Bennett Bear Creek Farm Water and Sanitation Dist. v. City and County of Denver By and Through Bd. of Water Com'rs

• Decision Date: 18 November 1996
• Docket Number: No. 95SC375,95SC375
• Citation: 928 P.2d 1254
• Parties: BENNETT BEAR CREEK FARM WATER AND SANITATION DISTRICT; Meadowbrook Water District; Willowbrook Water and Sanitation District; Cherry Creek Valley Water and Sanitation District; Cherry Moor Water District; Cherryridge Water and Sanitation District; Devonshire Heights Water and Sanitation District; Lakehurst Water and Sanitation District; City of Littleton; North Pecos Water and Sanitation District; Platte Canyon Water and Sanitation District; and Southwest Metropolitan Water and Sanitation District, Petitioners/Cross-Respondents, v. CITY AND COUNTY OF DENVER, a Municipal Corporation, Acting By and Through its BOARD OF WATER COMMISSIONERS, Respondent/Cross-Petitioner.
• Court: Colorado Supreme Court

Page 1254

928 P.2d 1254

BENNETT BEAR CREEK FARM WATER AND SANITATION DISTRICT;

Meadowbrook Water District; Willowbrook Water and

Sanitation District; Cherry Creek Valley Water and

Sanitation District; Cherry Moor Water District;

Cherryridge Water and Sanitation District; Devonshire

Heights Water and Sanitation District; Lakehurst Water and

Sanitation District; City of Littleton; North Pecos Water

and Sanitation District; Platte Canyon Water and Sanitation

District; and Southwest Metropolitan Water and Sanitation

District, Petitioners/Cross-Respondents, v. CITY AND COUNTY OF DENVER, a Municipal Corporation, Acting By and Through its BOARD OF WATER COMMISSIONERS,

Respondent/Cross-Petitioner.

No. 95SC375.

Supreme Court of Colorado,

En Banc.

Nov. 18, 1996.

Rehearing Denied Jan. 13, 1997.

Grimshaw & Harring, P.C., Richard L. Harring, Denver, for Petitioners/Cross-Respondents Bennett Bear Creek Water and Sanitation District; Meadowbrook Water District; and Willowbrook Water and Sanitation District.

Timothy C. Terrill, Janesville, WI, for Petitioners/Cross-Respondents Cherry Creek Valley Water and Sanitation District; Cherry Moor Water District; Cherryridge Water and Sanitation District; Devonshire Heights Water and Sanitation District; Lakehurst Water and Sanitation District; City of Littleton; North Pecos Water and Sanitation District; Platte Canyon Water and Sanitation District; and Southwest Metropolitan Water and Sanitation District.

Parcel, Mauro, Hultin & Spaanstra, P.C., Peggy E. Montano, Denver, David E. Bellack, Basalt, Colorado Board of Water Commissioners Legal Department, Patricia L. Wells, Michael L. Walker, Denver, for Respondent/Cross-Petitioner City and County of Denver.

James G. Colvin, II, City Attorney, Gregory L. Johnson, Assistant City Attorney--Utilities Patricia K. Kelly, Senior Litigation Attorney, Colorado Springs, for Amicus Curiae City of Colorado Springs.

Joseph N. de Raismes, III, City Attorney, Boulder, for Amicus Curiae City of Boulder.

Justice HOBBS delivered the Opinion of the Court.

We granted certiorari to review three questions ¹ regarding the court of appeals decision in Bennett Bear Creek Farm Water & Sanitation District v. City & County of Denver, 907 P.2d 648 (Colo.App.1995). This appeal was brought by municipal and quasi-municipal local governments ² of the State of Colorado (Districts) which receive a supply of water from the Denver Water Board (Water Board) pursuant to distributor contracts. Through breach of contract, tort, and declaratory judgment claims, the Districts sought review of the Water Board's determination of rates and charges for service outside of the City and County of Denver (extraterritorial service). After a lengthy proceeding which included the entry of detailed findings of fact and conclusions of law, the trial court determined that the Water Board had acted properly in a legislative capacity when setting rates and charges for both in-city and extraterritorial water service and rejected the Districts' breach of contract and common law public utility causes of action. The trial court entered judgment for the Water Board on all claims, dismissed the complaint, and awarded costs of suit in the amount of $192,916.34 against the Districts in favor of the Water Board.

The court of appeals agreed with the trial court's rejection of the Districts' common law public utility cause of action, but concluded that the Water Board acts in a proprietary capacity when setting rates and charges for extraterritorial water service. Having decided to remand the case on this basis for further proceedings on contractual grounds, the court of appeals did not reach the award of costs issue.

We affirm the court of appeals decision upholding dismissal of the common law public utility cause of action and reverse the court of appeals decision to remand to the trial court for further rate review proceedings. We remand the case for reconsideration of the cost award in light of Chief Justice Directive No. 85-21.

I.

This appeal continues a long history of cooperation, controversy, and conflict between Denver and certain Denver metropolitan governmental entities which obtain water service from the Water Board.

In Colorado, as demonstrated by the identities of the litigants here, the provision of domestic, municipal, commercial, and industrial water is primarily undertaken by public, not private, entities. Establishment of the citizen-composed Water Board under the Denver city charter was the product of progressive era reform. ³ The Denver Union Water Company, which undertook the Cheesman dam and reservoir project on the South Platte River system ⁴ was one of several privately-owned utility monopolies, including the gas, electric, and tramway companies, whose influence over the affairs of Denver citizens was pervasive in the late nineteenth and early twentieth centuries. ⁵ The reform movement led to Denver's purchase of the Denver Union Water company in 1918. ⁶ See City of Englewood v. City & County of Denver, 123 Colo. 290, 294, 229 P.2d 667, 670 (1951), overruled on other grounds by Board of County Comm'rs v. Denver Bd. of Water Comm'rs, 718 P.2d 235 (Colo.1986). Thereafter, the city devoted itself to securing high quality water supplies from the Fraser, Williams Fork, and Blue River systems. ⁷ See City & County of Denver v. Sheriff, 105 Colo. 193, 196-97, 96 P.2d 836, 838 (1939); City & County of Denver v. Northern Colo. Water Conservancy Dist., 130 Colo. 375, 381-83, 276 P.2d 992, 996-97 (1954).

Although each of the Districts is empowered by Colorado law to appropriate water and to develop its own water diversion, storage, carriage, and delivery system, see §§ 31-35-402(1), 31-15-708, 12B C.R.S. (1986), each has chosen to rely, in whole or in part, on Water Board supplies. See City & County of Denver v. Colorado River Water Conservation Dist., 696 P.2d 730, 741-42 (Colo.1985). In 1939 we recognized Denver's authority to lease water not needed for its immediate use and to receive a financial return therefrom. Sheriff, 105 Colo. at 208, 96 P.2d at 843. Despite recurring attempts to limit Denver water service to the city itself by Denver citizens, Colorado Open Space v. City & County of Denver, 190 Colo. 122, 123, 543 P.2d 1258, 1259 (1975), and the Colorado River Water Conservation District, Colorado River Water Conservation Dist., 696 P.2d at 743, the Water Board has been successful in establishing that its powers include supplying water extraterritorially to the Districts.

Contracts with the Water Board for extraterritorial service are highly prized because of the priority of Denver's water rights, the extent of its waterworks system, and the high quality of its water sources. But the Water Board's power to set rates and curtail deliveries when needed for in-city demands has generated conflict between the Districts and the Water Board despite their commonality of interest in the viability of the city's water supply and waterworks. At the time of trial in 1993 approximately forty percent of Denver's water service was extraterritorial. Colorado recognizes the validity of perpetual term water contracts. See Cherokee Water Dist. v. City of Colorado Springs, 184 Colo. 161, 164, 519 P.2d 339, 340-41 (1974). The Districts' contracts are perpetual.

The steps normally involved in rate determination are establishment of the revenue requirement, a cost-of-service study, the allocation of costs to specific customer groups, and the design of a rate schedule. ⁸ Overall, rates and charges must raise the revenue required to construct, operate, repair and replace the water works, meet bonded indebtedness requirements, pay the overhead and other costs of providing service, and recover an acceptable rate of return on investment. See generally Phillips, supra, note 8 at 301-03. Here, the underlying lawsuit arose from changes that the Water Board made in its utility rate determination methodologies. From the 1960s to the 1980s, in calculating rate base, the Water Board used the "current use" method of allocating water facility plant value by which capital costs were assigned based on water consumption. In 1980, the Water Board changed to the "historic investment" method under which capital costs were allocated on an incremental growth basis. In 1990, the Water Board adopted a version of the historical investment method termed the "split allocation" method, with capital costs being allocated on an incremental growth basis and operation, repair, and replacement costs being allocated on a current use basis. In 1992, the Water Board refined the split allocation methodology, by which capital investment in water facilities is added together and proportionately split between in-city and extraterritorial service based upon 35 years of historical growth and 35 years of prospective growth.

The Districts challenge the Water Board's departure from the current use method in effect prior to 1980. Essentially, the Water Board's revised rates now in effect are intended to reflect the increasing growth in the percentage of water service provided by the Water Board for extraterritorial service as compared to in-city service and to provide Denver with a rate of return on its plant investment for extraterritorial service pursuant to the Water Board's authority and mandate under the city charter. In making its decision following an extensive rate investigation, ⁹ the Water Board concluded that the city charter and the contracts with the Districts allowed and required the Water Board to adjust rates and charges to account for the increasing differential in growth within the Districts as compared to Denver.

Contracts between the Water Board and the Districts incorporate the Denver city charter. Pertinent provisions of the charter include sections C4.14 and C4.18, which empower the Water Board to exercise all authority the city has over the provision of water and the construction, operation, repair and...