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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

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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