City of Bend v. Juniper Util. Co.

• Decision Date: 06 April 2011
• Docket Number: No. 02CV0202ST; A137087.
• Citation: 242 Or.App. 9,252 P.3d 341
• Parties: CITY OF BEND, Plaintiff–Appellant Cross–Respondent,v.JUNIPER UTILITY COMPANY, an Oregon corporation; J.L. Ward Company, an Oregon corporation; and Jan L. Ward, Defendants–Respondents Cross–Appellants,andJuniper Water Company, an Oregon nonprofit corporation; Homeowners of Tillicum Village, an Oregon nonprofit corporation; Homeowners of Nottingham Square Association, an Oregon nonprofit corporation; Timber Ridge Homeowners Association, an Oregon nonprofit corporation; Frederick W. Rusch, II; Paul B. Brewer and Donna M. Brewer, Trustees of Brewer Family Trust; Richard R. Reynolds and Joann J. Reynolds, Trustees of Reynolds 1991 Revocable Living Trust; Alfred J. Caputo; Gordon Westergard and Sharon K. Westergard, dba The Pines Mobile Home Park; Jo Ann L. Gamette, Trustee of the Jo Ann L. Gamette Living Trust; Dennis Beltrame, trustee; Margaret Beltrame, trustee; Larry Beser, dba Quail Ridge Mobile Home Park; Kim D. Ward, LLC, dba Crown Villa RV Park, an Oregon limited liability company; Ward Investment Properties, Inc., an Oregon corporation; Kim D. Ward; Mountain High Homeowners Association, an Oregon nonprofit corporation; River Place MHC, a California limited partnership, Defendants.
• Court: Oregon Court of Appeals

242 Or.App. 9
252 P.3d 341

CITY OF BEND, Plaintiff–Appellant Cross–Respondent,
v.
JUNIPER UTILITY COMPANY, an Oregon corporation; J.L. Ward Company, an Oregon corporation; and Jan L. Ward, Defendants–Respondents Cross–Appellants,andJuniper Water Company, an Oregon nonprofit corporation; Homeowners of Tillicum Village, an Oregon nonprofit corporation; Homeowners of Nottingham Square Association, an Oregon nonprofit corporation; Timber Ridge Homeowners Association, an Oregon nonprofit corporation; Frederick W. Rusch, II; Paul B. Brewer and Donna M. Brewer, Trustees of Brewer Family Trust; Richard R. Reynolds and Joann J. Reynolds, Trustees of Reynolds 1991 Revocable Living Trust; Alfred J. Caputo; Gordon Westergard and Sharon K. Westergard, dba The Pines Mobile Home Park; Jo Ann L. Gamette, Trustee of the Jo Ann L. Gamette Living Trust; Dennis Beltrame, trustee; Margaret Beltrame, trustee; Larry Beser, dba Quail Ridge Mobile Home Park; Kim D. Ward, LLC, dba Crown Villa RV Park, an Oregon limited liability company; Ward Investment Properties, Inc., an Oregon corporation; Kim D. Ward; Mountain High Homeowners Association, an Oregon nonprofit corporation; River Place MHC, a California limited partnership, Defendants.

No. 02CV0202ST; A137087.

Court of Appeals of Oregon.

Argued and Submitted Oct. 6, 2010.Decided April 6, 2011.

[252 P.3d 343]

John W. Stephens, Portland, argued the cause for appellant-cross-respondent. With him on the briefs was Esler Stephens & Buckley.Gregory R. Mowe, Portland, argued the cause for respondents-cross-appellants. With him on the briefs were William F. Buchanan, Brad S. Daniels, and Stoel Rives LLP. On the reply brief was James N. Westwood.Before SCHUMAN, Presiding Judge, and WOLLHEIM, Judge, and ROSENBLUM, Judge.SCHUMAN, P.J.

[242 Or.App. 12] Nearly a decade ago, the City of Bend determined that a water and sewer utility, Juniper Utility Company, was not meeting the needs of its customers, so the city filed a condemnation action to take ownership of the utility for public use. The central question at trial was the proper method for determining the fair market value of the utility plant. The trial court applied what is known as the “cost approach” in determining that the fair market value of the plant was approximately $3.3 million. The city appeals, arguing that the court erred in applying the cost approach and that, under the proper test—the “income approach”—the fair market value was actually far less, because the plant had virtually no potential to generate income and, for that reason, no buyer would pay anything for it. Juniper Utility Company and other defendants in the case (collectively “the Utility Defendants”) cross-appeal, arguing that the award of just compensation was in fact too low, and that they were entitled to additional compensation for certain easements as well as further post-judgment interest. For the reasons that follow, we affirm the judgment with respect to the trial court's valuation of the utility plant, reverse with respect to the award of certain severance damages, and remand.

I. BACKGROUND

We take the relevant facts from the trial court's explicit and implicit factual findings, which are supported by evidence in the record. ORCP 62 F (“In an action tried without a jury, * * * the findings of the court upon the facts shall have the same force and effect, and be equally conclusive, as the verdict of a jury.”).¹ To the extent that the parties dispute the particulars or importance of various factual findings, we address those issues in greater detail in later sections of this opinion.

In the 1960s, the Ward brothers began developing various properties in the Bend area. In 1972, two of the brothers, Jan and Kim, incorporated Juniper Utility Company to provide water and sewer services to support the [242 Or.App. 13] family's development projects. Over the years, the Juniper Utility Company system ² evolved into what is now a unique combination of water delivery facilities with a sewage disposal and treatment system. The water delivery facilities include a two-pipe system, one pipe that delivers potable water and another that provides irrigation water. The two-pipe system serves approximately 1,125 customers in southeastern Bend and supplies them with nonpotable irrigation water at an affordable price, thereby allowing them to keep their neighborhoods lush

[252 P.3d 344]

throughout the summer. The sewage collection system, meanwhile, is pressurized by pump stations at customer residences; waste is pumped to a treatment plant for processing, and effluent from the plant is then pumped through pipes and disposed of on land owned by J.L. Ward Company, the successor to the various Ward businesses.

Much of the dispute in this case stems from the fact that Juniper Utility Company was never intended to be an independent profit source for its owners. Rather, from its inception, the Wards viewed it as a project that would support their other profit-making development ventures. Once the utility company was incorporated, various Ward family entities and individuals transferred ownership of an existing treatment plant, water reservoir, and certain pump and well sites to Juniper Utility Company, as well as certain “blanket easements”— i.e., easements to use their land for installation and maintenance of utilities, and to use and maintain certain “ponds.” The utility company, meanwhile, agreed to provide water and sewer services to properties owned by the grantors “on a non-profit basis.”

In addition to those capital contributions—known in utility terminology as “contributions in aid of construction”—the Ward family and its entities also bore the initial cost of expanding the utility infrastructure. When a parcel of land was developed, J.L. Ward Company ³ would subdivide the [242 Or.App. 14] land and then build the utility infrastructure in the common areas or, in some cases, on land dedicated to the public. Juniper Utility Company was then given an easement for its pipes and other facilities. As lots or homes were sold in the development, J.L. Ward Company recouped the cost of the infrastructure as part of the sales price. The utility entered into a series of operating agreements with homeowners associations (HOAs) and with Kim Ward (who developed mobile home and RV parks) that provided that rates would be set at a level necessary to operate and maintain the utilities but that “[n]o accumulations for profit shall be made.” ⁴

For more than two decades, Juniper Utility Company set its own rates for water and wastewater services. In 1998, however, the Oregon Public Utility Commission (PUC) asserted regulatory authority over Juniper Utility Company and held ratemaking proceedings. See ORS 757.061 (describing water utilities subject to financial regulation). In 2000, the PUC entered an order determining “fair, just, and reasonable rates” for Juniper Utility Company's services; those rates were substantially lower than the rates that Juniper Utility Company had been charging its customers.

The way in which Juniper Utility Company was created and operated had a significant effect on the rates set by the PUC. As a general matter, the ratemaking process is intended to provide utilities an opportunity to earn a fair and reasonable return on their investment. Property that the utility receives as a contribution in aid of construction—“CIAC” for short—is not considered part of the utility's investment and is therefore given a value of zero for purposes of calculating the utility's rate base, which is the amount of investment on which a regulated public utility can earn a fair and reasonable return. In setting rates for Juniper Utility Company, the PUC determined that developer contributions—that is, capital contributions from J.L. Ward Company and others to create and expand the utility—were CIAC and would therefore not be considered in calculating a [242 Or.App. 15] reasonable return on investment. As a result, the PUC determined that the total rate base for the utility was less than $100,000. The PUC authorized a 10 percent rate of return, the PUC's generic rate for water utilities, thereby allowing Juniper Utility Company to earn a return of less than $10,000 per year from its rate base.

After its rates were set at that reduced level, J.L. Ward Company, which had paid for necessary maintenance of Juniper Utility

[252 P.3d 345]

Company, stopped supporting the utility. Capital improvements and maintenance were deferred; service was curtailed and became inadequate in many respects. Customers responded with complaints about the utility to the PUC and to the City of Bend. Thereafter, the PUC and the city sought and obtained injunctive relief requiring Juniper Utility Company to provide adequate service. In September 2001, the Bend City Council adopted a resolution of necessity and intent to appropriate the Juniper system property. The city initiated this condemnation action in April 2002. See ORS 225.020(1)(a) (authorizing a city to bring an action for condemnation to “[a]cquire water systems and use, sell and dispose of its water for domestic, recreational, industrial, and public use and for irrigation and other purposes within and without its boundaries”).

The city's condemnation complaint sought to take various Juniper system assets for public use, including pipes, valves, pumps, wells, headgates, hydrants, a wastewater treatment facility, sewer lift stations, and other infrastructure, as well as water rights, real property, and utility easements. During the course of the litigation, the most hotly contested issue was the method of valuation to be used to determine the fair market value that the city should be required to pay for the “utility plant”—that is, “all pipes, valves, pumps, wells, treatment facilities and other infrastructure.”

As later discussed in greater detail, there are three commonly utilized methodologies for appraising the value of plants like the Juniper...