Alaska Public Utilities Commission v. Municipality of Anchorage, 2940

• Decision Date: 11 October 1976
• Docket Number: No. 2940,2940
• Citation: 555 P.2d 262
• Parties: ALASKA PUBLIC UTILITIES COMMISSION et al., Appellants, v. MUNICIPALITY OF ANCHORAGE, a Municipal Corporation, Appellee.
• Court: Alaska Supreme Court

Page 262

555 P.2d 262

ALASKA PUBLIC UTILITIES COMMISSION et al., Appellants, v. MUNICIPALITY OF ANCHORAGE, a Municipal Corporation, Appellee.

No. 2940.

Supreme Court of Alaska.

Oct. 11, 1976.

Jeffrey B. Lowenfels, Asst. Atty. Gen., Anchorage, Avrum M. Gross, Atty. Gen., Juneau, for appellants.

Roger R. Kemppel, Kemppel & Huffman, Anchorage, for appellee.

OPINION

Before BOOCHEVER, C. J., and RABINOWITZ, CONNOR, ERWIN and BURKE, JJ.

BOOCHEVER, Chief Justice.

This appeal concerns the extent of the authority of the Alaska Public Utility Commission ('Commission') to regulate and set rates of a municipally owned public utility. It arises out of the Commission's denial of a rate increase requested by the Municipal Light & Power Department of Anchorage ('M. L. & P.') for the purpose of generating adequate revenues to assure payment of amounts to become due under a proposed bond issue.

The Municipality of Anchorage ('Municipality') filed a complaint in the superior court asking for a permanent injunction and declaratory relief, which was eventually granted. It contended that the Commission generally had no authority to deny a rate increase where the purpose of the rate increase was to prevent the breaching of bond covenants regarding rates and also that the Commission did not have the authority to deny the specific rate increase requested, which was necessary to generate adequate debt service coverage for proposed bond covenants.

The proposed bonds were to contain a provision that rates will generate at least 1.4 times the principal and interest due each year on all bonded indebtedness after necessary expenses of maintenance and operation of the system have been paid, but before depreciation. The last sentence of AS 42.05.431 ('Power of commission to fix rates') states:

A municipality may covenant with bond purchasers regarding rates of a municipally owned utility, and the covenant is valid and enforceable and is considered to be a contract with the holders from time to time of the bonds.

The superior court held that the above section required the Commission to set rates to meet the covenants. This appeal followed and was handled by this court on an expedited basis due to an alleged urgent need for a decision so that it could be determined whether funding for improvements could be obtained. On June 11, 1976, we issued a decision and order (see Appendix 1) which, inter alia, provided that in advance of issuance of bonds, the Commission is not required to grant a rate which may be necessary to meet future bond requirements, but that the Commission must honor covenants contained in revenue bonds actually sold. That is, after there are existing contracts with bondholders, the covenants contained in the bonds must be honored by the Commission. We indicated in our order that an opinion would follow explaining the reasons for our decision.

The case arose when M. L. & P. filed a request on December 15, 1975 for a permanent rate increase of 51.75 percent of the rates in effect prior to July 8, 1975. Before the Commission, M. L. & P. argued that present and future construction had to be financed by marketing a revenue bond issue of $11,000,000.00. It contended that the rates had to be increased by 51.75 percent in order to generate an adequate debt service coverage, equal at least to 1.4 times the annual amount required for payment of principal and interest on the bonds, in order to sell the bonds. M. L. & P. argued that the Commission had no discretion under AS 42.05 and was required to set rates to insure such bond coverage not only for existing bonds, but also so that M. L. & P. could enter into covenants required by the bond market before future bonds are issued.

The Commission, in Order No. 7, denied the full 51.57 percent rate increase requested, although an increase of 35.10 percent of rates charged prior to July 8, 1975 was granted. On March 12, 1976, after the Commission had failed to act on its petition for reconsideration, the Municipality filed a 'Complaint for Declaratory Judgment and Permanent Injunctive Relief', alleging among other things, that the Commission incorrectly interpreted AS 42.05.431 'as not compelling the Commission to respect valid existing contracts between the Municipality and its bondholders.' ¹

On April 20, 1976, the superior court granted the permanent injunction and declared that:

AS 42.05, including AS 42.05.431, requires the defendants to fix rates for municipally owned utilities which are necessary to provide adequate coverage for covenants which the Municipality may enter into from time to time with future bondholders.

The court found that:

1. The Commission used the revenue requirements approach and refused to be bound by the bond coverage covenants;

2. The City relied on AS 42.05.431 in issuing the bonds;

3. The proposed new construction was necessary and desirable;

4. The traditional method of financing such construction is the sale of tax-exempt revenue bonds;

5. The bonds, in order to sell, must contain a coverage covenant that is 'meaningful, unequivocal, and absolute', and must be supported by a 'clean opinion' from the Municipality's bond counsel;

6. The Commission's action prevented issuance of such a clean opinion;

7. This action not only affected the proposed bond issue, but also 'would have a drastic effect on all municipal bonding, and to a certain degree on state bonds'; and

8. The harm would be immediate and would affect the Municipality and electrical consumers in the Anchorage area since the power system would be in danger of being unable to meet increasing demands, creating a greater likelihood of system failures and various forms of power outages.

The Commission appealed from the judgment of the superior court. In order to evaluate properly the questions raised by this appeal, it is necessary to review the history of AS 42.05.431 since its construction is at the core of the issues presented for review. The first Alaska Public Service Commission Act became law in 1959 and included municipal utilities within its coverage, Ch. 199, sec. 3(1), SLA 1959, AS 42.05.640(2). In 1963, the legislature specifically excluded municipal utilities from the regulatory powers of the Commission, leaving it with jurisdiction over privately owned public utilities only, ² Ch. 95, sec. 2, SLA 1963, amending AS 42.05.640(2). Conflicts subsequently arose between municipally owned utilities and other utilities concerning routes that would be utilized and customers that would be served. Two of those conflicts terminated in decisions by this court, namely, Chugach Electric Ass'n v. City of Anchorage, 426 P.2d 1001 (Alaska 1967), and Homer Electric Ass'n v. City of Kenai, 423 P.2d 285 (Alaska 1967). In the opinions in each of those appeals, the court urged passage of legislation pertaining to the relationship between municipal utilities and utilities regulated by the Public Utilities Commission, 426 P.2d at 1004-05; 423 P.2d at 290. Obviously, when utilities duplicate services, the unnecessary cost is reflected in higher rates to the customers. In responding to this problem, in 1970, the leggislature elected, with one significant exception, ³ to subject municipally owned utilities which were in competition with other utilities to the full gamut of regulation which pertained to other utilities. ⁴

Normally, the need for regulation of privately owned public utilities is quite distinct from any need to regulate municipally owned utilities. Both are usually granted a monopoly or at least a partial monopoly for service in certain areas. Without regulation, there would be no control by normal economic competition over the rates charged and the type of service furnished by a privately owned utility. In the case of a municipally owned utility, however, there is a governmental body elected by the people which has the primary responsibility in regard to the operation of the utilities and the rates charged for services. In Alaska, nevertheless, the Public Utilities Commission has been granted the same powers to regulate and control non-exempted municipal utilities as other utilities with the exception of the portion of AS 42.05.431 which states:

A municipality may covenant with bond purchsers regarding rates of a municipally owned utility, and the covenant is valid and enforceable and is considered to be a contract with the holders from time to time of the bonds.

Thus it is the construction of that provision and its relationship to the broad general regulatory powers of the Commission which must be determined in this case.

With reference to the standard to be applied in reviewing its order, the Commission argues that this case involves a complex subject matter and fundamental policy formulation so that its decisions should be reviewed under the 'reasonable basis' test: when there is a reasonable basis for the Commission's interpretation of the statute it must be upheld. ⁵ The Commission argues that the reasonable basis test must be applied here since an administrative agency's interpretation of part of the statute pursuant to which it operates falls within the agency's particular area of expertise.

In Kelly v. Zamarello, 486 P.2d 906, 917 (Alaska 1971), we stated that 'the reasonable basis approach should be used for the most part in cases concerning administrative expertise as to either complex subject matter or fundamental policy formulations.' Where, however, the question at issue concerns constitutional or statutory interpretations having litle to do with the Commission's expertise or particularized knowledge, it is considered to fall into the realm of special competency of the courts. ⁶ Here, as in State v. Aleut Corp., ⁷ we find no reason not to use conventional review and construction techniques as to the meaning of the statute at issue. The question presented for review here is whether AS 42.05.431 limits the statutory authority of the Commission to regulate rates when...