judge.

The City of Rochester appeals the Minnesota Public Utilities Commission’s determination that it must pay compensation to a rural electric cooperative pursuant to Minn. Stat. § 216B.44 (1988). We affirm.

FACTS

In 1987, the City of Rochester annexed two subdivisions (North Park and North Park II) covering an area previously within the electric service territory of People’s Cooperative Power Association. Rochester then began extending electric service into North Park. The co-op filed a complaint with the Minnesota Public Utilities Commission seeking compensation due to a rural cooperative when part of its service territory is taken over by a municipality.

In 1974, the Minnesota legislature established service regions for electric utilities. 1974 Minn.Laws ch. 429, §§ 37-44 (codified at Minn.Stat. §§ 216B.37-.44 (1988)). Annexation by a city of any tract within another utility’s assigned service area does not affect the existing utility’s right to serve the area unless the municipality elects to purchase the existing utility’s facilities. Minn.Stat. § 216B.41. Compensation for the existing utility’s facilities is governed by Minn.Stat. § 216B.44, which provides in part:

[Wjhenever a municipality which owns and operates an electric utility * * * extends its corporate boundaries through annexation * * * the municipality shall thereafter furnish electric service to these areas unless the area is already receiving electric service from an elec-trie utility, in which event, the municipality may purchase the facilities of the electric utility serving the area. The municipality acquiring the facilities shall pay to the electric utility formerly serving the area the appropriate value of its properties within the area.

(Emphasis added).

The City and intervenor Minnesota Municipal Utilities Association (MMUA) contend no compensation is due because the co-op had no customers in the North Park subdivisions at the time annexation occurred. It is undisputed, however, that the co-op has made investments enabling it to serve the area. The Minnesota Rural Electric Association (MREA) intervened on behalf of the co-op.

Following a contested case hearing, the administrative law judge determined the compensation owed the co-op. Taking into account the co-op’s system costs which would be recovered by sales of services in the annexed area, its costs saved by giving no service in the area, and the loss of anticipated margins in future sales of services to the North Park subdivisions, the judge determined appropriate and reasonable compensation of $136,392. The commission affirmed this decision. In addition, the commission granted an award of $11,-644 for higher power acquisition costs associated with the co-op’s purchase of a volume of power less than would be. needed to provide services as expanded into the North Park subdivisions. The City and MMUA appeal.

ISSUES

1. Must a municipality compensate an electric utility for the acquisition of service area even though the utility has no customers or facilities in the area?

2. Did the Minnesota Public Utilities Commission properly compute an award of compensation for investments establishing a utility's capacity to provide future electric service in newly annexed territory?

ANALYSIS

1. When statutory interpretation is at issue, a reviewing court is not bound by an agency’s determination. In re Hibbing Taconite Co., 431 N.W.2d 885, 889 (Minn.App.1988). The agency interpretation is entitled to some deference where “(1) the statutory language is technical in nature, and (2) the agency’s interpretation is one of longstanding application.” Id. (citation omitted).

The City and MMUA ask us to reconsider and reject a 1990 decision of this court holding that an area is “receiving electric service,” so that compensation is due, if the utility is “capable of providing [the area] with service.” In re Kandiyohi Cooperative Electric Power Ass’n, 455 N.W.2d 102, 105 (Minn.App.1990), pet. for rev. denied (Minn. Apr. 27, 1990).

In Kandiyohi, the City of Willmar proposed development of services in a newly annexed area without compensation to a rural cooperative.¹ It was undisputed there were no customers in the area purchasing service at the time it was annexed by Willmar. The commission concluded that furnishing electric service in the area was synonymous with a utility assigned to the area having developed facilities making it “capable” of providing service in the area. Kandiyohi, 455 N.W.2d at 103-04. This court affirmed the commission and accepted its position that any alternative construction of the statute’s compensation provisions would thwart planned investments by rural cooperatives. Id. at 105.

Kandiyohi was founded on an analysis of the language of section 216B.44. Under that section, in order for a municipality to furnish service in an area already “receiving electric service,” it must purchase the “facilities” of the utility serving the area. Minn.Stat. § 216B.44. The commission is empowered to “fix and determine the appropriate value of the property within the annexed area” in the event negotiations between the parties fail. Id. Because the statute provides for recovery of the value of properties within the annexed area, and requires compensation only when an area is receiving electric service, the City and MMUA contend that compensation is not due when no customers are receiving service in an area annexed by the City. We concluded in Kandiyohi, however, that the concept of “receiving service” included the capability to provide service because of investments by the rural cooperative outside the annexed territory. Kandiyohi, 455 N.W.2d at 105.

We find merit in this decision and decline to depart from it. The rationale of the commission in both Kandiyohi and the immediate proceedings reflects a proper application of the statutory compensation provisions. The commission’s interpretation encourages rural cooperatives to make investments necessary to provide power throughout their service territory. Because power plants require years of planning, utilities must be willing to make investments long before actual need. Moreover, compensation is needed to protect member customers, lenders and investors whose prior investments are rendered less usable and more expensive because of the loss of an opportunity to expand services in an annexed area.

The compensation statute governs a municipality’s choice to “purchase the facilities of the electric utility serving the area.” Minn.Stat. § 216B.44. Although the statute also describes the compensation requirement in terms of payment for “properties within the area,” we decided in Kandiyohi and ratify here the conclusion that the scope of a purchase extends to facilities built to enable service in the area but not found within it. Although this sacrifices regard for the literal language on the location of purchased properties, it avoids the unreasonable result of permitting acquisition without compensation for facilities built as part of a services plan which as a matter of fact contemplates service in the area.² Section 216B.44 requires payment of these facility acquisition costs. Moreover, the commission view conforms to the express legislative plan, partly for encouraging facility development, to create exclusive geographic service areas in the state. Minn.Stat. § 216B.37 (1988).³

The City observes that the commission decision imposes a heavy cost on municipalities determined to extend municipal utility services to newly annexed territory. The City also acknowledges, however, that this cost is appropriate where a rural cooperative already serves customers in the annexed area. What is material is not the City’s cost, but the justness of compensation awarded to the rural cooperative. Should a cooperative such as respondent be given no compensation, it suffers a waste of investments. Moreover, as the commission contends, a bright line rule prohibiting compensation where no customers are found invites gerrymandered annexation which that is designed to avoid costs and may cause a severe loss of rural cooperative investments.⁴

2. The MMUA contends that even if compensation is due to the co-op, the commission erroneously calculated the amount of the award. This court may reverse factual determinations of an administrative agency if they are:

(a) In violation of constitutional provisions; or

(b) In excess of the statutory authority or jurisdiction of the agency; or

(c) Made upon unlawful procedure; or

(d) Affected by other error of law; or

(e) Unsupported by substantial evidence in view of the entire record as submitted; or

(f) Arbitrary or capricious.

Minn.Stat. § 14.69 (1988) (scope of judicial review).

In determining the amount of compensation for an electric utility’s facilities, the commission

shall consider the original cost of the property, less depreciation, loss of revenue to the utility formerly serving the area, expenses resulting from integration of facilities, and other appropriate factors.

Minn.Stat. § 216B.44 (1988).

The MMUA first challenges the use of “loss of revenues” in calculating compensation, arguing that there can be no lost revenues where there are no present customers. In 1988, an administrative law judge denied the City’s motion for summary judgment and determined that compensation should take into account none of the specific factors mentioned in the statute, but only “other appropriate factors.” The commission affirmed the denial of summary judgment, but specifically stated in its order that the parties should présent evidence on all four statutory compensation factors. The commission calculated final compensation to the co-op of $136,392 by employing a valuation method taking into account loss-of future revenues.

We find no error in the MPUC’s consideration of the “loss of revenues” compensation factor. Initially, we observe that any appropriate consideration of revenue losses will look to future expectations, not past revenues only. In addition, nothing in the rationale of the compensation statute precludes factfinding using loss of anticipated future revenues as a tool to determine waste of investments outside the annexed territory caused by the loss of part of the utility’s service territory. The commission determined that lost revenues for services to be sold in the affected area demonstrated both (1) lost recovery of costs associated with facility development in contemplation of services in the area, and (2) margin losses that would increase the cost of services and decrease the real value of facilities for other patrons. As indicated in the discussion which follows, these findings were supported by substantial evidence.

The commission’s findings regarding lost revenues demonstrated use of the so-called “expense residual” method to determine damages. The MMUA contends the employment of this method was error. Neither the City nor the MMUA offered evidence in the case on the amount of compensation. The MREA offered testimony of Dennis Eicher, and compensation as calculated by Eicher was approved by the judge and the commission. Eicher employed the expense residual method, which attributes a portion of system-wide expenses of the utility to the service area it has lost, and subtracts from that figure the cost savings connected with not having to provide services to that area.⁵

This method did not give the rural cooperative an award based on the value of its franchise, but rather compensated it for the investment or expense loss attributable to the loss in its service jurisdiction. Also, the expense residual method permitted recovery for loss of real investment value attributable to a smaller customer base. The MMUA argues that the Department of Public Services offered an alternative means to calculate compensation that would have been preferable. The judge noted, however, that this expert’s compensation approach neglected to consider major distribution circuits and other system-wide facilities which were sized to serve future customers, including those in the annexed area, and which will suffer a diminished value with the loss of the North Park service territory.

The City also contends the record does not include proof that the investments of the rural cooperative were made specifically to fulfill a plan for services in the North Park subdivision. The judge and commission had before them evidence as to the time and nature of prior investments of the cooperative and planning decisions of the cooperative from time to time. These matters were also considered by the expert witness who testified on system-wide expenses of the cooperative. The evidence was substantial enough to permit the conclusions of the judge and commission that investments were made to permit services expected to be sold in the North Park subdivisions. The MMUA further alleges that the expense residual formula omitted capital investments needed to provide services in the area. To the contrary, the evidence utilized by the commission and the judge took into account the amortized cost of providing service in the area.

Finally, MMUA questions the sufficiency of evidence for commission findings that loss of service territory will increase the co-op’s costs for acquiring power from its provider. $11,644 was awarded as compensation for these costs. Although it is speculative to say when and in what form the higher costs will be suffered, the evidence permits a finding that inevitably the provider will have higher per unit costs because it sells fewer units of power, and that this experience will be reflected in higher distribution prices.

DECISION

The commission did nor err in determining that compensation may be due to a rural electric cooperative even where there are no customers in the annexed territory. Moreover, the commission properly compensated the co-op for investments made in anticipation of providing service in the North Park subdivisions.

Affirmed.

1 . The MMUA, in addition to asking that we reject the Kandiyohi case, also contends the case is distinguishable because it dealt with the rights of the parties before compensation was determined, rather than an actual award of compensation. In Kandiyohi, the MPUC enjoined Willmar from providing interim service to newly annexed territory until it negotiated acquisition of the rural electric co-op’s facilities. Kandiyohi, 455 N.W.2d at 104. We find no merit in the suggested distinction. Kandiyohi dealt squarely with the application of section 216B.44 and held that the municipality had to negotiate compensation for the acquisition before it could provide service in an area where no customers previously had been served. Id. at 105.

2 . While critical of compromising the literal statutory language, the dissenting opinion only states an alternative factual analysis to govern payment for facilities not literally "within" the service area. This analysis also rejects a literal construction of the statute. The dissent suggests that not all facilities considered here by the commission were duly "stranded” by the loss of the annexed service area. In fact, major facility construction by the co-op bordered the annexed area. More importantly, the commission measured compensation due by focusing on whether investments of the rural co-op were made in anticipation of furnishing services in this area; it then examined the adverse effect on these investments by taking the area from the co-op’s service territory. Commission findings on the scope of plans by the co-op in constructing facilities were supported by substantial evidence, and we are neither permitted nor able to devise a useable alternative identification of facilities to be considered in the commission’s task of determining the proper acquisition cost.

3 . The statute declares in full;

It is hereby declared to be in the public interest that, in order to encourage the development of coordinated statewide electric service at retail, to eliminate or avoid unnecessary duplication of electric utility facilities, and to promote economical, efficient, and adequate electric service to the public, the state of Minnesota shall be divided into geographic service areas within which a specified electric utility shall provide electric service to customers on an exclusive basis.

4 , Relators have argued extensively on the basis of decisions in other jurisdictions. Our review of these cases indicates many of them involve provision for transfer of service areas without compensation guarantees such as the one contained in the Minnesota statute. See e.g., Appleton Waterworks Co. v. Railroad Comm’n, 154 Wis. 121, 136-38, 142 N.W. 476, 480-81 (1913) (no compensation for loss of service territory under Wisconsin statutory scheme). Others lend support for the commission position that compensation for facilities includes loss of value to facilities outside the transferred area. See e.g., Indiana & Michigan Elec. Co. v. Whitley County Rural Elec. Membership Corp., 160 Ind. App. 446, 453, 312 N.E.2d 503, 508 (1974) (utility entitled to compensation if property outside the annexed territory is rendered less valuable by the loss of the annexed territory).

5 . This method was used by the commission in the another case, In Re Application of the City of Olivia to Extend Its Municipal Electric Service Area into an Area Served by Renville-Sibley Cooperative Power Ass’n, Docket No. E-288, 136/SA-85-93 (June 27, 1986), but has not been reviewed in an appellate decision. In condemnation proceedings, the Minnesota Supreme Court has affirmed proof of damage in the form of value anticipated upon completion of a building project less the remaining cost of completing the work. State v. LaBarre, 255 Minn. 309, 316, 96 N.W.2d 642, 647 (1959).