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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Tlingit-Haida Regional Electrical Authority v. State, Alaska Public Utilities Commission (1/12/01) sp-5357

Tlingit-Haida Regional Electrical Authority v. State, Alaska Public Utilities Commission (1/12/01) sp-5357

     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.


             THE SUPREME COURT OF THE STATE OF ALASKA


TLINGIT-HAIDA REGIONAL        )
ELECTRICAL AUTHORITY,         )    Supreme Court No. S-8833,
                              )    S-8834 and S-8843
          Appellant and       )
          Cross-Appellee,     )  
                              )    Superior Court No.
     v.                       )    1JU-94-2131-CI
                              )
STATE OF ALASKA, ALASKA       )    O P I N I O N
PUBLIC UTILITIES COMMISSION,  )
THE CITY OF KLAWOCK, and      )    [No. 5357 - January 12, 2001]
ALASKA POWER COMPANY,         )
                              )        
          Appellees and       )
          Cross-Appellants.   )
______________________________)    


          Appeal from the Superior Court of the State of
Alaska, First Judicial District, Juneau,
                      Larry R. Weeks, Judge.

          Appearances:  Roger R. Kemppel, Kemppel,
          Huffman & Ellis, P.C., Anchorage, and
          William G. Ruddy, Ruddy, Bradley & Kolkhorst,
Juneau, for Appellant/Cross-Appellee.  Martin M. Weinstein,
Assistant Attorney General, Anchorage, and Bruce M. Botelho,
Attorney General, Juneau, for Appellee/Cross-Appellant State of
Alaska, Alaska Public Utilities Commission.  Clyde E. Sniffen, Jr.,
Delaney, Wiles, Hayes, Gerety, Ellis & Young, Inc., Anchorage, for
Appellee/Cross-Appellant City of Klawock.  Robert E. Stoller,
Anchorage, for Appellee/Cross-Appellant Alaska Power Company.  Paul
L. Dillon, Dillon & Findley, P.C., Juneau, and John J. Leary, Jr.,
Smith & Leary, Seattle, Washington, for Amicus Curiae Klawock
Heenya Corporation.  

          Before:  Matthews, Chief Justice, Fabe,
          Bryner, and Carpeneti, Justices.  [Eastaugh,
Justice, not participating.]

          BRYNER, Justice.

  
I.   INTRODUCTION
          Twenty-five years after it created overlapping service
territory between two utilities that later became the Tlingit-Haida
Regional Electrical Authority (THREA) and the Alaska Power Company,
the Alaska Public Utility Commission (commission) eliminated the
overlap in favor of Alaska Power.  THREA appeals, alleging that the
commission's decision is procedurally flawed, is substantively
wrong, is preempted by federal law, and results in a taking of
THREA's property without just compensation.  Alaska Power, the
commission, and Klawock cross-appeal on the takings issue.  We
affirm the commission's decision.
II.  FACTS AND PROCEEDINGS
          This case arises out of Alaska's system of delivering
electricity to its rural areas.  From 1977 until 1997, THREA
operated the electric plant and distribution system in Klawock. 
Initially Klawock and nearby Craig were geographically and
electrically isolated, but in 1989 Alaska Power improved the road
between the two towns and completed a connecting power line.  As
electricity and commerce began to flow along these paths, THREA's
and Alaska Power's overlapping service territories came into
conflict.
          Under AS 42.05.221(a), any electric utility -- private or
municipal -- must secure a certificate of public convenience and
necessity, which defines the utility's service territory.  The
original version of the certification statute -- former
AS 42.05.194 -- applied only to privately held utilities; it
contained a grandfather clause that entitled utilities to receive
certificates of public convenience and necessity for areas that
they were already serving when the statute was passed. [Fn. 1] 
Alaska Power [Fn. 2] had been providing electricity to Craig;
hence, in applying for its certificate under former AS 42.05.194,
Alaska Power requested that its service area include territory
surrounding that town, which it described by certain latitude and
longitude measurements.  In issuing the requested certificate, the
commission [Fn. 3] used the surveyor's system of townships and
ranges to describe Alaska Power's service area, [Fn. 4] explaining
that it did so because accurate "protractions" were not available
for the territory around Craig. [Fn. 5]  As described in the newly
issued certificate, Alaska Power's service area extended beyond the
area it had requested, encompassing the town of Klawock, which
Alaska Power did not serve.
          This situation eventually led to conflicting
certificates.  In 1970, enactment of AS 42.05.221 extended the
original certification requirement to municipal utilities. [Fn. 6] 
In 1972 the town of Klawock, which then operated its own electric
utility, complied with this new statute by applying for a
certificate.  In granting Klawock's application, the commission
noted the overlap with Alaska Power's certificate:  
          The Commission recognizes that the issuance of

a certificate to the City of Klawock to serve the area requested in
its application would constitute an overlap of operating authority
unless additional action is taken.  Accordingly, the Commission
will examine, in the near future, the issue of revoking the
operating authority of [Alaska Power] to furnish electric utility
service in the area to be certificated to the City of Klawock by
this order.
Despite this statement of intent to take action "in the near
future," the commission did not revisit the issue of overlapping
certificates until a quarter-century later, when THREA initiated
the present proceedings.
          THREA entered the picture in 1975, when the Tlingit-Haida
Central Council created the utility as a regional electrical
authority under AS 18.57.  The Tlingit-Haida Regional Electrical
Authority is a nonprofit corporation and a subdivision of the state
that operates small rural electric utilities in Alaska.  THREA's
operations are funded by loans from the Rural Electrification
Administration.  In 1977 THREA purchased Klawock's electric utility
with funds borrowed from the Rural Electrification Administration;
the commission then issued THREA a certificate to provide electric
service to "Klawock and adjacent areas." [Fn. 7]  The commission's
order granting THREA's certificate did not mention Alaska Power's
overlapping certificate, but its silence on this point is hardly
surprising, since no actual conflict then existed: THREA served
Klawock and Alaska Power served nearby Craig through distribution
grids that were physically isolated. 
          That isolation ended around 1989, when the state
completed a new road and electrical intertie between Klawock and
Craig.  Soon after, THREA stopped generating its own electricity
and began buying wholesale from Alaska Power.  THREA also
contracted for Alaska Power to perform maintenance on THREA's
distribution grid in Klawock.  These arrangements left THREA in an
advantageous position.  With wholesale electricity and contractual
maintenance work available through Alaska Power, THREA
significantly reduced the cost of servicing its Klawock customers
-- a large part of its rate base.  Yet since THREA was exempt from
rate regulation, [Fn. 8] it was able to charge rates in Klawock
that were unusually high in comparison to those charged to other
consumers who were connected to Alaska Power's power grid.  In
effect, THREA was able to use its increased Klawock profits to
cross-subsidize electrical service to its more rural, off-grid
customers. 
          Around the time that the intertie went on line, Alaska
Power began serving a few customers within the overlapping
territory.  According to THREA's former general manager, THREA did
not object to Alaska Power's serving these customers.  Eventually,
though, as more Klawock consumers clamored for Alaska Power's
services, THREA felt threatened by unwanted competition.  In
May 1993, THREA sent a letter asking the commission to cut Klawock
out of Alaska Power's territory.  The commission construed the
letter to be a formal petition, and opened a docket.  After
receiving comments from Alaska Power, it denied THREA's petition
without prejudice, finding that THREA had not proved that excluding
Alaska Power from Klawock would be in the public interest.
          Two months later, THREA filed a second petition, renewing
its request to remove the overlap between THREA's and Alaska
Power's service areas.  The commission responded by opening docket
U-94-2 and by formally designating Alaska Power a party to the
proceeding.  The town of Klawock then moved to intervene, and the
commission granted its motion.
          The commission conducted several hearings on THREA's
petition.  At a consumer hearing in Klawock, ten of THREA's Klawock
customers voiced their desire to be switched from THREA's service
to Alaska Power's because Alaska Power's rates for Prince of Wales
Island were significantly lower than THREA's rates for Klawock. 
THREA did not have an opportunity to cross-examine the consumer
witnesses.  The commission also heard evidence concerning THREA's
performance as a public utility: its management and distribution
systems, rates, outages, and system of consumer representation.  
          After taking the matter under consideration, the
commission issued its judgment in Orders Nine and Ten.  Order Nine
laid out the commission's factual findings.  The most significant
of these were: (1) the representation of THREA and Alaska Power
throughout the proceedings provided sufficient due process to allow
the commission to modify both certificates; (2) the Klawock
consumer reaction "demonstrated a level of dissatisfaction with
utility service heretofore unheard of"; (3) THREA's rates were
distorted; (4) THREA's service and rates were unregulated because
it is a political subdivision of the state; (5) unlike most
political subdivisions, THREA was not politically responsible to
all of its customers; [Fn. 9] and (6) since the intertie was built,
THREA has acted largely as a broker for power generated and
delivered by Alaska Power.  In light of these findings, the
commission determined that, under AS 42.05.221(d) and .271,
competition between THREA and Alaska Power is not in the public
interest, and there was good cause for awarding the Klawock
territory to Alaska Power.
          THREA appealed this decision to the superior court,
raising three issues: (1) THREA did not receive due process,
particularly the opportunity to cross-examine the consumers
testifying at the Klawock consumer input hearing; (2) decertifying
THREA amounted to an uncompensated taking of THREA's property; and
(3) the commission's action was preempted by the federal Rural
Electrification Act. 
          On the preemption issue, the superior court ruled that,
by showing that the commission's action may have jeopardized some
of THREA's Rural Utility Service loans, THREA had set forth a prima
facie case of frustration of federal purpose under the federal
Rural Electrification Act.  Accordingly, the court remanded the
case to the commission, directing it to take a "hard look" at the
impact losing Klawock would have on THREA.  On THREA's due process
claim, the court directed the commission to provide THREA an
opportunity to cross-examine witnesses from Klawock.  
          On remand, the commission directed the parties to
resubmit any testimony from the previous hearings that they wanted
the commission to consider; the commission also stipulated that if
Alaska Power resubmitted testimony from prior witnesses who had not
been cross-examined by THREA, those witnesses would have to be made
available for cross-examination at the hearing on remand.  In
addition, the commission scheduled a hearing to take new evidence
concerning the financial impact of removing Klawock from THREA's
territory.
          This hearing produced extensive economic testimony
concerning how the loss of Klawock might affect THREA and its non-
Klawock customers.  Klawock's expert, Loren Uhlenkott, foresaw a
minimal effect; THREA's expert, Dennis Eicher, foresaw economic
ruin.  These different views arose from differing methodologies. 
Uhlenkott began by analyzing THREA's actual performance with
Klawock included in its service area; he then examined THREA's
hypothetical revenue requirements and projected performance ability
with Klawock removed from its certificate.  His hypothetical model
factored in various changes -- efficiencies, accounting procedures,
and a reduced rate of return -- that Uhlenkott believed THREA would
be capable of adopting.  Eicher, in contrast, analyzed two
hypothetical scenarios involving THREA's operations, one with
Klawock and one without; as to both scenarios, he applied identical
assumptions about rate of return, accounting methods, and
management efficiencies, basing these assumptions on THREA's
existing situation.  In other words, Eicher's analysis presumed
that if THREA lost Klawock, it would make no operational changes to
adapt to its new situation.   
          After hearing this evidence, the commission issued its
decision on remand.  As before, it found that the public interest
required that Alaska Power exclusively serve Klawock.  Finding
Uhlenkott's testimony persuasive, the commission concluded that
assigning Alaska Power the exclusive right to serve Klawock would
not frustrate the federal purposes of the Rural Electrification Act
-- subsidizing rural electricity through low interest loans and
loan guarantees -- because THREA's loss of Klawock would not
jeopardize that utility's financial well-being or the Rural
Electrification Act loans that Klawock's physical plant secured.  
          THREA again appealed to the superior court, which
affirmed the commission's decision but found that THREA's loss of
the use of its Klawock facility amounted to a de facto taking that
entitled THREA to "recover fair value for the property taken."  The
court again remanded the case to the commission, directing it to
determine the fair value of THREA's Klawock property. 
          THREA appeals, challenging multiple aspects of the
commission's and the superior court's orders.  Alaska Power, the
commission, and Klawock cross-appeal certain aspects of the
superior court's de facto taking decision.
III. DISCUSSION
     A.   Ripeness
          Because the superior court remanded this case to the
commission for further proceedings, its decision is not an
appealable final order:
          [A] decision of a superior court, acting as an

intermediate appellate court, which reverses the judgment of the
court below or the decision of an administrative agency and remands
for further proceedings, is a non-final order of the superior
court.[ [Fn. 10]]
Nevertheless, we may "treat an appeal improperly brought from a
non-final judgment as a petition for review in order to prevent
hardship and injustice." [Fn. 11]  The remand ordered by the
superior court would focus on the value of THREA's physical plant,
which the commission's certificate modification order effectively
forces THREA to sell.  That value turns on whether or not THREA's
certificate is property for which compensation is due.   If it is,
then a fundamentally different approach to valuation would be
necessary.  Furthermore, if THREA prevails on its federal
preemption and indispensable federal party arguments, the pending
proceedings on remand would be inappropriate.  Given these
circumstances, we conclude that it is "necessary to provide
immediate guidance" on the matters before us, and we choose to
review this case as though it were properly presented through
petitions for review. [Fn. 12]
     B.   Standard of Review
          When, as here, the superior court acts as an intermediate
appellate court, we decide legal questions ourselves and directly
review the agency's decision. [Fn. 13]  We independently review
questions of constitutional law, federal preemption, and
administrative procedure, substituting our judgment for that of the
agency. [Fn. 14]  But when the commission decides issues that fall
within its unique expertise, such as issues dealing with rural
utility policy goals, we defer to reasonable agency determinations
that are  "supported by the evidence in the record as a whole."
[Fn. 15]  We review the commission's findings of fact for clear
error, reversing them only if they are "not supported by
substantial evidence on the whole record." [Fn. 16]
     C.   Modification of THREA's Certificate
          1.   Removal of Klawock from THREA's service area
          Alaska Statute 42.05.271 [Fn. 17] broadly authorizes the
commission to amend, modify, suspend, or revoke a utility's
certificate when it finds good cause to do so in light of the
requirements of public convenience and necessity.  In deciding to
delete Klawock from THREA's service area, the commission relied on
this provision, finding that the requirements of public convenience
and necessity justified the modification.  THREA complains,
however, that the commission failed to give adequate notice of its
intent to modify THREA's certificate and that it improperly forced
THREA to bear the burden of proving the absence of good cause for
the modification. 
          THREA bases these arguments on the specific manner in
which this case arose before the commission.  THREA opened the
commission proceedings with its petition to modify Alaska Power's
certificate by removing Klawock from Alaska Power's service area.
[Fn. 18] In evaluating THREA's request, the commission eventually
began to consider whether a better course might be to modify
THREA's certificate instead by ousting THREA from Klawock.  It
ultimately chose that option.   
          THREA argues that, upon converting the proceeding from
one in which Alaska Power's certificate was at issue to one that
considered modifying THREA's certificate, the commission should
have notified THREA of the change and should have formally shifted
to THREA's adversaries the burden of establishing good cause for
the modification.  THREA reasons that, because the commission
failed to do so, its order modifying THREA's certificate violates
due process and is invalid.
          The commission has never published rules explaining what
burden of proof applies in proceedings before it, but a case
decided by this court and a recent commission decision suggest that
when a proceeding places a utility's certificate at risk of being
unfavorably modified, the usual practice is to assign the burden of
proof to the commission or to a complaining party. [Fn. 19]  Here,
Alaska Power did not formally move to modify THREA's certificate,
and the commission gave THREA no formal notice that the proceedings
had been expanded to encompass such a modification.  Yet the
expanded scope of the proceedings was made unmistakably clear to
all parties at an early stage of the proceedings.  At the August 3,
1994, consumer hearing, commission staff explained that the
commission had four options before it: "1) to maintain the status
quo with regard to the service area; 2) to award the entire service
area to [THREA]; 3) to award the entire service area to [Alaska
Power]; or 4) to divide the service area into two exclusive service
areas."  
          Although the commission reiterated its intent to consider
these options during later evidentiary hearings, THREA never
objected that the option of modifying THREA's petition was not
properly before the commission, never complained that it lacked
prior notice of this option, and never suggested the need for a
formal complaint alleging good cause for modification of its
certificate.  Instead, THREA simply acquiesced to the commission's
characterization of its available options and continued to litigate
the case on its merits. 
          In deciding to modify THREA's certificate, the commission
explicitly determined that all parties were afforded sufficient
notice and opportunity to be heard.  On appeal, THREA offers no
indication of how it might have proceeded differently had it
received more formal notice that its own certificate was at issue
or how such notice might have changed the ultimate outcome of the
proceedings.  Given that AS 42.05.271 broadly authorizes the
commission to modify any certificate for good cause "[u]pon
complaint or upon its own motion," given THREA's actual knowledge,
early on, that the commission would consider the option of
modifying either or both certificates, and given THREA's failure to
voice an objection after it acquired this knowledge, we conclude
that the commission's failure to give THREA more formal notice that
its certificate might be modified amounted, at most, to harmless
error.
          We reach the same conclusion on THREA's claim that the
commission erred in failing to formally shift the burden of proving 
good cause for modification.  Although the commission's decision
makes passing reference to THREA's failure to meet its burden, the
decision also makes it abundantly clear that the commission did not
find this to be a close case that might turn on the allocation of
burdens rather than on positive proof of good cause for
modification.  The commission made strong and specific findings
concerning the undesirability of THREA's continuing to provide
service to Klawock; these findings are supported by substantial,
affirmative record evidence.  And THREA makes no realistic effort
to demonstrate how a formal change in the allocation of burdens
could conceivably have changed this decision. [Fn. 20]  
          Instead, THREA advances two evidentiary points arising
from the superior court's original order on remand.  First, THREA
claims that the commission ignored the superior court's order to
disregard any consumer testimony presented during the first round
of hearings unless THREA was afforded the opportunity for cross-
examination on remand.  But the commission expressly determined on
remand that it would not consider any pre-remand testimony unless
the parties specifically designated the testimony and provided an
opportunity for cross-examination.  THREA infers that the
commission must have disregarded this determination because it
ultimately found that "the public interest requires that the
consumers in Klawock receive electrical service from an entity that
can provide safe, reliable service at a reasonable rate." 
According to THREA, this finding necessarily depends on pre-remand
consumer testimony.  But other evidence strongly supports a finding
that THREA was failing to meet those criteria.  For example, the
record shows that Alaska Power charged significantly lower rates in
locations similar to Klawock, yet Alaska Power performed THREA's
maintenance and repair work in Klawock on a contract basis, and
THREA did little more than broker Alaska Power's electricity. 
These facts alone support a finding that Alaska Power is better
suited to provide Klawock with safe, reliable service at a
reasonable rate. 
          Second, THREA claims that the commission violated the
superior court's order barring it from considering THREA's "postage
stamp" rate structure [Fn. 21] on remand.  But THREA's argument
misconstrues the court's order, which merely directed that, if
other utilities used similar rate structures, THREA's use of a
postage stamp rate would not itself amount to good cause for
modifying THREA's certificate.  On remand, the commission examined
THREA's postage stamp rate structure and found that it unfairly
burdened Klawock residents.  But the commission did not rely
exclusively on this factor in finding good cause for modification;
instead, it considered a host of other factors.  Moreover, the
commission did not find that other utilities used similar rate
structures.  While it heard evidence that Alaska Power, too, used
postage stamp rates, this evidence indicated that Alaska Power
confined this rate structure to contiguous and geographically
similar service areas.  Because Klawock was isolated and
geographically differed from other communities served by THREA, the
evidence concerning Alaska Power effectively distinguished its use
of postage stamp rates from THREA's, demonstrating that THREA's
rates were not in the public interest because they applied
indiscriminately to widely disparate communities.  
          Since neither of these evidentiary points has merit,
THREA has failed to establish that the commission's allocation of
the burden of proof amounted to reversible error.  Accordingly, we
uphold the commission's finding of good cause under AS 42.05.271.
[Fn. 22]
          2.   Methodology of Klawock's expert witness, Uhlenkott
          The superior court's original remand order required the
commission to determine how the loss of Klawock would affect THREA. 
The parties called various experts on this question.  The
commission relied on one of Klawock's experts in particular, Loren
Uhlenkott, to support its conclusion that the federal purpose of
the Rural Electrification Act would not be frustrated if THREA lost
the Klawock service area and to support its original conclusion
that the public interest would not be served by allowing THREA to
continue providing electrical service in Klawock.  The superior
court upheld the commission's reliance on Uhlenkott.  THREA
contests this ruling on appeal.
          THREA claims that in predicting that THREA would be able
to survive financially without Klawock in its service area,
Uhlenkott relied on an analytical model that was so flawed as to
render his expert opinions fundamentally unreliable.  Uhlenkott
compared THREA's actual situation, with Klawock included in its
service area, to a hypothetical situation adjusted to project
THREA's operations without Klawock.  In building this analytical
model, Uhlenkott adjusted many variables relating to THREA's rate
base, most importantly the desired rate of return.  THREA attacks
this approach because it changed several variables at once.  But
according to Uhlenkott, he designed his hypothetical model to
account for real world adjustments THREA would be capable of making
to cope with the loss of its profitable Klawock service area.  In
contrast, THREA's expert, Eicher, assumed that if THREA lost
Klawock, it would make no changes to adapt to offset the loss or
ameliorate its financial situation -- that it would simply continue
to operate just as it had with Klawock.  
          THREA's challenge to the reliability of Uhlenkott's model
posits the validity of Eicher's approach.  But it could just as
easily be argued that the flawed approach is Eicher's.  In reality,
though, neither approach seems so inherently flawed as to be
fundamentally unreliable.  Both experts presented substantial,
albeit opposing, evidence concerning THREA's financial ability to
weather the loss of Klawock.  The commission had the task of
determining the strengths of their competing views and assessing
their relative credibility.  The commission's ultimate decision to
favor Uhlenkott's testimony over Eicher's was not clearly
erroneous.
     D.   Fair Value of Property Taken from THREA
          The superior court ruled that THREA is entitled to
recover fair value for its property in Klawock because the
decertification order effectively prevents THREA from using that
property and therefore amounts to a de facto taking.  The court
ordered the commission to determine the fair value of THREA's
property.  On appeal, THREA contends that it should be compensated
not just for the value of its physical property in Klawock, but
also for the profits it could have made had it continued serving
Klawock under its original certificate.  In essence, THREA asserts
that the certificate itself is valuable property that the
commission has taken without just compensation.  In response,
Alaska Power and the commission do not deny that THREA is due
compensation for its stranded facility.  But they contest THREA's
claim that the proper measure of compensation includes anything
more than the fair market value of THREA's stranded Klawock
facility. 
          The Alaska Constitution's takings clause provides: 
"Private property shall not be taken or damaged for public use
without just compensation." [Fn. 23]  This clause must be
interpreted generously in favor of the property owner; [Fn. 24] by
requiring the state to pay when property is "damaged," and not just
when it is "taken," the clause offers Alaska property owners
broader protection than does the federal Constitution's Fifth
Amendment. [Fn. 25]  Furthermore, under Alaska's takings clause,
any state action that entirely denies a property owner "all the
economically feasible use" of the owner's property amounts to a per
se taking. [Fn. 26]  Here, because the commission's modification of
THREA's certificate had the effect of denying THREA the use of
property dedicated to providing Klawock with electrical service, we
agree with the superior court that the modification is a per se
taking for which compensation is due.
          But we disagree with THREA's contention that the 
property taken includes both its stranded Klawock facility and its
right, under its original certificate, to operate as a utility in
Klawock.  The commission originally granted THREA's certificate
under a statutory structure that allows certificate modification. 
Thus, THREA was on notice that modification in the future was a
real possibility.  Because the commission at all times had the
authority to modify THREA's service area under the circumstances
presented here, THREA owned no property interest against the
commission's regulatory action. 
          This approach finds support in the United States Supreme
Court's decision in Bowen v. Public Agencies Opposed to Social
Security Entrapment. [Fn. 27]  There, the Court considered whether
Congress took private property by eliminating an opt-out provision
in the Social Security Act that allowed voluntarily enrolled states
to withdraw from the Social Security System.  A key ingredient of
the case was that Congress had explicitly retained the power to
alter the terms of the Act.  The Supreme Court ruled that
"contractual rights" conferred under the Act were necessarily
subject to the sovereign power of the United States and "bear[]
little, if any, resemblance to rights held to constitute 'property'
within the meaning of the Fifth Amendment." [Fn. 28] 
Distinguishing between the right to withdraw from the Social
Security program and direct contractual rights or debts against the
federal government, the Court emphasized that Congress had
"reserved" the power to alter the opt-out element of the Social
Security Act. [Fn. 29]
          A certificate of public convenience and necessity
presents a similar situation.  When the legislature passed AS
42.05.271(1), it gave specific notice that the commission could
modify or revoke a certificate of public convenience and necessity
upon good cause shown. [Fn. 30]  Thus, the certificate grants a
utility like THREA no vested right against the commission's
exercise of this regulatory power. [Fn. 31]  Since THREA offers no
convincing authority or reason why a certificate should qualify as
property when the commission exercises a reserved regulatory power
that was a condition of the certificate's original issuance, we
conclude that the commission's decertification order is not a
compensable taking of business rights conferred by THREA's original
certificate. 
          In summary, the commission's action did strand some of
THREA's physical assets.  The superior court correctly recognized
that THREA must be compensated for those assets, and it properly
ordered the commission to determine their value in the next phase
of its proceedings.  But the court did not err in failing to
identify THREA's original certificate as compensable property taken
by the commission's order.  
          One aspect of the takings issue remains to be considered. 
In its cross-appeal, Alaska Power expresses reservations about the
commission's impending determination of the fair market value of
THREA's Klawock facilities.  Fearing that the price may prove too
high, Alaska Power argues that it should remain free to build new
facilities in Klawock, thereby stranding THREA's facilities and
leaving the state with the burden of paying THREA fair
compensation. 
          But in our view, under AS 42.05.221(d) and other
provisions of the Public Utility Act, the commission may direct
that Alaska Power purchase the existing Klawock facilities as a
condition of its exclusive certification.  If Alaska Power
disagrees with the commission's evaluation of these assets, it may,
of course, resort to its administrative appeal rights.  But having
come this far in this process, Alaska Power may not back away from
the obligation to provide service in Klawock or to acquire THREA's
plant, if the commission makes that purchase part of the package.
     E.   Federal Preemption
          THREA's operations as a rural utility are funded by
federal loans issued under the Rural Electrification Act. [Fn. 32] 
The purpose of the Rural Electrification Act is best explained by
section 902 of the Act, which "authorizes and empowers" the
Secretary of Agriculture 
          to make loans in the several States and

Territories of the United States for rural electrification and
. . . for the purpose of furnishing and improving electric and
telephone service in rural areas, as provided in this chapter, and
for the purpose of assisting electric borrowers to implement demand
side management, energy conservation programs, and on-grid and off-
grid renewable energy systems.[ [Fn. 33]]
          In both of its appeals to the superior court, THREA
argued that the commission's decision to modify its certificate
frustrated the purposes of the Rural Electrification Act and was
therefore preempted by federal law.  In THREA's first appeal, the
superior court ruled that THREA had presented a prima facie case of
federal preemption and remanded the case to the commission for a
"hard look" at whether modifications to THREA's permit would
frustrate the federal purpose of the Rural Electrification Act. 
After a new round of hearings, the commission affirmed its initial
decision, ruling that the federal purpose of the Rural
Electrification Act would not be frustrated by removing Klawock
from THREA's service area because the Rural Utility Service's loan
interest would be protected and because THREA would be financially
capable of continuing to serve other rural areas.  The superior
court affirmed these findings in THREA's second appeal.  THREA
challenges the superior court's ruling and argues federal
preemption. 
          The law of federal preemption "is derived from the
supremacy clause of article VI of the federal Constitution, which
declares that federal law shall be 'the supreme Law of the Land;
and the Judges in every State shall be bound thereby, any Thing in
the Constitution or Laws of any State to the Contrary
notwithstanding.'" [Fn. 34]  Thus, state regulation that conflicts
with federal law cannot stand.
          To determine whether Congress has preempted state action
in a particular arena, we "look to the policy, intent, and context
of the federal statute to determine whether application of the
state law would frustrate the operation of the federal one." [Fn.
35]  Generally, we apply a two-step analysis to preemption
questions.  First, we look to see whether Congress has overtly
preempted the subject matter the state wishes to regulate, either
explicitly, by declaring its intent to preempt all state authority,
or implicitly, by occupying the entire field of regulation on the
subject in question. [Fn. 36]  Second, if neither kind of direct
preemption is found, we look to whether federal and state law
conflict in this particular instance.  If state and federal
regulations openly conflict or if state regulations obstruct the
purpose of federal regulations, then the supremacy clause blocks
the state regulation. [Fn. 37]  
          THREA asserts that this latter type of preemption --
frustration of federal purpose -- is at issue here.  According to
THREA, the commission's order deleting Klawock from its certificate
of public necessity and convenience stands "as an obstacle to the
accomplishment and execution of the full purposes and objectives"
of the Rural Electrification Act. 
          In considering this argument, we must "start with the
assumption that the historic police powers of the States were not
to be superseded by the Federal Act unless that was the clear and
manifest purpose of Congress." [Fn. 38]  And we must further
recognize, as the Supreme Court has, that "the regulation of
utilities is one of the most important of the functions
traditionally associated with the police power of the States." [Fn.
39]  
          As we have already pointed out, the Rural Electrification
Act's central purpose is to lend money to promote rural
electrification. [Fn. 40]  In keeping with the Act's purpose, the
United States Supreme Court has described the Rural Electrification
Administration as "a lending agency rather than a classic public
utility regulatory body." [Fn. 41]  Our own decisions have
recognized that the Rural Electrification Act is meant "to provide
electric energy to persons residing in rural areas who were not
able to receive such services from utility companies serving cities
and other populated communities." [Fn. 42] 
          Because the Rural Electrification Act was designed to
promote rural electrification by offering financial incentives to
utilities that serve outlying areas, direct interference with
property mortgaged to the Rural Utility Service could conceivably
frustrate the purposes of the Act.  But legitimate regulation of a
utility that allows the Rural Utility Service and its loan
recipient to recoup their investments, does not.  Thus, as the
United States Supreme Court expressly noted in the context of rate
setting, the Rural Electrification Administration has been
"expected to play a role in assisting the fledgling rural power
cooperatives in setting their rate structures . . . within the
constraints of existing state regulatory schemes." [Fn. 43]  Here,
the fact that this federal role does not act as a substitute for
existing state regulation is demonstrated by Rural Utility
Service's insistence that THREA obtain a certificate of public
convenience and necessity as a condition of receiving its Rural
Electrification Act loan.
          Although courts considering federal preemption under the
Rural Electrification Act in contexts other than rate regulation
have split on the issue, [Fn. 44] we believe that Stilwell v.
Ozarks Rural Electric Cooperative represents the better view.  In
Stilwell, relying on the trial court's determination that a rural
utility would not suffer financial jeopardy if it lost a contested
service area, the Tenth Circuit Court of Appeals held that the
Rural Electrification Act did not preempt state action restricting
the utility's territory, declining "to read the [Rural
Electrification Act] so broadly as to expand the [Rural Utility
Service's] authority beyond that which is . . . 'derivative of the
Administrator's responsibilities for the operation of the loan and
guarantee programs under the [Rural Electrification Act].'" [Fn.
45]
          THREA attempts to distinguish Stilwell, arguing that a
Rural Utility Service officer in that case agreed that loss of the
contested service area would not be harmful to the rural utility's
economic future; in contrast, here, a Rural Utility Service officer
testified that losing Klawock would doom THREA.  But preemption
requires something more than the personal prediction of an agency
official.  For as the United States Supreme Court has noted,
federal officials have not "always welcomed state regulation of
rural power cooperatives, or thought it was a good idea. . . . But,
of course, such expressions of opinion do not constitute sufficient
grounds for pre-emption." [Fn. 46]  In the present case, after
hearing substantial evidence on both sides of the issue --
including testimony from Klawock's expert that favored Alaska Power
-- the commission found that THREA would be capable of surviving
the loss of Klawock.  Faced with conflicting evidence on the
relative merits of different approaches to utility management, we
apply a deferential standard of review and rely on the commission's
considerable expertise in resolving such matters. [Fn. 47]  Because
substantial evidence supports the commission's finding that THREA
will not founder if it loses Klawock, we will not disturb that
finding.  
          Given the commission's findings that THREA's continuing
service of Klawock was not in the public interest, that the loss of
that service area would not jeopardize THREA's ability to serve
other rural areas, and that THREA must be justly compensated for
the federally-financed facilities that the commission's action
would strand, we do not see how the commission's decertification
order frustrates the federal purpose of capitalizing rural
electrification.  Accordingly, we affirm the superior court's
ruling that federal law does not preempt the commission's action. 
     F.   Indispensable Party
          Finally, we turn to the question of whether the Rural
Utility Service was an indispensable party to this action. [Fn. 48] 
Alaska Civil Rule 19 governs courts in deciding whether an absent
party is indispensable to particular court proceedings.  Rule 19(a)
describes when courts must join absent parties, if possible.
          A person who is subject to service of process

and whose joinder will not deprive the court of jurisdiction over
the subject matter of the action shall be joined as a party in the
action if (1) in the person's absence complete relief cannot be
accorded among those already parties, or (2) the person claims an
interest relating to the subject of the action and is so situated
that the disposition of the action in the person's absence may (i)
as a practical matter impair or impede the person's ability to
protect that interest or (ii) leave any of the persons already
parties subject to a substantial risk of incurring double,
multiple, or otherwise inconsistent obligations by reason of the
claimed interest.  If the person has not been joined, the court
shall order that the person be made a party.  If the person should
join as a plaintiff but refuses to do so, the person may be made a
defendant, or, in a proper case, an involuntary plaintiff.  If the
joined party objects to venue and joinder of that party would
render the venue of the action improper, that party shall be
dismissed from the action.
Rule 19(b) explains how courts should proceed when joinder is
impossible:
          If a person as described in subsection

(a)(1)-(2) hereof cannot be made a party, the court shall determine
whether in equity and good conscience the action should proceed
among the parties before it, or should be dismissed, the absent
person being thus regarded as indispensable.  The factors to be
considered by the court include:  first, to what extent a judgment
rendered in the person's absence might be prejudicial to the person
or those already parties;  second, the extent to which, by
protective provisions in the judgment, by the shaping of relief, or
other measures, the prejudice can be lessened or avoided; third,
whether a judgment rendered in the person's absence will be
adequate;  fourth, whether the plaintiff will have an adequate
remedy if the action is dismissed for nonjoinder.  
          Although this rule does not directly apply to
administrative actions, we agree with THREA that it appropriately
balances the equities involved when a case arises without all
necessary parties.  The rule thus provides relevant guidance. [Fn.
49]  Moreover, since administrative adjudications are reviewed by
courts that are bound by Rule 19, the most consistent approach is
to apply Rule 19 at the outset. 
          The parties agree that the Rural Utility Service has
declined to take part in these proceedings and cannot be required
to participate because it is cloaked by the sovereign immunity of
the United States.  Therefore, we look to Rule 19(b) to answer
whether this litigation should have continued, based on: (1) the
prejudice to the Rural Utility Service or the existing parties, (2)
how relief may be shaped to avoid prejudice, (3) adequacy of such
relief, and (4) what remedy is left if the action is dismissed.
          Here, the commission found that its inability to order
the Rural Utility Service to be joined as a party caused
insufficient prejudice to justify dismissing the docket.  In
reaching this conclusion, the commission distinguished City of
Fairbanks v. Electric Distribution System, [Fn. 50] where we ruled
that the Rural Utility Service was an indispensable party in a
condemnation proceeding against property for which it held a
mortgage. [Fn. 51]  We agree with the commission's reasoning.
          Though similar to this case in many ways, City of
Fairbanks is distinguishable because the regulatory context here
allows a remedy to be fashioned that protects the Rural Utility
Service's unrepresented interests.   City of Fairbanks involved a
pure condemnation proceeding; Fairbanks sought to acquire customers
from the densely populated portion of a rural utility's territory,
evidently to add to the service area of its own municipal utility.
[Fn. 52]  In that circumstance, the rural utility and the Rural
Utility Service were the only parties concerned with the provision
of electricity to the rural areas outside the contested service
area.  We thus explained that 
          the United States has an interest in this

litigation that would be adversely affected by a judgment
condemning the electric distribution facilities in the Island Homes
Subdivision.  It is an interest that would not be satisfied merely
by repayment from the condemnation proceeds of the pro tanto
portion of the money the United States has loaned . . . .  The
interest of the United States is not merely that of a money lender
who expects repayment of its loan with interest.  The interest of
the United States is in seeing to it that [the rural utility it has
financed] is able to continue to provide electrical services at
reasonable rates to the rural areas it has undertaken to serve. 
This it may not be able to do if the cream of its consumers of
electrical energy in the densely populated areas is skimmed off by
another utility . . . .[ [Fn. 53]]
          In the present situation, by contrast, the superior court
initially remanded this case so that the commission could take a
"hard look" at how the loss of Klawock would affect THREA's ability
to serve other rural areas.  On remand, the commission then heard
testimony from several experts, including the Rural Utility
Service, regarding THREA's future.  Afterwards, the commission
specifically found that the loss of Klawock would not unduly damage
THREA.  Thus, our concerns in City of Fairbanks were specifically
addressed by the commission.  This effort by the commission
satisfied the four elements of Rule 19(b).
          First, the commission's treatment of this case avoids
undue prejudice to the parties or to the Rural Utility Service,
itself.  THREA points out various problems that might arise by
proceeding without the participation of the Rural Utility Service.
[Fn. 54] In our view, the commission's planned second phase of
hearings is more likely to result in an equitable resolution of the
issues than would a dismissal based on the Rural Utility Service's
absence.  If this action were dismissed, THREA and Alaska Power
would be in direct competition for Klawock customers and there
would be no guarantee that THREA would receive anything for its
facilities if it lost its Klawock business to Alaska Power, its
wholesale supplier.  Under the commission's proposed procedure,
THREA will be able to recoup the value of its Klawock facility,
which will offer it the opportunity to apply that capital to its
Rural Utility Service loans and to investments in other rural
areas.
          The second element of Rule 19(b) -- the commission's
ability to fashion a protective remedy lessening or avoiding
prejudice in the Rural Utility Service's absence -- also supports
the commission's decision to proceed.  In the next phase of its
proceedings, the commission can assure THREA and the Rural Utility
Service alike the opportunity to receive optimal value for THREA's
Klawock property.  We are similarly satisfied that the proceedings
on remand will address Rule 19(b)'s third element by ensuring the
adequacy of the ultimate judgment in the Rural Utility Service's
absence.  
          And turning to the final element of Rule 19(b) -- the
adequacy of the plaintiffs' remedy in the event of a dismissal for
nonjoinder -- we again find little reason to declare the Rural
Utility Service an indispensable party.  In the event of a
dismissal, both Alaska Power and THREA would keep Klawock within
their service territories; unregulated market forces presumably
would decide the fate of THREA's Klawock facility, leaving neither
the commission nor Alaska Power under any obligation to purchase it
in the future.  Because the commission could reasonably deem this
remedy to be undesirable, we conclude that the commission did not
abuse its discretion in ruling that the Rural Utility Service was
not an indispensable party. 
IV.  CONCLUSION
          For these reasons, we AFFIRM the superior court's order
and REMAND this case to the commission for further proceedings
consistent with this opinion.


                            FOOTNOTES


Footnote 1:

     See Former AS 42.05.194 (1964).


Footnote 2:

     The Alaska Power Company was then called the Alaska Power &
Telephone Company.


Footnote 3:

     The Alaska Public Utility Commission was then called the
Public Service Commission.


Footnote 4:

     Townships and ranges are uniform grid blocks measured relative
to a specified point.  Black's Law Dictionary 1266, 1499 (7th ed.
1999).


Footnote 5:

     A protraction is "the drawing to scale of an area of land."
Webster's New International Dictionary of the English Language
Unabridged 1826 (1963).  We interpret the reference to protractions
in the original certificate to mean that the commission had no
detailed surveys of the area Alaska Power requested.  


Footnote 6:

     See Ch. 113, sec. 6, SLA 1970.


Footnote 7:

     As a condition of its original certificate, THREA agreed that
it would be subject to the commission's regulatory powers.  But as
a political subdivision of the state, THREA retained the option of
choosing not to be governed by the commission's rate making power. 
See AS 42.05.711.  In 1990 THREA requested, and the commission
approved, an exemption from rate regulation.


Footnote 8:

     See supra note 7.


Footnote 9:

     THREA is governed by a board chosen by the Tlingit-Haida
Council.  Thus, one must be on the Council rolls even to have
indirect representation on THREA's board.


Footnote 10:

     City and Borough of Juneau v. Thibodeau, 595 P.2d 626, 629
(Alaska 1979).


Footnote 11:

     Id. at 631.


Footnote 12:

     Id.


Footnote 13:

     See Cook Inlet Pipe Line Co. v. Alaska Pub. Utils. Comm'n, 836
P.2d 343, 348 (Alaska 1992).


Footnote 14:

     See id.


Footnote 15:

     Id. (quoting Kodiak Western Alaska Airlines, Inc. v. Bob
Harris Flying Serv., Inc., 592 P.2d 1200, 1203 n.7 (Alaska 1979)).


Footnote 16:

     City of Fairbanks v. Alaska Pub. Utils. Comm'n, 611 P.2d 493,
495 (Alaska 1980).


Footnote 17:

     AS 42.05.271 reads:

          Upon complaint or upon its own motion the

commission, after notice and opportunity for hearing and for good
cause shown, may amend, modify, suspend, or revoke a certificate,
in whole or in part.  Good cause for amendment, modification,
suspension, or revocation of a certificate includes
          (1)  the requirements of public convenience

and necessity;
          (2)  misrepresentation of a material fact in

obtaining the certificate;
          (3)  unauthorized discontinuance or

abandonment of all or part of a public utility's service;
          (4)  wilful failure to comply with the

provisions of this chapter or the regulations or orders of the
commission;  or
          (5)  wilful failure to comply with a term,

condition, or limitation of the certificate.


Footnote 18:

     At the time, THREA did not claim that Alaska Power's
certificate to serve Klawock was invalid.


Footnote 19:

     See North State Tel. Co., Inc. v. Alaska Pub. Utils. Comm'n,
522 P.2d 711, 716 (Alaska 1974) (quoting a commission chairman as
saying, "The Commission's opening case will be presented by . . .
legal counsel for Alaska Public Utilities Commission.  To the
extent of any contested factual issues that will develop in this
hearing, the burden will be on the Commission to establish its
contentions unless otherwise indicated." (alteration in original));
Re: Norgasco, Inc., 9 APUC 446 (May 16, 1989).


Footnote 20:

     To support its argument that misallocating the burden of proof
amounted to reversible error, THREA also cites Olson v. AIC/Martin
J.V., 818 P.2d 669 (Alaska 1992).  But in Olson we remanded for
other reasons without deciding the question of whether
misallocation of the burden of proof was harmless error.  See id.
at 672.  Where substantial evidence has supported a trial court's
ruling, we have not hesitated to affirm the ruling, even though the
court misapplied the burden of proof.  See Kodiak Oilfield Haulers
v. Adams, 777 P.2d 1145, 1150 (Alaska 1989).


Footnote 21:

     A postage stamp rate structure charges all customers the same
rate regardless of the associated cost of serving them.


Footnote 22:

     Our conclusion makes it unnecessary to consider THREA's
challenge to the commission's alternative finding that modification
of THREA's certificate was warranted under AS 42.05.221(d) to
eliminate undesirable competition between utilities providing
identical service.  


Footnote 23:

     Alaska Const. art. I, sec. 18. 


Footnote 24:

     See Anchorage v. Sandberg, 861 P.2d 554, 557 (Alaska 1993)
(citing State v. Doyle, 735 P.2d 733, 736 (Alaska 1987)).


Footnote 25:

     See State v. Hammer, 550 P.2d 820, 824 (Alaska 1976).


Footnote 26:

     See Sandberg, 861 P.2d at 557 (adopting the U.S. Supreme
Court's tests for per se takings).


Footnote 27:

     477 U.S. 41 (1986).


Footnote 28:

     Id. at 55.


Footnote 29:

     See id.


Footnote 30:

     See also AS 42.05.221(d) (authorizing the commission to
eliminate undesirable competition between utilities providing
identical service).


Footnote 31:

      THREA cites Homer Electric Ass'n v. City of Kenai, 423 P.2d
285 (Alaska 1967), to support its position.  But its reliance on
that case is unavailing, for although we recognized in Homer
Electric that "a certificate of public convenience and necessity is
a property right and as such is entitled to protection," the case
dealt with a municipality's outright condemnation of a competing
certificate, rather than its exercise of a reserved regulatory
power.  Id. at 289-90.


Footnote 32:

     7 U.S.C. sec.sec. 901-950.


Footnote 33:

     Id. sec. 902(a).


Footnote 34:

     Bald v. RCA Alascom, 569 P.2d 1328, 1331 (Alaska 1977).


Footnote 35:

     Webster v. Bechtel, Inc., 621 P.2d 890, 897 (Alaska 1980)
(quoting Bald, 569 P.2d at 1331).


Footnote 36:

     See Webster, 621 P.2d at 897-98.


Footnote 37:

     See id. at 897, 900-01; Bald, 569 P.2d at 1331.


Footnote 38:

     Webster, 621 P.2d at 898 (quoting Rice v. Santa Fe Elevator
Corp., 331 U.S. 218, 230 (1947)).


Footnote 39:

     Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm'n, 461 U.S.
375, 377 (1983).


Footnote 40:

     7 U.S.C. sec. 902(a).


Footnote 41:

     Arkansas Elec. Coop., 461 U.S. at 386.


Footnote 42:

     City of Fairbanks v. Electric Distribution Sys., 413 P.2d 165,
167 (Alaska 1966).


Footnote 43:

     Arkansas Elec. Coop., 461 U.S. at 386.


Footnote 44:

     Compare City of Morgan City v. South Louisiana Elec. Coop.
Ass'n, 31 F.3d 319, 321 (5th Cir. 1994) (determining that a
Louisiana condemnation proceeding would frustrate the purpose of
the Rural Electrification Act and so was preempted by federal law)
with Stilwell, Oklahoma v. Ozarks Rural Elec. Coop. Corp., 79 F.3d
1038 (10th Cir. 1996) (holding that condemnation under state law
was not preempted).


Footnote 45:

     Stilwell, 79 F.3d at 1044 (quoting Wabash Valley Power Ass'n
v. Rural Electrification Agency, 988 F.2d 1480, 1489-90 (7th Cir.
1993)).


Footnote 46:

     Arkansas Elec. Coop., 461 U.S. at 386 n.10.


Footnote 47:

     Cook Inlet Pipe Line Co. v. Alaska Pub. Utils. Comm'n, 836
P.2d 343, 348 (Alaska 1992).


Footnote 48:

      We review a trial court's rulings on indispensable party
status for abuse of discretion.  See In Re Pacific Marine Ins. Co.
of Alaska in Liquidation, 877 P.2d 264, 268 (Alaska 1994).


Footnote 49:

      Cf. Hammond v. North Slope Borough, 645 P.2d 750, 766-67
(Alaska 1982); Pan American Petroleum Corp. v. Shell Oil Co., 455
P.2d 12, 16 (Alaska 1969).


Footnote 50:

     413 P.2d 165 (Alaska 1966).


Footnote 51:

     See id. at 168.


Footnote 52:

     See id. at 167.


Footnote 53:

     Id. at 168.


Footnote 54:

     Thus, THREA claims that unless the Rural Utility Service is a
party, THREA may become subject to inconsistent obligations because
its loan agreement forbids it from selling or negotiating the sale
of "any part of [the Klawock physical plant] without prior written
approval" from the Rural Electrification Administrator. THREA also
claims that any order directing it to sell its Klawock facilities
to Alaska Power will be impossible to fulfill without the Rural
Utility Service's blessing.  THREA separately expresses concern
that the Rural Utility Service might be prejudiced because its
interests go beyond those of a mere lender.  But this concern is
addressed by the commission's finding that THREA will be capable of
continuing to serve its other rural territory after it loses
Klawock.