In Re The Validity Of The Power Sales Agreement

• Decision Date: 08 July 2010
• Docket Number: No. 36721.,36721.
• Citation: 149 Idaho 574,237 P.3d 1200
• Court: Idaho Supreme Court
• Parties: In re The Validity of The Power Sales Agreement and The Credit-Worthiness Agreement Between Verified Petition for The City of Idaho Falls Judicial Confirmation and The Bonneville Power Administration. The CITY OF IDAHO FALLS, Petitioner-Respondent, v. Jared FUHRIMAN, Mayor, Intervenor-Appellant.

149 Idaho 574

237 P.3d 1200

In re The Validity of The Power Sales Agreement and The Credit-Worthiness Agreement Between Verified Petition for The City of Idaho Falls Judicial Confirmation and The Bonneville Power Administration.The CITY OF IDAHO FALLS, Petitioner-Respondent,

v.Jared FUHRIMAN, Mayor, Intervenor-Appellant.

No. 36721.

Supreme Court of Idaho, Boise, February 2010 Term.

July 8, 2010.

Richardson & O'Leary, PLLC, Boise, for appellant. Mary “Molly” O'Leary argued.

Holden, Kidwell, Hahn & Crapo, PLLC, Idaho Falls, for respondent. Dale W. Storer argued.

Williams Bradbury, P.C. Boise, for amici curiae. Ronald L. Williams argued.

BURDICK, Justice.

Jared Fuhriman, mayor of the city of Idaho Falls, appeals the district court's order confirming the validity of a power sales agreement (PSA), and related creditworthiness agreement (CA), pursuant to the Judicial Confirmation Law. ¹ Both agreements are between Idaho Falls's municipal electric utility Idaho Falls Power (IFP) and the United States of America, Department of Energy, acting by-and-through the Bonneville Power Administration (BPA). Fuhriman argues that the district court erred in finding that the city of Idaho Falls (Idaho Falls) could incur public liability by entering into the seventeen-year PSA without first submitting the PSA to a public vote. Fuhriman argues that the obligations incurred by Idaho Falls under the PSA are ordinary, but not necessary, expenses under Article VIII, § 3 of the Idaho Constitution. ²

I. FACTUAL AND PROCEDURAL BACKGROUND

Idaho Falls owns and operates a municipal electric utility, IFP, which provides electricity to customers located within the established service area. IFP owns two hydroelectric generation facilities, but these only generate approximately 10% of IFP's electricity needs, and Idaho Falls currently purchases the remainder of its electricity from BPA under a power purchase agreement that expires on September 30, 2011.

To replace the power purchase agreement that is set to expire, Idaho Falls intends to begin purchasing electricity from BPA pursuant to the PSA beginning October 1, 2011. The PSA creates an obligation for Idaho Falls to purchase power and energy from BPA, and for BPA to sell power and energy to Idaho Falls, for a seventeen-year term commencing on October 1, 2011. These obligations are firm unless an “uncontrollable force” precludes performance. Under the PSA, Idaho Falls will purchase “Slice” ³ and “Block” ⁴ products from BPA. BPA requires customers purchasing the “Slice” product to execute a creditworthiness agreement. The CA provides that, upon the occurrence of certain events, Idaho Falls may be required to post cash or a letter of credit to secure its payment obligations under the PSA.

Idaho Falls filed a petition under Idaho's Judicial Confirmation Law, I.C. § 7-1301, et seq. , on March 19, 2009, requesting a determination that Idaho Falls's obligations under the PSA are “ordinary and necessary expenses” under Article VIII, § 3, of the Idaho Constitution, and a determination that the CA did not create any new or additional obligation for Idaho Falls. On April 17, 2009, Fuhriman filed an answer in opposition arguing that, under this Court's holding in City of Boise v. Frazier, 143 Idaho 1, 137 P.3d 388 (2006), the obligations incurred under the PSA lack the requisite urgency needed to be considered necessary. Following a hearing on May 7, 2009, the district court issued its order on June 15, 2009, holding that any obligations incurred pursuant to the PSA are ordinary and necessary.

On July 14, 2009, Fuhriman filed a timely notice of appeal pursuant to I.C. § 7-1309. On August 10, 2009, Idaho Falls filed a motion for expedited hearing pursuant to Idaho Appellate Rule 44, and this Court granted the motion on September 2, 2009.

II. STANDARD OF REVIEW

This Court aptly summarized the applicable standard of review in Frazier, as follows: “[t]his Court defers to the factual findings of the district court unless those findings are clearly erroneous. This Court exercises free review of the district court's application of the relevant law to the facts. Constitutional issues are questions of law over which we also exercise free review.” 143 Idaho at 2, 137 P.3d at 389 (internal citations omitted).

III. ANALYSIS

Cities in Idaho are generally barred from incurring debts or liabilities, in excess of the income and revenue provided for debts and liabilities in such year, unless they first conduct an election and secure voter approval of the proposed expenditure, as provided in Article VIII, § 3 of the Idaho Constitution. ⁵ Frazier, 143 Idaho at 2, 137 P.3d at 389. There is, however, one relevant exception known as the “proviso clause” wherein no public vote is required if the expenditures constitute “ordinary and necessary expense[s] authorized by the general laws of the state.” Id. at 3, 137 P.3d at 390 (quotation omitted).

Here, the district court initially expressed uncertainty as to whether the PSA should properly be considered as the incurring of an “indebtedness or liability” under the Idaho Constitution, as “a contract to buy power in the future is simply a promise to continue to pay for a municipal budgetary item in the future.” The district court nevertheless recognized that it is “within the realm of reason” that Idaho Falls is incurring a new liability by entering into the PSA, ⁶ so the court analyzed the PSA and CA. The district court found that the CA is merely a security agreement, imposing no additional indebtedness or liabilities on Idaho Falls, and found that the liability incurred under the PSA constitutes an ordinary and necessary expense under the proviso clause.

A. The Development of Article VIII, § 3 of the Idaho Constitution

In Frazier, this Court summarized the development of Article VIII, § 3 of the Idaho Constitution as follows:

Article VIII, § 3 has been part of Idaho's Constitution since the beginning of statehood. The draft version of Article VIII, § 3 that was submitted to the 1889 Idaho Constitutional Convention was modeled after and nearly identical to Article XI, § 18 of the California Constitution of 1879. See 1 PROCEEDINGS AND DEBATES OF THE CONSTITUTIONAL CONVENTION OF IDAHO 1889, 589 (1912) (henceforth 1 PROCEEDINGS); CAL. CONST. of 1879, Art. XI, § 18. The intention was to prevent local government entities from incurring debts without approval from the voters and a clear plan to retire those debts. DONALD CROWLEY & FLORENCE HEFFRON, THE IDAHO STATE CONSTITUTION 170 (1994).

Broadly speaking, Article VIII, § 3 imposes two requirements to be met by local governments before incurring indebtedness. The first requirement is a public election securing two-thirds of the vote, and the second is the collection of an annual tax sufficient to pay the debt within thirty years. The remainder of the section consists of exceptions to those requirements, beginning with the previously mentioned proviso clause and continuing with language added in a series of subsequent amendments not applicable to our analysis.

When the draft version of Article VIII, § 3 was presented to the constitutional convention, it was amended by the delegates to add the words “provided, that this section shall not be construed to apply to the ordinary and necessary expenses authorized by the general laws of the state.” See IDAHO CONST. art. VIII, § 3; 1 PROCEEDINGS at 584-94. Delegate William Claggett offered the original proviso clause. See 1 PROCEEDINGS at 586. Claggett explained his intent to the other delegates, stating: “[w]e all know that in the practical administration of county government, that there sometimes will be extraordinary expenses, I mean extraordinary expenses in the ordinary administration of affairs.” Id. at 588. By way of example, Claggett mentioned the payment of witness fees. Id. Other delegates mentioned juror fees and criminal court expenses, id. at 590, the expense of controlling streams and ditches, id. at 592, and “any emergency” id. at 587.

143 Idaho at 3-4, 137 P.3d at 390-91.

B. The liability incurred under the PSA is not “necessary” under the proviso clause of Article VIII, § 3 of the Idaho Constitution.

In Frazier, this Court considered whether the City of Boise could incur long-term indebtedness in financing an expansion of the City's airport parking facilities without first submitting the project to a vote. 143 Idaho at 2, 137 P.3d at 389. This Court, in holding that the project did not fit within the proviso clause, wrote that “in order for an expenditure to qualify as ‘necessary’ under the proviso clause of Article VIII, § 3 there must exist a necessity for making the expenditure at or during such year.” 143 Idaho at 5, 137 P.3d at 392 (emphasis added). “The required urgency can result from a number of possible causes, such as threats to public safety, the need for repairs, maintenance, or preservation of existing property, or a legal obligation to make the expenditure without delay.” Id. at 6-7, 137 P.3d at 393-94 (internal citations omitted).

Applying the Frazier analysis to the facts of this case, the liability that Idaho Falls is incurring under the PSA cannot reasonably be said to be “necessary” as there is no reason the liability had to be incurred in the year in which the contract was signed. The purchase of electricity under the PSA will not commence until October 1, 2011, and will continue for seventeen years thereafter. Clearly there was no urgency which required that the agreement be entered into “during such year” that it was entered into as ample time existed during which Idaho Falls could have submitted this proposed contract to its taxpayers for a confirmatory vote.

Idaho Falls makes the argument that Frazier is not properly read as imposing a bright-line rule that in order for an expenditure to be “necessary” it must be urgent, but this is inconsistent with the plain reading of Frazier. Idaho Falls urges this Court to distinguish ...